<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Public Service Enterprise Group Incorporated
--------------------------------------------------
(Name of Registrant as Specified In Its Charter)
--------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[_] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-
11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- -------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- -------------------------------------------------------------------------------
(3) Filing Party:
- -------------------------------------------------------------------------------
(4) Date Filed:
- -------------------------------------------------------------------------------
<PAGE>
[LOGO]PSEG
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
80 PARK PLAZA, P.O. BOX 1171, NEWARK, NEW JERSEY 07101-1171
- -------------------------------------------------------------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 16, 1996
AND
PROXY STATEMENT
TO THE STOCKHOLDERS OF PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED:
Notice Is Hereby Given that the Annual Meeting of Stockholders of Public
Service Enterprise Group Incorporated will be held at Newark Symphony Hall,
1020 Broad Street, Newark, New Jersey, on April 16, 1996, at 2:00 P.M., for
the following purposes:
1. To elect three members of Class III of the Board of Directors to hold
office until the Annual Meeting of Stockholders in 1999 and one member
of Class I to hold office until the Annual Meeting of Stockholders in
1997, in each case until their respective successors are elected and
qualified;
2. To consider and act upon the approval of the appointment of Deloitte &
Touche LLP as independent auditors for the year 1996; and
3. To transact such other business as may properly come before said meeting
or any adjournment thereof.
Stockholders entitled to vote at the meeting are the holders of Common Stock
of record at the close of business on February 26, 1996.
By order of the Board of Directors,
Edward J. Biggins, Jr.
Secretary
February 28, 1996
YOUR VOTE IS IMPORTANT. PLEASE SIGN, DATE AND MAIL THE ACCOMPANYING
PROXY FORM PROMPTLY.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTRODUCTION.............................................................. 1
VOTING SECURITIES......................................................... 1
BOARD OF DIRECTORS........................................................ 2
COMMITTEES OF THE BOARD................................................... 2
ELECTION OF DIRECTORS (Proposal 1)........................................ 4
SECURITY OWNERSHIP OF DIRECTORS AND MANAGEMENT............................ 8
EXECUTIVE COMPENSATION.................................................... 9
Summary Compensation Table.............................................. 9
Option Grants in Last Fiscal Year (1995)................................ 10
Aggregated Option Exercises in Last Fiscal Year (1995) and
Fiscal Year-End Option Values (12/31/95)............................... 11
Employment Contracts and Arrangements................................... 11
Compensation Committee Interlocks and Insider Participation............. 11
Compensation of Directors and Certain Business Relationships............ 12
Compensation Pursuant to Pension Plans.................................. 12
ORGANIZATION AND COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION.. 13
PERFORMANCE GRAPH......................................................... 16
APPOINTMENT OF INDEPENDENT AUDITORS (Proposal 2).......................... 16
LEGAL PROCEEDING.......................................................... 17
DATE FOR SUBMISSION OF STOCKHOLDER PROPOSALS.............................. 17
MISCELLANEOUS............................................................. 17
APPENDIX: FINANCIAL STATEMENTS............................................ A-1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................... A-1
FINANCIAL STATEMENT RESPONSIBILITY....................................... A-13
INDEPENDENT AUDITORS' REPORT............................................. A-14
CONSOLIDATED STATEMENTS OF INCOME........................................ A-15
CONSOLIDATED BALANCE SHEETS.............................................. A-16
CONSOLIDATED STATEMENTS OF CASH FLOWS.................................... A-18
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS............................. A-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................... A-20
</TABLE>
<PAGE>
INTRODUCTION
This Proxy Statement is furnished in connection with the solicitation of
proxies by Public Service Enterprise Group Incorporated (Enterprise) on behalf
of its Board of Directors to be voted at the 1996 Annual Meeting of
Stockholders of Enterprise. Enterprise is a public utility holding company
that owns directly two subsidiaries: its principal subsidiary, Public Service
Electric and Gas Company (PSE&G), which is an operating electric and gas
utility; and Enterprise Diversified Holdings Incorporated (EDHI), which
directly owns the non-utility businesses of Enterprise. The complete mailing
address of the principal executive offices of Enterprise is 80 Park Plaza,
P.O. Box 1171, Newark, New Jersey 07101-1171, telephone (201) 430-7000. The
approximate date on which this Proxy Statement and the accompanying proxy were
first sent or given to security holders was March 7, 1996.
Every vote is important. Accordingly, each stockholder is urged to date,
sign and return the accompanying proxy form whether or not he or she plans to
attend the meeting. When a proxy form is returned properly dated and signed,
the shares represented thereby will be voted by the persons named as proxies
in accordance with each stockholder's directions. Stockholders may specify
their choices by marking the appropriate boxes on the enclosed proxy form. If
a proxy form is dated, signed and returned without specifying choices, the
shares will be voted as recommended by the Board of Directors.
A proxy given in the form which accompanies this Proxy Statement is
revocable. However, by law, the presence at the Annual Meeting of a
stockholder who has given such a proxy will not revoke the proxy, unless the
stockholder files a written notice of such revocation with the Secretary of
Enterprise prior to the voting of the proxies at the meeting, or the
stockholder votes the shares subject to the proxy by written ballot.
Included in the Appendix to this Proxy Statement are the 1995 Financial
Statements of Enterprise, along with Management's Discussion and Analysis of
Financial Condition and Results of Operations and the Independent Auditors'
Report. In prior years, such information had been included in Enterprise's
Annual Report to Stockholders.
VOTING SECURITIES
Holders of record of the 244,697,930 shares of Common Stock of Enterprise
outstanding at the close of business on February 26, 1996 will have one vote
per share. The holders of Common Stock entitled to cast a majority of the
votes at the meeting, present in person or represented by proxy, will
constitute a quorum. All votes cast by proxy or in person will be counted.
Abstentions and broker non-votes will not be counted.
The accompanying proxy includes any shares registered in the name listed
thereon in the Enterprise Dividend Reinvestment and Stock Purchase Plan and
the Enterprise Employee Stock Purchase Plan.
Participants in the PSE&G Thrift and Tax Deferred Savings Plan or PSE&G
Employee Savings Plan will receive a separate direction card from each plan's
trustee for shares that have been allocated to their accounts under the
Enterprise Common Stock Fund D and their ESOP Accounts. The trustee will vote
the shares of Enterprise Common Stock beneficially owned by the participant
under the respective plan in accordance with such participant's instructions.
Stockholders are entitled to cumulative voting in the election of directors.
This means that stockholders may cast with respect to the class to be elected
a number of votes equal to the number of votes to which their shares are
entitled, multiplied by the number of directors to be elected in that class.
The votes may be cast for the election of one nominee or may be distributed
among as many nominees in that class as desired.
1
<PAGE>
BOARD OF DIRECTORS
Management of Enterprise is under the general direction of the Board of
Directors. The Board is divided into three classes of as nearly equal numbers
of directors as possible. As a result of this classification of directors, one
class of directors is elected each year for a three-year term. Directors whose
terms expire are eligible for renomination and will be considered by the
Nominating Committee in accordance with its customary standards, subject to
the retirement policy for directors mentioned below.
The present terms of the three directors included in Class III of the Board
of Directors, T. J. Dermot Dunphy, Raymond V. Gilmartin and Josh S. Weston,
expire at the 1996 Annual Meeting. Messrs. Dunphy, Gilmartin and Weston have
each been nominated to serve as a director in Class III for a new three-year
term, which will expire at the 1999 Annual Meeting.
In addition, the term of Forrest J. Remick, who was initially elected a
director by the Board of Directors effective May 16, 1995, will expire at the
1996 Annual Meeting. Dr. Remick has been nominated to serve as a director in
Class I, for a one-year term, which will expire at the 1997 Annual Meeting.
Therefore, at this year's meeting directors will be elected to fill three
positions in Class III to serve until the 1999 Annual Meeting and one position
in Class I to serve until the 1997 Annual Meeting, in each case until their
respective successors are elected and qualified. All the nominees, except Dr.
Remick, were elected to their present terms by the stockholders. The present
term of Class I of the Board of Directors expires at the 1997 Annual Meeting,
and the present term of Class II expires at the 1998 Annual Meeting. Other
than Dr. Remick, directors in Class I and Class II will not be elected at the
1996 Annual Meeting.
The By-Laws of Enterprise currently provide that the Board of Directors
shall consist of not less than 3 nor more than 16 directors as shall be fixed
from time to time by the Board. The number of directors is now fixed at 11.
The Board of Directors of Enterprise holds regular monthly meetings, except
in August, and meets on other occasions when circumstances require. The Board
met 12 times in 1995, and, on average, the meetings lasted approximately two
hours. Directors spend additional time preparing for Board and committee
meetings they attend and they are called upon for counsel between meetings. In
addition, each director serves on the Board of Directors of either PSE&G or
EDHI, except for Mr. Ferland, who serves on the Boards of both. The PSE&G
Board met 11 times and the EDHI Board met 9 times in 1995. Committee
membership and membership on the PSE&G and EDHI Boards are shown in the
biographies under "Election of Directors".
Under the retirement policy for directors, directors who have never been
employees of the Enterprise group of companies and directors who are former
chief executive officers of Enterprise may not serve as directors beyond the
Annual Meeting of Stockholders following their seventieth birthday. Directors
who are former employees, other than chief executive officers, may not serve
as directors beyond the Annual Meeting of Stockholders following termination
of active employment with the Enterprise group of companies.
COMMITTEES OF THE BOARD
The committees of the Enterprise Board and their principal functions are as
follows:
Audit Committee
Makes recommendations to the Board of Directors regarding the selection of
independent auditors. Reviews independence of independent auditors, services
provided by them, their fees and peer review reports of their performance.
Reviews annual audit reports of both independent and internal auditors.
Reviews planned scope of future audits. Ascertains implementation of auditors'
recommendations. Reviews internal auditing procedures
2
<PAGE>
and internal accounting controls. Reviews adequacy and implementation of
policies and practices relating to accounting, financial reporting, internal
auditing, operating controls, compliance and business ethics. Meets
periodically with management as well as with representatives of the
independent and internal auditors. The Committee held five meetings in 1995.
Executive Committee
Except as otherwise provided by law, has and may exercise all the authority
of the Board of Directors when the Board is not in session. This Committee
meets only on call and did not meet during 1995.
Finance Committee
Considers financial policies, or changes therein, before presentation to the
Board of Directors. Periodically reviews financial planning. Makes
recommendations to the Board of Directors regarding the issuance and sale of
securities. Oversees funding of the pension plan of PSE&G. The Committee held
three meetings in 1995.
Nominating Committee
Makes recommendations to the Board of Directors with respect to nominations
for the Board. Studies and makes recommendations concerning the size and
composition of the Board of Directors, including policies relating to the
retirement of directors. The Committee met two times in 1995.
The Nominating Committee will consider stockholders' recommendations for
nominees for election to the Board of Directors. Such recommendations must be
submitted in writing to Edward J. Biggins, Jr., Secretary, T4B, Public Service
Enterprise Group Incorporated, 80 Park Plaza, P.O. Box 1171, Newark, New
Jersey 07101-1171. Nominations must be accompanied by the written consent of
any such person to serve if nominated and elected and by biographical material
to permit evaluation of the individual recommended. In addition, the By-Laws
of Enterprise require that shareholder nominations must be submitted at least
90 days in advance of an Annual Meeting.
The Committee seeks candidates with an attained position of leadership in
their field of endeavor, breadth of experience, and sound business judgment.
It is the policy of the Board of Directors that a person who is not an
employee of Enterprise shall not be recommended initially to the stockholders
for election as a director unless it appears that, consistent with the
retirement policy for directors referred to above, such person would be
available to serve as a director for at least five years.
Nuclear Committee
Established in February 1995 to provide an independent basis for evaluating
the safety and effectiveness of the nuclear operations of PSE&G. Specific
attention is provided to evaluation of overall management attention to nuclear
safety, regulatory issues and other evaluations of nuclear operations, and to
improvement in operations. The Committee met eight times in 1995.
Organization and Compensation Committee
Studies and makes recommendations to the Board of Directors concerning
organization in general and compensation for certain executives. Administers
the compensation program for executive officers. Makes comparative studies and
reports to the Board of Directors with respect to compensation for directors
who are not officers. Reviews and makes recommendations to the Board of
Directors with respect to certain benefit plans for directors and officers.
Administers certain benefit plans for directors and officers. The Committee
held four meetings in 1995.
3
<PAGE>
PROPOSAL 1
ELECTION OF DIRECTORS
At the 1996 Annual Meeting of Stockholders, three members of Class III of
the Board of Directors are to be elected to hold office until the Annual
Meeting of Stockholders in 1999, and one member of Class I of the Board of
Directors is to be elected to hold office until the Annual Meeting of
Stockholders in 1997, in each case until their respective successors are
elected and qualified.
The nominees listed below were selected by the Board of Directors of
Enterprise upon the recommendation of the Nominating Committee. Proxies in the
accompanying form will be voted for these nominees, unless authority to vote
for one or more of them shall have been withheld by so marking the enclosed
proxy.
If at the time of the meeting any of the nominees listed below should be
unable to serve, which is not anticipated, it is the intention of the persons
designated as proxies to vote, in their discretion, for other nominees, unless
the number of directors constituting a full board is reduced.
There is shown as to each nominee, and as to each director whose term of
office will continue after the 1996 Annual Meeting, the period of service as a
director of Enterprise (and PSE&G prior to the formation of Enterprise), age
as of the date of the Annual Meeting, present committee memberships, business
experience during the last five years and other present directorships.
Beneficial ownership of Enterprise Common Stock is shown under Security
Ownership of Directors and Management. During 1995, each nominee and each
director attended more than 75% of the aggregate number of Board meetings and
committee meetings on which he or she served, with the exception of Ernest H.
Drew, who attended 68%.
4
<PAGE>
NOMINEES FOR ELECTION AS DIRECTOR
CLASS III -- NOMINEES FOR TERMS EXPIRING IN 1999
T. J. Dermot Dunphy has been a director since 1980. Age 64.
Chairman of Finance Committee and member of Audit Committee
and Organization and Compensation Committee. Director of
Enterprise's subsidiary, EDHI. Has been President and Chief
Executive Officer of Sealed Air Corporation, Saddle Brook, New
Jersey (manufactures protective packaging products and
systems), since 1971. Director of Sealed Air Corporation, UJB [PHOTO OF]
Financial Corp. and United Jersey Bank.
T. J. Dermot
Dunphy
Raymond V. Gilmartin has been a director since 1993. Age 55.
Chairman of Nominating Committee and member of Finance
Committee and Organization and Compensation Committee.
Director of Enterprise's subsidiary, PSE&G. Has been Chairman
of the Board, President and Chief Executive Officer of Merck &
Co., Inc., Whitehouse, New Jersey (discovers, develops,
produces and markets human and animal health products) since
November 1994. Was President and Chief Executive Officer of
Merck & Co., Inc. from June 1994 to November 1994. Was
Chairman of the Board, President and Chief Executive Officer
of Becton Dickinson and Company from November 1992 to June
1994 and President and Chief Executive Officer of Becton
Dickinson and Company from February 1989 to November 1992.
Director of Merck & Co., Inc. and Providian Corporation. [PHOTO OF]
Raymond V.
Gilmartin
Josh S. Weston has been a director since 1984. Age 67.
Member of Executive Committee, Nuclear Committee and
Organization and Compensation Committee. Director of
Enterprise's subsidiary, EDHI. Has been Chairman of the Board
and Chief Executive Officer of Automatic Data Processing Inc.,
Roseland, New Jersey since April 1986. Director of Automatic
Data Processing Inc., Olsten Corporation and Shared Medical [PHOTO OF]
Systems Corporation.
Josh S.
Weston
----------------
CLASS I--NOMINEE FOR TERM EXPIRING IN 1997
Forrest J. Remick has been a director since May 1995. Age
65. Chairman of Nuclear Committee and member of Audit
Committee and Nominating Committee. Director of Enterprise's
subsidiary, PSE&G. Has been an engineering consultant since
July 1994. Was Commissioner, United States Nuclear Regulatory
Commission, from December 1989 to June 1994. Was Associate
Vice President-Research and Professor of Nuclear Engineering [PHOTO OF]
at Pennsylvania State University, from 1985 to 1989.
Forrest J.
Remick
5
<PAGE>
DIRECTORS WHOSE TERMS CONTINUE BEYOND THE 1996 ANNUAL MEETING
AND WHO ARE NOT SUBJECT TO ELECTION THIS YEAR
CLASS I--DIRECTORS WHOSE TERMS EXPIRE IN 1997
Lawrence R. Codey has been a director since 1991. Age 51.
Member of Executive Committee and Finance Committee. Has been
President and Chief Operating Officer of PSE&G since September
1991. Was Senior Vice President-Electric of PSE&G from January
1989 to September 1991. Director of Enterprise's subsidiary,
PSE&G. Director of Sealed Air Corporation, The Trust Company
[PHOTO OF] of New Jersey, United Water Resources Inc. and Blue Cross &
Blue Shield of New Jersey.
Lawrence R.
Codey
Ernest H. Drew has been a director since 1993. Age 59.
Member of Executive Committee, Audit Committee and Finance
Committee. Director of Enterprise's subsidiary, EDHI. Has been
a Member, Board of Management, Hoechst AG, Frankfurt, Germany
(manufactures pharmaceuticals, chemicals, fibers, film,
specialties and advanced materials) since January 1995. Was
Chairman of the Board and Chief Executive Officer of Hoechst
Celanese Corporation, Somerville, New Jersey from May 1994
until January 1995, and President and Chief Executive Officer
[PHOTO OF] from January 1988 until May 1994. Director of Thomas & Betts
Corporation.
Ernest H.
Drew
James C. Pitney has been a director since 1979. Age 69.
Member of Executive Committee, Audit Committee, Finance
Committee and Nominating Committee. Director of Enterprise's
subsidiary, PSE&G. Has been a partner in the law firm of
Pitney, Hardin, Kipp & Szuch, Morristown, New Jersey, since
[PHOTO OF] 1958. Director of Tri-Continental Corporation, sixteen funds
of the Seligman family of funds and Seligman Quality, Inc.
James C.
Pitney
6
<PAGE>
DIRECTORS WHOSE TERMS CONTINUE BEYOND THE 1996 ANNUAL MEETING
AND WHO ARE NOT SUBJECT TO ELECTION THIS YEAR
CLASS II--DIRECTORS WHOSE TERMS EXPIRE IN 1998
E. James Ferland has been a director since 1986, and
Chairman of the Board, President and Chief Executive Officer
of Enterprise since July 1986, Chairman of the Board and Chief
Executive Officer of PSE&G since September 1991, and Chairman
of the Board and Chief Executive Officer of EDHI since June
1989. Age 54. Chairman of Executive Committee. President of
PSE&G from July 1986 to September 1991. Director of
Enterprise's subsidiaries PSE&G and EDHI and EDHI's principal
subsidiaries. Director of Foster Wheeler Corporation and The [PHOTO OF]
Hartford Steam Boiler Inspection and Insurance Company.
E. James
Ferland
Irwin Lerner has been a director since 1981. Age 65.
Chairman of Organization and Compensation Committee and member
of Audit Committee, Finance Committee and Nuclear Committee.
Director of Enterprise's subsidiary, PSE&G. Was Chairman,
Board of Directors and Executive Committee from January 1993
to September 1993 and President and Chief Executive Officer
from 1980 to December 1992 of Hoffmann-La Roche Inc., Nutley,
New Jersey (prescription pharmaceuticals, vitamins and fine
chemicals, and diagnostic products and services). Director of [PHOTO OF]
Humana Inc., Sequana Therapeutics, Inc. and Medarex Inc.
Irwin Lerner
Marilyn M. Pfaltz has been a director since 1980. Age 63.
Chairman of Audit Committee and member of Nominating Committee
and Organization and Compensation Committee. Director of
Enterprise's subsidiary, EDHI. Has been a partner of P and R
Associates, Summit, New Jersey (communication specialists), [PHOTO OF]
since 1968. Trustee of New Jersey Automobile Club (AAA).
Marilyn M.
Pfaltz
Richard J. Swift has been a director since 1994. Age 51.
Member of Finance Committee, Nominating Committee and Nuclear
Committee. Director of Enterprise's subsidiary, EDHI. Has been
Chairman of the Board, President and Chief Executive Officer
of Foster Wheeler Corporation, Clinton, New Jersey (provides
design, engineering, construction, manufacturing, management,
plant operations and environmental services) since May 1994.
Was President and Chief Operating Officer of Foster Wheeler
Corporation from December 1992 to May 1994, Executive Vice
President from April 1992 to December 1992 and Chief Executive
Officer and Group Executive of Power Systems Group of Foster
Wheeler Corporation from September 1989 to April 1992.
Director of Foster Wheeler Corporation and Ingersoll-Rand [PHOTO OF]
Company.
Richard J.
Swift
7
<PAGE>
SECURITY OWNERSHIP OF DIRECTORS AND MANAGEMENT
The following table sets forth, as of February 26, 1996, beneficial
ownership of Enterprise Common Stock, including options, by the directors and
executive officers named in the table appearing under Executive Compensation.
None of these amounts exceeds 1% of the Common Stock outstanding.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME OF BENEFICIAL OWNERSHIP
---- -----------------------
<S> <C>
Lawrence R. Codey................................ 21,611(/1/)
Ernest H. Drew................................... 2,347
T. J. Dermot Dunphy.............................. 35,741
Leon R. Eliason.................................. 8,600(/2/)
E. James Ferland................................. 63,479(/3/)
Raymond V. Gilmartin............................. 2,347
Irwin Lerner..................................... 8,071
Robert C. Murray................................. 13,752(/4/)
Marilyn M. Pfaltz................................ 5,644
Forrest J. Remick................................ 676
James C. Pitney.................................. 8,864
Richard J. Swift................................. 1,507
Paul H. Way...................................... 21,015(/5/)
Josh S. Weston................................... 7,393
All directors and executive officers as a group
(18)............................................ 146,528(/6/)
</TABLE>
- -------------------------------------------------------------------------------
(1) Includes options to purchase 9,000 additional shares, 700 of which are
currently exercisable.
(2) Includes options to purchase 6,800 additional shares, none of which are
currently exercisable.
(3) Includes the equivalent of 9,432 shares held under Thrift and Tax-Deferred
Savings Plan. Includes options to purchase 17,700 additional shares, none
of which are currently exercisable.
(4) Includes the equivalent of 752 shares held under Thrift and Tax-Deferred
Savings Plan. Includes options to purchase 5,800 additional shares, none
of which are currently exercisable.
(5) Includes the equivalent of 1,283 shares held under Thrift and Tax-Deferred
Savings Plan. Includes options to purchase 10,500 additional shares, 3,100
of which are currently exercisable.
(6) Includes the equivalent of 12,132 shares held under Thrift and Tax-
Deferred Savings Plan. Includes options to purchase 68,400 additional
shares, 8,000 of which are currently exercisable.
8
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth compensation paid or awarded to the Chief
Executive Officer (CEO) and the four most highly compensated executive
officers of Enterprise as of December 31, 1995 for all services rendered to
Enterprise and its subsidiaries and affiliates during each year indicated.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-----------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------- -------- --------
BONUS/ANNUAL LTIP ALL OTHER
SALARY INCENTIVE OPTIONS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) AWARD($)(/1/) (#)(/2/) ($)(/3/) ($)(/4/)
- --------------------------- ---- ------- ------------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
E. James Ferland......... 1995 682,377 (/5/) 5,800 246,288 8,681
Chairman of the Board,
President and 1994 652,492 251,383 5,400 127,140 5,628
CEO of Enterprise 1993 622,606 265,316 5,800 28,072 7,678
Lawrence R. Codey........ 1995 418,392 (/5/) 2,800 118,746 5,756
President and Chief
Operating Officer 1994 398,468 129,276 2,500 48,900 5,351
of PSE&G 1993 378,545 109,585 2,800 9,570 6,981
Paul H. Way.............. 1995 328,829 (/5/) 2,500 70,368 4,478
President and Chief
Operating Officer 1994 308,813 110,285 2,300 39,120 4,359
of EDHI 1993 280,691 89,603 2,500 0 6,468
Leon R. Eliason.......... 1995 323,755 165,000(/5/)(/6/) 5,500 26,388 3,242
President--Nuclear
Business Unit and 1994 74,713 0 600 0 0
Chief Nuclear Officer of
PSE&G(/7/) 1993 0 0 0 0 0
Robert C. Murray......... 1995 318,775 25,000(/5/)(/8/) 2,000 70,368 5,169
Vice President and Chief
Financial 1994 303,832 152,621(/8/) 1,800 26,895 4,944
Officer of Enterprise 1993 271,697 154,032(/8/) 2,000 3,190 7,264
</TABLE>
- --------
(1) Amount awarded in given year was earned under Management Incentive
Compensation Plan (MICP) and determined in following year with respect to
the given year based on individual performance and financial and operating
performance of Enterprise and PSE&G, including comparison to other
companies. Award is accounted for as market-priced phantom stock with
dividend reinvestment at 95% of market price, with payment made over three
years beginning in second year following grant.
(2) Granted under Long-Term Incentive Plan (LTIP) in tandem with equal number
of performance units and dividend equivalents which may provide cash
payments, dependent upon future financial performance of Enterprise in
comparison to other companies and dividend payments by Enterprise, to
assist officers in exercising options granted. The grant is made at the
beginning of a three-year performance period and cash payment of the value
of such performance units and dividend equivalents is made following such
period in proportion to the options, if any, exercised at such time.
(3) Amount paid in proportion to options exercised, if any, based on value of
previously granted performance units and dividend equivalents, each as
measured during three-year period ending the year prior to the year in
which payment is made.
(4) Includes employer contribution to Thrift and Tax-Deferred Savings Plan and
value of 5% discount on phantom stock dividend reinvestment under MICP:
<TABLE>
<CAPTION>
FERLAND CODEY WAY ELIASON MURRAY
------------ ------------ ----------- ----------- -----------
THRIFT MICP THRIFT MICP THRIFT MICP THRIFT MICP THRIFT MICP
------ ----- ------ ----- ------ ---- ------ ---- ------ ----
($) ($) ($) ($) ($) ($) ($) ($) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995.......... 3,752 2,383 4,502 1,254 3,750 728 1,795 0 4,502 667
1994.......... 3,751 1,877 4,197 1,154 3,753 606 0 0 4,504 440
1993.......... 5,900 1,778 5,896 1,085 5,899 569 0 0 7,078 186
</TABLE>
9
<PAGE>
In addition, for Mr. Ferland and Mr. Eliason, 1995 amounts include $2,546
and $1,447, respectively, representing interest on compensation deferred
under PSE&G's Deferred Compensation Plan in excess of 120% of the
applicable federal long-term rate as prescribed under Section 1274(d) of
the Internal Revenue Code. Under PSE&G's Deferred Compensation Plan,
interest is paid at prime rate plus 1/2%, adjusted quarterly.
(5) The 1995 MICP award amount has not yet been determined. The target award
is 40% of salary for Mr. Ferland, 30% for Messrs. Codey, Eliason and Way
and 25% for Mr. Murray. The target award is adjusted as described in the
Organization and Compensation Committee Report on Executive Compensation.
(6) Amount paid pursuant to Mr. Eliason's employment agreement.
(7) Mr. Eliason commenced employment September 26, 1994.
(8) 1995 amount paid pursuant to Mr. Murray's employment agreement. 1994 and
1993 amounts include $50,000 and $75,000, respectively, paid pursuant to
Mr. Murray's employment agreement.
OPTION GRANTS IN LAST FISCAL YEAR (1995)
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------
POTENTIAL REALIZABLE
NUMBER VALUE AT ASSUMED ANNUAL
OF % OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE OR TERM(2)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -------------------------
NAME GRANTED(1) FISCAL YEAR ($/SH) DATE 0%($) 5%($) 10%($)
---- ---------- ------------ ----------- ---------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
E. James Ferland........ 5,800 16.6 26.625 1/04/05 0 97,117 246,114
Lawrence R. Codey....... 2,800 8.0 26.625 1/04/05 0 46,884 118,874
Paul H. Way............. 2,500 7.1 26.625 1/04/05 0 41,861 106,083
Leon R. Eliason......... 2,500 26.625 1/04/05 0 41,861 106,083
1,800 15.7 31.375 1/04/05 0 35,517 90,007
1,200 30.500 1/04/05 0 23,018 58,331
Robert C. Murray........ 2,000 5.7 26.625 1/04/05 0 33,489 84,867
</TABLE>
- --------
(1) Granted under LTIP in tandem with equal number of performance units and
dividend equivalents which may provide cash payments, dependent on future
financial performance of Enterprise in comparison to other companies and
dividend payments by Enterprise, to assist individuals in exercising
options, with exercisability commencing January 1, 1998, except with
respect to Mr. Eliason, for whom exercisabilty commences January 1, 1996,
1997 and 1998, respectively, for each of his three grants. Cash payment is
made, based on the value, if any, of performance units awarded and
dividend equivalents accrued, if any, as measured during the three-year
period ending the year prior to the year in which payment, if any, is
made, only if the specified performance level is achieved, dividend
equivalents have accrued and options are exercised.
(2) All options reported have a ten-year term, as noted. Amounts shown
represent hypothetical future values at such term based upon hypothetical
price appreciation of Enterprise Common Stock and may not necessarily be
realized. Actual values which may be realized, if any, upon any exercise
of such options, will be based on the market price of Enterprise Common
Stock at the time of any such exercise and thus are dependent upon future
performance of Enterprise Common Stock.
10
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR (1995) AND FISCAL YEAR-END
OPTION VALUES (12/31/95)
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FY-END (#)(1) AT FY-END($)(3)
ACQUIRED VALUE ------------------------- -------------------------
ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (#)(1) ($)(2) (#) (#) ($) ($)
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
E. James Ferland........ 5,600 0 0 17,000 0 23,925
Lawrence R. Codey....... 2,700 0 700 8,100 4,463 11,550
Paul H. Way............. 1,600 0 3,100 7,300 12,063 10,225
Leon R. Eliason......... 600 72 0 5,500 0 10,150
Robert C. Murray........ 1,600 192 0 5,800 0 8,250
</TABLE>
- --------
(1) Does not reflect any options granted and/or exercised after year-end
(12/31/95). The net effect of any such grants and exercises is reflected
in the table appearing under Security Ownership of Directors and
Management.
(2) Represents difference between exercise price and market price of
Enterprise Common Stock on date of exercise.
(3) Represents difference between market price of Enterprise Common Stock and
the respective exercise prices of the options at fiscal year-end
(12/31/95). Such amounts may not necessarily be realized. Actual values
which may be realized, if any, upon any exercise of such options will be
based on the market price of Enterprise Common Stock at the time of any
such exercise and thus are dependent upon future performance of Enterprise
Common Stock.
EMPLOYMENT CONTRACTS AND ARRANGEMENTS
Employment agreements were entered into with Messrs. Ferland, Way, Eliason
and Murray at the time of their employment. For Messrs. Ferland and Way, the
remaining applicable provisions of these agreements provide for additional
credited service for pension purposes in the amount of 22 years and 15 years,
respectively. The principal remaining applicable terms of the agreement with
Mr. Eliason provide for payment of severance in the amount of one year's
salary, if discharged without cause during his first five years of employment,
which began in September 1994, for lump sum cash payments of $100,000 in 1996,
$65,000 in 1997 and $35,000 in 1998 to align Mr. Eliason with MICP payments
for other executive officers, and additional years of credited service for
pension purposes for allied work experience of 19 years after completion of
three years of service, and up to 29 years after completion of ten years of
service. The principal remaining applicable terms of the agreement with Mr.
Murray provide for payment of severance in the amount of one year's salary, if
discharged without cause during his first five years of employment, which
began in January 1992, and additional years of credited service for pension
purposes for allied work experience of five years after completion of five
years of service, and up to fifteen years after completion of ten years of
service.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1995, each of the following individuals served as a member of the
Organization and Compensation Committee: Josh S. Weston, Chairman, T. J.
Dermot Dunphy, Raymond V. Gilmartin, Irwin Lerner, Marilyn M. Pfaltz and James
C. Pitney. During 1995, no member of the Organization and Compensation
Committee was an officer or employee or a former officer or employee of the
Enterprise group of companies. During 1995, Mr. Codey served as a director of
Sealed Air Corporation, the President and Chief Executive Officer of which,
T. J. Dermot Dunphy, served as a director and member of the Organization and
Compensation Committee of Enterprise during 1995. James C. Pitney, a member of
the Organization and Compensation Committee during 1995, is a partner in the
law firm of Pitney, Hardin, Kipp & Szuch, which rendered legal services to the
Enterprise group of companies during 1995 and is expected to do so in 1996.
11
<PAGE>
COMPENSATION OF DIRECTORS AND CERTAIN BUSINESS RELATIONSHIPS
A director who is not an officer of Enterprise or its subsidiaries and
affiliates is paid an annual retainer of $22,000 and a fee of $1,200 for
attendance at any Board or committee meeting, inspection trip, conference or
other similar activity relating to Enterprise, PSE&G or EDHI. Fifty percent of
the annual retainer is paid in Enterprise Common Stock. No additional retainer
is paid for service as a director of PSE&G or EDHI.
Enterprise also maintains a Stock Plan for Outside Directors pursuant to
which directors who are not employees of Enterprise or its subsidiaries
receive 300 shares of restricted stock for each year of service as a director.
Such shares held by each non-employee director are included in the table above
under the heading Security Ownership of Directors and Management. Prior to
1996, Enterprise had maintained a retirement plan for non-employee directors
which provided an annual benefit for life equal to the annual Board retainer
in effect at the time the director's service terminated if the director
retired from the Board after 10 years of service. Participation of all current
directors under that plan was terminated December 31, 1995. As of January 1,
1996, current non-employee directors with ten years or more of service
received an award of shares of restricted stock equal to the present value of
the retirement benefit under this prior retirement plan, while those with less
than ten years of service received an award of 300 shares per year of service.
The number of shares awarded were as follows: Dr. Drew: 900; Mr. Dunphy:
3,283; Mr. Gilmartin: 900; Mr. Lerner: 3,768; Ms. Pfaltz: 3,055; Mr. Pitney:
5,467; Dr. Remick: 300; Mr. Swift: 300; and Mr. Weston: 4,401. No current
director remains eligible to receive a benefit under the prior retirement
plan.
The restrictions on the stock granted under the Stock Plan for Outside
Directors provide that the shares are subject to forfeiture if the director
leaves service at any time prior to the Annual Meeting of Stockholders
following his or her 70th birthday. This restriction would be deemed to have
been satisfied if the director's service were terminated if Enterprise were to
merge with another corporation and not be the surviving corporation or if the
director were to die in office. Enterprise also has the ability to waive these
restrictions for good cause shown. Restricted stock may not be sold or
otherwise transferred prior to the lapse of the restrictions. Dividends on
shares held subject to restrictions are paid directly to the director, and the
director has the right to vote the shares.
COMPENSATION PURSUANT TO PENSION PLANS
PENSION PLAN TABLE
<TABLE>
<CAPTION>
AVERAGE LENGTH OF SERVICE
FINAL ----------------------------------------------------------------------
COMPENSATION 30 YEARS 35 YEARS 40 YEARS 45 YEARS
------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
$ 300,000 $180,000 $195,000 $210,000 $225,000
400,000 240,000 260,000 280,000 300,000
500,000 300,000 325,000 350,000 375,000
600,000 360,000 390,000 420,000 450,000
700,000 420,000 455,000 490,000 525,000
800,000 480,000 520,000 560,000 600,000
900,000 540,000 585,000 630,000 675,000
1,000,000 600,000 650,000 700,000 750,000
</TABLE>
The above table illustrates annual retirement benefits expressed in terms of
single life annuities based on the average final compensation and service
shown and retirement at age 65. A person's annual retirement benefit is based
upon a percentage that is equal to years of credited service plus 30, but not
more than 75%, times average final compensation at the earlier of retirement,
attainment of age 65 or death. These amounts are reduced by Social Security
benefits and certain retirement benefits from other employers. Pensions in the
form of joint and survivor annuities are also available.
Average final compensation, for purposes of retirement benefits of executive
officers, is generally equivalent to the average of the aggregate of the
salary and bonus amounts reported in the Summary Compensation Table above
under "Annual Compensation" for the five years preceding retirement, not to
exceed 120% of the average annual salary for such five year period. Messrs.
Ferland, Codey, Way, Eliason and Murray will have accrued approximately 48,
41, 34, 44 and 39 years of credited service, respectively, as of age 65.
12
<PAGE>
ORGANIZATION AND COMPENSATION COMMITTEE
REPORT ON EXECUTIVE COMPENSATION
The compensation program for executive officers of Enterprise, PSE&G and
EDHI is administered by the Organization and Compensation Committee of the
Board of Directors. During 1995, the Committee consisted solely of non-
employee directors, each of whom is named below. Effective February 20, 1996,
following the adoption of this report, the Committee membership was adjusted
as part of a general rotation of assignments to the various committees of the
Board. Irwin Lerner became Chairman, Josh S. Weston remained as a member and
James C. Pitney left the Committee. Policies and plans developed by the
Committee are approved by the full Board of Directors. Administration of the
plans is the responsibility of the Committee.
The Committee's philosophy on executive compensation is to link compensation
to the value and level of performance of the executive. To achieve this
linkage the Committee has developed and administers several pay delivery
systems designed to focus executive efforts on improving corporate
performance. These systems include base salary, an annual incentive plan and a
long-term incentive plan. Also included as compensation are a deferred
compensation plan, company contributions to a thrift plan and an employee
stock purchase plan.
Base salary levels are reviewed annually using compensation data compiled by
outside compensation experts for similar positions and comparable companies.
The utilities surveyed include some of, but are not limited to, those included
in the Dow Jones Utilities Index. Most of the general industry companies
surveyed are included in the S&P 500 Composite Stock Price Index. Each of
these indices are shown in the Performance Graph below. For PSE&G positions,
market data is reviewed for large electric and gas utilities, as well for
general industry, while for EDHI positions, general industry data is taken
into consideration. Individual performance of the executive with respect to
corporate performance criteria is determined and taken into account when
setting salaries against the competitive market data. Such corporate
performance criteria include attainment of business unit plans and financial
targets as well as individual measures for each executive officer related to
such person's area of responsibility. In addition, factors such as leadership
ability, managerial skills and other personal aptitudes and attributes are
considered. Base salaries for satisfactory performance are targeted at the
median of the competitive market.
For fiscal year 1995, the base salary of E. James Ferland, Chairman of the
Board, President and Chief Executive Officer, based on overall performance,
was set at a rate which was approximately the median of comparable size
utilities and significantly below that of general industry. Since the
incentive compensation plans discussed below are based in part upon a
percentage of salary, these elements of Mr. Ferland's compensation may be
affected by increases in salary. In determining base salary for Mr. Ferland,
individual performance in relation to corporate performance factors such as
achievement of PSE&G and EDHI business plans, financial results, human
resources management, nuclear operations, effectiveness of transition to
competitive environment and civic leadership are utilized.
The Management Incentive Compensation Plans are designed to motivate and
reward executives of PSE&G and EDHI for both achievement of individual goals
and overall company results. For each year, each individual executive officer
has a target incentive award, expressed as a percentage of salary ranging from
16% to 40%, established by the Committee. Each individual target incentive
award is multiplied by two components, one reflecting corporate goal results
and one reflecting individual goal results. The corporate goals for 1995 and
1994 were based upon a comparison of Enterprise's return on capital compared
to the median return on capital of a group of utilities which comprise the Dow
Jones Utilities Index and a comparison of PSE&G's change in customer costs for
electricity and gas compared to a panel of other utilities.
The corporate goal is computed by assigning an award factor of between 0 and
1.5 based upon the comparison of return on capital adjusted by adding or
subtracting a factor ranging from -0.5 to +0.5 to reflect the electric and gas
cost comparison. No award is granted if Enterprise's return on capital falls
below a threshold amount which is one percentage point below the median return
of the comparison group. A return of one
13
<PAGE>
percentage point above the median results in an award factor of 1.5. After
applying the corporate goal factor, the resulting amount is further multiplied
by an individual factor of between 0 and 1.5, based upon the executive's
accomplishment of specific objectives. The criteria utilized with respect to a
significant percentage of such individual specific objectives were the
attainment of certain corporate performance goals. These corporate factors for
1995 and 1994 included for all executive officers, cost control and
organizational transformation. Depending on the executive officer, other
corporate factors were financial integrity, nuclear performance, large
customer retention, employee safety, regulatory strategies, new business
initiatives, customer satisfaction, process improvement, EDHI earnings and
work force diversity.
Annual awards are determined within 120 days of the end of the fiscal year.
Awards for 1995, including Mr. Ferland's, have not yet been determined. Mr.
Ferland's 1994 annual incentive award was determined in 1995 based upon fiscal
year 1994 performance and reflects that (i) Enterprise's 1994 return on
capital ranked above the median of the comparison group, the Dow Jones
Utilities Index, (ii) the combined annual change in customer costs in 1994 was
slightly higher than that of the comparison utilities and (iii) improvements
were made in certain of Enterprise's operating activities. For each of 1995
and 1994, Mr. Ferland's target award was set at 40% of salary and for 1994 his
individual multiplier, reflecting accomplishments of specific objectives, was
set at the average of the individual amounts of the other participants in the
plans. For 1994, the corporate goal factor was 1.245 and Mr. Ferland's
individual goal factor was 1.03. For each of those years, Mr. Ferland's
specific objectives primarily reflected the individual goals of all of the
executive officers of Enterprise, including the various corporate factors
noted above. Mr. Ferland's actual award for 1994 was reduced due to nuclear
operating results.
The Long-Term Incentive Plan is used by Enterprise to motivate and reward
executive officers for accomplishing corporate objectives. The plan is
designed to encourage certain executives of Enterprise and its subsidiaries to
increase their ownership of Enterprise Common Stock. It is also designed to
more closely align the executives' interest with the long-term interests of
Enterprise's shareholders.
The plan's design includes the granting of stock options, performance units
and dividend equivalents in tandem. Cash payment is made, based on the value,
if any, of performance units awarded and dividend equivalents accrued, if any,
as measured during the three-year period ending the year prior to the year in
which payment, if any, is made, only if the specified performance level is
achieved, dividend equivalents have accrued and options are exercised. Grant
levels are determined by the Committee based upon several factors including
the participant's ability to contribute to the overall success of Enterprise
and its subsidiaries and competitive market data. The level of grants and the
value of the performance units are reviewed annually by the Committee. The
Committee does not consider the current level of options held by executive
officers when determining option grants.
In 1995, the total value of the tandem grant of options, performance units
and dividend equivalents to executive officers as a group was targeted at the
median of the competitive market, but, depending upon individual factors for
particular executives, in some cases was either above or below the median. In
1995, Mr. Ferland was granted 5,800 options based on his ability to influence
long-term results for the benefit of shareholders and market data for
individuals at comparable salary levels. This grant to Mr. Ferland was at
approximately the median of the comparative market data.
In 1995, the performance unit value was determined by Enterprise's total
return to shareholders, over a three-year performance period, as compared to
the companies in the Dow Jones Utilities Index. The higher the ranking of
Enterprise in the group, the greater the value of the performance unit. If
Enterprise ranks in the top three out of fifteen in the group, executives
receive 125% of the target award. If Enterprise ranks as the fourth company,
executives receive 100% of the target award, with decreasing awards from 90%
down to 10%, if Enterprise is the fifth through the thirteenth company,
respectively. No award is given if Enterprise's total return to shareholders
falls below the thirteenth company out of fifteen.
14
<PAGE>
In 1995, Enterprise's long-term performance as measured by the total return
to shareholders over the 1992 through 1994 period placed it as the fourth
company. Therefore, performance unit awards equal to 100% of the target award
were granted.
Section 162(m) of the Internal Revenue Code, which became effective January
1, 1994, generally denies a deduction for Federal income tax purposes for
compensation in excess of $1 million for persons named in the proxy statement,
except for compensation pursuant to stockholder-approved performance-based
plans and for compensation that is paid pursuant to certain contracts entered
into prior to February 1993. Although Mr. Ferland's compensation paid in 1995
for Federal income tax purposes slightly exceeded $1 million, a full deduction
is available, as a portion of such compensation was paid pursuant to contracts
entered into prior to February 1993. The Committee and Enterprise have elected
not to take any action at this time to modify the compensation program in
light of the provisions of Section 162(m) but will continue to evaluate
executive compensation in light of Section 162(m).
Members of the Organization and Compensation Committee:
Josh S. Weston, Chairman
T. J. Dermot Dunphy James C. Pitney
Raymond V. Gilmartin Marilyn M. Pfaltz
Irwin Lerner
15
<PAGE>
PERFORMANCE GRAPH
The graph below shows a comparison of the five-year cumulative total return
assuming $100 invested on December 31, 1990 in Enterprise Common Stock, the
S&P 500 Composite Stock Price Index and the Dow Jones Utilities Index.
[GRAPH APPEARS HERE]
12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95
-------- -------- -------- -------- -------- --------
Enterprise 100 120.20 136.26 150.50 135.05 168.11
S&P 500 100 130.47 140.41 154.56 156.60 214.86
Dow Jones Utilities 100 115.25 119.94 131.49 111.39 147.01
PROPOSAL 2
APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has appointed Deloitte & Touche LLP of Parsippany,
New Jersey, as independent auditors to make the annual audit of the books of
account and supporting records of Enterprise for 1996, subject to the approval
of the stockholders entitled to vote for the election of directors, by a
majority of the votes cast on the question of such approval, provided a quorum
is present, at the Annual Meeting of Stockholders.
Deloitte & Touche LLP has made the annual audit of the books of account
since 1973. Representatives of Deloitte & Touche LLP will be present at the
meeting, and will be afforded an opportunity to make a statement if they so
desire and to respond to appropriate questions.
16
<PAGE>
LEGAL PROCEEDING
As previously disclosed in Enterprise's reports filed with the Securities
and Exchange Commission pursuant to the Securities Exchange Act of 1934, in
October 1995 Enterprise received a letter from a representative of a purported
shareholder demanding that it commence legal action against certain of its
officers and directors with regard to nuclear operations and the current
shutdown of PSE&G's Salem generating station. In January 1996, Enterprise and
all its incumbent directors, except Forrest J. Remick, were served with a
civil complaint in a shareholder derivative action by such purported
shareholder on behalf of Enterprise shareholders. The complaint seeks recovery
of damages for alleged losses purportedly arising out of PSE&G's operation of
the Salem and Hope Creek generating stations, together with certain other
relief, including removal of certain executive officers of PSE&G and
Enterprise and certain changes in the composition of Enterprise's Board of
Directors. The Board of Directors has commenced an investigation of the
matters raised in the October demand letter, and that investigation has not
yet been completed. Following conclusion of the investigation, the Board will
meet to determine what action, if any, should be taken in respect to the
complaint filed in the shareholder derivative action.
DATE FOR SUBMISSION OF STOCKHOLDER PROPOSALS
Stockholder proposals intended for inclusion in next year's Proxy Statement
should be sent to Edward J. Biggins, Jr., Secretary, T4B, Public Service
Enterprise Group Incorporated, 80 Park Plaza, P. O. Box 1171, Newark, New
Jersey 07101-1171, and must be received by October 31, 1996.
MISCELLANEOUS
If any matters not described in this Proxy Statement should come before the
meeting, the persons named in the enclosed form of proxy or their substitutes
will vote proxies given in said form in respect of any such matters in
accordance with their best judgment. At the time this Proxy Statement went to
press, the Board of Directors and the management of Enterprise did not know of
any other matters which might be presented for stockholder action at the
meeting.
The cost of soliciting proxies in the form accompanying this Proxy Statement
will be borne by Enterprise. In addition to solicitation by mail, proxies may
be solicited by directors, officers and employees of Enterprise and its
subsidiaries, in person or by telephone, telegraph or facsimile. Enterprise
has also retained Morrow & Co. to aid in the solicitation of proxies from
brokers, bank nominees, other institutional holders and certain large
individual holders. The anticipated cost of such services is approximately
$10,000, plus reimbursement of expenses.
A summary of the proceedings at the Annual Meeting will be mailed to
stockholders. Enterprise will also provide without charge to each person
solicited, on the written request of any such person, a copy of its Annual
Report on Form 10-K for the year 1995, which has been filed with the
Securities and Exchange Commission. Any such request should be made in writing
to Francis J. Riepl, Treasurer, T6B, Public Service Enterprise Group
Incorporated, 80 Park Plaza, P. O. Box 1171, Newark, New Jersey 07101-1171.
Any such copy of Enterprise's Annual Report on Form 10-K so furnished will not
include any exhibits thereto, but will be accompanied by a list briefly
describing all such exhibits, and Enterprise will furnish any such exhibit
upon request and upon payment of the fee specified therefor.
By order of the Board of Directors,
Edward J. Biggins, Jr.
Secretary
February 28, 1996
17
<PAGE>
APPENDIX
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................... A-1
FINANCIAL STATEMENT RESPONSIBILITY......................................... A-13
INDEPENDENT AUDITORS' REPORT............................................... A-14
CONSOLIDATED STATEMENTS OF INCOME.......................................... A-15
CONSOLIDATED BALANCE SHEETS................................................ A-16
CONSOLIDATED STATEMENTS OF CASH FLOWS...................................... A-18
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS............................... A-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................. A-20
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Significant factors affecting the consolidated financial condition and the
results of operations of Public Service Enterprise Group Incorporated
(Enterprise) and its subsidiaries are described below. This discussion refers
to the Consolidated Financial Statements and related Notes of Enterprise and
should be read in conjunction with such statements and notes.
OVERVIEW
Enterprise has two direct wholly owned subsidiaries, Public Service Electric
and Gas Company (PSE&G) and Enterprise Diversified Holdings Incorporated
(EDHI). Enterprise's principal subsidiary, PSE&G, is an operating public
utility providing electric and gas service in certain areas in the State of
New Jersey.
EDHI is the parent of Enterprise's nonutility businesses: Energy Development
Corporation (EDC), an oil and gas exploration and production and marketing
company; Community Energy Alternatives Incorporated (CEA), an investor in and
developer and operator of cogeneration and independent power production (IPP)
facilities and exempt wholesale generators (EWGs); Public Service Resources
Corporation (PSRC), which has made primarily passive investments; and
Enterprise Group Development Corporation (EGDC), a diversified nonresidential
real estate development and investment business. EDHI also has two finance
subsidiaries: PSEG Capital Corporation (Capital), which provides privately
placed debt financing on the basis of a minimum net worth maintenance
agreement from Enterprise and Enterprise Capital Funding Corporation
(Funding), which provides privately placed debt financing guaranteed by EDHI
but without direct support from Enterprise. Enterprise has been conducting a
controlled exit from the real estate business since 1993 and, in December
1995, announced that it intends to divest EDC.
As of December 31, 1995 and December 31, 1994, PSE&G comprised 85% of
Enterprise assets. For each of the years 1995, 1994 and 1993, PSE&G revenues
were 93% of Enterprise's revenues and PSE&G's earnings available to Enterprise
for such years were 88%, 91% and 96%, respectively, of Enterprise's net
income.
The major factors which will affect Enterprise's future results include
general and regional economic conditions, PSE&G's customer retention and
growth, the ability of PSE&G and EDHI to meet competitive pressures and to
contain costs, the ability to respond to and take advantage of opportunities
arising from increasing competition in the utility business, the adequacy and
timeliness of rate relief, cost recovery and necessary regulatory approvals,
the ability to continue to operate and maintain nuclear programs in accordance
with Nuclear Regulatory Commission (NRC) and New Jersey Board of Public
Utilities (BPU) requirements, the impact of environmental regulations,
continued access to the capital markets and continued favorable regulatory
treatment of consolidated tax benefits. (See Note 2--Rate Matters, Note 10--
Federal Income Taxes and Note 12--Commitments and Contingent Liabilities of
Notes to Consolidated Financial Statements ("Notes").)
COMPETITION
The regulatory structure which has historically embraced the electric and
gas industry is in the process of transition. Legislative and regulatory
initiatives, at both the federal and state levels, are designed to promote
competition and will continue to impose additional pressures on PSE&G's
ability to retain customers. In addition, new technology and interest in self
generation and cogeneration have provided customers with alternative sources
of energy.
Over the last several years, the gas industry has been transformed. Today,
commercial and industrial customers can negotiate their own gas purchases
directly with producers or brokers, while PSE&G is required to provide
intrastate transportation of such purchased gas to the customers' facilities.
Although PSE&G is not providing gas sales service to certain commercial and
industrial customers, to date there has been no negative impact on earnings
since sales service and transportation service tariffs result in the same non-
fuel revenue per
A-1
<PAGE>
therm. Additionally, as a result of this restructuring, PSE&G has been able to
negotiate lower cost gas supplies for those customers who continue to be part
of its bundled rate schedules. A potential significant competitive challenge
could emerge if interstate pipeline companies are permitted to expand their
facilities into PSE&G territory and provide intrastate transportation to
customers. However, this type of expansion would require federal and state
regulatory approvals not currently in existence.
The restructuring of the electric industry is more complex and evolving at a
slower pace than that of the gas industry. Federal legislation, such as the
National Energy Policy Act (EPAct) has eased restrictions on independent power
producers (IPP) in an effort to increase competition in the wholesale electric
generation market. As the barriers to entry in the power production business
have been lowered, the construction of cogeneration facilities and independent
power production facilities has been growing, with the result of creating
lower cost alternatives for large commercial and industrial customers.
Presently, PSE&G is in the process of assessing the potential for individual
arrangements with commercial and industrial customers which have such
competitive alternatives, but PSE&G believes that it does not currently have a
material exposure with respect to such customers.
Further, EPAct authorized the Federal Energy Regulatory Commission (FERC) to
mandate utilities to transport and deliver or "wheel" energy for the supply of
bulk power to wholesale customers. In March 1995, FERC issued a Notice of
Proposed Rulemaking (NOPR) that would require utilities to (1) establish open
access to all wholesale sellers and buyers, (2) offer transmission service
comparable to service they provide themselves and (3) take transmission
service under the same tariffs offered to other buyers and sellers. FERC's
stated position is that it will ensure that utilities have a fair opportunity
to recover prudently incurred investments that could become stranded costs as
a result of the NOPR.
In the wholesale electric market, other competitive pressures, such as
municipalization, may also have an impact on utilities in the evolving
electric power industry. Municipalization involves the acquisition and
operation of existing investor-owned facilities by a municipal utility (MUNI)
through condemnation, purchase or lease or the construction and operation of
duplicate, parallel facilities within a municipal boundary. As a result,
utilities, such as PSE&G, could lose customers (residential, commercial and
industrial) in the municipality that is served by the MUNI, as well as lose
the municipal entity itself as a customer.
EPAct granted the states sole authority to mandate retail wheeling. New
Jersey regulators have been reviewing existing regulations in an effort to
develop a revised regulatory structure that would afford public utilities,
such as PSE&G, increased flexibility to meet the competitive challenges of the
future. Phase I of the New Jersey Energy Master Plan (Phase I), a two-phase
plan to better manage the future energy needs of the State, has been
completed. Phase I called for legislation that would allow New Jersey
utilities to propose, subject to BPU approval, alternatives to rate base/rate
of return pricing, allow for pricing flexibility under certain standards for
customers with competitive options and equalize the impact of tax policies,
such as the New Jersey Gross Receipts and Franchise Tax (NJGRT) currently
assessed on retail energy utility sales, upon all energy producers. On July
20, 1995, Governor Whitman signed into law legislation which provides
utilities the flexibility to propose, subject to BPU approval, alternatives to
existing rate base/rate of return pricing and offer negotiated off-tariff
agreements to customers with competitive options. On June 1, 1995, the BPU
issued its order initiating a formal Phase II proceeding of the Master Plan.
The proceeding will address wholesale and retail competition in New Jersey.
Recoverability of stranded costs is largely dependent on the transition
rules established by regulators, including FERC and the BPU. Stranded costs
that could result as the industry moves to a more competitive environment
include investments in generating facilities, transmission assets, purchase
power agreements where the price being paid under such an agreement exceeds
the market price for electricity and regulatory assets for which recovery is
based solely on continued cost based regulation. At this time, management
cannot predict the level of stranded costs, if any, or the extent to which
regulators will allow recovery of such costs.
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Increased competition and the shift of risks and opportunities between rate
payers and PSE&G resulting from PSE&G's filing of its proposed Alternative
Rate Plan (discussed below) will increase the emphasis upon electric
operational reliability, efficiency and cost. While the incremental cost of
nuclear production is less expensive than PSE&G's other sources of generation,
comparatively high embedded costs for nuclear plants increase the need for
PSE&G to optimize the utilization of its nuclear generating capacity in order
to make its actual generation output cost competitive.
In order to succeed in this increasingly competitive environment, Enterprise
and its subsidiaries have taken the following steps designed to retain
customers, reduce costs, improve operations and strategically position itself
for future operation:
(1) On January 16, 1996, PSE&G filed its proposed alternative rate plan,
the "New Jersey Partners in Power" Plan (Alternative Rate Plan). This
seven-year proposed Alternative Rate Plan allows for a transition to a
competitive energy marketplace while substantially shifting the business
and financial risks and opportunities involved in such transition away from
customers to PSE&G. Some of the key features of the proposal are: (a) an
indexed or price-capped approach to replace the rate base/rate of return
form of regulation including the discontinuance of the electric Levelized
Energy Adjustment Clause (LEAC) and the BPU's Nuclear Performance Standard
(NPS), (b) a productivity gains sharing mechanism with electric and gas
customers, (c) continued recovery of costs associated with activities
mandated by state or federal agencies and (d) a program of rewards and
penalties based on the performance of certain key overall service
indicators, such as the duration of customer power outages compared to a
five year average. For a full discussion of the Alternative Rate Plan, see
Note 2--Rate Matters of Notes.
(2) PSE&G reorganized its senior nuclear leadership team to address
operation and performance issues at PSE&G operated nuclear facilities and
completed a thorough work scope assessment of Salem 1 and Salem 2 in order
to return these units to safe, reliable operation over the long-term.
(3) PSE&G reorganized to reflect the evolution toward stand-alone energy
and energy services businesses designed to compete successfully in the
future. The reorganization "unbundled" the services previously provided by
the electric and gas businesses. The focus is now on areas of business:
Generation, Transmission and Distribution and Customer Services.
(4) Also as part of the corporate reorganization, a new business was
created, Enterprise Ventures & Services Corporation, to pursue products and
services which can be marketed beyond traditional geographic and industry
boundaries. Among these are: natural gas marketing in the wake of
deregulation of that industry, conservation and energy management services
and a product development venture with AT&T Corp. to pilot and eventually
market two-way customer communications systems and services.
(5) PSE&G developed initiatives, including the announced closure of five
older, less efficient generating units, to reduce annual fossil generation
operating and maintenance expenses, as well as to reduce annual fossil
capital expenditures.
(6) PSE&G has established a deleveraging plan to retire more than $1
billion of outstanding debt over the next five years and to fund its
current five-year construction program entirely through internally
generated cash.
(7) PSE&G became the first utility in the Northeast to implement a
service guarantee program. It covers nine key service areas and provides
direct bill credits to customers should PSE&G fail to live up to its
promises.
(8) The Strategic Account Marketing Organization was created within PSE&G
to provide more individualized service to its 200 largest customers.
(9) PSE&G received BPU approval for its proposed Experimental Hourly
Energy Pricing Tariff and the first service agreement thereunder with its
second largest customer. This type of agreement serves as an incentive to
retain customers with other energy alternatives in PSE&G's customer base,
as well as in New Jersey.
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(10) Also in 1995, PSE&G completed the Bergen Repowering Project which
improved the efficiency and environmental effectiveness of the facility.
Fuel costs for the facility will be reduced by approximately $30 million
annually.
(11) CEA pursued business opportunities in certain international markets.
During 1995, CEA closed on three projects and a strategic alliance in China
and South America.
(12) Enterprise announced that EDHI will pursue the divestiture of EDC.
The decision to divest EDC stems from Enterprise's conclusion that
ownership of large oil and natural gas reserves is no longer necessary to
provide efficient energy solutions to customers and that the true market
value of EDC is not reflected in the price of Enterprise Common Stock.
Enterprise and its subsidiaries remain committed to the pursuit of
initiatives to contain costs and retain customers.
ACCOUNTING FOR THE EFFECTS OF REGULATION
Currently, PSE&G accounts for the effects of regulation in accordance with
Statement of Financial Accounting Standards No. 71 "Accounting for the Effects
of Certain Types of Regulation" (SFAS 71). In accordance with the provisions
of SFAS 71, PSE&G defers certain expenses (regulatory assets) on the basis
that they will be recovered from customers as part of the ratemaking process.
PSE&G believes that if its proposed Alternative Rate Plan is approved
essentially as proposed, it would continue to meet the criteria to account for
certain utility revenues and expenses in accordance with SFAS 71. However, if
future events or regulatory changes limit PSE&G's ability to establish prices
to recover its costs, PSE&G might conclude that it no longer meets the
application criteria to defer certain expenses in accordance with SFAS 71. If
PSE&G were to discontinue the application of SFAS 71, the accounting impact
would be an extraordinary, non-cash charge to operations that could be
material to the financial position and results of operations of Enterprise and
PSE&G.
PSE&G has certain regulatory assets resulting from the use of a level of
depreciation expense in the rate making process that is less than the amount
that would be recorded under Generally Accepted Accounting Principles (GAAP)
for non-regulated companies. PSE&G cannot presently quantify what the
financial statement impact may be if depreciation expense were required to be
determined absent regulation, but the impact on the financial position and
results of operations of PSE&G and Enterprise could be material.
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets" (SFAS 121) effective for 1996, establishes
accounting standards for the impairment of long-lived assets. SFAS 121 also
requires that regulatory assets which are no longer probable of recovery
through future revenues be charged to earnings. The adoption of SFAS 121 is
not expected to have a material impact on the financial position or results of
operations of PSE&G and Enterprise.
PSE&G ENERGY AND FUEL ADJUSTMENT CLAUSES
Under the existing regulatory framework, PSE&G has fuel and energy tariff
rate adjustment clauses, the Levelized Gas Adjustment Charge (LGAC) and the
LEAC, which are designed to permit adjustments for changes in electric energy
and gas supply costs and certain other costs as approved by the BPU, when
compared to cost recovery included in base rates. Presently, charges under the
clauses are primarily based on energy and gas supply costs which are normally
projected over twelve-month periods except for large gas commercial and
industrial customers for which commencing January 1, 1996, gas supply costs
are projected monthly. The changes in the clauses do not directly affect
earnings because such costs are adjusted monthly to match amounts recovered
through revenues except for the financing costs of carrying underrecovered
balances and required interest payments on net overrecovered balances. Under
the clauses, if actual costs differ from the costs recovered, the amount of
the underrecovery or overrecovery is deferred. Actual costs otherwise
includable in the LEAC are subject to adjustment by the BPU in accordance with
the NPS. (See Note 2--Rate Matters and Note 12--Commitments and Contingent
Liabilities of Notes.) The Alternative Rate Plan proposes discontinuing
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<PAGE>
LEAC and NPS and would substantially shift the risks and opportunities
involved in managing changes in fuel and replacement power costs from
customers to PSE&G.
ACCOUNTING FOR STOCK COMPENSATION
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-
Based Compensation" (SFAS 123) is effective for fiscal years that begin after
December 15, 1995. SFAS 123 establishes financial accounting and reporting
standards for stock based compensation plans and includes all arrangements by
which employees receive shares of stock or other equity instruments of the
employer or by which the employer incurs liabilities to employees in amounts
based on the price of the employer's stock. The adoption of SFAS 123 is not
expected to have a material impact on the financial position or results of
operations of PSE&G and Enterprise.
CORPORATE POLICY FOR THE USE OF DERIVATIVES
Enterprise and its subsidiaries have established a policy to use derivatives
only for the purpose of managing financial risk and not for speculative
purposes. EDHI currently uses derivatives to manage financial risk for EDC and
PSRC, including its subsidiary United States Energy Partners (USEP). The
derivatives are used to mitigate the impact on earnings of volatile gas prices
for EDC and USEP and volatile security prices for PSRC's investing activities.
For details, see Note 8--Financial Instruments and Risk Management of Notes.
Although PSE&G does not currently use derivatives, if the Alternative Rate
Plan is approved as proposed, PSE&G could find derivatives to be a useful and
appropriate tool in managing the volatility of fuel prices, among other
things.
NUCLEAR OPERATIONS
Operation of the Salem units has continued to present challenges to PSE&G.
The units have experienced equipment failures which, combined with personnel
errors, have precipitated or contributed to plant events or trips which have
led to a number of outages over the lifetime of the units.
Both of the Salem units are currently out of service and their return dates
are subject to completion of testing, analysis, repair activity and NRC
concurrence that they are prepared to restart. Restart of Salem 1, which had
originally been scheduled for the second quarter of 1996, will be delayed for
a substantial period as a result of the ongoing steam generator inspection and
analysis. Salem 2, which is also undergoing steam generator inspection and
analysis is still scheduled to return to service in the third quarter of 1996.
The inability to successfully return these units to continuous, safe operation
could have a material effect on the financial position, results of operation
and net cash flows of Enterprise and PSE&G.
RESULTS OF OPERATIONS
Earnings per share of Enterprise Common Stock were $2.71 in 1995, $2.78 in
1994 and $2.50 in 1993.
In 1995, Enterprise earnings decreased principally due to increased
operating expenses and lower gas sales from PSE&G. These decreases in earnings
were partially offset by improved electric sales, EDC revenues resulting from
the settlement of litigation related to a take or pay sales contract and from
gains realized on sales of properties by EDC.
In 1994, the increase in Enterprise earnings was driven primarily by
increased weather related electric and gas sales. Enterprise earnings also
benefited from higher investment income from PSRC.
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<PAGE>
PSE&G--EARNINGS AVAILABLE TO ENTERPRISE
<TABLE>
<CAPTION>
1995 VS. 1994 1994 VS. 1993
-------------------- -------------------
PER PER
AMOUNT SHARE AMOUNT SHARE
-------- --------- -------- --------
(MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
PSE&G
Revenues (net of fuel costs and
gross receipts taxes)............. $ 38 $ .16 $ 147 $ .60
Other operation expenses........... 10 .04 (77) (.32)
Maintenance expenses............... (4) (.02) (4) (.02)
Depreciation and amortization
expenses.......................... (39) (.16) (41) (.17)
Federal income taxes............... (27) (.11) 14 .06
Interest charges................... (11) (.05) (6) (.02)
Allowance for Funds used During
Construction (AFDC)............... (2) (.01) 11 .05
Preferred Securities Dividend
Requirements...................... (8) (.03) (4) (.02)
Other income and expenses.......... 7 .03 2 .01
-------- --------- -------- --------
Earnings Available to Enterprise... $ (36) $ (.15) $ 42 $ .17
======== ========= ======== ========
</TABLE>
PSE&G--REVENUES
ELECTRIC
Revenues increased $281 million, or 7.5%, in 1995 from 1994; 1994 revenues
increased $44 million, or 1.2%, compared to 1993. The significant components
of these changes follow:
<TABLE>
<CAPTION>
INCREASE OR (DECREASE)
---------------------------
1995 VS. 1994 1994 VS. 1993
------------- -------------
(MILLIONS)
<S> <C> <C>
Kilowatthour sales............................... $ 38 $ 69
Recovery of energy costs......................... 189 (26)
NJGRT............................................ 12 (4)
Other operating revenues......................... 42 5
---- ----
Total Electric Revenues...................... $281 $ 44
==== ====
</TABLE>
GAS
During 1995, revenues decreased $92 million, or 5.2%, from 1994; 1994
revenues increased $184 million, or 11.6%, over 1993. The significant
components of these changes follow:
<TABLE>
<CAPTION>
INCREASE OR (DECREASE)
---------------------------
1995 VS. 1994 1994 VS. 1993
------------- -------------
(MILLIONS)
<S> <C> <C>
Therm sales...................................... $ (35) $ 61
Recovery of fuel costs........................... (78) 121
NJGRT............................................ 19 (12)
Other operating revenues......................... 2 14
----- -----
Total Gas Revenues........................... $ (92) $ 184
===== =====
</TABLE>
During 1995, electric revenues were impacted by higher residential and
commercial sales resulting from a recovering economy, warm summer weather and
a modest increase in customer base. In addition, other electric revenues
increased principally due to higher miscellaneous revenues from increased
capacity sales to unaffiliated utilities and to wholesale customers, service
reconnections, temporary services and revenues from Public Service
Conservation Resources Corporation (PSCRC), PSE&G's energy services
subsidiary. Capacity sales are sales
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<PAGE>
for the reservation of a specified quantity of PSE&G system generating
capacity and must be paid even when the energy is not taken.
In 1995, gas revenues decreased due to the mild winter weather, partially
offset by revenues resulting from the rapidly growing off system sales and
higher gas service contract revenues. Off system sales are sales of excess gas
to brokers and other utilities which are not part of PSE&G's firm customer
base. Earnings on these sales are shared between the firm customer and PSE&G
on an 80/20 split, respectively.
In 1994, electric and gas revenues benefited from weather related sales
which primarily impacted electric commercial sales and all firm gas rate
schedules. Other electric revenues increased principally due to increased
capacity sales to unaffiliated utilities and increased miscellaneous revenues,
partially offset by lower energy sales to the unaffiliated utilities. Other
gas revenues were significantly impacted by a one time $10 million legal
settlement of a gas contract.
PSE&G--EXPENSES
FUEL EXPENSES
As discussed in the PSE&G Energy and Fuel Adjustment Clauses section,
variances in fuel expenses do not directly affect earnings because of the
adjustment clause mechanism. However, if the proposed Alternative Rate Plan is
adopted as filed, future changes in electric fuel and replacement power costs
could impact earnings.
OTHER OPERATION EXPENSES
During 1995, other operation expenses decreased $10 million from 1994
levels. PSE&G had lower nuclear and miscellaneous production expenses. Nuclear
production expenses decreased during 1995 due in part to the extended outage
of Salem Units 1 and 2. PSE&G also secured savings in miscellaneous
expenditures, such as clerical and office supplies in its steam production
area. These savings were partially offset by increased marketing expenditures
for customer related programs initiated in 1995.
During 1994, other operation expenses increased $77 million when compared to
1993 principally due to increased nuclear production expenses which were
higher than 1993 levels when Salem had a refueling outage, increased
transmission and distribution expenses incurred during the bitter 1994 winter
and increased administrative and general expenses primarily due to a rise in
personal and property damage claim expenses. The increase in personal and
property damage claims was directly related to storm damage and other weather
related occurrences.
MAINTENANCE EXPENSES
Maintenance expense increased $4 million in 1995 in comparison to 1994 due
to the extended outage at Salem Units 1 and 2, partially offset by decreased
expenses for electric and gas distribution facilities. Maintenance expense for
1994 was $4 million higher than in 1993 primarily due to the 1994 Hope Creek
refueling outage and increased expenses for gas distribution facilities which
resulted from the extremely cold weather during January and February 1994.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and Amortization expenses increased $39 million in 1995 when
compared to 1994 and $41 million in 1994 when compared to 1993. The increases
in 1995 and 1994 are attributable to increased depreciation expenses directly
related to increases in plant in service.
FEDERAL INCOME TAXES
In 1995, Federal Income Taxes increased $27 million from 1994 and 1994
Federal Income Taxes decreased $14 million from 1993. The 1995 taxes were
higher than 1994 principally due to the receipt of a non-taxable
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<PAGE>
insurance benefit in 1994 and to higher pre-tax operating income. Federal
Income Taxes decreased in 1994 due to the receipt of a non-taxable insurance
benefit, partially offset by higher pre-tax operating income.
INTEREST CHARGES
In 1995, interest charges were $11 million higher than in 1994 and, in 1994,
interest charges were $6 million higher than in 1993. The primary reason for
the 1995 increase was higher interest charges on miscellaneous liabilities,
while the driving force behind the 1994 increase was a higher average daily
balance of short-term debt outstanding at higher interest rates.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION
In 1995, there was a $2 million decrease in AFDC income principally due to a
decrease in construction expenditures. In 1994, AFDC income was $11 million
higher than the 1993 level due to increased construction resulting from the
repowering of the Bergen Generating Station.
PREFERRED SECURITIES
Dividend requirements on preferred securities increased $8 million in 1995
compared to 1994 and $4 million in 1994 compared to 1993. The increases are
the result of the issuance of higher rate Monthly Income Preferred Securities
used to redeem certain issues of PSE&G Preferred Stock.
EDHI--NET INCOME
<TABLE>
<CAPTION>
1995 VS. 1994 1994 VS. 1993
------------------- -------------------
PER PER
AMOUNT SHARE AMOUNT SHARE
-------- -------- -------- --------
(MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
PSRC................................ -- -- 14 .06
CEA................................. (4) (.02) 2 .01
EDC................................. 23 .10 (34) (.14)
EGDC................................ 1 -- 54 .22
------- -------- ------- --------
Total............................. $ 20 $ .08 $ 36 $ .15
======= ======== ======= ========
</TABLE>
The net income of EDHI was $80 million in 1995, a $20 million increase over
1994. EDC's income increased $23 million primarily due to the realization of a
settlement related to a take-or-pay sales contract. EDC's gains from property
sales, higher oil prices and volumes and reduced depreciation, depletion and
amortization (DD&A) expenses also contributed to higher earnings but were
substantially offset by lower gas prices and volumes. CEA's earnings decreased
$4 million compared to 1994 due to higher interest and development expenses.
The net income of EDHI was $60 million in 1994. Excluding the impact of an
impairment of assets of $51 million, after tax, by EGDC in 1993, EDHI's
earnings in 1994 decreased $15 million in comparison to 1993. Increased income
from PSRC (higher investment income, lower income taxes compared to 1993 which
included the effects of a Federal income tax increase and lower interest
charges) and CEA (higher income from operating plants) was offset by lower EDC
earnings (lower gas volumes and prices and higher exploration and development
expenditures due to increased drilling activities).
DIVIDENDS
The ability of Enterprise to declare and pay dividends is contingent upon
its receipt of dividend payments from its subsidiaries. PSE&G has made regular
payments to Enterprise in the form of dividends on outstanding shares of its
common stock since Enterprise was formed in 1986. In addition, commencing in
1992, EDHI has also made payments to Enterprise in the form of dividends on
its outstanding common stock. Since 1992,
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Enterprise has maintained a constant rate of common stock dividends.
Management believes that gradually reducing the common stock dividend payout
ratio is a prudent policy.
Dividends paid to holders of Enterprise Common Stock increased $.5 million
during 1995 compared to 1994 and increased $6 million during 1994 compared to
1993. Such increases were due to the issuance of additional shares of
Enterprise Common Stock.
Dividends paid to holders of PSE&G's Preferred Stock decreased $6.7 million
during 1995 compared to 1994 and increased $2 million during 1994 compared to
1993. The 1995 decrease in such dividends was due to the redemption of certain
series of Preferred Stock. The increase in 1994 was due to the issuance of
additional shares of Preferred Stock. (See Liquidity and Capital Resources.)
Dividends paid to holders of Monthly Income Preferred Securities of Public
Service Electric and Gas Capital, L.P. (Partnership), a limited partnership of
which PSE&G is the general partner, increased $14 million during 1995 compared
to 1994. The Partnership's Monthly Income Preferred Securities were first
issued in 1994 and were not outstanding for the entire year. The increase in
1995 was due to the issuance of additional securities coupled with the fact
that Monthly Income Preferred Securities were outstanding for the entire year.
(See Note 4--Schedule of Consolidated Capital Stock and Other Securities of
Notes.)
LIQUIDITY AND CAPITAL RESOURCES
Enterprise's liquidity is affected by maturing debt, investment and
acquisition activities, the capital requirements of PSE&G's and EDHI's
construction and investment programs, permitted regulatory recovery of
expenses and collection of revenues. Capital resources available to meet such
requirements depend upon general and regional economic conditions, PSE&G's
customer retention and growth, the ability of PSE&G and EDHI to meet
competitive pressures and to contain costs, the adequacy and timeliness of
rate relief, cost recovery and necessary regulatory approvals, the ability to
continue to operate and maintain nuclear programs in accordance with NRC and
BPU requirements, the impact of environmental regulations, continued access to
the capital markets and continued favorable regulatory treatment of
consolidated tax benefits. (For additional information see the discussion of
Competition above and Note 12, Commitments and Contingencies of the Notes.)
PSE&G
PSE&G had utility plant additions of $686 million, $887 million and $890
million, for 1995, 1994 and 1993, respectively, including AFDC of $36 million,
$38 million and $27 million, respectively. Construction expenditures were
related to improvements in PSE&G's existing power plants, transmission and
distribution system, gas system and common facilities. PSE&G also expended $30
million, $34 million and $48 million for the cost of plant removal (net of
salvage) in 1995, 1994 and 1993, respectively. Construction expenditures from
1996 through 2000 are expected to aggregate $2.8 billion, including AFDC.
Forecasted construction expenditures are related to improvements in PSE&G's
existing power plants (including nuclear fuel), transmission and distribution
system, gas system and common facilities. (See Construction, Investments and
Other Capital Requirements Forecast below.)
PSE&G expects that it will be able to internally generate all of its capital
requirements, including construction expenditures, over the next five years
and reduce its debt outstanding by approximately $1 billion, assuming adequate
and timely recovery of costs, as to which no assurances can be given. (See
Note 2--Rate Matters and Note 12--Commitments and Contingent Liabilities of
Notes.)
EDHI
During the next five years, a majority of EDHI's capital requirements are
expected to be provided from operational cash flows. (See Construction,
Investments and Other Capital Requirements Forecast below.) CEA is expected to
be the primary vehicle for EDHI's business growth. A significant portion of
CEA's growth is expected to occur in the international arena due to the
current and anticipated growth in electric capacity required
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<PAGE>
in certain regions of the world. EDC will continue to pursue a program to grow
its reserve base through a combination of strategic acquisitions, high
potential exploration activities and exploitation of its acquired properties
and new discoveries. EDC's worldwide 1995 production totaled 99 BCFE and, at
year end, EDC had proved reserves of 920 BCFE. EDC expended approximately $153
million, $188 million and $109 million in 1995, 1994 and 1993, respectively,
to acquire, discover or develop domestic and international reserves. Of these
expenditures, $132 million, $160 million and $92 million in 1995, 1994 and
1993, respectively, were capitalized. These amounts included capitalized
interest of $4 million, $4 million and $3 million, respectively. For
discussion regarding the potential divestiture of EDC, see Competition.
PSRC will continue to limit new investments to those related to the energy
businesses, while EGDC will exit the real estate business in a prudent manner.
Over the next several years, EDHI and its subsidiaries will also be required
to refinance a portion of their maturing debt in order to meet their capital
requirements. In addition, any divestiture of EDC will require the
renegotiation of existing loan agreements of Funding. Any inability to extend
or replace maturing debt and or existing agreements at current levels and
interest rates may affect future earnings and result in an increase in EDHI's
cost of capital.
PSRC is a limited partner in various limited partnerships and is committed
to make investments from time to time, upon the request of the respective
general partners. At December 31, 1995, $58 million remained as PSRC's
unfunded commitment subject to call.
EDHI and each of its subsidiaries are subject to restrictive business and
financial covenants contained in existing debt agreements and are required to
not exceed various debt to equity ratios which vary from 3:1 to 1.75:1. EDHI
is also required to maintain a twelve-months earnings before interest and
taxes to interest (EBIT) coverage ratio of at least 1.35:1. As of December 31,
1995 and 1994, EDHI had a consolidated debt to equity ratio of 1.15:1 and, for
the years ended December 31, 1995, 1994 and 1993, EBIT coverage ratios, as
defined to exclude the effects of EGDC, of 2.47:1, 1.94:1 and 2.13:1,
respectively. Compliance with applicable financial covenants will depend upon
future financial position and levels of earnings, as to which no assurance can
be given. (See Note 6--Schedule of Consolidated Debt and Note 16--Property
Impairment of Enterprise Group Development Corporation of Notes.)
LONG-TERM INVESTMENTS AND REAL ESTATE
Long-term investments and real estate increased $82 million in 1995 and
decreased $58 million and $67 million in 1994 and 1993, respectively. The
increase in 1995 was primarily due to an increase in PSCRC's long-term
investments of $49 million, PSRC's increase in investments in partnerships and
leases of $52 million and CEA's increase in partnership investments of $27
million, partially offset by EGDC's property sales of $53 million. The
decrease in 1994 was primarily due to a $73 million net decrease in PSE&G's
investment in an insurance contract, partially offset by an increase in long-
term investments of $23 million. The decrease in 1993 was due primarily to
EDHI's decrease in long-term investments of $63 million. (For more details,
see Note 7--long-term investments and Note 11--Leasing Activities--As Lessor
of Notes.)
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<PAGE>
CONSTRUCTION, INVESTMENTS AND OTHER CAPITAL REQUIREMENTS FORECAST
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000 TOTAL
------ ------ ------ ---- ------ ------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
PSE&G (including AFDC)
Electric (including Nuclear)....... $ 464 $ 408 $ 383 $356 $ 342 $1,953
Gas................................ 128 117 110 106 102 563
Miscellaneous Corporate............ 70 56 50 41 35 252
------ ------ ------ ---- ------ ------
Total PSE&G Construction
Requirements.................... 662 581 543 503 479 2,768
------ ------ ------ ---- ------ ------
EDHI................................. 272 148 229 206 225 1,080
------ ------ ------ ---- ------ ------
Mandatory Retirement of Securities:
PSE&G.............................. 345 400 118 100 400 1,363
EDHI............................... 91 125 195 200 78 689
------ ------ ------ ---- ------ ------
436 525 313 300 478 2,052
------ ------ ------ ---- ------ ------
Working Capital and Other--net....... 16 (26) 70 (21) 59 98
------ ------ ------ ---- ------ ------
Total Capital Requirements....... $1,386 $1,228 $1,155 $988 $1,241 $5,998
====== ====== ====== ==== ====== ======
</TABLE>
While the above forecast includes capital costs to comply with revised
Federal Clean Air Act (CAA) requirements through 2000, it does not include
additional requirements being developed under the CAA by Federal and State
agencies. Such additional costs cannot be reasonably estimated at this time.
PSE&G believes that such CAA costs would be recoverable from electric
customers. In accordance with the proposed Alternative Rate Plan, separate
mechanisms would be established to ensure continued recovery of costs
associated with activities mandated or approved by state or federal agencies
or otherwise out of PSE&G's control.
INTERNAL GENERATION OF CASH FROM OPERATIONS
Enterprise's cash from operations is generated primarily from the operating
activities of PSE&G.
Enterprise's cash provided by operations for 1995 increased $261 million to
$1.493 billion from 1994. This increase was primarily due to the increase in
PSE&G's revenues (partially offset by an increase in accounts receivable and
unbilled revenues), an increase in the recovery of electric energy and gas
costs through PSE&G's LEAC and LGAC and a decrease in PSE&G's gross receipts
taxes. For additional information see Results of Operations.
Enterprise's cash provided by operations for 1994 increased $200 million to
$1.232 billion from 1993. This increase was primarily due to the increase in
PSE&G's revenues (plus a decrease in accounts receivable and unbilled
revenues) and an increase in the recovery of electric energy and gas costs
through PSE&G's LEAC and LGAC. For additional information see Results of
Operations.
EXTERNAL FINANCINGS--PSE&G
In 1995, PSE&G issued $156 million of its First and Refunding Mortgage Bonds
(Bonds)/Medium-Term Notes (MTNs) for the purpose of redeeming $56 million of
its higher cost Bonds and to pay a portion of its maturing bonds.
In 1995, Partnership issued $60 million of Monthly Income Preferred
Securities, the proceeds of which were used to redeem $60 million of PSE&G's
Preferred Stock.
The BPU has authorized PSE&G to issue approximately $4.375 billion aggregate
amount of additional Bonds/MTNs/Preferred Stock/Monthly Income Preferred
Securities through 1997 for refunding purposes. Under its Mortgage, PSE&G may
issue new Bonds against retired Bonds and as of December 31, 1995, up to
A-11
<PAGE>
$2.840 billion aggregate amount of new Bonds against previous additions and
improvements to utility plant, provided that the ratio of earnings to fixed
charges is at least 2:1. At December 31, 1995 the ratio was 2.77:1.
In January 1996, PSE&G issued $350 million of Bonds. In February 1996, the
net proceeds from the sale were deposited in an escrow account for the purpose
of refunding certain higher cost bonds at their respective first optional
redemption dates in November 1996 and February 1997.
The BPU has authorized PSE&G to issue and have outstanding at any one time
not more than $1 billion of its short-term obligations, consisting of
commercial paper and other unsecured borrowings from banks and other lenders
through January 1, 1997. On December 31, 1995, PSE&G had $449 million of
short-term debt outstanding.
To provide liquidity for its commercial paper program, PSE&G has a $500
million one year revolving credit agreement expiring in August 1996 and a $500
million five year revolving credit agreement expiring in August 2000 with a
group of commercial banks, which provides for borrowing up to one year. On
December 31, 1995, there were no borrowings outstanding under these credit
agreements. PSE&G expects to be able to renew the credit agreement expiring in
1996.
PSCRC has a $30 million revolving credit facility supported by a PSE&G
subscription agreement in an aggregate amount of $30 million which terminates
on March 7, 1996. PSCRC is presently in the process of negotiating a one year
extension for this facility. As of December 31, 1995, PSCRC had $30 million
outstanding under this facility.
PSE&G Fuel Corporation (Fuelco) has a $150 million commercial paper program
to finance a 42.49% share of Peach Bottom nuclear fuel, supported by a $150
million revolving credit facility with a group of banks, which expires on June
28, 1996. PSE&G has guaranteed repayment of Fuelco's respective obligations.
As of December 31, 1995, Fuelco had commercial paper of $88 million
outstanding under such program.
EXTERNAL FINANCINGS--EDHI
Funding has a commercial paper program, supported by a commercial bank
letter of credit and credit facility, in the amount of $225 million expiring
in March 1998. As of December 31, 1995, Funding had $182 million of borrowings
outstanding under this commercial paper program.
Additionally, Funding has a $225 million revolving credit facility expiring
in March 1998. As of December 31, 1995, Funding had $100 million of borrowings
outstanding under this facility.
Capital's MTN program has previously provided for an aggregate principal
amount of up to $750 million of MTNs so that its total debt outstanding at any
time, including MTNs, would not exceed such amount. Effective January 31,
1995, Capital will not have more than $650 million of debt outstanding at any
time. In 1995, Capital repaid $112 million of its MTNs. At December 31, 1995,
Capital had total debt outstanding of $478 million, including $355 million of
MTNs.
A-12
<PAGE>
FINANCIAL STATEMENT RESPONSIBILITY
Management of Enterprise is responsible for the preparation, integrity and
objectivity of the consolidated financial statements and related notes of
Enterprise. The consolidated financial statements and related notes are
prepared in accordance with generally accepted accounting principles. The
financial statements reflect estimates based upon the judgment of management
where appropriate. Management believes that the consolidated financial
statements and related notes present fairly Enterprise's financial position
and results of operations. Information in other parts of this Appendix is also
the responsibility of management and is consistent with these consolidated
financial statements and related notes.
The firm of Deloitte & Touche LLP, independent auditors, is engaged to audit
Enterprise's consolidated financial statements and related notes and issue a
report thereon. Deloitte & Touche's audit is conducted in accordance with
generally accepted auditing standards. Management has made available to
Deloitte & Touche, all the corporation's financial records and related data,
as well as the minutes of directors' meetings. Furthermore, management
believes that all representations made to Deloitte & Touche, during its audit
were valid and appropriate.
Management has established and maintains a system of internal accounting
controls to provide reasonable assurance that assets are safeguarded, and that
transactions are executed in accordance with management's authorization and
recorded properly for the prevention and detection of fraudulent financial
reporting, so as to maintain the integrity and reliability of the financial
statements. The system is designed to permit preparation of consolidated
financial statements and related notes in accordance with generally accepted
accounting principles. The concept of reasonable assurance recognizes that the
costs of a system of internal accounting controls should not exceed the
related benefits. Management believes the effectiveness of this system is
enhanced by an ongoing program of continuous and selective training of
employees. In addition, management has communicated to all employees its
policies on business conduct, safeguarding assets and internal controls.
The Internal Auditing Department of PSE&G conducts audits and appraisals of
accounting and other operations of Enterprise and its subsidiaries and
evaluates the effectiveness of cost and other controls and recommends to
management, where appropriate, improvements thereto. Management has considered
the internal auditors' and Deloitte & Touche's recommendations concerning the
corporation's system of internal accounting controls and has taken actions
that, in its opinion, are cost-effective in the circumstances to respond
appropriately to these recommendations. Management believes that, as of
December 31, 1995, the corporation's system of internal accounting controls is
adequate to accomplish the objectives discussed herein.
The Board of Directors of Enterprise carries out its responsibility of
financial overview through its Audit Committee, which presently consists of
six directors who are not employees of Enterprise or any of its affiliates.
The Audit Committee meets periodically with management as well as with
representatives of the internal auditors and Deloitte & Touche. The Audit
Committee reviews the work of each to ensure that its respective
responsibilities are being carried out and discusses related matters. Both the
internal auditors and Deloitte & Touche periodically meet alone with the Audit
Committee and have free access to the Audit Committee, and its individual
members, at any time.
E. James Ferland Robert C. Murray
Chairman of the Board, Vice President and
President and Chief Executive Chief Financial Officer
Officer
Patricia A. Rado
Vice President and Controller
Principal Accounting Officer
February 14, 1996
A-13
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and the Board of Directors of
Public Service Enterprise Group Incorporated:
We have audited the consolidated balance sheets of Public Service Enterprise
Group Incorporated and its subsidiaries (the "Company") as of December 31,
1995 and 1994, and the related consolidated statements of income, retained
earnings, and cash flows for each of the three years in the period ended
December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Public Service Enterprise
Group Incorporated and its subsidiaries at December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1995 in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
February 14, 1996
Parsippany, New Jersey
A-14
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Operating Revenues
Electric............................. $ 4,020,842 $ 3,739,713 $ 3,696,114
Gas.................................. 1,686,403 1,778,528 1,594,341
Nonutility Activities................. 456,908 404,202 418,135
----------- ----------- -----------
Total Operating Revenues........... 6,164,153 5,922,443 5,708,590
----------- ----------- -----------
Operating Expenses
Operation
Fuel for Electric Generation and
Interchanged Power.................. 891,782 695,763 717,136
Gas Purchased and Materials for Gas
Produced............................ 961,539 1,023,956 897,885
Other................................ 1,118,758 1,118,523 1,014,455
Maintenance........................... 312,610 308,080 304,403
Depreciation and Amortization......... 674,231 634,028 601,597
Property Impairment (note 16)......... -- -- 77,637
Taxes
Federal Income Taxes (note 10)....... 353,997 312,551 313,680
New Jersey Gross Receipts Taxes...... 612,961 583,167 597,898
Other................................ 80,565 82,282 77,052
----------- ----------- -----------
Total Operating Expenses........... 5,006,443 4,758,350 4,601,743
----------- ----------- -----------
Operating Income....................... 1,157,710 1,164,093 1,106,847
----------- ----------- -----------
OTHER INCOME
Allowance for Funds Used During
Construction--Equity................. 5,324 12,789 12,265
Miscellaneous--net.................... 8,041 6,430 (3,778)
----------- ----------- -----------
Total Other Income................. 13,365 19,219 8,487
----------- ----------- -----------
Income Before Interest Charges and
Dividends on Preferred Securities..... 1,171,075 1,183,312 1,115,334
----------- ----------- -----------
Interest Charges (note 6)
Long-Term Debt........................ 434,066 459,158 469,120
Short-Term Debt....................... 32,822 23,962 13,860
Other................................. 29,172 12,805 19,554
----------- ----------- -----------
Total Interest Charges............. 496,060 495,925 502,534
Allowance for Funds Used During
Construction--Debt and Capitalized
Interest.............................. (37,208) (33,793) (20,833)
----------- ----------- -----------
Net Interest Charges................... 458,852 462,132 481,701
----------- ----------- -----------
Preferred Securities Dividend
Requirements (note 4)................. 49,426 42,147 38,114
Preferred Stock Redemption Premium..... 474 -- --
----------- ----------- -----------
Income before cumulative effect of
accounting change..................... 662,323 679,033 595,519
Cumulative effect of change in
accounting for income taxes (note
10)................................... -- -- 5,414
----------- ----------- -----------
Net Income............................. $ 662,323 $ 679,033 $ 600,933
=========== =========== ===========
Shares of Common Stock Outstanding
End of Year........................... 244,697,930 244,697,930 243,688,256
Average for Year...................... 244,697,930 244,470,794 240,663,599
Earnings Per Average Share of Common
Stock
Before cumulative effect of accounting
change............................... $ 2.71 $ 2.78 $ 2.48
Cumulative effect of change in
accounting for income taxes.......... -- -- .02
----------- ----------- -----------
Total Earnings Per Average Share of
Common Stock.......................... $ 2.71 $ 2.78 $ 2.50
=========== =========== ===========
Dividends Paid Per Share of Common
Stock................................. $ 2.16 $ 2.16 $ 2.16
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
A-15
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Utility Plant--Original Cost (note 15)
Electric.............................................. $13,095,103 $12,345,919
Gas................................................... 2,442,572 2,318,233
Common................................................ 517,104 545,131
----------- -----------
Total............................................... 16,054,779 15,209,283
Less: accumulated depreciation and amortization........ 5,440,414 5,147,105
----------- -----------
Net.................................................... 10,614,365 10,062,178
Nuclear Fuel in Service, net of accumulated
amortization--1995, $297,435; 1994, $302,906......... 180,018 205,273
----------- -----------
Net Utility Plant in Service........................ 10,794,383 10,267,451
Construction Work in Progress, including Nuclear Fuel
in Process--1995, $104,743; 1994, $65,429............. 369,082 806,934
Plant Held for Future Use.............................. 23,966 23,860
----------- -----------
Net Utility Plant................................... 11,187,431 11,098,245
----------- -----------
Investments and Other Noncurrent Assets (notes 3, 7, 8,
11, 12 and 16)
Long-Term Investments, net of amortization--1995,
$7,213; 1994, $2,365, and net of valuation
allowances--1995, $21,302; 1994, $17,104,
respectively......................................... 1,822,160 1,625,952
Oil and Gas Property, Plant and Equipment, net of
accumulated depreciation and amortization--1995,
$786,736; 1994, $748,245............................. 608,015 577,913
Real Estate, Property and Equipment, net of
accumulated depreciation--1995, $5,063; 1994,
$14,242, and net of valuation allowances--1995,
$8,228; 1994, $23,264, respectively.................. 75,558 115,210
Other Plant, net of accumulated depreciation and
amortization--1995, $6,531; 1994, $4,653............. 27,997 36,063
Nuclear Decommissioning and Other Special Funds....... 276,348 233,022
Other Assets--net..................................... 55,974 85,478
----------- -----------
Total Investments and Other Noncurrent Assets....... 2,866,052 2,673,638
----------- -----------
Current Assets
Cash and Cash Equivalents (note 9).................... 76,233 67,866
Accounts Receivable:
Customer Accounts Receivable.......................... 525,404 434,207
Other Accounts Receivable............................. 260,713 211,779
Less: allowance for doubtful accounts................. 37,641 40,915
Unbilled Revenues..................................... 246,876 204,056
Fuel, at average cost................................. 253,360 268,927
Materials and Supplies, net of inventory valuation
reserves--1995, $20,100; 1994, $18,200,
respectively......................................... 144,970 148,285
Deferred Income Taxes (note 10)....................... 27,571 25,311
Miscellaneous Current Assets.......................... 62,631 37,356
----------- -----------
Total Current Assets................................ 1,560,117 1,356,872
----------- -----------
Deferred Debits (note 5)
Property Abandonments--net............................ 70,120 88,269
Oil and Gas Property Write-Down....................... 36,078 41,232
Unamortized Debt Expense.............................. 123,833 134,599
Deferred OPEB Costs (notes 1 and 13).................. 167,189 116,476
Underrecovered Electric Energy and Gas Costs--net..... 170,565 172,563
Unrecovered Environmental Costs (notes 2 and 12)...... 130,070 138,435
Unrecovered Plant and Regulatory Study Costs.......... 35,150 37,128
Unrecovered SFAS 109 Deferred Income Taxes (note 10).. 769,136 791,393
Deferred Decontamination and Decommissioning Costs
(note 3)............................................. 49,872 53,016
Other................................................. 5,826 15,574
----------- -----------
Total Deferred Debits............................... 1,557,839 1,588,685
----------- -----------
Total............................................... $17,171,439 $16,717,440
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
A-16
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Capitalization (notes 4 and 6)
Common Equity
Common Stock.......................................... $ 3,801,157 $ 3,801,157
Retained Earnings..................................... 1,643,785 1,510,010
----------- -----------
Total Common Equity................................. 5,444,942 5,311,167
Subsidiaries' Securities and Obligations
Preferred Securities
Preferred Stock Without Mandatory Redemption.......... 324,994 384,994
Preferred Stock With Mandatory Redemption............. 150,000 150,000
Monthly Income Preferred Securities................... 210,000 150,000
Long-Term Debt........................................ 5,189,791 5,180,657
----------- -----------
Total Capitalization................................ 11,319,727 11,176,818
----------- -----------
Other Long-Term Liabilities
Decontamination, Decommissioning and Low Level
Radwaste Costs (note 3).............................. 50,449 56,149
Environmental Costs (notes 2 and 12).................. 96,272 105,684
Capital Lease Obligations............................. 53,111 53,770
----------- -----------
Total Other Long-Term Liabilities................... 199,832 215,603
----------- -----------
Current Liabilities
Long-Term Debt due within one year.................... 90,630 499,738
Commercial Paper and Loans (note 6)................... 849,567 491,586
Book Overdrafts....................................... 70,014 86,576
Accounts Payable...................................... 567,787 433,471
Other Taxes Accrued................................... 34,678 44,149
Interest Accrued...................................... 108,245 107,962
Estimated Liability for Vacation Pay.................. 17,089 27,080
Customer Deposits..................................... 32,785 33,698
Liability for Injuries and Damages.................... 38,141 29,814
Miscellaneous Environmental Liabilities............... 16,954 15,365
Other................................................. 95,907 87,480
----------- -----------
Total Current Liabilities........................... 1,921,797 1,856,919
----------- -----------
Deferred Credits
Accumulated Deferred Income Taxes (note 10)........... 3,094,620 2,905,390
Accumulated Deferred Investment Tax Credits........... 392,324 412,466
Deferred OPEB Costs (notes 1 and 13).................. 167,189 116,476
Other................................................. 75,950 33,768
----------- -----------
Total Deferred Credits.............................. 3,730,083 3,468,100
----------- -----------
Commitments and Contingent Liabiltiies (note 12)
Total............................................... $17,171,439 $16,717,440
=========== ===========
</TABLE>
A-17
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
---------- ----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net Income.............................. $ 662,323 $ 679,033 $ 600,933
Adjustments to reconcile net income to
net cash flows from operating
activities:
Depreciation and Amortization........... 674,231 634,028 601,597
Amortization of Nuclear Fuel............ 75,028 95,173 102,718
Recovery (Deferral) of Electric Energy
and Gas Costs--net..................... 1,998 (110,529) (184,770)
Loss from Property Impairments.......... -- -- 77,637
Cumulative Effect of Change in
Accounting for Income Taxes............ -- -- (5,414)
Unrealized Gains on Investments--net.... (46,668) (26,329) (8,694)
Provision for Deferred Income Taxes--
net.................................... 145,092 138,919 168,406
Investment Tax Credits--net............. (20,142) (20,247) (11,655)
Allowance for Funds Used During
Construction--Debt and Equity and
Capitalized Interest................... (42,532) (46,582) (33,098)
Proceeds from Leasing Activities--net... 37,652 27,682 14,780
Changes in certain current assets and
liabilities:
Net (increase) decrease in Accounts
Receivable and Unbilled Revenues...... (186,225) 84,440 (68,382)
Net decrease in Inventory--Fuel and
Materials and Supplies................ 18,882 41,169 16,438
Net increase (decrease) in Accounts
Payable............................... 134,316 (85,790) 95,331
Net decrease in Accrued Taxes.......... (17,279) (258,818) (293,919)
Net change in Other Current Assets and
Liabilities........................... (12,005) 36,748 (19,505)
Other................................... 68,244 42,893 (20,732)
---------- ----------- -----------
Net cash provided by operating
activities........................... 1,492,915 1,231,790 1,031,671
---------- ----------- -----------
Cash Flows From Investing Activities:
Additions to Utility Plant, excluding
AFDC................................... (649,883) (849,174) (863,294)
Additions to Oil and Gas Property, Plant
and Equipment, excluding Capitalized
Interest............................... (127,729) (156,302) (88,864)
Net (increase) decrease in Long-Term
Investments and Real Estate............ (81,264) 58,416 66,659
Increase in Decommissioning and Other
Special Funds, excluding interest...... (29,617) (35,394) (45,508)
Cost of Plant Removal--net.............. (29,674) (33,962) (47,791)
Other................................... 29,899 13,933 (14,042)
---------- ----------- -----------
Net cash used in investing
activities........................... (888,268) (1,002,483) (992,840)
---------- ----------- -----------
Cash Flows From Financing Activities:
Net increase (decrease) in Short-Term
Debt................................... 357,981 (86,050) 185,654
(Decrease) increase in Book Overdrafts.. (16,562) 23,584 (10,078)
Issuance of Long-Term Debt.............. 156,320 849,800 2,137,700
Redemption of Long-Term Debt............ (556,294) (593,790) (2,083,453)
Long-Term Debt Issuance and Redemption
Costs.................................. (9,177) (29,811) (72,114)
Issuance of Preferred Stock............. -- 75,000 75,000
Redemption of Preferred Stock........... (60,000) (120,000) --
Issuance of Monthly Income Preferred
Securities............................. 60,000 150,000 --
Issuance of Common Stock................ -- 28,495 273,479
Cash Dividends Paid on Common Stock..... (528,548) (528,071) (521,572)
Other................................... -- (1,970) (6,772)
---------- ----------- -----------
Net cash used in financing
activities........................... (596,280) (232,813) (22,156)
---------- ----------- -----------
Net increase (decrease) in Cash and Cash
Equivalents............................. 8,367 (3,506) 16,675
Cash and Cash Equivalents at Beginning of
Year.................................... 67,866 71,372 54,697
---------- ----------- -----------
Cash and Cash Equivalents at End of
Year.................................... $ 76,233 $ 67,866 $ 71,372
========== =========== ===========
Income Taxes Paid........................ $ 185,376 $ 155,104 $ 140,172
Interest Paid............................ $ 481,264 $ 432,873 $ 458,956
</TABLE>
See Notes to Consolidated Financial Statements.
A-18
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
---------- ---------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Balance January 1............................. $1,510,010 $1,361,018 $1,282,931
Add Net Income................................ 662,323 679,033 600,933
---------- ---------- ----------
Total..................................... 2,172,333 2,040,051 1,883,864
---------- ---------- ----------
Deduct
Dividends on Common Stock(A)................ 528,548 528,071 521,572
Capital Stock Expenses...................... -- 1,970 1,274
---------- ---------- ----------
Total Deductions.......................... 528,548 530,041 522,846
---------- ---------- ----------
Balance December 31........................... $1,643,785 $1,510,010 $1,361,018
========== ========== ==========
</TABLE>
(A) The ability of Enterprise to declare and pay dividends is contingent upon
its receipt of dividend payments from its subsidiaries. PSE&G, Enterprise's
principal subsidiary, has restrictions on the payment of dividends which
are contained in its Restated Certificate of Incorporation, as amended,
certain of the indentures supplemental to its Mortgage and certain other
indentures. However, none of these restrictions presently limits the
payment of dividends out of current earnings. The amount of PSE&G's
restricted retained earnings at December 31, 1995, 1994 and 1993 was $10
million.
See Notes to Consolidated Financial Statements.
A-19
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Public Service Enterprise Group (Enterprise) has two direct wholly owned
subsidiaries, Public Service Electric and Gas Company (PSE&G) and Enterprise
Diversified Holdings Incorporated (EDHI). Enterprise's principal subsidiary,
PSE&G, is an operating public utility providing electric and gas service to
customers in certain areas in the State of New Jersey. As of December 31,
1995, PSE&G comprised 85% of Enterprise's assets and for the year ending on
that date, 93% of its revenues. Of the 150,000,000 authorized shares of PSE&G
common stock at December 31, 1995, there were 132,450,344 shares outstanding,
with an aggregate book value of $2.6 billion.
PSE&G has a finance subsidiary, PSE&G Fuel Corporation (Fuelco), providing
financing, unconditionally guaranteed by PSE&G, of up to $150 million
aggregate principal amount at any one time of a 42.49% interest in the nuclear
fuel acquired for Peach Bottom Atomic Power Station Units 2 and 3 (Peach
Bottom). PSE&G also has a subsidiary, Public Service Conservation Resources
Corporation (PSCRC) which offers demand side management (DSM) services to
utility customers. In 1994, Public Service Electric and Gas Capital, L.P.
(Partnership), a limited partnership in which PSE&G is the general partner,
was formed for the purpose of issuing Monthly Income Preferred Securities.
(See Note 4--Schedule of Consolidated Capital Stock and Other Securities). In
1995, PSE&G created a new subsidiary, Enterprise Ventures and Services, to
pursue products and services beyond traditional geographic and industry
boundaries.
EDHI is the parent of Enterprise's nonutility businesses: Energy Development
Corporation (EDC), an oil and gas exploration and production and marketing
company; Community Energy Alternatives Incorporated (CEA), an investor in and
developer and operator of cogeneration and independent power production
facilities; Public Service Resources Corporation (PSRC), which makes primarily
passive investments; and Enterprise Group Development Corporation (EGDC), a
nonresidential real estate development and investment business. EDHI also has
two finance subsidiaries: PSEG Capital Corporation (Capital) and Enterprise
Capital Funding Corporation (Funding).
CONSOLIDATION POLICY
The consolidated financial statements include the accounts of Enterprise and
its subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation. Certain reclassifications of prior years'
data have been made to conform with the current presentation.
REGULATION--PSE&G
The accounting and rates of PSE&G are subject, in certain respects, to the
requirements of the New Jersey Board of Public Utilities (BPU) and the Federal
Energy Regulatory Commission (FERC). As a result, PSE&G maintains its accounts
in accordance with their prescribed Uniform Systems of Accounts, which are the
same. The applications of Generally Accepted Accounting Principles (GAAP) by
PSE&G differ in certain respects from applications by non-regulated
businesses. PSE&G prepares its financial statements in accordance with the
provisions of Statement of Financial Accounting Standards No. 71--"Accounting
for the Effects of Certain Types of Regulation" (SFAS 71). In general, SFAS 71
recognizes that accounting for rate-regulated enterprises should reflect the
relationship of costs and revenues. As a result, a regulated utility may defer
recognition of cost (a regulatory asset) or recognize an obligation (a
regulatory liability) if it is probable that, through the rate-making process,
there will be a corresponding increase or decrease in revenues. Accordingly,
PSE&G has deferred certain costs, which will be amortized over various
periods. To the extent that collection of such costs or payment of liabilities
is no longer probable as a result of changes in regulation and/or PSE&G's
competitive position, the associated regulatory asset or liability will be
reversed with a charge or credit to income. (See Note
A-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5--Deferred Items). If PSE&G were to discontinue the application of SFAS 71,
the accounting impact would be an extraordinary, non-cash charge to operations
that could be material to the financial position and results of operations of
Enterprise and PSE&G.
Amounts charged to operations for depreciation expense reflect estimated
useful lives and methods, which include estimates of cost of removal and
salvage, prescribed and approved by regulators rather than those that might
otherwise apply to non-regulated enterprises. PSE&G cannot presently quantify
what the financial statement impact may be if depreciation expense were to be
determined absent regulation.
UTILITY PLANT AND RELATED DEPRECIATION--PSE&G
Additions to utility plant and replacements of units of property are
capitalized at original cost. The cost of maintenance, repairs and
replacements of minor items of property is charged to appropriate expense
accounts. At the time units of depreciable property are retired or otherwise
disposed of, the original cost less net salvage value is charged to
accumulated depreciation.
Depreciation is computed under the straight-line method. Depreciation is
based on estimated average remaining lives of the several classes of
depreciable property. These estimates are reviewed on a periodic basis and
necessary adjustments are made as approved by the BPU. Depreciation provisions
stated in percentages of original cost of depreciable property were 3.52% in
1995, 3.51% in 1994 and 3.46% in 1993.
USE OF ESTIMATES
The process of preparing financial statements in conformity with GAAP
requires the use of estimates and assumptions regarding certain types of
assets, liabilities, revenues and expenses. Such estimates primarily relate to
unsettled transactions and events as of the date of the financial statements.
Accordingly, upon settlement, actual results may differ from estimated
amounts.
DECONTAMINATION AND DECOMMISSIONING--PSE&G
In 1993, FERC issued Order No. 557 on the accounting and rate-making
treatment of special assessments levied under the National Energy Policy Act
of 1992 (EPAct). Order No. 557 provides that special assessments are a
necessary and reasonable current cost of fuel and shall be fully recoverable
in rates in the same manner as other fuel costs. In accordance with its filed
Alternative Rate Plan, PSE&G has requested to have separate mechanisms to
ensure continued recovery of costs associated with activities mandated or
approved by state or federal agencies, but no assurances can be given that the
BPU will authorize such recovery from customers. (See Note 2--Rate Matters and
Note 3--PSE&G Nuclear Decommissioning and Amortization of Nuclear Fuel--
Uranium, Decontamination and Decommissioning Fund).
AMORTIZATION OF NUCLEAR FUEL--PSE&G
Nuclear energy burnup costs are charged to fuel expense on a units-of-
production basis over the estimated life of the fuel. Rates for the recovery
of fuel used at all nuclear units include a provision of one mill per
kilowatthour (KWH) of nuclear generation for spent fuel disposal costs. (See
Note 3--PSE&G Nuclear Decommissioning and Amortization of Nuclear Fuel).
REVENUES AND FUEL COSTS--PSE&G
Revenues are recorded based on services rendered to customers during each
accounting period. PSE&G records unbilled revenues representing the estimated
amount customers will be billed for services rendered from the time meters
were last read to the end of the respective accounting period. Rates include
projected fuel costs for electric generation, purchased and interchanged
power, gas purchased and materials used for gas production.
A-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Any under or overrecoveries, together with interest (in the case of net
overrecoveries), are deferred and included in operations in the period in
which they are reflected in rates.
LONG-TERM INVESTMENTS
PSRC has invested in securities and limited partnerships investing in
securities, which are recorded at fair value, and various leases and other
limited partnerships. EGDC is a participant in the nonresidential real estate
markets. CEA is an investor in and developer and operator of cogeneration and
power production facilities. (See Note 7--Long-Term Investments).
DERIVATIVES
Gains and losses on hedges of existing assets or liabilities are included in
the carrying amounts of those assets and liabilities and are ultimately
recognized in income as part of those carrying amounts. Gains and losses
related to qualifying hedges of firm commitments or anticipated transactions
also are deferred and recognized in income or as adjustments of carrying
amounts when the hedged transaction occurs. (See Note 8--Financial Instruments
and Risk Management).
OIL AND GAS ACCOUNTING--EDC
EDC uses the successful efforts method of accounting under which proved
leasehold costs are capitalized and amortized over the proved developed and
undeveloped reserves on a unit-of-production basis. Drilling and equipping
costs, except exploratory dry holes, are capitalized and depreciated over the
proved developed reserves on a unit-of-production basis. Estimated future
abandonment costs of offshore proved properties are depreciated on a unit-of-
production basis over the proved developed reserves. Estimated future
abandonment costs of onshore properties are estimated to be offset by the
salvage value of the tangible equipment. Unproved leasehold costs are
capitalized and not amortized, pending an evaluation of the exploration
results. Unproved leasehold and producing properties costs are assessed
periodically to determine if an impairment of the cost of significant
individual properties has occurred. The cost of an impairment is charged to
expense. Costs incurred for exploratory dry holes, exploratory geological and
geophysical work and delay rentals are charged to expense as incurred.
INCOME TAXES
Enterprise and its subsidiaries file a consolidated Federal income tax
return and income taxes are allocated to Enterprise's subsidiaries based on
taxable income or loss of each. Investment tax credits are deferred and
amortized over the useful lives of the related property, including nuclear
fuel.
Effective January 1, 1993, Enterprise and its subsidiaries adopted Statement
of Financial Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS
109). Under SFAS 109, deferred income taxes are provided for all temporary
differences between the financial statement carrying amounts and the tax bases
of existing assets and liabilities irrespective of the treatment for rate-
making purposes. For periods prior to January 1, 1993, PSE&G provided deferred
income taxes to the extent permitted for rate-making purposes. (See Note 10--
Federal Income Taxes).
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFDC) AND CAPITALIZED INTEREST
PSE&G--AFDC represents the cost of debt and equity funds used to finance the
construction of new utility facilities. The amount of AFDC capitalized is
reported in the Consolidated Statements of Income as a reduction of interest
charges for the borrowed funds component and as other income for the equity
funds component. The rates used for calculating AFDC in 1995, 1994 and 1993
were 6.98%, 6.48% and 6.96%, respectively. These rates were within the limits
set by FERC.
A-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EDHI--The operating subsidiaries of EDHI capitalize interest costs allocable
to construction expenditures at the average cost of borrowed funds.
PENSION PLAN AND OTHER POSTRETIREMENT BENEFITS
The employees of PSE&G, other than non represented employees commencing
service after January 1, 1996, as well as those of participating affiliates,
are covered by a noncontributory trusteed pension plan (Pension Plan) from the
date of hire. New represented employees of PSE&G who commence service after
January 1, 1996 are covered by a Cash Balance Pension Plan. The policy is to
fund pension costs accrued. PSE&G also provides certain health care and life
insurance benefits to active and retired employees. The portion of such costs
pertaining to retirees amounted to $33 million, $29 million, and $28 million
in 1995, 1994 and 1993, respectively. The current cost of these benefits is
charged to expense when paid and is currently being recovered from ratepayers.
On January 1, 1993, Enterprise and PSE&G adopted Statement of Financial
Accounting Standards No. 106, "Employers Accounting for Postretirement
Benefits Other Than Pensions" (SFAS 106), which requires that the expected
cost of employees' postretirement health care benefits be charged to expense
during the years in which employees render service. Prior to 1993, Enterprise
and PSE&G recognized postretirement health care costs in the year in which the
benefits were paid. PSE&G elected to amortize over 20 years its unfunded
obligation at January 1, 1993. (See Note 13--Postretirement Benefits Other
Than Pensions and Note 14--Pension Plan).
NOTE 2. RATE MATTERS
ALTERNATIVE RATE PLAN
On January 16, 1996, PSE&G proposed to the BPU major changes in utility
regulation that include an immediate $50 million rate reduction for its
electric customers, various types of rate freezes, assurances that future
price increases related to controllable costs will be lower than the rate of
inflation and funding of up to an aggregate of $55 million in two economic
development initiatives.
The seven-year "New Jersey Partners in Power" Plan (Plan), if approved,
would give PSE&G the mechanisms and incentives to compete more effectively on
several fronts, including the ability to develop revenue from non-regulated
products and services, accelerate or modify depreciation schedules to help
mitigate any potential stranded asset issue and more aggressively manage the
control of costs. In addition, the Plan would provide the foundation for
ongoing price flexibility without the need for prolonged, adversarial
regulatory proceedings.
The Plan begins the process for a transition to a more competitive energy
marketplace while substantially shifting the business and financial risks and
opportunities involved in this transition away from customers to PSE&G and
enhancing PSE&G's ability to make the necessary human, intellectual and
financial investments required to stimulate innovation and productivity.
Key energy pricing features of the proposed Plan are as follows:
Upon the BPU's approval of the Plan, PSE&G will reduce electric rates across
the board by $50 million annually as an upfront guaranteed share of the
productivity improvements that it expects to achieve over the life of the
Plan.
New rates for all PSE&G electric customers reflecting the reduction would be
established through a merger of existing base tariffs and the electric
Levelized Energy Adjustment Clause (LEAC) and would be frozen at these levels
through December 31, 1996. In addition, the Plan proposes the elimination of
the BPU's existing Nuclear Performance Standard (NPS). This discontinuance of
the LEAC and NPS would result in substantially
A-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
shifting the risks and opportunities involved in managing changes in fuel and
replacement power costs from customers to PSE&G. Gas fuel costs will continue
to be recovered on a dollar for dollar basis from customers under the existing
Levelized Gas Adjustment Charge (LGAC).
In order to create incentives to lower costs and improve efficiency and
productivity, the Plan would rely on a comprehensive external price cap index
based upon changes in the Gross Domestic Product Price Index (GDPPI) and a
separate fuel price index mechanism, reduced by a fixed productivity offset of
0.30% to establish optional annual price changes each January 1st for
electricity. In addition, the Plan would rely on an index for non-fuel gas
prices calculated on the basis of changes in the GDPPI, reduced by a fixed
productivity offset of 0.35%, to establish optional annual price changes each
January 1st. The price cap mechanisms would become effective on January 1,
1997 and would assure that any rate increase related to controllable costs
would be below the rate of inflation, guaranteeing that these costs would
decline in real terms.
Under the Plan, PSE&G would establish an initial service block equal to the
first 150 kilowatthours (KWH) of usage for residential electric customers who
would be protected from price cap index increases through December 31, 2002,
the proposed expiration date of the Plan. Similarly, an initial service block
equal to 40 therms would be set for residential gas customers and protected
from index increases over the same period of time. In addition, public street
lighting prices would not be subject to index increases for the life of the
Plan.
The Plan includes a productivity gains sharing mechanism. This mechanism has
been designed to provide incentives to maximize efficiency and productivity
improvements and ensure that electric and gas customers receive an increasing
share of productivity gains using returns on equity as a proxy for these
gains. The gains, which would be awarded through bill credits, would be based
on a threshold earnings level defined as PSE&G's established return on equity
of 12% plus a 100 basis points neutral zone above that level. Customers would
receive a 10% share of the gains from the first 50 basis points above the
threshold level. Their share would increase by an additional 10% for each
subsequent increase of 50 basis points up to a maximum of 50%.
Separate mechanisms also would be established to ensure continued recovery
of costs associated with activities mandated or approved by state or federal
agencies or otherwise out of PSE&G's control. These costs include demand side
management programs, environmental remediation, costs associated with non-
utility electric generators, nuclear decommissioning funding and nuclear fuel
assessment costs. These mechanisms would assure that PSE&G recovers only
actual costs related to these activities.
The Plan would allow for electric and non-fuel gas prices to be changed to
reflect exogenous events beyond the control of PSE&G and would be subject to
modification for industry restructuring.
The Plan calls for an increase of $50 million in annual depreciation
expenses for PSE&G's Hope Creek nuclear generating station--$25 million
effective January 1, 1997, and an additional $25 million effective January 1,
1998. In addition, the Plan proposes a transfer of depreciation reserves
totaling $253 million from transmission and distribution to fossil steam
electric generating accounts. The Plan would permit depreciation to be changed
annually following BPU review and approval.
In addition to the pricing features, the Plan guarantees enhanced quality of
customer services through PSE&G's recently established service guarantee
program for electric and gas customers and specific incentive and penalty
mechanisms based on various service indicators.
The Plan would establish a program of rewards and penalties in key overall
service indicators such as duration of customer power outages compared to a
historic five-year average.
In addition to these service quality incentives, the Plan would establish
rewards and penalties based on the movement of PSE&G's average electric
residential rate measured against the national average of residential
A-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
electric rates. Rewards or penalties of up to $5 million would be implemented
if comparisons indicate that PSE&G's residential rates decreased or increased
by more than one-half of one percent relative to the national average.
A major component of the Plan is a proposed economic and market development
and retention assurance program. This would allow flexible pricing and promote
special economic development activities designed to enhance the economic
vitality of the State of New Jersey. One aspect of the program would give
PSE&G the ability to quickly establish new optional electric or gas rates or
individual customer contracts to serve new markets and retain or attract
individual customers.
Also under the Plan, PSE&G would fund two economic development initiatives.
The first is a private sector leadership investment of $5 million in the New
Jersey Fund for Community Economic Development. The second new initiative is
the establishment of the PSE&G Economic Development Fund in which PSE&G would
commit to investing up to $50 million for financing significant economic
development projects within PSE&G's service territory over the seven years of
the Plan.
In addition, the Plan calls for establishment of a State Emissions Trading
Bank (Bank) for economic development and environmental improvement. PSE&G
would donate 1,000 tons of nitrogen oxide emissions credits to the Bank for
use in economic development. This is intended as a key step to linking
economic development with sound environmental policy and building on New
Jersey's leadership role in seeking a regional solution to air pollution
problems.
Under the Plan, price levels associated with the recovery of Gross Receipts
and Franchise Tax (GRFT) or successor taxes will be directly adjusted in such
a manner as to insure their full and timely recovery from ratepayers.
PSE&G cannot predict what action, if any, may be taken by the BPU with
respect to the Plan.
LEVELIZED GAS ADJUSTMENT CHARGE
On October 2, 1995, PSE&G petitioned the BPU for modifications to its LGAC,
requesting that:
(a) The LGAC be renamed to the Levelized Gas Incentive Clause (LGIC);
(b) A benchmark be established for certain gas delivered from the Gulf
Coast, and any difference between PSE&G's actual gas purchase costs and the
benchmark price, either positive or negative, be shared 50/50 between
customers and PSE&G;
(c) The current annual LGAC rate be converted to a monthly rate for firm
commercial and industrial customers; and
(d) A fixed annual margin would be credited to LGAC for certain
interruptible rate schedules, while actual margins from such sales will be
retained by PSE&G. Any differences, positive or negative, will be absorbed
by PSE&G.
On December 20, 1995, the BPU approved an interim Stipulation to include the
implementation of monthly pricing on the commodity portion of the LGAC rate
for firm commercial and industrial customers effective January 1, 1996. The
incentive proposal relating to interruptible sales (request (d)) above was
withdrawn. The remaining aspects of PSE&G's October 2, 1995 petition remain
the subject of continued investigation and litigation.
ELECTRIC LEVELIZED ENERGY ADJUSTMENT CLAUSE
By Order dated May 5, 1995, the BPU approved PSE&G's LEAC. Such Order also
required that a hearing be convened regarding the April 1994 Salem 1 shutdown,
to determine whether PSE&G should be allowed to
A-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
recover replacement power costs of approximately $8 million which have been
deferred. On October 18, 1995, this matter was ordered to be transmitted to
the Office of Administrative Law (OAL) for hearing. PSE&G cannot predict the
outcome of this proceeding.
REMEDIATION ADJUSTMENT CHARGE
On July 21, 1995, PSE&G petitioned the BPU to recover Remediation Program
costs incurred during the period August 1, 1994 through July 31, 1995. In
accordance with a BPU Order dated November 4, 1994, the petition proposes to
recover, effective October 1, 1995, $2.5 million from gas customers and $1.6
million from electric customers.
CONSOLIDATED TAX BENEFITS
In a case affecting another utility in which neither Enterprise nor PSE&G
were parties, the BPU considered the extent to which tax savings generated by
nonutility affiliates included in the consolidated tax return of that
utility's holding company should be considered in setting that utility's
rates. In September 1992, the BPU approved an order in such case treating
certain consolidated tax savings generated after June 30, 1990 by that
utility's nonutility affiliates as a reduction of its rate base. In December
1992, the BPU issued an order approving a stipulation in PSE&G's 1992 base
rate proceeding which resolved the case without separate quantification of the
consolidated tax issue. The stipulation did not provide final resolution of
the consolidated tax issue for any subsequent base rate filing. While
Enterprise continues to account for its two wholly-owned subsidiaries on a
stand-alone basis, resulting in a realization of the tax benefits by the
entity generating the benefit, an ultimate unfavorable resolution of the
consolidated tax issue could reduce PSE&G's and Enterprise's future revenue
and net income. In addition, an unfavorable resolution may adversely impact
Enterprise's nonutility investment strategy. Enterprise believes that PSE&G's
taxes should be treated on a stand-alone basis for rate-making purposes, based
on the separate nature of the utility and nonutility businesses. However,
neither Enterprise nor PSE&G is able to predict what action, if any, the BPU
may take concerning consolidation of tax benefits in future rate proceedings.
(See Note 10--Federal Income Taxes).
OTHER RATE MATTERS
On July 21, 1995, the BPU initiated a generic proceeding to expeditiously
adopt specific standards to guide utility "off-tariff" negotiated rate
agreement programs, which proceeding would consider minimum prices,
confidentiality, maximum contract duration, filing requirements and such other
standards as necessary for compliance with the law. A Written Summary Decision
and Order was issued on October 27, 1995, which ordered each New Jersey
electric utility, including PSE&G, to file initial minimum tariffs, consistent
with the terms of such Order, and further, indicated that such Order will be
supplemented by a Final Decision and Order to fully discuss and explain the
rationale for the BPU's overall decision. On November 13, 1995 PSE&G filed its
compliance filing. PSE&G cannot predict what impact, if any, the generic
tariff may have on its electric revenues and earnings.
In September 1994, the BPU initiated a generic proceeding regarding recovery
of capacity costs associated with electric utility power purchases from
cogeneration and small power producers. The initial phase of the proceeding,
which has been transmitted to the Office of Administrative Law, seeks to
determine whether there was any such overrecovery and, if so, the amount
overrecovered.
The New Jersey Division of Ratepayer Advocate has intervened in the
proceeding and alleges, among other things, that PSE&G has overrecovered such
costs ranging from $250 to $300 million during the period from August 1991 to
December 1994. PSE&G denies such overrecovery because its capacity cost
recovery mechanisms were approved by the BPU as to each of its cogeneration
contracts and as to its base rates. Additionally, PSE&G contends that a review
of any individual cost item is inappropriate and that the BPU has
A-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
previously found that, during the period under review, PSE&G did not overearn
compared to its established return. Moreover, PSE&G contends that the
Ratepayer Advocate's assertion is proscribed as retroactive ratemaking.
While PSE&G cannot predict the outcome of this proceeding, the final
resolution of this issue may impact the financial position, results from
operations or net cash flows of Enterprise and PSE&G on a prospective basis.
NOTE 3. PSE&G NUCLEAR DECOMMISSIONING AND AMORTIZATION OF NUCLEAR FUEL
The BPU decision in PSE&G's 1992 base rate case utilized studies based on
the prompt removal/dismantlement method of decommissioning for all of PSE&G's
nuclear generating stations. This method consists of removing all fuel, source
material and all other radioactive materials with activity levels above
accepted release limits from the nuclear sites. PSE&G has an ownership
interest in five nuclear units: Salem 1 and Salem 2--42.59% each, Hope Creek--
95% and Peach Bottom 2 and 3--42.49% each. In accordance with rate orders
received from the BPU, PSE&G has established an external master nuclear
decommissioning trust for all of its nuclear units. The Internal Revenue
Service (IRS) has ruled that payments to the trust are tax deductible. PSE&G's
total estimated cost of decommissioning its share of these 5 nuclear units is
estimated at $681 million in year-end 1990 dollars (the year that the site
specific estimate was prepared), excluding contingencies. The 1992 base rate
decision provided that $15.6 million of such costs are to be collected through
base rates and an additional annual amount of $7.0 million in 1993 and $14
million each year thereafter are to be recovered through PSE&G's LEAC. In
accordance with the filed Alternative Rate Plan, PSE&G has requested to have
separate mechanisms to ensure continued recovery of costs associated with
activities mandated or approved by state or federal agencies, but no
assurances can be given that the BPU will authorize such recovery from
customers. (See Note 2--Rate Matters). At December 31, 1995 and 1994, the
accumulated provision for depreciation and amortization included reserves for
nuclear decommissioning for PSE&G's units of $292 million and $249 million,
respectively. As of December 31, 1995 and 1994, PSE&G had contributed $220
million and $190 million, respectively, into independent external qualified
and nonqualified nuclear decommissioning trust funds.
On January 3, 1996, PSE&G filed with the BPU its 1995 nuclear plant
decommissioning cost update. The filing includes decommissioning cost updates
for PSE&G's respective ownership share of Salem, Hope Creek and Peach Bottom.
PSE&G's filing was based on the existing Nuclear Regulatory Commission (NRC)
generic formula(s). PSE&G does not believe that the NRC generic estimates
provide an accurate estimate of the cost of decommissioning because the NRC
formula does not factor into its cost estimates the cost of removal of
nonradiological structures and equipment and interim spent fuel storage
installations. PSE&G is currently completing site specific studies in order to
update its filing with the BPU during 1996.
The Staff of the Securities and Exchange Commission (SEC) has questioned
certain of the current accounting practices of the electric utility industry,
including PSE&G, regarding the recognition, measurement and classification of
decommissioning costs for nuclear generating stations in the financial
statements of electric utilities. In response to these questions, the
Financial Accounting Standards Board (FASB) has agreed to review the
accounting for removal costs, including decommissioning. If current electric
utility industry accounting practices for such decommissioning are changed:
(1) annual provisions for decommissioning could increase, (2) the estimated
cost for decommissioning could be recorded as a liability rather than as
accumulated depreciation and (3) trust fund income from the external
decommissioning trusts could be reported as investment income rather than as a
reduction to decommissioning expense.
URANIUM ENRICHMENT DECONTAMINATION AND DECOMMISSIONING FUND
In accordance with EPAct, domestic utilities that own nuclear generating
stations are required to pay a cumulative total of $150 million each year
(adjusted for inflation) into a decontamination and decommissioning
A-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
fund, based on their past purchases of enrichment services from the United
States Department of Energy (DOE) Uranium Enrichment Enterprise (now a federal
government corporation known as the United States Enrichment Corporation
(USEC)). These amounts are being collected over a period of 15 years or until
$2.25 billion (adjusted for inflation) has been collected. Under this
legislation, PSE&G's obligation for the nuclear generating stations in which
it has an interest is $67 million (adjusted for inflation). Since 1993, PSE&G
has paid $17 million, resulting in a balance due of $50 million. PSE&G has
deferred the expenditures incurred to date as part of deferred underrecovered
electric energy costs and expects to recover its costs in the next LEAC. In
accordance with the filed Alternative Rate Plan, PSE&G has requested to have
separate mechanisms to ensure continued recovery of costs associated with
activities mandated or approved by state or federal agencies, but no
assurances can be given that the BPU will authorize such recovery from
customers. (See Note 2--Rate Matters).
SPENT NUCLEAR FUEL DISPOSAL COSTS
In accordance with the Nuclear Waste Policy Act (NWPA), PSE&G has entered
into contracts with the DOE for the disposal of spent nuclear fuel. Payments
made to the DOE for disposal costs are based on nuclear generation and are
included in Fuel for Electric Generation and Interchanged Power in the
Statements of Income. These costs are recovered through the LEAC. In
accordance with the filed Alternative Rate Plan, PSE&G has requested to have
separate mechanisms to ensure continued recovery of costs associated with
activities mandated or approved by state or federal agencies, but no
assurances can be given that the BPU will authorize such recovery from
customers. (See Note 2--Rate Matters).
A-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4. SCHEDULE OF CONSOLIDATED CAPITAL STOCK AND OTHER SECURITIES
<TABLE>
<CAPTION>
CURRENT
REDEMPTION
OUTSTANDING PRICE DECEMBER 31, DECEMBER 31,
SHARES PER SHARE 1995 1994
----------- ---------- ------------ ------------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Enterprise Common Stock (no
par)--(note A)--
Authorized 500,000,000 shares;
issued and outstanding at
December 31, 1995, and
December 31, 1994, 244,697,930
shares, and at December 31,
1993, 243,688,256 shares...... $3,801,157 $3,801,157
Enterprise Preferred Securities
(note B) PSE&G
Cumulative Preferred
Securities (note C) Without
Mandatory Redemption (notes D
and E) $100 par value series
4.08%........................ 250,000 103.00 $ 25,000 $ 25,000
4.18%........................ 249,942 103.00 24,994 24,994
4.30%........................ 250,000 102.75 25,000 25,000
5.05%........................ 250,000 103.00 25,000 25,000
5.28%........................ 250,000 103.00 25,000 25,000
6.80%........................ 250,000 102.00 25,000 25,000
6.92%........................ 600,000 -- 60,000 60,000
7.40%........................ 500,000 101.00 50,000 50,000
7.52%........................ 500,000 101.00 50,000 50,000
7.70% (note E)............... -- -- -- 60,000
$25 par value series
6.75%........................ 600,000 -- $ 15,000 $ 15,000
---------- ----------
Total Preferred Stock
without Mandatory
Redemption................ $ 324,994 $ 384,994
========== ==========
With Mandatory Redemption
(notes D and F) $100 par
value series
7.44%........................ 750,000 -- $ 75,000 $ 75,000
5.97%........................ 750,000 -- 75,000 75,000
---------- ----------
Total Preferred Stock with
Mandatory Redemption (note
G)........................ $ 150,000 $ 150,000
========== ==========
Monthly Income Preferred
Securities
(notes D, F, G and H)
9.375%....................... 6,000,000 -- $ 150,000 $ 150,000
8.00%........................ 2,400,000 -- $ 60,000 --
---------- ----------
Total Monthly Income Pre-
ferred Securities........... $ 210,000 $ 150,000
========== ==========
</TABLE>
(A) Total authorized and unissued shares include 7,302,488 shares of
Enterprise Common Stock reserved for issuance through Enterprise's
Dividend Reinvestment and Stock Purchase Plan and various employee benefit
plans. In 1995, no shares of Enterprise Common Stock were issued or sold
and in 1994, 1,009,674 shares were issued and sold for $28,495,122.
(B) Enterprise has authorized a class of 50,000,000 shares of Preferred Stock
without par value, none of which is outstanding.
(C) As of December 31, 1995, there were 2,900,058 shares of $100 par value and
9,400,000 shares of $25 par value Cumulative Preferred Stock which were
authorized and unissued, and which upon issuance may or may not provide
for mandatory sinking fund redemption. If dividends upon any shares of
Preferred Stock are in arrears in an amount equal to the annual dividend
thereon, voting rights for the election of a majority of PSE&G's Board of
Directors become operative and continue until all accumulated and unpaid
dividends thereon have been paid, whereupon all such voting rights cease,
subject to being again revived from time to time.
A-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(D) At December 31, 1995, the annual dividend requirement and embedded
dividend for Preferred Stock without mandatory redemption were $20,046,765
and 6.14%, respectively, and for Preferred Stock with mandatory redemption
were $10,057,500 and 6.75%, respectively.
At December 31, 1994, the annual dividend requirement and embedded dividend
for Preferred Stock without mandatory redemption were $24,666,763 and
6.39%, respectively and for Preferred Stock with mandatory redemption were
$10,057,500 and 6.75%, respectively.
At December 31, 1995, the annualized monthly income requirement of the
Monthly Income Preferred Securities and their embedded cost were
$18,862,500 and 6.04%, respectively.
At December 31, 1994, the annualized monthly income requirement of the
Monthly Income Preferred Securities and their embedded cost were
$14,062,500 and 6.31%, respectively.
(E) On October 16, 1995, PSE&G redeemed all of the 600,000 shares of its
outstanding 7.70% Cumulative Preferred Stock ($100 par), at a redemption
price of $100.79.
(F) For information concerning fair value of financial instruments, see Note
8--Financial Instruments and Risk Management.
(G) On September 12, 1995, Partnership issued 2,400,000 shares of its 8%
Monthly Income Preferred Securities, Series B, with a stated liquidation
preference of $25 each.
(H) Public Service Electric and Gas Capital, L.P. (Partnership) was formed for
the purpose of issuing Monthly Income Preferred Securities. The proceeds
of Monthly Income Preferred Securities sales are lent to PSE&G and
evidenced by PSE&G's Deferrable Interest Subordinated Debentures. If and
for as long as payments on PSE&G's Deferred Interest Subordinated
Debentures have been deferred, or PSE&G has defaulted on the indenture
related thereto or its guarantee thereof, PSE&G may not pay any dividends
on its Capital Stock.
NOTE 5. DEFERRED ITEMS
PROPERTY ABANDONMENTS
The BPU has authorized PSE&G to recover after-tax property abandonment costs
from its customers. The following table reflects the application of Statement
of Financial Accounting Standards No. 90, "Regulated Enterprises--Accounting
for Abandonments and Disallowances of Plant Costs," as amended (SFAS 90), on
property abandonments, and related tax effects, for which no return is earned.
The net-of-tax discount rate used was between 4.443% and 7.801%. (See Note 2--
Rate Matters). The following table reflects property abandonments:
<TABLE>
<CAPTION>
PROPERTY ABANDONMENTS
-------------------------------------
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------ ------------------
DISCOUNTED DISCOUNTED
COST TAXES COST TAXES
---------- ------- ---------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Atlantic Project....................... $58,221 $24,440 $70,130 $29,453
LNG Project............................ 2,992 957 7,287 2,635
Uranium Projects....................... 8,907 3,871 10,852 4,677
------- ------- ------- -------
$70,120 $29,268 $88,269 $36,765
======= ======= ======= =======
</TABLE>
A-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNDER (OVER) RECOVERED ELECTRIC ENERGY AND GAS COSTS--NET
Recoveries of electric energy and gas costs are determined by the BPU under
the LEAC and LGAC. PSE&G's deferred fuel balances as of December 31, 1995 and
December 31, 1994, reflect underrecovered costs as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1995 1994
------ ------
(MILLIONS)
<S> <C> <C>
Underrecovered Electric Energy Costs......................... $162.4 $172.0
Underrecovered Gas Fuel Costs................................ 8.2 .6
------ ------
Total.................................................... $170.6 $172.6
====== ======
</TABLE>
UNRECOVERED PLANT AND REGULATORY STUDY COSTS
Amounts shown in the consolidated balance sheets consist of costs associated
with developing, consolidating and documenting the specific design basis of
PSE&G's jointly owned nuclear generating stations, as well as PSE&G's share of
costs associated with the cancellation of the Hydrogen Water Chemistry System
Project (HWCS Project) at Peach Bottom. PSE&G has received both BPU and FERC
approval to defer and amortize, over the remaining life of the Salem and Hope
Creek nuclear units, costs associated with configuration baseline
documentation and the canceled HWCS Project. PSE&G has received FERC approval
to defer and amortize over the remaining life of the applicable Peach Bottom
units, costs associated with the configuration baseline documentation and the
canceled HWCS Project. In accordance with the filed Alternative Rate Plan,
PSE&G has requested to have separate mechanisms to ensure continued recovery
of costs associated with activities mandated or approved by state or federal
agencies or otherwise out of PSE&G's control. (See Note 2--Rate Matters).
UNAMORTIZED DEBT EXPENSE
Gains and losses and the costs of issuing and redeeming long-term debt for
PSE&G are deferred and amortized over the life of the applicable debt.
OIL AND GAS PROPERTY WRITE-DOWN
On December 31, 1992, the BPU approved the recovery of PSE&G's deferral of
an EDC write-down through PSE&G's LGAC over a ten-year period beginning
January 1, 1993. At December 31, 1995 and 1994, the remaining balance to be
amortized was $36.1 million and $41.2, respectively.
A-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6. SCHEDULE OF CONSOLIDATED DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
INTEREST RATES DUE 1995 1994
-------------- --- ---------- ----------
(THOUSANDS OF
DOLLARS)
<C> <S> <C> <C>
LONG-TERM
PSE&G
FIRST AND REFUNDING MORTGAGE BONDS (NOTE A)
4 3/4%-6% 1995.......................... $ -- $ 310,000
6 7/8%-7 1/8% 1997.......................... 300,000 300,000
6% 1998.......................... 100,000 100,000
8 3/4% 1999.......................... 100,000 100,000
6%-7 5/8% 2000.......................... 400,000 400,000
6 1/8%-9 1/8% 2001-2005..................... 1,125,000 1,125,000
6.30%-6.90% 2006-2010..................... 177,990 234,310
6.80%-7 3/8% 2011-2015..................... 198,500 198,500
Variable 2011-2015..................... 42,620 --
6.45%-8.10% 2016-2020..................... 29,600 29,600
Variable 2016-2020..................... 13,700 --
5.20%-9 1/4% 2021-2025..................... 1,263,500 1,267,500
5.70%-6.55% 2026-2030..................... 244,835 244,835
5.45%-6.40% 2031-2035..................... 399,565 399,565
5%-8% 2037.......................... 15,001 15,001
MEDIUM-TERM NOTES
7.10%-7.13% 1997.......................... 100,000 --
7.15%-7.18% 2023.......................... 40,500 40,500
8.10%-8.16% 2009.......................... 60,000 60,000
---------- ----------
Total First and Refunding Mortgage Bonds..... $4,610,811 $4,824,811
---------- ----------
DEBENTURE BONDS UNSECURED
6% 1998.......................... $ 18,195 $ 18,195
---------- ----------
Total Debenture Bonds........................ 18,195 18,195
---------- ----------
Principal Amount Outstanding (note F)......... 4,629,006 4,843,006
Amounts Due Within One Year (note B).......... -- (310,200)
Net Unamortized Discount...................... (42,738) (46,019)
---------- ----------
Total Long-Term Debt of PSE&G (note G)...... 4,586,268 4,486,787
---------- ----------
EDHI
CAPITAL (note C) Senior notes
9.875%--10.05% 1998.......................... 122,500 165,000
MEDIUM-TERM NOTES
5.65%-9.55% 1995.......................... -- 112,000
9.00% 1996.......................... 20,000 20,000
5.79%-5.92% 1997.......................... 27,000 27,000
9.00% 1998.......................... 75,000 75,000
8.95%-9.93% 1999.......................... 155,000 155,000
6.54% 2000.......................... 78,000 78,000
---------- ----------
Principal Amount Outstanding (note F)......... 477,500 632,000
Amounts Due Within One Year (note B).......... (62,482) (154,405)
Net Unamortized Discount...................... (901) (1,278)
---------- ----------
Total Long-Term Debt of Capital............. 414,117 476,317
---------- ----------
</TABLE>
A-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
INTEREST RATES DUE 1995 1994
-------------- --- ---------- ----------
(THOUSANDS OF
DOLLARS)
<C> <S> <C> <C>
Funding (note D)
9.54% 1995................................ -- 35,000
9.55% 1996................................ 28,000 28,000
6.85%-9.59% 1997................................ 55,000 55,000
9.95% 1998................................ 83,000 83,000
7.58% 1999................................ 45,000 45,000
---------- ----------
Principal Amount Outstanding (note F)................. 211,000 246,000
Amounts Due Within One Year (note B).................. (28,000) (35,000)
---------- ----------
Total Long-Term Debt of Funding..................... 183,000 211,000
---------- ----------
EGDC MORTGAGE NOTES
10.625%--12.75% 2012 (note F)....................... 6,554 6,686
---------- ----------
Amounts Due Within One Year (note B).................. (148) (133)
---------- ----------
Total Long-Term Debt of EGDC....................... 6,406 6,553
---------- ----------
Total Long-Term Debt of EDHI....................... 603,523 693,870
---------- ----------
Consolidated Long-Term Debt (note E)............. $5,189,791 $5,180,657
========== ==========
</TABLE>
NOTES:
(A) PSE&G's Mortgage, securing the Bonds, constitutes a direct first mortgage
lien on substantially all PSE&G'S property and franchises.
(B) The aggregate principal amounts of mandatory requirements for sinking
funds and maturities for each of the five years following December 31,
1995 are as follows:
<TABLE>
<CAPTION>
SINKING
FUNDS MATURITIES
-------- --------------------------------------------
YEAR CAPITAL PSE&G CAPITAL EGDC FUNDING TOTAL
- ---- -------- ---------- -------- ---- -------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
1996...................... $ 42,500 $ -- $ 20,000 $148 $ 28,000 $ 90,648
1997...................... 42,500 400,000 27,000 166 55,000 524,666
1998...................... 37,500 118,195 75,000 184 83,000 313,879
1999...................... -- 100,000 155,000 205 45,000 300,205
2000...................... -- 400,000 78,000 228 -- 478,228
-------- ---------- -------- ---- -------- ----------
$122,500 $1,018,195 $355,000 $931 $211,000 $1,707,626
======== ========== ======== ==== ======== ==========
</TABLE>
In January 1996 principal amounts of $3.5 million of the 8 3/4% EE First
and Refunding Mortgage Bonds Series and $16.942 million of the 8 3/4%
Series HH First and Refunding Mortgage Bonds were reacquired.
On February 1, 1996 a sinking fund in the principal amount of $1.5 million
of the 8 3/4% Series HH First and Refunding Mortgage Bonds was met. In
addition, the remaining principal amounts of $192.5 million of the 8 3/4%
Series EE and $130.058 million of the 8 3/4% Series HH were defeased.
(C) Capital has provided up to $750 million debt financing for EDHI's
businesses on the basis of a net worth maintenance agreement with
Enterprise. Since January 31, 1995, Capital has agreed to limit its
borrowings to no more than $650 million.
(D) Funding provides debt financing for EDHI's businesses other than EGDC on
the basis of unconditional guarantees from EDHI.
(E) At December 31, 1995 and 1994, the annual interest requirement on long-
term debt was $399.8 million and $422.7 million, of which $315.6 million
and $335.6 million was the requirement for Bonds. The embedded interest
cost on long-term debt on such date was 7.71% and 7.79%, respectively.
A-33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(F) For information concerning fair value of financial instruments, see Note
8--Financial Instruments and Risk Management.
(G) At December 31, 1995 and 1994, PSE&G's annual interest requirement on
long-term debt was $330.5 million and $343.3 million, of which $315.6
million and $335.6 million, respectively, was the requirement for Bonds.
The embedded interest cost on long-term debt was 7.54% and 7.59%,
respectively.
PSE&G has authorization from the BPU to issue approximately $4.375 billion
aggregate amount of additional bonds/MTNs/Preferred Stock/Monthly Income
Preferred Securities through 1997 for refunding purposes.
SHORT-TERM (COMMERCIAL PAPER AND LOANS)
Commercial paper represents unsecured bearer promissory notes sold through
dealers at a discount with a term of nine months or less.
Bank loans represent PSE&G's unsecured promissory notes issued under
informal credit arrangements with various banks and have a term of eleven
months or less.
PSE&G
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Principal amount outstanding at end of year,
primarily commercial paper.................... $ 567 $ 402 $ 533
Weighted average interest rate for Short-Term
Debt at year-end.............................. 5.93% 6.07% 3.34%
</TABLE>
PSE&G has authorization from the BPU to issue and have outstanding not more
than $1 billion of its short-term obligations at any one time, consisting of
commercial paper and other unsecured borrowings from banks and other lenders.
This authorization expires January 1, 1997.
PSE&G has a $500 million one year revolving credit agreement expiring in
August 1996 and a $500 million five year revolving credit agreement expiring
in August 2000 with a group of commercial banks each of which provides for
borrowing up to one year. As of December 31, 1995, there was no short-term
debt outstanding under this agreement.
PSE&G has a $50 million uncommitted Line of Credit facility extended by a
bank to primarily support short-term borrowings all of which was outstanding
under this facility on December 31, 1995 and is included in the table above.
PSE&G had various Lines of Credit facility extended by a bank to primarily
support the issuance of Letters of Credit. As of December 31, 1995, Letters of
Credit were issued in the amount of $20.6 million.
Fuelco has a $150 million commercial paper program to finance a 42.49% share
of Peach Bottom nuclear fuel, supported by a $150 million revolving credit
facility with a group of banks, which expires in June 1996. PSE&G has
guaranteed repayment of Fuelco's respective obligations. As of December 31,
1995, 1994 and 1993, Fuelco had commercial paper of $87.7 million, $93.7
million and $108.7 million, respectively, outstanding under such program,
which amounts are included in the table above.
PSCRC has a $30 million revolving credit facility supported by a PSE&G
subscription agreement in an aggregate amount of $30 million which terminates
on March 7, 1996. PSCRC is presently in the process of negotiating a one year
extension for this facility. As of December 31, 1995, PSCRC had $30 million
outstanding under this facility, which amount is included in the table above.
PSE&G has entered into standby financing arrangements with a bank totaling
$61 million. These facilities support tax-exempt multi-mode financings done
through the New Jersey Economic Development Authority and
A-34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the York County (Pennsylvania) Industrial Development Authority. As of
December 31, 1995, no amounts were outstanding under such arrangements.
EDHI
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Principal amount outstanding at end of year..... $ 182 $ 90 $ 45
Weighted average interest rate for Short-Term
Debt at year-end............................... 6.26% 5.97% 3.47%
</TABLE>
At December 31, 1995, Funding had a $225 million commercial paper program
supported by a direct pay commercial bank letter of credit and revolving
credit facility and a $225 million revolving credit facility, each of which
expires in March 1998. At December 31, 1995, there was $100 million
outstanding under this agreement.
ENTERPRISE
At December 31, 1995, 1994 and 1993, Enterprise had a $25 million line of
credit with a bank. At December 31, 1995, 1994 and 1993, Enterprise had no
borrowings under this line.
NOTE 7. LONG-TERM INVESTMENTS
Long-Term Investments are primarily those of EDHI. A summary of Long-Term
Investments is as follows:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Lease Agreements (see Note
11--Leasing Activities):
Leveraged Leases.......... $ 845 $ 789
Direct-Financing Leases... 35 76
Other Leases.............. 6 6
---------- ----------
Total................... 886 871
---------- ----------
Partnerships:
General Partnerships...... 177 168
Limited Partnerships...... 522 437
---------- ----------
Total................... 699 605
---------- ----------
Corporate Joint Ventures.... 49 26
Securities.................. 76 75
Valuation Allowances........ (21) (17)
Other Investments........... 133 66
---------- ----------
Total Long-Term Invest-
ments.................. $ 1,822 $ 1,626
========== ==========
</TABLE>
PSRC's leveraged leases are reported net of principal and interest on
nonrecourse loans, unearned income and deferred tax credits. Income and
deferred tax credits are recognized at a level rate of return from each lease
during the periods in which the net investment is positive.
Partnership investments are those of PSRC, EGDC and CEA and are undertaken
with other investors. PSRC is a limited partner in various partnerships and is
committed to make investments from time to time upon the request of the
respective general partners. As of December 31, 1995, $58 million remained as
PSRC's unfunded commitment subject to call.
PSRC has invested in securities and limited partnerships investing in
securities, which are recorded at fair value. Realized investment gains and
losses on the sale of investment securities are determined utilizing the
specific cost identification method. (See Note 8--Financial Instruments and
Risk Management.)
A-35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of December 31, 1995 and 1994, EDHI's long-term investments aggregated
$1.7 billion and $1.6 billion, respectively, and its property, plant and
equipment (net of accumulated depreciation and amortization and valuation
allowances) aggregated $.7 billion. As of December 31, 1995 and December 31,
1994, EDHI comprised 15% of Enterprise's assets.
NOTE 8. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Enterprise's operations give rise to exposure to market risks from changes
in crude oil and natural gas prices, interest rates, foreign exchange rates
and security prices of investments. Enterprise's policy is to use derivatives
for the purpose of managing market risk consistent with its business plans and
prudent practices. Enterprise does not hold or issue financial instruments for
trading purposes.
The notional amounts of derivatives summarized below do not represent
amounts exchanged by the parties and, thus, are not a measure of the exposure
of Enterprise through its use of derivatives. The amounts exchanged, under the
terms of the derivatives, are calculated on the basis of the notional amounts.
Enterprise limits its exposure to credit-related losses in the event of
nonperformance by counterparties by limiting its counterparties to those with
high credit ratings.
NATURAL GAS AND CRUDE OIL HEDGING
EDC sold natural gas futures contracts outstanding at December 31, 1995 and
1994 which hedged 21,250,000 mmbtu and 10,650,000 mmbtu, respectively. Such
amounts represented approximately 26% and 13% of EDC's anticipated domestic
natural gas production in 1996 and 1995, respectively, at average sales prices
of $1.93 per mmbtu and $1.95 per mmbtu, respectively.
At December 31, 1995, EDC sold crude oil futures contracts outstanding which
hedged 1.5 million barrels of oil representing approximately 38% of EDC's
anticipated domestic oil production in 1996 at an average price of $17.74 per
barrel.
The deferred unrealized gains (losses) at December 31, 1995 and 1994 related
to EDC's futures contracts were ($5.1) million and $2.6 million, respectively.
Through December 31, 1995 and 1994, USEP entered into swaps for future
contracts to buy 4,970,000 mmbtu and 2,850,000 mmbtu of natural gas related to
fixed-price sales commitments. Such swaps hedged approximately 54% and 73% of
sales commitments at December 31, 1995 and 1994 at average prices of $1.78 and
$1.94 per mmbtu, respectively. USEP had deferred unrealized gains of $3.1
million at December 31, 1995 and unrealized losses of $.7 million at December
31, 1994.
INTEREST RATE SWAP
Capital entered into an interest rate swap in December, 1990 to allow EDHI
to borrow at floating rates and effectively swap them into fixed rates. The
interest differential to be received or paid under the interest rate swap
agreement is accrued over the life of the agreement as an adjustment to the
interest expense of the related borrowing. The swap expired on December 11,
1995.
<TABLE>
<CAPTION>
1995 1994
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Pay-fixed swap
Notional amount.................................. $ 100,000 $ 100,000
Pay rate......................................... 8.0% 8.0%
Average receive rate............................. 6.4% 4.1%
Year-end receive rate............................ -- % 6.8%
</TABLE>
A-36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOREIGN EXCHANGE
During 1994, PSRC entered into a forward purchase contract for foreign
currency to hedge an EDC firm purchase commitment denominated in pound
sterling. The EDC commitment related to the acquisition of Industrial Scotland
Energy Limited (ISE) for approximately 21 million pounds. The realized gain of
approximately $800 thousand on the forward purchase contract for foreign
currency was used to reduce the net acquisition cost allocated to ISE's assets
upon completion of the acquisition in June 1994.
Currently, substantially all of Enterprise's foreign revenues and expenses
are denominated in U.S. dollars.
SECURITY SWAP
During 1994, PSRC entered into two agreements to swap portions of its
ownership interest in certain equity securities, held in a partnership, to the
S&P 500 return. The purpose of the swaps was to minimize PSRC's exposure to
the potential price volatility of such equity securities. The agreements had
respective notional amounts of $17.6 million and $12.9 million.
The aggregate notional amounts swapped and the year end unrealized gain
during 1994 for these two agreements were $30.5 million and $3.8 million,
respectively.
In March 1995, the equity securities, in which PSRC had an ownership
interest, were exchanged for equity securities of another entity.
Consequently, PSRC terminated the security swap and realized a pre-tax gain of
$3.5 million which was offset by the reversal of the $3.8 million unrealized
gain at year end 1994.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value was determined using the market quotations or
values of securities with similar terms, credit ratings, remaining maturities
and redemptions at the end of 1995 and 1994, respectively.
<TABLE>
<CAPTION>
1995 1994
-------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- ---------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Long-Term Debt:
EDHI............................... $ 603,523 $ 730,000 $ 884,686 $ 930,000
PSE&G.............................. 4,629,006 4,828,008 4,843,006 4,500,000
Preferred Securities Subject to Man-
datory Redemption:
PSE&G Cumulative Preferred Securi-
ties.............................. 150,000 156,000 150,000 145,900
Monthly Income Preferred Securi-
ties.............................. 210,000 225,300 150,000 158,300
</TABLE>
NOTE 9. CASH AND CASH EQUIVALENTS
The December 31, 1995 and 1994 balances consist primarily of working funds
and highly liquid marketable securities (commercial paper) with a maturity of
three months or less.
A-37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10. FEDERAL INCOME TAXES
A reconciliation of reported Net Income with pretax income and of Federal
income tax expense with the amount computed by multiplying pretax income by
the statutory Federal income tax rate of 35% is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Net Income................................... $ 662,323 $ 679,033 $600,933
Preferred securities dividend requirements... 34,236 40,467 38,114
SFAS 109 Cumulative Effect................... -- -- (5,414)
---------- ---------- --------
Subtotal................................. 696,559 719,500 633,633
---------- ---------- --------
Federal income taxes:
Operating income:
Current provision.......................... 183,268 162,521 151,208
Provision for deferred income taxes--
net(A).................................... 192,648 173,327 186,256
Investment tax credits--net................ (21,919) (23,297) (23,784)
---------- ---------- --------
Total included in operating income......... 353,997 312,551 313,680
Miscellaneous other income:
Current provision.......................... (9,897) (8,186) (14,340)
Provision for deferred income taxes(A)..... 9,816 10,422 9,815
SFAS 90 deferred income taxes(A)............. 2,161 2,530 2,948
---------- ---------- --------
Total Federal income tax provisions...... 356,077 317,317 312,103
---------- ---------- --------
Pretax income................................ $1,052,636 $1,036,817 $945,736
========== ========== ========
</TABLE>
Reconciliation between total Federal income tax provisions and tax computed
at the statutory tax rate on pretax income:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Tax computed at the statutory rate.............. $368,423 $362,887 $331,008
-------- -------- --------
Increase (decrease) attributable to flow through
of certain tax adjustments:
Depreciation.................................. 16,257 (4,597) 3,347
Amortization of investment tax credits........ (21,919) (23,297) (23,784)
Other......................................... (6,684) (17,676) 1,532
-------- -------- --------
Subtotal.................................... (12,346) (45,570) (18,905)
-------- -------- --------
Total Federal income tax provisions......... $356,077 $317,317 $312,103
======== ======== ========
Effective Federal income tax rate............... 33.8% 30.6% 33.0%
</TABLE>
(A) The provision for deferred income taxes represents the tax effects of
the following items:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Deferred Credits:
Additional tax depreciation and amortization.... $174,190 $109,106 $112,814
Leasing Activities.............................. 64,567 60,129 34,958
Property Abandonments........................... (7,411) (6,606) (6,632)
Oil and Gas Property Write-Down................. (2,451) (2,451) (2,451)
Deferred fuel costs--net........................ (3,601) 39,361 63,330
Other........................................... (20,669) (13,260) (3,000)
-------- -------- --------
Total......................................... $204,625 $186,279 $199,019
======== ======== ========
</TABLE>
A-38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Between the years 1987 and 1994, Enterprise's Federal alternative minimum
tax (AMT) liability exceeded its regular Federal income tax liability. This
excess can be carried forward indefinitely to offset regular income tax
liability in future years. Enterprise commenced using these AMT credits in
1995 and expects to continue using them in future years as regular tax
liability exceeds AMT. As of December 31, 1995, 1994 and 1993, Enterprise had
AMT credits of $203 million, $256 million and $247 million, respectively.
Since 1986, Enterprise has filed a consolidated Federal income tax return on
behalf of itself and its subsidiaries. Prior to 1986, PSE&G filed consolidated
tax returns. In March, 1992, the Internal Revenue Service (IRS) issued a
Revenue Agent's Report (RAR) following completion of examination of PSE&G's
consolidated tax return for 1985 and Enterprise's consolidated tax returns for
1986 and 1987, proposing various adjustments for such years which would
increase Enterprise's consolidated Federal income tax liability by
approximately $121 million, exclusive of interest and penalties, of which
approximately $118 million is attributable to PSE&G. Interest after taxes on
these proposed adjustments is currently estimated to be approximately $119
million as of December 31, 1995 and will continue to accrue at the Federal
rate for large corporate underpayments, currently 11% annually.
The most significant of these proposed adjustments relates to the IRS
contention that PSE&G's Hope Creek nuclear unit is a partnership with a short
1986 taxable year. In addition, the IRS contends that the tax in-service date
of that unit is four months later than the date claimed by PSE&G. In June
1992, Enterprise and PSE&G filed a protest with the IRS disagreeing with
certain of the proposed adjustments (including those related to Hope Creek)
contained in the RAR for taxable years 1985 through 1987 and continue to
contest these issues. Any tax adjustments resulting from the RAR would reduce
Enterprise's and PSE&G's respective deferred credits for accumulated deferred
income taxes. While PSE&G believes that assessments attributable to it are
generally recoverable from its customers in rates, no assurances can be given
as to what regulatory treatment may be afforded by the BPU.
On January 1, 1993, Enterprise adopted SFAS 109 without restating prior
years' financial statements which resulted in Enterprise recording a $5.4
million cumulative effect increase in its net income. Under SFAS 109, deferred
taxes are provided at the enacted statutory tax rate for all temporary
differences between the financial statement carrying amounts and the tax bases
of existing assets and liabilities irrespective of the treatment for rate-
making purposes. Since management believes that it is probable that the
effects of SFAS 109 on PSE&G, principally the accumulated tax benefits that
previously have been treated as a flow-through item to customers, will be
recovered from utility customers in the future, an offsetting regulatory asset
was established. As of December 31, 1995, PSE&G had recorded a deferred tax
liability and an offsetting regulatory asset of $769 million representing the
future revenue expected to be recovered through rates based upon established
regulatory practices which permit recovery of current taxes payable. This
amount was determined using the 1995 Federal income tax rate of 35%.
A-39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SFAS 109
The following is an analysis of accumulated deferred income taxes:
<TABLE>
<CAPTION>
ACCUMULATED DEFERRED INCOME TAXES 1995 1994
--------------------------------- ----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Assets:
Current (net)............................................. $ 27,571 $ 25,311
Non-Current:
Unrecovered Investment Tax Credits...................... 129,713 136,402
Nuclear Decommissioning................................. 25,241 25,082
Hope Creek Cost Disallowance............................ -- 10,127
Construction Period Interest and Taxes.................. 17,199 15,913
Vacation Pay............................................ 6,681 6,822
AMT Credit.............................................. 202,655 255,828
Real Estate Impairment.................................. 5,213 20,932
Other................................................... 4,107 6,863
----------- -----------
Total Non-Current..................................... $ 390,809 $ 477,969
----------- -----------
Total Assets.......................................... $ 418,380 $ 503,280
=========== ===========
Liabilities:
Non-Current:
Plant Related Items..................................... $ 2,370,830 $ 2,268,688
Leasing Activities...................................... 616,914 580,415
Property Abandonments................................... 21,469 26,971
Oil and Gas Property Write-Down......................... 13,061 14,925
Deferred Electric Energy & Gas Costs.................... 56,283 59,884
Unamortized Debt Expense................................ 36,945 37,599
Taxes Recoverable Through Future Rates (net)............ 262,625 270,684
Other................................................... 107,302 124,193
----------- -----------
Total Non-Current..................................... $ 3,485,429 $ 3,383,359
----------- -----------
Total Liabilities..................................... $ 3,485,429 $ 3,383,359
=========== ===========
Summary--Accumulated Deferred Income Taxes
Net Current Assets....................................... $ 27,571 $ 25,311
Net Deferred Liability................................... $ 3,094,620 $ 2,905,390
----------- -----------
Total................................................. $ 3,067,049 $ 2,880,079
=========== ===========
</TABLE>
NOTE 11. LEASING ACTIVITIES
AS LESSEE
The Consolidated Balance Sheets include assets and related obligations
applicable to capital leases under which PSE&G is a lessee. The total
amortization of the leased assets and interest on the lease obligations equals
the net minimum lease payments included in rent expense for capital leases.
Capital leases of PSE&G relate primarily to its corporate headquarters and
other capital equipment. Certain of the leases contain renewal and purchase
options and also contain escalation clauses.
Enterprise and its other subsidiaries are not lessees in any capitalized
leases.
A-40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Utility plant includes the following amounts for capital leases at December
31:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Common Plant........................................ $ 58,610 $ 58,610
Less: Accumulated Amortization...................... 5,499 4,840
----------- -----------
Net Assets under Capital Leases..................... $ 53,111 $ 53,770
=========== ===========
</TABLE>
Future minimum lease payments for noncancelable capital and operating leases
at December 31, 1995 were:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------- ------------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
1996.............................................. 13,174 14,616
1997.............................................. 13,175 12,580
1998.............................................. 13,176 8,638
1999.............................................. 13,177 6,517
2000.............................................. 12,834 4,449
Later Years....................................... 189,229 12,998
----------- -----------
Minimum Lease Payments............................ 254,765 $ 59,798
===========
Less: Amount representing estimated executory
costs, together with any profit thereon, included
in minimum lease payments........................ 126,029
-----------
Net minimum lease payments........................ 128,736
Less: Amount representing interest................ 75,625
-----------
Present value of net minimum lease payments(A).... $ 53,111
===========
</TABLE>
(A) Reflected in the Consolidated Balance Sheets for 1995 and 1994 were
Capital Lease Obligations of $53.111 million and $53.770 million which
includes Capital Lease Obligations due within one year of $739 thousand
and $659 thousand, respectively.
The following schedule shows the composition of rent expense included in
Operating Expenses:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
---------- ---------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Interest on Capital Lease Obligations........ $ 6,084 $ 6,156 $ 6,074
Amortization of Utility Plant under Capital
Leases...................................... 659 588 513
---------- ---------- ----------
Net minimum lease payments relating to Capi-
tal
Leases...................................... 6,743 6,744 6,587
Other Lease payments......................... 27,219 28,447 22,132
---------- ---------- ----------
Total Rent Expense......................... $ 33,962 $ 35,191 $ 28,719
========== ========== ==========
</TABLE>
A-41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AS LESSOR
PSRC's net investments in leveraged and direct financing leases are composed
of the following elements:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
-------------------------- --------------------------
(MILLIONS OF DOLLARS)
DIRECT DIRECT
LEVERAGED FINANCING LEVERAGED FINANCING
LEASES LEASES TOTAL LEASES LEASES TOTAL
--------- --------- ------ --------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Lease rents receivable.. $1,031 $39 $1,070 $ 990 $92 $1,082
Estimated residual val-
ue..................... 635 8 643 622 13 635
------ --- ------ ----- --- ------
1,666 47 1,713 1,612 105 1,717
Unearned and deferred
income................. (821) (12) (833) (823) (29) (852)
------ --- ------ ----- --- ------
Total investments..... 845 35 880 789 76 865
Deferred taxes.......... (405) (11) (416) (333) (20) (353)
------ --- ------ ----- --- ------
Net investments....... $ 440 $24 $ 464 $ 456 $56 $ 512
====== === ====== ===== === ======
</TABLE>
PSRC's other capital leases are with various regional, state and city
authorities for transportation equipment and aggregated $6 million as of
December 31, 1995 and 1994.
During 1995, PSRC converted two Airbus A-300 aircraft under direct-finance
leases to operating leases. As of December 31, 1995, such aircraft had a net
asset value of $11 million. On January 31, 1996, the aircraft were sold for an
amount approximating their net asset value.
NOTE 12. COMMITMENTS AND CONTINGENT LIABILITIES
NUCLEAR PERFORMANCE STANDARD
The BPU has established its NPS for nuclear generating stations owned by New
Jersey electric utilities, including the five nuclear units in which PSE&G has
an ownership interest: Salem Units 1 and 2--42.59%; Hope Creek--95%; and Peach
Bottom Units 2 and 3--42.49%. PSE&G operates Salem and Hope Creek, while Peach
Bottom is operated by PECO Energy, Inc. (PECO).
The penalty/reward under the NPS is a percentage of replacement power costs.
(See table below.)
<TABLE>
<CAPTION>
CAPACITY FACTOR RANGE REWARD PENALTY
--------------------- ------ -------
<S> <C> <C>
Equal to or greater than 75%.................................. 30% --
Equal to or greater than 65% and less than 75%................ None None
Equal to or greater than 55% and less than 65%................ -- 30%
Equal to or greater than 45% and less than 55%................ -- 40%
Equal to or greater than 40% and less than 45%................ -- 50%
Below 40%..................................................... BPU Intervenes
</TABLE>
Under the NPS, the capacity factor is calculated annually using maximum
dependable capability of the five nuclear units in which PSE&G owns an
interest. This method takes into account actual operating conditions of the
units.
While the NPS does not specifically have a gross negligence provision, the
BPU has indicated that it would consider allegations of gross negligence
brought upon a sufficient factual basis. A finding of gross negligence could
result in penalties other than those prescribed under the NPS. During 1995,
the five nuclear units in which PSE&G has an ownership interest aggregated a
62% combined capacity factor which resulted in a penalty for
A-42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1995 of approximately $3.5 million. On January 16, 1996, PSE&G filed its
Alternative Rate Plan with the BPU which proposes the elimination of the NPS.
See Note 2.
Based upon current projections and assumptions regarding PSE&G's five
nuclear units during 1996, including the return of Hope Creek to service in
early March, the return of Salem 2 in the third quarter and the continued
outage of Salem 1 for the remainder of the year, the 1996 aggregate capacity
factor would be approximately 57%, which would result in a penalty ranging
from $11 to $12 million. Both of the Salem units are currently out of service
and their return dates are subject to completion of testing, analysis, repair
activity and NRC concurrence that they are prepared to restart. Restart of
Salem 1, which had originally been scheduled for the second quarter of 1996,
will be delayed for a substantial period as a result of the ongoing steam
generator inspection and analysis. Salem 2, which is also undergoing steam
generator inspection and analysis is still scheduled to return to service in
the third quarter of 1996. The inability to successfully return these units to
continuous, safe operation could have a material effect on the financial
position, results of operation and net cash flows of Enterprise and PSE&G.
Certain of the owners of Salem have indicated that they may seek to hold
PSE&G responsible for their share of costs of the current outage. PSE&G cannot
predict what actions, if any, may be taken.
NUCLEAR INSURANCE COVERAGES AND ASSESSMENTS
PSE&G's insurance coverages and maximum retrospective assessments for its
nuclear operations are as follows:
<TABLE>
<CAPTION>
PSE&G MAXIMUM
TOTAL ASSESSMENTS
SITE FOR A SINGLE
TYPE AND SOURCE OF COVERAGES COVERAGES INCIDENT
- ---------------------------- --------- -------------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Public Liability:
American Nuclear Insurers............................ $ 200.0 $ --
Indemnity(A)......................................... 8,720.3 210.2
-------- ------
$8,920.3(B) $210.2
-------- ------
Nuclear Worker Liability:
American Nuclear Insurers(C)......................... $ 200.0 $ 8.1
-------- ------
Property Damage:
Nuclear Mutual Limited............................... $ 500.0 $ 9.2
Nuclear Electric Insurance Ltd. (NEIL II)............ 1,400.0 8.3(D)
Nuclear Electric Insurance Ltd. (NEIL III)........... 850.0 9.2
-------- ------
$2,750.0 $ 26.7
-------- ------
Replacement Power:
Nuclear Electric Insurance Ltd (NEIL I).............. $ 3.5(E) $ 11.4
</TABLE>
(A) Retrospective premium program under the Price-Anderson liability
provisions of the Atomic Energy Act of 1954, as amended (Price-Anderson).
Subject to retrospective assessment with respect to loss from an incident
at any licensed nuclear reactor in the United States. Assessment adjusted
for inflation effective August 20, 1993.
(B) Limit of liability for each nuclear incident under Price-Anderson.
(C) Industry aggregate limit representing the potential liability from workers
claiming exposure to the hazard of nuclear radiation. This policy includes
automatic reinstatements up to an aggregate of $200 million, thereby
A-43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
providing total coverage of $400 million. This policy does not increase
PSE&G's obligation under Price- Anderson.
(D) In the event of a second industry loss triggering NEIL II--coverage, the
maximum retrospective premium assessment can increase to $18.5 million.
(E) Represents limit of coverage available to co-owners of Salem and Hope
Creek, for each plant. Each co-owner purchases its own policy. PSE&G is
currently covered for its percent ownership interest of this limit for each
plant.
Price-Anderson sets the "limit of liability" for claims that could arise from
an incident involving any licensed nuclear facility in the nation. The "limit
of liability" is based on the number of licensed nuclear reactors and is
adjusted at least every five years based on the Consumer Price Index. The
current "limit of liability" is $8.9 billion. All utilities owning a nuclear
reactor, including PSE&G, have provided for this exposure through a combination
of private insurance and mandatory participation in a financial protection pool
as established by Price-Anderson. Under Price-Anderson, each party with an
ownership interest in a nuclear reactor can be assessed its share of $79.3
million per reactor per incident, payable at $10 million per reactor per
incident per year. If the damages exceed the "limit of liability", the
President is to submit to Congress a plan for providing additional compensation
to the injured parties. Congress could impose further revenue raising measures
on the nuclear industry to pay claims. PSE&G's maximum aggregate assessment per
incident is $210.2 million (based on PSE&G's ownership interests in Hope Creek,
Peach Bottom and Salem) and its maximum aggregate annual assessment per
incident is $26.5 million.
Further, a recent decision by the U.S. Court of Appeals for the Third
Circuit, not involving PSE&G, held that the Price Anderson Act did not preclude
awards based on state law claims for punitive damage.
PSE&G is a member of two industry mutual insurance companies; Nuclear Mutual
Limited (NML), and Nuclear Electric Insurance Limited (NEIL). NML provides the
primary property insurance at Salem and Hope Creek. NEIL provides excess
property insurance through its NEIL II and NEIL III policies and replacement
power coverage through its NEIL I policy. Both companies may make retrospective
premium assessments in case of adverse loss experience. PSE&G's maximum
potential liabilities under these assessments are included in the table and
notes above. Certain of the policies also provide that the insurer may suspend
coverage with respect to all nuclear units on a site without notice if the NRC
suspends or revokes the operating license for any unit on a site, issues a
shutdown order with respect to such unit or issues a confirmatory order keeping
such unit down. All coverages at Salem and Hope Creek remain fully in effect.
CONSTRUCTION AND FUEL SUPPLIES
PSE&G has substantial commitments as part of its ongoing construction program
which include capital requirements for nuclear fuel. PSE&G's construction
program is continuously reviewed and periodically revised as a result of
changes in economic conditions, revised load forecasts, changes in the
scheduled retirement dates of existing facilities, changes in business
strategies, site changes, cost escalations under construction contracts,
requirements of regulatory authorities and laws, the timing of and amount of
electric and gas rate changes and the ability of PSE&G to raise necessary
capital. Pursuant to an electric integrated resource plan (IRP), PSE&G
periodically reevaluates its forecasts of future customers, load and peak
growth, sources of electric generating capacity and demand side management
(DSM) to meet such projected growth, including the need to construct new
electric generating capacity. The IRP takes into account assumptions concerning
future demands of customers, effectiveness of conservation and load management
activities, the long-term condition of PSE&G's plants, capacity available from
electric utilities and other suppliers and the amounts of co-generation and
other non-utility capacity projected to be available.
Based on PSE&G's construction program, construction expenditures are expected
to aggregate approximately $2.8 billion, which includes $428 million for
nuclear fuel and $84 million of Allowance for Funds
A-44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
used During Construction (AFDC) during the years 1996 through 2000. The
estimate of construction requirements is based on expected project completion
dates and includes anticipated escalation due to inflation of approximately
3%, annually. Therefore, construction delays or higher inflation levels could
cause significant increases in these amounts. PSE&G expects to generate
internally the funds necessary to satisfy its construction expenditures over
the next five years, assuming adequate and timely recovery of costs, as to
which no assurances can be given. In addition, PSE&G does not presently
anticipate any difficulties in obtaining sufficient sources of fuel for
electric generation or adequate gas supplies during the years 1996 through
2000.
HAZARDOUS WASTE
Certain Federal and State laws authorize the United States Environmental
Protection Agency (EPA) and the New Jersey Department of Environmental
Protection (NJDEP), among other agencies, to issue orders and bring
enforcement actions to compel responsible parties to take investigative and
remedial actions at any site that is determined to present an imminent and
substantial danger to the public or the environment because of an actual or
threatened release of one or more hazardous substances. Because of the nature
of PSE&G's business, including the production of electricity, the distribution
of gas and, formerly, the manufacture of gas, various by-products and
substances are or were produced or handled which contain constituents
classified as hazardous. PSE&G generally provides for the disposal or
processing of such substances through licensed independent contractors.
However, these statutory provisions impose joint and several responsibility
without regard to fault on all responsible parties, including the generators
of the hazardous substances, for certain investigative and remediation costs
at sites where these substances were disposed of or processed. PSE&G has been
notified with respect to a number of such sites and the remediation of these
potentially hazardous sites is receiving greater attention from the government
agencies involved. Generally, actions directed at funding such site
investigations and remediation include all suspected or known responsible
parties. PSE&G does not expect its expenditures for any such site to have a
material effect on its financial position, results of operations or net cash
flows.
PSE&G MANUFACTURED GAS PLANT REMEDIATION PROGRAM
In 1988, NJDEP notified PSE&G that it had identified the need for PSE&G,
pursuant to a formal arrangement, to systematically investigate and, if
necessary, resolve environmental concerns extant at PSE&G's former
manufactured gas plant sites. To date, NJDEP and PSE&G have identified 38
former gas plant sites. PSE&G is currently working with NJDEP under a program
to assess, investigate and, if necessary, remediate environmental concerns at
these sites (Remediation Program). The Remediation Program is periodically
reviewed and revised by PSE&G based on regulatory requirements, experience
with the Remediation Program and available technologies. The cost of the
Remediation Program cannot be reasonably estimated, but experience to date
indicates that costs of at least $20 million per year could be incurred over a
period of more than 30 years and that the overall cost could be material to
PSE&G's financial position, results of operations or net cash flows.
Costs incurred through December 31, 1995 for the Remediation Program
amounted to $64.6 million, net of certain insurance proceeds. In addition, at
December 31, 1995, PSE&G's estimated liability for remediation costs through
1998 aggregated $96.3 million.
In accordance with a Stipulation approved by the BPU in 1992, PSE&G is
recovering through its LEAC over a six-year period $32 million of its actual
remediation costs to reflect costs incurred through September 30, 1992. As of
December 31, 1995, PSE&G has recovered $27.8 million of the $32 million of
such costs. PSE&G is expected to recover the balance of $4.2 million in its
currently filed LGAC period ending in 1996.
NOTE 13. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
On January 1, 1993, Enterprise and PSE&G adopted SFAS 106 which requires
that the expected cost of employees' postretirement health care and insurance
benefits be charged to expense during the years in which
A-45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
employees render service. PSE&G elected to amortize, over 20 years, its
unfunded obligation of $609.3 million at January 1, 1993. The following table
discloses the significant components of the net periodic postretirement
benefit obligation:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
NET PERIODIC POSTRETIREMENT BENEFIT OBLIGATION 1995 1994 1993
---------------------------------------------- ------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Service cost.............................................. $ 8.5 $ 11.1 $ 11.7
Interest on accumulated postretirement obligation......... 48.2 45.4 44.4
Amortization of transition obligation..................... 30.5 30.5 30.5
Amortization of Net (Gain)/Loss (a)....................... (3.8) -- --
Deferral of current expense............................... (50.7) (57.8) (58.6)
------ ------ ------
Annual net expense..................................... $ 32.7 $ 29.2 $ 28.0
====== ====== ======
</TABLE>
(a) Reflects change in Plan Assumptions.
The discount rate used in determining the PSE&G net periodic postretirement
benefit cost was 8.50% and 7.25% for 1995 and 1994, respectively.
A one-percentage-point increase in the assumed health care cost trend rate
for each year would increase the aggregate of the service and interest cost
components of net periodic postretirement health care cost by approximately
$2.6 million, or 5.6%, and increase the accumulated postretirement benefit
obligation as of December 31, 1995 by $34.8 million, or 5.9%.
The assumed health care cost trend rates used in measuring the accumulated
postretirement benefit obligation in 1995 were: medical costs for pre-age
sixty-five retirees--13.0%, medical costs for post-age sixty-five retirees--
9.0% and dental costs--7.0%; such rates are assumed to gradually decline to
5.0%, 5.0% and 5.0%, respectively, in 2011. The medical costs above include a
provision for prescription drugs.
In its 1992 base rate case, PSE&G requested full recovery of the costs
associated with postretirement benefits other than pensions (OPEB) on an
accrual basis, in accordance with SFAS 106. The BPU's December 31, 1992 base
rate order provided that (1) PSE&G's pay-as-you-go basis OPEB costs will
continue to be included in cost of service and will be recoverable in base
rates on a pay-as-you-go basis; (2) prudently incurred OPEB costs, that are
accounted for on an accrual basis in accordance with SFAS 106, will be
recoverable in future rates; (3) PSE&G should account for the differences
between its OPEB costs on an accrual basis and the pay-as-you-go basis being
recovered in rates as a regulatory asset; and (4) the issue of cash versus
accrual accounting will be revisited and in the event that FASB or the SEC
requires the use of accrual accounting for OPEB costs for rate-making
purposes, the regulatory asset will be recoverable, through rates, over an
appropriate amortization period.
Accordingly, PSE&G is accounting for the differences between its SFAS 106
accrual cost and the cash cost currently recovered through rates as a
regulatory asset. OPEB costs charged to expenses during 1995 were $32.6
million and accrued OPEB costs deferred were $50.7 million. The amount of the
unfunded liability, at December 31, 1995, as shown below, is $717.9 million
and funding options are currently being explored. The primary effect of
adopting SFAS 106 on Enterprise's and PSE&G's financial reporting is on the
presentation of their financial positions with minimal effect on their results
of operations.
During January 1993 and subsequent to the receipt of the Order, the FASB's
Emerging Issues Task Force (EITF) concluded that deferral of such costs is
acceptable, provided regulators allow SFAS 106 costs in rates within
approximately five years of the adoption of SFAS 106 for financial reporting
purposes, with any cost deferrals recovered in approximately twenty years. In
accordance with the Alternative Rate Plan filed, PSE&G
A-46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
expects full SFAS 106 recovery in accordance with the EITF's view of such
standard and believes that it is probable that any deferred costs will be
recovered from utility customers within such twenty-year time period. As of
December 31, 1995, PSE&G has deferred $167.2 million of such costs. However,
if recovery of SFAS 106 costs is not approved by the BPU, the impact on the
financial position and results of operations would be material.
In accordance with SFAS 106 disclosure requirements, a reconciliation of the
funded status of the plan is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1994
------- -------
(MILLIONS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................... $(444.6) $(379.2)
Fully eligible active plan participants.................... (52.9) (45.7)
Other active plan participants............................. (220.4) (161.0)
------- -------
Total.................................................... (717.9) (585.9)
Plan assets at fair value.................................... -- --
------- -------
Accumulated postretirement benefit obligation in excess of
plan assets................................................. (717.9) (585.9)
Unrecognized net (gain)/loss from past experience different
from that assumed and from changes in assumptions........... 32.8 (78.8)
Unrecognized prior service cost.............................. -- --
Unrecognized transition obligation........................... 517.9 548.3
------- -------
Accrued postretirement obligation............................ $(167.2) $(116.4)
======= =======
</TABLE>
The discount rate used in determining the accumulated postretirement benefit
obligation as of December 31, 1995 was 7.25% and 8.50% for 1995 and 1994,
respectively.
NOTE 14. PENSION PLAN
The discount rates, expected long-term rates of return on assets and average
compensation growth rates used in determining the Pension Plan's funded status
and net pension cost as of December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
----- -----
<S> <C> <C>
Funded Status:
Discount Rate used to Determine Benefit Obligations............. 7 1/4% 8 1/2%
Average Compensation Growth to Determine Benefit Obligations.... 4.5% 4.5%
Net Pension Cost:
Discount Rate................................................... 8.5% 7 1/4%
Expected Long-Term Return on Assets............................. 8.5% 8%
Average Compensation Growth..................................... 4.5% 5.5%
</TABLE>
A-47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table shows the Pension Plan's funded status:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested
benefits of $1,403,313 in 1995 and $1,151,677 in
1994.............................................. $(1,509,841) $(1,235,930)
Effect of projected future compensation............ (321,545) (261,846)
----------- -----------
Projected benefit obligations........................ (1,831,386) (1,497,776)
Plan assets at fair value, primarily listed equity
and debt securities................................. 1,533,446 1,270,116
----------- -----------
Projected benefit obligations in excess of plan
assets.............................................. (297,940) (227,660)
Unrecognized net gain (loss) from past experience and
effects of changes in assumptions................... 120,859 32,815
Prior service cost not yet recognized in net pension
cost................................................ 110,213 119,783
Unrecognized net obligations being recognized over
16.7 years.......................................... 61,287 69,387
----------- -----------
Accrued pension expense.............................. $ (5,581) $ (5,675)
=========== ===========
</TABLE>
The net pension cost for the years ending December 31, 1995, 1994 and 1993,
include the following components:
<TABLE>
<CAPTION>
1995 1994 1993
--------- -------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Service cost--benefits earned during year..... $ 37,033 $ 42,904 $ 42,948
Interest cost on projected benefit
obligations.................................. 124,147 108,394 103,118
Return on assets.............................. (312,190) 5,022 (166,916)
Net amortization and deferral................. 222,916 (90,752) 90,958
--------- -------- ---------
Total....................................... $ 71,906 $ 65,568 $ 70,108
========= ======== =========
</TABLE>
See Note 1--Organization and Summary of Significant Accounting Policies.
A-48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15. FINANCIAL INFORMATION BY BUSINESS SEGMENTS
Information related to the segments of Enterprise's business is detailed
below:
<TABLE>
<CAPTION>
NONUTILITY
ELECTRIC GAS EDC ACTIVITIES(A) TOTAL
----------- ---------- -------- ------------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DE-
CEMBER 31, 1995
Operating Revenues...... $ 4,020,842 $1,686,403 $248,002 $ 208,906 $ 6,164,153
Eliminations
(Intersegment
Revenues).............. -- -- -- -- --
----------- ---------- -------- ---------- -----------
Total Operating
Revenues............... 4,020,842 1,686,403 248,002 208,906 6,164,153
----------- ---------- -------- ---------- -----------
Depreciation and
Amortization........... 503,022 88,092 77,265 5,852 674,231
Operating Income Before
Income Taxes........... 1,140,279 178,718 58,654 142,172 1,519,823
Capital Expenditures.... 545,997 140,153 132,098 8,364 826,612
December 31, 1995
Net Utility Plant....... 9,651,695 1,535,736 -- -- 11,187,431
Oil and Gas Property,
Plant & Equipment...... -- -- 608,015 -- 608,015
Other Corporate Assets.. 2,778,691 589,455 147,822 1,858,654 5,374,622
----------- ---------- -------- ---------- -----------
Total Assets............ $12,430,386 $2,125,191 $755,837 $1,858,654 $17,170,068
=========== ========== ======== ========== ===========
FOR THE YEAR ENDED DE-
CEMBER 31, 1994
Operating Revenues...... $ 3,739,713 $1,778,528 $229,880 $ 187,067 $ 5,935,188
Eliminations
(Intersegment
Revenues).............. -- -- (11,179) (1,566) (12,745)
----------- ---------- -------- ---------- -----------
Total Operating
Revenues............... 3,739,713 1,778,528 218,701 185,501 5,922,443
----------- ---------- -------- ---------- -----------
Depreciation and
Amortization........... 471,910 79,462 78,567 4,089 634,028
Operating Income Before
Income Taxes........... 1,083,155 226,196 39,210 133,590 1,482,151
Capital Expenditures.... 734,100 153,183 160,296 8,445 1,056,024
December 31, 1994
Net Utility Plant....... 9,642,177 1,456,068 -- -- 11,098,245
Oil and Gas Property,
Plant & Equipment...... -- -- 577,913 -- 577,913
Other Corporate Assets.. 2,589,348 576,806 150,973 1,724,155 5,041,282
----------- ---------- -------- ---------- -----------
Total Assets............ $12,231,525 $2,032,874 $728,886 $1,724,155 $16,717,440
=========== ========== ======== ========== ===========
FOR THE YEAR ENDED DE-
CEMBER 31, 1993
Operating Revenues...... $ 3,696,114 $1,594,341 $278,470 $ 161,650 $ 5,730,575
Eliminations
(Intersegment
Revenues).............. -- -- (20,158) (1,827) (21,985)
----------- ---------- -------- ---------- -----------
Total Operating
Revenues............... 3,696,114 1,594,341 258,312 159,823 5,708,590
----------- ---------- -------- ---------- -----------
Depreciation and
Amortization........... 441,164 69,375 86,136 4,922 601,597
Operating Income Before
Income Taxes........... 1,117,739 173,916 92,162 43,310 1,427,127
Capital Expenditures.... 738,362 152,012 91,988 2,026 984,388
December 31, 1993
Net Utility Plant....... 9,451,581 1,352,799 -- -- 10,804,380
Oil and Gas Property,
Plant & Equipment...... -- -- 506,047 -- 506,047
Other Corporate Assets.. 2,313,394 866,524 173,390 1,665,921 5,019,229
----------- ---------- -------- ---------- -----------
Total Assets............ $11,764,975 $2,219,323 $679,437 $1,665,921 $16,329,656
=========== ========== ======== ========== ===========
</TABLE>
(A) The Nonutility Activities include amounts applicable to Enterprise, the
parent corporation.
A-49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Information related to Property, Plant and Equipment of PSE&G is detailed
below:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1995 1994 1993
----------- ----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Utility Plant--Original Cost
Electric Plant in Service
Steam Production.......................... $ 1,791,010 $ 1,810,674 $ 1,763,253
Nuclear Production........................ 5,992,341 5,931,049 5,873,274
Transmission.............................. 1,127,031 1,078,928 1,034,150
Distribution.............................. 3,044,830 2,877,862 2,724,202
Other..................................... 1,139,891 647,406 526,015
----------- ----------- -----------
Total Electric Plant in Service......... 13,095,103 12,345,919 11,920,894
=========== =========== ===========
Gas Plant in Service
Transmission.............................. 65,109 62,213 63,395
Distribution.............................. 2,250,705 2,131,816 1,993,044
Other..................................... 126,758 124,204 121,402
----------- ----------- -----------
Total Gas Plant in Service.............. 2,442,572 2,318,233 2,177,841
----------- ----------- -----------
Common Plant in Service
Capital Leases............................ 58,610 58,610 56,812
General................................... 458,494 486,521 463,473
----------- ----------- -----------
Total Common Plant in Service........... 517,104 545,131 520,285
----------- ----------- -----------
Total................................. $16,054,779 $15,209,283 $14,619,020
=========== =========== ===========
</TABLE>
NOTE 16. PROPERTY IMPAIRMENT OF ENTERPRISE GROUP DEVELOPMENT CORPORATION
As a result of a management review of each property's current value and the
potential for increasing such value through operating and other improvements,
EGDC recorded an impairment in 1993 related to certain of its properties,
including properties upon which EDHI's management revised its intent from a
long-term investment strategy to a hold for sale status, reflecting such
properties on its books at their net realizable value. This impairment reduced
the estimated value of EGDC's properties by $77.6 million and 1993 net income
by $50.5 million, after tax, or 21 cents per share of Enterprise Common Stock.
A-50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 17. JOINTLY OWNED FACILITIES--UTILITY PLANT
PSE&G has ownership interests in and is responsible for providing its share
of the necessary financing for the following jointly owned facilities. All
amounts reflect the share of PSE&G's jointly owned projects and the
corresponding direct expenses are included in Consolidated Statements of
Income as operating expenses. (See Note 1--Organization and Summary of
Significant Accounting Policies.)
<TABLE>
<CAPTION>
OWNERSHIP PLANT IN ACCUMULATED PLANT UNDER
PLANT--DECEMBER 31, 1995 INTEREST SERVICE DEPRECIATION CONSTRUCTION
- ------------------------ --------- --------- ------------ ------------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Coal Generating
Conemaugh............... 22.50% $ 198,724 $ 38,339 $2,401
Keystone................ 22.84 119,690 32,800 1,629
Nuclear Generating
Peach Bottom............ 42.49 755,504 312,856 21,139
Salem................... 42.59 1,055,114 396,795 57,041
Hope Creek.............. 95.00 4,122,715 1,063,403 13,592
Nuclear Support Facili-
ties................... Various 179,065 33,754 2,990
Pumped Storage Generating
Yards Creek............. 50.00 27,246 9,293 2,350
Transmission Facilities... Various 121,100 36,266 89
Merrill Creek Reservoir... 13.91 37,231 12,111 --
Linden Gas Plant.......... 90.00 15,855 19,388 --
</TABLE>
NOTE 18. SELECTED QUARTERLY DATA (UNAUDITED)
The information shown below, in the opinion of Enterprise, includes all
adjustments, consisting only of normal recurring accruals, necessary to a fair
presentation of such amounts. Due to the seasonal nature of the utility
business, quarterly amounts vary significantly during the year.
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------------------- --------------------- --------------------- ---------------------
CALENDAR QUARTER ENDED 1995 1994 1995 1994 1995 1994 1995 1994
---------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(THOUSANDS WHERE APPLICABLE)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Revenues...... $1,676,269 $1,795,457 $1,328,784 $1,279,588 $1,492,130 $1,376,199 $1,666,970 $1,471,199
Operating Income........ $ 334,336 $ 348,948 $ 233,239 $ 252,725 $ 311,528 $ 311,920 $ 278,607 $ 250,500
Net Income.............. $ 212,592 $ 230,127 $ 110,667 $ 129,885 $ 186,782 $ 187,178 $ 152,282 $ 131,843
Earnings Per Share of
Common Stock........... $ 0.87 $ 0.94 $ 0.45 $ 0.53 $ 0.76 $ 0.76 $ 0.62 $ 0.54
Average Shares of Common
Stock Outstanding...... 244,698 243,777 244,698 244,698 244,698 244,698 244,698 244,698
</TABLE>
A-51
<PAGE>
[MAP APPEARS HERE]
Map describing portion of City of Newark, New Jersey including location of
Enterprise's Headquarters, free parking for Enterprise's stockholders, and 1996
location of Annual Meeting of Stockholders of Public Service Enterprise Group
Incorporated at Symphony Hall, 1020 Broad Street, Newark, New Jersey on April
16, 1996. Top of map contains the corporate logo and Newark, New Jersey
07101-1171.
Directions for reaching Newark, New Jersey, by bus or train may be obtained by
calling New Jersey Transit at 1-800-772-2222 from area codes 201 and 908 in New
Jersey, 1-800-582-5946 from area code 609 in New Jersey and 1-201-762-5100 from
outside of the State.
Arrangements have been made to provide free parking at designated locations
within close proximity to Newark Symphony Hall as shown on the map above.
Please bring your parking ticket with you to the meeting so that it can be
validated by Enterprise. Reasonable parking expenses incurred at locations
other than those designated will be reimbursed. In addition, shuttle bus
service before and after the meeting will be provided between the East Park
Street entrance at Enterprise's headquarters and Newark Symphony Hall.
<PAGE>
PROXY FORM
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
PROXY FORM
80 PARK PLAZA, P.O. BOX 1171
NEWARK, N.J. 07101-1171
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
APRIL 16, 1996
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF ENTERPRISE
The undersigned hereby appoints E. JAMES FERLAND, RAYMOND V. GILMARTIN AND
JOSH S. WESTON, and each or any of them, proxies of the undersigned, each with
full power of substitution, to vote in their discretion (subject to any
directions indicated on the reverse side of this proxy) at the Annual Meeting of
Stockholders of Public Service Enterprise Group Incorporated (Enterprise) to be
held on April 16, 1996 and at all adjournments thereof, upon all matters which
may come before the meeting or any adjournment, including the proposals set
forth in the Notice of Meeting and Proxy Statement, receipt of which is hereby
acknowledged. Said proxies are instructed to vote as set forth on the reverse
side hereof with respect to said proposals.
The Board of Directors of Enterprise recommends a vote FOR ITEMS (1) AND (2)
ON THE REVERSE SIDE, AND SHARES REPRESENTED BY THIS PROXY WILL BE SO VOTED
UNLESS OTHERWISE INDICATED ON THE REVERSE, IN WHICH CASE THEY WILL BE VOTED AS
MARKED. Information pertaining to each proposal is included in the Proxy
Statement under proposals corresponding to the item numbers set forth on the
reverse side.
Please mark your proxy on the reverse side, sign it and date it, and return
it promptly in the envelope provided.
<PAGE>
(Continued from other side)
ACCOUNT NUMBER
PLEASE MARK ALL
/X/ CHOICES LIKE THIS
- -------------------------------------------------------------
The Board of Directors Recommends a vote FOR the proposals regarding:
(1) ELECTION OF DIRECTORS:
Nominees for Class III term expiring 1999 are:
T. J. D. Dunphy, R. V. Gilmartin, J. S. Weston
Nominee for Class I term expiring 1997 is:
F. J. Remick
FOR / / WITHHOLD / /
all nominees listed above authority to vote for all
(except as marked to the nominees listed above
contrary to the right)
-------------------------------------
(INSTRUCTIONS: To withhold authority
to vote for any individual
nominee, write that nominee's name
on the line provided above.) / /
(2) Appointment of Deloitte & FOR AGAINST ABSTAIN
Touche LLP as Independent / / / / / /
Auditors for the year 1996.
If you wish to include any comments,
please mark this box and write your Stop annual report mailings to this
comments on the reverse side of this account since duplicate copies now
account form. / / come to this address. / /
- --------------------------------------------------------------------------------
Please date and sign exactly as your name appears hereon. When signing as an
attorney, executor, administrator, trustee, guardian, etc., give your full title
as such. If stock is held jointly, each joint owner should sign.
SIGNATURE____________ DATE___________
SIGNATURE____________ DATE___________
<PAGE>
February 28, 1996
[NAME AND ADDRESS]
You are cordially invited to join us at the 1996 Annual Meeting of Stockholders
of Public Service Enterprise Group Incorporated. This year's meeting will be
held at Newark Symphony Hall, 1020 Broad Street, Newark, New Jersey, on April
16, 1996, starting at 2:00 P.M. I hope you will be able to attend. At the
meeting, we will elect directors to fill terms that expire and will vote on the
approval of Deloitte & Touche LLP as independent auditors.
You will note that the format of our Proxy Statement and our Annual Report to
Stockholders has changed. This year, we have included the detailed 1995
Enterprise financial statements, as well as Management's Discussion and Analysis
of Financial Condition and Results of Operation in the Proxy Statement, rather
than in the Annual Report, which now contains condensed financial statements.
While we have continued to provide the same information as supplied in past
years, we have done so in a way that is more economical and that we believe you
will find more useful.
It is important that your shares be voted whether or not you plan to be
present at the meeting. You should specify your choices by marking the
appropriate boxes on the proxy form below, and date, sign and return your proxy
form in the enclosed, postpaid return envelope as promptly as possible. If you
date, sign and return your proxy form without specifying your choices, your
shares will be voted in accordance with the recommendations of your directors.
As in past years, we will discuss the business of Enterprise and its
subsidiaries during the meeting. I welcome your comments and suggestions, and we
will provide time during the meeting for questions from stockholders. I am
looking forward to seeing many of you at the meeting.
Sincerely,
E. James Ferland
