PUBLIC SERVICE ENTERPRISE GROUP, INC. This combined MD&A is separately filed byPublic Service Enterprise Group Incorporated (PSEG),Public Service Electric and Gas Company (PSE&G) andPSEG Power LLC (PSEG Power ). Information contained herein relating to any individual company is filed by such company on its own behalf.PSE&G andPSEG 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 ofNew Jersey . PSE&G is subject to regulation by theNew Jersey Board of Public Utilities (BPU) and theFederal Energy Regulatory Commission (FERC). PSE&G also invests in regulated solar generation projects and energy efficiency and related programs inNew 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-AtlanticUnited 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 byFERC , theNuclear Regulatory Commission (NRC), theEnvironmental 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 theLong Island Power Authority's (LIPA) transmission and distribution (T&D) system under an Operations Services Agreement (OSA);PSEG Energy Holdings L.L.C. (Energy Holdings ), which primarily has investments in leveraged leases; andPSEG 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 2019 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 2019 and Future Outlook provided in Item 7 in our Form 10-K by describing significant events and business developments that have occurred during 2020 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 2020 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 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. We also announced inJuly 2020 that we are exploring strategic alternatives forPSEG Power's non-nuclear generating fleet, which includes more than 6,750 megawatts (MW) of fossil generation located inNew Jersey ,Connecticut ,New York andMaryland as well as the 467 MW Solar Source portfolio located in various states. PSE&G,PSEG Power and PSEG LI continue to provide essential services during 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 continue to 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 (PPE) and practicing physical distancing measures. Extensive cleaning protocols are also in place. Earlier this year, we suspended non-essential work activities, while continuing to respond to customer outages and requests for emergency service as well as infrastructure maintenance and upgrades. AsNew Jersey has relaxed its coronavirus response protocols over the past few months, we have initiated a phased re-starting of certain of these activities (i.e., inside premises appliance repair and monthly meter reading activities), while maintaining protocols for physical distancing and PPE. Similarly, we have also begun to formulate policies and protocols for the responsible reopening of our offices and work sites. Our "responsible reentry" policies 72 --------------------------------------------------------------------------------
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and protocols will continue to focus on the health and safety of our employees, customers and the communities we serve while also taking a cautious and measured approach toward reopening. We are continuing to assess the appropriate timeline for this process. In connection with their reopening plans,New Jersey ,New York andConnecticut have issued advisories for anyone returning from states that have a significant degree of community-wide spread of COVID-19, referred to as "designated states." These advisories include exceptions for essential employees and we are assessing what impact this may have on members of our workforce who may live in a designated state. We are also using enhanced physical distancing and safety protocols where there are impacts on members of our workforce who may live in or travel from a designated state. The ongoing coronavirus pandemic has not had a material impact on our results of operations, financial condition or cash flows for the nine months endedSeptember 30, 2020 . However, 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, including the duration and severity of the outbreak as well as third-party actions taken to contain its spread and mitigate its public health effects. 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 endingDecember 31, 2024 , PSE&G expects to invest between$12.5 billion to$14.7 billion , resulting in an expected compound annual rate base growth of 7% to 8%. These ranges are driven by certain unapproved investment programs, including the Energy Cloud (EC) and Electric Vehicle (EV)/Energy Storage (ES) portions of the Clean Energy Future (CEF) program, any extension of the CEF Energy Efficiency (EE) program beyond the initial three-years approved by the BPU inSeptember 2020 , and incremental reliability and resiliency investments anticipated in the 2024 timeframe that we intend to seek approval for under the third phase of existing infrastructure programs. See below for a description of the CEF program. In 2019, we commenced our BPU-approved Gas System Modernization Program II (GSMP II), an expanded, five-year program to invest$1.9 billion beginning in 2019 to replace approximately 875 miles of cast iron and unprotected steel mains in addition to other improvements to the gas system. Approximately$1.6 billion will be recovered through periodic rate roll-ins, with the remaining$300 million to be recovered through a future base rate proceeding. As part of the settlement approved by the BPU, PSE&G agreed to file for a base rate proceeding no later thanDecember 2023 , to maintain a base level of gas distribution capital expenditures of$155 million per year and to achieve certain leakage reduction targets. Also in 2019, the BPU approved our Energy Strong II Program (ES II ), an$842 million program to harden, modernize and improve the resiliency of our electric and gas distribution systems. This program began in the fourth quarter of 2019 and is expected to be completed by the end of 2023. Approximately$692 million of the program will be recovered through periodic rate recovery filings, with the balance to be recovered in our next distribution base rate case. InOctober 2018 , we filed our proposed CEF program with the BPU, a six-year estimated$3.5 billion investment covering four programs; (i) an EE program totaling$2.5 billion of investment designed to achieve energy efficiency targets required underNew Jersey's Clean Energy law; (ii) an EV infrastructure program; (iii) an ES program, which was submitted to the BPU together with the EV infrastructure program in a single filing; and (iv) an EC program which will include installing approximately two million electric smart meters and associated infrastructure. InJanuary 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). InSeptember 2020 , PSE&G reached a settlement with all parties in the CEF-EE proceeding, which the BPU approved. The settlement provides for an investment of$1 billion over a three-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 (CIP), a mechanism that will provide for recovery of lost electric and gas variable margin revenues. The CIP is effective inJune 2021 for electric andOctober 2021 for gas. PSE&G will suspend its gas Weather Normalization Charge (WNC) when the gas CIP deferral period begins. The BPU has also issued procedural schedules for the CEF-EC and CEF-EV/ES investment program filings, with evidentiary hearings scheduled for the fourth quarter of 2020. InApril 2020 , PSE&G filed with the BPU an update of its CEF-EC petition to revise certain assumptions, including an updated deployment schedule based on the procedural schedule. 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 2020-2022 is$2.9 billion . 73 --------------------------------------------------------------------------------
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As noted above, PSE&G has been deemed byNew Jersey to provide essential services during the ongoing coronavirus pandemic. Our capital programs, including GSMP II,ES 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 has led many state and federal agencies to implement remote working protocols and divert resources to address the pandemic which, if prolonged, could impact regulatory agencies' ability to review proposed programs and delay the timing of approvals for matters subject to regulatory approval, including parts of our CEF program that is currently before the BPU and 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, and expects these changes to continue during a prolonged coronavirus pandemic. InOctober 2020 , the state formally extended its moratorium on non-safety related service disconnections for non-payment for residential customers throughMarch 15, 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 as discussed below. InJuly 2020 , the BPU authorized regulated utilities inNew 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 onMarch 9, 2020 throughSeptember 30, 2021 , or 60 days after theNew 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. During the third quarter of 2020, PSE&G recorded a Regulatory Asset related to COVID-19 to defer incremental costs of$35 million . There is no assurance that these costs will ultimately be recovered. While the impact on our results of operations, financial condition and cash flows for the nine months endedSeptember 30, 2020 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 At PSEG Power , we strive 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 nine months of 2020, our natural gas and nuclear units generated 16.8 and 24.0 terawatt hours and operated at a capacity factor of 49.0% and 94.2%, respectively. Our commitments for load, such as basic generation service (BGS) inNew 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 and ability to capitalize on market opportunities help it to manage some of the volatility of the merchant power business. More than 70% ofPSEG Power's expected gross margin in 2020 relates to hedging of our energy margin, our expected revenues from the capacity market mechanisms, Zero Emission Certificate (ZEC) revenues that commenced inApril 2019 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 MinimumOffer 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 ofFERC'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. In the first nine months of 2020, as a result of the ongoing coronavirus pandemic,PSEG Power experienced a decrease in aggregate wholesale electric demand. An extended outbreak could have a material adverse impact on future results of operations and cash flows. 74 --------------------------------------------------------------------------------
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PSEG Power has also implemented protocols to ensure the safety and health of employees at its generation facilities and contractors working at the facilities during planned outages. A prolonged unavailability of employees and contractors due to the ongoing coronavirus pandemic could materially and adversely impact our ability to operate our generation facilities, which would have a material impact on our business, results of operations and cash flows. PSEG LI Following the effects of Tropical Storm Isaias, theNew York Attorney General initiated an inquiry into PSEG LI's preparation and response to the storm. In addition, theDepartment of Public Service within theNew 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. LIPA also initiated its own review of PSEG LI's performance. PSEG LI agreed with LIPA that it would fund claims by customers for food and medication spoilage costs incurred as a result of being without electric service during the storm up to the amount of incentive compensation earned by PSEG LI in 2020. PSEG LI does not expect the claims to be material. PSEG LI is fully cooperating in each of these inquiries, which remain ongoing. We cannot predict their outcome. Strategic Alternatives forPSEG Power's Non-Nuclear Fleet OnJuly 31, 2020 , PSEG announced that it is exploring strategic alternatives forPSEG Power's non-nuclear generating fleet, which includes more than 6,750 MW of fossil generation located inNew Jersey ,Connecticut ,New York andMaryland as well as the 467 MW Solar Source portfolio located in various states. An exit from the fossil generation business would accelerate PSEG's transition to a primarily regulated and contracted business, with a zero-carbon generation platform. 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 ofPSEG Power's existing nuclear fleet. While PSEG is in the preliminary stage of this evaluation, the marketing of a potential transaction in one or a series of steps is anticipated to launch in the fourth quarter of this year, and any potential transaction is expected to be completed sometime in 2021. There is no assurance that the strategic review will result in a sale or other disposition of all or any portion of these 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. 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 power. 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. InJuly 2019 , we announced that we expect to cut carbon emissions atPSEG 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 GHG, into the air. In addition, PSE&G's CEF-EE program, which was approved by the BPU inSeptember 2020 and CEF-EV/ES and EC proposals, which are under review by the BPU, are intended to supportNew 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. Operational Excellence We emphasize operational performance while developing opportunities in both our competitive and regulated businesses. Flexibility in our generating fleet has allowed us to take advantage of opportunities in a rapidly evolving market as we remain diligent in managing costs. In the first nine months of 2020, 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 nine months of 2020 as we •maintained sufficient liquidity, 75 --------------------------------------------------------------------------------
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•maintained solid investment grade credit ratings, and •increased our indicative annual dividend for 2020 to$1.96 per share. We expect to be able to fund our planned capital requirements, as described in Liquidity and Capital Resources, and the impacts of the Tax Cuts and Jobs Act of 2017 (Tax Act) without the issuance of new equity. Financial Results The results for PSEG,PSE&G andPSEG Power for the three months and nine months endedSeptember 30, 2020 and 2019 are presented as follows: Three Months Ended Nine Months Ended September 30, September 30, Earnings (Losses) 2020 2019 2020 2019 Millions PSE&G$ 313 $ 344 $ 1,036 $ 974 PSEG Power (A) 254 53 437 309 Other (B) 8 6 1 (27) PSEG Net Income$ 575 $ 403 $ 1,474 $ 1,256
PSEG Net Income Per Share (Diluted)$ 1.14 $ 0.79 $ 2.91 $ 2.47 (A)Includes an after-tax gain of$86 million in the three and nine months endedSeptember 30, 2020 related to the sale ofPSEG Power's interest in theYards Creek generation facility and an after-tax loss of$286 million in the nine months endedSeptember 30, 2019 related to the sale ofPSEG Power's ownership interests in the Keystone and Conemaugh fossil generation plants. See Item 1. Note 4. Early Plant Retirements/Asset Dispositions for additional information. (B)Other includes after-tax activities at the parent company, PSEG LI, andEnergy Holdings as well as intercompany eliminations.Energy Holdings recorded an after-tax charge of$32 million in the nine months endedSeptember 30, 2019 related to its investment in leveraged leases. See Item 1. Note 8. Financing Receivables for additional information.PSEG Power's results above include theNuclear 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 theNDT Fund and MTM are shown in the following table: Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 Millions, after tax
NDT Fund Income (Expense) (A) (B) $ 60 $ (4) $ 43 $ 97
Non-Trading MTM Gains (Losses) (C) $ (59) $ (88) $ (59) $ 140
(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 O&M Expense and
the depreciation related to the ARO asset recorded in Depreciation and
Amortization (D&A) Expense.
(B)Net of tax (expense) benefit of $(40) million and $0 million for the three
months and $(30) million and $(67) million for the nine months ended
September 30, 2020 and 2019, respectively.
(C)Net of tax (expense) benefit of $23 million and $33 million for the three
months and $23 million and $(55) million for the nine months ended September 30,
2020 and 2019, respectively.
Our $172 million increase in Net Income for the three months ended September 30,
2020 was driven primarily by
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•a gain on the sale ofPSEG Power's ownership interest in theYards Creek generating facility in 2020 (see Item 1. Note 4. Early Plant Retirements/Asset Dispositions), •Net unrealized gains in 2020 on equity securities in theNDT Fund as compared to net unrealized losses in 2019 atPSEG Power , and •higher earnings due to investments in T&D programs at PSE&G. Our$218 million increase in Net Income for the nine months endedSeptember 30, 2020 was driven primarily by •a gain on sale ofPSEG Power's ownership interest in theYards Creek generating facility in 2020, •an asset impairment in 2019 related to the sale ofPSEG Power's interests in the Keystone and Conemaugh fossil generation plants (see Item 1. Note 4. Early Plant Retirements/Asset Dispositions), •higher earnings due to investments in T&D programs at PSE&G, and •higher pension and OPEB credits, •partially offset by MTM losses in 2020 as compared to gains in 2019 atPSEG Power , and •a decrease atPSEG Power due to lower average realized prices on lower volumes of electricity sold in PJM and under the BGS contracts, as well as lower capacity revenues, partially offset by a net decrease in fuel costs and higher ZEC revenues starting inmid-April 2020 . The greater emphasis on capital spending in recent years for projects at PSE&G relative toPSEG Power , particularly those on which we receive contemporaneous returns at PSE&G has yielded strong results, which when combined with the cash flow generated byPSEG 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, including the economic impact of the ongoing coronavirus pandemic, 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. In the first nine months of 2020, 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, and •continued to evaluate potential offshore wind opportunities. 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 our Quarterly Reports on Form 10-Q for the periods endingMarch 31, 2020 andJune 30, 2020 (first and second quarter 2020 10-Qs) and this Quarterly Report on Form 10-Q. Transmission Rate Proceedings and Return on Equity (ROE) InMarch 2020 ,FERC issued a Notice of Proposed Rulemaking (NOPR) proposing to revise its electric transmission incentive policy to encourage the development of infrastructure needed to ensure grid reliability and reduce congestion to lower the cost of power for consumers. The NOPR proposes to shift the focus in granting incentives from an approach based on the risks and challenges faced by a project to an approach based on economic and reliability benefits to consumers. The NOPR proposes to retain several existing incentives, increase the 50 basis point adder forRegional Transmission Organization (RTO) participation to 100 basis points and provide incentives for transmission technologies that enhance reliability, efficiency and capacity. InMay 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 (DCF) model, the Capital Asset Pricing model (CAPM) 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 77 --------------------------------------------------------------------------------
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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 beforeFERC regarding MISO transmission owners, theISO 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 theNew Jersey Division of Rate Counsel (New Jersey Rate Counsel) about the level of PSE&G's base transmission ROE; however, we cannot predict the outcome of these settlement discussions. 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 . Wholesale Power Market Design InDecember 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. In addition, as a result ofFERC'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. 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. AFERC order issued inMay 2020 authorizing enhancements to the methodology used by PJM to price energy reserves has created additional uncertainty regarding the impact of the MOPR expansion in future RPM auctions onPSEG Power's nuclear units that receive ZECs. One of the findings made byFERC in that order will affect how the MOPR offer floors are calculated and could have the effect, in the future, of increasing the price floors for the plants and thereby increasing the risk of being unable to clear in an RPM auction. In addition, if one or more electric distribution zones inNew Jersey (or another state) were to become fixed resource requirement (FRR) alternative service 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 (LSE) using the FRR approach. In aMarch 2020 order, the BPU initiated an investigation to examine whetherNew 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 withinNew 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. InJanuary 2020 ,New Jersey rejoined the Regional Greenhouse Gas Initiative (RGGI). As a result, generating plants operating inNew Jersey , including those owned byPSEG 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 ofPSEG Power's generating fleet. Environmental Regulation We are subject to liability under environmental laws for the costs of remediating environmental contamination of property now or formerly owned by us and of property contaminated by hazardous substances that we generated. In particular, the historic operations of PSEG companies and the operations of numerous other companies along thePassaic and Hackensack Rivers are alleged by Federal and State agencies to have discharged substantial contamination into thePassaic River/Newark Bay Complex in violation of various statutes. We are also currently involved in a number of proceedings relating to sites where other hazardous substances may have been discharged and may be subject to additional proceedings in the future, and the costs of any such remediation efforts could be material. For further information regarding the matters described above, as well as other matters that may impact our financial condition and results of operations, see Item 1. Note 11. 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Nuclear
InApril 2019 ,PSEG Power's Salem 1,Salem 2 andHope 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 generated in payments to selected nuclear plants (ZEC payment)). These nuclear plants are expected to receive ZEC revenue for approximately three years, throughMay 2022 , and will be obligated to maintain operations during that period, subject to 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. The ZEC payment may be adjusted by the BPU (a) at any time to offset environmental or fuel diversity payments that a selected nuclear plant may receive from another source or (b) at certain times specified in the ZEC legislation if the BPU determines that the purposes of the ZEC legislation can be achieved through a reduced charge that will nonetheless be sufficient to achieve the State's air quality and other environmental objectives by preventing the retirement of nuclear plants. For instance, the New Jersey Rate Counsel, in written comments filed with the BPU, has advocated for the BPU to offset market benefits resulting fromNew Jersey's rejoining the RGGI 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 decision awarding ZECs has been appealed by the New Jersey Rate Counsel. PSEG cannot predict the outcome of this matter. InOctober 2020 ,PSEG Power filed with the BPU its ZEC applications forSalem 1,Salem 2 andHope Creek for the three-year eligibility period starting inJune 2022 . No other plants applied for ZECs for this eligibility period. The BPU's schedule to consider these applications includes the BPU Staff issuing their preliminary findings regarding ZEC eligibility and the value of ZEC payments for this period inDecember 2020 , followed by public and evidentiary hearings and a final BPU decision byApril 2021 .PSEG Power is not aware of any changes from its ZEC application for the first eligibility period that would materially affect its ability to establish eligibility to be awarded ZECs during the second eligibility period. We cannot predict the outcome of either the BPU Staff's preliminary findings or the BPU's final determination. In the event that (i) the ZEC program is overturned or is otherwise materially adversely modified through legal process; (ii) the amount of ZEC payments that may be awarded or other terms and conditions of the second ZEC eligibility period proposed by the BPU Staff in theDecember 2020 preliminary findings or by the BPU in its final decision differ from those of the current ZEC period; or (iii) any of theSalem 1,Salem 2 andHope Creek plants is not awarded ZEC payments by the BPU and does not otherwise experience a material financial change,PSEG Power will take all necessary steps to cease to operate all of these plants. Alternatively, if all of theSalem 1,Salem 2 andHope Creek plants are selected to continue to receive ZEC payments but 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 aFERC -authorized capacity mechanism), or, in the case of theSalem nuclear plants, decisions by theEPA 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 onPSEG's andPSEG Power's results of operations. Nuclear Refueling Outage TheSalem 1 nuclear generating plant entered a scheduled refueling outage inOctober 2020 , which is expected to continue throughmid-December 2020 . In light of the COVID-19 pandemic, we have implemented additional health protocols to protect the health and safety of our employees and contractors, including daily health screenings, increased hygiene, physical distancing, PPE requirements and close-contact monitoring. During this outage, the plant's main generator stator, which has reached the end of its useful life, is being replaced. The process for replacingSalem 1's generator stator is highly complex. During the outage, we are also performing additional reactor vessel inspections and upgrades. Limitations due to additional health protocols, delays in replacing the main generator stator due to its complexity, or adverse findings from the reactor vessel inspections could result in an extended outage and in turn, lower revenues and increased costs, which could have a material impact on the results of operations of the plant andPSEG Power . Offshore Wind InJune 2019 , the BPU selected Ørsted US Offshore Wind'sOcean Wind project as the winning bid inNew Jersey's initial solicitation for 1,100 MW of offshore wind generation. InOctober 2019 , PSEG exercised its option on Ørsted'sOcean Wind project, resulting in a period of exclusive negotiation for PSEG to potentially acquire a 25% equity interest in the project, subject to negotiations toward a joint venture agreement, advanced due diligence and any required regulatory approvals. Additionally, PSEG and Ørsted each owns 50% ofGarden State Offshore Energy LLC (GSOE) which holds rights to an offshore wind lease area. PSEG and Ørsted are exploring other offshore wind opportunities through GSOE. 79 --------------------------------------------------------------------------------
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Tax Legislation InJuly 2020 , the Internal Revenue Service (IRS) issued final and proposed regulations addressing the limitation on deductible business interest expense contained in the 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 years after 2021 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 ofPSEG's andPSEG Power's business interest expense that was disallowed in 2018 and 2019 will now be deductible in those respective years. PSEG is still in the process of analyzing these regulations, which may impact the financial condition and cash flows of PSEG,PSE&G andPSEG Power . InMarch 2020 , the federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted. We continue to assess the impact of the tax aspects of the CARES Act on our results of operations and cash flow. We expect that a prolonged coronavirus pandemic, the tax provisions of the CARES Act and any future coronavirus-related federal or state legislation could have a material impact on our effective tax rate and cash tax position. EffectiveJanuary 1, 2018 , the Tax Act established tax laws including, but not limited to, a limitation on deductible interest and limitations on the utilization of net operating losses (NOLs), such as eliminating carrybacks. InNovember 2018 , theIRS issued proposed regulations addressing the interest disallowance rules contained in the Tax Act. For non-regulated businesses, the Tax Act enacted rules that set a cap on the amount of business interest that can be deducted in a given year. Any amount that is disallowed can be carried forward indefinitely. Amounts recorded under the Tax Act and the CARES Act, such as depreciation and business interest disallowance, are subject to change based on several factors, including but not limited to, theIRS and state taxing authorities issuing additional guidance and/or further clarification. Any such further guidance or clarification could impact PSEG's,PSE&G's andPSEG Power's financial statements. For additional information, see Item 1. Note 16. Income Taxes. InJuly 2018 ,New Jersey made changes to its income tax laws, including requiring corporate taxpayers to file in a combined reporting group as defined underNew Jersey law starting in 2019. This provision includes an exemption for public utilities. We believe PSE&G meets the definition of a public utility and, therefore, will not be included in the combined reporting group. We anticipateNew Jersey will be issuing clarifying guidance regarding combined reporting rules. Any further guidance or clarification could impactPSEG's andPSEG Power's financial statements. 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 must continue to: •obtain approval of and execute our utility capital investment program, including the remainder of our CEF program and other investments that yield contemporaneous and reasonable risk-adjusted returns, while enhancing the resiliency of our infrastructure and maintaining the reliability of the service we provide to our customers, •focus on controlling costs while maintaining safety, reliability and customer satisfaction and complying with applicable standards and requirements, •successfully manage our energy obligations and re-contract our open supply positions in response to changes in prices and demand, •advocate for the continuation of the ZEC program and measures to ensure the implementation by PJM,FERC and state regulators of market design and transmission planning rules that continue to promote fair and efficient electricity markets, including recognition of the cost of emissions, •engage multiple stakeholders, including regulators, government officials, customers, investors and suppliers, •finalize our analysis of our strategic alternatives forPSEG Power's non-nuclear generating assets and successfully execute any transactions involving those assets, and •successfully operate the LIPA T&D system and manage LIPA's fuel supply and generation dispatch obligations. In addition to the risks described elsewhere in this Form 10-Q, the first and second quarter 2020 10-Qs and in our Form 10-K, for 2020 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, 80 --------------------------------------------------------------------------------
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•the continuing impact of the ongoing coronavirus pandemic and the associated economic impact, which could extend beyond the duration of the pandemic, •the continuing impacts of the Tax and CARES Acts and future changes in federal and state tax laws, and •the impact of changes in demand, natural gas and electricity prices and increasing environmental compliance costs. We continually assess a broad range of strategic options to maximize long-term stockholder value. In assessing our options, we consider a wide variety of factors, including the performance and prospects of our businesses; the views of investors, regulators, customers and rating agencies; our existing indebtedness and restrictions it imposes; and tax considerations, among other things. Strategic options available to us include: •the acquisition, construction or disposition of T&D facilities, clean energy investments and/or offshore wind opportunities, •the disposition or reorganization of our merchant generation business or portions thereof or other existing businesses or the acquisition or development of new businesses, and •investments in capital improvements and additions, including the installation of environmental upgrades and retrofits, improvements to system resiliency, modernizing existing infrastructure and participation in transmission projects throughFERC's "open window" solicitation process. There can be no assurance, however, that we will successfully develop and execute any of the strategic options noted above, or any additional options we may consider in the future. The execution of any such strategic plan may not have the expected benefits or may have unexpected adverse consequences. RESULTS OF OPERATIONS PSEG Our results of operations are primarily comprised of the results of operations of our principal operating subsidiaries,PSE&G andPSEG 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/ Nine Months Ended Increase/ September 30, (Decrease) September 30, (Decrease) 2020 2019 2020 vs. 2019 2020 2019 2020 vs. 2019 Millions Millions % Millions Millions % Operating Revenues$ 2,370 $ 2,302 $ 68 3$ 7,201 $ 7,598 $ (397) (5) Energy Costs 775 753 22 3 2,276 2,581 (305) (12) Operation and Maintenance 767 745 22 3 2,254 2,251 3 - Depreciation and Amortization 317 307 10 3 956 928 28 3 (Gain) Loss on Asset Dispositions (122) 7 (129) N/A (122) 402 (524) N/A Income from Equity Method Investments 4 3 1 33 10 10 - -Net Gains (Losses) on Trust Investments 107 (3) 110 N/A 87 164 (77) (47) Other Income (Deductions) 39 35 4 11 81 101 (20) (20) Net Non-Operating Pension and OPEB Credits (Costs) 62 55 7 13 186 121 65 54 Interest Expense 149 147 2 1 453 417 36 9 Income Tax (Benefit) Expense 121 30 91 N/A 274 159 115 72
The following discussions for
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PSE&G
Three Months Ended Increase/ Nine Months Ended Increase/
September 30, (Decrease) September 30, (Decrease)
2020 2019 2020 vs. 2019 2020 2019 2020 vs. 2019
Millions Millions % Millions Millions %
Operating Revenues $ 1,660 $ 1,604 $ 56 3 $ 4,999 $ 5,018 $ (19) -
Energy Costs 663 618 45 7 1,881 2,094 (213) (10)
Operation and Maintenance 409 388 21 5 1,175 1,165 10 1
Depreciation and Amortization 218 206 12 6 657 620 37 6
Net Gains (Losses) on Trust
Investments 1 - 1 N/A 2 1 1 100
Other Income (Deductions) 28 22 6 27 81 60 21 35
Net Non-Operating Pension and
OPEB Credits (Costs) 51 46 5 11 154 105 49 47
Interest Expense 97 92 5 5 291 268 23 9
Income Tax Expense (Benefit) 40 24 16 67 196 63 133 N/A
Three Months Ended September 30, 2020 as Compared to 2019
Operating Revenues increased $56 million due to changes in delivery, commodity,
clause and other operating revenues.
Delivery Revenues decreased $1 million due primarily to
•Gas distribution revenues decreased by $24 million due primarily to a $27
million decrease in the WNC, partially offset by a $3 million increase from the
GSMP I and GSMP II.
•Electric and Gas revenues decreased by $11 million due to an 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.
•Transmission revenues were $25 million higher due primarily to an increase in
2020 revenue requirements attributable to higher rate base investment.
•Electric distribution revenues increased by $9 million due to a $13 million
increase from higher volumes, partially offset by a $4 million decrease in the
collection of Green Program Recovery Charges (GPRC).
Commodity Revenues increased $42 million as a result of higher Electric
revenues, partially offset by lower Gas revenues. The changes in Commodity
revenues for both electric and gas are entirely offset by the changes in Energy
Costs. PSE&G earns no margin on the provision of BGS or basic gas supply service
(BGSS) to retail customers.
•Electric commodity revenues increased $52 million due primarily to $31 million
from higher BGS sales volumes and $20 million in higher prices.
•Gas commodity revenues decreased $10 million due primarily to $6 million from
lower BGSS sales volumes and a $3 million decrease in prices.
Clause Revenues increased $15 million due primarily to higher SBC revenues of $9
million , a $6 million increase in GPRC deferrals and a $2 million increase in
Margin Adjustment Clause (MAC) collections. These increases were partially
offset by a $2 million decrease in Tax Adjustment Credit (TAC) deferrals. The
changes in the SBC and MAC amounts and the GPRC and TAC deferrals 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 or MAC revenues or GPRC and TAC deferrals.
Other Operating Revenues was flat over the prior year. A $3 million increase in
solar renewable energy credits (SREC) included in this component of revenues is
entirely offset by changes to Energy Costs.
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Energy Costs increased$45 million . This is entirely offset by changes in Commodity Revenues and Other Operating Revenues. Operation and Maintenance increased$21 million due primarily to a$10 million increase in gas maintenance costs, a$10 million increase in appliance service costs, a net$6 million increase in clause and renewable-related expenses, a$5 million increase in storm costs, a$4 million increase in vegetation management and a$9 million increase in other operating expenses. These increases were partially offset by reductions of$12 million and$11 million for COVID-19 related costs and gas bad debt expense, respectively, due primarily to the deferrals recorded in the third quarter as authorized by the BPU. See Note 6. Rate Filings for additional information. Depreciation and Amortization increased$12 million due primarily to additional plant in service. Other Income (Deductions) increased$6 million due primarily to an increase in the allowance for funds used during construction (AFUDC). Net Non-Operating Pension and OPEB Credits (Costs) increased$5 million due primarily to a$4 million increase in the expected return on plan assets and a$3 million decrease in interest cost, partially offset by a$1 million increase in the amortization of the net actuarial loss and a$1 million decrease in the amortization of prior service credit. Interest Expense increased$5 million due primarily to a$7 million increase from new debt issuances in 2020 and a$1 million increase from net debt issuances inAugust 2019 . These increases were partially offset by a$2 million decrease due to a reduction in short-term borrowings and AFUDC. Income Tax Expense increased$16 million due primarily to an increase in bad debt flow-through and the reduction in the 2020 flowback of PSE&G's excess deferred income tax liabilities. Nine Months EndedSeptember 30, 2020 as Compared to 2019 Operating Revenues decreased$19 million due to changes in delivery, commodity, clause and other operating revenues. Delivery Revenues increased$156 million due primarily to •Transmission revenues were$163 million higher due to an increase of$89 million in 2020 revenue requirements attributable to higher rate base investment and a decrease in the net flowback to customers of$74 million of certain excess deferred taxes. •Electric distribution revenues increased$7 million due primarily to a$13 million increase attributable to higher sales volumes, partially offset by a$6 million decrease in GPRC collections. •Gas distribution revenues decreased$1 million due primarily to a$28 million reduction due to lower volumes and a$3 million decrease in GPRC revenues. These decreases were partially offset by a$21 million increase from the GSMP I and GSMP II and a$9 million increase in WNC. •Electric and Gas revenues decreased by$13 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 decreased$285 million as a result of lower Gas revenues and lower 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 BGSS and BGS to retail customers. •Gas commodity revenues decreased$146 million due primarily to lower BGSS prices of$87 million and lower BGSS sales volumes of$59 million . •Electric commodity revenues decreased$139 million due primarily to$143 million in lower BGS prices, partially offset by a$5 million increase in non-utility generation charges. Clause Revenues increased$40 million due primarily to a$32 million increase in TAC and GPRC deferrals and higher SBC revenues of$15 million . These increases were partially offset by a$6 million decrease in MAC revenues. The changes in TAC and GPRC deferral amounts, SBC and MAC revenues 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 TAC and GPRC deferrals, SBC and MAC revenues. Other Operating Revenues increased by$70 million due primarily to$44 million in ZEC revenues billed sincemid-April 2019 and a$28 million increase in SREC revenues. See Item 1. Note 4. Early Plant Retirements/Asset Disposition. The changes in these components of revenues are entirely offset by changes to Energy Costs. 83 --------------------------------------------------------------------------------
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Operating Expenses Energy Costs decreased$213 million . This is entirely offset by changes in Commodity Revenues and Other Operating Revenues. Operation and Maintenance increased$10 million due primarily to a$17 million increase in gas maintenance costs, a$12 million increase in vegetation management and a$7 million increase in storm costs. These increases were partially offset by a$6 million decrease in distribution corrective and preventative maintenance, a$5 million decrease in injuries and damages, a$4 million net decrease in clause and renewable-related expenses and an$11 million reduction in other operating expenses. Depreciation and Amortization increased$37 million due primarily to a$32 million increase related to additional plant in service and a$3 million increase in the amortization of Regulatory Assets. Other Income (Deductions) increased$21 million due primarily to an increase in AFUDC. Net Non-Operating Pension and OPEB Credits (Costs) increased$49 million due primarily to a$27 million increase in the expected return on plan assets, a$20 million decrease in interest cost and a$6 million decrease in the amortization of the net actuarial loss, partially offset by a$4 million decrease in the amortization of prior service credit. Interest Expense increased$23 million due primarily to a$16 million increase from net debt issuances in 2020 and a$12 million increase from net debt issuances in May andAugust 2019 . These increases were partially offset by a decrease of$6 million due to a reduction in short-term borrowings and AFUDC. Income Tax Expense increased$133 million due primarily to higher pre-tax income, the reduction in the 2020 flowback of PSE&G's excess deferred income tax liabilities and an increase in bad debt flow-through.PSEG Power Three Months Ended Increase/ Nine Months Ended Increase/ September 30, (Decrease) September 30, (Decrease) 2020 2019 2020 vs. 2019 2020 2019 2020 vs. 2019 Millions Millions % Millions Millions %
Operating Revenues $ 746 $ 771 $ (25) (3) $ 2,649 $ 3,270 $ (621) (19)
Energy Costs 290 359 (69) (19) 1,289 1,556 (267) (17)
Operation and Maintenance 213 233 (20) (9) 679 736 (57) (8)
Depreciation and Amortization 91 93 (2) (2) 276 282 (6) (2)
(Gain) Loss on Asset
Dispositions (122) 7 (129) N/A (122) 402 (524) N/A
Income from Equity Method
Investments 4 3 1 33 10 10 - -
Net Gains (Losses) on Trust
Investments 103 (4) 107 N/A 79 160 (81) (51)
Other Income (Deductions) 11 15 (4) (27) - 43 (43) (100)
Net Non-Operating Pension and
OPEB Credits (Costs) 8 8 - - 25 14 11 79
Interest Expense 28 34 (6) (18) 92 85 7 8
Income Tax Expense (Benefit) 118 14 104 N/A 112 127 (15) (12)
Three Months Ended September 30, 2020 as Compared to 2019
Operating Revenues decreased $25 million due primarily to changes in generation
revenues.
Generation Revenues decreased $24 million due primarily to
•a net decrease of $30 million due to lower generation in the PJM region
primarily due to the sale of our ownership interests in Keystone and Conemaugh
generation plants in 2019 coupled with lower prices in the PJM region. This was
partially offset by higher volumes sold under our load contract obligations in
the PJM and New England (NE) regions, and
•a decrease of $18 million in electricity sold under our BGS contracts primarily
due to lower volumes coupled with
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lower prices, •partially offset by a net increase of$23 million due to less MTM losses in 2020 as compared to 2019. Of this amount, there was a$41 million increase due to changes in forward prices this year as compared to last year, partially offset by an$18 million decrease due to more losses on positions reclassified to realized upon settlement. Gas Supply Revenues decreased$1 million due primarily to •a net decrease of$6 million in sales under the BGSS contract, primarily due to lower average sales prices, and •a decrease of$5 million due to MTM losses in 2020, primarily due to changes in forward prices, •partially offset by a net increase of$10 million related to sales to third parties, of which$23 million was due to higher volumes sold, partially offset by$13 million due to lower average sales prices. Operating Expenses Energy Costs represent the cost of generation, which includes fuel costs for generation as well as purchased energy in the market, and gas purchases to meetPSEG Power's obligation under its BGSS contract with PSE&G. Energy Costs decreased$69 million due to Generation costs decreased$57 million due primarily to •a net decrease of$51 million in fuel costs primarily in the PJM region reflecting utilization of lower gas volumes and lower gas prices coupled with the utilization of lower volumes of coal due to the sale of our ownership interests in Keystone and Conemaugh generation plants, and •a net decrease of$21 million due to higher MTM gains in 2020 as compared to 2019. Of this amount, there was a$15 million decrease due to changes in forward prices this year as compared to last year coupled with a$6 million decrease due to more gains on positions reclassified to realized upon settlement, •partially offset by a net increase of$10 million primarily due to increased renewable energy credit obligations in the PJM and NE regions. Gas costs decreased$12 million due mainly to •a net decrease of$20 million related to sales under the BGSS contract, which was primarily due to a net decrease in the average cost of gas. Included in the average cost of gas were$11 million of interstate gas pipeline refunds due to a settlement on pipeline rates from prior periods, •partially offset by a net increase of$8 million related to sales to third parties, of which$21 million was due to higher volumes sold, partially offset by$13 million due to a decrease in the average cost of gas. Operation and Maintenance decreased$20 million due primarily to a net decrease at our fossil plants due to the sale of our ownership interests in the Keystone and Conemaugh generation plants in 2019 and our ownership interest in theYards Creek generation facility inSeptember 2020 , coupled with higher planned outage costs in 2019. Depreciation and Amortization decreased$2 million due primarily to a net decrease at our nuclear plants due to the Peach Bottom License Renewal that was approved by the NRC inMarch 2020 , partially offset by an increased asset base. (Gain) Loss on Asset Dispositions reflects a gain on the sale of our ownership interest in theYards Creek generation facility inSeptember 2020 and a loss related to the sale of our ownership interests in the Keystone and Conemaugh generation plants in 2019. (see Item 1. Note 4. Early Plant Retirements/Asset Dispositions).Net Gains (Losses) on Trust Investments increased$107 million due primarily to a$55 million increase resulting from net unrealized gains in 2020 as compared to net unrealized losses in 2019 on equity investments in theNDT Fund and a$52 million increase in net realized gains onNDT Fund investments. Interest Expense decreased$6 million due primarily to anApril 2020 debt maturity. Income Tax Expense increased$104 million due primarily to higher pre-tax income, including higher pre-tax income from the NDT qualified fund, which is subject to an additional trust tax, and the impact of the increase in the 2020New Jersey temporary surtax. Nine Months EndedSeptember 30, 2020 as Compared to 2019 Operating Revenues decreased$621 million due primarily to changes in generation and gas supply revenues. Generation Revenues decreased$524 million due primarily to 85 --------------------------------------------------------------------------------
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•a net decrease of$313 million due to MTM losses in 2020 as compared to MTM gains in 2019. Of this amount, there was a$164 million decrease due to losses on positions reclassified to realized upon settlement in 2020 compared to gains in 2019 coupled with a$149 million decrease due to changes in forward prices this year as compared to last year, •a net decrease of$143 million due primarily to lower average realized prices in PJM, NE and NY regions coupled with lower volumes sold in the PJM region primarily due to the sale of our ownership interests in Keystone and Conemaugh generation plants. This was partially offset by higher volumes of electricity sold in the NE region, primarily due to the commencement of commercial operations of Bridgeport Harbor Unit 5 (BH5) inConnecticut inJune 2019 and higher volumes of electricity sold in the NY region, •a net decrease of$67 million in capacity revenues due primarily to decreases in auction prices in the PJM region coupled with lower volumes due to the sale of our ownership interests in the Keystone and Conemaugh generation plants, and •a decrease of$66 million in electricity sold under our BGS contracts primarily due to lower volumes coupled with lower prices, •partially offset by an increase of$70 million due to ZEC revenues that started inmid-April 2019 . Gas Supply Revenues decreased$97 million due primarily to •a decrease of$107 million in sales under the BGSS contract, of which$64 million was due to a decrease in sales volumes and$43 million was due to lower average sales prices, and •a decrease of$9 million due to MTM losses in 2020, primarily due to changes in forward prices, •partially offset by a net increase of$19 million related to sales to third parties, of which$80 million was due to higher volumes sold, partially offset by$61 million due to lower average sales prices. Operating Expenses Energy Costs represent the cost of generation, which includes fuel costs for generation as well as purchased energy in the market, and gas purchases to meetPSEG Power's obligation under its BGSS contract with PSE&G. Energy Costs decreased$267 million due to Generation costs decreased$180 million due primarily to •a net decrease of$159 million in fuel costs, reflecting lower gas prices in the PJM and NY regions coupled with the utilization of lower volumes of coal in the PJM region primarily due to the sale of our ownership interests in Keystone and Conemaugh generation plants, and lower volumes of gas in the PJM region. This was partially offset by utilization of higher volumes of gas in the NE region at higher prices due to the commencement of commercial operations of BH5 inJune 2019 coupled with utilization of higher volumes of gas in the NY region, and •a net decrease of$46 million due to higher MTM gains in 2020 as compared to 2019. Of this amount, there was a$34 million decrease due to changes in forward prices this year as compared to last year coupled with a$12 million decrease due to higher gains on positions reclassified to realized upon settlement in 2020 as compared to 2019, •partially offset by a net increase of$21 million in emission costs primarily due toNew Jersey reentering the RGGI program beginning in 2020, and •an$11 million increase due to a net lower of cost or market adjustment on oil inventory caused by a decrease in oil demand and pricing earlier in 2020. Gas costs decreased$87 million due mainly to •a decrease of$106 million related to sales under the BGSS contract, of which$58 million was due to a decrease in the average cost of gas and$48 million was due to a decrease in send out volumes. Included in the average cost of gas were$18 million of interstate gas pipeline refunds due to a settlement on pipeline rates from prior periods, •partially offset by a net increase of$19 million related to sales to third parties, of which$74 million was due to higher volumes sold, partially offset by$55 million due to a decrease in the average cost of gas. Operation and Maintenance decreased$57 million due primarily to a net decrease at our fossil plants due to the sale of our ownership interests in the Keystone and Conemaugh generation plants in 2019 and our ownership interest in theYards Creek generation facility inSeptember 2020 , coupled with lower planned outage costs in 2020. 86 --------------------------------------------------------------------------------
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Depreciation and Amortization decreased$6 million due primarily to a$6 million net decrease at our nuclear plants due to the Peach Bottom License Renewal that was approved by the NRC inMarch 2020 , partially offset by an increased asset base. This decrease was coupled with a$1 million net decrease at our fossil plants, primarily due to the sale of our ownership interests in the Keystone and Conemaugh generation plants in 2019, partially offset by an increase due to BH5 being placed into service inJune 2019 . (Gain) Loss on Asset Dispositions reflects a gain on the sale of our ownership interest in theYards Creek generation facility inSeptember 2020 and a loss on the sale of our ownership interests in the Keystone and Conemaugh generation plants in 2019. (see Item 1. Note 4. Early Plant Retirements/Asset Dispositions).Net Gains (Losses) on Trust Investments decreased$81 million due primarily to a$116 million decrease resulting from net unrealized losses in 2020 as compared to net unrealized gains in 2019 on equity investments in theNDT Fund , partially offset by a$37 million increase in net realized gains onNDT Fund investments. Other Income (Deductions) decreased$43 million primarily due to purchases of net operating losses in 2020 underNew Jersey's Technology Tax Benefit Transfer Program and lower interest and dividend income onNDT Fund investments. Net Non-Operating Pension and OPEB Credits (Costs) increased$11 million due to a$7 million decrease in interest cost, a$5 million increase in the expected return on plan assets, and a$3 million decrease in the amortization of the net actuarial loss, partially offset by a$3 million increase in co-owner charges and a$1 million decrease in the amortization of prior service credit. Interest Expense increased$7 million due primarily to lower capitalized interest as a result of BH5 being placed into service in 2019, partially offset by anApril 2020 debt maturity. Income Tax Expense decreased$15 million due primarily to the benefit from the 2019 net operating losses purchased under the New Jersey Technology Tax Benefit Transfer Program in 2020, and the tax benefit from changes in uncertain tax positions as a result of the settlement of the 2011-2016 federal income tax audits, offset by higher pre-tax income and changes in uncertain tax positions unrelated to the settlement of the 2011-2016 federal income tax audits. 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 provide opportunities for shareholder dividends. For the nine months endedSeptember 30, 2020 , our operating cash flow decreased$192 million as compared to the same period in 2019. The net decrease was primarily due to the net changes from our subsidiaries, as discussed below, offset by net tax refunds in 2020 as compared to net tax payments in 2019 at the parent company and lower tax payments in 2020 atEnergy 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 nine months endedSeptember 30, 2020 has not been material, a prolonged coronavirus pandemic and the associated economic impacts, which could extend beyond the duration of the pandemic, is expected to materially impact cash from operations, Accounts Receivable and bad debt expense. PSE&G PSE&G's operating cash flow decreased$57 million from$1,481 million to$1,424 million for the nine months endedSeptember 30, 2020 , as compared to the same period in 2019, due primarily to tax payments in 2020 as compared to tax refunds in 2019, a decrease of$97 million from higher accounts receivable in 2020 and a net decrease of$50 million deferred as Regulatory Assets due to storm and COVID-19 costs, reduced revenues from a warmer than normal winter, and an increase in the TAC with a partial offsetting decrease in transmission formula rate true-ups. These decreases were partially offset by a$123 million increase largely due to lower BGS payments from decreased sales and higher earnings. 87 --------------------------------------------------------------------------------
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PSEG Power PSEG Power's operating cash flow decreased$362 million from$1,362 million to$1,000 million for the nine months endedSeptember 30, 2020 , as compared to the same period in 2019, due to a$313 million reduction resulting from an increase in counterparty cash collateral posting requirements in 2020 as compared to a significant reduction in postings in 2019, and tax payments in 2020 as compared to tax refunds in 2019, partially offset by higher earnings. Short-Term Liquidity PSEG meets its short-term liquidity requirements, as well as those ofPSEG 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. InMarch 2020 , PSEG entered into a$300 million , 364-day term loan agreement. InApril 2020 , PSEG entered into two 364-day term loan agreements for$200 million and$300 million which were prepaid inAugust 2020 . These term loans are not included in the credit facility amounts presented in the following table. Our total credit facilities and available liquidity as ofSeptember 30, 2020 were as follows: As of September 30, 2020 Total Available Company/Facility Facility Usage Liquidity Millions PSEG$ 1,500 $ 13 $ 1,487 PSE&G 600 17 583 PSEG Power 2,100 175 1,925 Total$ 4,200 $ 205 $ 3,995 As ofSeptember 30, 2020 , our credit facility capacity was in excess of our projected maximum liquidity requirements over our 12 month planning horizon as we continue to monitor the impact and volatility of the ongoing coronavirus pandemic on cash flows and capital market conditions. Our maximum liquidity requirements are based on stress scenarios that incorporate changes in commodity prices and the potential impact ofPSEG Power losing its investment grade credit rating from S&P or Moody's, which would represent a three level downgrade from its current S&P or Moody's ratings. In the event of a deterioration ofPSEG Power's credit rating, certain ofPSEG 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 ifPSEG Power were to lose its investment grade credit rating was approximately$844 million and$974 million as ofSeptember 30, 2020 andDecember 31, 2019 , respectively. For additional information, see Item 1. Note 12. Debt and Credit Facilities. Long-Term Debt Financing During the next twelve months, •PSEG has a$700 million floating rate term loan maturing inNovember 2020 , •PSE&G has$9 million of 7.04% Medium-Term Notes (MTN), Series A, maturing inNovember 2020 ,$300 million of 1.90% MTN, Series K, maturing inMarch 2021 and$134 million of 9.25% Mortgage Bonds Series CC maturing inJune 2021 , and •PSEG Power has a$700 million 3.00% Senior Note maturing inJune 2021 and a$250 million 4.15% Senior Note maturing inSeptember 2021 . 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. For additional information see Item 1. Note 12. Debt and Credit Facilities. 88 --------------------------------------------------------------------------------
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Guarantor Financial InformationPSEG Power's Senior Notes are fully and unconditionally guaranteed on a joint and several basis by its subsidiaries,PSEG Fossil LLC ,PSEG Nuclear LLC andPSEG Energy Resources & Trade LLC . Each guarantor subsidiary is a wholly owned consolidated subsidiary ofPSEG Power . Summarized financial information is being presented, on a combined basis, only forPSEG Power (parent company) and the guarantors ofPSEG Power's Senior Notes, excluding investments in, and earnings (losses) from, subsidiaries that are not guarantors. All transactions betweenPSEG 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 have been moved outside the Notes to Condensed Consolidated Financial Statements and are provided in the following tables. Nine Months Ended Year Ended September 30, 2020 December 31, 2019 Millions Operating Revenues (A) $ 2,592 $ 4,315 Operating Income $ 518 $ 451 Net Income $ 440 $ 484
(A)Operating Revenues include sales to affiliates of
As of As of
September 30, 2020 December 31, 2019
Millions
Current Receivables from Subsidiaries and
Affiliates $ 2,380 $ 2,456
Total Current Assets $ 3,395 $ 3,559
Noncurrent Receivables from Affiliates $ 17 $ 17
Total Noncurrent Assets $ 7,194 $ 7,025
Current Payables to Subsidiaries and Affiliates $ 259 $ 218
Total Current Liabilities $ 1,740 $ 1,155
Noncurrent Payables to Affiliates $ 58 $ 115
Total Noncurrent Liabilities $ 4,052 $ 4,934
Pension and NDT Fund Obligations
IRS minimum funding requirements for pension plans are determined based on the
fund assets and liabilities at the end of a calendar year for the subsequent
calendar year. As a result, the market downturn associated with the ongoing
coronavirus pandemic is not expected to impact our pension contributions in
2020. 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 had accumulated
funding credits totaling approximately $600 million through 2019, 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. The market downturn associated
with the ongoing coronavirus pandemic is not currently expected to result in any
supplemental required funding of the NDT Fund . 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 July 21, 2020 , our Board of Directors declared a $0.49 dividend per share of
common stock for the third quarter of 2020. This reflects an indicative annual
dividend rate of $1.96 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
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businesses, alternate investment opportunities, legal requirements, regulatory constraints, industry practice, the impact of the ongoing coronavirus pandemic on our business and the capital and credit markets 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 (Moody's) and Corporate Credit Ratings (S&P) 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. InAugust 2020 , S&P loweredPSEG Power's Senior Note rating to BBB from BBB+. 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
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 atPSEG Power and Services as compared to amounts disclosed in our 2019 Form 10-K. InSeptember 2020 , the BPU issued an Order approving our CEF-EE program, authorizing PSE&G to spend$1 billion to achieve energy efficiency targets required underNew Jersey's Clean Energy law over a three-year period. The CEF-EE program was not included in PSE&G's projected capital expenditures disclosed in our 2019 Form 10-K. See Executive Overview of 2020 and Future Outlook for additional information. PSE&G During the nine months endedSeptember 30, 2020 , PSE&G made capital expenditures of$1,777 million , primarily for T&D system reliability. This does not include expenditures for cost of removal, net of salvage, of$77 million , which are included in operating cash flows.PSEG Power During the nine months endedSeptember 30, 2020 ,PSEG Power made capital expenditures of$147 million , excluding$160 million for nuclear fuel, primarily related to various nuclear, solar and fossil projects. ACCOUNTING MATTERS For information related to recent accounting matters, see Item 1. Note 2. Recent Accounting Standards. 90 --------------------------------------------------------------------------------
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