Income Taxes

PSEG’s, PSE&G’s and PSEG Power’s effective tax rates for the three months and six months ended June 30, 2019 and 2018 were as follows:




	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2019	2018	2019	2018
PSEG	(15.0)%	26.5%	13.1%	26.6%
PSE&G	5.8%	25.7%	5.8%	26.4%
PSEG Power	21.6%	31.7%	30.6%	27.1%

For the three months and six months ended June 30, 2019, the differences in PSEG’s and PSE&G’s effective tax rates as compared to the same periods in the prior year and the statutory tax rate of 28.11% were due primarily to the flowback of PSE&G’s excess deferred income tax liabilities as a result of the Tax Act and tax repair-related accumulated deferred income taxes as a result of PSE&G’s 2018 settled distribution base rate case and the FERC approved Section 205 filing, where applicable.

For the three months ended June 30, 2019, the differences in PSEG Power’s effective tax rates as compared to the same periods in the prior year and the statutory tax rate of 28.11% were due primarily to the impact higher NDT qualified fund trust tax had on a pre-tax loss. For the six months ended June 30, 2019, the differences in PSEG Power’s effective tax rates as compared to the same periods in the prior year and the statutory rate of 28.11% were due primarily to higher pre-tax income from the NDT qualified fund in 2019, which is subject to an additional trust tax.

Tax Act

Effective January 1, 2018, the U.S. federal corporate tax rate was reduced from a maximum of 35% to 21% resulting in a decrease in PSEG’s, PSE&G’s and PSEG Power’s effective income tax rates. To the extent allowed under the Tax Act, PSEG Power’s operating cash flows reflect the full expensing of capital investments for income tax purposes. The Tax Act has led to lower customer rates due to lower income tax expense recoveries and the BPU and FERC have approved PSEG’s proposals to refund excess deferred income tax Regulatory Liabilities. The impact of the lower federal income tax rate on PSE&G was reflected in PSE&G’s distribution base rate proceeding and its 2018 transmission formula rate filings. The Tax Act is generally expected to result in lower operating cash flows for PSE&G resulting from the elimination of bonus depreciation, partially offset by higher revenues due to the higher rate base.

In August 2018, the IRS issued a Notice of Proposed Rulemaking (Notice) regarding the application of tax depreciation rules as amended by the Tax Act. While the Notice provides some guidance as to the application of the changes made by the Tax Act to the bonus depreciation rules, certain aspects still remain unclear. Further, in November 2018 the IRS issued proposed regulations addressing the interest disallowance rules contained in the Tax Act. For non-regulated businesses, these rules set a cap on the amount of interest that can be deducted in a given year. Any amount that is disallowed can be carried forward indefinitely. For 2019, PSEG and PSEG Power expect that a portion of the interest will be disallowed in the current period but realized in future periods. However, certain aspects of the proposed regulations are unclear. Therefore, PSEG recorded taxes based on its interpretation of the relevant statutes.

Depreciation amounts recorded in 2019 were based on PSEG’s interpretation of the Tax Act and the depreciation rules contained in the Notice. Such amounts are subject to change based on several factors, including but not limited to, the IRS and state taxing authorities issuing final guidance and/or further clarification. Any further guidance or clarification could impact PSEG’s, PSE&G’s and PSEG Power’s financial statements.

New Jersey State Tax Reform

In 2018, the State of New Jersey made significant changes to its income tax laws, including imposing a temporary surtax of 2.5% effective January 1, 2018 and 2019 and 1.5% in 2020 and 2021, as well as requiring corporate taxpayers to file in a combined reporting group as defined under New Jersey law starting in 2019. Both provisions include an exemption for public utilities. At this time, PSEG believes PSE&G meets the definition of a public utility and, therefore, will not be impacted by the temporary surtax or be included in the combined reporting group.

In 2019, the State of New Jersey issued further guidance regarding the temporary surtax and clarified that New Jersey net operating loss carryovers can be deducted in computing a taxpayer’s entire net income.

Income Taxes [Line Items]

Income Taxes

PSEG’s, PSE&G’s and PSEG Power’s effective tax rates for the three months and six months ended June 30, 2019 and 2018 were as follows:




	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2019	2018	2019	2018
PSEG	(15.0)%	26.5%	13.1%	26.6%
PSE&G	5.8%	25.7%	5.8%	26.4%
PSEG Power	21.6%	31.7%	30.6%	27.1%

For the three months and six months ended June 30, 2019, the differences in PSEG’s and PSE&G’s effective tax rates as compared to the same periods in the prior year and the statutory tax rate of 28.11% were due primarily to the flowback of PSE&G’s excess deferred income tax liabilities as a result of the Tax Act and tax repair-related accumulated deferred income taxes as a result of PSE&G’s 2018 settled distribution base rate case and the FERC approved Section 205 filing, where applicable.

For the three months ended June 30, 2019, the differences in PSEG Power’s effective tax rates as compared to the same periods in the prior year and the statutory tax rate of 28.11% were due primarily to the impact higher NDT qualified fund trust tax had on a pre-tax loss. For the six months ended June 30, 2019, the differences in PSEG Power’s effective tax rates as compared to the same periods in the prior year and the statutory rate of 28.11% were due primarily to higher pre-tax income from the NDT qualified fund in 2019, which is subject to an additional trust tax.

Tax Act

Effective January 1, 2018, the U.S. federal corporate tax rate was reduced from a maximum of 35% to 21% resulting in a decrease in PSEG’s, PSE&G’s and PSEG Power’s effective income tax rates. To the extent allowed under the Tax Act, PSEG Power’s operating cash flows reflect the full expensing of capital investments for income tax purposes. The Tax Act has led to lower customer rates due to lower income tax expense recoveries and the BPU and FERC have approved PSEG’s proposals to refund excess deferred income tax Regulatory Liabilities. The impact of the lower federal income tax rate on PSE&G was reflected in PSE&G’s distribution base rate proceeding and its 2018 transmission formula rate filings. The Tax Act is generally expected to result in lower operating cash flows for PSE&G resulting from the elimination of bonus depreciation, partially offset by higher revenues due to the higher rate base.

In August 2018, the IRS issued a Notice of Proposed Rulemaking (Notice) regarding the application of tax depreciation rules as amended by the Tax Act. While the Notice provides some guidance as to the application of the changes made by the Tax Act to the bonus depreciation rules, certain aspects still remain unclear. Further, in November 2018 the IRS issued proposed regulations addressing the interest disallowance rules contained in the Tax Act. For non-regulated businesses, these rules set a cap on the amount of interest that can be deducted in a given year. Any amount that is disallowed can be carried forward indefinitely. For 2019, PSEG and PSEG Power expect that a portion of the interest will be disallowed in the current period but realized in future periods. However, certain aspects of the proposed regulations are unclear. Therefore, PSEG recorded taxes based on its interpretation of the relevant statutes.

Depreciation amounts recorded in 2019 were based on PSEG’s interpretation of the Tax Act and the depreciation rules contained in the Notice. Such amounts are subject to change based on several factors, including but not limited to, the IRS and state taxing authorities issuing final guidance and/or further clarification. Any further guidance or clarification could impact PSEG’s, PSE&G’s and PSEG Power’s financial statements.

New Jersey State Tax Reform

In 2018, the State of New Jersey made significant changes to its income tax laws, including imposing a temporary surtax of 2.5% effective January 1, 2018 and 2019 and 1.5% in 2020 and 2021, as well as requiring corporate taxpayers to file in a combined reporting group as defined under New Jersey law starting in 2019. Both provisions include an exemption for public utilities. At this time, PSEG believes PSE&G meets the definition of a public utility and, therefore, will not be impacted by the temporary surtax or be included in the combined reporting group.

In 2019, the State of New Jersey issued further guidance regarding the temporary surtax and clarified that New Jersey net operating loss carryovers can be deducted in computing a taxpayer’s entire net income.