Income Taxes

PSEG’s, PSE&G’s and PSEG Power’s effective tax rates for the three months and nine months ended September 30, 2020 and 2019 were as follows:



	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2020	2019	2020	2019
PSEG	17.4%	6.9%	15.7%	11.2%
PSE&G	11.3%	6.5%	15.9%	6.1%
PSEG Power	31.7%	20.9%	20.4%	29.1%

For the three months and nine months ended September 30, 2020, the differences in PSEG’s effective tax rates as compared to the same periods in the prior year were due primarily to the reduction in the 2020 flowback of PSE&G’s excess deferred income tax (EDIT) liabilities as PSE&G refunded all FERC-approved transmission-related EDIT liabilities that are not subject to the normalization rules in 2019. For the three months ended September 30, 2020, the difference in PSEG’s effective tax rate as compared to the statutory tax rate of 28.11% was due primarily to the flowback of PSE&G’s EDIT liabilities and tax repair-related accumulated deferred income taxes. For the nine months ended September 30, 2020, the difference in PSEG’s effective tax rate as compared to the statutory tax rate of 28.11% was due primarily to the flowback of PSE&G’s EDIT liabilities and tax repair-related accumulated deferred income taxes, the benefit of purchasing 2019 net operating losses (NOLs) under the New Jersey Technology Tax Benefit Transfer Program in the first quarter of 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.

For the three months and nine months ended September 30, 2020, the differences in PSE&G’s effective tax rates as compared to the same periods in the prior year were due primarily to the reduction in the 2020 flowback of PSE&G’s EDIT liabilities, as PSE&G refunded all FERC-approved transmission-related EDIT liabilities that are not subject to the normalization rules in 2019, and bad debt related flow-through. For the three months and nine months ended September 30, 2020, the differences in PSE&G’s effective tax rates as compared to the statutory tax rate of 28.11% were due primarily to the flowback of PSE&G’s EDIT liabilities and tax repair-related accumulated deferred income taxes, which increased in the third quarter of 2020 as a result of PSE&G’s IRS PLR, discussed below, offset by bad debt related flow-through.

For the three months ended September 30, 2020, the differences in PSEG Power’s effective tax rate as compared to the same period in the prior year and the statutory tax rate of 28.11% were due primarily to higher pre-tax income from the NDT qualified fund, which is subject to an additional trust tax, and the impact of the retroactive increase in the 2020 New Jersey temporary surtax discussed below. For the nine months ended September 30, 2020 the differences in PSEG Power’s effective tax rate as compared to the same period in the prior year and the statutory tax rate of 28.11% were due primarily to the benefit of purchasing 2019 NOLs 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.

Tax Cuts and Jobs Act of 2017 (Tax Act)

Effective January 1, 2018, the Tax Act established tax laws including, but not limited to, a limitation on deductible interest and limitations on the utilization of NOLS, such as eliminating carrybacks.

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 2018 and 2019, the tax deductibility of a portion of PSEG’s and PSEG Power’s interest expense was disallowed and was recorded as a deferred tax asset. Amounts recorded under the Tax Act and relevant statutes, including but not limited to depreciation and interest disallowance, are subject to change based on several factors, including but not limited to, the IRS and state taxing authorities issuing additional guidance and/or further clarification.

In July 2020, the 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 of PSEG’s and PSEG Power’s business interest expense that was disallowed in 2018 and 2019 will now be deductible in those respective years. PSEG is still in the process of analyzing these regulations, which may impact PSEG’s, PSE&G’s and PSEG Power’s financial condition and cash flows.

Coronavirus Aid, Relief, and Economic Security Act (CARES Act)

In March 2020, the CARES Act was signed into federal law. As applicable to PSEG and PSEG Power, the CARES Act favorably increases the limitation on the amount of interest that can be deducted in 2020. The increased limitation will allow a portion of the previously disallowed amounts to reduce PSEG’s and PSEG Power’s 2020 taxable income. The CARES Act also reversed certain NOL provisions from the Tax Act such as allowing five-year carrybacks of 2018, 2019 and 2020 NOLs.

IRS PLR

In April 2020, the IRS issued a PLR to PSE&G concluding that certain excess deferred taxes previously classified as protected should be classified as unprotected. Unprotected excess deferred income taxes are not subject to the normalization rules allowing them to be refunded to customers sooner as agreed to with FERC and the BPU. In July 2020, FERC and the BPU approved PSE&G’s requests to refund these unprotected excess deferred income taxes to customers. FERC approved the refund of these unprotected excess deferred income taxes within the 2019 true-up filing. The BPU approved the refund of these unprotected excess deferred income taxes within the next five years beginning in July 2020. See Note 6. Rate Filings for additional information.

Unrecognized Tax Benefits

In April 2020, the Joint Committee on Taxation approved PSEG’s nuclear carryback claim and federal tax returns for the years 2011 and 2012. In June 2020, the federal income tax audits for years 2011 through 2016 and the nuclear carryback claim were concluded. As a result, in the second quarter of 2020, PSEG, PSE&G, and PSEG Power decreased their total unrecognized tax benefits by $149 million, $83 million, and $63 million, respectively. As these unrecognized tax benefits primarily relate to temporary differences for which there are associated accumulated deferred income taxes, PSEG, PSE&G, and PSEG Power recorded $37 million, $9 million, and $25 million, respectively, of income statement benefits. The final cash settlement is expected to be completed within the next twelve months.

New Jersey State Tax Reform

In September 2020, New Jersey enacted its State Fiscal Year 2021 Budget, which amended the temporary surtax originally enacted into law in 2018, from 1.5% to 2.5% for 2020 and 2021 and extended the 2.5% surtax to 2023. PSE&G continues to be exempt and this amendment will not have a material impact on PSEG’s and PSEG Power’s financial statements.

In July 2018, New Jersey made changes to its income tax laws, including imposing the aforementioned temporary surtax, 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. 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. PSEG anticipates New Jersey will be issuing clarifying guidance regarding combined reporting rules. Any further guidance or clarification could impact PSEG’s and PSEG Power’s financial statements.

Income Taxes [Line Items]

Income Taxes

PSEG’s, PSE&G’s and PSEG Power’s effective tax rates for the three months and nine months ended September 30, 2020 and 2019 were as follows:



	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2020	2019	2020	2019
PSEG	17.4%	6.9%	15.7%	11.2%
PSE&G	11.3%	6.5%	15.9%	6.1%
PSEG Power	31.7%	20.9%	20.4%	29.1%

For the three months and nine months ended September 30, 2020, the differences in PSEG’s effective tax rates as compared to the same periods in the prior year were due primarily to the reduction in the 2020 flowback of PSE&G’s excess deferred income tax (EDIT) liabilities as PSE&G refunded all FERC-approved transmission-related EDIT liabilities that are not subject to the normalization rules in 2019. For the three months ended September 30, 2020, the difference in PSEG’s effective tax rate as compared to the statutory tax rate of 28.11% was due primarily to the flowback of PSE&G’s EDIT liabilities and tax repair-related accumulated deferred income taxes. For the nine months ended September 30, 2020, the difference in PSEG’s effective tax rate as compared to the statutory tax rate of 28.11% was due primarily to the flowback of PSE&G’s EDIT liabilities and tax repair-related accumulated deferred income taxes, the benefit of purchasing 2019 net operating losses (NOLs) under the New Jersey Technology Tax Benefit Transfer Program in the first quarter of 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.

For the three months and nine months ended September 30, 2020, the differences in PSE&G’s effective tax rates as compared to the same periods in the prior year were due primarily to the reduction in the 2020 flowback of PSE&G’s EDIT liabilities, as PSE&G refunded all FERC-approved transmission-related EDIT liabilities that are not subject to the normalization rules in 2019, and bad debt related flow-through. For the three months and nine months ended September 30, 2020, the differences in PSE&G’s effective tax rates as compared to the statutory tax rate of 28.11% were due primarily to the flowback of PSE&G’s EDIT liabilities and tax repair-related accumulated deferred income taxes, which increased in the third quarter of 2020 as a result of PSE&G’s IRS PLR, discussed below, offset by bad debt related flow-through.

For the three months ended September 30, 2020, the differences in PSEG Power’s effective tax rate as compared to the same period in the prior year and the statutory tax rate of 28.11% were due primarily to higher pre-tax income from the NDT qualified fund, which is subject to an additional trust tax, and the impact of the retroactive increase in the 2020 New Jersey temporary surtax discussed below. For the nine months ended September 30, 2020 the differences in PSEG Power’s effective tax rate as compared to the same period in the prior year and the statutory tax rate of 28.11% were due primarily to the benefit of purchasing 2019 NOLs 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.

Tax Cuts and Jobs Act of 2017 (Tax Act)

Effective January 1, 2018, the Tax Act established tax laws including, but not limited to, a limitation on deductible interest and limitations on the utilization of NOLS, such as eliminating carrybacks.

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 2018 and 2019, the tax deductibility of a portion of PSEG’s and PSEG Power’s interest expense was disallowed and was recorded as a deferred tax asset. Amounts recorded under the Tax Act and relevant statutes, including but not limited to depreciation and interest disallowance, are subject to change based on several factors, including but not limited to, the IRS and state taxing authorities issuing additional guidance and/or further clarification.

In July 2020, the 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 of PSEG’s and PSEG Power’s business interest expense that was disallowed in 2018 and 2019 will now be deductible in those respective years. PSEG is still in the process of analyzing these regulations, which may impact PSEG’s, PSE&G’s and PSEG Power’s financial condition and cash flows.

Coronavirus Aid, Relief, and Economic Security Act (CARES Act)

In March 2020, the CARES Act was signed into federal law. As applicable to PSEG and PSEG Power, the CARES Act favorably increases the limitation on the amount of interest that can be deducted in 2020. The increased limitation will allow a portion of the previously disallowed amounts to reduce PSEG’s and PSEG Power’s 2020 taxable income. The CARES Act also reversed certain NOL provisions from the Tax Act such as allowing five-year carrybacks of 2018, 2019 and 2020 NOLs.

IRS PLR

In April 2020, the IRS issued a PLR to PSE&G concluding that certain excess deferred taxes previously classified as protected should be classified as unprotected. Unprotected excess deferred income taxes are not subject to the normalization rules allowing them to be refunded to customers sooner as agreed to with FERC and the BPU. In July 2020, FERC and the BPU approved PSE&G’s requests to refund these unprotected excess deferred income taxes to customers. FERC approved the refund of these unprotected excess deferred income taxes within the 2019 true-up filing. The BPU approved the refund of these unprotected excess deferred income taxes within the next five years beginning in July 2020. See Note 6. Rate Filings for additional information.

Unrecognized Tax Benefits

In April 2020, the Joint Committee on Taxation approved PSEG’s nuclear carryback claim and federal tax returns for the years 2011 and 2012. In June 2020, the federal income tax audits for years 2011 through 2016 and the nuclear carryback claim were concluded. As a result, in the second quarter of 2020, PSEG, PSE&G, and PSEG Power decreased their total unrecognized tax benefits by $149 million, $83 million, and $63 million, respectively. As these unrecognized tax benefits primarily relate to temporary differences for which there are associated accumulated deferred income taxes, PSEG, PSE&G, and PSEG Power recorded $37 million, $9 million, and $25 million, respectively, of income statement benefits. The final cash settlement is expected to be completed within the next twelve months.

New Jersey State Tax Reform

In September 2020, New Jersey enacted its State Fiscal Year 2021 Budget, which amended the temporary surtax originally enacted into law in 2018, from 1.5% to 2.5% for 2020 and 2021 and extended the 2.5% surtax to 2023. PSE&G continues to be exempt and this amendment will not have a material impact on PSEG’s and PSEG Power’s financial statements.

In July 2018, New Jersey made changes to its income tax laws, including imposing the aforementioned temporary surtax, 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. 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. PSEG anticipates New Jersey will be issuing clarifying guidance regarding combined reporting rules. Any further guidance or clarification could impact PSEG’s and PSEG Power’s financial statements.