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Financial Risk Management Activities

12 Months Ended

Dec. 31, 2021

Derivative accounting guidance requires that a derivative instrument be recognized as either an asset or a liability at fair value, with changes in fair value of the derivative recognized in earnings each period. Other accounting treatments are available through special election and designation provided that the derivative instrument meets specific, restrictive criteria, both at the time of designation and on an ongoing basis. These alternative permissible treatments include normal purchases and normal sales (NPNS), cash flow hedge and fair value hedge accounting. PSEG and PSE&G have applied the NPNS scope exception to certain derivative contracts for the forward sale of generation, power procurement agreements and fuel agreements. PSEG uses interest rate swaps and other derivatives, which are designated and qualifying as cash flow or fair value hedges. PSEG Power enters into additional contracts that are derivatives, but are not designated as either cash flow hedges or fair value hedges. These transactions are economic hedges and are recorded at fair market value with changes recognized in earnings.

Commodity Prices

Within PSEG and its affiliate companies, PSEG Power has the most exposure to commodity price risk. PSEG Power is exposed to commodity price risk primarily relating to changes in the market price of electricity, fossil fuels and other commodities. Fluctuations in market prices result from changes in supply and demand, fuel costs, market conditions, weather, state and federal regulatory policies, environmental policies, transmission availability and other factors. PSEG Power uses a variety of derivative and non-derivative instruments, such as financial options, futures, swaps, fuel purchases and forward purchases and sales of electricity, to manage the exposure to fluctuations in commodity prices and optimize the value of PSEG Power’s expected generation. PSEG Power also uses derivatives to hedge a portion of its anticipated BGSS obligations with PSE&G. For additional information see Note 15. Commitments and Contingent Liabilities. Changes in the fair market value of these derivative contracts are recorded in earnings.

Interest Rates

PSEG and PSE&G are subject to the risk of fluctuating interest rates in the normal course of business. Exposure to this risk is managed by targeting a balanced debt maturity profile which limits refinancing in any given period or interest rate environment. In addition, they have used a mix of fixed and floating rate debt and interest rate swaps.

Cash Flow Hedges

PSEG uses interest rate swaps and other derivatives, which are designated and effective as cash flow hedges, to manage its exposure to the variability of cash flows, primarily related to variable-rate debt instruments. There were no outstanding interest rate hedges as of December 31, 2021 and 2020.

The Accumulated Other Comprehensive Income (Loss) (after tax) related to outstanding and terminated interest rate derivatives designated as cash flow hedges was $(6) million and $(9) million as of December 31, 2021 and December 31, 2020, respectively. The after-tax unrealized losses on these hedges expected to be reclassified to earnings during the next 12 months are $(3) million.

Fair Values of Derivative Instruments

The following are the fair values of derivative instruments on the Consolidated Balance Sheets. The following tables also include disclosures for offsetting derivative assets and liabilities which are subject to a master netting or similar agreement. In general, the terms of the agreements provide that in the event of an early termination the counterparties have the right to offset amounts owed or owing under that and any other agreement with the same counterparty. Accordingly, and in accordance with PSEG’s accounting policy, these positions are offset on the Consolidated Balance Sheets of PSEG. For additional information see Note 19. Fair Value Measurements.

Substantially all derivative instruments are contracts subject to master netting agreements. Contracts not subject to master netting or similar agreements are immaterial and did not have any collateral posted or received as of December 31, 2021 and 2020. The following tabular disclosure does not include the offsetting of trade receivables and payables.



	As of December 31, 2021
	Not Designated
Balance Sheet Location	Energy- Related Contracts		Netting (A)		Total Derivatives
	Millions
Derivative Contracts
Current Assets	$	816	$	(744)	$	72
Noncurrent Assets	546		(518)		28
Total Mark-to-Market Derivative Assets	$	1,362	$	(1,262)	$	100
Derivative Contracts
Current Liabilities	$	(1,055)	$	1,038	$	(17)
Noncurrent Liabilities	(856)		839		(17)
Total Mark-to-Market Derivative (Liabilities)	$	(1,911)	$	1,877	$	(34)
Total Net Mark-to-Market Derivative Assets (Liabilities)	$	(549)	$	615	$	66



	As of December 31, 2020
	Not Designated
Balance Sheet Location	Energy- Related Contracts		Netting (A)		Total Derivatives
	Millions
Derivative Contracts
Current Assets	$	464	$	(404)	$	60
Noncurrent Assets	93		(84)		9
Total Mark-to-Market Derivative Assets	$	557	$	(488)	$	69
Derivative Contracts
Current Liabilities	$	(412)	$	391	$	(21)
Noncurrent Liabilities	(109)		105		(4)
Total Mark-to-Market Derivative (Liabilities)	$	(521)	$	496	$	(25)
Total Net Mark-to-Market Derivative Assets (Liabilities)	$	36	$	8	$	44

(A) Represents the netting of fair value balances with the same counterparty (where the right of offset exists) and the application of cash collateral. All cash collateral (received) posted that has been allocated to derivative positions, where the right of offset exists, has been offset on the Consolidated Balance Sheets. As of December 31, 2021 and 2020, PSEG Power had net cash collateral payments to counterparties of $844 million and $54 million, respectively. Of these net cash collateral (receipts) payments, $615 million as of December 31, 2021 and $8 million as of December 31, 2020 were netted against the corresponding net derivative contract positions. Of the $615 million as of December 31, 2021, $(30) million was netted against current assets, $(13) million was netted against non-current assets, $323 million was netted against current liabilities and $335 million was netted against noncurrent liabilities. Of the $8 million as of December 31, 2020, $(13) million was netted against current assets and $21 million was netted against noncurrent liabilities.

Certain of PSEG Power’s derivative instruments contain provisions that require PSEG Power to post collateral. This collateral may be posted in the form of cash or credit support with thresholds contingent upon PSEG Power’s credit rating from each of the major credit rating agencies. The collateral and credit support requirements vary by contract and by counterparty. These credit risk-related contingent features stipulate that if PSEG Power were to be downgraded to a below investment grade rating by S&P or Moody’s, it would be required to provide additional collateral. A below investment grade credit rating for PSEG Power would represent a two level downgrade from its current Moody’s and S&P ratings. This incremental collateral requirement can offset collateral requirements related to other derivative instruments that are assets with the same counterparty, where the contractual right of offset exists under applicable master agreements. PSEG Power also enters into commodity transactions on the New York Mercantile Exchange (NYMEX) and Intercontinental Exchange (ICE). The NYMEX and ICE clearing houses act as counterparties to each trade. Transactions on the NYMEX and ICE must adhere to comprehensive collateral and margin requirements.

The aggregate fair value of all derivative instruments with credit risk-related contingent features in a liability position that are not fully collateralized (excluding transactions on the NYMEX and ICE that are fully collateralized) was $75 million and $28 million as of December 31, 2021 and 2020, respectively. As of December 31, 2021 and 2020, PSEG Power had the contractual right of offset of $29 million and $3 million, respectively, related to derivative instruments that are assets with the same counterparty under master agreements and net of margin posted. If PSEG Power had been downgraded to a below investment grade rating, it would have had additional collateral obligations of $46 million and $25 million as of December 31, 2021 and 2020, respectively, related to its derivatives, net of the contractual right of offset under master agreements and the application of collateral.

The following shows the effect on the Consolidated Statements of Operations and on Accumulated Other Comprehensive Loss (AOCL) of derivative instruments designated as cash flow hedges for the years ended December 31, 2021, 2020 and 2019.



	Amount of Pre-Tax Gain (Loss) Recognized in AOCL on Derivatives						Location of Pre-Tax Gain (Loss) Reclassified from AOCL into Income	Amount of Pre-Tax Gain (Loss) Reclassified from AOCL into Income
Derivatives in Cash Flow Hedging Relationships	Years Ended December 31,							Years Ended December 31,
	2021		2020		2019			2021		2020		2019
	Millions							Millions
Interest Rate Swaps	$	—	$	(6)	$	(23)	Interest Expense	$	(4)	$	(14)	$	(4)
Total	$	—	$	(6)	$	(23)		$	(4)	$	(14)	$	(4)

The effect of interest rate cash flow hedges is recorded in Interest Expense in PSEG’s Consolidated Statement of Operations. For the year ended December 31, 2021, the amount of loss on interest rate hedges reclassified from Accumulated Other Comprehensive Income (Loss) into income was $3 million, $10 million and $3 million after tax as of December 31, 2021, 2020 and 2019, respectively.

The following reconciles the Accumulated Other Comprehensive Income (Loss) for derivative activity included in the AOCL of PSEG on a pre-tax and after-tax basis.



Accumulated Other Comprehensive Income (Loss)	Pre-Tax		After-Tax
	Millions
Balance as of December 31, 2019	$	(21)	$	(15)
Loss Recognized in AOCI	(6)		(4)
Less: Loss Reclassified into Income	14		10
Balance as of December 31, 2020	$	(13)	$	(9)
Loss Recognized in AOCI	—		—
Less: Loss Reclassified into Income	4		3
Balance as of December 31, 2021	$	(9)	$	(6)

The following shows the effect on the Consolidated Statements of Operations of derivative instruments not designated as hedging instruments or as NPNS for the years ended December 31, 2021, 2020 and 2019. PSEG Power’s derivative contracts reflected in this table include contracts to hedge the purchase and sale of electricity and natural gas, and the purchase of fuel. The table does not include contracts that PSEG Power has designated as NPNS, such as its BGS contracts and certain other energy supply contracts that it has with other utilities and companies with retail load.



Derivatives Not Designated as Hedges	Location of Pre-Tax Gain (Loss) Recognized in Income on Derivatives	Pre-Tax Gain (Loss) Recognized in Income on Derivatives
		Years Ended December 31,
		2021		2020		2019
		Millions
Energy-Related Contracts	Operating Revenues	$	993	$	279	$	560
Energy-Related Contracts	Energy Costs	(126)		(142)		(119)
Total		$	867	$	137	$	441

The following table summarizes the net notional volume purchases/(sales) of open derivative transactions by commodity as of December 31, 2021 and 2020.



		As of December 31,
Type	Notional	2021	2020
		Millions
Natural Gas	Dekatherm (Dth)	47	321
Electricity	MWh	(76)	(66)
Financial Transmission Rights (FTRs)	MWh	27	20

Credit Risk

Credit risk relates to the risk of loss that PSEG Power would incur as a result of non-performance by counterparties pursuant to the terms of their contractual obligations. PSEG has established credit policies that it believes significantly minimize credit risk. These policies include an evaluation of potential counterparties’ financial condition (including credit rating), collateral requirements under certain circumstances and the use of standardized agreements, which allow for the netting of positive and negative exposures associated with a single counterparty. In the event of non-performance or non-payment by a major counterparty, there may be a material adverse impact on PSEG’s financial condition, results of operations or net cash flows.

The following table provides information on PSEG Power’s credit risk from wholesale counterparties, net of collateral, as of December 31, 2021. It further delineates that exposure by the credit rating of the counterparties, which is determined by the lowest rating from S&P, Moody’s or an internal scoring model. In addition, it provides guidance on the concentration of credit risk to individual counterparties and an indication of the quality of PSEG Power’s credit risk by credit rating of the counterparties.

As of December 31, 2021, 99.8% of the net credit exposure for PSEG Power’s wholesale operations was with investment grade counterparties. Credit exposure is defined as any positive results of netting accounts receivable/accounts payable and the forward value of open positions (which includes all financial instruments including derivatives, NPNS and non-derivatives).



Rating	Current Exposure		Securities held as Collateral		Net Exposure		Number of Counterparties >10%	Net Exposure of Counterparties >10% (A)
	Millions							Millions
Investment Grade	$	356	$	185	$	171	1	$	143
Non-Investment Grade	2		1		1		—	—
Total	$	358	$	186	$	172	1	$	143

(A)Represents net exposure with PSE&G.

As of December 31, 2021, collateral held from counterparties where PSEG Power had credit exposure included $186 million in letters of credit.

As of December 31, 2021, PSEG Power had 106 active counterparties.

PSE&G’s supplier master agreements are approved by the BPU and govern the terms of its electric supply procurement contracts. These agreements define a supplier’s performance assurance requirements and allow a supplier to meet its credit requirements with a certain amount of unsecured credit. The amount of unsecured credit is determined based on the supplier’s credit ratings from the major credit rating agencies and the supplier’s tangible net worth. The credit position is based on the initial market price, which is the forward price of energy on the day the procurement transaction is executed, compared to the forward price curve for energy on the valuation day. To the extent that the forward price curve for energy exceeds the initial market price, the supplier is required to post a parental guaranty or other security instrument such as a letter of credit or cash, as collateral to the extent the credit exposure is greater than the supplier’s unsecured credit limit. As of December 31, 2021, PSEG held parental guaranties, letters of credit and cash as security. PSE&G’s BGS suppliers’ credit exposure is calculated each business day. As of December 31, 2021, PSE&G had credit exposure of $68 million with its suppliers. As of December 31, 2021, PSE&G had no net credit exposure with PSEG Power.

PSE&G is permitted to recover its costs of procuring energy through the BPU-approved BGS tariffs. PSE&G’s counterparty credit risk is mitigated by its ability to recover realized energy costs through customer rates.

Public Service Electric and Gas Company

Derivative [Line Items]

Financial Risk Management Activities