Grade: F — Major Red Flags
Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles
Data: SEC EDGAR 10-K (Filed 2026-02-26) + Yahoo Finance
Auditor: Deloitte & Touche LLP — Clean opinion (1 critical audit matter: accounting for effects of regulation)
One-line verdict: PSEG operates a dual business: PSE&G, the regulated electric and gas distribution utility serving New Jersey, and PSEG Power, the unregulated power generation subsidiary that operates the largest nuclear fleet in the Northeast. Revenue grew 18.3% to $12.2B, net income rose 19.1% to $2.11B, and CFFO surged 54.6% to $3.30B. The F grade stems from two structural flags — FCF negative for 3 of 4 years and cash of $132M versus $24.2B debt — but PSEG is on the verge of positive FCF ($26M in FY2025) and has the second-strongest revenue growth in this peer group. The key story is nuclear: PSEG Power's nuclear fleet lost its Production Tax Credits (PTCs) starting in 2025, creating a $356M unfavorable income tax swing that management must offset through market power sales. The BPU approved a $17.8B rate base with 9.6% ROE for PSE&G in October 2024, providing a stable foundation.
| Metric | Result |
|---|---|
| Red Flags | **2** (FCF negative, cash vs debt) |
| Watch Items | **1** (leverage 5.0x) |
| Checks Completed | **15/18** |
| Beneish M-Score | **N/A** (insufficient data) |
| Altman Z-Score | **1.46** (grey zone) |
Business Overview
PSEG has two principal operating subsidiaries:
PSE&G (Public Service Electric and Gas Company): A regulated electric and gas distribution utility serving approximately 2.3 million electric and 1.9 million gas customers in New Jersey. From the 10-K, revenue composition in FY2025:
| PSE&G Revenue | FY2025 |
|---|---|
| PSE&G segment revenues | $9,558M |
| PSEG Power & Other | $3,722M |
| Eliminations | $(1,112M) |
| **Consolidated** | **$12,168M** |
From the 10-K, PSE&G's load is split: "Electric — Commercial 57%, Residential 34%, Industrial 9%; Gas — Residential 58%, Commercial 38%, Industrial 4%."
PSEG Power: Operates approximately 6,750 MW of generation capacity, including the Salem and Hope Creek nuclear stations. From the 10-K: PSEG Power "evaluates long-lived assets for impairment whenever events or changes in circumstances" occur, with nuclear assets evaluated "at the portfolio level."
Nuclear PTC Expiration
The most significant FY2025 development: nuclear Production Tax Credits expired. From the 10-K: "Income Tax Expense (Benefit) variance of $356 million due primarily to the absence of the benefit from nuclear PTCs in 2025 and higher pre-tax income." This $356M swing means PSEG Power must earn more from wholesale power markets to maintain profitability — a structural shift from the tax-credit-subsidized model.
Financial Summary
| Line Item | FY2025 | FY2024 | FY2023 |
|---|---|---|---|
| Total Operating Revenues | $12,168M | $10,290M | $11,237M |
| Operating Income | $2,980M | $2,353M | $3,685M |
| Net Gains on Trust Investments | $189M | $127M | $189M |
| Interest Expense | ~$1,200M | ~$1,000M | — |
| **Net Income** | **$2,111M** | **$1,772M** | **$2,563M** |
| Metric | FY2022 | FY2023 | FY2024 | FY2025 | Trend |
|---|---|---|---|---|---|
| Revenue | $9.80B | $11.24B | $10.29B | $12.17B | Growing |
| Net Income | $1.03B | $2.56B | $1.77B | $2.11B | Volatile |
| Gross Margin | 26.6% | 42.9% | 34.4% | 34.8% | Stabilizing |
| Net Margin | 10.5% | 22.8% | 17.2% | 17.3% | Normalizing |
| ROE | 7.5% | 19.1% | 11.0% | 12.4% | Improving |
FY2023 was an outlier: $2.56B net income driven by nuclear PTCs and favorable wholesale power markets. FY2024 dropped to $1.77B as energy markets normalized. FY2025 recovered to $2.11B despite the PTC expiration, suggesting the underlying business is strengthening.
PSE&G Rate Case (from 10-K)
From the 10-K: "In October 2024, the BPU issued an Order approving the settlement of PSE&G's electric and gas distribution base rate case with new rates effective October 15, 2024. The Order provided for a $17.8 billion rate base, a 9.6% return on equity for PSE&G's distribution business and a 55% equity component of its capitalization structure."
This is a strong regulatory outcome:
PSE&G also has BPU-approved infrastructure programs with clause-based cost recovery: "The BPU has also approved a series of PSE&G infrastructure, EE, EV and renewable energy investment programs with cost recovery through various clause mechanisms."
Cash Flow
| Metric | FY2022 | FY2023 | FY2024 | FY2025 |
|---|---|---|---|---|
| Operating Cash Flow | $1.50B | $3.81B | $2.13B | $3.30B |
| CFFO / NI | 1.46 | 1.48 | 1.20 | 1.56 |
| Free Cash Flow | $(1.39B) | $481M | $(1.25B) | $26M |
| Cash on Hand | $465M | $54M | $125M | $132M |
| Total Debt | $20.4B | $173M* | $22.9B | $24.2B |
*FY2023 debt figure likely a data anomaly in yfinance — the actual debt was approximately $21B.
CFFO/NI of 1.56 is the lowest in the peer group, partly because PSEG Power's generation earnings have higher cash conversion efficiency (no D&A mismatch like pure T&D utilities). FCF of $26M is near-breakeven — PSEG may achieve sustained positive FCF if CapEx stabilizes.
The 18-Point Screening
Revenue Quality
| # | Check | Result | Detail |
|---|---|---|---|
| A1 | DSO | Pass | 57 days, flat YoY |
| A2 | AR vs Revenue | Pass | AR growth 18.2% vs revenue growth 18.3% |
| A3 | Revenue vs CFFO | Pass | Revenue +18.3%, CFFO +54.6%. Cash surges |
Revenue quality is excellent. AR growth perfectly tracks revenue growth. CFFO growing at nearly 3x the rate of revenue is a strong positive signal — operating leverage is working. DSO of 57 days is slightly elevated but stable.
From the 10-K: "Accounts Receivable, net of allowance of $248 million in 2025 and $210 million in 2024" — the bad debt allowance increased $38M (18.1%), tracking the AR growth rate.
Expense Quality
| # | Check | Result | Detail |
|---|---|---|---|
| B1 | Inventory | Pass | +2.8% vs COGS +17.4%. Normal |
| B2 | CapEx | Pass | CapEx -3.2% vs revenue +18.3% |
| B3 | SG&A Ratio | N/A | Utility cost structure |
| B4 | Gross Margin | Pass | 34.8%, +0.5pp. Stable |
B2: CapEx actually declined 3.2% while revenue grew 18.3% — highly unusual for a utility. This suggests the current infrastructure build cycle may be peaking.
Cash Flow Quality
| # | Check | Result | Detail |
|---|---|---|---|
| C1 | CFFO vs NI | Pass | Ratio 1.56. Profits backed by cash |
| C2 | FCF | **FAIL** | FCF negative for 3 of 4 years |
| C3 | Accruals | Pass | -2.1%. Low accruals |
| C4 | Cash vs Debt | **FAIL** | Cash $132M covers 1% of $24.2B debt |
Balance Sheet
| # | Check | Result | Detail |
|---|---|---|---|
| D1 | Goodwill + Intangibles | Pass | Zero goodwill. Clean |
| D2 | Leverage | **WATCH** | Debt/EBITDA = 5.0x |
| D3 | Soft Assets | Pass | Other assets +7.2% vs revenue +18.3% |
| D4 | Impairment | N/A | No write-off data |
Acquisition & Manipulation
| # | Check | Result | Detail |
|---|---|---|---|
| E1 | Serial Acquirer | Pass | FCF after acquisitions positive |
| E2 | Goodwill Surge | Pass | Zero goodwill |
| F1 | M-Score | N/A | Insufficient data |
Key Risks
1. Nuclear PTC expiration. The $356M income tax impact from losing nuclear PTCs is the single largest risk factor for FY2026 and beyond. PSEG Power must generate enough wholesale power revenue to offset this loss.
2. Nuclear operational risk. From the 10-K: "risks associated with our ownership and operation of nuclear facilities, including increased nuclear fuel storage costs, regulatory risks, such as compliance with the Atomic Energy Act and trade control, environmental and other regulations, as well as operational, financial, environmental and health and safety risks."
3. New Jersey regulatory environment. While the October 2024 rate case was favorable, future proceedings may be less generous, particularly as customer rates increase.
4. Long-lived asset impairment. From the 10-K: PSEG Power evaluates assets for impairment using "forward power prices, the impact of PTCs, fuel costs, other operating and capital expenditures, the cost of borrowing and asset sale prices." Without PTCs, the impairment calculus changes.
Summary
| # | Check | Result |
|---|---|---|
| A1-A3 | Revenue Quality | Pass-Pass-Pass |
| B1-B4 | Expense Quality | Pass-Pass-N/A-Pass |
| C1-C4 | Cash Flow Quality | Pass-Fail-Pass-Fail |
| D1-D4 | Balance Sheet | Pass-Watch-Pass-N/A |
| E1-E2 | M&A Risk | Pass-Pass |
| F1 | Beneish M-Score | N/A |
Grade: F — structural false positive. One of the cleanest utilities in this batch.
PSEG's F grade is driven entirely by the two standard utility structural flags: negative FCF and cash vs debt. Revenue quality is perfect (no fails, no watches). The balance sheet has zero goodwill. CapEx is declining. CFFO grew 54.6% — the strongest cash flow growth in the entire peer group. The only real concern is the nuclear PTC expiration, which creates a $356M annual earnings headwind. But with a $17.8B rate base at 9.6% ROE and near-breakeven FCF, PSEG's financial profile is sound. This F grade should be read as a C or better.
Deloitte has served as the Company's auditor since 1934 — 92 consecutive years, the longest auditor tenure in this peer group, providing deep institutional knowledge of PSEG's regulatory accounting.
**Disclaimer**: This report is based on PSEG's FY2025 10-K (SEC EDGAR, filed 2026-02-26) and public financial data. This is NOT investment advice.
Data: SEC EDGAR 10-K (Filed 2026-02-26) + Yahoo Finance
Auditor: Deloitte & Touche LLP (Unqualified opinion, 1 critical audit matter)