Public Service Enterprise Group 10-Q 2021-09-30

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED September 30, 2021

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

Securities registered pursuant to Section 12(b) of the Act:

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 ☐

(Cover continued on next page)

Table of Contents

(Cover continued from previous page)

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.

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 October 19, 2021, Public Service Enterprise Group Incorporated had outstanding 505,663,672 shares of its sole class of Common Stock, without par value.

As of October 19, 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.

Table of Contents

Showing the first 8K of 411K characters. Open the full section

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. 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 progressing on our strategy to become a predominantly regulated electric and gas utility and a contracted carbon-free energy infrastructure company. We are focused on meeting customer expectations and being well aligned with public policy objectives by investing to modernize our infrastructure, improve reliability, increase energy efficiency and deliver cleaner energy. Our business plan focuses on achieving growth while controlling costs and managing the risks associated with regulatory and policy 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, which improves the sustainability and predictability of our earnings and cash flows and provides more financial flexibility. In June 2021, we completed the sale of PSEG Power’s solar portfolio and in August 2021 we entered into two agreements to sell 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 and Impairments for additional information.

PSE&G, PSEG Power and PSEG LI are providing essential services during the 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.

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

Table of Contents

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 has increased its expected investments by $1 billion, resulting in a range of $14 billion to $16 billion, which strengthens our 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 timeframe of 2023. The upper end of the range is driven by certain unapproved investment programs, including an Infrastructure Advancement Program (IAP) which we plan to file with the BPU in the fourth quarter. The IAP is expected to be an approximate $848 million investment made over four years to improve the reliability of the “last mile” of our electric distribution system, address aging substations and gas metering and regulating stations and invest in electric vehicle charging infrastructure at our facilities to support the electrification of our fleet over the coming years. The upper end of the range also includes an extension of our 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.

In January 2020, New Jersey released its Energy Master Plan (EMP) which, among other things, recognized the importance of the State’s EE targets and supported EVs, ES, and ad

Showing the first 8K of 102K characters. Open the full section

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.

Commodity Contracts

The availability and price of energy-related commodities are subject to fluctuations from factors such as weather, environmental policies, changes in supply and demand, state and federal regulatory policies, market rules and other events. To reduce price risk caused by market fluctuations, we enter into supply contracts and derivative contracts, including forwards, futures, swaps and options with approved counterparties. These contracts, in conjunction with physical sales and other services, help reduce risk and optimize the value of owned electric generation capacity.

Value-at-Risk (VaR) Models

VaR represents the potential losses, under normal market conditions, for instruments or portfolios due to changes in market factors, for a specified time period and confidence level. We estimate VaR across our commodity businesses.

MTM VaR consists of MTM derivatives that are economic hedges. The MTM VaR calculation does not include market risks associated with activities that are subject to accrual accounting, primarily our generating facilities and some load-serving activities.

The VaR models used are variance/covariance models adjusted for the change of positions with 95% and 99.5% confidence levels and a one-day holding period for the MTM activities. The models assume no new positions throughout the holding periods; however, we actively manage our portfolio.

From July through September 2021, MTM VaR varied between a low of $22 million and a high of $76 million at the 95% confidence level. The range of VaR was wider for the three months ended September 30, 2021 as compared with the year ended December 31, 2020.

See Item 1. Note 13. Financial Risk Management Activities for a discussion of credit risk.

Table of Contents

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.

Internal Controls

PSEG, PSE&G and PSEG Power

There have been no changes in internal control over financial reporting that occurred during the third 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

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 in the first and second quarter 2021 10-Qs and in this Quarterly Report on Form 10-Q.

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. There are no remaining shares available for repurchase under the plan.

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 and first and second quarter 2021 10-Qs. References are to the related pages on the Form 10-K and the first quarter and second quarter 2021 Form 10-Qs.

Table of Contents

Federal Regulation

Energy Clearing Prices

December 31, 2020 Form 10-K page 13, March 31, 2021 Form 10-Q page 82 and June 30, 2021 Form 10-Q page 91. In May 2020, FERC issued an order approving PJM’s proposal to modify the curves used for pricing reserves with FERC. The reforms include a consolidation of synchronized reserve products, improved use of existing capability for locational reserve needs, better alignment of reserve products in day-ahead and real-time markets, a downward-sloping operating reserve demand curve, and increased penalty factors to ensure use of all supply prior to a reserve shortage. These reforms are currently planned for implementation in May 2022. However, in August 2021, FERC filed a motion with the Court of Appeals for the D.C. Circuit (D.C. Circuit) seeking the D.C. Circuit’s approval to remand the case to allow FERC an opportunity to reassess its orders on PJM’s reserves reforms. We cannot predict the outcome of this proceeding and, specifically, whether FERC will modify PJM’s rules governing reserve pricing.

Capacity Market Issues

December 31, 2020 Form 10-K page 13 and June 30, 2021 Form 10-Q page 91. In July 2021, PJM submitted to FERC a proposal to replace the current MOPR, which applies to both new and existing resources that receive certain out-of-market payments, with new provisions that accommodate state public policy programs that do not attempt to set the price of capacity. Under the PJM proposal, PSEG Power’s New Jersey nuclear plants that receive ZEC payments would not be subject to the MOPR. In September 2021, FERC issued a notice that it was not able to act on PJM’s proposed changes to the MOPR because of a split among the Commissioners on the lawfulness of PJM’s proposal. Therefore, PJM’s rules became automatically effective as of September 29, 2021 and will apply to the next base residual auction, which has been delayed until January 25, 2022 in order to allow entities additional time to meet the pre-auction deadlines.

In a second order related to the auction, FERC found that the current rules related to the Market Seller Offer Cap were unjust and unreasonable and ultimately eliminated the default offer cap. In its place, FERC adopted a unit-specific approach to reviewing certain capacity market offers. These new rules could result in lower capacity prices since market offers for many resource types will need to be approved by the Market Monitor and PJM.

Transmission Rate Proceedings and Return on Equity

December 31, 2020 Form 10-K page 14 and June 30, 2021 Form 10-Q page 91. In October 2021, FERC approved a settlement agreement effective August 1, 2021 between PSE&G, the BPU and the New Jersey Rate Counsel related to the level of PSE&G’s base transmission ROE and other formula rate matters. The settlement reduces PSE&G’s base ROE from 11.18% to 9.9%. As a result of this settlement, PSE&G’s projects Net Income will decrease by approximately $50 million to $60 million during the first twelve months following the August 1, 2021 implementation date. The agreement provides that the settling parties will not seek changes to PSE&G’s transmission formula rate for three years. We will be implementing the effects of the settlement agreement over the next several months.

State Regulation

New Jersey Solar Initiatives

December 31, 2020 Form 10-K page 16 and June 30, 2021 Form 10-Q page 92. In July 2021, the BPU issued an order formally establishing the Successor Solar Incentive (SuSI) Program to serve as the permanent program for providing solar incentives to qualified solar electric generation facilities. The program provides for administratively-set incentive payments applicable to net-metered projects of 5 MW or less and an annual competitive solicitation applicable to grid-supply projects and net-metered C&I projects in excess of 5 MW. The SuSI Program commenced on August 28, 2021.

Environmental Matters

Environmental Justice

December 31, 2020 Form 10-K page 18. In September 2020, the New Jersey governor signed legislation that enacted an environmental justice process for applicants seeking environmental permits, including those emission permits regulated under Title V of the Clean Air Act, for facilities located in what the law defines as overburdened communities. In September 2021, the New Jersey Department of Environmental Protection (NJDEP) issued an administrative order requiring an environmental justice review of certain permit applications pursuant to the New Jersey Environmental Justice (EJ) Law. The order will remain in effect until implementing regulations under the EJ Law are promulgated, which are expected to be issued as early as Spring 2022. The impacts of the NJDEP’s action are being evaluated for both PSE&G and PSEG Power and the outcome cannot be determined at this time.

CO****2 Regulation under the Clean Air Act

December 31, 2020 Form 10-K page 18. In June 2019, the EPA issued its final Affordable Clean Energy (ACE) rule as a

Table of Contents

replacement for the repealed Clean Power Plan, a GHG emission regulation for existing power plants. The ACE rule narrowly defines the “best system of emissions reductions” (BSER) as heat improvements to be applied only to an individual unit, excluding other potential mechanisms to address climate change. In September 2019, a coalition of power companies, including PSEG, filed a Petition for Review of the ACE rule with the D.C. Circuit challenging the EPA’s narrow interpretation of BSER. In January 2021, the D.C. Circuit vacated the ACE rule and remanded the rulemaking to the EPA for further consideration. In October 2021, the U.S. Supreme Court agreed to review the 2021 D.C. Circuit’s decision vacating the ACE Rule. We cannot predict the outcome of this matter or estimate its impact on our business or results of operations.

Table of Contents

A listing of exhibits being filed with this document is as follows:

Table of Contents

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.

Date: November 2, 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.

Date: November 2, 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.

Date: November 2, 2021