☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED March 31, 2021
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission File Number
Name of Registrant, Address, and Telephone Number
State or other jurisdiction of Incorporation or Organization
I.R.S. Employer Identification Number
001-09120
Public Service Enterprise Group Incorporated
New Jersey
22-2625848
80 Park Plaza
Newark,
New Jersey
07102
973
430-7000
001-00973
Public Service Electric and Gas Company
New Jersey
22-1212800
80 Park Plaza
Newark,
New Jersey
07102
973
430-7000
001-34232
PSEG Power LLC
Delaware
22-3663480
80 Park Plaza
Newark,
New Jersey
07102
973
430-7000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange On Which Registered
Public Service Enterprise Group Incorporated
Common Stock without par value
PEG
New York Stock Exchange
Public Service Electric and Gas Company
9.25% First and Refunding Mortgage Bonds, Series CC, due 2021
PEG21
New York Stock Exchange
8.00% First and Refunding Mortgage Bonds, due 2037
PEG37D
New York Stock Exchange
5.00% First and Refunding Mortgage Bonds, due 2037
PEG37J
New York Stock Exchange
PSEG Power LLC
8.625% Senior Notes, due 2031
PEG31
New York Stock Exchange
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrants have submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrants were required to submit such files). Yes ☒ No ☐
Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Public Service Enterprise Group Incorporated
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
Public Service Electric and Gas Company
Large accelerated filer
☐
Accelerated filer
☐
Non-accelerated filer
☒
Smaller reporting company
☐
Emerging growth company
☐
PSEG Power LLC
Large accelerated filer
☐
Accelerated filer
☐
Non-accelerated filer
☒
Smaller reporting company
☐
Emerging growth company
☐
If any of the registrants is an emerging growth company, indicate by check mark if such registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether any of the registrants is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 20, 2021, Public Service Enterprise Group Incorporated had outstanding 505,479,706 shares of its sole class of Common Stock, without par value.
As of April 20, 2021, Public Service Electric and Gas Company had issued and outstanding 132,450,344 shares of Common Stock, without nominal or par value, all of which were privately held, beneficially and of record, by Public Service Enterprise Group Incorporated.
Public Service Electric and Gas Company and PSEG Power LLC are wholly owned subsidiaries of Public Service Enterprise Group Incorporated and meet the conditions set forth in General Instruction H(1) of Form 10-Q. Each is filing its Quarterly Report on Form 10-Q with the reduced disclosure format authorized by General Instruction H.
Certain of the matters discussed in this report about our and our subsidiaries’ future performance, including, without limitation, future revenues, earnings, strategies, prospects, consequences and all other statements that are not purely historical constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those anticipated. Such statements are based on management’s beliefs as well as assumptions made by and information currently available to management. When used herein, the words “anticipate,” “intend,” “estimate,” “believe,” “expect,” “plan,” “should,” “hypothetical,” “potential,” “forecast,” “project,” variations of such words and similar expressions are intended to identify forward-looking statements. Factors that may cause actual results to differ are often presented with the forward-looking statements themselves. Other factors that could cause actual results to differ materially from those contemplated in any forward-looking statements made by us herein are discussed in filings we make with the United States Securities and Exchange Commission (SEC), including our Annual Report on Form 10-K and subsequent reports on Form 10-Q and Form 8-K. These factors include, but are not limited to:
•any inability to successfully develop, obtain regulatory approval for, or construct generation, transmission and distribution projects;
•lack of growth or slower growth in the number of customers or the failure of our Conservation Incentive Program to fully address a decline in customer demand;
•any equipment failures, accidents, severe weather events, acts of war or terrorism or other incidents, including pandemics such as the ongoing coronavirus pandemic, that may impact our ability to provide safe and reliable service to our customers;
•any inability to recover the carrying amount of our long-lived assets;
•any inability to maintain sufficient liquidity;
•the impact of cybersecurity attacks or intrusions;
•the impact of the ongoing coronavirus pandemic;
•the impact of our covenants in our debt instruments on our operations;
•adverse performance of our nuclear decommissioning and defined benefit plan trust fund investments and changes in funding requirements;
•risks associated with the timeline and ultimate outcome of our exploration of strategic alternatives relating to PSEG Power’s non-nuclear generating fleet;
•the failure to complete, or delays in completing, our proposed investment in the Ocean Wind offshore wind project, or following the completion of our initial investment in the project, the failure to realize the anticipated strategic and financial benefits of the project;
•fluctuations in wholesale power and natural gas markets, including the potential impacts on the economic viability of our generation units;
•our ability to obtain adequate fuel supply;
•market risks impacting the operation of our generating stations;
•changes in technology related to energy generation, distribution and consumption and changes in customer usage patterns;
•third-party credit risk relating to our sale of generation output and purchase of fuel;
•any inability of PSEG Power to meet its commitments under forward sale obligations;
•reliance on transmission facilities to maintain adequate transmission capacity for our power generation fleet;
•the impact of changes in state and federal legislation and regulations on our business, including PSE&G’s ability to recover costs and earn returns on authorized investments;
•PSE&G’s proposed investment programs may not be fully approved by regulators and its capital investment may be lower than planned;
•the absence of a long-term legislative or other solution for our New Jersey nuclear plants that sufficiently values them for their carbon-free, fuel diversity and resilience attributes, or the impact of the current or subsequent payments for such attributes being materially adversely modified through legal proceedings;
•adverse changes in energy industry laws, policies and regulations, including market structures and transmission planning and transmission returns;
•risks associated with our ownership and operation of nuclear facilities, including regulatory risks, such as compliance with the Atomic Energy Act and trade control, environmental and other regulations, as well as financial, environmental and health and safety risks;
•changes in federal and state environmental regulations and enforcement; and
•delays in receipt of, or an inability to receive, necessary licenses and permits.
All of the forward-looking statements made in this report are qualified by these cautionary statements and we cannot assure you that the results or developments anticipated by management will be realized or even if realized, will have the expected consequences to, or effects on, us or our business, prospects, financial condition, results of operations or cash flows. Readers are cautioned not to place undue reliance on these forward-looking statements in making any investment decision. Forward-looking statements made in this report apply only as of the date of this report. While we may elect to update forward-looking statements from time to time, we specifically disclaim any obligation to do so, even in light of new information or future events, unless otherwise required by applicable securities laws.
The forward-looking statements contained in this report are intended to qualify for the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
FILING FORMAT
This combined Quarterly Report on Form 10-Q is separately filed by Public Service Enterprise Group Incorporated (PSEG), Public Service Electric and Gas Company (PSE&G) and PSEG Power LLC (PSEG Power). Information relating to any individual company is filed by such company on its own behalf. PSE&G and PSEG Power are each only responsible for information about itself and its subsidiaries.
Discussions throughout the document refer to PSEG and its direct operating subsidiaries, PSE&G and PSEG Power. Depending on the context of each section, references to “we,” “us,” and “our” relate to PSEG or to the specific company or companies being discussed.
Note 1. Organization, Basis of Presentation and Significant Accounting Policies
Organization
Public Service Enterprise Group Incorporated (PSEG) is a holding company with a diversified business mix within the energy industry. Its operations are primarily in the Northeastern and Mid-Atlantic United States and in other select markets. PSEG’s principal direct wholly owned subsidiaries are:
•Public Service Electric and Gas Company (PSE&G)—which is a public utility engaged principally in the transmission of electricity and distribution of electricity and natural gas in certain areas of New Jersey. PSE&G is subject to regulation by the New Jersey Board of Public Utilities (BPU) and the Federal Energy Regulatory Commission (FERC). PSE&G also invests in regulated solar generation projects and energy efficiency and related programs in New Jersey, which are regulated by the BPU.
•PSEG Power LLC (PSEG Power)—which is a multi-regional energy supply company that integrates the operations of its merchant nuclear and fossil generating assets with its power marketing businesses and fuel supply functions through competitive energy sales in well-developed energy markets primarily in the Northeast and Mid-Atlantic United States through its principal direct wholly owned subsidiaries. In addition, PSEG Power owns and operates solar generation in various states. PSEG Power’s subsidiaries are subject to regulation by FERC, the Nuclear Regulatory Commission (NRC), the Environmental Protection Agency (EPA) and the states in which they operate.
PSEG’s other direct wholly owned subsidiaries are: PSEG Long Island LLC (PSEG LI), which operates the Long Island Power Authority’s (LIPA) electric transmission and distribution (T&D) system under an Amended and Restated Operations Services Agreement (OSA); PSEG Energy Holdings L.L.C. (Energy Holdings), which earns it revenues from its portfolio of lease investments and holds our investment in offshore wind ventures; and PSEG Services Corporation (Services), which provides certain management, administrative and general services to PSEG and its subsidiaries at cost.
In December 2020, PSEG entered into a definitive agreement with Ørsted North America to acquire a 25% equity interest in Ørsted’s Ocean Wind project. Ocean Wind was selected by New Jersey to be the first offshore wind farm as part of the state’s intention to add 7,500 MW of offshore wind generating capacity by 2035. The Ocean Wind project could provide first power in late 2024. On March 31, 2021, the BPU approved PSEG’s investment in Ocean Wind and the acquisition was completed in April 2021. Additionally, PSEG and Ørsted each owns 50% of Garden State Offshore Energy LLC which holds rights to an offshore wind lease area. PSEG and Ørsted are exploring other offshore wind opportunities.
Basis of Presentation
The respective financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) applicable to Quarterly Reports on Form 10-Q. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting guidance generally accepted in the United States (GAAP) have been condensed or omitted pursuant to such rules and regulations. These Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements (Notes) should be read in conjunction with, and update and supplement matters discussed in, the Annual Report on Form 10-K for the year ended December 31, 2020.
The unaudited condensed consolidated financial information furnished herein reflects all adjustments which are, in the opinion of management, necessary to fairly state the results for the interim periods presented. All such adjustments are of a normal recurring nature. All significant intercompany accounts and transactions are eliminated in consolidation. The year-end Condensed Consolidated Balance Sheets were derived from the audited Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2020.
Significant Accounting Policies
Cash, Cash Equivalents and Restricted Cash
The followingprovides a reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheets that sum to the total of the same such amounts for the beginning (December 31, 2020) and ending periods shown in the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021. Restricted cash consists primarily of deposits received related to various construction projects at PSE&G.
19
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(A)Includes amounts applicable to PSEG (parent company), Energy Holdings and Services.
Note 2. Recent Accounting Standards
New Standards Issued and Adopted
Simplifying the Accounting for Income Taxes—Accounting Standards Update (ASU) 2019-12
This accounting standard updates Accounting Standards Codification (ASC) 740 to simplify the accounting for income taxes, including the elimination of several exceptions and making other clarifications to the current guidance. Some of the more pertinent modifications include a change to the tax accounting related to franchise taxes that are partially based on income, an election to allocate the consolidated tax expense to a disregarded entity that is a member of a consolidated tax return filing group when those entities issue separate financial statements, and modifications and clarifications to interim tax reporting.
The standard is effective for fiscal years beginning after December 15, 2020. PSEG adopted this standard on January 1, 2021. PSEG has elected to allocate the consolidated tax expense to all eligible entities that are included in a consolidated tax filing on a prospective basis. This election is consistent with PSEG’s Tax Sharing Agreements with its affiliated subsidiaries. Adoption of this standard did not have an impact on the financial statements of PSEG, PSE&G, and PSEG Power.
Clarifying the Interactions between Investments-Equity Securities, Investments-Equity Method and Joint Ventures, and Derivatives and Hedging—ASU 2020-01
This accounting standard clarifies that an entity should consider transaction prices for purposes of measuring the fair value of certain equity securities immediately before applying or upon discontinuing the equity method. This accounting standard also clarifies that when accounting for contracts entered into to purchase equity securities, an entity should not consider whether, upon the settlement of the forward contract or exercise of the purchased option, the underlying securities would be accounted for under the equity method or the fair value option.
The standard is effective for fiscal years beginning after December 15, 2020. PSEG adopted this standard prospectively on January 1, 2021. Adoption of this standard did not have an impact on the financial statements of PSEG, PSE&G and PSEG Power.
Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity—ASU 2020-06
This accounting standard simplifies the accounting for convertible debt and convertible preferred stock by removing the requirements to separately present certain conversion features in equity. In addition, the ASU eliminates certain criteria that must be satisfied in order to classify a contract as equity, which is expected to decrease the number of freestanding instruments and embedded derivatives accounted for as assets or liabilities. The ASU also revises the guidance on calculating earnings per share, requiring use of the if-converted method for all convertible instruments and rescinding the ability to rebut the presumption of share settlement for instruments that may be settled in cash or other assets.
The standard is effective for fiscal years beginning after December 15, 2020. PSEG adopted this standard on January 1, 2021 on a modified retrospective basis. Adoption of this standard did not have an impact on the financial statements of PSEG, PSE&G and PSEG Power.
20
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Codification Improvements to Callable Debt Securities—ASU 2020-08
This accounting standard clarifies that an entity should reevaluate for each reporting period whether a purchased callable debt security that has multiple call dates is within the scope of certain guidance on nonrefundable fees and other costs related to receivables.
The standard is effective for fiscal years beginning after December 15, 2020. PSEG adopted this standard prospectively on January 1, 2021. Adoption of this standard did not have an impact on the financial statements of PSEG, PSE&G and PSEG Power.
Codification Improvements—ASU 2020-10
This accounting standard conforms, clarifies, simplifies, and provides technical corrections to various codification topics.
The standard is effective for fiscal years beginning after December 15, 2020. PSEG adopted this standard on January 1, 2021. Adoption of this standard did not have an impact on the financial statements of PSEG, PSE&G and PSEG Power.
This accounting standard clarifies certain guidance related to derivative instruments affected by the market-wide change in the interest rates even if those derivatives do not reference the LIBOR or another rate that is expected to be discontinued as a result of reference rate reform. The accounting standard also clarifies other aspects of the relief provided in the reference rate reform GAAP guidance.
The standard is effective upon issuance and allows for retrospective or prospective application with certain conditions. PSEG adopted this standard prospectively in January 2021. Adoption of this standard did not have an impact on the financial statements of PSEG, PSE&G and PSEG Power.
Note 3. Revenues
Nature of Goods and Services
The following is a description of principal activities by reportable segment from which PSEG, PSE&G and PSEG Power generate their revenues.
PSE&G
Revenues from Contracts with Customers
Electric and Gas Distribution and Transmission Revenues—PSE&G sells gas and electricity to customers under default commodity supply tariffs. PSE&G’s regulated electric and gas default commodity supply and distribution services are separate tariffs which are satisfied as the product(s) and/or service(s) are delivered to the customer. The electric and gas commodity and delivery tariffs are recurring contracts in effect until modified through the regulatory approval process as appropriate. Revenue is recognized over time as the service is rendered to the customer. Included in PSE&G’s regulated revenues are unbilled electric and gas revenues which represent the estimated amount customers will be billed for services rendered from the most recent meter reading to the end of the respective accounting period.
PSE&G’s transmission revenues are earned under a separate tariff using a FERC-approved annual formula rate mechanism. The performance obligation of transmission service is satisfied and revenue is recognized as it is provided to the customer. The formula rate mechanism provides for an annual filing of an estimated revenue requirement with rates effective January 1 of each year and a true-up to that estimate based on actual revenue requirements. The true-up mechanism is an alternative revenue which is outside the scope of revenue from contracts with customers.
Other Revenues from Contracts with Customers
Other revenues from contracts with customers, which are not a material source of PSE&G revenues, are generated primarily from appliance repair services and solar generation projects. The performance obligations under these contracts are satisfied and revenue is recognized as control of products is delivered or services are rendered.
Payment for services rendered and products transferred are typically due on average within 30 days of delivery.
Revenues Unrelated to Contracts with Customers
Other PSE&G revenues unrelated to contracts with customers are derived from alternative revenue mechanisms recorded pursuant to regulatory accounting guidance. These revenues, which include weather normalization, green energy program true-ups and transmission formula rate true-ups, are not a material source of PSE&G revenues.
21
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Electricity and Related Products—Wholesale and retail load contracts are executed in the different Independent System Operator (ISO) regions for the bundled supply of energy, capacity, renewable energy credits (RECs) and ancillary services representing PSEG Power’s performance obligations. Revenue for these contracts is recognized over time as the bundled service is provided to the customer. Transaction terms generally run from several months to three years. PSEG Power also sells to the ISOs energy and ancillary services which are separately transacted in the day-ahead or real-time energy markets. The energy and ancillary services performance obligations are typically satisfied over time as delivered and revenue is recognized accordingly. PSEG Power generally reports electricity sales and purchases conducted with those individual ISOs net on an hourly basis in either Operating Revenues or Energy Costs in its Condensed Consolidated Statements of Operations. The classification depends on the net hourly activity.
PSEG Power enters into capacity sales and capacity purchases through the ISOs. The transactions are reported on a net basis dependent on PSEG Power’s monthly net sale or purchase position through the individual ISOs. The performance obligations with the ISOs are satisfied over time upon delivery of the capacity and revenue is recognized accordingly. In addition to capacity sold through the ISOs, PSEG Power sells capacity through bilateral contracts and the related revenue is reported on a gross basis and recognized over time upon delivery of the capacity.
In April 2019, PSEG Power’s Salem 1, Salem 2 and Hope Creek nuclear plants were awarded Zero Emission Certificates (ZECs) by the BPU. These nuclear plants are expected to receive ZEC revenue for approximately three years, through May 2022, from the electric distribution companies (EDCs) in New Jersey. PSEG Power recognizes revenue when the units generate electricity, which is when the performance obligation is satisfied. These revenues are included in PJM Sales in the following tables. See Note 4. Early Plant Retirements/Asset Dispositions for additional information.
Gas Contracts—PSEG Power sells wholesale natural gas, primarily through an index based full-requirements Basic Gas Supply Service (BGSS) contract with PSE&G to meet the gas supply requirements of PSE&G’s customers. The BGSS contract remains in effect unless terminated by either party with a two-year notice. The performance obligation is primarily delivery of gas which is satisfied over time. Revenue is recognized as gas is delivered. Based upon the availability of natural gas, storage and pipeline capacity beyond PSE&G’s daily needs, PSEG Power also sells gas and pipeline capacity to other counterparties under bilateral contracts. The performance obligation under these contracts is satisfied over time upon delivery of the gas or capacity, and revenue is recognized accordingly.
Other Revenues from Contracts with Customers
PSEG Power enters into bilateral contracts to sell solar power and solar RECs from its solar facilities. Contract terms range from 15 to 30 years. The performance obligations are generally solar power and RECs which are transferred to customers upon generation. Revenue is recognized upon generation of the solar power.
PSEG Power has entered into long-term contracts with LIPA for energy management and fuel procurement services. Revenue is recognized over time as services are rendered.
Revenues Unrelated to Contracts with Customers
PSEG Power’s revenues unrelated to contracts with customers include electric, gas and certain energy-related transactions accounted for in accordance with Derivatives and Hedging accounting guidance. See Note 13. Financial Risk Management Activities for further discussion. PSEG Power is also a party to solar contracts that qualify as leases and are accounted for in accordance with lease accounting guidance.
Other
Revenues from Contracts with Customers
PSEG LI has a contract with LIPA which generates revenues. PSEG LI’s subsidiary, Long Island Electric Utility Servco, LLC (Servco) records costs which are recovered from LIPA and records the recovery of those costs as revenues when Servco is a principal in the transaction.
Revenues Unrelated to Contracts with Customers
Energy Holdings generates lease revenues which are recorded pursuant to lease accounting guidance.
22
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(A)Includes primarily revenues from appliance repair services and the sale of solar renewable energy certificates (SRECs) at auction at PSE&G, solar power projects and energy management and fuel service contracts with LIPA at PSEG Power, and PSEG LI’s OSA with LIPA in Other.
(B)Includes primarily alternative revenues at PSE&G, derivative contracts and lease contracts at PSEG Power, and lease contracts in Other.
Contract Balances
PSE&G
PSE&G did not have any material contract balances (rights to consideration for services already provided or obligations to provide services in the future for consideration already received) as of March 31, 2021 and December 31, 2020. Substantially all of PSE&G’s accounts receivable and unbilled revenues result from contracts with customers that are priced at tariff rates. Allowances represented approximately 16% and 14% of accounts receivable (including unbilled revenues) as of March 31, 2021 and December 31, 2020, respectively.
Accounts Receivable—Allowance for Credit Losses
PSE&G’s accounts receivable, including unbilled revenues, is primarily comprised of utility customer receivables for the provision of electric and gas service and appliance services, and are reported in the balance sheet as gross outstanding amounts adjusted for an allowance for credit losses. The allowance for credit losses reflects PSE&G’s best estimate of losses on the account balances. The allowance is based on PSE&G’s projection of accounts receivable aging, historical experience, economic factors and other currently available evidence, including the estimated impact of the ongoing coronavirus pandemic (COVID-19) on the outstanding balances as of March 31, 2021. PSE&G’s electric bad debt expense is recoverable through its Societal Benefits Clause mechanism. As of March 31, 2021, PSE&G deferred incremental gas bad debt expense for future regulatory recovery due to the impact of the ongoing pandemic. See Note 6. Rate Filings for additional information.
The following provides a reconciliation of PSE&G’s allowance for credit losses for the three months ended March 31, 2021 and 2020:
2021
2020
Millions
Balance at Beginning of Year
$
206
$
68
(A)
Utility Customer and Other Accounts
Provision
44
32
Write-offs, net of Recoveries of $2 million in 2021 and 2020
(11)
(20)
Balance at End of Period
$
239
$
80
(A)Includes an $8 million pre-tax increase upon adoption of ASU 2016-13.
PSEG Power
PSEG Power generally collects consideration upon satisfaction of performance obligations, and therefore, PSEG Power had no material contract balances as of March 31, 2021 and December 31, 2020.
PSEG Power’s accounts receivable include amounts resulting from contracts with customers and other contracts which are out of scope of accounting guidance for revenues from contracts with customers. The majority of these accounts receivable are subject to master netting agreements. As a result, accounts receivable resulting from contracts with customers and receivables unrelated to contracts with customers are netted within Accounts Receivable and Accounts Payable on the Condensed Consolidated Balance Sheets.
PSEG Power’s accounts receivable consist mainly of revenues from wholesale load contracts and capacity sales which are executed in the different ISO regions. PSEG Power also sells energy and ancillary services directly to ISOs and other counterparties. In the wholesale energy markets in which PSEG Power operates, payment for services rendered and products transferred are typically due within 30 days of delivery. As such, there is little credit risk associated with these receivables. PSEG Power did not record an allowance for credit losses for these receivables as of March 31, 2021. PSEG Power monitors the status of its counterparties on an ongoing basis to assess whether there are any anticipated credit losses.
Other
PSEG LI did not have any material contract balances as of March 31, 2021 and December 31, 2020.
24
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Remaining Performance Obligations under Fixed Consideration Contracts
PSEG Power and PSE&G primarily record revenues as allowed by the guidance, which states that if an entity has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date, the entity may recognize revenue in the amount to which the entity has a right to invoice. PSEG has future performance obligations under contracts with fixed consideration as follows:
PSEG Power
As previously stated, capacity transactions with ISOs are reported on a net basis dependent on PSEG Power’s monthly net sale or purchase position through the individual ISOs.
Capacity Revenues from the PJM Annual Base Residual and Incremental Auctions—The Base Residual Auction is generally conducted annually three years in advance of the operating period. The 2022/2023 auction is expected to be held in the first half of 2021. PSEG Power expects to realize the following average capacity prices resulting from the base and incremental auctions, including unit specific bilateral contracts for previously cleared capacity obligations.
Delivery Year
$ per MW-Day
MW Cleared
June 2020 to May 2021
$167
7,600
June 2021 to May 2022
$166
7,800
Capacity Payments from the ISO New England Forward Capacity Market (FCM)—The FCM Auction is conducted annually three years in advance of the operating period. The table below includes PSEG Power’s cleared capacity in the FCM Auction for the Bridgeport Harbor Station 5 (BH5), which cleared the 2019/2020 auction at $231/MW-day for seven years, and the planned retirement of Bridgeport Harbor Station 3 in May 2021. PSEG Power expects to realize the following average capacity prices for capacity obligations to be satisfied resulting from the FCM Auctions which have been completed through May 2025 and the seven-year rate lock for BH5 through May 2026:
Delivery Year
$ per MW-Day (A)
MW Cleared
June 2020 to May 2021
$195
1,330
June 2021 to May 2022
$192
950
June 2022 to May 2023
$179
950
June 2023 to May 2024
$152
930
June 2024 to May 2025
$158
950
June 2025 to May 2026
$231
480
(A) Capacity cleared prices for BH5 through 2026 will be escalated based upon the Handy-Whitman Index. These adjustments are not included above.
Bilateral capacity contracts—Capacity obligations pursuant to contract terms through 2029 are anticipated to result in revenues totaling $147 million.
Other
The LIPA OSA is a 12-year services contract ending in 2025 with annual fixed and incentive components. The fixed fee for the provision of services thereunder in 2021 is $68 million and is updated each year based on the change in the Consumer Price Index.
Note 4. Early Plant Retirements/Asset Dispositions
Nuclear
In April 2019, PSEG Power’s Salem 1, Salem 2 and Hope Creek nuclear plants were awarded ZECs by the BPU. Pursuant to a process established by the BPU, ZECs are purchased from selected nuclear plants and recovered through a non-bypassable distribution charge in the amount of $0.004 per kilowatt-hour (KWh) used (which is equivalent to approximately $10 per megawatt hour (MWh) generated in payments to selected nuclear plants (ZEC payment)). Each nuclear plant is expected to
25
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
receive ZEC revenue for approximately three years, through May 2022.
In April 2021, PSEG Power’s Salem 1, Salem 2 and Hope Creek nuclear plants were awarded ZECs for the three-year eligibility period starting June 2022 at the same approximate $10 per MWh received during the current ZEC period through May 2022 referenced above. As a result, each nuclear plant is expected to receive ZEC revenue for approximately three years starting June 2022. The terms and conditions of this April 2021 ZEC award are generally similar to the current ZEC period as discussed above.
The award of ZECs attaches certain obligations, including an obligation to repay the ZECs in the event that a plant ceases operations during the approximate three-year period that it was awarded ZECs, subject to certain exceptions specified in the ZEC legislation. PSEG Power has and will continue to recognize revenue monthly as the nuclear plants generate electricity and satisfy their performance obligations. Further, the ZEC payment may be adjusted by the BPU at any time to offset environmental or fuel diversity payments that a selected nuclear plant may receive from another source. For instance, the New Jersey Division of Rate Counsel (New Jersey Rate Counsel), in written comments filed with the BPU, has advocated for the BPU to offset market benefits resulting from New Jersey’s rejoining the Regional Greenhouse Gas Initiative from the ZEC payment. PSEG intends to vigorously defend against these arguments. Due to its preliminary nature, PSEG cannot predict the outcome of this matter.
The BPU’s April 2019 decision awarding ZECs through May 2022 has been appealed by the New Jersey Rate Counsel. In March 2021, the New Jersey Appellate Division affirmed the BPU’s April 2019 decision granting ZECs for the first eligibility period. In April 2021, New Jersey Rate Counsel has petitioned to the New Jersey Supreme Court for further appellate review. PSEG cannot predict the outcome of this matter.
In the event that (i) the ZEC program is overturned or is otherwise materially adversely modified through legal process; or (ii) any of the Salem 1, Salem 2 and Hope Creek plants is not sufficiently valued for its environmental, fuel diversity or resilience attributes in future periods and does not otherwise experience a material financial change that would remove the need for such attributes to be sufficiently valued, PSEG Power will take all necessary steps to cease to operate all of these plants. Alternatively, even with sufficient valuation of these attributes, if the financial condition of the plants is materially adversely impacted by changes in commodity prices, FERC’s changes to the capacity market construct (absent sufficient capacity revenues provided under a program approved by the BPU in accordance with a FERC-authorized capacity mechanism), or, in the case of the Salem nuclear plants, decisions by the EPA and state environmental regulators regarding the implementation of Section 316(b) of the Clean Water Act (CWA) and related state regulations, or other factors, PSEG Power will take all necessary steps to cease to operate all of these plants. Ceasing operations of these plants would result in a material adverse impact on PSEG’s and PSEG Power’s results of operations.
Non-Nuclear
In July 2020, PSEG announced that it is exploring strategic alternatives for PSEG Power’s non-nuclear generating fleet, which includes more than 6,750 MW of fossil generation located in New Jersey, Connecticut, New York and Maryland as well as the 467 MW Solar Source portfolio located in various states. PSEG intends to retain ownership of PSEG Power’s existing nuclear fleet. The marketing of a potential transaction in one or a series of steps launched in the fourth quarter of 2020, and any potential transaction is expected to be completed sometime in 2021. As a result of the strategic review of PSEG Power’s non-nuclear generating assets, and the launch in the fourth quarter of 2020 of an associated marketing process for their potential disposition, PSEG Power has performed an impairment assessment of its PJM, NYISO and ISO-NE asset groupings, as well as for its solar assets, as of each quarter end. The assessments included probability weightings assigned to undiscounted cash flow scenarios of retaining the assets through the end of their estimated useful lives and a successful disposition of the non-nuclear assets in 2021. Estimates of cash flows associated with a sale scenario were based on management’s expectations of the fair value of such assets. The probability weighted aggregation of undiscounted cash flows for each of the asset groupings expected to result from the use and potential disposition of the asset groups exceeded their carrying value at the assessment dates. As such, it demonstrated that no impairment exists for any of the asset groupings and they continue to remain classified as held-for-use as of March 31, 2021. However, certain assumptions are subject to change as the potential sales and marketing process progresses. The net book value of the fossil generation and of the solar Property, Plant and Equipment (net of eligible investment tax credits) was approximately $4.5 billion and $550 million, respectively, as of March 31, 2021.
In May 2021, PSEG Power Ventures LLC (Power Ventures), a direct wholly owned subsidiary of PSEG Power, entered into a purchase agreement with Quattro Solar, LLC, an affiliate of LS Power, relating to the sale by Power Ventures of 100% of its ownership interest in PSEG Solar Source LLC (Solar Source) including its related assets and liabilities. The transaction is expected to close during the second or third quarter of 2021, subject to certain closing conditions, adjustments and regulatory approvals. As a result, the assets and liabilities of Solar Source will be classified as Assets Held for Sale beginning in the
26
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
second quarter of 2021. The net carrying value of the assets and liabilities to be sold is approximately $500 million as of March 31, 2021.
There is no assurance that the strategic review will result in a sale or other disposition of all or any portion of the fossil generation assets on terms that are favorable to us, or at all. Any transaction would be subject to market conditions and customary closing conditions, including the receipt of all required regulatory approvals. Management expects that a change in the probability of a successful disposition based upon further progression in the marketing process, but prior to meeting all necessary held-for-sale classification criteria, would result in an impairment of the ISO-NE asset grouping, which would be material. Furthermore, a change to a held-for-sale classification from a held-for-use classification would result in an impairment of the PJM, NYISO and ISO-NE asset groupings, which would be material.
Note 5. Variable Interest Entity (VIE)
VIE for which PSEG LI is the Primary Beneficiary
PSEG LI consolidates Servco, a marginally capitalized VIE, which was created for the purpose of operating LIPA’s T&D system in Long Island, New York as well as providing administrative support functions to LIPA. PSEG LI is the primary beneficiary of Servco because it directs the operations of Servco, the activity that most significantly impacts Servco’s economic performance and it has the obligation to absorb losses of Servco that could potentially be significant to Servco. Such losses would be immaterial to PSEG.
Pursuant to the OSA, Servco’s operating costs are paid entirely by LIPA, and therefore, PSEG LI’s risk is limited related to the activities of Servco. PSEG LI has no current obligation to provide direct financial support to Servco. In addition to payment of Servco’s operating costs as provided for in the OSA, PSEG LI receives an annual contract management fee. PSEG LI’s annual contractual management fee, in certain situations, could be partially offset by Servco’s annual storm costs not approved by the Federal Emergency Management Agency, limited contingent liabilities and penalties for failing to meet certain performance metrics.
For transactions in which Servco acts as principal and controls the services provided to LIPA, such as transactions with its employees for labor and labor-related activities, including pension and OPEB-related transactions, Servco records revenues and the related pass-through expenditures separately in Operating Revenues and Operation and Maintenance (O&M) Expense, respectively. Servco recorded $123 million and $127 million for the three months ended March 31, 2021 and 2020, respectively, of O&M costs, the full reimbursement of which was reflected in Operating Revenues. For transactions in which Servco acts as an agent for LIPA, it records revenues and the related expenses on a net basis, resulting in no impact on PSEG’s Condensed Consolidated Statement of Operations.
Note 6. Rate Filings
This Note should be read in conjunction with Note 7. Regulatory Assets and Liabilities to the Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2020.
In addition to items previously reported in the Annual Report on Form 10-K, significant regulatory orders received and currently pending rate filings with the BPU are as follows:
BGSS—In March 2021, the BPU gave final approval to PSE&G’s request to maintain the current BGSS rate of 32 cents per therm which had been provisionally approved effective October 1, 2020.
COVID-19 Deferral—PSE&G continues to make quarterly filings as required by the BPU and has recorded a Regulatory Asset as of March 31, 2021 of approximately $60 million for net incremental costs, including $35 million for incremental gas bad debt expense associated with customer accounts receivable, which PSE&G expects are probable of recovery under the BPU order.
Energy Strong II—In April 2021, the BPU approved PSE&G’s filing for a $13 million revenue increase under this investment program, effective May, 2021.
GSMPII—In March 2021, PSE&G updated its petition previously filed in December 2020 seeking BPU approval to recover in gas base rates an annual revenue increase of approximately $21 million effective June 1, 2021 representing the return on and of GSMP II investments placed in service through February 2021.
27
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PSEG and its subsidiaries are both a lessor and a lessee in operating leases. As of March 31, 2021, PSEG and its subsidiaries were lessors for leases classified as operating leases or leveraged leases. See Note 8. Financing Receivables. There was no significant change in amounts reported in Note 8. Leases in the Annual Report on Form 10-K for the year ended December 31, 2020 for operating leases in which PSEG and its subsidiaries are lessees.
PSEG and its subsidiaries, as lessors, have lease agreements with lease and non-lease components, which are primarily related to generating facilities. Rental income from these leases is included in Operating Revenues.
PSEG Power
Certain of PSEG Power’s sales agreements related to its solar generating plants qualify as operating leases with remaining terms through 2043 with no extension terms. Lease income is based on solar energy generation; therefore, all rental income is variable under these leases.
Other
Energy Holdings is the lessor in leveraged leases. See Note 8. Financing Receivables.
Energy Holdings is the lessor in two operating leases for domestic energy generation facilities with remaining terms through 2036, one of which has an optional renewal period. Energy Holdings was previously the lessor in operating leases for real estate assets which were sold in March 2020.
The following is the operating lease income for PSEG Power and Energy Holdings for the three months ended March 31, 2021 and 2020:
PSEG Power
Energy Holdings
Total
Millions
Operating Lease Income
Three Months Ended March 31, 2021
Fixed Lease Income
$
—
$
5
$
5
Variable Lease Income
5
—
5
Total Operating Lease Income
$
5
$
5
$
10
Three Months Ended March 31, 2020
Fixed Lease Income
$
—
$
5
$
5
Variable Lease Income
5
—
5
Total Operating Lease Income
$
5
$
5
$
10
Note 8. Financing Receivables
PSE&G
PSE&G’s Solar Loan Programs are designed to help finance the installation of solar power systems throughout its electric service area. Interest income on the loans is recorded on an accrual basis. The loans are paid back with SRECs generated from the related installed solar electric system. PSE&G uses collection experience as a credit quality indicator for its Solar Loan Programs and conducts a comprehensive credit review for all prospective borrowers. As of March 31, 2021, none of the solar loans were impaired; however, in the event of a loan default or if a loan becomes impaired, the basis of the solar loan would be recovered through a regulatory recovery mechanism. As of March 31, 2021, none of the solar loans were delinquent and no loans are currently expected to become delinquent in light of the payment mechanism. Therefore, no current credit losses have been recorded for Solar Loan Programs I, II and III. A substantial portion of these amounts are noncurrent and reported in Long-Term Investments on PSEG’s and PSE&G’s Condensed Consolidated Balance Sheets. The following table reflects the outstanding loans by class of customer, none of which would be considered “non-performing.”
28
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Noncurrent Portion (included in Long-Term Investments)
$
121
$
122
The solar loans originated under three Solar Loan Programs are comprised as follows:
Programs
Balance as of March 31, 2021
Funding Provided
Residential Loan Term
Non-Residential Loan Term
Millions
Solar Loan I
$
19
prior to 2013
10 years
15 years
Solar Loan II
69
prior to 2015
10 years
15 years
Solar Loan III
62
largely funded as of March 31, 2021
10 years
10 years
Total
$
150
The average life of loans paid in full is eight years, which is lower than the loan terms of 10 to 15 years due to the generation of SRECs being greater than expected and/or cash payments made to the loan. Payments on all outstanding loans were current as of March 31, 2021 and have an average remaining life of approximately four years.
Energy Holdings
Energy Holdings, through several of its indirect subsidiaries, has investments in assets subject primarily to leveraged lease accounting. A leveraged lease is typically comprised of an investment by an equity investor and debt provided by a third-party debt investor. The debt is recourse only to the assets subject to lease and is not included on PSEG’s Condensed Consolidated Balance Sheets. As an equity investor, Energy Holdings’ equity investments in the leases are comprised of the total expected lease receivables over the lease terms plus the estimated residual values at the end of the lease terms, reduced for any income not yet earned on the leases. This amount is included in Long-Term Investments on PSEG’s Condensed Consolidated Balance Sheets. The more rapid depreciation of the leased property for tax purposes creates tax cash flow that will be repaid to the taxing authority in later periods. As such, the liability for such taxes due is recorded in Deferred Income Taxes on PSEG’s Condensed Consolidated Balance Sheets.
Leveraged leases outstanding as of March 31, 2021 commenced in or prior to 2000. The following table shows Energy Holdings’ gross and net lease investment as of March 31, 2021 and December 31, 2020.
As of
As of
March 31, 2021
December 31, 2020
Millions
Lease Receivables (net of Non-Recourse Debt)
$
274
$
299
Estimated Residual Value of Leased Assets
55
55
Total Investment in Rental Receivables
329
354
Unearned and Deferred Income
(100)
(104)
Gross Investments in Leases
229
250
Deferred Tax Liabilities
(60)
(64)
Net Investments in Leases
$
169
$
186
29
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The corresponding receivables associated with the lease portfolio are reflected as follows, net of non-recourse debt. The ratings in the table represent the ratings of the entities providing payment assurance to Energy Holdings.
Lease Receivables, Net of Non-Recourse Debt
Counterparties' Standard & Poor's (S&P) Credit Rating as of March 31, 2021
As of March 31, 2021
Millions
AA
$
8
A-
51
BBB+ to BBB
178
BB+
37
Total
$
274
The “BB+” rating in the preceding table represents a lease receivable related to Merrill Creek Reservoir. Metropolitan Edison Company (a subsidiary of First Energy) is the lease counterparty. As of March 31, 2021, the gross investment in this lease was $23 million ($18 million, net of deferred taxes).
PSEG recorded no credit losses for the leveraged leases existing on March 31, 2021. Upon the occurrence of certain defaults, indirect subsidiaries of Energy Holdings would exercise their rights and seek recovery of their investment, potentially including stepping into the lease directly to protect their investments. While these actions could ultimately protect or mitigate the loss of value, they could require the use of significant capital and trigger certain material tax obligations which could, for certain leases, wholly or partially be mitigated by tax indemnification claims against the counterparty. A bankruptcy of a lessee would likely delay and potentially limit any efforts on the part of the lessors to assert their rights upon default and could delay the monetization of claims.
Note 9. Trust Investments
Nuclear Decommissioning Trust (NDT) Fund
PSEG Power maintains an external master NDT to fund its share of decommissioning costs for its five nuclear facilities upon their respective termination of operation. The trust contains two separate funds: a qualified fund and a non-qualified fund. Section 468A of the Internal Revenue Code limits the amount of money that can be contributed into a qualified fund. The funds are managed by third-party investment managers who operate under investment guidelines developed by PSEG Power.
The following tables show the fair values and gross unrealized gains and losses for the securities held in the NDT Fund.
As of March 31, 2021
Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
Millions
Equity Securities
Domestic
$
482
$
308
$
(1)
$
789
International
365
140
(8)
497
Total Equity Securities
847
448
(9)
1,286
Available-for-Sale Debt Securities
Government
636
13
(12)
637
Corporate
587
21
(8)
600
Total Available-for-Sale Debt Securities
1,223
34
(20)
1,237
Total NDT Fund Investments (A)
$
2,070
$
482
$
(29)
$
2,523
(A)The NDT Fund Investments table excludes cash of $1 million and foreign currency of $1 million as of March 31, 2021, which are part of the NDT Fund.
30
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(A)The NDT Fund Investments table excludes foreign currency of $2 million as of December 31, 2020, which is part of the NDT Fund.
Net unrealized gains (losses) on debt securities of $8 million (after-tax) were included in Accumulated Other Comprehensive Loss on PSEG’s and PSEG Power’s Condensed Consolidated Balance Sheets as of March 31, 2021. The portion of net unrealized gains related to equity securities still held as of March 31, 2021 recognized during the first three months of 2021 was $24 million.
The amounts in the preceding tables do not include receivables and payables for NDT Fund transactions which have not settled at the end of each period. Such amounts are included in Accounts Receivable and Accounts Payable on the Condensed Consolidated Balance Sheets as shown in the following table.
As of
As of
March 31, 2021
December 31, 2020
Millions
Accounts Receivable
$
15
$
11
Accounts Payable
$
22
$
12
31
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the value of securities in the NDT Fund that have been in an unrealized loss position for less than and greater than 12 months.
As of March 31, 2021
As of December 31, 2020
Less Than 12 Months
Greater Than 12 Months
Less Than 12 Months
Greater Than 12 Months
Fair Value
Gross Unrealized Losses
Fair Value
Gross Unrealized Losses
Fair Value
Gross Unrealized Losses
Fair Value
Gross Unrealized Losses
Millions
Equity Securities (A)
Domestic
$
56
$
(1)
$
2
$
—
$
23
$
(2)
$
6
$
(1)
International
42
(4)
20
(4)
26
(2)
27
(7)
Total Equity Securities
98
(5)
22
(4)
49
(4)
33
(8)
Available-for-Sale Debt Securities
Government (B)
299
(12)
1
—
72
(1)
—
—
Corporate (C)
203
(8)
9
—
31
(1)
7
—
Total Available-for-Sale Debt Securities
502
(20)
10
—
103
(2)
7
—
NDT Trust Investments
$
600
$
(25)
$
32
$
(4)
$
152
$
(6)
$
40
$
(8)
(A)Equity Securities—Investments in marketable equity securities within the NDT Fund are primarily in common stocks within a broad range of industries and sectors. Unrealized gains and losses on these securities are recorded in Net Income.
(B)Debt Securities (Government)—Unrealized gains and losses on these securities are recorded in Accumulated Other Comprehensive Income (Loss). The unrealized losses on PSEG Power’s NDT investments in U.S. Treasury obligations and Federal Agency mortgage-backed securities were caused by interest rate changes. PSEG Power also has investments in municipal bonds. It is not expected that these securities will settle for less than their amortized cost. PSEG Power does not intend to sell these securities nor will it be more-likely-than-not required to sell before recovery of their amortized cost. PSEG Power did not recognize credit losses for U.S. Treasury obligations and Federal Agency mortgage-backed securities because these investments are guaranteed by the U.S. government or an agency of the U.S. government. PSEG Power did not recognize credit losses for municipal bonds because they are primarily investment grade securities.
(C)Debt Securities (Corporate)—Unrealized gains and losses on these securities are recorded in Accumulated Other Comprehensive Income (Loss). Unrealized losses were due to market declines. It is not expected that these securities would settle for less than their amortized cost. PSEG Power does not intend to sell these securities nor will it be more-likely-than-not required to sell before recovery of their amortized cost. PSEG Power did not recognize credit losses for these corporate bonds because they are primarily investment grade securities.
32
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The proceeds from the sales of and the net gains (losses) on securities in the NDT Fund were:
Three Months Ended
March 31,
2021
2020
Millions
Proceeds from NDT Fund Sales (A)
$
597
$
555
Net Realized Gains (Losses) on NDT Fund
Gross Realized Gains
$
79
$
38
Gross Realized Losses
(15)
(34)
Net Realized Gains (Losses) on NDT Fund (B)
64
4
Unrealized Gains (Losses) on Equity Securities
(7)
(221)
Impairment of Available-for-Sale Debt Securities (C)
—
(3)
Net Gains (Losses) on NDT Fund Investments
$
57
$
(220)
(A)Includes activity in accounts related to the liquidation of funds being transitioned within the trust.
(B)The cost of these securities was determined on the basis of specific identification.
(C)PSEG Power recognized an impairment of available-for-sale debt securities in 2020. PSEG Power’s policy is to sell all securities that are rated below investment grade.
The NDT Fund debt securities held as of March 31, 2021 had the following maturities:
Time Frame
Fair Value
Millions
Less than one year
$
18
1 - 5 years
329
6 - 10 years
238
11 - 15 years
79
16 - 20 years
92
Over 20 years
481
Total NDT Available-for-Sale Debt Securities
$
1,237
PSEG Power periodically assesses individual debt securities whose fair value is less than amortized cost to determine whether the investments are impaired. For these securities, management considers its intent to sell or requirement to sell a security prior to expected recovery. In those cases where a sale is expected, any impairment would be recorded through earnings. For fixed income securities where there is no intent to sell or likely requirement to sell, management evaluates whether credit loss is a component of the impairment. If so, that portion is recorded through earnings while the noncredit loss component is recorded through Accumulated Other Comprehensive Income (Loss). Any subsequent recoveries of the noncredit loss component of the impairment would be recorded through Accumulated Other Comprehensive Income (Loss). Any subsequent recoveries of the credit loss component would be recognized through earnings. The assessment of fair market value compared to cost is applied on a weighted average basis taking into account various purchase dates and initial cost of the securities.
33
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PSEG maintains certain unfunded nonqualified benefit plans to provide supplemental retirement and deferred compensation benefits to certain key employees. Certain assets related to these plans have been set aside in a grantor trust commonly known as a “Rabbi Trust.”
The following tables show the fair values, gross unrealized gains and losses and amortized cost basis for the securities held in the Rabbi Trust.
As of March 31, 2021
Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
Millions
Domestic Equity Securities
$
18
$
10
$
—
$
28
Available-for-Sale Debt Securities
Government
100
2
(4)
98
Corporate
109
5
(2)
112
Total Available-for-Sale Debt Securities
209
7
(6)
210
Total Rabbi Trust Investments
$
227
$
17
$
(6)
$
238
As of December 31, 2020
Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
Millions
Domestic Equity Securities
$
21
$
10
$
—
$
31
Available-for-Sale Debt Securities
Government
94
6
—
100
Corporate
123
12
—
135
Total Available-for-Sale Debt Securities
217
18
—
235
Total Rabbi Trust Investments
$
238
$
28
$
—
$
266
Net unrealized gains (losses) on debt securities included in Accumulated Other Comprehensive Loss on PSEG’s Condensed Consolidated Balance Sheet were immaterial as of March 31, 2021. The portion of net unrealized losses recognized during the first three months of 2021 related to equity securities still held as of March 31, 2021 was immaterial.
The amounts in the preceding tables do not include receivables and payables for Rabbi Trust Fund transactions which have not settled at the end of each period. Such amounts are included in Accounts Receivable and Accounts Payable on the Condensed Consolidated Balance Sheets as shown in the following table.
As of
As of
March 31, 2021
December 31, 2020
Millions
Accounts Receivable
$
1
$
1
Accounts Payable
$
2
$
1
34
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the value of securities in the Rabbi Trust Fund that have been in an unrealized loss position for less than 12 months and greater than 12 months.
As of March 31, 2021
As of December 31, 2020
Less Than 12 Months
Greater Than 12 Months
Less Than 12 Months
Greater Than 12 Months
Fair Value
Gross Unrealized Losses
Fair Value
Gross Unrealized Losses
Fair Value
Gross Unrealized Losses
Fair Value
Gross Unrealized Losses
Millions
Available-for-Sale Debt Securities
Government (A)
$
61
$
(4)
$
—
$
—
$
19
$
—
$
—
$
—
Corporate (B)
44
(2)
1
—
2
—
1
—
Total Available-for-Sale Debt Securities
105
(6)
1
—
21
—
1
—
Rabbi Trust Investments
$
105
$
(6)
$
1
$
—
$
21
$
—
$
1
$
—
(A)Debt Securities (Government)—Unrealized gains and losses on these securities are recorded in Accumulated Other Comprehensive Income (Loss). The unrealized losses on PSEG’s Rabbi Trust investments in U.S. Treasury obligations and Federal Agency mortgage-backed securities were caused by interest rate changes. PSEG also has investments in municipal bonds. It is not expected that these securities will settle for less than their amortized cost. PSEG does not intend to sell these securities nor will it be more-likely-than-not required to sell before recovery of their amortized cost. PSEG did not recognize credit losses for U.S. Treasury obligations and Federal Agency mortgage-backed securities because these investments are guaranteed by the U.S. government or an agency of the U.S. government. PSEG did not recognize credit losses for municipal bonds because they are primarily investment grade securities.
(B)Debt Securities (Corporate)—Unrealized gains and losses on these securities are recorded in Accumulated Other Comprehensive Income (Loss). Unrealized losses were due to market declines. It is not expected that these securities would settle for less than their amortized cost. PSEG does not intend to sell these securities nor will it be more-likely-than-not required to sell before recovery of their amortized cost. PSEG did not recognize credit losses for these corporate bonds because they are primarily investment grade.
The proceeds from the sales of and the net gains on securities in the Rabbi Trust Fund were:
Three Months Ended
March 31,
2021
2020
Millions
Proceeds from Rabbi Trust Sales
$
65
$
54
Net Realized Gains (Losses) on Rabbi Trust:
Gross Realized Gains
$
5
$
5
Gross Realized Losses
(2)
(1)
Net Realized Gains (Losses) on Rabbi Trust (A)
3
4
Unrealized Gains (Losses) on Equity Securities
—
(5)
Net Gains (Losses) on Rabbi Trust Investments
$
3
$
(1)
(A)The cost of these securities was determined on the basis of specific identification.
35
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Rabbi Trust debt securities held as of March 31, 2021 had the following maturities:
Time Frame
Fair Value
Millions
Less than one year
$
—
1 - 5 years
42
6 - 10 years
25
11 - 15 years
10
16 - 20 years
27
Over 20 years
106
Total Rabbi Trust Available-for-Sale Debt Securities
$
210
PSEG periodically assesses individual debt securities whose fair value is less than amortized cost to determine whether the investments are considered to be impaired. For these securities, management considers its intent to sell or requirement to sell a security prior to expected recovery. In those cases where a sale is expected, any impairment would be recorded through earnings. For fixed income securities where there is no intent to sell or likely requirement to sell, management evaluates whether credit loss is a component of the impairment. If so, that portion is recorded through earnings while the noncredit loss component is recorded through Accumulated Other Comprehensive Income (Loss). Any subsequent recoveries of the noncredit loss component of the impairment would be recorded through Accumulated Other Comprehensive Income (Loss). Any subsequent recoveries of the credit loss component would be recognized through earnings. The assessment of fair market value compared to cost is applied on a weighted average basis taking into account various purchase dates and initial cost of the securities.
The fair value of the Rabbi Trust related to PSE&G, PSEG Power and PSEG’s other subsidiaries is detailed as follows:
As of
As of
March 31, 2021
December 31, 2020
Millions
PSE&G
$
43
$
51
PSEG Power
62
66
Other
133
149
Total Rabbi Trust Investments
$
238
$
266
Note 10. Pension and Other Postretirement Benefits (OPEB)
PSEG sponsors qualified and nonqualified pension plans and OPEB plans covering PSEG’s and its participating affiliates’ current and former employees who meet certain eligibility criteria.
PSEG, PSE&G and PSEG Power are required to record the under or over funded positions of their defined benefit pension and OPEB plans on their respective balance sheets. Such funding positions of each PSEG company are required to be measured as of the date of their respective year-end Consolidated Balance Sheets.
The following table provides the components of net periodic benefit costs relating to all qualified and nonqualified pension and OPEB plans on an aggregate basis for PSEG, excluding Servco. Amounts shown do not reflect the impacts of capitalization and co-owner allocations. Only the service cost component is eligible for capitalization, when applicable.
36
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Components of Net Periodic Benefit (Credits) Costs
Service Cost (included in O&M Expense)
$
38
$
35
$
2
$
2
Non-Service Components of Pension and OPEB (Credits) Costs
Interest Cost
35
48
5
9
Expected Return on Plan Assets
(119)
(111)
(10)
(10)
Amortization of Net
Prior Service Credit
—
(2)
(32)
(32)
Actuarial Loss
26
23
11
12
Non-Service Components of Pension and OPEB (Credits) Costs
(58)
(42)
(26)
(21)
Total Benefit (Credits) Costs
$
(20)
$
(7)
$
(24)
$
(19)
Pension and OPEB (credits) costs for PSE&G, PSEG Power and PSEG’s other subsidiaries, excluding Servco, are detailed as follows:
Pension Benefits
OPEB
Three Months Ended
Three Months Ended
March 31,
March 31,
2021
2020
2021
2020
Millions
PSE&G
$
(16)
$
(7)
$
(23)
$
(19)
PSEG Power
(4)
(1)
(1)
—
Other
—
1
—
—
Total Benefit (Credits) Costs
$
(20)
$
(7)
$
(24)
$
(19)
PSEG does not plan to contribute to its pension and OPEB plans in 2021.
Servco Pension and OPEB
At the direction of LIPA, Servco sponsors benefit plans that cover its current and former employees who meet certain eligibility criteria. Under the OSA, all of these and any future employee benefit costs are to be funded by LIPA. See Note 5. Variable Interest Entity. These obligations, as well as the offsetting long-term receivable, are separately presented on the Condensed Consolidated Balance Sheet of PSEG.
Servco amounts are not included in any of the preceding pension and OPEB cost disclosures. Pension and OPEB costs of Servco are accounted for according to the OSA. Servco recognizes expenses for contributions to its pension plan trusts and for OPEB payments made to retirees. Operating Revenues are recognized for the reimbursement of these costs. Servco plans to contribute $37 million into its pension plan during 2021.Servco’s pension-related revenues and costs were $9 million and $8 million for the three months ended March 31, 2021 and 2020, respectively. The OPEB-related revenues earned and costs incurred were $3 million and $2 million for the three months ended March 31, 2021 and 2020, respectively.
37
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PSEG Power’s activities primarily involve the purchase and sale of energy and related products under transportation, physical, financial and forward contracts at fixed and variable prices. These transactions are with numerous counterparties and brokers that may require cash, cash-related instruments or guarantees as a form of collateral.
PSEG Power has unconditionally guaranteed payments to counterparties on behalf of its subsidiaries in commodity-related transactions in order to
•support current exposure, interest and other costs on sums due and payable in the ordinary course of business, and
•obtain credit.
PSEG Power is subject to
•counterparty collateral calls related to commodity contracts of its subsidiaries, and
•certain creditworthiness standards as guarantor under performance guarantees of its subsidiaries.
Under these agreements, guarantees cover lines of credit between entities and are often reciprocal in nature. The exposure between counterparties can move in either direction.
In order for PSEG Power to incur a liability for the face value of the outstanding guarantees,
•its subsidiaries would have to fully utilize the credit granted to them by every counterparty to whom PSEG Power has provided a guarantee, and
•the net position of the related contracts would have to be “out-of-the-money” (if the contracts are terminated, PSEG Power would owe money to the counterparties).
PSEG Power believes the probability of this result is unlikely. For this reason, PSEG Power believes that the current exposure at any point in time is a more meaningful representation of the potential liability under these guarantees. Current exposure consists of the net of accounts receivable and accounts payable and the forward value on open positions, less any collateral posted.
Changes in commodity prices can have a material impact on collateral requirements under such contracts, which are posted and received primarily in the form of cash and letters of credit. PSEG Power also routinely enters into futures and options transactions for electricity and natural gas as part of its operations. These futures contracts usually require a cash margin deposit with brokers, which can change based on market movement and in accordance with exchange rules.
In addition to the guarantees discussed above, PSEG Power has also provided payment guarantees to third parties and regulatory authorities on behalf of its affiliated companies. These guarantees support various other non-commodity related obligations.
The following table shows the face value of PSEG Power’s outstanding guarantees, current exposure and margin positions as of March 31, 2021 and December 31, 2020.
As of
As of
March 31, 2021
December 31, 2020
Millions
Face Value of Outstanding Guarantees
$
1,788
$
1,792
Exposure under Current Guarantees
$
113
$
128
Letters of Credit Margin Posted
$
112
$
128
Letters of Credit Margin Received
$
51
$
45
Cash Deposited and Received
Counterparty Cash Collateral Deposited
$
—
$
—
Counterparty Cash Collateral Received
$
(4)
$
(5)
Net Broker Balance Deposited (Received)
$
102
$
59
Additional Amounts Posted
Other Letters of Credit
$
42
$
42
38
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As part of determining credit exposure, PSEG Power nets receivables and payables with the corresponding net fair values of energy contracts. See Note 13. Financial Risk Management Activities for further discussion. In accordance with PSEG’s accounting policy, where it is applicable, cash (received)/deposited is allocated against derivative asset and liability positions with the same counterparty on the face of the Condensed Consolidated Balance Sheet. The remaining balances of net cash (received)/deposited after allocation are generally included in Accounts Payable and Receivable, respectively.
In addition to amounts for outstanding guarantees, current exposure and margin positions, PSEG and PSEG Power have posted letters of credit to support PSEG Power’s various other non-energy contractual and environmental obligations. See the preceding table.
Environmental Matters
Passaic River
Lower Passaic River Study Area
The U.S. Environmental Protection Agency (EPA) has determined that a 17-mile stretch of the Passaic River (Lower Passaic River Study Area (LPRSA)) in New Jersey is a “Superfund” site under the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA). PSE&G and certain of its predecessors conducted operations at properties in this area, including at one site that was transferred to PSEG Power.
Certain Potentially Responsible Parties (PRPs), including PSE&G and PSEG Power, formed a Cooperating Parties Group (CPG) and agreed to conduct a Remedial Investigation and Feasibility Study of the LPRSA. The CPG allocated, on an interim basis, the associated costs among its members. The interim allocation is subject to change. In June 2019, the EPA conditionally approved the CPG’s Remedial Investigation. In December 2020, the EPA conditionally approved the CPG’s Feasibility Study (FS), which evaluated various adaptive management scenarios for the remediation of only the upper 9 miles of the LPRSA. In April 2021, the EPA announced the tentative selection of its preferred adaptive management scenario for the upper 9 miles from the options presented in the FS. This tentative selection is subject to public review and comment prior to the EPA’s announcement of a final selection, which is expected in 2021.
Separately, the EPA has released a Record of Decision (ROD) for the LPRSA’s lower 8.3 miles that requires the removal of sediments at an estimated cost of $2.3 billion (ROD Remedy). An EPA-commenced process to allocate the associated costs is underway and PSEG cannot predict the outcome. The allocation does not address certain costs incurred by the EPA for which they may be entitled to reimbursement and which may be material. Occidental Chemical Corporation, one of the PRPs, has commenced the design of the ROD Remedy, but declined to participate in the allocation process. Instead, it filed suit against PSE&G and others seeking cost recovery and contribution under CERCLA but has not quantified alleged damages. The litigation is ongoing and PSEG cannot predict the outcome.
Two PRPs, Tierra Solutions, Inc. (Tierra) and Maxus Energy Corporation (Maxus), have filed for Chapter 11 bankruptcy. The trust representing the creditors in this proceeding has filed a complaint asserting claims against Tierra’s and Maxus’ current and former parent entities, among others. Any damages awarded may be used to fund the remediation of the LPRSA.
As of March 31, 2021, PSEG has approximately $65 million accrued for this matter. Of this amount, PSE&G has an Environmental Costs Liability of $52 million and a corresponding Regulatory Asset based on its continued ability to recover such costs in its rates. PSEG Power has an Other Noncurrent Liability of $13 million.
The outcome of this matter is uncertain, and until (i) a final remedy for the entire LPRSA is selected and an agreement is reached by the PRPs to fund it, (ii) PSE&G’s and PSEG Power’s respective shares of the costs are determined, and (iii) PSE&G’s ability to recover the costs in its rates is determined, it is not possible to predict this matter’s ultimate impact on PSEG’s financial statements. It is possible that PSE&G and PSEG Power will record additional costs beyond what they have accrued, and that such costs could be material, but PSEG cannot at the current time estimate the amount or range of any additional costs.
Newark Bay Study Area
The EPA has established the Newark Bay Study Area, which is an extension of the LPRSA and includes Newark Bay and portions of surrounding waterways. The EPA has notified PSEG and 11 other PRPs of their potential liability. PSE&G and PSEG Power are unable to estimate their respective portions of any loss or possible range of loss related to this matter. In December 2018, PSEG Power completed the sale of the site of the Hudson electric generating station. PSEG Power contractually transferred all land rights and structures on the Hudson site to a third-party purchaser, along with the assumption of the environmental liabilities for the site.
39
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
New Jersey and certain federal regulators have alleged that PSE&G, PSEG Power and 56 other PRPs may be liable for natural resource damages within the LPRSA. In particular, PSE&G, PSEG Power and other PRPs received notice from federal regulators of the regulators’ intent to move forward with a series of studies assessing potential damages to natural resources at the Diamond Alkali Superfund Site, which includes the LPRSA and the Newark Bay Study Area. PSE&G and PSEG Power are unable to estimate their respective portions of any possible loss or range of loss related to this matter.
Manufactured Gas Plant (MGP) Remediation Program
PSE&G is working with the New Jersey Department of Environmental Protection (NJDEP) to assess, investigate and remediate environmental conditions at its former MGP sites. To date, 38 sites requiring some level of remedial action have been identified. Based on its current studies, PSE&G has determined that the estimated cost to remediate all MGP sites to completion could range between $300 million and $338 million on an undiscounted basis, including its $52 million share for the Passaic River as discussed above. Since no amount within the range is considered to be most likely, PSE&G has recorded a liability of $300 million as ofMarch 31, 2021. Of this amount, $110 million was recorded in Other Current Liabilities and $190 million was reflected as Environmental Costs in Noncurrent Liabilities. PSE&G has recorded a $300 millionRegulatory Asset with respect to these costs. PSE&G periodically updates its studies taking into account any new regulations or new information which could impact future remediation costs and adjusts its recorded liability accordingly. PSE&G completed sampling in the Passaic River to delineate coal tar from certain MGP sites that abut the Passaic River Superfund site. PSEG cannot determine at this time whether this will have an impact on the Passaic River Superfund remedy.
CWA Section 316(b) Rule
The EPA’s CWA Section 316(b) rule establishes requirements for the regulation of cooling water intakes at existing power plants and industrial facilities with a design flow of more than two million gallons of water per day. The EPA requires that National Pollutant Discharge Elimination System permits be renewed every five years and that each state Permitting Director manage renewal permits for its respective power generation facilities on a case by case basis. The NJDEP manages the permits under the New Jersey Pollutant Discharge Elimination System (NJPDES) program. Connecticut and New York also have permits to manage their respective pollutant discharge elimination system programs.
In June 2016, the NJDEP issued a final NJPDES permit for Salem. In July 2016, the Delaware Riverkeeper Network (Riverkeeper) filed an administrative hearing request challenging certain conditions of the permit, including the NJDEP’s application of the 316(b) rule. If the Riverkeeper’s challenge is successful, PSEG Power may be required to incur additional costs to comply with the CWA. Potential cooling water and/or service water system modification costs could be material and could adversely impact the economic competitiveness of this facility. The NJDEP granted the hearing request but no hearing date has been established.
Jersey City, New Jersey Subsurface Feeder Cable Matter
In October 2016, a discharge of dielectric fluid from subsurface feeder cables located in the Hudson River near Jersey City, New Jersey, was identified and reported to the NJDEP. The feeder cables are located within a subsurface easement granted to PSE&G by the property owners, Newport Associates Development Company (NADC) and Newport Associates Phase I Developer Limited Partnership. The feeder cables are subject to agreements between PSE&G and Consolidated Edison Company of New York, Inc. (Con Edison) and are jointly owned by PSE&G and Con Edison. The impacted cable was repaired in September 2017. A federal response was initially led by the U.S. Coast Guard. The U.S. Coast Guard transitioned control of the federal response to the EPA, and the EPA ended the federal response to the matter in 2018. The investigation of small amounts of residual dielectric fluid believed to be contained with the marina sediment is ongoing as part of the NJDEP site remediation program. In August 2020, PSE&G finalized a settlement with the federal government regarding the reimbursement of costs associated with the federal response to this matter and payment of civil penalties of an immaterial amount.
A lawsuit in federal court is pending to determine ultimate responsibility for the costs to address the leak among PSE&G, Con Edison and NADC. In addition, Con Edison filed counter claims against PSE&G and NADC, including seeking injunctive relief and damages. Based on the information currently available and depending on the outcome of the federal court action, PSE&G’s portion of the costs to address the leak may be material; however, PSE&G anticipates that it will recover its costs, other than civil penalties, through regulatory proceedings.
Basic Generation Service (BGS), BGSS and ZECs
Each year, PSE&G obtains its electric supply requirements through annual New Jersey BGS auctions for two categories of customers that choose not to purchase electric supply from third-party suppliers. The first category, which represents about 80% of PSE&G’s load requirement, is residential and smaller commercial and industrial customers (BGS-Residential Small Commercial Pricing (RSCP)). The second category is larger customers that exceed a BPU-established load (kW) threshold
40
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(BGS-Commercial and Industrial Energy Pricing (CIEP)). Pursuant to applicable BPU rules, PSE&G enters into the Supplier Master Agreements with the winners of these RSCP and CIEP BGS auctions to purchase BGS for PSE&G’s load requirements. The winners of the RSCP and CIEP auctions have been responsible for fulfilling all the requirements of a PJM load-serving entity including the provision of capacity, energy, ancillary services, transmission and any other services required by PJM. BGS suppliers assume all volume risk and customer migration risk and must satisfy New Jersey’s renewable portfolio standards. Beginning with the 2021 BGS auction, transmission will become the responsibility of the New Jersey EDCs, and will no longer be a component of the BGS auction product for either the RSCP or CIEP auctions. BGS suppliers serving load from the 2018, 2019 and 2020 BGS auctions had the option to transfer the transmission obligation to the New Jersey EDCs as of February 2021. Suppliers that did so will have their total BGS payment from the EDCs reduced to reflect the transfer of the transmission obligation to the EDCs.
The BGS-CIEP auction is for a one-year supply period from June 1 to May 31 with the BGS-CIEP auction price measured in dollars per MW-day for capacity. The final price for the BGS-CIEP auction year commencing June 1, 2021 is $351.06 per MW-day, replacing the BGS-CIEP auction year price ending May 31, 2021 of $359.98 per MW-day. Energy for BGS-CIEP is priced at hourly PJM locational marginal prices for the contract period.
PSE&G contracts for its anticipated BGS-RSCP load on a three-year rolling basis, whereby each year one-third of the load is procured for a three-year period. The contract prices in dollars per MWh for the BGS-RSCP supply, as well as the approximate load, are as follows:
Auction Year
2018
2019
2020
2021
36-Month Terms Ending
May 2021
May 2022
May 2023
May 2024
(A)
Load (MW)
2,900
2,800
2,800
2,900
$ per MWh
$91.77
$98.04
$102.16
$64.80
(A)Prices set in the 2021 BGS auction will become effective on June 1, 2021 when the 2018 BGS auction agreements expire.
PSE&G has a full-requirements contract with PSEG Power to meet the gas supply requirements of PSE&G’s gas customers. PSEG Power has entered into hedges for a portion of these anticipated BGSS obligations, as permitted by the BPU. The BPU permits PSE&G to recover the cost of gas hedging up to 115 billion cubic feet or 80% of its residential gas supply annual requirements through the BGSS tariff. Current plans call for PSEG Power to hedge on behalf of PSE&G approximately 70 billion cubic feet or 50% of its residential gas supply annual requirements. For additional information, see Note 20. Related-Party Transactions.
Pursuant to a process established by the BPU, New Jersey EDCs, including PSE&G, are required to purchase ZECs from eligible nuclear plants selected by the BPU. In April 2019, PSEG Power’s Salem 1, Salem 2 and Hope Creek nuclear plants were selected to receive ZEC revenue for approximately three years, through May 2022. In April 2021, PSEG Power’s Salem 1, Salem 2 and Hope Creek nuclear plants were awarded ZECs for the three-year eligibility period starting June 2022. PSE&G has implemented a tariff to collect a non-bypassable distribution charge in the amount of $0.004 per KWh from its retail distribution customers to be used to purchase the ZECs from these plants. PSE&G will purchase the ZECs on a monthly basis with payment to be made annually following completion of each energy year. The legislation also requires nuclear plants to reapply for any subsequent three-year periods and allows the BPU to adjust prospective ZEC payments.
Minimum Fuel Purchase Requirements
PSEG Power’s nuclear fuel strategy is to maintain certain levels of uranium and to make periodic purchases to support such levels. As such, the commitments referred to in the following table may include estimated quantities to be purchased that deviate from contractual nominal quantities. PSEG Power’s nuclear fuel commitments cover approximately 100% of its estimated uranium, enrichment and fabrication requirements through 2021 and a significant portion through 2022 at Salem, Hope Creek and Peach Bottom.
PSEG Power has various multi-year contracts for natural gas and firm transportation and storage capacity for natural gas that are primarily used to meet its obligations to PSE&G. When there is excess delivery capacity available beyond the needs of PSE&G’s customers, PSEG Power can use the gas to supply its fossil generating stations in New Jersey.
41
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of March 31, 2021, the total minimum purchase requirements included in these commitments were as follows:
Fuel Type
PSEG Power’s Share of Commitments through 2025
Millions
Nuclear Fuel
Uranium
$
192
Enrichment
$
345
Fabrication
$
177
Natural Gas
$
1,259
Pending FERC Matter
PSE&G has received requests for information and a Notice of Investigation from FERC’s Office of Enforcement concerning a transmission project. PSE&G retained outside counsel to assist with an internal investigation. PSE&G is fully cooperating with FERC’s requests for information and the investigation. It is not possible at this time to predict the outcome of this matter.
Pending Tropical Storm Matter
Following the effects of Tropical Storm Isaias, the New York Attorney General initiated an inquiry into PSEG LI’s preparation and response to the storm. In addition, the Department of Public Service (DPS) within the New York State Public Service Commission launched an investigation of state electric service providers, including PSEG LI, and other state telephone, cable and internet providers into their preparation and restoration efforts following Tropical Storm Isaias.Although the inquiry by the New York Attorney General remains pending, the DPS issued an interim storm investigation report. With respect to PSEG LI, the DPS’ report found that PSEG LI violated its Emergency Response Plan and DPS Regulations, and recommended that LIPA consider taking various actions, including terminating or renegotiating the OSA. LIPA also initiated its own review of PSEG LI’s performance and issued a report with recommendations for improvements to PSEG LI’s structure and processes, including a timeline for implementing those recommendations. That report also recommended that LIPA either renegotiate or terminate the OSA.
PSEG LI agreed with LIPA that it would fund approximately $6.5 million in claims by customers for food and medication spoilage costs incurred as a result of being without electric service during the storm.
In December 2020, LIPA filed a complaint against PSEG LI in New York State court alleging multiple breaches of the OSA in connection with PSEG LI’s preparation for and response to Tropical Storm Isaias seeking specific performance and $70 million in damages. Pursuant to recommendations by the New York State DPS, LIPA has initiated a series of actions to allow its board to determine whether to seek to terminate the OSA or instead continue with PSEG LI as its Service Provider.
PSEG LI is fully cooperating with the inquiries by the New York Attorney General and the DPS, and we cannot predict their outcome. PSEG LI also continues to work closely with LIPA to address the recommendations in LIPA’s report. PSEG LI intends to vigorously defend itself with regard to the allegations in LIPA’s complaint alleging breaches of the OSA; however, a decision in this proceeding requiring specific performance or the payment of damages by PSEG LI or resulting in the termination of the OSA could have a material adverse effect on PSEG’s results of operations and financial condition.
Pending BPU Audit of PSE&G
In September 2020, the BPU ordered the commencement of a comprehensive affiliate and management audit of PSE&G. Phase 1 of the planned audit will review affiliate relations and cost allocation between PSE&G and its affiliates, including an analysis of the relationship between PSE&G and PSEG Energy Resources & Trade, LLC, a wholly owned subsidiary of PSEG Power over the past ten years, and between PSE&G and PSEG LI. Phase 2 will be a comprehensive management audit, which will address, among other things, executive management, corporate governance, system operations, human resources, cyber security, compliance with customer protection requirements and customer safety. It is not possible at this time to predict the outcome of this matter.
Litigation
Sewaren 7 Construction
In June 2018, a complaint was filed in federal court in Newark, New Jersey against PSEG Fossil LLC, a wholly owned subsidiary of PSEG Power, regarding an ongoing dispute with Durr Mechanical Construction, Inc. (Durr), a contractor on the
42
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Sewaren 7 project. Among other things, Durr seeks damages of $93 million and alleges that PSEG Power withheld money owed to Durr and that PSEG Power’s intentional conduct led to the inability of Durr to obtain prospective contracts. PSEG Power intends to vigorously defend against these allegations. In January 2021, the court partially granted PSEG Power’s motion to dismiss certain claims, reducing the amount claimed to $68 million. In December 2018, Durr filed for Chapter 11 bankruptcy in the federal court in the Southern District of New York (SDNY). The SDNY bankruptcy court has allowed the New Jersey litigation to proceed. PSEG Power has accrued an amount related to outstanding invoices which does not reflect an assessment of claims and potential counterclaims in this matter. Due to its preliminary nature, PSEG Power cannot predict the outcome of this matter.
Other Litigation and Legal Proceedings
PSEG and its subsidiaries are party to various lawsuits in the ordinary course of business. In view of the inherent difficulty in predicting the outcome of such matters, PSEG, PSE&G and PSEG Power generally cannot predict the eventual outcome of the pending matters, the timing of the ultimate resolution of these matters, or the eventual loss, fines or penalties related to each pending matter.
In accordance with applicable accounting guidance, a liability is accrued when those matters present loss contingencies that are both probable and reasonably estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. PSEG will continue to monitor the matter for further developments that could affect the amount of the accrued liability that has been previously established.
Based on current knowledge, management does not believe that loss contingencies arising from pending matters, other than the matters described herein, could have a material adverse effect on PSEG’s, PSE&G’s or PSEG Power’s consolidated financial position or liquidity. However, in light of the inherent uncertainties involved in these matters, some of which are beyond PSEG’s control, and the large or indeterminate damages sought in some of these matters, an adverse outcome in one or more of these matters could be material to PSEG’s, PSE&G’s or PSEG Power’s results of operations or liquidity for any particular reporting period.
Ongoing Coronavirus Pandemic
PSE&G, PSEG Power and PSEG LI are providing essential services during this national emergency related to the ongoing coronavirus (COVID-19) pandemic. The COVID-19 pandemic and associated government actions and economic effects continue to impact our businesses. PSEG and its subsidiaries have incurred additional expenses to protect our employees and customers, and PSE&G is experiencing significantly higher bad debts and lower cash collections from customers due to the moratorium on shutoffs for residential customers that has been extended through June 30, 2021. PSE&G has deferred the impact of these costs for future recovery. The potential future impact of the pandemic and the associated economic impacts, which could extend beyond the duration of the pandemic, could have risks that drive certain accounting considerations. The ultimate impact of the ongoing coronavirus pandemic is highly uncertain and cannot be predicted at this time.
Note 12. Debt and Credit Facilities
Long-Term Debt Financing Transactions
The following long-term debt transactions occurred in the three months ended March 31, 2021:
PSE&G
•issued $450 million of 0.95% Secured Medium-Term Notes, Series N, due March 2026,
•issued $450 million of 3.00% Secured Medium-Term Notes, Series N, due March 2051, and
•retired $300 million of 1.90% Medium-Term Notes, Series K, at maturity.
Debt Covenants
PSEG Power’s existing credit agreements and senior notes contain covenants restricting the ability of PSEG Power and its subsidiaries that guarantee its indebtedness from consummating certain mergers, consolidations or asset sales. The disposal of PSEG Power’s non-nuclear generating fleet could, depending on the structure of such transaction, among other factors, trigger a default under one or more of these provisions. In March 2021, PSEG Power and its subsidiaries received waivers from the lenders and the administrative agent under their existing credit agreements permitting them to divest, in one or more transactions, some or all of its and its subsidiaries’ non-nuclear assets without breaching the terms of the agreements. For these reasons, or for other reasons, PSEG Power may decide, or be required, to seek amendments or waivers under its credit agreements and may redeem its outstanding senior notes, at a price equal to the principal amount thereof plus a make-whole
43
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
premium. Whether such amendments, waivers or redemptions will be required will depend on a number of factors, including the structure of any transaction resulting from the strategic review, and any actual redemption price would depend on the applicable treasury rate in effect at such time. It is likewise possible that the ultimate outcome of the process may result in a transaction, or may result in no transaction at all, where the PSEG Power notes are not redeemed. If PSEG Power is required to redeem its senior notes, the cost of such redemption would be material.
Short-Term Liquidity
PSEG meets its short-term liquidity requirements, as well as those of PSEG Power, primarily through the issuance of commercial paper and, from time to time, short-term loans. PSE&G maintains its own separate commercial paper program to meet its short-term liquidity requirements. Each commercial paper program is fully back-stopped by its own separate credit facilities.
The commitments under the $4.2 billion credit facilities are provided by a diverse bank group. As of March 31, 2021, the total available credit capacity was $3.9 billion.
As of March 31, 2021, no single institution represented more than 9% of the total commitments in the credit facilities.
As of March 31, 2021, total credit capacity was in excess of the total anticipated maximum liquidity requirements over PSEG’s 12-month planning horizon, including access to meet redemptions.
Each of the credit facilities is restricted as to availability and use to the specific companies as listed in the following table; however, if necessary, the PSEG facilities can also be used to support its subsidiaries’ liquidity needs.
The total credit facilities and available liquidity as of March 31, 2021 were as follows:
As of March 31, 2021
Company/Facility
Total Facility
Usage (D)
Available Liquidity
Expiration Date
Primary Purpose
Millions
PSEG
5-year Credit Facilities (A)
$
1,500
$
167
$
1,333
Mar 2024
Commercial Paper Support/Funding/Letters of Credit
Total PSEG
$
1,500
$
167
$
1,333
PSE&G
5-year Credit Facility (B)
$
600
$
18
$
582
Mar 2024
Commercial Paper Support/Funding/Letters of Credit
Total PSE&G
$
600
$
18
$
582
PSEG Power
3-year Letter of Credit Facility
$
100
$
32
$
68
Sept 2021
Letters of Credit
3-year Letter of Credit Facility
100
81
19
Sept 2022
Letters of Credit
5-year Credit Facilities (C)
1,900
39
1,861
Mar 2024
Funding/Letters of Credit
Total PSEG Power
$
2,100
$
152
$
1,948
Total
$
4,200
$
337
$
3,863
(A)PSEG facilities will be reduced by $9 million in March 2022.
(B)PSE&G facility will be reduced by $4 million in March 2022.
(C)PSEG Power facilities will be reduced by $12 million in March 2022.
(D)The primary use of PSEG’s and PSE&G’s credit facilities is to support their respective Commercial Paper Programs, under which as of March 31, 2021, PSEG had $165 million outstanding at a weighted average interest rate of 0.23%. PSE&G had no Commercial Paper outstanding as of March 31, 2021.
Short-Term Loans
PSEG
In March 2021, PSEG entered into a $500 million, 364-day variable rate term loan agreement. In March 2020, PSEG entered into a $300 million, 364-day variable rate term loan agreement which was prepaid in January 2021.
44
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Derivative accounting guidance requires that a derivative instrument be recognized as either an asset or a liability at fair value, with changes in fair value of the derivative recognized in earnings each period. Other accounting treatments are available through special election and designation provided that the derivative instrument meets specific, restrictive criteria, both at the time of designation and on an ongoing basis. These alternative permissible treatments include normal purchases and normal sales (NPNS), cash flow hedge and fair value hedge accounting. PSEG, PSEG Power and PSE&G have applied the NPNS scope exception to certain derivative contracts for the forward sale of generation, power procurement agreements and fuel agreements. PSEG uses interest rate swaps and other derivatives, which are designated and qualifying as cash flow or fair value hedges. PSEG Power enters into additional contracts that are derivatives, but are not designated as either cash flow hedges or fair value hedges. These transactions are economic hedges and are recorded at fair market value with changes recognized in earnings.
Commodity Prices
Within PSEG and its affiliate companies, PSEG Power has the most exposure to commodity price risk. PSEG 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. PSEG Power uses a variety of derivative and non-derivative instruments, such as financial options, futures, swaps, fuel purchases and forward purchases and sales of electricity, to manage the exposure to fluctuations in commodity prices and optimize the value of PSEG Power’s expected generation. PSEG Power also uses derivatives to hedge a portion of its anticipated BGSS obligations with PSE&G. For additional information see Note 11. Commitments and Contingent Liabilities. Changes in the fair market value of these derivative contracts are recorded in earnings.
Interest Rates
PSEG, 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.
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 terminated interest rate derivatives designated as cash flow hedges was $(8) million and $(9) million as of March 31, 2021 and December 31, 2020, respectively. The after-tax unrealized losses on these hedges expected to be reclassified to earnings during the next 12 months are $(3) million.
Fair Values of Derivative Instruments
The following are the fair values of derivative instruments on the Condensed Consolidated Balance Sheets. The following tables also include disclosures for offsetting derivative assets and liabilities which are subject to a master netting or similar agreement. In general, the terms of the agreements provide that in the event of an early termination the counterparties have the right to offset amounts owed or owing under that and any other agreement with the same counterparty. Accordingly, and in accordance with PSEG’s accounting policy, these positions are offset on the Condensed Consolidated Balance Sheets of PSEG Power and PSEG. For additional information see Note 14. Fair Value Measurements. The following tabular disclosure does not include the offsetting of trade receivables and payables.
45
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Total Net Mark-to-Market Derivative Assets (Liabilities)
$
(11)
$
31
$
20
$
20
As of December 31, 2020
PSEG Power (A)
Consolidated
Not Designated
Balance Sheet Location
Energy- Related Contracts
Netting (B)
Total PSEG Power
Total Derivatives
Millions
Derivative Contracts
Current Assets
$
464
$
(404)
$
60
$
60
Noncurrent Assets
93
(84)
9
9
Total Mark-to-Market Derivative Assets
$
557
$
(488)
$
69
$
69
Derivative Contracts
Current Liabilities
$
(412)
$
391
$
(21)
$
(21)
Noncurrent Liabilities
(109)
105
(4)
(4)
Total Mark-to-Market Derivative (Liabilities)
$
(521)
$
496
$
(25)
$
(25)
Total Net Mark-to-Market Derivative Assets (Liabilities)
$
36
$
8
$
44
$
44
(A)Substantially all of PSEG 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, 2021 and December 31, 2020.
(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) 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, 2021 and December 31, 2020, PSEG Power had net cash collateral (receipts) payments to counterparties of $98 million and $54 million, respectively. Of these net cash collateral (receipts) payments, $31 million and $8 million as of March 31, 2021 and December 31, 2020, respectively, were netted against the corresponding net derivative contract positions. Of the $31 million as of March 31, 2021, $(2) million was netted against current assets, $(12) million was netted against noncurrent assets, $44 million was netted against current liabilities and $1 million was netted against noncurrent liabilities. Of the $8 million as of December 31, 2020, $(13) million was netted against current assets and $21 million was netted against noncurrent liabilities.
46
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Certain of PSEG Power’s derivative instruments contain provisions that require PSEG Power to post collateral. This collateral may be posted in the form of cash or credit support with thresholds contingent upon PSEG 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 PSEG Power were to be downgraded to a below investment grade rating by S&P or Moody’s, it would be required to provide additional collateral. A below investment grade credit rating for PSEG Power would represent a three level downgrade from its current Moody’s rating and a two level downgrade from its current S&P rating. 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. PSEG 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 $28 million as of March 31, 2021 and December 31, 2020. As of March 31, 2021 and December 31, 2020, PSEG Power had the contractual right of offset of $2 million and $3 million, respectively, related to derivative instruments that are assets with the same counterparty under master agreements and net of margin posted. If PSEG Power had been downgraded to a below investment grade rating, it would have had additional collateral obligations of $26 million and $25 million as of March 31, 2021 and December 31, 2020, respectively, related to its derivatives, net of the contractual right of offset under master agreements and the application of collateral.
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, 2021 and 2020:
Derivatives in Cash Flow Hedging Relationships
Amount of Pre-Tax Gain (Loss) Recognized in AOCI on Derivatives
Location of Pre-Tax Gain (Loss) Reclassified from AOCI into Income
Amount of Pre-Tax Gain (Loss) Reclassified from AOCI into Income
Three Months Ended
Three Months Ended
March 31,
March 31,
2021
2020
2021
2020
Millions
Millions
PSEG
Interest Rate Swaps
$
—
$
(6)
Interest Expense
$
(1)
$
(2)
Total PSEG
$
—
$
(6)
$
(1)
$
(2)
The effect of interest rate cash flow hedges is recorded in Interest Expense in PSEG’s Condensed Consolidated Statement of Operations. For the three months ended March 31, 2021 and 2020, the amount of loss on interest rate hedges reclassified from Accumulated Other Comprehensive Income (Loss) into income was $(1) million after-tax.
The following reconciles the Accumulated Other Comprehensive Income (Loss) for derivative activity included in the Accumulated Other Comprehensive Loss of PSEG on a pre-tax and after-tax basis.
Accumulated Other Comprehensive Income (Loss)
Pre-Tax
After-Tax
Millions
Balance as of December 31, 2019
$
(21)
$
(15)
Loss Recognized in AOCI
(6)
(4)
Less: Loss Reclassified into Income
14
10
Balance as of December 31, 2020
$
(13)
$
(9)
Loss Recognized in AOCI
—
—
Less: Loss Reclassified into Income
1
1
Balance as of March 31, 2021
$
(12)
$
(8)
47
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following shows the effect on the Condensed Consolidated Statements of Operations of derivative instruments not designated as hedging instruments or as NPNS for the three months ended March 31, 2021 and 2020, respectively. PSEG Power’s derivative contracts reflected in this table include contracts to hedge the purchase and sale of electricity and natural gas, and the purchase of fuel. The table does not include contracts that PSEG Power has designated as NPNS, such as its BGS contracts and certain other energy supply contracts that it has with other utilities and companies with retail load.
Derivatives Not Designated as Hedges
Location of Pre-Tax Gain (Loss) Recognized in Income on Derivatives
Pre-Tax Gain (Loss) Recognized in Income on Derivatives
Three Months Ended
March 31,
2021
2020
Millions
PSEG and PSEG Power
Energy-Related Contracts
Operating Revenues
$
(46)
$
231
Energy-Related Contracts
Energy Costs
6
(68)
Total PSEG and PSEG Power
$
(40)
$
163
The following table summarizes the net notional volume purchases/(sales) of open derivative transactions by commodity as of March 31, 2021 and December 31, 2020.
Type
Notional
Total
PSEG
PSEG Power
PSE&G
Millions
As of March 31, 2021
Natural Gas
Dekatherm (Dth)
308
—
308
—
Electricity
MWh
(66)
—
(66)
—
Financial Transmission Rights (FTRs)
MWh
11
—
11
—
As of December 31, 2020
Natural Gas
Dth
321
—
321
—
Electricity
MWh
(66)
—
(66)
—
FTRs
MWh
20
—
20
—
Credit Risk
Credit risk relates to the risk of loss that PSEG Power would incur as a result of non-performance by counterparties pursuant to the terms of their contractual obligations. PSEG has established credit policies that it believes significantly minimize credit risk. These policies include an evaluation of potential counterparties’ financial condition (including credit rating), collateral 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 PSEG Power’s and PSEG’s financial condition, results of operations or net cash flows.
The following table provides information on PSEG Power’s credit risk from wholesale counterparties, net of collateral, as of March 31, 2021. It further delineates that exposure by the credit rating of the counterparties, which is determined by the lowest rating from S&P, Moody’s or an internal scoring model. In addition, it provides guidance on the concentration of credit risk to individual counterparties and an indication of the quality of PSEG Power’s credit risk by credit rating of the counterparties.
As of March 31, 2021, 91% of the net credit exposure for PSEG Power’s wholesale operations was with investment grade counterparties. Credit exposure is defined as any positive results of netting accounts receivable/accounts payable and the forward value of open positions (which includes all financial instruments including derivatives, NPNS and non-derivatives).
48
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(A)Represents net exposure of $121 million with PSE&G.
As of March 31, 2021, collateral held from counterparties where PSEG Power had credit exposure included $3 million in cash collateral and $34 million in letters of credit.
As of March 31, 2021, PSEG Power had 131 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, 2021, primarily all of the posted collateral was in the form of parental guarantees. The unsecured credit used by the suppliers represents PSE&G’s net credit exposure. PSE&G’s BGS suppliers’ credit exposure is calculated each business day As of March 31, 2021, PSE&G had no net credit exposure with suppliers, including PSEG Power.
PSE&G is permitted to recover its costs of procuring energy through the BPU-approved BGS tariffs. PSE&G’s counterparty credit risk is mitigated by its ability to recover realized energy costs through customer rates.
Note 14. Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Accounting guidance for fair value measurement emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and establishes a fair value hierarchy that distinguishes between assumptions based on market data obtained from independent sources and those based on an entity’s own assumptions. The hierarchy prioritizes the inputs to fair value measurement into three levels:
Level 1—measurements utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that PSEG, PSE&G and PSEG Power have the ability to access. These consist primarily of listed equity securities and money market mutual funds, as well as natural gas futures contracts executed on NYMEX.
Level 2—measurements include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and other observable inputs such as interest rates and yield curves that are observable at commonly quoted intervals. These consist primarily of non-exchange traded derivatives such as forward contracts or options and most fixed income securities.
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. These consist primarily of certain electric load contracts and gas contracts.
Certain derivative transactions may transfer from Level 2 to Level 3 if inputs become unobservable and internal modeling techniques are employed to determine fair value. Conversely, measurements may transfer from Level 3 to Level 2 if the inputs become observable.
The following tables present information about PSEG’s, PSE&G’s and PSEG Power’s respective assets and (liabilities) measured at fair value on a recurring basis as of March 31, 2021 and December 31, 2020, 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 PSEG Power.
49
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Recurring Fair Value Measurements as of December 31, 2020
Description
Total
Netting (D)
Quoted Market Prices for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Millions
PSEG
Assets:
Cash Equivalents (A)
$
312
$
—
$
312
$
—
$
—
Derivative Contracts:
Energy-Related Contracts (B)
$
69
$
(488)
$
26
$
519
$
12
NDT Fund (C)
Equity Securities
$
1,352
$
—
$
1,351
$
1
$
—
Debt Securities—U.S. Treasury
$
239
$
—
$
—
$
239
$
—
Debt Securities—Govt Other
$
342
$
—
$
—
$
342
$
—
Debt Securities—Corporate
$
566
$
—
$
—
$
566
$
—
Rabbi Trust (C)
Equity Securities
$
31
$
—
$
31
$
—
$
—
Debt Securities—U.S. Treasury
$
59
$
—
$
—
$
59
$
—
Debt Securities—Govt Other
$
41
$
—
$
—
$
41
$
—
Debt Securities—Corporate
$
135
$
—
$
—
$
135
$
—
Liabilities:
Derivative Contracts:
Energy-Related Contracts (B)
$
(25)
$
496
$
(33)
$
(483)
$
(5)
PSE&G
Assets:
Cash Equivalents (A)
$
50
$
—
$
50
$
—
$
—
Rabbi Trust (C)
Equity Securities
$
6
$
—
$
6
$
—
$
—
Debt Securities—U.S. Treasury
$
11
$
—
$
—
$
11
$
—
Debt Securities—Govt Other
$
8
$
—
$
—
$
8
$
—
Debt Securities—Corporate
$
26
$
—
$
—
$
26
$
—
PSEG Power
Assets:
Derivative Contracts:
Energy-Related Contracts (B)
$
69
$
(488)
$
26
$
519
$
12
NDT Fund (C)
Equity Securities
$
1,352
$
—
$
1,351
$
1
$
—
Debt Securities—U.S. Treasury
$
239
$
—
$
—
$
239
$
—
Debt Securities—Govt Other
$
342
$
—
$
—
$
342
$
—
Debt Securities—Corporate
$
566
$
—
$
—
$
566
$
—
Rabbi Trust (C)
Equity Securities
$
8
$
—
$
8
$
—
$
—
Debt Securities—U.S. Treasury
$
15
$
—
$
—
$
15
$
—
Debt Securities—Govt Other
$
10
$
—
$
—
$
10
$
—
Debt Securities—Corporate
$
33
$
—
$
—
$
33
$
—
Liabilities:
Derivative Contracts:
Energy-Related Contracts (B)
$
(25)
$
496
$
(33)
$
(483)
$
(5)
(A)Represents money market mutual funds.
(B)Level 1—These contracts represent natural gas futures contracts executed on NYMEX, and are being valued solely on settled pricing inputs which come directly from the exchange.
Level 2—Fair values for energy-related contracts are obtained primarily using a market-based approach. Most derivative contracts (forward purchase or sale contracts and swaps) are valued using settled prices from similar assets and liabilities from an exchange, such as NYMEX, ICE and Nodal Exchange, or auction prices. Prices used in
51
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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—Unobservable inputs are used for the valuation of certain contracts. See “Additional Information Regarding Level 3 Measurements” below for more information on the utilization of unobservable inputs.
(C)The fair value measurement table excludes cash of $1 million and foreign currency of $1 million in the NDT Fund as of March 31, 2021 and foreign currency of $2 million as of December 31, 2020. The NDT Fund maintains investments in various equity and fixed income securities. The Rabbi Trust maintains investments in a Russell 3000 index fund and various fixed income securities. These securities are generally valued with prices that are either exchange provided (equity securities) or market transactions for comparable securities and/or broker quotes (fixed income securities).
Level 1—Investments in marketable equity securities within the NDT Fund are primarily investments in common stocks across a broad range of industries and sectors. Most equity securities are priced utilizing the principal market close price or, in some cases, midpoint, bid or ask price. Certain other equity securities in the NDT and Rabbi Trust Funds consist primarily of investments in money market funds which seek a high level of current income as is consistent with the preservation of capital and the maintenance of liquidity. To pursue its goals, the funds normally invest in diversified portfolios of high quality, short-term, dollar-denominated debt securities and government securities. The funds’ net asset value is priced and published daily. The Rabbi Trust’s Russell 3000 index fund is valued based on quoted prices in an active market and can be redeemed daily without restriction.
Level 2—NDT and Rabbi Trust fixed income securities include investment grade corporate bonds, collateralized mortgage obligations, asset-backed securities and certain government and U.S. Treasury obligations or Federal Agency asset-backed securities and municipal bonds with a wide range of maturities. Since many fixed income securities do not trade on a daily basis, they are priced using an evaluated pricing methodology that varies by asset class and reflects observable market information such as the most recent exchange price or quoted bid for similar securities. Market-based standard inputs typically include benchmark yields, reported trades, broker/dealer quotes and issuer spreads. The preferred stocks are not actively traded on a daily basis and therefore, are also priced using an evaluated pricing methodology. Certain short-term investments are valued using observable market prices or market parameters such as time-to-maturity, coupon rate, quality rating and current yield.
(D)Represents the netting of fair value balances with the same counterparty (where the right of offset exists) and the application of collateral. See Note 13. Financial Risk Management Activities for additional detail.
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 considers credit and non-performance 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 non-performance risk by counterparty. The impacts of credit and non-performance risk were not material to the financial statements.
The fair value of PSEG Power’s electric load contracts in which load consumption may change hourly based on demand are measured using certain unobservable inputs, such as historic load variability and, accordingly, are categorized as Level 3. The fair value of PSEG Power’s gas physical contracts at certain illiquid delivery locations are measured using average historical basis and, accordingly, are categorized as Level 3. While these physical gas contracts have an unobservable component in their respective forward price curves, the fluctuations in fair value have been driven primarily by changes in the observable inputs.
52
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following tables provide details surrounding significant Level 3 valuations as of March 31, 2021 and December 31, 2020.
Quantitative Information About Level 3 Fair Value Measurements
Significant
Level 3
Fair Value as of
Valuation
Unobservable
Arithmetic
Commodity
Position
March 31, 2021
Technique(s)
Input
Range
Average
Assets
(Liabilities)
Millions
PSEG Power
Electricity
Electric Load Contracts
$
3
$
(1)
Discounted Cash Flow
Load Shaping Cost
0% to 11%
4%
Gas
Gas Physical Contracts
—
(1)
Discounted Cash Flow
Historical Basis Adjustment
-2% to -30%
-10%
Electricity
Other (A)
—
(2)
Total PSEG Power
$
3
$
(4)
Total PSEG
$
3
$
(4)
Quantitative Information About Level 3 Fair Value Measurements
Significant
Level 3
Fair Value as of
Valuation
Unobservable
Arithmetic
Commodity
Position
December 31, 2020
Technique(s)
Input
Range
Average
Assets
(Liabilities)
Millions
PSEG Power
Electricity
Electric Load Contracts
$
12
$
—
Discounted Cash Flow
Load Shaping Cost
0% to 11%
4%
Gas
Gas Physical Contracts
—
(2)
Discounted Cash Flow
Historical Basis Adjustment
-60% to -30%
-43%
Electricity
Other (A)
—
(3)
Total PSEG Power
$
12
$
(5)
Total PSEG
$
12
$
(5)
(A)Other is comprised of a heat rate call option and capacity swaps.
As of March 31, 2021, significant unobservable inputs listed above would have a direct impact on the fair values of the above Level 3 instruments if they were adjusted. For energy-related contracts in cases where PSEG Power is a seller, an increase in the load variability would decrease the fair value. For gas-related contracts in cases where PSEG Power is a buyer, an increase in the average historical basis would increase the fair value.
53
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the beginning and ending balances of Level 3 derivative contracts and securities for the three months ended March 31, 2021 and March 31, 2020, respectively, follows:
Changes in Level 3 Assets and (Liabilities) Measured at Fair Value on a Recurring Basis
for the Three Months Ended March 31, 2021
Three Months Ended March 31, 2021
Description
Balance as of December 31, 2020
Total Gains or (Losses) Realized/Unrealized Included in Income (A)
Purchases (Sales)
Issuances/ Settlements (B)
Transfers In/Out (C)
Balance as of March 31, 2021
Millions
PSEG and PSEG Power
Net Derivative Assets (Liabilities)
$
7
$
(4)
$
—
$
(4)
$
—
$
(1)
Changes in Level 3 Assets and (Liabilities) Measured at Fair Value on a Recurring Basis
for the Three Months Ended March 31, 2020
Three Months Ended March 31, 2020
Description
Balance as of December 31, 2019
Total Gains or (Losses) Realized/Unrealized Included in Income (A)
Purchases (Sales)
Issuances/ Settlements (B)
Transfers In/Out (C)
Balance as of March 31, 2020
Millions
PSEG and PSEG Power
Net Derivative Assets (Liabilities)
$
7
$
13
$
—
$
(1)
$
—
$
19
(A)Unrealized gains (losses) in the following table represent the change in derivative assets and liabilities still held as of March 31, 2021 and 2020.
Three Months Ended March 31,
2021
2020
Total Gains (Losses)
Unrealized Gains (Losses)
Total Gains (Losses)
Unrealized Gains (Losses)
Millions
PSEG and PSEG Power
Operating Revenues
$
(5)
$
(9)
$
18
$
11
Energy Costs
1
1
(5)
1
Total
$
(4)
$
(8)
$
13
$
12
(B)Includes settlements of $(4) million for the three months ended March 31, 2021 and $(1) million for the three months ended March 31, 2020, respectively.
(C)There were no transfers into or out of Level 3 during the three months and three months ended March 31, 2021 and 2020.
As of March 31, 2021, PSEG carried $3.4 billion of net assets that are measured at fair value on a recurring basis, of which $(1) million of net liabilities were measured using unobservable inputs and classified as Level 3 within the fair value hierarchy were immaterial.
As of March 31, 2020, PSEG carried $2.7 billion of net assets that are measured at fair value on a recurring basis, of which $19 million of net assets was measured using unobservable inputs and classified as Level 3 within the fair value hierarchy.
Fair Value of Debt
The estimated fair values, carrying amounts and methods used to determine fair value of long-term debt as of March 31, 2021
54
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
and December 31, 2020 are included in the following table and accompanying notes.
As of
As of
March 31, 2021
December 31, 2020
Carrying Amount
Fair Value
Carrying Amount
Fair Value
Millions
Long-Term Debt:
PSEG (A)
$
2,930
$
3,013
$
2,929
$
3,092
PSE&G (A)
11,502
12,695
10,909
13,372
PSEG Power (A)
2,343
2,623
2,342
2,679
Total Long-Term Debt
$
16,775
$
18,331
$
16,180
$
19,143
(A)Given that these bonds do not trade actively, the fair value amounts of taxable debt securities (primarily Level 2 measurements) are generally determined by a valuation model that is based on a conventional discounted cash flow methodology. The fair value amounts above do not represent the price at which the outstanding debt may be called for redemption by each issuer under their respective debt agreements.
Note 15. Other Income (Deductions)
PSE&G
PSEG Power
Other (A)
Consolidated
Millions
Three Months Ended March 31, 2021
NDT Fund Interest and Dividends
$
—
$
13
$
—
$
13
Allowance for Funds Used During Construction
23
—
—
23
Solar Loan Interest
3
—
—
3
Purchases of Tax Losses under New Jersey Technology Tax Benefit Transfer Program
—
(16)
—
(16)
Other
2
(1)
1
2
Total Other Income (Deductions)
$
28
$
(4)
$
1
$
25
Three Months Ended March 31, 2020
NDT Fund Interest and Dividends
$
—
$
13
$
—
$
13
Allowance for Funds Used During Construction
21
—
—
21
Solar Loan Interest
4
—
—
4
Purchases of Tax Losses under New Jersey Technology Tax Benefit Transfer Program
—
(35)
—
(35)
Other
2
(1)
—
1
Total Other Income (Deductions)
$
27
$
(23)
$
—
$
4
(A)Other consists of activity at PSEG (as parent company), Energy Holdings, Services, PSEG LI and intercompany eliminations.
55
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PSEG’s, PSE&G’s and PSEG Power’s effective tax rates for the three months ended March 31, 2021 and 2020 were as follows:
Three Months Ended
March 31,
2021
2020
PSEG
15.3%
8.9%
PSE&G
14.2%
19.9%
PSEG Power
24.4%
122.8%
For the three months ended March 31, 2021, the difference in PSEG’s effective tax rate as compared to the same period in the prior year was due primarily to the impact of the additional trust tax on the NDT qualified fund net gains in 2021 and net losses in 2020 and a decrease in the benefit due to lower purchases of net operating losses (NOLs) under the New Jersey Technology Tax Benefit Transfer Program, offset by an increase in the 2021 flowback of PSE&G’s excess deferred income tax liabilities and Clean Energy Future program investments. The difference in PSEG’s effective tax rate as compared to the statutory tax rate of 28.11% was due primarily to an increase in the 2021 flowback of PSE&G’s excess deferred income tax liabilities and Clean Energy Future program investments and the benefit of purchasing 2020 NOLs under the New Jersey Technology Tax Benefit Transfer Program in 2021.
For the three months ended March 31, 2021, the difference in PSE&G’s effective tax rate as compared to the same period in the prior year was due to an increase in the 2021 flowback of PSE&G’s excess deferred income tax liabilities and Clean Energy Future program investments offset by an increase in bad debt flow-through. The difference in PSE&G’s effective tax rate as compared to the statutory tax rate of 28.11% was due primarily to an increase in the 2021 flowback of PSE&G’s excess deferred income tax liabilities and Clean Energy Future program investments.
For the three months ended March 31, 2021, the difference in PSEG Power’s effective tax rate as compared to the same period in the prior year was due primarily to the impact the additional trust tax on the NDT qualified fund net gains and the benefit of purchasing NOLs under the New Jersey Technology Tax Benefit Transfer Program had on PSEG Power’s 2021 pre-tax income compared to the impact the additional trust tax benefit on the NDT qualified fund net losses and the benefit of purchasing more NOLs under the New Jersey Technology Tax Benefit Transfer Program in 2020 had on PSEG Power’s 2020 pre-tax loss. The difference in PSEG Power’s effective tax rate as compared to the statutory tax rate of 28.11% was due primarily to the benefit of purchasing 2020 NOLs under the New Jersey Technology Tax Benefit Transfer Program in 2021 offset by the impact of the additional trust tax on NDT qualified fund net gains.
In March 2020, the federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted. Among other provisions, the CARES Act allows a five-year carryback of any NOL generated in a taxable year beginning after December 31, 2017, and before January 1, 2021.
In April 2020, the Internal Revenue Service (IRS) issued a Private Letter Ruling to PSE&G concluding that certain excess deferred taxes previously classified as protected should be classified as unprotected. Unprotected excess deferred income taxes are not subject to the normalization rules allowing them to be refunded to customers sooner as agreed to with FERC and the BPU. In July 2020, FERC and the BPU approved PSE&G’s requests to refund these unprotected excess deferred income taxes to customers. FERC approved the refund of these unprotected excess deferred income taxes within the 2019 true-up filing. The BPU approved the refund of these unprotected excess deferred income taxes within the next five years beginning in July 2020.
In July 2020, the IRS issued final and proposed regulations addressing the limitation on deductible business interest expense contained in the Tax Cuts and Jobs Act of 2017 (Tax Act). These regulations retroactively allow depreciation to be added back in computing the 30% adjusted taxable income (ATI) cap, increasing the amount of interest that can be deducted by unregulated businesses in years before 2022. For 2022 and after, the regulations continue to disallow the addback of depreciation in the computation of ATI, effectively lowering the cap on the amount of deductible business interest and contain special rules in allocating interest between regulated and non-regulated businesses. The portion of PSEG’s and PSEG Power’s business interest expense that was disallowed in 2018 and 2019 under the previously issued proposed regulations will now be deductible in those respective years. These regulations remain uncertain in some respects.
In late December 2020, the Consolidated Appropriations Act (CAA), 2021 was enacted. PSEG does not believe the CAA will have a material impact on the financial condition and cash flows of PSEG, PSE&G and PSEG Power.
PSEG expects that a prolonged coronavirus pandemic and economic recovery may result in additional federal or state tax legislation that can have a material impact on PSEG’s, PSE&G’s and PSEG Power’s tax expense and cash tax position.
56
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Amounts recorded under the Tax Act, CARES Act and CAA, including depreciation and interest disallowance regulations, are subject to change based on several factors, including, among other things, whether the IRS or state taxing authorities issue additional guidance and/or further clarification. Any further guidance or clarification could impact PSEG’s, PSE&G’s and PSEG Power’s financial statements.
As of March 31, 2021, PSE&G had a $14 million New Jersey Corporate Business Tax NOL that is expected to be fully realized in the future. There are no other material tax carryforwards in other jurisdictions.
New Jersey State Tax Reform
In September 2020, New Jersey enacted its State Fiscal Year 2021 Budget, which amended the temporary surtax originally enacted into law in 2018, from 1.5% to 2.5% for 2020 and 2021 and extended the 2.5% surtax to 2023. PSE&G continues to be exempt and this amendment will not have a material impact on PSEG’s and PSEG Power’s financial statements.
Note 17. Accumulated Other Comprehensive Income (Loss), Net of Tax
PSEG
Three Months Ended March 31, 2021
Accumulated Other Comprehensive Income (Loss)
Cash Flow Hedges
Pension and OPEB Plans
Available-for-Sale Securities
Total
Millions
Balance as of December 31, 2020
$
(9)
$
(545)
$
50
$
(504)
Other Comprehensive Income (Loss) before Reclassifications
—
—
(40)
(40)
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)
1
3
(2)
2
Net Current Period Other Comprehensive Income (Loss)
1
3
(42)
(38)
Balance as of March 31, 2021
$
(8)
$
(542)
$
8
$
(542)
PSEG
Three Months Ended March 31, 2020
Accumulated Other Comprehensive Income (Loss)
Cash Flow Hedges
Pension and OPEB Plans
Available-for-Sale Securities
Total
Millions
Balance as of December 31, 2019
$
(15)
$
(499)
$
25
$
(489)
Other Comprehensive Income (Loss) before Reclassifications
(4)
—
14
10
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)
1
3
(6)
(2)
Net Current Period Other Comprehensive Income (Loss)
(3)
3
8
8
Balance as of March 31, 2020
$
(18)
$
(496)
$
33
$
(481)
57
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) to Income Statement
Three Months Ended
Description of Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)
Location of Pre-Tax Amount In Statement of Operations
March 31, 2020
Pre-Tax Amount
Tax (Expense) Benefit
After-Tax Amount
Millions
Pension and OPEB Plans
Amortization of Prior Service (Cost) Credit
Non-Operating Pension and OPEB Credits (Costs)
$
5
$
(1)
$
4
Amortization of Actuarial Loss
Non-Operating Pension and OPEB Credits (Costs)
(8)
2
(6)
Total Pension and OPEB Plans
(3)
1
(2)
Available-for-Sale Debt Securities
Realized Gains (Losses) and Impairments
Net Gains (Losses) on Trust Investments
7
(3)
4
Total Available-for-Sale Debt Securities
7
(3)
4
Total
$
4
$
(2)
$
2
Note 18. Earnings Per Share (EPS) and Dividends
EPS
Diluted EPS is calculated by dividing Net Income by the weighted average number of shares of common stock outstanding, including shares issuable upon exercise of stock options outstanding or vesting of restricted stock awards granted under PSEG’s stock compensation plans and upon payment of performance share units or restricted stock units. The following table shows the effect of these stock options, performance share units and restricted stock units on the weighted average number of shares outstanding used in calculating diluted EPS:
Three Months Ended March 31,
2021
2020
Basic
Diluted
Basic
Diluted
EPS Numerator (Millions):
Net Income
$
648
$
648
$
448
$
448
EPS Denominator (Millions):
Weighted Average Common Shares Outstanding
504
504
504
504
Effect of Stock Based Compensation Awards
—
3
—
3
Total Shares
504
507
504
507
EPS
Net Income
$
1.29
$
1.28
$
0.89
$
0.88
60
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On April 20, 2021, the PSEG Board of Directors approved a $0.51 per share common stock dividend for the second quarter of 2021.
Note 19. Financial Information by Business Segment
PSE&G
PSEG Power
Other (A)
Eliminations (B)
Consolidated Total
Millions
Three Months Ended March 31, 2021
Operating Revenues
$
2,073
$
1,167
$
151
$
(502)
$
2,889
Net Income
477
161
10
—
648
Gross Additions to Long-Lived Assets
586
46
1
—
633
Three Months Ended March 31, 2020
Operating Revenues
$
1,883
$
1,220
$
156
$
(478)
$
2,781
Net Income (Loss)
440
13
(5)
—
448
Gross Additions to Long-Lived Assets
620
97
3
—
720
As of March 31, 2021
Total Assets
$
36,217
$
12,654
$
2,444
$
(1,109)
$
50,206
Investments in Equity Method Subsidiaries
$
—
$
66
$
—
$
—
$
66
As of December 31, 2020
Total Assets
$
35,581
$
12,704
$
2,692
$
(927)
$
50,050
Investments in Equity Method Subsidiaries
$
—
$
64
$
—
$
—
$
64
(A)Includes amounts applicable to Energy Holdings and PSEG LI, which are below the quantitative threshold for separate disclosure as reportable segments. Other also includes amounts applicable to PSEG (parent company) and Services.
(B)Intercompany eliminations primarily relate to intercompany transactions between PSE&G and PSEG Power. For a further discussion of the intercompany transactions between PSE&G and PSEG Power, see Note 20. Related-Party Transactions.
61
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(A)PSE&G has entered into a requirements contract with PSEG Power under which PSEG Power provides the gas supply services needed to meet PSE&G’s BGSS and other contractual requirements. PSEG Power has also entered into contracts to supply energy, capacity and ancillary services to PSE&G through the BGS auction process and sells ZECs to PSE&G under the ZEC program. The rates in the BGS and BGSS contracts and for the ZEC sales are prescribed by the BPU. BGS and BGSS sales are billed and settled on a monthly basis. ZEC sales are billed on a monthly basis and settled annually following completion of each energy year. In addition, PSEG Power and PSE&G provide certain technical services for each other generally at cost in compliance with FERC and BPU affiliate rules.
(B)Services provides and bills administrative services to PSE&G and PSEG Power at cost. In addition, PSE&G and PSEG Power have other payables to Services, including amounts related to certain common costs, which Services pays on behalf of each of the operating companies.
(C)PSEG files a consolidated federal income tax return with its affiliated companies. A tax allocation agreement exists between PSEG and each of its affiliated companies. The general operation of these agreements is that the subsidiary company will compute its taxable income on a stand-alone basis. If the result is a net tax liability, such amount shall be paid to PSEG. If there are NOLs and/or tax credits, the subsidiary shall receive payment for the tax savings from PSEG to the extent that PSEG is able to utilize those benefits.
(D)PSE&G and PSEG Power have advanced working capital to Services. The amounts are included in Other Noncurrent Assets on PSE&G’s and PSEG Power’s Condensed Consolidated Balance Sheets.
(E)PSEG Power’s short-term loans with PSEG are for working capital and other short-term needs. Interest Income and Interest Expense relating to these short-term funding activities were immaterial.
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)
This combined MD&A is separately filed by Public Service Enterprise Group Incorporated (PSEG), Public Service Electric and Gas Company (PSE&G) and PSEG Power LLC (PSEG Power). Information contained herein relating to any individual company is filed by such company on its own behalf. PSE&G and PSEG Power each make representations only as to itself and make no representations whatsoever as to any other company.
PSEG’s business consists of two reportable segments, our principal direct wholly owned subsidiaries, which are:
•PSE&G—which is a public utility engaged principally in the transmission of electricity and distribution of electricity and natural gas in certain areas of New Jersey. PSE&G is subject to regulation by the New Jersey Board of Public Utilities (BPU) and the Federal Energy Regulatory Commission (FERC). PSE&G also invests in regulated solar generation projects and energy efficiency and related programs in New Jersey, which are regulated by the BPU, and
•PSEG Power—which is a multi-regional energy supply company that integrates the operations of its merchant nuclear and fossil generating assets with its power marketing businesses and fuel supply functions through competitive energy sales in well-developed energy markets primarily in the Northeast and Mid-Atlantic United States through its principal direct wholly owned subsidiaries. In addition, PSEG Power owns and operates solar generation in various states. PSEG Power’s subsidiaries are subject to regulation by FERC, the Nuclear Regulatory Commission (NRC), the Environmental Protection Agency (EPA) and the states in which they operate.
PSEG’s other direct wholly owned subsidiaries are: PSEG Long Island LLC (PSEG LI), which operates the Long Island Power Authority’s (LIPA) transmission and distribution (T&D) system under an Amended and Restated Operations Services Agreement (OSA); PSEG Energy Holdings L.L.C. (Energy Holdings), which earns it revenues from its portfolio of lease investments and holds our investment in offshore wind ventures; and PSEG Services Corporation (Services), which provides certain management, administrative and general services to PSEG and its subsidiaries at cost.
Our business discussion in Part I, Item 1. Business of our 2020 Annual Report on 10-K (Form 10-K) provides a review of the regions and markets where we operate and compete, as well as our strategy for conducting our businesses within these markets, focusing on operational excellence, financial strength and making disciplined investments. Our risk factor discussion in Part I, Item 1A. Risk Factors of Form 10-K provides information about factors that could have a material adverse impact on our businesses. The following supplements that discussion and the discussion included in the Executive Overview of 2020 and Future Outlook provided in Item 7 in our Form 10-K by describing significant events and business developments that have occurred during 2021 and changes to the key factors that we expect may drive our future performance. The following discussion refers to the Condensed Consolidated Financial Statements (Statements) and the Related Notes to Condensed Consolidated Financial Statements (Notes). This discussion should be read in conjunction with such Statements, Notes and the Form 10-K.
EXECUTIVE OVERVIEW OF 2021 AND FUTURE OUTLOOK
We are continuing our transformation into a primarily regulated electric and gas utility that is focused on meeting customer expectations and is aligned with public policy objectives promoting infrastructure investments to modernize and improve reliability and clean energy investments. Our business plan focuses on achieving growth while controlling costs and managing the risks associated with regulatory changes, fluctuating commodity prices and changes in customer demand. In furtherance of these goals, over the past few years, our investments have altered our business mix to reflect a higher percentage of earnings contribution by PSE&G. In May 2021, we entered into a purchase agreement to sell PSEG Power’s solar portfolio and we are continuing to explore strategic alternatives for PSEG Power’s more than 6,750 megawatts (MW) of fossil generation located in New Jersey, Connecticut, New York and Maryland. See Item 1. Note 4. Early Plant Retirements/Asset Dispositions for additional information.
PSE&G, PSEG Power and PSEG LI are providing essential services during this national emergency related to the ongoing coronavirus (COVID-19) pandemic. We have implemented a comprehensive set of enhanced safety actions to help protect our employees, customers and communities, and we will continue to closely monitor developments and adjust as needed to ensure that we provide reliable service while protecting the safety and health of our workforce and the communities we serve. We continue to be guided by the recommendations of health authorities at the federal, state and local levels. Employees who can perform their job duties remotely are doing so. Those employees who must report to a work site are wearing personal protective equipment and practicing physical distancing measures.
The COVID-19 pandemic and associated government actions and economic effects continue to impact our businesses. We have incurred additional expenses to protect our employees and customers, and PSE&G is experiencing significantly higher bad debts and lower cash collections, as discussed below. The potential future impact of the pandemic and the associated economic
impacts, which could extend beyond the duration of the pandemic, will depend on a number of factors outside of our control. These include the duration and severity of the outbreak as well as third-party actions taken to contain its spread and mitigate its public health effects, and governmental or regulatory actions regarding customer collections, potential limitations on rate increases, recovery of incremental costs, and other matters. While we currently cannot estimate the potential impact to our results of operations, financial condition and cash flows, this MD&A includes a discussion of potential effects of a prolonged outbreak.
PSE&G
At PSE&G, our focus is on enhancing reliability and resiliency of our T&D system, meeting customer expectations and supporting public policy objectives by investing capital in T&D infrastructure and clean energy programs. For the five-year period ending December 31, 2025, PSE&G expects to invest between $13 billion to $15 billion, resulting in an expected compound annual growth in rate base of 6.5% to 8%. The low end of the range assumes an extension of our Gas System Modernization Program (GSMP) and Clean Energy Future (CEF)-Energy Efficiency (EE) program at their average annual investment levels, as these programs are expected to continue at least at those current rates beyond their currently approved timeframes of 2023 and 2024, respectively. The range is driven by certain unapproved investment programs, including a to-be- filed extension of the Energy Strong program, which otherwise concludes in 2023, as well as the remaining portion of our CEF proposal (portion of Electric Vehicle (EV) and Energy Storage (ES) programs) and a potentially higher amount of investment for GSMP and CEF-EE beyond current levels. See below for a description of the CEF program.
In January 2020, New Jersey released its Energy Master Plan (EMP) which, among other things, recognizes the importance of the State’s EE targets and supported EVs, ES, and advanced metering infrastructure (AMI).
In September 2020, PSE&G reached a settlement with parties in the CEF-EE proceeding, which the BPU approved. The settlement commits $1 billion over a three-year period, with the majority of the investment occurring over a five-year period. Costs will be recovered through annual rate-making, with returns aligned with our most recent base rate case and a ten-year amortization period.
The approval also included a Conservation Incentive Program, a mechanism that will provide for recovery of lost electric and gas variable margin revenues relative to a baseline of the test year in our last base rate case from July 2017 to June 2018. The deferral period for this mechanism is effective beginning in June 2021 for electric and October 2021 for gas. PSE&G will suspend its gas Weather Normalization Charge (WNC) when the gas deferral period begins.
In January 2021, the BPU approved a settlement with PSE&G and other parties in the CEF-Energy Cloud (EC) proceeding. The capital cost of the program, which includes implementation of AMI, is estimated to be approximately $700 million, invested over the next four years.
Also in January 2021, the BPU approved a settlement with PSE&G and other parties in the CEF-EV proceeding for a majority of the components of the program. The approved investment under the program is for $166 million, primarily relating to preparatory work to deliver infrastructure to the charging point for three programs: residential smart charging; Level-2 mixed use charging; and direct current fast charging.
All of the capital costs and expenses of the CEF-EC and CEF-EV programs will be recovered in PSE&G’s next base rate case, expected in the second half of 2024. From the start of the program until the commencement of new base rates, the return on and of the capital portion of each of these programs, as well as expenses incurred to implement the CEF-EV program and operating costs and stranded costs associated with the retirement of existing meters under the CEF-EC program, will be included for recovery in those rates. The remaining component of our CEF-EV proposal, the vehicle innovation subprogram, as well as the overall CEF-ES program, are being held in abeyance pending future policy guidance from the BPU.
We also continue to invest in transmission infrastructure in order to (i) maintain and enhance system integrity and grid reliability, grid security and safety, (ii) address an aging transmission infrastructure, (iii) leverage technology to improve the operation of the system, (iv) reduce transmission constraints, (v) meet growing demand and (vi) meet environmental requirements and standards set by various regulatory bodies. Our planned capital spending for transmission in 2021-2023 is $2.5 billion.
PSE&G has been deemed by New Jersey to provide essential services during the ongoing coronavirus pandemic. Our capital programs, including GSMP II, Energy Strong II and our transmission infrastructure investments, have not been materially impacted to date. However, a prolonged outbreak and the associated economic impacts, which could extend beyond the duration of the pandemic, could impact our ability to obtain necessary permits and approvals and could lead to shortages of necessary materials, supplies and labor. In addition, a determination by any state or federal regulatory authority that one or all of our projects is non-essential could require us to temporarily halt work. Any delay in our planned capital program could impact our operational performance and could materially impact our results of operations and financial condition through decreased cost recovery.
Further, the ongoing coronavirus pandemic could impact regulatory agencies’ ability to review proposed programs and delay the timing of approvals for matters subject to regulatory approval, including the approval of various clause recovery mechanisms.
PSE&G has experienced a reduction in demand from its commercial and industrial (C&I) customers, partially offset by increases in residential demand, and adverse changes to residential and C&I payment patterns. PSE&G expects these changes to continue during the prolonged coronavirus pandemic. In March 2021, the state formally extended its moratorium on non-safety related service disconnections for non-payment for residential customers through June 30, 2021. During the moratorium, PSE&G has experienced a significant decrease in cash inflow and higher Accounts Receivable aging and an associated increase in bad debt expense, which we expect could extend beyond the duration of the coronavirus pandemic.PSE&G’s electric distribution bad debt expense is recoverable through its Societal Benefits Clause (SBC) mechanism. PSE&G has deferred its incremental gas distribution bad debt expense as a result of COVID-19 as a Regulatory Asset and will seek recovery of that cost, as well as other net incremental COVID-19 costs, in its next base rate case.
In July 2020, the BPU authorized regulated utilities in New Jersey, including PSE&G, to create a COVID-19-related Regulatory Asset by deferring on their books and records the prudently incurred incremental costs related to COVID-19 beginning on March 9, 2020 through September 30, 2021, or 60 days after the New Jersey governor determines that the Public Health Emergency is no longer in effect, or in the absence of such a determination, 60 days from the time the Public Health Emergency automatically terminates by law, whichever is later. Deferred costs are to be offset by any federal or state assistance that the utility may receive as a direct result of the COVID-19 pandemic. As of March 31, 2021, PSE&G has recorded a Regulatory Asset related to COVID-19 to defer incremental costs of $60 million, which PSE&G expects are probable of recovery under the BPU order.
While the impact on our results of operations, financial condition and cash flows for the three months ended March 31, 2021 has not been material, a prolonged coronavirus pandemic and the associated economic impacts, which could extend beyond the duration of the pandemic, could materially impact cash from operations, Accounts Receivable and bad debt expense.
PSEG Power
In July 2020, we announced that we are exploring strategic alternatives for PSEG Power’s non-nuclear generating fleet with the intention of accelerating the transformation of our business into a primarily regulated electric and gas utility, with a significantlycontracted generation business. It is expected to reduce overall business risk and earnings volatility, improve PSEG’s credit profile and is consistent with PSEG’s climate strategy and sustainability efforts, which is to focus on clean energy investments, methane reduction, and zero-carbon generation. PSEG intends to retain ownership of PSEG Power’s existing nuclear fleet. Since the announcement, we have engaged in proprietary activities relating to the potential divestiture of these assets and any potential transactions are expected to be completed sometime in 2021.
In May 2021, PSEG Power Ventures LLC (Power Ventures), a direct wholly owned subsidiary of PSEG Power, entered into a purchase agreement with Quattro Solar, LLC, an affiliate of LS Power, relating to the sale by Power Ventures of 100% of its ownership interest in PSEG Solar Source LLC including its related assets and liabilities. The transaction is expected to close during the second or third quarter of 2021, subject to certain closing conditions, adjustments and regulatory approvals.
There is no assurance that the strategic review will result in a sale or other disposition of all or any portion of the fossil generation assets on terms that are favorable to us, or at all. Any transaction would be subject to market conditions and customary closing conditions, including the receipt of all required regulatory approvals.
At PSEG Power, we have sought to achieve operational excellence and manage costs in order to optimize cash flow generation from our fleet in light of low wholesale power and gas prices, environmental considerations and competitive market forces that reward efficiency and reliability. In the first three months of 2021, our natural gas and nuclear units generated 4.7 and 8.2 terawatt hours and operated at a capacity factor of 41.7% and 98.8%, respectively. Our commitments for load, such as basic generation service (BGS) in New Jersey and other bilateral supply contracts, are backed by this generation or may be combined with the use of physical commodity purchases and financial instruments from the market to optimize the economic efficiency of serving our obligations. PSEG Power’s hedging practices help to manage some of the volatility of the merchant power business. More than 75% of PSEG Power’s expected gross margin in 2021 relates to hedging of our energy margin, our expected revenues from the capacity market mechanisms, Zero Emission Certificate (ZEC) revenues and certain ancillary service payments such as reactive power.
As discussed further below under “Wholesale Power Market Design,” FERC issued an order establishing new rules for PJM’s capacity market, extending the PJM Minimum Offer Price Rule (MOPR) to include both new and existing resources that receive or are entitled to receive certain out-of-market payments, with certain exemptions. PSEG Power’s New Jersey nuclear plants that receive ZEC payments will be subject to the new MOPR. In addition, as a result of FERC’s finding that default procurement auctions such as BGS could be considered subsidies, it is possible that other PSEG units could be subject to the MOPR. The MOPR’s floor prices are not expected to prevent either our nuclear or gas-fired units from clearing in the next
Reliability Pricing Model (RPM) auction. We cannot predict whether additional changes will be made to the MOPR, or whether changes will occur in the PJM market that would impact our ability to clear any of these units in future RPM auctions.
PSEG LI
Following the effects of Tropical Storm Isaias, the New York Attorney General initiated an inquiry into PSEG LI’s preparation and response to the storm. In addition, the Department of Public Service (DPS) within the New York State Public Service Commission launched an investigation of state electric service providers, including PSEG LI, and other state telephone, cable and internet providers into their preparation and restoration efforts following Tropical Storm Isaias. Although the inquiry by the New York Attorney General remains pending, the DPS issued an interim storm investigation report. With respect to PSEG LI, the DPS’ report found that PSEG LI violated its Emergency Response Plan and DPS Regulations, and recommended that LIPA consider taking various actions, including terminating or renegotiating the OSA. LIPA also initiated its own review of PSEG LI’s performance and issued a report with recommendations for improvements to PSEG LI’s structure and processes, including a timeline for implementing those recommendations. That report also recommended that LIPA either renegotiate or terminate the OSA.
In December 2020, LIPA filed a complaint against PSEG LI in New York State court alleging multiple breaches of the OSA in connection with PSEG LI’s preparation for and response to Tropical Storm Isaias seeking specific performance and $70 million in damages. Pursuant to recommendations by the New York State DPS, LIPA has initiated a series of actions to allow its board to determine whether to seek to terminate the OSA or instead continue with PSEG LI as its Service Provider. LIPA and PSEG LI are engaged in settlement discussions concerning various amendments to the OSA during which the litigation has been tolled. If the parties reach a settlement agreement, any amendments to the OSA will require the approval of the New York Attorney General and the New York Comptroller.
PSEG LI is fully cooperating with the inquiries by the New York Attorney General and the DPS, and we cannot predict their outcome. PSEG LI also continues to work closely with LIPA to address the recommendations in LIPA’s report. In the absence of a settlement agreement and the required approvals, PSEG LI intends to vigorously defend itself with regard to the allegations in LIPA’s complaint alleging breaches of the OSA; however, a decision in this proceeding requiring specific performance or the payment of damages by PSEG LI or resulting in the termination of the OSA could have a material adverse effect on PSEG’s results of operations and financial condition.
Climate Strategy and Sustainability Efforts
For more than a century, our mission has been to provide safe access to an around-the-clock supply of reliable, affordable energy. Building on this mission, we believe in a future where customers universally use less energy, the energy they use is cleaner, and its delivery is more reliable and more resilient. In July 2019, we announced that we expect to cut carbon emissions at PSEG Power’s generation fleet by 80% by 2046, from 2005 levels. We have also announced our vision of attaining net zero- carbon emissions by 2050, assuming advances in technology, public policy and customer behavior.
PSE&G has also undertaken a number of initiatives that support the reduction of greenhouse gas (GHG) emissions and the implementation of energy efficiency initiatives. The first phase of our GSMP replaced approximately 450 miles of cast-iron and unprotected steel gas infrastructure, and the second phase of this program is expected to replace an additional 875 miles of gas pipes through 2023. The GSMP is designed to significantly reduce gas leaks in our distribution system, which would reduce the release of methane, a potent GHG, into the air. Through GSMP II, from 2018 through 2023 we expect an approximate 22% reduction in methane, and assuming a continuation of GSMP, we expect an approximate 60% reduction in methane emissions from 2011 through 2030. In addition, PSE&G’s CEF-EE which was approved by the BPU in September 2020, the CEF-EC and CEF-EV programs, which were approved by the BPU in January 2021, and the proposed CEF-ES program are intended to support New Jersey’s EMP through programs designed to help customers increase their energy efficiency, support the expansion of the electric vehicle infrastructure in the State, install energy storage capacity to supplement solar generation and enhance grid resiliency, install smart meters and supporting infrastructure to allow for the integration of other clean energy technologies and to more efficiently respond to weather and other outage events. We also continue to assess physical risks of climate change and adapt our capital investment program to improve the reliability and resiliency of our system in an environment of increasing frequency and severity of weather events, notably through our investments in Energy Strong.
Offshore Wind
In December 2020, PSEG entered into a definitive agreement with Ørsted North America to acquire a 25% equity interest in Ørsted’s Ocean Wind project. Ocean Wind was selected by New Jersey to be the first offshore wind farm as part of the state’s intention to add 7,500 MW of offshore wind generating capacity by 2035. The Ocean Wind project could provide first power in late 2024. On March 31, 2021, the BPU approved PSEG’s investment in Ocean Wind and the acquisition was completed in April 2021. Additionally, PSEG and Ørsted each owns 50% of Garden State Offshore Energy LLC which holds rights to an offshore wind lease area. PSEG and Ørsted are exploring other offshore wind opportunities.
We emphasize operational performance while developing opportunities in both our regulated and competitive businesses. In the first three months of 2021, our utility continued its efforts to control costs while maintaining strong operational performance and has implemented protocols to ensure that we are providing essential services to our customers during the ongoing coronavirus pandemic in a safe and reliable manner.
Financial Strength
Our financial strength is predicated on a solid balance sheet, positive operating cash flow and reasonable risk-adjusted returns on increased investment. Our financial position remained strong during the first three months of 2021 as we
•maintained sufficient liquidity,
•maintained solid investment grade credit ratings, and
•increased our indicative annual dividend for 2021 to $2.04 per share.
We expect to be able to fund our planned capital requirements, as described in Liquidity and Capital Resources without the issuance of new equity. Our planned capital requirements, which are driven by growth in our regulated utility, and the potential sale of our non-nuclear generation fleet are expected to improve our business and financial profile.
Financial Results
The results for PSEG, PSE&G and PSEG Power for the three months ended March 31, 2021 and 2020 are presented as follows:
Three Months Ended
March 31,
Earnings (Losses)
2021
2020
Millions
PSE&G
$
477
$
440
PSEG Power
161
13
Other (A)
10
(5)
PSEG Net Income
$
648
$
448
PSEG Net Income Per Share (Diluted)
$
1.28
$
0.88
(A)Other includes after-tax activities at the parent company, PSEG LI, and Energy Holdings as well as intercompany eliminations.
PSEG Power’s results above include the Nuclear Decommissioning Trust (NDT) Fund activity and the impacts of non-trading commodity mark-to-market (MTM) activity, which consist of the financial impact from positions with future delivery dates.
The variances in our Net Income attributable to changes related to the NDT Fund and MTM are shown in the following table:
Three Months Ended
March 31,
2021
2020
Millions, after tax
NDT Fund Income (Expense) (A) (B)
$
32
$
(135)
Non-Trading MTM Gains (Losses) (C)
$
(34)
$
77
(A)NDT Fund Income (Expense) includes gains and losses on NDT securities which are recorded in Net Gains (Losses) on Trust Investments. See Item 1. Note 9. Trust Investments for additional information. NDT Fund Income (Expense) also includes interest and dividend income and other costs related to the NDT Fund recorded in Other Income (Deductions), interest accretion expense on PSEG Power’s nuclear Asset Retirement Obligation (ARO) recorded in Operation and Maintenance Expense and the depreciation related to the ARO asset recorded in Depreciation and Amortization (D&A) Expense.
(B)Net of tax (expense) benefit of $(23) million and $84 million for the three months ended March 31, 2021 and 2020, respectively.
(C)Net of tax (expense) benefit of $13 million and $(30) million for the three months ended March 31, 2021 and 2020, respectively.
Our $200 million increase in Net Income for the three months ended March 31, 2021 was driven primarily by
•net gains on NDT Fund equity securities as compared to significant net losses in 2020 at PSEG Power,
•higher earnings due to continued investments in T&D programs at PSE&G,
•higher average realized prices in the PJM, New England (NE) and New York (NY) regions coupled with higher volumes of electricity sold in the NE region at PSEG Power, and
•higher pension and OPEB credits,
•partially offset by MTM losses in 2021 as compared to MTM gains in 2020 at PSEG Power.
The greater emphasis on capital spending in recent years for projects at PSE&G relative to PSEG Power, particularly those on which we receive contemporaneous returns at PSE&G has yielded strong results, which when combined with the cash flow generated by PSEG Power, has allowed us to meet customer needs and address market conditions and investor expectations. We continue our focus on operational excellence, financial strength and disciplined investment. These guiding principles have provided the base from which we have been able to execute our strategic initiatives.
Disciplined Investment
We utilize rigorous criteria and consider a number of external factors, focusing on the value for our stakeholders, as well as other impacts, when determining how and when to efficiently deploy capital. We principally explore opportunities for investment in areas that complement our existing business and provide reasonable risk-adjusted returns and continuously assess and optimize our business mix as appropriate. In the first three months of 2021, we
•made additional investments in T&D infrastructure projects on time and on budget,
•continued to execute our Energy Efficiency and other existing BPU-approved utility programs,
•continued to evaluate potential additional offshore wind opportunities, and
•continued the process to potentially sell PSEG Power’s non-nuclear generation business, which is expected to improve our business profile and accelerate our transition to a primarily regulated electric and gas utility, with a significantly contracted energy business.
Regulatory, Legislative and Other Developments
In our pursuit of operational excellence, financial strength and disciplined investment, we closely monitor and engage with stakeholders on significant regulatory and legislative developments. Transmission planning rules and wholesale power market design are of particular importance to our results and we continue to advocate for policies and rules that promote fair and efficient electricity markets. For additional information about regulatory, legislative and other developments that may affect us, see Part I, Item 1. Business—Regulatory Issues in our Form 10-K and Item 5. Other Information in this Quarterly Report on Form 10-Q.
Transmission Rate Proceedings and Return on Equity (ROE)
In March 2019, FERC issued a Notice of Inquiry seeking comments on improvements to FERC’s electric transmission incentives policy. Subsequently, in April 2021, FERC issued a supplemental notice of proposed rulemaking to eliminate the incentive for Regional Transmission Organization (RTO) membership for transmitting utilities that have already received the incentive for three or more years. PSE&G began receiving a 50 basis point adder for RTO membership in 2008. Elimination of the adder for RTO membership could reduce PSE&G’s annual Net Income and annual cash inflows by approximately $30 million.
In May 2020, FERC issued an order revising an earlier order that established a new ROE policy for reviewing existing transmission ROEs. The revised methodology uses the Discounted Cash Flow model, the Capital Asset Pricing model and the Risk Premium model to determine if an existing base ROE is unjust and unreasonable and, if so, what replacement ROE is appropriate. FERC’s order indicated that it would not be bound by this revised methodology when considering the just and reasonableness of a utility’s ROE in future proceedings. We continue to analyze the potential impact of these methodologies.
ROE complaints have been pending before FERC regarding MISO transmission owners, the ISO New England Inc. transmission owners and utilities in other jurisdictions. In addition, over the past few years, several companies have negotiated settlements that have resulted in reduced ROEs.
We are engaged in settlement discussions with the BPU Staff and the New Jersey Division of Rate Counsel about the level of PSE&G’s base transmission ROE and other formula rate matters. An adverse change to PSE&G’s base transmission ROE or ROE incentives could be material. We estimate that for each 25 basis point reduction in PSE&G’s base transmission ROE, and all other factors unchanged, PSE&G’s annual Net Income and annual cash inflows would decrease by approximately $15 million. While we cannot predict the outcome of the settlement discussions, it may result in a change to our base transmission ROE that is multiples of this sensitivity measure.
Wholesale Power Market Design
In December 2019, FERC issued an order establishing new rules for PJM’s capacity market, extending the PJM MOPR to include both new and existing resources that receive or are entitled to receive certain out-of-market payments, with certain exemptions.
PSEG Power’s New Jersey nuclear plants that receive ZEC payments will be subject to the new MOPR. Resources that are subject to the MOPR continue to have the ability to justify a bid below the MOPR floor price under the unit-specific exemption. The MOPR floor prices are not expected to prevent either our nuclear units or gas-fired units from clearing in the next RPM auction. In May 2020, FERC issued an order modifying PJM’s methodology for pricing energy reserves. It also directed PJM to use forward-looking energy and ancillary service revenues,which can affect how the MOPR offer floors are calculated. In addition, if one or more electric distribution zones in New Jersey (or another state) were to become fixed resource requirement (FRR) alternativeservice areas, procurements needed for that area could provide an alternate means for nuclear units whose ability to clear in RPM auctions was affected by the MOPR to provide capacity within PJM. We cannot predict whether additional changes will be made to the MOPR, or whether changes will occur in the PJM market that would impact our ability to clear any of these units in future RPM auctions.
States that have clean energy programs designed to achieve public policy goals that support such resources as solar, offshore wind and nuclear, are not prevented from pursuing those programs by the expanded MOPR and could choose to utilize the existing FRR approach authorized under the PJM tariff. Subsidized units that cannot clear in a RPM capacity auction because of the expanded MOPR could still count as capacity resources to a load serving entity using the FRR approach. In a March 2020 order, the BPU initiated an investigation to examine whether New Jersey can achieve its long-term clean energy and environmental objectives under the current resource adequacy procurement paradigm and potential alternatives. One of the areas of inquiry concerns the potential creation of FRR service areas within New Jersey. We cannot predict the impact these rules or any measures taken by the BPU will have on the capacity market or our generating stations.
In January 2020, New Jersey rejoined the Regional Greenhouse Gas Initiative (RGGI). As a result, generating plants operating in New Jersey, including those owned by PSEG Power, that emit CO2 emissions will be required to procure credits for each ton they emit. In response to RGGI, PJM initiated a process in 2019 to investigate the development of a carbon pricing mechanism that may mitigate the environmental and financial distortions that could occur when emissions “leak” from non-participating states to the RGGI states. If the process leads to a market solution, it could have a material impact on the value of PSEG Power’s generating fleet.
Environmental Regulation
We are subject to liability under environmental laws for the costs and penalties of remediating environmental contamination of property now or formerly owned by us and of property contaminated by hazardous substances that we generated. In particular, the historic operations of PSEG companies and the operations of numerous other companies along the Passaic and Hackensack Rivers are alleged by Federal and State agencies to have discharged substantial contamination into the Passaic River/Newark Bay Complex in violation of variousstatutes. We are also currently involved in a number of proceedings relating to sites where other hazardous substances may have been discharged and may be subject to additional proceedings in the future, and the costs and penalties of any such remediation efforts could be material.
For further information regarding the matters described above, as well as other matters that may impact our financial condition and results of operations, see Item 1. Note 11. Commitments and Contingent Liabilities.
Nuclear
In April 2019, PSEG Power’s Salem 1, Salem 2 and Hope Creek nuclear plants were awarded ZECs by the BPU. Pursuant to a process established by the BPU, ZECs are purchased from selected nuclear plants and recovered through a non-bypassable distribution charge in the amount of $0.004 per kilowatt-hour used (which is equivalent to approximately $10 per megawatt hour (MWh) generated in payments to selected nuclear plants (ZEC payment)). Each nuclear plant is expected to receive ZEC revenue for approximately three years, through May 2022.
In April 2021, PSEG Power’s Salem 1, Salem 2 and Hope Creek nuclear plants were awarded ZECs for the three-year eligibility period starting June 2022 at the same approximate $10 per MWh received during the current ZEC period through May 2022 referenced above. As a result, each nuclear plant is expected to receive ZEC revenue for approximately three years
starting June 2022. The terms and conditions of this April 2021 ZEC award are generally similar to the current ZEC period as discussed above.
The award of ZECs attaches certain obligations, including an obligation to repay the ZECs in the event that a plant ceases operations during the approximate three-year period that it was awarded ZECs, subject to certain exceptions specified in the ZEC legislation. PSEG Power has and will continue to recognize revenue monthly as the nuclear plants generate electricity and satisfy their performance obligations. Further, the ZEC payment may be adjusted by the BPU at any time to offset environmental or fuel diversity payments that a selected nuclear plant may receive from another source. For instance, the New Jersey Division of Rate Counsel (New Jersey Rate Counsel), in written comments filed with the BPU, has advocated for the BPU to offset market benefits resulting from New Jersey’s rejoining the Regional Greenhouse Gas Initiative from the ZEC payment. PSEG intends to vigorously defend against these arguments. Due to its preliminary nature, PSEG cannot predict the outcome of this matter.
The BPU’s April 2019 decision awarding ZECs through May 2022 has been appealed by the New Jersey Rate Counsel. In March 2021, the New Jersey Appellate Division affirmed the BPU’s April 2019 decision granting ZECs for the first eligibility period. In April 2021, New Jersey Rate Counsel has petitioned to the New Jersey Supreme Court for further appellate review. PSEG cannot predict the outcome of this matter.
In the event that (i) the ZEC program is overturned or is otherwise materially adversely modified through legal process; or (ii) any of the Salem 1, Salem 2 and Hope Creek plants is not sufficiently valued for its environmental, fuel diversity or resilience attributes in future periods and does not otherwise experience a material financial change that would remove the need for such attributes to be sufficiently valued, PSEG Power will take all necessary steps to cease to operate all of these plants. Alternatively, even with sufficient valuation of these attributes, if the financial condition of the plants is materially adversely impacted by changes in commodity prices, FERC’s changes to the capacity market construct (absent sufficient capacity revenues provided under a program approved by the BPU in accordance with a FERC-authorized capacity mechanism), or, in the case of the Salem nuclear plants, decisions by the EPA and state environmental regulators regarding the implementation of Section 316(b) of the Clean Water Act and related state regulations, or other factors, PSEG Power will take all necessary steps to cease to operate all of these plants. Ceasing operations of these plants would result in a material adverse impact on PSEG’s and PSEG Power’s results of operations.
Tax Legislation
On March 31, 2021, the White House released an overview of The American Jobs Plan and Made in America Tax Plan. Although very few details of the plans have been released, the Made in America Tax Plan includes an increase in the federal corporate tax rate and a minimum tax levied on book earnings. If either provision is enacted, it would have an unfavorable impact on PSEG’s and PSEG Power’s financial statements and would increase PSE&G’s customers’ bills.
A prolonged coronavirus pandemic or further economic stimulus could result in future federal or state legislation which could have a material impact on our effective tax rate and cash tax position.
The Consolidated Appropriations Act, 2021 (CAA) was enacted in late December 2020. The CAA provides a 30% investment tax credit for offshore wind projects that begin construction before December 31, 2025. Also, on December 31, 2020, Notice 2021-05 was issued. For qualifying offshore wind projects, the notice extends the four year continuity safe harbor to ten calendar years commencing the calendar year after which construction of the project begins.
In July 2020, the Internal Revenue Service (IRS) issued final and proposed regulations addressing the limitation on deductible business interest expense contained in the Tax Cuts and Jobs Act (Tax Act). These regulations retroactively allow depreciation to be added back in computing the 30% adjusted taxable income (ATI) cap, increasing the amount of interest that can be deducted by unregulated businesses in years before 2022. For 2022 and after, the regulations continue to disallow the addback of depreciation in the computation of ATI, effectively lowering the cap on the amount of deductible business interest. The portion of PSEG’s and PSEG Power’s business interest expense that was disallowed in 2018 and 2019 will now be deductible in those respective years.
In March 2020, the federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted. The CARES Act allows a five-year carryback of any net operating loss (NOL) generated in a taxable year beginning after December 31, 2017 and before January 1, 2021.
Future Outlook
Our future success will depend on our ability to continue to maintain strong operational and financial performance to capitalize on or otherwise address regulatory and legislative developments that impact our business and to respond to the issues and challenges described below. In order to do this, we will continue to:
•obtain approval of and execute on our utility capital investment program to enhance the resiliency of our infrastructure, maintain the reliability of the service we provide to our customers, and align our sustainability and climate goals with
•focus on controlling costs while maintaining safety, reliability and customer satisfaction and complying with applicable standards and requirements,
•deliver on our Human Capital Management strategy to attract, develop and retain a diverse, high-performing workforce,
•successfully manage our energy obligations and re-contract our open supply positions in response to changes in prices and demand, mindful of the cost and affordability impacts to our electric and gas distribution customers,
•advocate for federal and state programs to properly value New Jersey’s largest zero-carbon generation resource and measures that promote fair and efficient electricity markets, including recognition of the cost of emissions,
•engage constructively with our multiple stakeholders, including regulators, government officials, customers, employees, investors, suppliers and the communities in which we do business,
•finalize our strategic alternatives review for PSEG Power’s non-nuclear generating assets and successfully execute any transactions involving those assets as we transform our business mix into a mostly regulated utility and contracted generating company with a carbon-free nuclear and offshore wind fleet,
•successfully operate the LIPA T&D system and manage LIPA’s fuel supply and generation dispatch obligations, and
•manage the risks and opportunities in environmental, social and governance (ESG) matters, which is an integral part of our long-term strategy to be a clean energy leader for the benefit of all stakeholders.
In addition to the risks described elsewhere in this Form 10-Q and in our Form 10-K, for 2021 and beyond, the key issues and challenges we expect our business to confront include:
•regulatory and political uncertainty, both with regard to future energy policy, design of energy and capacity markets, transmission policy and environmental regulation, as well as with respect to the outcome of any legal, regulatory or other proceedings,
•the continuing impact of the ongoing coronavirus pandemic and the associated economic impact, which could extend beyond the duration of the pandemic,
•future changes in federal and state tax laws, including The American Jobs Plan and Made in America Tax Plan, and
•the impact of changes in demand, natural gas and electricity prices, and expanded efforts to decarbonize several sectors of the economy.
We continually assess a broad range of strategic options to maximize long-term stockholder value and address the interests of our multiple stakeholders. In assessing our options, we consider a wide variety of factors, including the performance and prospects of our businesses; the views of employees, investors, regulators, customers and rating agencies; our existing indebtedness and restrictions it imposes; and tax considerations, among other things. Strategic options available to us include:
•investments in T&D facilities to enhance reliability, resiliency and modernize the system to meet the growing needs and increasingly higher expectations of customers, and clean energy investments such as CEF-EE, CEF-EV and CEF-ES,
•the disposition or restructuring of our merchant generation business or portions thereof or other existing businesses or the acquisition or development of new businesses,
•investments in offshore wind with long-term contracts that provide predictability and a reasonable risk-adjusted return,
•continued operations of our nuclear generation facilities, to the extent there is sufficient certainty that their operation will render an acceptable risk-adjusted return, and
•acquisitions, dispositions and other transactions involving assets or businesses that could provide value to customers and shareholders.
There can be no assurance, however, that we will successfully develop and execute any of the strategic options noted above, or any additional options we may consider in the future. The execution of any such strategic plan may not have the expected benefits or may have unexpected adverse consequences.
Our results of operations are primarily comprised of the results of operations of our principal operating subsidiaries, PSE&G and PSEG Power, excluding charges related to intercompany transactions, which are eliminated in consolidation. For additional information on intercompany transactions, see Item 1. Note 20. Related-Party Transactions.
Three Months Ended
Increase/ (Decrease)
March 31,
2021
2020
2021 vs. 2020
Millions
Millions
%
Operating Revenues
$
2,889
$
2,781
$
108
4
Energy Costs
1,029
906
123
14
Operation and Maintenance
778
754
24
3
Depreciation and Amortization
341
324
17
5
Income from Equity Method Investments
3
3
—
—
Net Gains (Losses) on Trust Investments
60
(221)
281
N/A
Other Income (Deductions)
25
4
21
N/A
Net Non-Operating Pension and OPEB Credits (Costs)
82
62
20
32
Interest Expense
146
153
(7)
(5)
Income Tax (Benefit) Expense
117
44
73
N/A
The following discussions for PSE&G and PSEG Power provide a detailed explanation of their respective variances.
PSE&G
Three Months Ended
Increase/ (Decrease)
March 31,
2021
2020
2021 vs. 2020
Millions
Millions
%
Operating Revenues
$
2,073
$
1,883
$
190
10
Energy Costs
849
708
141
20
Operation and Maintenance
424
386
38
10
Depreciation and Amortization
241
222
19
9
Net Gains (Losses) on Trust Investments
1
—
1
N/A
Other Income (Deductions)
28
27
1
4
Net Non-Operating Pension and OPEB Credits (Costs)
66
51
15
29
Interest Expense
98
96
2
2
Income Tax Expense (Benefit)
79
109
(30)
(28)
Three Months Ended March 31, 2021 as Compared to 2020
Operating Revenues increased $190 million due to changes in delivery, commodity, clause and other operating revenues.
Delivery Revenues increased $23 million due primarily to
•Transmission revenues were $26 million higher due to an increase in revenue requirements attributable to higher rate base investment.
•Electric distribution revenues increased $12 million due primarily to a $10 million increase attributable to higher sales volumes and a $2 million increase in Green Program Recovery Charge (GPRC) collections.
•Gas distribution revenues increased $9 million due primarily to a $57 million increase due to higher sales volumes and a $3 million increase in GPRC revenues. These increases were partially offset by $51 million in accrued WNC revenues in the first quarter of 2020.
•Electric and Gas revenues decreased by $24 million due to a net increase in the flowback to customers of excess deferred tax liabilities and tax repair-related accumulated deferred income tax benefits resulting from rate reductions, which is offset in Income Tax Expense.
Commodity Revenues increased $144 million as a result of higher Gas revenues and higher Electric revenues. The changes in Commodity revenues for both gas and electric are entirely offset by the changes in Energy Costs. PSE&G earns no margin on the provision of basic gas supply service (BGSS) and BGS to retail customers.
•Gas commodity revenues increased $102 million due primarily to higher BGSS sales volumes of $57 million and higher BGSS prices of $45 million.
•Electric commodity revenues increased $42 million due primarily to a $67 million increase in sales volumes, partially offset by $25 million in lower BGS prices.
Clause Revenues increased $23 million due primarily to higher SBC revenues of $22 million and a $1 million net increase in Tax Adjustment Credit (TAC) and GPRC deferrals. The changes in SBC revenues and TAC and GPRC deferral amounts are entirely offset by changes in the amortization of Regulatory Assets and Regulatory Liabilities and related costs in O&M, D&A, Interest and Income Tax Expenses. PSE&G does not earn margin on SBC revenues or TAC and GPRC deferrals.
Other Operating Revenues were flat. An $11 million decrease in Solar Renewable Energy Certificate (SREC) revenues was entirely offset by an $8 million increase in Transition Renewable Energy Certificate (TREC) revenues and a $3 million increase in appliance service revenues. The changes in SREC and TREC components of revenues are entirely offset by changes to Energy Costs.
Operating Expenses
Energy Costs increased $141 million. This is entirely offset by changes in Commodity Revenues and Other Operating Revenues.
Operation and Maintenance increased $38 million due primarily to a $21 million increase in clause and renewable-related expenses, a $7 million increase in appliance service costs, a $4 million increase in transmission expenditures, a $3 million increase in grounds maintenance for snow removal, a $2 million increase in distribution corrective and preventative maintenance and $1 million increase in vegetation management expenditures.
Depreciation and Amortization increased $19 million due primarily to a $13 million increase related to additional plant in service and a $5 million increase in the amortization of Regulatory Assets.
Net Non-Operating Pension and OPEB Credits (Costs) increased $15 milliondue primarilyto a $12 million decrease in interest cost and a $7 million increase in the expected return on plan assets, partially offset by a $2 million increase in the amortization of the net actuarial loss and a $2 million increase in the amortization of net prior service cost.
Interest Expense increased $2 million due primarily to a $1 million increase from net debt issuances in 2021 and a $3 million increase from net debt issuances in 2020. These increases were partially offset by a decrease of $2 million due to a reduction in short-term borrowings and a decrease in the allowance for funds used during construction.
Income Tax Expense decreased $30 million due primarily to an increase in the 2021 flowback of PSE&G’s excess deferred income tax liabilities and CEF program investments, partially offset by an increase in bad debt flow-through.
Net Non-Operating Pension and OPEB Credits (Costs)
12
8
4
50
Interest Expense
27
34
(7)
(21)
Income Tax Expense (Benefit)
52
(70)
122
N/A
Three Months Ended March 31, 2021 as Compared to 2020
Operating Revenues decreased $53 million due primarily to changes in generation and gas supply revenues.
Generation Revenues decreased $128 million due primarily to
•a net decrease of $202 million due to MTM losses in 2021 as compared to MTM gains in 2020. Of this amount, there was a $167 million decrease due to changes in forward prices in 2021 as compared to 2020 coupled with a $35 million decrease due to losses on positions reclassified to realized upon settlement in 2021 compared to gains in 2020, and
•a net decrease of $22 million in electricity sold primarily due to the transfer of responsibility for firm transmission services under the BGS contracts from the BGS suppliers to the Electric Distribution Companies (EDCs),
•partially offset by a net increase of $81 million due primarily to higher average realized prices in the PJM, NE and NY regions coupled with higher volumes of electricity sold in the NE region. This was partially offset by lower volumes of electricity sold in the PJM region, and
•a net increase of $10 million in capacity revenues due primarily to increases in auction prices in the PJM region, partially offset by decreases in capacity prices and higher load obligations in the NE region.
Gas Supply Revenues increased $75 million due primarily to
•a net increase of $63 million in sales under the BGSS contract primarily due to higher sales volumes, and
•a net increase of $12 million related to sales to third parties, of which $23 million was due to higher average sales prices, partially offset by a decrease of $11 million due to lower volumes sold.
Operating Expenses
Energy Costs represent the cost of generation, which includes fuel costs for generation as well as purchased energy in the market, and gas purchases to meet PSEG Power’s obligation under its BGSS contract with PSE&G. Energy Costs increased $6 million due to
Gas costs increased $48 million due mainly to
•a net increase of $38 million in costs related to sales under the BGSS contract, of which $58 million was due to higher send out volumes, partially offset by a decrease of $20 million due to the lower average cost of gas, and
•a net increase of $8 million related to sales to third parties, of which $18 million was due to an increase in the average cost of gas, partially offset by a decrease of $10 million due to lower volumes sold.
Generation costs decreased $42 million due primarily to
•a net decrease of $48 million due to net MTM gains in 2021 compared to MTM losses in 2020. Of this amount, there was a $32 million decrease due to changes in forward prices in 2021 as compared to 2020 coupled with a $16 million
decrease due to gains on positions reclassified to realized upon settlement in 2021 as compared to losses in 2020,
•a net decrease of $28 million in transmission costs primarily due to a $22 million impact from the transfer of responsibility for firm transmission services under BGS contracts from BGS suppliers to the EDCs, coupled with a $6 million decrease from changes in BGS and other load, and
•a decrease of $20 million due to a lower of cost or market adjustment recorded in the first quarter of 2020 on oil inventory caused by a decrease in oil demand and pricing,
•partially offset by a net increase of $46 million in fuel costs reflecting higher gas prices in the PJM, NY, and NE regions coupled with the utilization of higher volumes of coal in the NE region. This was partially offset by utilization of lower volumes of gas in the PJM region.
Operation and Maintenance decreased $19 million due primarily to higher planned outage costs in 2020 at our fossil and nuclear plants.
Net Gains (Losses) on Trust Investments increased $278 million due primarily to a $214 million decrease in net unrealized losses on equity investments in the NDT Fund, and a $60 million increase in net realized gains on NDT Fund investments.
Other Income (Deductions) increased $19 million primarily due to lower purchases of NOL tax benefits in 2021 under the New Jersey Technology Tax Benefit Transfer Program.
Non-Operating Pension and OPEB Credits (Costs) increased $4 million due to a $3 million decrease in interest cost and a $1 million increase in the expected return on plan assets.
Interest Expense decreased $7 million due primarily to debt maturities in April 2020.
Income Tax Expense increased $122 million due primarily to higher pre-tax income, an additional trust tax on the NDT qualified fund net gains, and the purchase of less New Jersey NOL tax benefits in 2021 as compared to 2020 under the New Jersey Technology Tax Benefit Transfer Program.
LIQUIDITY AND CAPITAL RESOURCES
The following discussion of our liquidity and capital resources is on a consolidated basis, noting the uses and contributions, where material, of our two direct major operating subsidiaries.
Operating Cash Flows
We continue to expect our operating cash flows combined with cash on hand and financing activities to be sufficient to fund planned capital expenditures and shareholder dividends.
For the three months ended March 31, 2021, our operating cash flow decreased $126 million as compared to the same period in 2020. The net decrease was primarily due to the net changes from our subsidiaries, as discussed below, offset by higher tax refunds in 2021 at the parent company and tax refunds in 2021 as compared to tax payments in 2020 at Energy Holdings.
Given the current economic challenges, PSE&G has informed both our residential customers and state regulators that all non-safety related service disconnections for non-payment will be temporarily suspended. In addition, the current economic conditions have adversely impacted residential and C&I customer payment patterns. During the moratorium, PSE&G has experienced a significant decrease in cash inflow and higher Accounts Receivable aging and an associated increase in bad debt expense, which we expect will extend beyond the duration of the coronavirus pandemic. While the impact on our results of operations, financial condition and cash flows for the three months ended March 31, 2021 was not material, a prolonged coronavirus pandemic and the associated economic impacts, which could extend beyond the duration of the pandemic, could materially impact cash from operations, Accounts Receivable and bad debt expense.
PSE&G
PSE&G’s operating cash flow decreased $117 million from $635 million to $518 million for the three months ended March 31, 2021, as compared to the same period in 2020, due primarily to higher accounts receivable reflecting lower collections due to the economic impacts of the pandemic and the moratorium on collections, increases in electric energy and vendor payables, and higher tax payments in 2021. These decreases were partially offset by a net decrease in regulatory deferrals.
PSEG Power
PSEG Power’s operating cash flow decreased $9 million from $484 million to $475 million for the three months ended March 31, 2021, as compared to the same period in 2020, due to a $99 million reduction related to cash collateral posting requirements, and tax payments in 2021 as compared to tax refunds in 2020, partially offset by higher earnings and a $41 million increase in the usage of fuels, materials and supplies.
PSEG meets its short-term liquidity requirements, as well as those of PSEG Power, primarily through the issuance of commercial paper and, from time to time, short-term loans. PSE&G maintains its own separate commercial paper program to meet its short-term liquidity requirements. Each commercial paper program is fully back-stopped by its own separate credit facilities.
We continually monitor our liquidity and seek to add capacity as needed to meet our liquidity requirements. Each of our credit facilities is restricted as to availability and use to the specific companies as listed below; however, if necessary, the PSEG facilities can also be used to support our subsidiaries’ liquidity needs.
In March 2020, PSEG entered into a $300 million, 364-day term loan agreement which was prepaid in January 2021. In March 2021, PSEG entered into a $500 million, 364-day variable rate term loan agreement. This term loan is not included in the credit facility amounts presented in the following table.
Our total credit facilities and available liquidity as of March 31, 2021 were as follows:
Company/Facility
As of March 31, 2021
Total Facility
Usage
Available Liquidity
Millions
PSEG
$
1,500
$
167
$
1,333
PSE&G
600
18
582
PSEG Power
2,100
152
1,948
Total
$
4,200
$
337
$
3,863
As of March 31, 2021, our credit facility capacity was in excess of our projected maximum liquidity requirements over our 12 month planning horizon, including access to capital to meet redemptions. Our maximum liquidity requirements are based on stress scenarios that incorporate changes in commodity prices and the potential impact of PSEG Power losing its investment grade credit rating from S&P or Moody’s, which would represent a three level downgrade from its current Moody’s rating and a two level downgrade from its current S&P rating. In the event of a deterioration of PSEG Power’s credit rating, certain of PSEG Power’s agreements allow the counterparty to demand further performance assurance. The potential additional collateral that we would be required to post under these agreements if PSEG Power were to lose its investment grade credit rating was approximately $818 million and $840 million as of March 31, 2021 and December 31, 2020, respectively.
For additional information, see Item 1. Note 12. Debt and Credit Facilities.
Long-Term Debt Financing
During the next twelve months,
•PSEG has $300 million of 2.00% Senior Notes maturing in November 2021,
•PSE&G has $134 million of 9.25% Mortgage Bonds Series CC maturing in June 2021, and
•PSEG Power has $700 million of 3.00% Senior Notes maturing in June 2021 and $250 million of 4.15% Senior Notes maturing in September 2021. PSEG Power has a letter of credit backing $44 million of Pennsylvania Economic Development Financing Authority Variable Rate Demand Bonds which expires in March 2022.
PSEG, PSEG Power, Energy Holdings, PSEG LI and Services participate in a corporate money pool, an aggregation of daily cash balances designed to efficiently manage their respective short-term liquidity needs, which are accounted for as intercompany loans. Servco does not participate in the corporate money pool. Servco’s short-term liquidity needs are met through an account funded and owned by LIPA.
For additional information see Item 1. Note 12. Debt and Credit Facilities.
Guarantor Financial Information
PSEG Power’s Senior Notes are fully and unconditionally guaranteed on a joint and several basis by its subsidiaries, PSEG Fossil LLC, PSEG Nuclear LLC and PSEG Energy Resources & Trade LLC. Each guarantor subsidiary is a wholly owned consolidated subsidiary of PSEG Power.
Summarized financial information is being presented, on a combined basis, only for PSEG Power (parent company) and the guarantors of PSEG Power’s Senior Notes, excluding investments in, and earnings (losses) from, subsidiaries that are not guarantors. All transactions between PSEG Power (parent company) and the guarantor subsidiaries are eliminated in the
combined summarized financial information. The required disclosures for the year-to-date interim period and the most recent fiscal year are provided in the following tables.
Three Months Ended
Year Ended
March 31, 2021
December 31, 2020
Millions
Operating Revenues (A)
$
1,151
$
3,564
Operating Income
$
171
$
598
Net Income
$
162
$
597
(A)Operating Revenues include sales to affiliates of $498 million and $1,218 million, respectively for the three months ended March 31, 2021 and year ended December 31, 2020, respectively.
As of
As of
March 31, 2021
December 31, 2020
Millions
Current Receivables from Subsidiaries and Affiliates
$
2,525
$
2,350
Total Current Assets
$
3,397
$
3,365
Noncurrent Receivables from Affiliates
$
17
$
17
Total Noncurrent Assets
$
7,178
$
7,228
Current Payables to Subsidiaries and Affiliates
$
286
$
258
Total Current Liabilities
$
1,800
$
1,734
Noncurrent Payables to Affiliates
$
57
$
57
Total Noncurrent Liabilities
$
3,974
$
4,027
Pension and NDT Fund Obligations
IRS minimum funding requirements for pension plans are determined based on the fund’s assets and liabilities at the end of a calendar year for the subsequent calendar year. In the event of a prolonged economic downturn associated with the ongoing coronavirus pandemic, our contributions to the pension plans may increase in future periods to meet IRS minimum funding requirements. PSEG hadaccumulated funding credits totaling approximately $600 million through 2020, which represent historical contributions in excess of IRS minimum funding requirements, and these credits can be applied to offset any future cash contribution obligations.
In addition, the NRC requires a biennial filing of the NDT fund balances against the decommissioning liability estimate. Any funding shortfalls are required to be cured prior to the next NRC reporting period. To the extent of a prolonged economic downturn associated with the ongoing coronavirus pandemic, our funding requirements may increase in future periods to meet NRC minimum funding requirements.
Common Stock Dividends
On April 20, 2021, our Board of Directors declared a $0.51 dividend per share of common stock for the second quarter of 2021. This reflects an indicative annual dividend rate of $2.04 per share. We expect to continue to pay cash dividends on our common stock; however, the declaration and payment of future dividends to holders of our common stock will be at the discretion of the Board of Directors and will depend upon many factors, including our financial condition, earnings, capital requirements of our businesses, alternate investment opportunities, legal requirements, regulatory constraints, industry practice and other factors that the Board of Directors deems relevant. For additional information related to cash dividends on our common stock, see Item 1. Note 18. Earnings Per Share (EPS) and Dividends.
Credit Ratings
If the rating agencies lower or withdraw our credit ratings, such revisions may adversely affect the market price of our securities and serve to materially increase our cost of capital and limit access to capital. Credit Ratings shown are for securities that we typically issue. Outlooks are shown for Issuer Credit Ratings and can be Stable, Negative, or Positive. There is no assurance that the ratings will continue for any given period of time or that they will not be revised by the rating agencies, if in their
respective judgments, circumstances warrant. Each rating given by an agency should be evaluated independently of the other agencies’ ratings. The ratings should not be construed as an indication to buy, hold or sell any security.
Moody’s (A)
S&P (B)
PSEG
Outlook
Stable
Stable
Senior Notes
Baa1
BBB
Commercial Paper
P2
A2
PSE&G
Outlook
Stable
Stable
Mortgage Bonds
Aa3
A
Commercial Paper
P1
A2
PSEG Power
Outlook
Stable
Stable
Senior Notes
Baa1
BBB
(A)Moody’s ratings range from Aaa (highest) to C (lowest) for long-term securities and P1 (highest) to NP (lowest) for short-term securities.
(B)S&P ratings range from AAA (highest) to D (lowest) for long-term securities and A1 (highest) to D (lowest) for short-term securities.
CAPITAL REQUIREMENTS
We expect that all of our capital requirements over the next three years will come from a combination of internally generated funds and external debt financing. There were no material changes to our projected capital expenditures at PSEG Power and Services as compared to amounts disclosed in our 2020 Form 10-K.
PSE&G
During the three months ended March 31, 2021, PSE&G made capital expenditures of $586 million, primarily for T&D system reliability. This does not include expenditures for cost of removal, net of salvage, of $27 million, which are included in operating cash flows.
PSEG Power
During the three months ended March 31, 2021, PSEG Power made capital expenditures of $36 million, excluding $10 million for nuclear fuel, primarily related tovarious nuclear and fossil projects.
ACCOUNTING MATTERS
For information related to recent accounting matters, see Item 1. Note 2. Recent Accounting Standards.
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The risk inherent in our market-risk sensitive instruments and positions is the potential loss arising from adverse changes in commodity prices, equity security prices and interest rates as discussed in the Notes to Condensed Consolidated Financial Statements. It is our policy to use derivatives to manage risk consistent with business plans and prudent practices. We have a Risk Management Committee comprised of executive officers who utilize a risk oversight function to ensure compliance with our corporate policies and risk management practices.
Additionally, we are exposed to counterparty credit losses in the event of non-performance or non-payment. We have a credit management process, which is used to assess, monitor and mitigate counterparty exposure. In the event of non-performance or non-payment by a major counterparty, there may be a material adverse impact on our financial condition, results of operations or net cash flows.
The availability and price of energy-related commodities are subject to fluctuations from factors such as weather, environmental policies, changes in supply and demand, state and federal regulatory policies, market rules and other events. To reduce price risk caused by market fluctuations, we enter into supply contracts and derivative contracts, including forwards, futures, swaps and options with approved counterparties. These contracts, in conjunction with physical sales and other services, help reduce risk and optimize the value of owned electric generation capacity.
Value-at-Risk (VaR) Models
VaR represents the potential losses, under normal market conditions, for instruments or portfolios due to changes in market factors, for a specified time period and confidence level. We estimate VaR across our commodity businesses.
MTM VaR consists of MTM derivatives that are economic hedges. The MTM VaR calculation does not include market risks associated with activities that are subject to accrual accounting, primarily our generating facilities and some load-serving activities.
The VaR models used are variance/covariance models adjusted for the change of positions with 95% and 99.5% confidence levels and a one-day holding period for the MTM activities. The models assume no new positions throughout the holding periods; however, we actively manage our portfolio.
From January through March 2021, MTM VaR was relatively stable between a low of $7 million and a high of $24 million at the 95% confidence level. The range of VaR was slightly wider for the three months ended March 31, 2021 as compared with the year ended December 31, 2020.
MTM VaR
Three Months Ended March 31, 2021
Year Ended December 31, 2020
Millions
95% Confidence Level, Loss could exceed VaR one day in 20 days
Period End
$
8
$
16
Average for the Period
$
14
$
10
High
$
24
$
18
Low
$
7
$
5
99.5% Confidence Level, Loss could exceed VaR one day in 200 days
Period End
$
13
$
24
Average for the Period
$
22
$
16
High
$
38
$
29
Low
$
11
$
8
See Item 1. Note 13. Financial Risk Management Activities for a discussion of credit risk.
ITEM 4.CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
PSEG, PSE&G and PSEG Power
We have established and maintain disclosure controls and procedures as defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to provide reasonable assurance that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported and is accumulated and communicated to the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) of each respective company, as appropriate, by others within the entities to allow timely decisions regarding required disclosure. We have established a disclosure committee which includes several key management employees and which reports directly to the CFO and CEO of each of PSEG, PSE&G and PSEG Power. The committee monitors and evaluates the effectiveness of these disclosure controls and procedures. The CFO and CEO of each of PSEG, PSE&G and PSEG Power have evaluated the effectiveness of the disclosure controls and procedures and, based on this evaluation, have concluded that disclosure controls and procedures at each respective company were effective at a reasonable assurance level as of the end of the period covered by the report.
There have been no changes in internal control over financial reporting that occurred during the first quarter of 2021 that have materially affected, or are reasonably likely to materially affect, each registrant’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
We are party to various lawsuits and environmental and regulatory matters, including in the ordinary course of business. For information regarding material legal proceedings, including updates to information reported in Item 3 of Part I of the Form 10-K, see Part I, Item 1. Note 11. Commitments and Contingent Liabilities and Item 5. Other Information.
ITEM 1A.RISK FACTORS
The discussion of our business and operations in this Quarterly Report on Form 10-Q should be read together with the risk factors contained in Part I, Item 1A of our Form 10-K, which describes various risks and uncertainties that could have a material adverse impact on our business, prospects, financial position, results of operations or cash flows and could cause results to differ materially from those expressed elsewhere in this report. We expect that the risks and uncertainties described in this Form 10-Q and our Form 10-K will be further adversely impacted by the ongoing coronavirus pandemic and any related, sustained economic downturn, which could extend beyond the duration of the pandemic.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In December 2020, we entered into a share repurchase plan that complies with Rule 10b5-1 of the Exchange Act, as amended, solely with respect to the repurchase of shares to satisfy obligations under equity compensation awards that are expected to be issued in 2021 and the repurchase of shares to satisfy purchases by employees under the Employee Stock Purchase Plan during 2021. The following table indicates our common share repurchases in the open market during the first quarter of 2021. There are no remaining shares available for repurchase under the plan.
Three Months Ended March 31, 2021
Total Number of Shares Purchased
Average Price Paid per Share
January 1 - January 31
1,000,000
$56.22
February 1 - February 28
—
—
March 1 - March 31
—
—
ITEM 5. OTHER INFORMATION
Certain information reported in the Form 10-K is updated below. Additionally, certain information is provided for new matters that have arisen subsequent to the filing of the Form 10-K. References are to the related pages on the Form 10-K.
Federal Regulation
Transmission Rate Proceedings
In March 2019, FERC issued a Notice of Inquiry (NOI) seeking comment on improvements to FERC’s electric transmission incentives policy to ensure that it appropriately encourages the development of the infrastructure needed to ensure grid reliability and reduce congestion to lower the cost of power for consumers. The NOI is intended to examine whether existing incentives, such as the 50 basis point adder for RTO membership, should continue to be granted and whether new incentives should be established. The NOI includes the consideration of incentives for economic efficiency and reliability benefits, RTO membership, improvements to existing transmission facilities, consideration of the costs and benefits of projects in awarding incentives, and determination of whether to review incentive applications on a case-specific or standardized basis. However, in April 2021, FERC issued a supplemental notice of proposed rulemaking to eliminate the incentive for RTO membership for transmitting utilities that have already received the incentive for three or more years. PSE&G began receiving a 50 basis point
adder for RTO membership in 2008. Elimination of the adder for RTO membership could be material to PSE&G.
Energy Clearing Prices
December 31, 2020 Form 10-K page 13. In April 2019, FERC issued an order directing PJM and NYISO to change their rules governing pricing for fast-start resources. In its Order, FERC found that current fast-start pricing practices are unjust and unreasonable because they do not allow prices to reflect the marginal cost of serving load. FERC required PJM and NYISO to make various changes to their respective tariffs to allow the start-up costs of fast-start resources to be reflected in prices, among other things. In August 2019, PJM stated that new tariff provisions would apply fast-start pricing to all eligible fast-start resources. However, in January 2020, FERC decided to hold the proceeding in abeyance in order to allow PJM and its stakeholders to address FERC’s concern that PJM’s pricing and dispatch are misaligned. In December 2020, FERC issued an order accepting aspects of PJM’s proposed reforms, but also directed PJM to submit an additional filing that includes an implementation date. In February 2021, PJM submitted the additional filing and requested an effective date of May 1, 2021. The new rules will not be implemented until FERC issues an order approving PJM’s final compliance filing. We will continue to participate in this proceeding.
State Regulation
BGSS Process
December 31, 2020 Form 10-K page 16. In September 2019, the BPU formally opened a stakeholder proceeding to explore gas capacity procurement and related issues with respect to service to all New Jersey natural gas customers, whether served through BGSS or a third- party supplier. In addition, the BPU directed that the proceeding review whether, and to what extent, third-party suppliers are providing savings to New Jersey customers on their natural gas supply. In 2019, the Board Staff conducted a public hearing and interested parties, including PSE&G, submitted oral and written comments while also answering the Staff’s specific questions concerning, among other things, capacity procurement (e.g., timing, price, sufficiency); the sufficiency of pipeline capacity within New Jersey; the cost impacts if gas distribution companies were made responsible for securing incremental capacity for their transportation customers; and economic benefits to residential customers. In early 2020, the BPU announced that it had retained a consultant, and in February 2021 that consultant issued discovery requests focused on PSE&G’s June 2020 BGSS filing. The proceeding remains open.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
(Registrant)
By:
/S/ ROSE M. CHERNICK
Rose M. Chernick Vice President and Controller (Principal Accounting Officer)
Date: May 5, 2021
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
(Registrant)
By:
/S/ ROSE M. CHERNICK
Rose M. Chernick Vice President and Controller (Principal Accounting Officer)
Date: May 5, 2021
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.
PSEG POWER LLC
(Registrant)
By:
/S/ ROSE M. CHERNICK
Rose M. Chernick Vice President and Controller (Principal Accounting Officer)
