<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] 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-2.
</TABLE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-12.
(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> 2
LOGO
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 15, 1997
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 15, 1997, at 2:00 P.M., for the
following purposes:
1. To elect three members of Class I of the Board of Directors to hold
office until the Annual Meeting of Stockholders in 2000 and 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 1997; 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 24, 1997.
By order of the Board of Directors,
EDWARD J. BIGGINS, JR.
Secretary
February 26, 1997
YOUR VOTE IS IMPORTANT. PLEASE SIGN, DATE AND MAIL THE ACCOMPANYING
PROXY FORM PROMPTLY.
<PAGE> 3
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 (1996)................................................ 10
Aggregated Option Exercises in Last Fiscal Year (1996) and
Fiscal Year-End Option Values (12/31/96)............................................. 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
APPROVAL OF THE APPOINTMENT OF INDEPENDENT AUDITORS (Proposal 2).......................... 16
LEGAL PROCEEDINGS......................................................................... 17
DATE FOR SUBMISSION OF STOCKHOLDER PROPOSALS.............................................. 17
MISCELLANEOUS............................................................................. 17
APPENDIX: FINANCIAL STATEMENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................................ A-1
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
FINANCIAL STATEMENT RESPONSIBILITY...................................................... A-54
INDEPENDENT AUDITORS' REPORT............................................................ A-55
</TABLE>
<PAGE> 4
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 1997 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 5, 1997.
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.
Again this year, included in the Appendix to this Proxy Statement are the
1996 Financial Statements of Enterprise, along with Management's Discussion and
Analysis of Financial Condition and Results of Operations and the Independent
Auditors' Report.
VOTING SECURITIES
Holders of record of the 231,957,608 shares of Common Stock of Enterprise
outstanding at the close of business on February 24, 1997 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 Enterprise Direct (formerly the 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 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> 5
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 four directors included in Class I of the Board of
Directors, Lawrence R. Codey, Ernest H. Drew, Forrest J. Remick and James C.
Pitney, expire at the 1997 Annual Meeting. Messrs. Codey, Drew and Remick have
each been nominated to serve as a director in Class I for a new three-year term,
which will expire at the 2000 Annual Meeting.
James C. Pitney will retire as a Director at the expiration of his term at
this year's Annual Meeting. The Board thanks Mr. Pitney for his many years of
dedicated service.
Therefore, at this year's meeting directors will be elected to fill three
positions in Class I to serve until the 2000 Annual Meeting and until their
respective successors are elected and qualified. All the nominees were elected
to their present terms by the stockholders. The present term of Class II of the
Board of Directors expires at the 1998 Annual Meeting, and the present term of
Class III expires at the 1999 Annual Meeting. Directors in Class II and Class
III will not be elected at the 1997 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, but
will be reduced to 10 effective upon the retirement of Mr. Pitney.
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 1996, 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 15 times and the EDHI Board met 11 times in 1996. 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 and any reports of material weaknesses prepared
by both independent and internal auditors. Reviews planned scope of future
audits. Ascertains implementation of auditors' recommendations. Reviews internal
auditing procedures and internal accounting controls. Reviews adequacy and
implementation of policies and practices relating to accounting, financial
reporting, internal auditing, operating controls, business conduct compliance
program and business ethics. Meets periodically with management as well as with
representa-
2
<PAGE> 6
tives of the independent and internal auditors. Reviews results of environmental
compliance program and meets with environmental auditors. The Committee held
four meetings in 1996.
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 1996.
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 plans of PSE&G. The Committee held
seven meetings in 1996.
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 one time in 1996.
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 Nominating 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
Provides 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 held ten meetings in 1996.
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 1996.
3
<PAGE> 7
PROPOSAL 1
ELECTION OF DIRECTORS
At the 1997 Annual Meeting of Stockholders, three members of Class I of the
Board of Directors are to be elected to hold office until the Annual Meeting of
Stockholders in 2000 and 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 1997 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 1996, 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.
4
<PAGE> 8
NOMINEES FOR ELECTION AS DIRECTOR
CLASS I -- NOMINEES FOR TERMS EXPIRING IN 2000
<TABLE>
<C> <S>
LAWRENCE R. CODEY has been a director since 1991. Age 52. Member of
Lawrence R. Codey Executive Committee and Finance Committee. Has been President and Chief
Operating Officer of PSE&G since September 1991. Director of Enterprise's
Lawrence R. Codey subsidiary, PSE&G. Director of Sealed Air Corporation, The Trust Company of
New Jersey, United Water Resources Inc. and Blue Cross & Blue Shield of New
Jersey.
ERNEST H. DREW has been a director since 1993. Age 60. Member of Executive
Ernest H. Drew Committee, Audit Committee and Finance Committee. Director of Enterprise's
subsidiary, EDHI. Has been a Member, Board of Management, Hoechst AG,
Ernest H. Drew 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 from January 1988 until May 1994. Director of
Thomas & Betts Corporation.
FORREST J. REMICK has been a director since 1995. Age 66. Chairman of
Forrest J. Remick Nuclear Committee and member of Audit Committee and Nominating Committee.
Director of Enterprise's subsidiary, PSE&G. Has been an engineering
Forrest J. Remick 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 at Pennsylvania
State University, from 1985 to 1989.
</TABLE>
5
<PAGE> 9
DIRECTORS WHOSE TERMS CONTINUE BEYOND THE 1997 ANNUAL MEETING
AND WHO ARE NOT SUBJECT TO ELECTION THIS YEAR
CLASS II -- DIRECTORS WHOSE TERMS EXPIRE IN 1998
<TABLE>
<S> <C>
E. JAMES FERLAND has been a director since 1986, and Chairman of the Board,
President and Chief Executive Officer of Enterprise since July 1986, E. James Ferland
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 E. James Ferland
June 1989. Age 55. Chairman of Executive Committee. Director of
Enterprise's subsidiaries, PSE&G and EDHI, and EDHI's principal
subsidiaries. Director of Foster Wheeler Corporation and The Hartford Steam
Boiler Inspection and Insurance Company.
IRWIN LERNER has been a director since 1981. Age 66. Chairman of
Organization and Compensation Committee and member of Audit Committee, Irwin Lerner
Finance Committee and Nuclear Committee. Director of Enterprise's
subsidiary, PSE&G. Was Chairman, Board of Directors from January 1993 to Irwin Lerner
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 Humana Inc., Sequana Therapeutics, Inc. and Medarex
Inc.
MARILYN M. PFALTZ has been a director since 1980. Age 64. Chair of Audit
Committee and member of Nominating Committee and Organization and Marilyn M. Pfaltz
Compensation Committee. Director of Enterprise's subsidiary, EDHI. Has been
a partner of P and R Associates, Summit, New Jersey (communication Marilyn M. Pfaltz
specialists), since 1968. Director of AAA National Association.
RICHARD J. SWIFT has been a director since 1994. Age 52. Member of Finance
Committee, Nominating Committee and Nuclear Committee. Director of Richard J. Swift
Enterprise's subsidiary, EDHI. Has been Chairman of the Board, President
and Chief Executive Officer of Foster Wheeler Corporation, Clinton, New Richard J. Swift
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 Company.
</TABLE>
6
<PAGE> 10
DIRECTORS WHOSE TERMS CONTINUE BEYOND THE 1997 ANNUAL MEETING
AND WHO ARE NOT SUBJECT TO ELECTION THIS YEAR
CLASS III -- NOMINEES FOR TERMS EXPIRING IN 1999
<TABLE>
<C> <S>
T. J. DERMOT DUNPHY has been a director since 1980. Age 65. Chairman of
T. J. Dermot Finance Committee and member of Audit Committee and Organization and
Dunphy Compensation Committee. Director of Enterprise's subsidiary, EDHI. Has been
Chairman of the Board and Chief Executive Officer of Sealed Air
T. J. Dermot Dunphy Corporation, Saddle Brook, New Jersey (manufactures protective packaging
products and systems), since November 1996 and was President and Chief
Executive Officer from 1971 to November 1996. Director of Sealed Air
Corporation, Summit Bancorp and Summit Bank.
RAYMOND V. GILMARTIN has been a director since 1993. Age 56. Chairman of
Raymond v. Gil- Nominating Committee and member of Finance Committee and Organization and
martin Compensation Committee. Director of Enterprise's subsidiary, PSE&G. Has
been Chairman of the Board, President and Chief Executive Officer of Merck
Raymond V. Gilmartin & 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.
JOSH S. WESTON has been a director since 1984. Age 68. Member of Executive
Josh S. Weston Committee, Nuclear Committee and Organization and Compensation Committee.
Director of Enterprise's subsidiary, EDHI. Has been Chairman of the Board
Josh S. Weston of Automatic Data Processing Inc., Roseland, New Jersey since April 1986
and was Chief Executive Officer from January 1983 to August 1996. Director
of Automatic Data Processing Inc., Olsten Corporation, Shared Medical
Systems Corporation and Vanstar Corporation.
</TABLE>
7
<PAGE> 11
SECURITY OWNERSHIP OF DIRECTORS AND MANAGEMENT
The following table sets forth, as of February 24, 1997, 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....................................... 25,811(1)
Robert J. Dougherty, Jr................................. 17,618(2)
Ernest H. Drew.......................................... 3,130
T. J. Dermot Dunphy..................................... 44,132
Leon R. Eliason......................................... 11,600(3)
E. James Ferland........................................ 72,206(4)
Raymond V. Gilmartin.................................... 3,130
Irwin Lerner............................................ 9,168
Marilyn M. Pfaltz....................................... 6,557
James C. Pitney......................................... 9,888
Forrest J. Remick....................................... 1,457
Richard J. Swift........................................ 2,254
Paul H. Way............................................. 21,867(5)
Josh S. Weston.......................................... 8,384
All directors and executive
officers as a group (20).............................. 282,118(6)
----------
</TABLE>
- --------------------------------------------------------------------------------
(1) Includes options to purchase 13,200 additional shares, 3,200 of
which are currently exercisable.
(2) Includes the equivalent of 739 shares held under PSE&G Thrift and
Tax-Deferred Savings Plan. Includes options to purchase 10,500
additional shares, 1,800 of which are currently exercisable.
(3) Includes options to purchase 9,800 additional shares, 1,800 of
which are currently exercisable.
(4) Includes the equivalent of 10,159 shares held under PSE&G Thrift
and Tax-Deferred Savings Plan. Includes options to purchase 20,300
additional shares, none of which are currently exercisable.
(5) Includes the equivalent of 1,382 shares held under PSE&G Thrift
and Tax-Deferred Savings Plan. Includes options to purchase 10,500
additional shares, 5,400 of which are currently exercisable.
(6) Includes the equivalent of 14,579 shares held under PSE&G Thrift
and Tax-Deferred Savings Plan. Includes options to purchase 90,700
additional shares, 16,500 of which are currently exercisable.
8
<PAGE> 12
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, 1996 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 PAYOUTS
---------------------- AWARDS -------
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............... 1996 712,261 (5) 6,500 168,084 10,994
Chairman of the Board,
President 1995 682,377 225,411 5,800 246,288 8,681
and CEO of Enterprise 1994 652,492 251,383 5,400 127,140 5,628
Lawrence R. Codey.............. 1996 435,327 (5) 3,000 81,144 5,934
President and Chief 1995 418,392 141,931 2,800 118,746 5,756
Operating Officer of PSE&G 1994 398,468 129,276 2,500 48,900 5,351
Robert J. Dougherty, Jr........ 1996 379,586 (5) 2,600 57,960 4,444
President - Enterprise Ventures 1995.. 322,759 111,259 2,500 70,368 4,269
and Services (8) 1994 273,946 72,027 1,800 26,895 4,227
Paul H. Way.................... 1996 342,406 (5) 2,600 52,164 5,204
President and Chief Operating 1995 328,829 106,355 2,500 70,368 4,478
Officer of EDHI(9) 1994 308,813 110,285 2,300 39,120 4,359
Leon R. Eliason................ 1996 336,706 100,000(5)(6) 2,500 34,776 6,239
President - Nuclear Business 1995 323,755 229,168(7) 5,500 26,388 3,242
Unit and Chief Nuclear 1994 74,713 0 600 0 0
Officer of PSE&G(10)
</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. For plan years prior to 1996, the 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. Beginning in 1997 with respect to the 1996 and future plan
years, awards will be payable in one lump sum and not deferred.
(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 recipients 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 DOUGHERTY WAY ELIASON
-------------- -------------- ------------- ------------- -------------
THRIFT MICP THRIFT MICP THRIFT MICP THRIFT MICP THRIFT MICP
------ ----- ------ ----- ------ ---- ------ ---- ------ ----
($) ($) ($) ($) ($) ($) ($) ($) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996.................. 4,150 2,861 4,502 1,432 3,750 694 4,372 832 2,678 212
1995.................. 3,752 2,383 4,502 1,254 3,754 515 3,750 728 1,795 0
1994.................. 3,751 1,877 4,197 1,154 3,752 475 3,753 606 0 0
</TABLE>
9
<PAGE> 13
In addition, 1996 and 1995 amounts include for Mr. Ferland $3,983 and
$2,546 and for Mr. Eliason $3,349 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 1996 MICP award amount has not yet been determined. The target award is
40% of salary for Mr. Ferland and 30% for Messrs. Codey, Dougherty, Way and
Eliason. 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) Includes $165,000 paid pursuant to Mr. Eliason's employment agreement.
(8) Mr. Dougherty became President and Chief Operating Officer of EDHI on
January 1, 1997.
(9) Mr. Way resigned as President and Chief Operating Officer of EDHI effective
December 31, 1996 and will retire effective July 17, 1997 upon attainment
of age 60. Prior to retirement, Mr. Way is available for consulting in
conjunction with the non-utility business of Enterprise.
(10) Mr. Eliason commenced employment September 26, 1994.
OPTION GRANTS IN LAST FISCAL YEAR (1996)
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------- VALUE AT ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE OR TERM(2)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -----------------------
NAME GRANTED(1) FISCAL YEAR ($/SH) DATE 0%($) 5%($) 10%($)
- ----------------------------- ----------- ------------ ----------- ---------- ----- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
E. James Ferland............. 6,500 22.6 30.875 1/03/06 0 126,211 319,844
Lawrence R. Codey............ 3,000 10.5 30.875 1/03/06 0 58,251 147,620
Robert J. Dougherty, Jr...... 2,600 9.1 30.875 1/03/06 0 50,485 127,938
Paul H. Way.................. 2,600 9.1 30.875 1/03/06 0 50,485 127,938
Leon R. Eliason.............. 2,500 8.7 30.875 1/03/06 0 48,543 123,017
</TABLE>
- ---------------
(1) Granted under LTIP in tandem with equal number of performance units and
dividend equivalents which may provide cash payments, dependent on future
financial performance of Enterprise in comparison to other companies and
dividend payments by Enterprise, to assist recipients in exercising
options, with exercisability commencing January 1, 1999. Cash payment is
made, based on the value, if any, of performance units awarded and dividend
equivalents accrued, if any, as measured during the three-year period
ending the year prior to the year in which payment, if any, is made, only
if the specified performance level is achieved, dividend equivalents have
accrued and options are exercised.
(2) All options reported have a ten-year term, as noted. Amounts shown represent
hypothetical future values at such term based upon hypothetical price
appreciation of Enterprise Common Stock and may not necessarily be
realized. Actual values which may be realized, if any, upon any exercise of
such options, will be based on the market price of Enterprise Common Stock
at the time of any such exercise and thus are dependent upon future
performance of Enterprise Common Stock.
10
<PAGE> 14
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR (1996) AND
FISCAL YEAR-END OPTION VALUES (12/31/96)
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FY-END(#)(1) AT FY-END($)(3)
ACQUIRED VALUE --------------------------- ---------------------------
ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (#)(1) ($)(2) (#) (#) ($) ($)
- ------------------------ ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
E. James Ferland........ 5,800 2,900 0 17,700 0 3,625
Lawrence R. Codey....... 2,800 0 700 8,300 2,100 1,750
Robert J. Dougherty,
Jr.................... 2,000 0 0 6,900 0 1,250
Paul H. Way............. 2,500 0 3,100 7,400 5,100 1,562
Leon R. Eliason......... 1,200 0 0 6,800 0 1,562
</TABLE>
- ---------------
(1) Does not reflect any options granted and/or exercised after year-end
(12/31/96). 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
(12/31/96). 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 and
Eliason at the time of their employment. For Messrs. Ferland and Way, the
remaining applicable provisions of these agreements provide for additional
credited service for retirement benefits 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 $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 retirement
benefits 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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1996, each of the following individuals served as a member of the
Organization and Compensation Committee: Irwin Lerner, Chairman, T. J. Dermot
Dunphy, Raymond V. Gilmartin, Marilyn M. Pfaltz and Josh S. Weston. In addition,
James C. Pitney was a member until February 1996. During 1996, 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 1996, Mr. Codey
served as a director of Sealed Air Corporation, the Chairman of the Board 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 1996.
James C. Pitney, a member of the Organization and Compensation Committee until
February 1996, is a partner in the law firm of Pitney, Hardin, Kipp & Szuch,
which rendered legal services to the Enterprise group of companies during 1996
and is expected to do so in 1997.
11
<PAGE> 15
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
The table below illustrates annual retirement benefits for executive
officers 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.
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>
12
<PAGE> 16
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 130% of the average annual salary for such five year period. Messrs.
Ferland, Codey, Dougherty and Eliason will have accrued approximately 48, 41, 48
and 42 years of credited service, respectively, as of age 65. Mr. Way's pension
at age 60 will be approximately $204,000 per year.
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
Enterprise Board of Directors. During 1996, the Committee consisted solely of
non-employee directors. Each of those named below has served on the Committee
since February 1996. In addition, James C. Pitney served until February 1996.
Also in February 1996, Mr. Lerner replaced Mr. Weston as Chairman. 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 1996, 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 1996 and 1995 were
based upon a comparison of Enterprise's return on capital compared to the median
return on capital of a group
13
<PAGE> 17
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 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.
Depending on the executive officer, for 1996 and 1995 these corporate factors
were financial performance, nuclear performance, cost savings, employee
relations, organizational management, regulatory and public policy strategies,
new business development, customer satisfaction and total quality management.
Annual awards are determined within 120 days of the end of the fiscal year.
Awards for 1996, including Mr. Ferland's, have not yet been determined. Mr.
Ferland's 1995 annual incentive award was determined in 1996 based upon fiscal
year 1995 performance and reflects that (i) Enterprise's 1995 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 1995 was slightly higher
than that of the comparison utilities and (iii) improvements were made in
certain of Enterprise's operating activities. For each of 1996 and 1995, Mr.
Ferland's target award was set at 40% of salary and for 1995 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
1995, the corporate goal factor was 1.043 and Mr. Ferland's individual goal
factor was 1.05. 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 1995 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 1996, 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
1996, Mr. Ferland was granted 6,500 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 1996, 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
14
<PAGE> 18
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 30%, if Enterprise is the fifth through the
eleventh company, respectively. No award is given if Enterprise's total return
to shareholders falls below the eleventh company out of fifteen.
In 1996, Enterprise's long-term performance as measured by the total return
to shareholders over the 1993 through 1995 period placed it as the eighth
company. Therefore, performance unit awards equal to 60% 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. No compensation paid in 1996 for Federal income tax
purposes to executive officers exceeded $1 million, so that a full deduction is
available. 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:
<TABLE>
<S> <C>
Irwin Lerner, Chairman
T. J. Dermot Dunphy Marilyn M. Pfaltz
Raymond V. Gilmartin Josh S. Weston
</TABLE>
15
<PAGE> 19
PERFORMANCE GRAPH
The graph below shows a comparison of the five-year cumulative total return
assuming $100 invested on December 31, 1991 in Enterprise Common Stock, the S&P
500 Composite Stock Price Index and the Dow Jones Utilities Index.
<TABLE>
<CAPTION>
Measurement Period Dow Jones
(Fiscal Year Covered) Enterprise S&P 500 Utilities
<S> <C> <C> <C>
1991 100.00 100.00 100.00
1992 113.36 107.62 104.08
1993 125.21 118.46 114.1
1994 112.36 120.03 096.65
1995 139.86 165.13 127.56
1996 134.62 203.05 139.17
</TABLE>
PROPOSAL 2
APPROVAL OF THE 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 1997, 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> 20
LEGAL PROCEEDINGS
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. The Board of Directors promptly
commenced an investigation and advised the purported shareholder thereof. While
the investigation was pending, the purported shareholder nevertheless commenced,
by complaint filed in December 1995, a shareholder derivative action on behalf
of Enterprise shareholders against the incumbent directors, except Dr. Remick.
Similar derivative complaints were filed by two profit sharing plans and one
individual in February and March 1996 against Messrs. Ferland, Codey, Eliason
and others. On March 19, 1996, the Board's investigation was concluded, and the
Board determined that this litigation should not have been instituted and should
be terminated. On July 3, 1996, another individual purported shareholder filed a
similar complaint naming the same defendants as the first derivative lawsuit. On
August 21, 1996, all defendants filed motions to dismiss all four derivative
actions, which motions were denied in January 1997. Also in January 1997, the
defendants filed motions for leave to appeal the trial court's denial of their
motions to dismiss, which are still pending. The four complaints generally seek
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.
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 29, 1997.
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 1996, 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 26, 1997
17
<PAGE> 21
APPENDIX
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..... A-1
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
FINANCIAL STATEMENT RESPONSIBILITY........................................................ A-54
INDEPENDENT AUDITORS' REPORT.............................................................. A-55
</TABLE>
<PAGE> 22
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ENTERPRISE
This discussion refers to the Consolidated Financial Statements and related
Notes (Notes) of Public Service Enterprise Group Incorporated (Enterprise) and
should be read in conjunction with such statements and notes.
CORPORATE STRUCTURE
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 non-utility businesses: 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; Energis Resources Incorporated (ERI),
formed in 1996 and consolidating two existing energy services subsidiaries of
PSRC, which provides total energy services to industrial and commercial
customers both within and outside of PSE&G's traditional service territory (see
Competitive Environment) and Enterprise Group Development Corporation (EGDC), a
nonresidential real estate development and investment business. EDHI also has
two finance subsidiaries: PSEG Capital Corporation (Capital), which provides
privately placed debt financing to EDHI subsidiaries other than ERI on the basis
of a minimum net worth maintenance agreement with Enterprise and Enterprise
Capital Funding Corporation (Funding), which provides privately placed debt
financing to EDHI subsidiaries other than EDGC and ERI guaranteed by EDHI, but
without direct support from Enterprise. EDHI has been conducting a controlled
exit from the real estate business since 1993. In July 1996, EDHI sold Energy
Development Corporation (EDC), an oil and gas subsidiary.
As of December 31, 1996 and 1995, PSE&G comprised 88% of Enterprise assets.
For each of the years 1996, 1995 and 1994, PSE&G revenues were approximately 97%
of Enterprise's revenues and PSE&G's earnings available to Enterprise for such
years were 87%, 88% and 91%, respectively, of Enterprise's net income.
OVERVIEW OF 1996
In January 1997, the New Jersey Board of Public Utilities (BPU) unveiled
its draft Phase II report of the New Jersey Energy Master Plan (draft Phase II
report) for deregulation of the electric utility industry. The draft Phase II
report requires PSE&G and other New Jersey electric utilities to develop rate
and service plans to give customers a choice of suppliers. Beginning in October
1998, five percent of retail electric customer load of all classes will be given
the ability to directly choose their electric power suppliers. All customers
would be phased-in by April 2001 (see Competitive Environment).
Operation of the Salem Nuclear Generating Station (Salem) Units continued
to present challenges to PSE&G. Both Salem Units 1 and 2 were shut down in
mid-1995 to address equipment and human performance issues and remained out of
service throughout 1996. Salem Unit 2 is expected to return to service in the
second quarter of 1997 and Salem Unit 1 in the Fall of 1997 (see Nuclear
Operations). The 1996 operating results reflect a one-time reduction of net
income of $59 million or 25 cents per share stemming from the BPU's December 31,
1996 Order (December 31st Order) resolving outstanding Salem and other
regulatory issues (see Note 3 -- Rate Matters of Notes). Despite these Salem
issues, Enterprise was able to achieve the following results:
- Formed ERI as a subsidiary of EDHI to better position Enterprise to
benefit from opportunities arising from deregulation
A-1
<PAGE> 23
- Experienced a sharp increase in PSRC's income
- Reduced staff levels by 4.5% primarily through attrition
- Sold EDC, a non-regulated oil and gas exploration and development
business for a $13 million gain
- Initiated a common stock repurchase program of 5% of Enterprise's
outstanding Common Stock with a portion of the EDC sale proceeds
- Implemented cost containment initiatives to reduce annual operating and
maintenance expenses
- Initiated a refurbishment of five of PSE&G's older, less efficient fossil
generating plants which were scheduled to be closed but will instead be
used to serve the competitive capacity marketplace
RESULTS OF OPERATIONS
Earnings per share of Enterprise Common Stock were $2.52 in 1996, $2.71 in
1995 and $2.78 in 1994.
In 1996, Enterprise earnings decreased 19 cents per share or 7% compared to
1995 primarily due to the refunds required by the BPU's December 31st Order (see
Note 3 -- Rate Matters of Notes). Under this Order, PSE&G has provided electric
customers with bill credits totaling $84 million and will forego recovery of
another $12 million in energy costs that have been deferred. The December 31st
Order resulted in a 1996 earnings loss of $59 million, or 25 cents per share.
Other factors that decreased earnings were: increased operation and maintenance
expenses related to the outages at Salem and the Hope Creek Nuclear Generating
Station (Hope Creek) and increased depreciation expense due to more plant in
service. The earnings per share decrease was partially offset by higher gas
sales in early 1996 due to favorable weather conditions, the gain on the
repurchase of certain of PSE&G's outstanding cumulative preferred stock at a
discount to par, increased investment income from PSRC and a one-time gain on
the sale of EDC (see Note 2 -- Discontinued Operations of Notes).
In 1995, Enterprise earnings decreased 7 cents per share or 3% compared to
1994 primarily 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.
PSE&G -- REVENUES
ELECTRIC
<TABLE>
<CAPTION>
INCREASE OR
(DECREASE)
--------------
1996 1995
VS. VS.
1995 1994
----- ----
(MILLIONS OF
DOLLARS)
<S> <C> <C>
Kilowatt-hour sales............................................... $ (26) $ 38
Salem Refund...................................................... (84) --
Recovery of energy costs.......................................... 30 189
New Jersey Gross Receipts and Franchise Tax (NJGRT)............... (7) 12
Other operating revenues.......................................... 11 42
----- -----
Total Electric Revenues................................. $ (76) $281
===== =====
</TABLE>
Revenues decreased $76 million, or 1.9% in 1996 and 1995 revenues increased
$281 million, or 7.5%. In 1996, electric revenues decreased primarily due to the
refunds required by the December 31st Order, lower industrial firm
A-2
<PAGE> 24
revenues due to a new cogeneration operation installed at a customer's facility,
outages at some larger industrial customers and cooler summer weather. These
decreases were partially offset by increased residential and commercial sales
due to economic growth. In 1995, electric revenues increased due to higher
residential and commercial sales resulting from a recovering New Jersey economy,
hot summer weather and a modest increase in customer base. Other electric
revenues increased due to higher miscellaneous revenues from increased capacity
sales to unaffiliated utilities and to wholesale customers.
GAS
<TABLE>
<CAPTION>
INCREASE OR
(DECREASE)
-------------
1996 1995
VS. VS.
1995 1994
---- ----
(MILLIONS OF
DOLLARS)
<S> <C> <C>
Therm sales....................................................... $ 36 $(35)
Recovery of fuel costs............................................ 164 (78)
NJGRT............................................................. (8) 19
Other operating revenues.......................................... 3 2
---- ----
Total Gas Revenues...................................... $195 $(92)
==== ====
</TABLE>
Revenues increased $195 million, or 11.5% in 1996 and 1995 revenues
decreased $92 million, or 5.2%. In 1996, gas revenues increased primarily due to
a higher recovery of fuel costs and favorable weather conditions in early 1996.
In 1995, gas revenues decreased due to mild winter weather and lower recovery of
fuel costs. These decreases were partially offset by increased revenues
resulting from off-system sales and higher gas service contract revenues.
PSE&G -- EXPENSES
FUEL EXPENSES
Variances in fuel expenses do not directly affect earnings because of the
adjustment clause mechanism. In accordance with the December 31st Order, PSE&G
will forego recovery of $12 million in deferred energy costs, $5 million of
which was recorded in 1995 (see Note 1 -- Organization and Summary of
Significant Accounting Policies and Note 3 -- Rate Matters of Notes).
OTHER OPERATION AND MAINTENANCE EXPENSES
Other operation and maintenance expenses increased $38 million or 3% in
1996 and decreased $6 million or .5% in 1995. The 1996 increase was due to
higher costs related to outage expenses for Salem Units 1 and 2 and higher
refueling outage costs at Hope Creek. These expenses were partially offset by
decreased maintenance expenses at PSE&G's fossil generating stations and
decreased transmission and distribution expenses. The 1995 decrease was due to
decreased expenses in PSE&G's steam production area and at electric and gas
distribution facilities. These savings were partially offset by outage expenses
at Salem Units 1 and 2.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expenses increased $13 million or 2% in 1996
and $40 million or 7% in 1995. The 1996 increase was due to the completion of
the repowering of the Bergen Generating Station in September 1995. The 1995
increase was due to increases in plant in service.
A-3
<PAGE> 25
FEDERAL INCOME TAXES
Federal income taxes decreased $56 million or 17% in 1996 and increased $27
million or 9% in 1995. The 1996 taxes were lower due to a decrease in pre-tax
operating income while the 1995 taxes were higher due to the receipt of a
nontaxable insurance benefit in 1994 and higher 1995 pre-tax operating income.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION
Allowance for Funds Used During Construction (AFDC) decreased $19 million
or 54% in 1996 and $2 million or 5% in 1995 primarily due to a lower AFDC rate
in 1996 and the completion of the repowering of the Bergen Generating Station in
September 1995.
NET GAIN (LOSS) ON PREFERRED STOCK REDEMPTIONS
The $18.2 million net gain on the repurchase of certain of PSE&G's
outstanding Cumulative Preferred Stock at discounts to par resulted from PSE&G's
June 1996 tender offer (see External Financings -- PSE&G).
EDHI -- NET INCOME
<TABLE>
<CAPTION>
INCREASE OR (DECREASE)
-------------------------------------------
1996 VS. 1995 1995 VS. 1994
------------------ ------------------
PER PER
AMOUNT SHARE AMOUNT SHARE
------ ----- ------ -----
(MILLIONS OF DOLLARS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C>
PSRC..................................................... $ 22 $ .09 $ 1 $ --
CEA...................................................... (2) (.01) (4) (.02)
ERI...................................................... (6) (.02) (1) --
EGDC..................................................... (1) -- 1 --
--- ---- --- ----
Continuing Operations.................................... 13 .06 (3) (.02)
Discontinued Operations -- EDC
Income from Operations................................. (24) (.11) 23 .10
Gain on Sale........................................... 13 .06 -- --
--- ---- --- ----
Total.......................................... $ 2 $ .01 $ 20 $ .08
=== ==== === ====
</TABLE>
CONTINUING OPERATIONS
EDHI's income from continuing operations was $57 million in 1996, a $13
million increase over 1995 and $44 million in 1995, a $3 million decrease from
1994. The 1996 increase was due to PSRC's increased income from partnership
investments. ERI's income decreased due to increased administrative and general
expenditures (startup costs) and lower margins related to retail gas marketing.
The 1995 decrease was due primarily to CEA's higher interest and development
expenses.
DISCONTINUED OPERATIONS
Income related to EDC operations was $11 million in 1996, a $24 million
decrease from 1995 and $35 million in 1995, a $23 million increase over 1994.
The 1996 decrease was due to the inclusion of only seven months of earnings for
1996 and a $23 million after-tax gain realized in 1995 related to the settlement
of a take-or-pay sales contract. The 1995 increase was due mainly to the
aforementioned gain related to the settlement of a take-or-pay sales contract.
A-4
<PAGE> 26
LIQUIDITY AND CAPITAL RESOURCES
ENTERPRISE
Cash generated from operations will provide the major source of funds for
the growth of the business. Cash and cash equivalents totaled $279 million at
the end of 1996 compared with $62 million at the end of 1995.
During 1996, Enterprise repurchased 11.2 million shares of its Common Stock
at an aggregate cost of $307 million. The Common Stock repurchase program
concluded on January 17, 1997. A total of 12.7 million shares were repurchased
under the program at a cost of $350 million.
In 1996, cash provided by operating activities totaled $1.434 billion, down
from $1.535 billion in 1995. Major contributors were net income of $612 million
and noncash provisions of $607 million for depreciation and amortization. Cash
used in investing activities totaled $9 million, down from $935 million in 1995;
primarily as a result of the sale of EDC. Net proceeds from the EDC sale were
$704 million. Cash used in financing activities was $1.208 billion in 1996.
Dividend payments on Common Stock were $2.16 per share and totaled $523 million,
a payout of 86% of net income. Long-term debt decreased in 1996 by $610 million
to $4.580 billion due primarily to scheduled debt maturities. Common equity
decreased by $225 million to $5.213 billion due primarily to the repurchase of
common stock. The return on average common equity decreased to 11.3% in 1996
compared to 12.3% in 1995 due primarily to a decrease in net income.
In 1995, cash provided by operating activities totaled $1.535 billion, up
from $1.244 billion in 1994. Major contributors were net income of $662 million
and noncash provisions of $597 million for depreciation and amortization. Cash
used in investing activities totaled $935 million in 1995, down from $1.010
billion in 1994 primarily as a result of a decrease in additions to utility
plant. Cash used in financing activities was $603 billion in 1995. Dividend
payments on Common Stock were $2.16 per share and totaled $529 million, a payout
of 80% of net income. Long-term debt increased in 1995 by $9 million to $5.190
billion. Common equity increased by $132 million to $5.438 billion. The return
on average common equity decreased to 12.3% in 1995 compared to 13.0% in 1994
due primarily to a decrease in net income.
As of December 31, 1996, Enterprise's capital structure consisted of 49.8%
common equity, 43.7% long-term debt and 6.5% preferred stock and securities. The
capital structure as of December 31, 1995 consisted of 48.1% common equity,
45.8% long-term debt and 6.1% preferred stock and securities.
PSE&G
PSE&G had utility plant additions of $603 million, $686 million and $887
million, for 1996, 1995 and 1994, respectively, including AFDC of $17 million,
$36 million and $38 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 $34
million, $30 million and $34 million for the cost of plant removal (net of
salvage) in 1996, 1995 and 1994, respectively. Construction expenditures from
1997 through 2001 are expected to aggregate $2.6 billion, including AFDC.
Forecasted construction expenditures are related to improvements in PSE&G's
transmission and distribution system, existing power plants (including
acquisition of nuclear fuel), gas system and common facilities. (See
Construction and Capital Requirements Forecast below.)
PSE&G expects that it will be able to internally generate all of its
construction and capital requirements 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 3 -- Rate
Matters and Note 13 -- Commitments and Contingent Liabilities of Notes).
A-5
<PAGE> 27
EDHI
During the next five years, a majority of EDHI's capital requirements are
expected to be provided from additional debt financing and operational cash
flows. (See Construction and Capital Requirements Forecast below.) CEA and ERI
are expected to be the primary vehicles 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 in
certain regions of the world. ERI is expected to expand upon the current energy
related services being provided to industrial and commercial customers.
PSRC will continue to limit new investments to those related to energy
businesses, while EGDC will continue its exit from 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. 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, 1996, $30 million remained as PSRC's unfunded
commitment subject to call.
EDHI, CEA and PSRC are subject to restrictive business and financial
covenants contained in existing debt agreements. EDHI is required to maintain a
debt to equity ratio of no more than 2.0:1 and a twelve-months earnings before
interest and taxes to interest (EBIT) coverage ratio of at least 1.50:1. As of
December 31, 1996 and 1995, EDHI had consolidated debt to equity ratios of
1.05:1 and 1.15:1 respectively, and for the years ended December 31, 1996, 1995
and 1994, EBIT coverage ratios, as defined to exclude the effects of EGDC and
the gain on the sale of EDC, of 2.45:1, 2.47:1 and 1.94:1, 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 7 -- Schedule of Consolidated Debt of Notes.)
CONSTRUCTION AND CAPITAL REQUIREMENTS FORECAST
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001 TOTAL
------ ------ ------ ------ ---- ------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Construction and Investment Requirements:
PSE&G.............................................. $ 589 $ 547 $ 506 $ 505 $481 $2,628
EDHI............................................... 173 269 312 320 291 1,365
------ ------ ------ ------ ---- ------
Total Construction and Investment Requirements..... 762 816 818 825 772 3,993
------ ------ ------ ------ ---- ------
Mandatory Retirement of Securities:
PSE&G.............................................. 400 118 100 400 100 1,118
EDHI............................................... 125 195 200 78 -- 598
------ ------ ------ ------ ---- ------
Total Retirement of Securities..................... 525 313 300 478 100 1,716
------ ------ ------ ------ ---- ------
Total Capital Requirements................. $1,287 $1,129 $1,118 $1,303 $872 $5,709
====== ====== ====== ====== ==== ======
</TABLE>
EXTERNAL FINANCINGS -- PSE&G
PSE&G has BPU authority to issue approximately $4.734 billion aggregate
amount of Bonds/MTNs/Preferred Securities through 1997 for refunding purposes.
Under its Mortgage, PSE&G may issue new First and Refunding Mortgage Bonds
(Bonds) against previous additions and improvements and/or retired Bonds
provided that its ratio of earnings to fixed charges is at least 2:1. As of
December 31, 1996, the Mortgage would permit up to $3.047 billion
A-6
<PAGE> 28
aggregate principal amount of new Bonds to be issued against previous additions
and improvements. At December 31, 1996, the coverage ratio under PSE&G's
Mortgage was 3.30:1.
In January 1996, PSE&G issued $350 million of its Bonds. The net proceeds
from the sale were deposited in an escrow account and used to refund PSE&G's
8.75% Series EE Bonds due 2021 and 8.75% Series HH Bonds due 2022 at their
respective first optional redemption dates.
In June 1996, PSE&G Capital Trust I (Trust I), a special purpose statutory
business trust controlled by PSE&G, issued $208 million of 8.625% Quarterly
Income Preferred Securities (Quarterly Guaranteed Preferred Beneficial Interest
in PSE&G's Subordinated Debentures). PSE&G used the proceeds to redeem all
500,000 shares of each of its 7.52% and 7.40% Cumulative Preferred Stock $100
par value at $101 per share on June 28, 1996. In addition, PSE&G purchased,
pursuant to a tender offer, an aggregate $111.6 million of its 4.08%, 4.18%,
4.30%, 5.05%, 5.28%, 6.80% and 6.92% Cumulative Preferred Stock $100 par value.
In February 1997, PSE&G Capital Trust II (Trust II), a special purpose
statutory business trust controlled by PSE&G, issued $95 million of 8.125%
Quarterly Income Preferred Securities (Quarterly Guaranteed Preferred Beneficial
Interest in PSE&G's Subordinated Debentures). PSE&G used the proceeds to fund
the redemption of all 188,684 shares of its 6.80% Cumulative Preferred Stock
$100 par value at $102 per share on January 31, 1997 and will redeem all 750,000
shares of its 7.44% Cumulative Preferred Stock $100 par value at $103.72 per
share in June 1997.
The BPU has authorized PSE&G to issue and have outstanding at any one time
not more than $1.3 billion of short-term obligations, consisting of commercial
paper and other unsecured borrowings from banks and other lenders through
January 2, 1999. At December 31, 1996, PSE&G had $525 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 1997 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, 1996, there were no borrowings outstanding under these credit
agreements. PSE&G expects to be able to renew the credit agreement expiring in
1997.
Public Service Conservation Resources Corporation (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, 1997. As of
December 31, 1996, PSCRC had $30 million outstanding under this facility.
PSE&G Fuel Corporation (Fuelco) has a $125 million commercial paper program
to finance a 42.49% share of Peach Bottom Atomic Power Station (Peach Bottom)
nuclear fuel, supported by a $125 million revolving credit facility with a group
of banks, which expires on June 28, 2001. PSE&G has guaranteed repayment of
Fuelco's respective obligations under this program. As of December 31, 1996,
Fuelco had commercial paper of $83 million outstanding under such program.
EXTERNAL FINANCINGS -- EDHI
Through July 31, 1996, Funding had a commercial paper program, supported by
a commercial bank letter of credit and credit facility, in the amount of $225
million. Additionally, Funding had a $225 million revolving credit facility.
Both facilities were scheduled to expire in March 1998. On July 31, 1996,
Funding amended and restated its commercial paper program and revolving credit
facility in conjunction with the sale of EDC, reducing the total amount from
$450 million to $300 million and extending the maturity from March 1998 to July
1999. The $225 million commercial paper program was eliminated and the $225
million revolving credit facility was increased to $300 million. As of December
31, 1996, Funding had no borrowings outstanding under the amended and restated
facility.
A-7
<PAGE> 29
Capital's Medium-Term Note (MTN) program is expected to provide an
aggregate principal amount of up to $650 million and its total debt outstanding
at any time, including MTNs, is not expected to exceed such amount. In 1996,
Capital repaid $20 million of its MTNs. At December 31, 1996, Capital had total
debt outstanding of $415 million, including $335 million of MTNs.
NUCLEAR OPERATIONS
PSE&G's Salem Units 1 and 2 were taken out of service in the second quarter
of 1995. Salem Unit 2 is expected to return to service in the second quarter of
1997. Salem Unit 1 is expected to return to service in the Fall of 1997
following installation of new steam generators. Restart of each Salem Unit is
subject to the approval of the NRC. The cost of the steam generator replacement,
including installation, will be approximately $150 to $170 million (PSE&G's
share will be $64 to $72 million). In addition, the cost of disposal of the four
old steam generators could be as much as $20 million (PSE&G's share would be $9
million). The inability to successfully return these units to continuous, safe
operation could have a material adverse effect on the financial position,
results of operations and net cash flows of Enterprise and PSE&G (see Note
3 -- Rate Matters of Notes).
PSE&G's share of total operating and maintenance expenses for both Salem
units for 1996 was $136 million and capital costs were $119.2 million, which
includes $59.7 million for steam generator replacement. The outage of a Salem
unit causes PSE&G to incur replacement power costs of approximately $4 to $6
million per month. Such amounts vary, however, depending on the availability of
other generation, the cost of purchased energy and other factors, including
modifications to maintenance schedules of other units.
On January 29, 1997, the Nuclear Regulatory Commission (NRC) Staff placed
Salem Units 1 and 2 on the NRC Watch List and designated the Salem Units as
Category 2 facilities (a plant that is authorized to operate, but one that the
NRC Staff will monitor closely). The NRC Staff noted that this action was not
due to any performance problems or decline during this evaluation period but
that Salem should have been previously designated as a Category 2 plant and
would not be ready to leave that status until satisfactory integrated station
performance at power could be observed.
COMPETITIVE ENVIRONMENT
Many forces are reshaping how the utility industry meets the needs and
expectations of its customers and shareholders. Profound changes in the way the
industry is regulated will affect how Enterprise conducts business and its
financial prospects in the future. Competitive changes in the utility industry
continued to occur in 1996 and early 1997. With the issuance of Federal Energy
Regulatory Commission (FERC) Order No. 888 in July 1996 and the draft Phase II
report issued by the BPU in January 1997, Enterprise is now in a better position
to identify and develop strategies for addressing the issues that the changing
regulatory structure presents.
DRAFT PHASE II REPORT
On January 16, 1997, the BPU addressed wholesale and retail electric
competition in New Jersey and proposed the restructuring of the electric power
industry. In 1997, New Jersey regulators plan to establish the rules that will
eventually enable consumers in all market sectors to choose their providers of
energy and energy service in the future. With the emergence of this competitive
marketplace, Enterprise has and will continue to take significant steps to meet
the challenges posed by this changing environment. A summary of the draft Phase
II report follows:
- - Beginning in October 1998, 5% of retail electric customer load of all classes
(industrial, commercial and residential) will be given the ability to directly
choose their electric power supplier. All customer load would be phased-in,
with the percentage increasing to 20% in April 1999, 35% in October 1999, 50%
in April 2000, 75% in October 2000 and 100% in April 2001.
A-8
<PAGE> 30
- - Beginning October 1998, the rates for bundled electricity services, consisting
of power generation, transmission, distribution and auxiliary customer
services, such as metering and billing, would be unbundled. Each electric
utility, including PSE&G, would continue to be responsible for providing
distribution service to all customers, with price and service quality for
distribution service regulated by the BPU. Other customer services would also
continue to be offered by each electric utility for a monthly fee, including
metering, billing and account administration, which would also be regulated by
the BPU.
- - Transmission service would be provided by an Independent System Operator (ISO)
which would be responsible for maintaining the reliability of the regional
power grid and would be regulated by FERC. Utilities would continue to pass
through the cost of transmission to customers in regulated rates. Metering and
billing would also be reviewed in order to make recommendations for the
introduction of competition into the customer services area. A distribution
utility would be permitted to offer customer-side services, such as equipment
repair and service contracts in a competitive marketplace.
- - The draft Phase II report states that a fully competitive marketplace must
exist before the BPU will act to end economic regulation of power supply. This
will require, at a minimum, utility generating assets and functions to be
functionally separated and operate at arms length from the transmission,
distribution and customer service functions of the electric utilities. The BPU
would reserve final judgment on the issue of requiring divestiture of utility
generating assets until detailed analyses of the potential for market power
abuses by utilities have been performed. In addition, the BPU indicated its
belief that it is necessary to have a fully independent and operating ISO
prior to the implementation of customer choice. The BPU proposes that retail
competition in New Jersey be introduced approximately 12 to 18 months after
the implementation of full wholesale competition as provided by FERC Order No.
888.
- - Each electric utility would be required to file, no later than July 15, 1997,
complete restructuring plans, stranded cost filings and unbundled rate
filings. Review of the filings would be completed by October 1998.
- - Consumer protections proposed include: maintaining the electric utility as a
universal service or "basic generation service" provider; continued funding of
social programs now provided by electric utilities; registration of all third
party power suppliers with the BPU; establishment of standards of conduct for
third party power suppliers; and continued funding for energy efficiency
programs.
- - Utilities would have an opportunity for a limited number of years to recover
through rates stranded costs associated with generating capacity commitments
made prior to the advent of competition. However, while the draft Phase II
report proposes that the quantification of eligible stranded costs and a
determination of stranded cost recovery should be undertaken on a case-by-case
basis, 100% recovery of all eligible stranded costs would not be guaranteed.
The opportunity for full recovery of such eligible costs would be contingent
upon and may be constrained by the utility meeting a number of conditions,
including achievement of the goal of delivering a near term rate reduction to
customers of 5 to 10%. The presumptive cutoff point for electric generation
stranded cost recovery for each utility would be its last base rate case with
costs incurred after such last base rate case to be subject to a greater
burden of proof for recovery, including evidence of a market test to determine
availability of cost-effective alternatives. PSE&G's last rate case was
finalized on December 31, 1992, reflecting a test year ended of June 30, 1992.
- - The draft Phase II report states that utilities are obligated to take all
reasonably available measures to mitigate stranded costs caused by the
introduction of retail competition. A specific market charge would be a
separate component of a customer's electric bill, to provide a mechanism to
allow utilities the opportunity to recover stranded costs for a limited number
of years, ranging from four to eight. New Jersey is currently studying the
"securitization" of stranded costs as a means of financing these costs at
interest rates lower than the utility's cost of capital, thereby helping to
mitigate the rate impact of stranded cost recovery. Recovery of securitization
may occur over a longer period of time.
A-9
<PAGE> 31
- - The draft Phase II report suggests the need for federal action in a number of
areas as an integral part of electric restructuring. Of particular concern is
the transport of nitrogen oxides (NOx) and other pollutants to New Jersey from
power plants located in the Midwest and Southeast. New Jersey will develop a
contingency action plan if federal action fails to mitigate adverse
environmental impacts caused by electric restructuring.
PSE&G is currently assessing the draft Phase II report's proposed findings
and recommendations and in accordance with the proceeding requirements and will
file formal written comments on February 28, 1997. On February 4, 5, and 11,
1997, PSE&G participated in a Phase II public hearings and will work vigorously
toward the goal of opening the New Jersey marketplace to competition. PSE&G also
indicated its intent to develop and submit a comprehensive restructuring plan
that meets the BPU's and PSE&G's shared objectives by the July 15, 1997
deadline. Since the Phase II proceeding is still in the proposal phase, PSE&G
cannot predict the outcome of the final Phase II report.
FERC ORDER NO. 888 (ORDER NO. 888)
Order No. 888 became effective on July 9, 1996 and requires all public
utilities owning, controlling or operating transmission lines to file
nondiscriminatory open access tariffs that offer others the same transmission
service they provide to themselves. By March 1, 1997, intra-pool transactions
for power pools must also be under a nondiscriminatory, pool-wide open access
tariff. In July 1996, the member companies of Pennsylvania -- New
Jersey -- Maryland Interconnection (PJM), including PSE&G but excluding PECO
Energy Company (PECO), filed a proposal to reorganize PJM into an ISO to
administer a pool-wide open-access transmission tariff and to operate a
centrally dispatched bid-based energy market in response to Order No. 888. PECO
filed a separate proposal with FERC. On November 13, 1996, FERC announced that
it was rejecting the restructuring proposals of both PECO and the other PJM
companies due to concerns regarding the independence of the proposed ISO and
directed PJM to submit a single consensus pool restructuring proposal by
December 31, 1996. On December 31, 1996, PJM submitted a pool-wide open-access
transmission tariff and a reformed pooling agreement. The filing consisted of a
pro forma tariff and revised pool agreement that contained some of the same
differences with PECO as the earlier filings. These differences were presented
as side-by-side comparisons in the single filing. FERC has not yet responded to
the filing but is expected to do so by March 1, 1997.
As a result of open access mandated by Order No. 888, there is likely to be
increased competition from older, dirtier coal-fired plants in the Midwest that
are subject to less restrictive pollution control requirements than utilities in
Northeastern states and consequently, produce lower cost energy. These
facilities, by increasing their power production in order to sell into the
Northeast market, will, in turn, increase the release of pollutants that
eventually make their way to New Jersey and other northeastern states due to the
prevailing westerly winds. PSE&G, which has to comply with strict New Jersey
environmental laws, will be at a competitive disadvantage if Order No. 888 is
not modified to recognize this issue. Numerous parties, including PSE&G, have
filed requests seeking rehearing and clarification of various aspects of Order
No. 888. These filings are currently pending before the FERC. After exhausting
administrative remedies, judicial appeals of Order No. 888 are also possible. It
is possible, therefore, that Order No. 888 will be substantially modified.
NJGRT
A joint task force of the BPU and the New Jersey Treasury Department has
proposed replacing the current 13% NJGRT collected by utilities from their
customers with a combination of a corporate business tax, state sales and use
tax and a transitional assessment which would be phased out over an expected
seven year time frame. After the phase-out is completed, the proposal would
improve the competitive position of PSE&G vis-a-vis non-utility energy providers
in New Jersey who do not collect such tax. If this tax reform is not adopted,
PSE&G would remain at a significant competitive disadvantage since PSE&G's rates
would be up to 13% higher than non-utility energy providers. PSE&G cannot
predict when or if this proposal will be adopted.
A-10
<PAGE> 32
GAS UNBUNDLING
On August 23, 1996, PSE&G filed its Gas Unbundling Status Report. The
filing also contained PSE&G's proposal for a residential gas unbundling pilot
program to be known as SelectGas. If approved, this pilot program will allow
certain residential natural gas customers to participate in a competitive
marketplace. The SelectGas pilot program would involve four municipalities
representing approximately 65,000 residential customers. The review of the pilot
program, including formal discovery, has been initiated. PSE&G cannot predict
when or if this proposal will be adopted.
OFF-TARIFF RATE AGREEMENT (OTRA)
In 1995, the BPU initiated a generic proceeding that would give PSE&G the
ability to offer "off-tariff" negotiated rates to customers. Although these
OTRA's are offered at PSE&G's sole discretion, they are subject to BPU approval
of minimum price, confidentiality of information, contract duration, regulatory
filing requirements and other reporting requirements. These negotiated OTRA's
form part of PSE&G's overall strategy to retain customers in its service
territory. To date, three OTRA's have been filed with and approved by the BPU
and PSE&G is currently in negotiations with several other customers. PSE&G
cannot predict how many customers will leave or stay in this increasingly
competitive environment.
COMPETITIVE TRANSITION CHARGE (CTC)
On September 19, 1996, PSE&G filed a petition with the BPU to establish an
interim CTC. The CTC is designed to recover stranded costs which may result from
a customer leaving PSE&G's system as a full requirements customer. If approved
by the BPU as filed, this charge would apply to customers who, after September
19, 1996, commit to an alternate source of electric power while remaining
physically located in PSE&G's electric franchise area. Further, this interim
charge would be limited to customers with present billing demands in excess of
500KW. The proposed charge would be interim pending BPU resolution of the draft
Phase II report which addresses the stranded cost issue on a generic basis.
PSE&G cannot predict what action the BPU may take with respect to the CTC
petition.
STRANDED COSTS
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. Since the Energy Master Plan proceeding is
still in the proposal phase, and recognizing that the issue of securitization
and the extent of its application have not been determined, as well as the
potential need for legislative action, management cannot predict the level of
PSE&G's stranded costs or the extent to which regulators will allow recovery of
such costs.
BOND RATINGS
The changes in the utility industry are attracting increased attention of
bond rating agencies which regularly assess business and financial matters
including how utility companies are meeting competition and competitive
initiatives, especially as they affect potential stranded costs. Bond ratings
affect the cost of capital and the ability to obtain external financing. PSE&G
continually updates the rating agencies on all corporate matters. This minimizes
surprises and gives the rating agencies time to comprehend the information.
Given the uncertainty of the industry, attention and scrutiny of PSE&G's
competitive strategies by rating agencies will likely continue. This could
result in changes to PSE&G's bond ratings.
A-11
<PAGE> 33
ERI
On December 31, 1996, Enterprise formed ERI, which it believes better
positions Enterprise to enter the rapidly deregulating energy market by
marketing products and services to industrial and commercial customers
throughout the Northeast and Mid-Atlantic States. ERI has consolidated the
operations of two former PSRC subsidiaries with proven track records: U.S.
Energy Partners, which sold natural gas, and Enterprise Strategic Energy
Solutions, which provided consulting, engineering and repair services. In
addition, the financing of energy-savings or demand-side management projects,
formerly offered by PSE&G's subsidiary, PSCRC, will now be supplied by ERI. ERI
is expected to draw on Enterprise's depth of experience and financial strength
by offering a variety of services: sales of natural gas and electricity; energy
consulting; engineering, equipment installation and repair; inspection and
diagnostic services for motors, generators and other energy conversion and use
equipment; and up-front financing. ERI's potential customers include small
businesses, department stores, schools, hospitals and manufacturers from Maine
to Maryland.
ACCOUNTING ISSUES
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 through the ratemaking process. PSE&G
believes it continues 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 applicable 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,
noncash charge to operations that could be material to the financial position,
results of operations or net cash flows of Enterprise and PSE&G.
PSE&G has certain regulatory assets resulting from the use of a level of
depreciation expense in the ratemaking process that is less than the amount that
is recorded under generally accepted accounting principles for non-regulated
companies. PSE&G cannot presently quantify what the financial statement impact
would be if depreciation expense were required to be determined absent
regulation, but the impact on the financial position, results of operations or
net cash flows of Enterprise and PSE&G could be material.
Statement of Position 96-1 "Environmental Remediation Liabilities" (SOP
96-1) issued by the American Institute of Certified Public Accountants is
effective for the fiscal years that begin after December 15, 1996. SOP 96-1
provides guidance where remediation is required because of the threat of
litigation, a claim, or an assessment. This Statement does not provide guidance
on accounting for pollution control costs as it applies to current operations,
costs of future site restoration or closure that are required upon the cessation
of operations or sale of facilities or for remediation obligations undertaken at
the sole discretion of management. The adoption of SOP 96-1 is not expected to
have a material impact on the financial position, results of operations or net
cash flows of Enterprise and PSE&G.
RATE MATTERS
See Note 3 -- Rate Matters of Notes.
SITE RESTORATIONS AND OTHER ENVIRONMENTAL COSTS
It is difficult to estimate the future financial impact of environmental
laws, including potential liabilities. PSE&G accrues environmental provisions
when it is probable that a liability has been incurred and the amount of the
liability is reasonably estimable. Management expects that the amounts provided
as of December 31, 1996 and 1995 will be paid out over the period of
investigation, negotiation, remediation and restoration for the applicable
A-12
<PAGE> 34
sites, which may be 30 years or more. Provisions for estimated losses from
environmental remediation are, depending on the site, based primarily on
internal and third-party environmental studies, estimates as to the number and
participation level of any other Potentially Responsible Parties, the extent of
the contamination and the nature of required remedial and restoration actions.
The cost of environmental remediation could be material to Enterprise and
PSE&G's financial position, results of operations or net cash flows. (See Note
13 -- Commitments and Contingent Liabilities of Notes.)
FUTURE OUTLOOK
One of the most important lessons of 1996 was that deregulation is coming
sooner, not later. To meet the challenge of deregulation, Enterprise is focusing
on three business objectives: getting the rules right, investing for growth and
achieving operational excellence.
Enterprise is seeking to ensure that the new rules on industry
restructuring provide customer choice and lower cost without endangering public
safety or compromising New Jersey's stringent environmental standards.
Equally important are the investments that keep the business growing. To
this end, Enterprise will rely to a large extent on CEA. Because of the
substantial opportunities overseas, CEA focuses on international markets. CEA is
already established and competitive in several international markets. Another
way Enterprise will grow the business is by providing regional energy services
through ERI. ERI markets new and existing energy products and services to
commercial and industrial business customers throughout the Northeast and
Mid-Atlantic states. As the deregulation of the gas and electricity markets
increase, Enterprise expects ERI to play a significant role in its domestic
growth.
Enterprise is continuing to emphasize operational excellence as a key
business objective. Enterprise is looking at all operating areas for
opportunities to cut costs and increase efficiency. As part of its commitment to
operational excellence, Enterprise is implementing a business integration system
which is designed to increase operating efficiencies across all of its business
organizations.
Enterprise and PSE&G cannot predict the ultimate outcome of the ongoing
changes that are taking place in the utility industry or predict whether such
outcome will have a material impact on its financial condition, results of
operations or net cash flows. However, Enterprise and PSE&G believe that the end
result will involve a fundamental change in the way it conducts business. These
changes may impact financial operating trends and could result in earnings
volatility. PSE&G is actively seeking regulatory and operational changes that
will allow it to provide energy services in a safe and reliable manner at
competitive prices while achieving strong financial performance.
FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the Act) provides a
new "safe harbor" for forward-looking statements to encourage such disclosures
without the threat of litigation providing those statements are identified as
forward-looking and are accompanied by meaningful, cautionary statements
identifying important factors that could cause the actual results to differ
materially from those projected in the statement. Forward-looking statements
have been made in this report. Such statements are based on management's beliefs
as well as assumptions made by and information currently available to
management. When used herein, the words "will", "anticipate", "estimate",
"expect", "objective" and similar expressions are intended to identify
forward-looking statements. In addition to any assumptions and other factors
referred to specifically in connection with such forward-looking statements,
factors that could cause actual results to differ materially from those
contemplated in any forward-looking statements include, among others, the
following: deregulation and the unbundling of energy supplies and services; an
increasingly competitive energy marketplace; sales retention and growth
potential in a mature service territory and a need to contain costs; ability to
obtain adequate and timely rate relief, cost recovery, including the potential
impact of stranded costs, and other necessary regulatory approvals; federal and
state
A-13
<PAGE> 35
regulatory actions; costs of construction; operating restrictions, increased
cost and construction delays attributable to environmental regulations; nuclear
decommissioning and the availability of reprocessing and storage facilities for
spent nuclear fuel; licensing and regulatory approval necessary for nuclear and
other operating stations; and credit market concerns. Enterprise and PSE&G
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
The foregoing review of factors pursuant to the Act should not be construed as
exhaustive or as any admission regarding the adequacy of disclosures made by
Enterprise and PSE&G prior to the effective date of the Act.
A-14
<PAGE> 36
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING REVENUES
Electric........................................................ $ 3,944,362 $ 4,020,842 $ 3,739,713
Gas............................................................. 1,880,994 1,686,403 1,778,528
Nonutility Activities........................................... 215,893 186,417 177,082
----------- ----------- -----------
Total Operating Revenues.................................... 6,041,249 5,893,662 5,695,323
----------- ----------- -----------
OPERATING EXPENSES
Operation
Fuel for Electric Generation and Interchanged Power........... 918,514 891,782 695,763
Gas Purchased................................................. 1,117,716 961,539 1,023,956
Other......................................................... 1,053,520 1,007,735 1,015,806
Maintenance..................................................... 318,280 312,610 308,080
Depreciation and Amortization................................... 607,293 596,966 555,461
Taxes
Federal Income Taxes (note 11)................................ 290,253 337,966 309,946
New Jersey Gross Receipts Taxes............................... 598,016 612,961 583,167
Other......................................................... 80,698 76,913 81,305
----------- ----------- -----------
Total Operating Expenses.................................... 4,984,290 4,798,472 4,573,484
----------- ----------- -----------
OPERATING INCOME................................................ 1,056,959 1,095,190 1,121,839
----------- ----------- -----------
OTHER INCOME (EXPENSES)
Allowance for Funds Used During Construction -- Equity.......... -- 5,324 12,789
Miscellaneous -- net............................................ (1,920) 8,041 6,430
----------- ----------- -----------
Total Other Income (Expenses)............................... (1,920) 13,365 19,219
----------- ----------- -----------
INCOME BEFORE INTEREST CHARGES AND DIVIDENDS ON PREFERRED
SECURITIES.................................................... 1,055,039 1,108,555 1,141,058
----------- ----------- -----------
INTEREST CHARGES (note 7)
Long-Term Debt.................................................. 386,289 402,213 425,422
Short-Term Debt................................................. 33,759 32,822 23,962
Other........................................................... 33,063 29,172 12,805
----------- ----------- -----------
Total Interest Charges...................................... 453,111 464,207 462,189
Allowance for Funds Used During Construction -- Debt and
Capitalized Interest.......................................... (18,155) (32,839) (29,799)
----------- ----------- -----------
Net Interest Charges............................................ 434,956 431,368 432,390
----------- ----------- -----------
Preferred Securities Dividend Requirements (note 5)............. 27,741 15,664 1,680
Preferred Stock Dividend Requirements (note 5).................. 23,161 33,762 40,467
Net Gain (Loss) on Preferred Stock Redemptions (note 5)......... 18,177 (474) --
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS............................... 587,358 627,287 666,521
Discontinued Operations -- Net of Taxes (note 2)................ 10,746 35,036 12,512
Gain on Sale of Discontinued Operations -- Net of Taxes......... 13,492 -- --
----------- ----------- -----------
NET INCOME...................................................... $ 611,596 $ 662,323 $ 679,033
=========== =========== ===========
SHARES OF COMMON STOCK OUTSTANDING
End of Period................................................. 233,470,291 244,697,930 244,697,930
Average for Period............................................ 242,400,755 244,697,930 244,470,794
EARNINGS PER AVERAGE SHARE
Income From Continuing Operations............................. $ 2.42 $ 2.57 $ 2.73
Income From Discontinued Operations........................... 0.04 0.14 0.05
Gain on Sale of Discontinued Operations....................... 0.06 -- --
----------- ----------- -----------
TOTAL EARNINGS PER AVERAGE SHARE................................ $ 2.52 $ 2.71 $ 2.78
=========== =========== ===========
DIVIDENDS PAID PER SHARE OF COMMON STOCK........................ $ 2.16 $ 2.16 $ 2.16
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
A-15
<PAGE> 37
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS
ASSETS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
UTILITY PLANT -- Original cost (note 16)
Electric...................................................................... $13,314,033 $13,095,103
Gas........................................................................... 2,555,901 2,442,572
Common........................................................................ 530,185 517,104
----------- -----------
Total.................................................................. 16,400,119 16,054,779
Less: Accumulated depreciation and amortization............................... 5,889,098 5,440,414
----------- -----------
Net......................................................................... 10,511,021 10,614,365
Nuclear Fuel in Service, net of accumulated amortization -- 1996, $259,384;
1995, $297,435.............................................................. 198,845 180,018
----------- -----------
Net Utility Plant in Service................................................ 10,709,866 10,794,383
Construction Work in Progress, including Nuclear Fuel in Process -- 1996,
$70,455; 1995, $104,743..................................................... 445,321 369,082
Plant Held for Future Use..................................................... 23,966 23,966
----------- -----------
Net Utility Plant........................................................... 11,179,153 11,187,431
----------- -----------
INVESTMENTS AND OTHER NONCURRENT ASSETS (notes 4, 8, 9 and 12)
Long-Term Investments, net of amortization -- 1996, $12,679; 1995, $6,009, and
net of valuation allowances -- 1996, $16,969; 1995, $ --.................... 1,854,304 1,808,368
Real Estate Property and Equipment, net of accumulated depreciation -- 1996,
$5,906; 1995, $6,121........................................................ 64,753 88,627
Other Plant, net of accumulated depreciation and amortization -- 1996, $6,518;
1995, $6,677................................................................ 37,031 28,720
Nuclear Decommissioning and Other Special Funds (note 4)...................... 382,348 313,178
Other Assets -- net of valuation allowances -- 1996, $826; 1995, $ --......... 13,548 3,851
----------- -----------
Total Investments and Other Noncurrent Assets.......................... 2,351,984 2,242,744
----------- -----------
CURRENT ASSETS
Cash and Cash Equivalents (note 10)........................................... 278,903 61,964
Accounts Receivable:
Customer Accounts Receivable................................................ 499,858 525,404
Other Accounts Receivable................................................... 241,483 201,775
Less: Allowance for Doubtful Accounts....................................... 42,283 38,003
Unbilled Revenues............................................................. 248,504 246,876
Fuel, at average cost......................................................... 313,019 253,360
Materials and Supplies, at average cost, net of inventory valuation
reserves -- 1996, $16,100; 1995, $20,100.................................... 147,757 143,741
Deferred Income Taxes (note 11)............................................... 23,210 27,571
Miscellaneous Current Assets.................................................. 33,976 39,884
Net Assets of Discontinued Operations......................................... -- 365,905
----------- -----------
Total Current Assets................................................... 1,744,427 1,828,477
----------- -----------
DEFERRED DEBITS (note 6)
Property Abandonments -- net.................................................. 52,573 70,120
Oil and Gas Property Write-Down............................................... 30,924 36,078
Unamortized Debt Expense...................................................... 139,067 123,833
Deferred OPEB Costs (notes 1 and 14).......................................... 226,171 167,189
Unrecovered Environmental Costs (notes 3 and 13).............................. 125,900 130,070
Unrecovered Plant and Regulatory Study Costs.................................. 33,941 35,150
Underrecovered Electric Energy and Gas Costs -- net (notes 3 and 6)........... 176,055 170,565
Unrecovered SFAS 109 Deferred Income Taxes (note 11).......................... 751,763 769,136
Deferred Decontamination and Decommissioning Costs (note 4)................... 46,643 49,872
Other......................................................................... 56,730 5,826
----------- -----------
Total Deferred Debits.................................................. 1,639,767 1,557,839
----------- -----------
Total........................................................................... $16,915,331 $16,816,491
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
A-16
<PAGE> 38
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER DECEMBER
31, 31,
1996 1995
----------- -----------
<S> <C> <C>
CAPITALIZATION (notes 5 and 7)
Common Equity:
Common Stock..................................................... $ 3,626,792 $ 3,801,157
Retained Earnings................................................ 1,586,256 1,636,971
----------- -----------
Total Common Equity......................................... 5,213,048 5,438,128
Subsidiaries' Preferred Securities:
Preferred Stock Without Mandatory Redemption..................... 113,392 324,994
Preferred Stock With Mandatory Redemption........................ 150,000 150,000
Monthly Guaranteed Preferred Beneficial Interest in PSE&G's
Subordinated Debentures......................................... 210,000 210,000
Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's
Subordinated Debentures......................................... 208,000 --
Long-Term Debt...................................................... 4,580,231 5,189,791
----------- -----------
Total Capitalization........................................ 10,474,671 11,312,913
----------- -----------
OTHER LONG-TERM LIABILITIES
Decontamination, Decommissioning and Low Level Radwaste Costs (note
4)............................................................... 46,643 50,449
Environmental Costs (notes 3 and 13)................................ 85,755 96,272
Capital Lease Obligations (note 12)................................. 52,371 53,111
----------- -----------
Total Other Long-Term Liabilities........................... 184,769 199,832
----------- -----------
CURRENT LIABILITIES
Long-Term Debt due within one year.................................. 547,981 61,060
Commercial Paper and Loans (note 7)................................. 638,051 567,316
Book Overdrafts..................................................... 106,372 70,014
Accounts Payable.................................................... 590,932 538,585
Other Taxes Accrued................................................. 31,577 30,816
Interest Accrued.................................................... 95,800 108,245
Provision for Rate Refund........................................... 89,210 13,810
Other............................................................... 171,831 158,180
----------- -----------
Total Current Liabilities................................... 2,271,754 1,548,026
----------- -----------
DEFERRED CREDITS
Deferred Income Taxes (note 11)..................................... 3,250,343 3,083,426
Deferred Investment Tax Credits..................................... 361,786 392,324
Deferred OPEB Costs (notes 1 and 14)................................ 226,171 167,189
Other............................................................... 145,837 112,781
----------- -----------
Total Deferred Credits...................................... 3,984,137 3,755,720
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES (note 13)...................... -- --
----------- -----------
Total................................................................. $16,915,331 $16,816,491
=========== ===========
</TABLE>
A-17
<PAGE> 39
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................................. $ 611,596 $ 662,323 $ 679,033
Adjustments to reconcile net income to net cash flows from operating
activities:
Depreciation and Amortization............................................ 607,293 596,966 555,461
Amortization of Nuclear Fuel............................................. 59,881 75,028 95,173
(Deferral) Recovery of Electric Energy and Gas Costs -- net.............. (5,490) 1,998 (110,529)
Unrealized Gains on Investments -- net................................... (6,982) (46,668) (26,329)
Provision for Deferred Income Taxes -- net............................... 64,724 133,898 103,051
Investment Tax Credits -- net............................................ (28,805) (20,142) (20,247)
Allowance for Funds Used During Construction -- Debt and Equity and
Capitalized Interest.................................................... (18,155) (38,163) (42,588)
Proceeds from Leasing Activities......................................... 88,970 37,652 27,682
Changes in certain current assets and liabilities:
Net (increase) decrease in Accounts Receivable and Unbilled Revenues..... (11,510) (169,148) 66,609
Net (increase) decrease in Inventory -- Fuel and Materials and
Supplies................................................................ (63,675) 18,589 41,163
Net increase (decrease) in Accounts Payable.............................. 24,049 116,029 (73,283)
Net increase (decrease) in Provision for Rate Refund..................... 75,400 (8,143) 19,538
Net increase (decrease) in Other Accrued Taxes........................... 761 (17,492) (257,897)
Net change in Other Current Assets and Liabilities....................... 11,475 20,222 19,423
Other.................................................................... (28,693) 68,318 75,371
Net cash provided by operating activities -- Discontinued Operations..... 53,621 103,606 92,147
---------- ---------- ----------
Net Cash provided by operating activities........................... 1,434,460 1,534,873 1,243,778
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Utility Plant, excluding AFDC................................. (585,929) (649,883) (849,174)
Net decrease (increase) in Long-Term Investments and Real Estate........... 4,916 (66,374) 59,647
Contribution to Decommissioning Funds and Other Special Funds.............. (29,280) (29,617) (35,394)
Cost of Plant Removal -- net............................................... (33,503) (29,674) (33,962)
Other...................................................................... (18,113) (46,715) 7,093
Change in Net Assets -- Discontinued Operations............................ (51,568) (113,042) (158,630)
Net Proceeds from the Sale of Discontinued Operations...................... 704,252 -- --
---------- ---------- ----------
Net cash used in investing activities............................... (9,225) (935,305) (1,010,420)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in Short-Term Debt................................. 70,735 357,981 (86,050)
Increase (decrease) in Book Overdrafts..................................... 36,358 (16,562) 23,584
Issuance of Long-Term Debt................................................. 373,500 156,320 849,800
Redemption of Long-Term Debt............................................... (808,241) (556,294) (593,790)
Long-Term Debt Issuance and Redemption Costs............................... (40,370) (14,176) (29,198)
Issuance of Preferred Stock................................................ -- -- 75,000
Redemption of Preferred Stock.............................................. (211,602) (60,000) (120,000)
Issuance of Preferred Securities of Subsidiaries........................... 208,000 60,000 150,000
Issuance of Common Stock................................................... -- -- 28,495
Retirement of Common Stock................................................. (307,412) -- --
Cash Dividends Paid on Common Stock........................................ (522,565) (528,548) (528,071)
Other...................................................................... (6,699) (1,814) (6,970)
---------- ---------- ----------
Net cash used in financing activities............................... (1,208,296) (603,093) (237,200)
---------- ---------- ----------
Net increase (decrease) in Cash and Cash Equivalents......................... 216,939 (3,525) (3,842)
Cash and Cash Equivalents at Beginning of Period............................. 61,964 65,489 69,331
---------- ---------- ----------
Cash and Cash Equivalents at End of Period................................... $ 278,903 $ 61,964 $ 65,489
========== ========== ==========
Income Taxes Paid............................................................ $ 156,656 $ 185,376 $ 155,104
Interest Paid................................................................ $ 462,877 $ 481,264 $ 432,873
</TABLE>
See Notes to Consolidated Financial Statements.
A-18
<PAGE> 40
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Balance at Beginning of Period............................. $1,636,971 $1,505,010 $1,361,018
Add:
Net Income............................................... 611,596 662,323 679,033
---------- ---------- ----------
Total...................................................... 2,248,567 2,167,333 2,040,051
---------- ---------- ----------
Deduct:
Cash Dividends on Common Stock........................... 522,565 528,548 528,071
Retirement of Common Stock............................... 133,047 -- --
Preferred Securities Issuance Expenses................... 6,699 1,814 6,970
---------- ---------- ----------
Total Deductions................................. 662,311 530,362 535,041
---------- ---------- ----------
Balance at End of Period................................... $1,586,256 $1,636,971 $1,505,010
========== ========== ==========
</TABLE>
Note: 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, and certain of the debentures 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, 1996, 1995 and 1994 was $10 million. There are no restrictions on
EDHI's retained earnings.
See Notes to Consolidated Financial Statements.
A-19
<PAGE> 41
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
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 non-utility businesses: 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; Energis Resources Incorporated (ERI),
which provides total energy services to industrial and commercial customers both
within and outside of PSE&G's traditional service territory (see Competitive
Environment) and Enterprise Group Development Corporation (EGDC), a
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 with Enterprise and Enterprise Capital Funding Corporation (Funding),
which provides privately placed debt financing guaranteed by EDHI, but without
direct support from Enterprise. EDHI has been conducting a controlled exit from
the real estate business since 1993. In July 1996, EDHI sold Energy Development
Corporation (EDC), an oil and gas subsidiary.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 application of Generally Accepted Accounting Principles (GAAP) by
PSE&G differs 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 costs (a regulatory asset) or recognize obligations (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 6 -- Deferred Items). If PSE&G were to
discontinue the application of SFAS 71, the accounting impact would be an
extraordinary, noncash charge to operations that could be material to the
financial position, results of operations or net cash flows 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.
A-20
<PAGE> 42
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 year
data have been made to conform with the current presentation.
Unamortized Debt Expense
Gains, 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.
Utility Plant -- PSE&G
Additions to utility plant and replacements of units of property are
capitalized at original cost. The cost of maintenance, repair and replacement of
minor items of property is charged to appropriate expense accounts. At the time
units of depreciable property are retired or otherwise disposed, the original
cost less net salvage value is charged to accumulated depreciation.
Depreciation and Amortization
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 rates stated in
percentages of original cost of depreciable property were 3.53% in 1996, 3.52%
in 1995 and 3.51% in 1994.
Nuclear fuel 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
kilowatt-hour (KWH) of nuclear generation for spent fuel disposal costs (see
Note 4 -- PSE&G Nuclear Decommissioning).
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 regarding 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. By Order dated December 31, 1996 (December
31st Order), the BPU approved a settlement that provides that PSE&G can continue
to follow deferred accounting treatment for the non-energy components of the
Electric Levelized Energy Adjustment Clause (LEAC). The parties to the December
31st Order, including the New Jersey Division of Ratepayer Advocate and BPU
Staff, reserved the right to review the reasonableness of these costs in a
future proceeding, prior to recovery from customers (see Note 4 -- PSE&G Nuclear
Decommissioning).
A-21
<PAGE> 43
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Allowance for Funds Used During Construction (AFDC) -- 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 1996, 1995 and 1994 were
5.83%, 6.98% and 6.48%, respectively.
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
and gas purchased.
Any LEAC and Levelized Gas Adjustment Charge (LGAC) underrecoveries 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 (see Note 3 -- Rate Matters).
Financial Instruments
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 9 -- Financial Instruments and Risk
Management).
Income Taxes
Enterprise and its subsidiaries file a consolidated federal income tax
return and income taxes are allocated to Enterprise's subsidiaries based on the
taxable income or loss of each subsidiary. Investment tax credits are deferred
and amortized over the useful lives of the related property, including nuclear
fuel.
Benefit Plans
Non-represented employees of PSE&G commencing service before January 1,
1996, represented employees of PSE&G commencing employment before January 1,
1997 and certain employees of PSE&G's affiliated companies are covered by a
noncontributory trusteed pension plan (Pension Plan) from the date of hire.
Non-represented employees of PSE&G who commenced service after January 1, 1996,
represented employees of PSE&G who commence employment after January 1, 1997, as
well as certain employees of PSE&G's affiliated companies are covered by a Cash
Balance Pension Plan. The policy is to fund pension costs accrued (see Note
15 -- Pension Plan).
In 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 and life insurance benefits be charged to expense
during the years in which employees render service (see Note
14 -- Postretirement Benefits Other Than Pensions).
A-22
<PAGE> 44
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Impairment of Long-Lived Assets
On January 1, 1996, Enterprise and PSE&G adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" (SFAS 121), which requires
review for possible impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
adoption of SFAS 121 did not have an impact on the results of operations,
financial condition or net cash flows of Enterprise and PSE&G. However, future
developments in the electric industry and utility regulation could jeopardize
the full recovery of the carrying cost of certain investments. Consequently,
Enterprise and PSE&G are monitoring the changing conditions facing the electric
utility industry.
Stock Based 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. SFAS 123 provides an entity the
option to either adopt the new method or to continue to measure compensation
cost as prescribed by Accounting Principles Board Opinion No. 25 (APB 25)
"Accounting for Stock Issued to Employees" and provide proforma disclosure of
the effect of adopting SFAS 123. Enterprise has elected to continue its current
accounting treatment for stock compensation under APB 25. If stock based
compensation costs for Enterprise had been determined based on methodology
prescribed in SFAS 123, there would not have been a material effect on the
financial position, results of operations or net cash flows of Enterprise.
NOTE 2. DISCONTINUED OPERATIONS
On July 1, 1996, EDHI entered into a contract for the sale of EDC to
Samedan Oil Corporation, a subsidiary of Noble Affiliates, Inc., for an
aggregate purchase price of $779 million subject to various purchase price
adjustments. As a result, Consolidated Financial Statements previously issued
have been restated to give effect to the classification of EDC as discontinued
operations. The sale, which was completed on July 31, 1996, resulted in an
after-tax gain of $13 million.
Operating results of EDC for 1996 (7 months), 1995, and 1994 are summarized
in the following table:
<TABLE>
<CAPTION>
1996
(7 MONTHS) 1995 1994
---------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Revenues......................................... $128,353 $270,134 $234,608
Operating income................................. 24,551 80,786 43,938
Earnings before income taxes..................... 9,062 53,299 14,196
Income taxes..................................... (1,684) 18,263 1,684
Net income....................................... 10,746 35,036 12,512
</TABLE>
A-23
<PAGE> 45
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net assets of EDC included in Enterprise's Consolidated Balance Sheet
at December 31, 1995 are summarized in the following table:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
(THOUSANDS
OF DOLLARS)
<S> <C>
Property............................................. $608,015
Current assets, primarily receivables................ 90,986
Other assets......................................... 56,836
Current liabilities.................................. 62,204
Debt................................................. 311,821
Deferred credits and other liabilities............... 15,907
--------
Net assets........................................... $365,905
========
</TABLE>
NOTE 3. RATE MATTERS
SETTLEMENT OF CERTAIN REGULATORY ISSUES
By Order dated December 31, 1996 (December 31st Order), the BPU approved a
settlement among PSE&G, the staff of the BPU (Staff) and the New Jersey Division
of Ratepayer Advocate addressing (i) the cost impact of the current shutdown of
Salem Units 1 and 2, including the "used and useful" issue related to the units
through December 31, 1998; (ii) the recovery of certain replacement power costs
associated with the 1994 Salem Unit 1 outage; and (iii) the recovery of capacity
costs associated with PSE&G's power purchases from cogeneration producers
through December 31, 1998. Under the December 31st Order, PSE&G has provided
electric customers with bill credits totaling $83.9 million in January and
February 1997 and PSE&G will forego recovery of $12 million associated with
energy costs that previously have been deferred. The resulting earnings loss of
$62.3 million or 26 cents per share of Enterprise common stock was previously
recorded ($59.0 million or 25 cents per share in the third quarter of 1996 and
$3.3 million or 1 cent per share in 1995).
Under the terms of the December 31st Order, Salem Units 1 and 2 will
continue in base rates without being subject to further refund and PSE&G will
assume all nuclear and fossil generating fuel and performance risks, including
replacement power costs associated with the Salem, Hope Creek and Peach Bottom
nuclear stations from January 1, 1997 through December 31, 1998. The BPU's
nuclear performance standard (NPS) will not apply to PSE&G from January 1, 1996
through December 31, 1998 (see Note 13 -- Commitments and Contingent
Liabilities). In addition, the energy component of PSE&G's LEAC will be fixed at
its existing level with no increase to customers until at least January, 1999.
Any underrecovered or overrecovered LEAC balance existing on December 31, 1998
will not be considered in any LEAC review subsequent to that date. Any
overrecovery at that date will be applied to reduce any potential stranded costs
and any underrecovered balance will be charged to income in the period
identified.
The December 31st Order provides PSE&G the opportunity, but no guarantee,
during the period January 1, 1997 through December 31, 1998, to fully recover
the December 31, 1996 underrecovered LEAC energy balance of $151.2 million
without any change in the current energy component of the LEAC charge.
Management believes that it will fully recover the underrecovered LEAC balance
by December 31, 1998 and will continue to follow deferred accounting treatment
for the LEAC.
A-24
<PAGE> 46
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition to the resolution of the Salem "used and useful" issue, the
December 31st Order addresses two other separate long-standing issues that PSE&G
had been litigating before the BPU. The first pertains to the recovery of
certain replacement power costs associated with a 58-day outage at Salem Unit 1
in 1994. The December 31st Order required PSE&G to reduce its underrecovered
LEAC balance by $7 million. The second pertains to the recovery of capacity
costs associated with electric utility power purchases from cogeneration
producers through December 31, 1998. The December 31st Order required PSE&G to
provide bill credits to electric customers totaling $6.4 million in during
January and February 1997. In addition, PSE&G reduced its underrecovered LEAC
balance by $5 million.
Through separate letter agreements, PSE&G and the Ratepayer Advocate agreed
on a commitment by PSE&G to provide financial assistance toward economic growth
and development in New Jersey. This commitment, which runs through December 31,
1999, has four key elements. First, PSE&G will create a $30 million revolving
economic development fund with emphasis on stimulating jobs and developing high
technology projects in urban areas. Second, PSE&G will provide incentives to
encourage local public housing authorities to replace up to 4,000 refrigerators
a year. Third, PSE&G will commit $1 million to develop a fund to provide
innovative assistance to low-income residents who are having difficulty paying
energy bills. Finally, PSE&G will develop a computer system to assist low-income
residents in identifying government and community programs from which they would
be eligible to receive benefits. On February 24, 1997, an Intervenor's group
filed an appeal in New Jersey Superior Court seeking an invalidation of the
December 31st Order. PSE&G cannot predict the outcome of this appeal.
LGAC
On July 30, 1996, PSE&G filed its 1996/97 LGAC petition with the BPU
requesting that it be effective October 1, 1996 through December 31, 1997. PSE&G
has requested the LGAC be modified so as to more closely track the market price
of gas and avoid the distortions and dislocations resulting from the reflection
of over and underrecoveries. The 1996/97 LGAC proposal requested that
residential and certain other customer billings be converted from a levelized
charge to one derived on a monthly basis. The requested change in the LGAC
pricing is the same as the change in pricing for Large Volume Gas (LVG) and
General Service Gas (GSG) customers which was approved by the BPU in PSE&G's
1995/96 LGAC filing. In addition, there would be a cap of five cents per therm
in the month to month change in the 1996/97 LGAC rate for all customer classes.
PSE&G has also requested that the 1996/97 LGAC reflect a refund of approximately
$14 million to LVG and GSG customers in the form of bill credits, stemming from
over collections which occurred during the 1995/96 LGAC period.
On November 22, 1996, the BPU approved an approximate $80 million increase
based upon a modified Interim Stipulation in the LGAC proceeding. The BPU did
not approve PSE&G's 1996/1997 LGAC proposal that residential and certain other
customer billings be converted from an annual levelized charge to one derived on
a monthly basis. The monthly pricing methodology for LVG and GSG customers, with
minor modifications, will continue. During the months of December 1996 and
January 1997, approximately $14 million was refunded through bill credits to
customers that purchased LVG or GSG service (excluding off-peak service) during
the period January 1, 1996 through October 31, 1996. The refund was based on an
overcollection of gas costs from those customer classes and was apportioned
based on those customers' billed usage during that period. PSE&G, Staff and the
Ratepayer Advocate have the right to revisit all issues in a later proceeding.
PSE&G cannot predict the outcome of such a proceeding.
A-25
<PAGE> 47
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ELECTRIC LEVELIZED ENERGY ADJUSTMENT CLAUSE
On February 24, 1997, PSE&G filed with the BPU for an increase in the
Demand Side Adjustment Factor component of the LEAC, to become effective on or
before May 1, 1997. The filing would be effective for the period from May 1997
through December 1998 and requests an annualized increase of $151.8 million. The
filing includes recovery of demand side management (DSM)/conservation costs
related to BPU approved programs and would raise rates to a level sufficient to
recover such costs. At December 31, 1996, PSE&G had an underrecovered balance of
approximately $43 million related to these programs. Such amount is included in
other Deferred Debits on PSE&G's balance sheet. This underrecovery is expected
to grow to approximately $75 million by April 30, 1997. Approval of this filing
would result in recovery of this balance, as well as the costs of these programs
through December 1998. PSE&G cannot predict the outcome of this matter.
See Settlement of Certain Regulatory Issues.
REMEDIATION ADJUSTMENT CHARGE (RAC)
In 1992, the BPU approved a mechanism for recovery of PSE&G's costs
associated with its Manufactured Gas Plant Remediation Program (Remediation
Program) since October 1, 1992, allowing the recovery of actual costs plus
carrying charges, net of insurance recoveries, over a seven -- year period
through PSE&G's LGAC and LEAC, with 60% charged to gas customers and 40% charged
to electric customers. On November 22, 1996, the BPU approved an Interim LGAC
Stipulation regarding costs incurred during the period August 1, 1995 through
July 31, 1996. Under this Order, PSE&G is expected to recover $2.7 million from
gas customers and $1.8 million from electric customers during the period
November 1, 1996 through October 31, 1997.
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
non-utility affiliates included in the consolidated tax return of that utility's
holding company should be considered in setting that utility's rates. In 1992,
the BPU approved an order in such case treating certain consolidated tax savings
generated after June 30, 1990 by that utility's non-utility affiliates as a
reduction of its rate base. Also in 1992, the BPU issued an order resolving
PSE&G's 1992 base rate proceeding without separate quantification of the
consolidated tax issue. Such order 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 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 revenues, net income or net cash flows. In
addition, an unfavorable resolution may adversely impact Enterprise's
non-utility 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 non-utility businesses. The issue of
Enterprise sharing the benefits of consolidated tax savings with PSE&G or its
ratepayers was addressed by the BPU in its July 28, 1996 letter which informed
PSE&G that the issue of consolidated tax savings can be discussed in the context
of PSE&G's next base rate case or plan for an alternative form of regulation.
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 11 -- Federal Income Taxes).
A-26
<PAGE> 48
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ALTERNATIVE RATE PLAN
On January 16, 1996, PSE&G proposed to the BPU an alternative rate plan
that included 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. As a result of the findings and filing requirements of the BPU's
draft Phase II report of the Master Plan (draft Phase II report), on January 31,
1997, PSE&G withdrew its alternative rate plan from further consideration.
OTHER RATE MATTERS
In 1995, the BPU initiated a generic proceeding that would eventually lead
to New Jersey electric utilities having the ability to offer "off-tariff"
negotiated rates to customers. Although these Off-Tariff Rate Agreements (OTRA)
are offered at PSE&G's sole discretion, they are subject to BPU approval of
minimum price, confidentiality of information, contract duration, regulatory
filing requirements and other reporting requirements. These negotiated OTRAs
form part of PSE&G's overall strategy to retain customers in its service
territory and maintain long term electric sales. To date, three OTRAs have been
filed with and approved by the BPU and PSE&G is currently in negotiations with
several other customers. PSE&G cannot predict what impact OTRAs may have on its
financial position, results of operations and net cash flows.
On August 1, 1996, the BPU initiated a generic proceeding to resolve the
regulatory and rate issues associated with SFAS 106. On January 8, 1997, the BPU
issued its Order adopting a stipulation of the parties to the proceeding
regarding SFAS 106 cost recovery mechanisms and initiating a second phase of the
generic proceeding requiring each utility's individual filing to obtain SFAS 106
accrual rate recognition under one of the rate mechanisms established in the BPU
Order. PSE&G cannot predict the outcome of this proceeding.
On September 19, 1996, PSE&G filed a petition with the BPU to establish an
interim Competitive Transition Charge (CTC). The CTC is designed to recover
stranded costs which may result from a customer leaving PSE&G's system as a full
requirements customer. If approved by the BPU as filed, this charge would apply
to customers who, after September 19, 1996, commit to an alternate source of
electric power while remaining physically located in PSE&G's electric franchise
area. Further, this interim charge would be limited to customers with present
billing demands in excess of 500KW. The proposed charge would be interim,
pending BPU resolution of the stranded cost issue on a generic basis in the
Energy Master Plan. PSE&G cannot predict what action the BPU may take with
respect to the CTC petition.
Recoverability of stranded costs is largely dependent on the transition
rules established by regulators, including the 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. Since the Energy Master Plan
proceeding is still in the proposal phase, and recognizing that the issue of
securitization and the extent of its application have not been determined, as
well as the potential need for legislative action, management cannot predict the
level of PSE&G's stranded costs or the extent to which regulators will allow
recovery of such costs.
A-27
<PAGE> 49
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. PSE&G NUCLEAR DECOMMISSIONING
The BPU decision in PSE&G's most recent 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 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 its nuclear units. This trust contains two separate funds: a
qualified fund and a non-qualified fund, due to an Internal Revenue Service
(IRS) ruling. Section 468A of the Internal Revenue Code limits the amount of
money that can be contributed into a "qualified" fund. Contributions made into a
qualified fund are tax deductible. PSE&G estimated the total cost of
decommissioning its share of these five nuclear units at $986 million in year
end 1995 dollars (the year that the most recent site specific estimates were
prepared), excluding contingencies. On December 23, 1996, PSE&G filed its 1995
nuclear plant decommissioning cost update with the BPU. The filing included
decommissioning cost updates for PSE&G's respective ownership shares of its five
nuclear units. PSE&G's filing was based on site specific studies (year end 1995
dollars).
The most recent 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 million in 1993 and $14 million each year thereafter are to be recovered
through PSE&G's LEAC. At December 31, 1996 and 1995, the accumulated provision
for depreciation and amortization included reserves for nuclear decommissioning
for PSE&G's nuclear units of $338 million and $292 million, respectively. As of
December 31, 1996 and 1995, PSE&G had contributed $249 million and $220 million,
respectively, into independent, external, qualified and non-qualified nuclear
decommissioning trust funds. The fair market value of these funds as of December
31, 1996 and 1995 was $375 million and $311 million, respectively.
The staff of the SEC has questioned certain of the current accounting
practices of the electric utility industry, including PSE&G, regarding the
recognition, measurement and classification of nuclear decommissioning costs in
their financial statements. 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 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 fund, based
on their past purchases of U.S. government enrichment services. 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 $69 million
(adjusted for inflation). Since 1993, PSE&G has paid $22 million, resulting in a
balance due of $47 million. PSE&G has deferred the expenditures incurred to date
as part of deferred underrecovered electric energy costs (see Note 3 -- Rate
Matters).
A-28
<PAGE> 50
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SPENT NUCLEAR FUEL DISPOSAL COSTS
In accordance with the Nuclear Waste Policy Act (NWPA), PSE&G has entered
into contracts with the Department of Energy (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 Net Interchanged
Power in the Statements of Income. These costs are being recovered through the
LEAC (see Note 3 -- Rate Matters).
A-29
<PAGE> 51
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. SCHEDULE OF CONSOLIDATED CAPITAL STOCK AND OTHER SECURITIES
<TABLE>
<CAPTION>
CURRENT
REDEMPTION
OUTSTANDING PRICE DECEMBER 31, DECEMBER 31,
SHARES PER SHARE 1996 1995
----------- ---------- ------------ ------------
(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, 1996, 233,470,291
shares and at December 31, 1995 and December 31,
1994, 244,697,930 shares........................... $3,626,792 $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%........................................... 146,221 103.00 $ 14,622 $ 25,000
4.18%........................................... 116,958 103.00 11,696 24,994
4.30%........................................... 149,478 102.75 14,948 25,000
5.05%........................................... 104,002 103.00 10,400 25,000
5.28%........................................... 117,864 103.00 11,786 25,000
6.80%........................................... 188,684 102.00 18,869 25,000
6.92%........................................... 160,711 -- 16,071 60,000
7.40%........................................... -- -- -- 50,000
7.52%........................................... -- -- -- 50,000
$25 par value series
6.75%........................................... 600,000 -- 15,000 15,000
-------- --------
Total Preferred Stock without Mandatory
Redemption...................................... $ 113,392 $ 324,994
======== ========
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.... $ 150,000 $ 150,000
======== ========
Monthly Guaranteed Preferred Beneficial Interest in
PSE&G's Subordinated Debentures (Notes D, F and G)
9.375%.......................................... 6,000,000 -- $ 150,000 $ 150,000
8.00%........................................... 2,400,000 -- 60,000 60,000
-------- --------
Total Monthly Guaranteed Preferred Beneficial
Interest in PSE&G's Subordinated Debentures..... $ 210,000 $ 210,000
======== ========
Quarterly Guaranteed Preferred Beneficial Interest
in PSE&G's Subordinated Debentures (Notes D, F and
H)
8.625%.......................................... 8,320,000 -- $ 208,000 --
--------
Total Quarterly Guaranteed Preferred Beneficial
Interest in PSE&G's Subordinated Debentures..... $ 208,000 --
========
</TABLE>
- ---------------
A-30
<PAGE> 52
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(A) In July 1996, Enterprise initiated a common stock repurchase program. As of
December 31, 1996, 11,227,639 shares had been repurchased for $307 million.
The program concluded on January 17, 1997. The total number of shares
repurchased under the program was 12,740,322 at a cost of $350 million.
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
1996 and 1995, no shares of Enterprise Common Stock were issued or sold
through these plans.
(B) Enterprise has authorized a class of 50,000,000 shares of Preferred Stock
without par value, none of which is outstanding.
(C) At December 31, 1996, there were aggregates of 5,016,082 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 revived from time to time.
(D) At December 31, 1996, the annual dividend requirement and embedded dividend
rate for Preferred Stock without mandatory redemption was $6,283,425 and
5.45%, respectively, and for Preferred Stock with mandatory redemption was
$10,057,500 and 6.75%, respectively.
At December 31, 1995, the annual dividend requirement and embedded
dividend rate for Preferred Stock without mandatory redemption was
$20,046,765 and 6.14%, respectively, and for Preferred Stock with
mandatory redemption was $10,057,500 and 6.75%, respectively.
At December 31, 1996 and 1995, the annual dividend requirement and
embedded cost of the Monthly Income Preferred Securities (Guaranteed
Preferred Beneficial Interest in PSE&G's Subordinated Debentures) was
$18,862,500 and 6.04%, respectively.
At December 31, 1996, the annual dividend requirement of the Quarterly
Income Preferred Securities (Guaranteed Preferred Beneficial Interest in
PSE&G's Subordinated Debentures) and their embedded costs were $17,940,000
and 5.80%, respectively.
(E) On June 28, 1996, PSE&G redeemed all of the 500,000 shares of each of its
outstanding 7.52% and 7.40% cumulative preferred stock ($100 par), at a
redemption price of $101 per share.
In addition, PSE&G purchased an aggregate of 1,116,024 shares of its
4.08%, 4.18%, 4.30%, 5.05%, 5.28%, 6.80% and 6.92% Cumulative Preferred
Stock ($100 par) through a tender offer.
(F) For information concerning fair value of financial instruments, see Note
9 -- Financial Instruments and Risk Management.
(G) Public Service Electric and Gas Capital, L.P. was formed for the purpose of
issuing Monthly Income Preferred Securities (Monthly Guaranteed Preferred
Beneficial Interest in PSE&G's Subordinated Debentures). The proceeds of
Monthly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated
Debentures sales were 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
Deferrable 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 Common and Preferred Stock.
A-31
<PAGE> 53
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(H) On June 26, 1996, PSE&G Capital Trust I (Trust), a special purpose statutory
business trust wholly owned by PSE&G, issued $208 million of 8.625%
Quarterly Income Preferred Securities (Quarterly Guaranteed Preferred
Beneficial Interest in PSE&G's Subordinated Debentures). The sole asset of
the Trust is PSE&G's 8.625% Series A Deferrable Interest Subordinated
Debenture, evidenced by such loan, in an aggregate principal amount of
$214,433,000 with a stated maturity date of June 26, 2045. The Subordinated
Debentures and the Indenture constitute a full and unconditional guarantee
by PSE&G of the Preferred Securities issued by the Trust.
NOTE 6. 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,"
(SFAS 90) on property abandonments, and related tax effects, for which no return
is earned. The net-of-tax discount rate used was between 4.868% and 5.292%.
<TABLE>
<CAPTION>
PROPERTY ABANDONMENTS
-------------------------------------------------
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------- ----------------------
DISCOUNTED DISCOUNTED
COST TAXES COST TAXES
---------- ------- ---------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Atlantic Project.............................. $ 45,718 $19,178 $ 58,221 $24,440
LNG Project................................... 0 0 2,992 957
Uranium Projects.............................. 6,855 3,019 8,907 3,871
------- ------- ------- -------
$ 52,573 $22,197 $ 70,120 $29,268
======= ======= ======= =======
</TABLE>
UNDERRECOVERED 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, 1996 and
1995 reflect underrecovered costs as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------ ------
(MILLIONS OF
DOLLARS)
<S> <C> <C>
Underrecovered Electric Energy Costs........................... $151.2 $162.4
Underrecovered Gas Fuel Costs.................................. 24.9 8.2
----- -----
Total................................................ $176.1 $170.6
===== =====
</TABLE>
The December 31st Order provides PSE&G the opportunity, but no guarantee,
during the period January 1, 1997 through December 31, 1998, to fully recover
its December 31, 1996 underrecovered LEAC balance of $151.2 million without any
change in the current energy component of the LEAC charge. Management believes
that it will fully recover the underrecovered LEAC balance by December 31, 1998
and will continue to follow deferred accounting treatment for the LEAC.
A-32
<PAGE> 54
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 lives of the Salem, Hope
Creek and Peach Bottom nuclear units, costs associated with configuration
baseline documentation and the canceled HWCS Project.
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.
A-33
<PAGE> 55
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. SCHEDULE OF CONSOLIDATED DEBT
LONG-TERM
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
INTEREST RATES MATURITY 1996 1995
- ---------------------------------------------------- ---------- ---------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
PSE&G
First and Refunding Mortgage Bonds (Note A)
6.875%-7.125% 1997...... $ 300,000 $ 300,000
6.00% 1998...... 100,000 100,000
8.75% 1999...... 100,000 100,000
6.00%-7.625% 2000...... 400,000 400,000
7.875% 2001...... 100,000 100,000
6.125%-9.125% 2002-2006... 1,200,000 1,200,000
6.25%-6.90% 2007-2011... 152,990 2,990
6.75%-7.375% 2012-2016... 398,500 198,500
Variable 2012-2016... 66,120 42,620
6.45%-9.25% 2017-2021... 172,980 375,600
Variable 2017-2021... 13,700 13,700
5.20%-8.75% 2022-2026... 689,362 917,500
5.70%-6.55% 2027-2031... 349,200 349,200
5.45%-6.40% 2032-2036... 295,200 295,200
5.00%-8.00% 2037...... 15,001 15,001
MEDIUM-TERM NOTES
7.10%-7.13% 1997...... 100,000 100,000
8.10%-8.16% 2009...... 60,000 60,000
7.15%-7.18% 2023...... 40,500 40,500
---------- ----------
Total First and Refunding Mortgage Bonds................ 4,553,553 4,610,811
---------- ----------
Debenture Bonds Unsecured
6.00% 1998...... 18,195 18,195
---------- ----------
Total Debenture Bonds................................... 18,195 18,195
---------- ----------
Principal Amount Outstanding (Note F)............................. 4,530,831 4,629,006
Amounts Due Within One Year (Note B).............................. (423,500) --
Net Unamortized Discount.......................................... (40,917) (42,738)
---------- ----------
Total Long-Term Debt of PSE&G (Note G).................. $4,107,331 $4,586,268
========== ==========
</TABLE>
A-34
<PAGE> 56
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
INTEREST RATES MATURITY 1996 1995
- ---------------------------------------------------- ---------- ---------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
EDHI
CAPITAL (NOTE C) SENIOR NOTES
9.875%-10.05% 1998...... $ 80,000 $ 122,500
MEDIUM-TERM NOTES
9.00% 1996...... -- 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)............................. 415,000 477,500
Amount included in Net Assets of Discontinued Operations.......... -- (1,570)
Amounts Due Within One Year (Note B).............................. (69,481) (60,912)
Net Unamortized Discount.......................................... (619) (901)
---------- ----------
Total Long-Term Debt of Capital......................... $ 344,900 $ 414,117
========== ==========
FUNDING (NOTE D)
9.55% 1996...... $ -- $ 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)............................. 183,000 211,000
Amount included in Net Assets of Discontinued Operations.......... -- (28,000)
Amounts Due Within One Year (Note B).............................. (55,000) --
---------- ----------
Total Long-Term Debt of Funding......................... $ 128,000 $ 183,000
========== ==========
EGDC MORTGAGE NOTES
10.625%-12.75% (Note F) 2012...... $ -- $ 6,554
Amounts Due Within One Year....................................... -- (148)
---------- ----------
Total Long-Term Debt of EGDC............................ $ -- $ 6,406
========== ==========
Total Long-Term Debt of EDHI............................ $ 472,900 $ 603,523
========== ==========
Consolidated Long-Term Debt (Note E).................. $4,580,231 $5,189,791
========== ==========
</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.
During the year, PSE&G reacquired on the open market $75.1 million of its
8 1/2% Series LL First and Refunding Mortgage Bonds and $6.6 million of its
9 1/4% Series CC First and Refunding Mortgage Bonds. On
A-35
<PAGE> 57
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
January 30, 1996, PSE&G issued $200 million and $150 million, respectively,
principal amount of its First and Refunding Mortgage Bonds 6 3/4% Series VV
due 2016 and 6 1/4% Series WW due 2007, respectively.
(B) The aggregate principal amounts of mandatory requirements for sinking funds
and maturities for each of the five years following December 31, 1996 are
as follows:
<TABLE>
<CAPTION>
SINKING
FUNDS MATURITIES
------- -------------------------------------------------
YEAR CAPITAL PSE&G CAPITAL FUNDING TOTAL
--------------------------------------- ------- ---------- ---------- ---------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
1997................................... $42,500 $ 400,000 $ 27,000 $ 55,000 $ 524,500
1998................................... 37,500 118,195 75,000 83,000 313,695
1999................................... -- 100,000 155,000 45,000 300,000
2000................................... -- 400,000 78,000 -- 478,000
2001................................... -- 100,000 -- -- 100,000
------- ---------- -------- -------- ----------
$80,000 $1,118,195 $ 335,000 $ 183,000 $1,716,195
======= ========== ======== ======== ==========
</TABLE>
(C) Capital has provided up to $750 million debt financing for EDHI's
businesses, except ERI, on the basis of a net worth maintenance agreement
with Enterprise. Effective January 31, 1995, Capital agreed to limit its
borrowings to no more than $650 million.
(D) Funding provides debt financing for EDHI's businesses, other than EGDC and
ERI, on the basis of an unconditional guarantee from EDHI.
(E) At December 31, 1996 and 1995, the annual interest requirement on long-term
debt was $369.9 million and $399.8 million, of which $302.0 million and
$315.6 million, respectively, was the requirement for Bonds. The embedded
interest cost on long-term debt on such date was 7.62% and 7.71%,
respectively.
(F) For information concerning fair value of financial instruments, see Note
9 -- Financial Instruments and Risk Management.
(G) At December 31, 1996 and 1995, PSE&G's annual interest requirement on
long-term debt was $316.8 million and $330.5 million, of which $302.0
million and $315.6 million, respectively, was the requirement for Bonds. The
embedded interest cost on long-term debt on such dates was 7.45% and 7.54%,
respectively. The embedded interest cost on long-term debt due within one
year at December 31, 1996 was 7.46%.
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>
1996 1995 1994
---- ---- ----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Principal amount outstanding at year end, primarily commercial paper...... $638 $567 $402
Weighted average interest rate for short-term debt at year end............ 5.70% 5.93% 6.07%
</TABLE>
A-36
<PAGE> 58
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PSE&G has authorization from the BPU to issue and have outstanding not more
than $1.3 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 2, 1999.
PSE&G has a $1 billion commercial paper program (Program) supported by a
$500 million one year revolving credit agreement expiring in August 1997 and a
$500 million five year revolving credit agreement expiring in August 2000 with a
group of commercial banks. As of December 31, 1996, 1995 and 1994, PSE&G had
$443 million, $391 million and $258 million respectively, outstanding under the
Program, which amounts are included in the table above. As of December 31, 1996,
there was no debt outstanding under the revolving credit agreements.
PSE&G has $114 million in uncommitted lines of credit facilities extended
by a number of banks to primarily support short-term borrowings, of which $64
million was outstanding on December 31, 1996 and are included in the table
above.
PSE&G had various lines of credit facilities extended by banks to primarily
support the issuance of letters of credit. As of December 31, 1996, letters of
credit were issued in the amount of $20.6 million.
PSE&G Fuel Corporation (Fuelco) has a $125 million commercial paper program
to finance a 42.49% share of Peach Bottom nuclear fuel, supported by a $125
million revolving credit facility with a group of banks, which expires in March
2000. PSE&G has guaranteed repayment of Fuelco's respective obligations. As of
December 31, 1996, 1995 and 1994, Fuelco had commercial paper of $83.2 million,
$87.7 million and $93.7 million, respectively, outstanding under the commercial
paper program, which amounts are included in the table above. As of December 31,
1996, there was no debt outstanding under the revolving credit facility.
Public Service Conservation Resources Corporation (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, 1997. As of
December 31, 1996, 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
$80 million. These facilities support tax-exempt multi-mode financings done
through the New Jersey Economic Development Authority and the York County
(Pennsylvania) Industrial Development Authority. As of December 31, 1996, no
amounts were outstanding under such arrangements.
EDHI
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Principal amount outstanding at year end.................................. -- $182(A) $ 90(A)
Weighted average interest rate for short-term debt at year end............ -- 6.26% 5.97%
</TABLE>
- ---------------
(A) Amounts included in Net Assets of Discontinued Operations.
Through July 31, 1996, Funding had a commercial paper program, supported by
a commercial bank letter of credit and credit facility, in the amount of $225
million. Additionally, Funding had a $225 million revolving credit facility.
Both facilities were scheduled to expire in March 1998. On July 31, 1996,
Funding amended and restated its commercial paper program and revolving credit
facility in conjunction with the sale of EDC, reducing the total amount from
$450 million to $300 million and extending the maturity from March 1998 to July
1999. The $225 million commercial paper program was eliminated and the $225
million revolving credit facility was increased to
A-37
<PAGE> 59
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$300 million. As of December 31, 1996, Funding had no borrowings outstanding
under the amended and restated facility.
ENTERPRISE
At December 31, 1996, 1995 and 1994, Enterprise had a $25 million line of
credit with a bank. At those dates, Enterprise had no borrowings under this
line.
NOTE 8. LONG-TERM INVESTMENTS
Long-Term Investments are primarily those of EDHI.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------ ------
(MILLIONS OF
DOLLARS)
<S> <C> <C>
Lease Agreements (see Note 12 -- Leasing Activities):
Leveraged Leases..................................................... $ 932 $ 845
Direct-Financing Leases.............................................. 33 35
Other Leases......................................................... 3 6
------ ------
Total........................................................ 968 886
------ ------
Partnerships:
General Partnerships................................................. 138 173
Limited Partnerships................................................. 495 518
------ ------
Total........................................................ 633 691
------ ------
Corporate Joint Ventures............................................... 75 49
Securities............................................................. 48 63
Other Investments...................................................... 130 119
------ ------
Total Long-Term Investments.................................. $1,854 $1,808
====== ======
</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. At December 31, 1996, $30 million remained as
PSRC's unfunded commitment subject to call.
Other investments relate primarily to PSCRC's investment in Demand Side
Management projects. PSCRC's investment balance at December 31, 1996 and 1995
was approximately $101 million and $91 million, respectively.
NOTE 9. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Enterprise's operations give rise to exposure to market risks from changes
in natural gas prices, interest rates, foreign exchange rates and security
prices of investments. Enterprise's policy is to use derivatives for the purpose
of
A-38
<PAGE> 60
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
managing market risk consistent with its business plans and prudent practices.
Enterprise does not hold or issue financial instruments for trading purposes.
NATURAL GAS HEDGING
Through December 31, 1996 and 1995, ERI entered into futures contracts to
buy 10,810,000 mmbtu and 4,970,000 mmbtu of natural gas at average prices of
$2.10 per mmbtu and $1.78 per mmbtu, respectively, related to fixed-price sales
commitments. Such contracts, together with physical purchase contracts, hedged
approximately 95% and 91% of its fixed-price sales commitments at December 31,
1996 and 1995, respectively. ERI had deferred unrealized hedge gains of $3.6
million and $3.1 million at those respective dates.
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 1996 and 1995, respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1996 1995
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Long-Term Debt(A):
EDHI.............................................. $ 597,381 $ 606,000 $ 694,153 $ 731,000
PSE&G............................................. 4,530,831 4,591,947 4,586,268 4,828,008
Preferred Securities Subject to Mandatory
Redemption:
PSE&G Cumulative Preferred Securities............. 150,000 151,875 150,000 156,000
Monthly Guaranteed Preferred Beneficial Interest
in PSE&G's Subordinated Debentures............. 210,000 220,200 210,000 225,300
Quarterly Guaranteed Preferred Beneficial Interest
in PSE&G's Subordinated Debentures............. 208,000 211,120 -- --
</TABLE>
- ---------------
(A) Includes current maturities
NOTE 10. CASH AND CASH EQUIVALENTS
The December 31, 1996 and 1995 balances consist primarily of working funds
and highly liquid marketable securities (commercial paper and money market
funds) with a maturity of three months or less.
A-39
<PAGE> 61
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11. 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>
1996 1995 1994
-------- ---------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Net Income............................................... $611,596 $ 662,323 $ 679,033
Preferred securities (net)............................... 4,984 34,236 40,467
Discontinued Operations.................................. (24,238) (35,036) (12,512)
-------- ---------- ----------
Subtotal....................................... 592,342 661,523 706,988
-------- ---------- ----------
Federal income taxes:
Operating income:
Current provision................................... 124,436 207,663 166,088
Provision for deferred income taxes -- net(A)....... 187,479 152,222 167,155
Investment tax credits -- net....................... (21,662) (21,919) (23,297)
-------- ---------- ----------
Total included in operating income............. 290,253 337,966 309,946
Miscellaneous other income:
Current provision................................... 537 (9,897) (8,186)
Provision for deferred income taxes(A).............. 21 9,816 10,422
SFAS 90 deferred income taxes(A).................... 1,781 2,161 2,530
-------- ---------- ----------
Total Federal income tax provisions............ 292,592 340,046 314,712
-------- ---------- ----------
Pretax income............................................ $884,934 $1,001,569 $1,021,700
======== ========== ==========
</TABLE>
Reconciliation between total Federal income tax provisions and tax computed
at the statutory tax rate on pretax income:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Tax computed at the statutory rate.............................. $309,727 $350,549 $357,595
-------- -------- --------
Increase (decrease) attributable to flow through of certain tax
adjustments:
Depreciation............................................... 11,031 16,257 (4,597)
Amortization of investment tax credits..................... (21,662) (21,919) (23,297)
Other...................................................... (6,504) (4,841) (14,989)
-------- -------- --------
Subtotal.............................................. (17,135) (10,503) (42,883)
-------- -------- --------
Total Federal income tax provisions................... $292,592 $340,046 $314,712
======== ======== ========
Effective Federal income tax rate............................... 33.1% 34.0% 30.8%
</TABLE>
A-40
<PAGE> 62
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(A) The provision for deferred income taxes represents the tax effects of the
following items:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Deferred Credits:
Additional tax depreciation and amortization.................. $ 38,487 $133,764 $102,934
Leasing Activities............................................ 136,402 64,567 60,129
Property Abandonments......................................... (6,985) (7,411) (6,606)
Oil and Gas Property Write-Down............................... (2,451) (2,451) (2,451)
Deferred Fuel Costs -- net.................................... 6,533 (3,601) 39,361
Other......................................................... 17,295 (20,669) (13,260)
-------- -------- --------
Total................................................. $189,281 $164,199 $180,107
======== ======== ========
</TABLE>
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 the regular tax liability
exceeds AMT. As of December 31, 1996, 1995 and 1994, Enterprise had AMT credits
of $88 million, $183 million and $225 million, respectively.
In March 1992, the IRS issued reports following its examination of PSE&G's
consolidated tax return for 1985 and Enterprise's consolidated tax returns for
1986 and 1987. The reports proposed an increase in tax liability of $121
million, primarily due to issues related to the Hope Creek nuclear unit.
Interest, after taxes, on the increased liability totaled an additional $119
million as of December 31, 1995. In August 1996, Enterprise reached an agreement
with the IRS covering most of the disputed issues. The partial agreement
included resolution of all disputed issues related to Hope Creek and did not
have a material impact on the financial position, results of operations or net
cash flows of PSE&G or Enterprise. While no assurances can be given regarding
the outcome of the remaining unresolved issues, an unfavorable resolution is not
expected to have a material adverse impact on the financial position, results of
operations or net cash flows of PSE&G or Enterprise.
Enterprise provides deferred taxes 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. Management believes that it is probable that the
accumulated tax benefits that previously have been treated as a flow-through
item to PSE&G customers will be recovered from utility customers in the future.
Accordingly, an offsetting regulatory asset was established. As of December 31,
1996, PSE&G had a deferred tax liability and an offsetting regulatory asset of
$752 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 1996 Federal income
tax rate of 35%.
A-41
<PAGE> 63
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is an analysis of deferred income taxes:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
DEFERRED INCOME TAXES 1996 1995
- ------------------------------------------------------------------------ ---------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Assets:
Current (net)......................................................... $ 23,210 $ 27,571
---------- ----------
Noncurrent:
Unrecovered Investment Tax Credits................................. 123,073 129,713
Nuclear Decommissioning............................................ 27,156 25,241
Construction Period Interest and Taxes............................. 16,292 17,199
Vacation Pay....................................................... 6,796 6,681
AMT Credit......................................................... 87,806 183,237
Real Estate Impairment............................................. 3,244 5,213
Other.............................................................. 22,948 4,108
---------- ----------
Total Noncurrent.............................................. 287,315 371,392
---------- ----------
Total Assets.................................................. 310,525 398,963
---------- ----------
Liabilities:
Noncurrent:
Plant Related Items................................................ 2,361,656 2,341,374
Leasing Activities................................................. 669,405 616,914
Property Abandonments.............................................. 16,281 21,469
Oil and Gas Property Write-Down.................................... 11,196 13,061
Underrecovered Electric Energy & Gas Costs (net)................... 62,817 56,283
Unamortized Debt Expense........................................... 39,980 36,945
Taxes Recoverable Through Future Rates (net)....................... 258,740 262,625
Other.............................................................. 117,583 106,147
---------- ----------
Total Noncurrent.............................................. 3,537,658 3,454,818
---------- ----------
Total Liabilities............................................. 3,537,658 3,454,818
---------- ----------
Summary -- Deferred Income Taxes
Net Current Assets................................................. 23,210 27,571
Net Deferred Liability............................................. 3,250,343 3,083,426
---------- ----------
Total......................................................... $3,227,133 $3,055,855
========== ==========
</TABLE>
NOTE 12. 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
A-42
<PAGE> 64
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to its corporate headquarters and other capital equipment. Certain of the leases
contain renewal and purchase options as well as escalation clauses. Enterprise
and its other subsidiaries are not lessees in any capitalized leases.
Utility plant includes the following amounts for capital leases at December
31:
<TABLE>
<CAPTION>
1996 1995
------- -------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Common Plant................................................. $58,610 $58,610
Less: Accumulated Amortization............................... 6,239 5,499
------- -------
Net Assets under Capital Leases.............................. $52,371 $53,111
======= =======
</TABLE>
Future minimum lease payments for non-cancelable capital and operating
leases at December 31, 1996 were:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- -------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
1997................................................................ $ 13,175 $11,190
1998................................................................ 13,176 8,322
1999................................................................ 13,177 7,621
2000................................................................ 12,834 5,217
2001................................................................ 12,810 4,403
Later Years......................................................... 176,420 9,185
-------- -------
Minimum Lease Payments.............................................. 241,592 $45,938
=======
Less: Amount representing estimated executory costs, together with
any profit thereon, included in minimum lease payments............ 119,606
--------
Net minimum lease payments.......................................... 121,986
Less: Amount representing interest.................................. 69,615
--------
Present value of net minimum lease payments(A)...................... $ 52,371
========
</TABLE>
- ---------------
(A) Reflected in the Consolidated Balance Sheets for 1996 and 1995 were Capital
Lease Obligations of $52.371 million and $53.111 million which includes
Capital Lease Obligations due within one year of $829 thousand and $739
thousand, respectively.
The following schedule shows the composition of rent expense included in
Operating Expenses:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Interest on Capital Lease Obligations...................... $ 6,004 $ 6,084 $ 6,156
Amortization of Utility Plant under Capital Leases......... 739 659 588
------- ------- -------
Net minimum lease payments relating to Capital Leases...... 6,743 6,743 6,744
Other Lease payments....................................... 24,801 27,219 28,447
------- ------- -------
Total Rent Expense............................... $31,544 $33,962 $35,191
======= ======= =======
</TABLE>
A-43
<PAGE> 65
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
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, 1996 DECEMBER 31, 1995
---------------------------------- ----------------------------------
(MILLIONS OF DOLLARS) (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......... $ 1,094 $ 35 $1,129 $ 1,031 $ 39 $1,070
Estimated residual value....... 638 8 646 635 8 643
------ ---- ------ ------ ---- ------
1,732 43 1,775 1,666 47 1,713
Unearned and deferred income... (800) (10) (810) (821) (12) (833)
------ ---- ------ ------ ---- ------
Total investments.... 932 33 965 845 35 880
Deferred taxes................. (530) (10) (540) (405) (11) (416)
------ ---- ------ ------ ---- ------
Net investments...... $ 402 $ 23 $ 425 $ 440 $ 24 $ 464
====== ==== ====== ====== ==== ======
</TABLE>
PSRC's other capital leases are with various regional, state and city
authorities for transportation equipment and aggregated $3 million and $6
million as of December 31, 1996 and 1995, respectively.
NOTE 13. 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. Under the NPS, an aggregate capacity factor is
calculated annually using maximum dependable capability of each of the five
nuclear units. This method takes into account actual operating conditions of the
units. Failure to attain a satisfactory capacity factor percentage results in
penalties.
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. The BPU's December 31, 1996
Order provides that the NPS will not apply to PSE&G for the period January 1,
1996 through December 31, 1998 (see Note 3 -- Rate Matters).
A-44
<PAGE> 66
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
ASSESSMENTS
TOTAL FOR A
SITE SINGLE
TYPE AND SOURCE OF COVERAGES COVERAGES INCIDENT
- --------------------------------------------------------------------------- --------- -----------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Public Liability:
American Nuclear Insurers................................................ $ 200.0 N/A
Indemnity(A)............................................................. 8,720.3 $ 210.2
-------- ------
$ 8,920.3(B) $ 210.2
======== ======
Nuclear Worker Liability:
American Nuclear Insurers(C)............................................. $ 200.0 $ 8.0
======== ======
Property Damage:
Primary Coverage
American Nuclear Insurers (Peach Bottom).............................. $ 500.0 N/A
Nuclear Mutual Limited (Salem/Hope Creek)............................. 500.0 $ 9.3
Excess Coverage
Nuclear Electric Insurance Ltd. (NEIL II)............................. 2,250.0 17.7
-------- ------
Per Site Total........................................................ $ 2,750.0 $ 27.0
======== ======
Replacement Power:
Nuclear Electric Insurance Ltd. (NEIL I)................................. $ 3.5(D) $ 11.5
======== ======
</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. This retrospective assessment
can be adjusted for inflation every five years. The last adjustment was
effective as of 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
providing total coverage of $400 million. This policy is not subject to
retrospective assessments under the Price-Anderson Act.
(D) 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 in each plant for this limit.
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
A-45
<PAGE> 67
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 policy 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. While the NRC has issued confirmatory action letters with
respect to the Salem shutdown, PSE&G does not expect any action to be taken by
any insurer as a result of these NRC letters.
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, scheduled
retirement dates of existing facilities, 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.
PSE&G's construction expenditures are expected to aggregate approximately
$2.6 billion during the years 1997 through 2001, which includes $433 million for
nuclear fuel and $96 million of AFDC. 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 internally generate the funds necessary to
satisfy its construction expenditures over this period, 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 1997 through 2001.
A-46
<PAGE> 68
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
HAZARDOUS WASTE
Certain Federal and State laws authorize the U.S. 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 investigate and take 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. Except as discussed below with respect to its Manufactured Gas Plant
Remediation Program (Remediation Program), 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.
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, 1996 for the Remediation Program
amounted to $81.2 million, net of certain insurance proceeds. In addition, at
December 31, 1996, PSE&G's estimated liability for remediation costs through
1999 aggregate $86 million.
NOTE 14. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
In 1993, Enterprise and PSE&G adopted SFAS 106 which requires that the
expected cost of employees' postretirement health care and life insurance
benefits be charged to expense during the years in which employees
A-47
<PAGE> 69
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1996 1995 1994
- ---------------------------------------------------------------------- ------ ------ ------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Service cost.......................................................... $ 10.4 $ 8.5 $ 11.1
Interest on accumulated postretirement obligation..................... 51.2 48.2 45.4
Amortization of transition obligation................................. 30.5 30.5 30.5
Amortization of Net (Gain)/Loss(A).................................... (1.0) (3.8) --
Deferral of current expense........................................... (59.0) (50.7) (57.8)
------ ------ ------
Annual net expense.......................................... $ 32.1 $ 32.7 $ 29.2
====== ====== ======
</TABLE>
- ---------------
(A) Reflects change in Plan Assumptions.
The discount rate used in determining the PSE&G net periodic postretirement
benefit cost was 8.0% and 8.5% for 1996 and 1995, 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 $5.2
million, or 10.0%, and increase the accumulated postretirement benefit
obligation as of December 31, 1996 by $51.4 million, or 8.3%.
The assumed health care cost trend rates used in measuring the accumulated
postretirement benefit obligation in 1996 were: medical costs for pre-age
sixty-five retirees -- 12.5%, medical costs for post-age sixty-five retirees --
8.5% and dental costs -- 6.5%; such rates are assumed to gradually decline to 5%
each in 2011. The medical costs above include a provision for prescription
drugs.
In its most recent 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 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 expense during 1996 were $32.1 million and accrued
OPEB costs deferred were $59.0 million. The amount of the unfunded liability, at
December 31, 1996, as shown below, is $734.5 million and funding options are
currently being explored. The primary effect of adopting SFAS 106 on
Enterprise's and PSE&G's financial reporting was on the presentation of their
financial positions with minimal effect on their results of operations.
In 1993, 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
A-48
<PAGE> 70
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
financial reporting purposes, with any cost deferrals recovered in approximately
twenty years. In accordance with the BPU's January 8, 1997 Order regarding SFAS
106 cost recovery mechanisms, PSE&G expects full SFAS 106 recovery and believes
that it is probable that current and deferred costs as of December 31, 1996 will
be recovered from utility customers within such twenty-year time period. As of
December 31, 1996, PSE&G had deferred $226.2 million of such costs.
In accordance with SFAS 106 disclosure requirements, a reconciliation of
the funded status of the plan is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION 1996 1995
- ----------------------------------------------------------------------------- ------- -------
(MILLIONS OF
DOLLARS)
<S> <C> <C>
Retirees..................................................................... $(493.0) $(444.6)
Fully eligible active plan participants...................................... (35.9) (52.9)
Other active plan participants............................................... (205.6) (220.4)
------- -------
Total.............................................................. (734.5) (717.9)
Plan assets at fair value.................................................... -- --
------- -------
Accumulated postretirement benefit obligation in excess of plan assets....... (734.5) (717.9)
Unrecognized net (gain)/loss from past experience different from that assumed
and from changes in assumptions............................................ 14.9 32.8
Unrecognized prior service cost.............................................. 33.9 --
Unrecognized transition obligation........................................... 459.5 517.9
------- -------
Accrued postretirement obligation............................................ $(226.2) $(167.2)
======= =======
</TABLE>
The discount rate used in determining the accumulated postretirement
benefit obligation was 7.50% and 7.25% for 1996 and 1995, respectively.
NOTE 15. 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, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Funded Status:
Discount Rate used to Determine Benefit Obligations.............................. 7.50% 7.25%
Average Compensation Growth to Determine Benefit Obligations..................... 4.50% 4.50%
Net Pension Cost:
Discount Rate.................................................................... 8.00% 8.50%
Expected Long-Term Return on Assets.............................................. 8.50% 8.50%
Average Compensation Growth...................................................... 4.50% 4.50%
</TABLE>
A-49
<PAGE> 71
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table shows the Pension Plan's funded status:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested benefits of
$1,474,074 in 1996 and $1,403,313 in 1995........................... $(1,571,807) $(1,509,841)
Effect of projected future compensation............................... (459,251) (321,545)
----------- -----------
Projected benefit obligations......................................... (2,031,058) (1,831,386)
Plan assets at fair value, primarily listed equity and debt
securities.......................................................... 1,686,532 1,533,446
----------- -----------
Projected benefit obligations in excess of plan assets................ (344,526) (297,940)
Unrecognized net gain (loss) from past experience and effects of
changes in assumptions.............................................. 151,440 120,859
Prior service cost not yet recognized in net pension cost............. 130,664 110,213
Unrecognized net obligations being recognized over 16.7 years......... 53,187 61,287
Additional minimum liability for Cash Balance Plan.................... (115) --
----------- -----------
Accrued pension expense............................................... $ (9,350) $ (5,581)
=========== ===========
</TABLE>
The net pension cost for the years ended December 31, 1996, 1995 and 1994,
include the following components:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Service cost -- benefits earned during year................... $ 50,610 $ 37,033 $ 42,904
Interest cost on projected benefit obligations................ 136,333 124,147 108,394
Return on assets.............................................. (131,728) (312,190) 5,022
SFAS 88 early retirement(A)................................... 1,800 -- --
Net amortization and deferral................................. 18,639 222,916 (90,752)
--------- --------- --------
Total............................................... $ 75,654 $ 71,906 $ 65,568
========= ========= ========
</TABLE>
See Note 1 -- Organization and Summary of Significant Accounting Policies.
(A) Effective May 1, 1996, PSE&G's Pension Plan was amended allowing employees
the option to retire early upon attainment of age 55 and completion of 25 or
more years of service. Also, between May 1, 1996 and April 30, 1997, early
retirement without reduction is available to employees who have attained age
50 and have completed 30 or more years of service. The accounting statement
that establishes the standards for this is Statement of Financial Accounting
Standard No. 88, "Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits" (SFAS 88). SFAS
88 requires that an employer that offers special termination benefits to
employees shall recognize a liability when the employees accept the offer
and the amount can be reasonably estimated. This results in an immediate
expense applicable to the employees who, as of December 31, 1996, have
accepted the offer.
A-50
<PAGE> 72
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16. FINANCIAL INFORMATION BY BUSINESS SEGMENTS
Information related to the segments of Enterprise's business is detailed
below:
<TABLE>
<CAPTION>
NON-UTILITY
ACTIVITIES
ELECTRIC GAS (A) TOTAL
----------- ---------- ------------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1996
Total Operating Revenues.......................... $ 3,944,362 $1,880,994 $ 215,893 $ 6,041,249
----------- ---------- ---------- -----------
Depreciation and Amortization..................... 516,968 87,277 3,048 607,293
Operating Income Before Income Taxes.............. 977,545 234,215 140,136 1,351,896
Capital Expenditures.............................. 463,263 139,520 46,829 649,612
December 31, 1996
Net Utility Plant................................. 9,565,698 1,613,455 -- 11,179,153
Other Corporate Assets............................ 2,839,894 780,307 2,115,977 5,736,178
----------- ---------- ---------- -----------
Total Assets...................................... $12,405,592 $2,393,762 $ 2,115,977 $16,915,331
=========== ========== ========== ===========
FOR THE YEAR ENDED DECEMBER 31, 1995
Total Operating Revenues.......................... $ 4,020,842 $1,686,403 $ 186,417 $ 5,893,662
----------- ---------- ---------- -----------
Depreciation and Amortization..................... 503,022 88,092 5,852 596,966
Operating Income Before Income Taxes.............. 1,140,279 178,718 121,362 1,440,359
Capital Expenditures.............................. 545,997 140,153 139,538 825,688
December 31, 1995
Net Utility Plant................................. 9,651,695 1,535,736 -- 11,187,431
Other Corporate Assets............................ 2,730,245 669,289 2,229,526 5,629,060
----------- ---------- ---------- -----------
Total Assets...................................... $12,381,940 $2,205,025 $ 2,229,526 $16,816,491
=========== ========== ========== ===========
FOR THE YEAR ENDED DECEMBER 31, 1994
Total Operating Revenues.......................... $ 3,739,713 $1,778,528 $ 177,082 $ 5,695,323
----------- ---------- ---------- -----------
Depreciation and Amortization..................... 471,910 79,462 4,089 555,461
Operating Income Before Income Taxes.............. 1,083,155 226,196 129,366 1,438,717
Capital Expenditures.............................. 734,100 153,183 142,501 1,029,784
December 31, 1994
Net Utility Plant................................. 9,642,177 1,456,068 -- 11,098,245
Other Corporate Assets............................ 2,586,847 574,306 2,053,336 5,214,489
----------- ---------- ---------- -----------
Total Assets...................................... $12,229,024 $2,030,374 $ 2,053,336 $16,312,734
=========== ========== ========== ===========
</TABLE>
(A) The Non-utility Activities include amounts applicable to Enterprise, the
parent corporation.
A-51
<PAGE> 73
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information related to Property, Plant and Equipment of PSE&G is detailed
below:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Utility Plant -- Original Cost
Electric Plant in Service
Steam Production................................... $ 1,843,257 $ 1,791,010 $ 1,810,674
Nuclear Production................................. 6,000,860 5,992,341 5,931,049
Transmission....................................... 1,145,760 1,127,031 1,078,928
Distribution....................................... 3,170,851 3,044,830 2,877,862
Other.............................................. 1,153,305 1,139,891 647,406
----------- ----------- -----------
Total Electric Plant in Service............... 13,314,033 13,095,103 12,345,919
----------- ----------- -----------
Gas Plant in Service
Transmission....................................... 67,218 65,109 62,213
Distribution....................................... 2,357,584 2,250,705 2,131,816
Other.............................................. 131,099 126,758 124,204
----------- ----------- -----------
Total Gas Plant in Service.................... 2,555,901 2,442,572 2,318,233
----------- ----------- -----------
Common Plant in Service
Capital Leases..................................... 58,610 58,610 58,610
General............................................ 471,575 458,494 486,521
----------- ----------- -----------
Total Common Plant in Service................. 530,185 517,104 545,131
----------- ----------- -----------
Total.................................... $16,400,119 $16,054,779 $15,209,283
=========== =========== ===========
</TABLE>
A-52
<PAGE> 74
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
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>
PLANT -- DECEMBER 31, 1996
--------------------------------------------------------
OWNERSHIP PLANT IN ACCUMULATED PLANT UNDER
INTEREST SERVICE DEPRECIATION CONSTRUCTION
--------- ---------- ----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Coal Generating
Conemaugh...................................... 22.50% $ 203,436 $ 45,353 $ 1,104
Keystone....................................... 22.84% 123,525 36,789 1,349
Nuclear Generating
Peach Bottom................................... 42.49% 767,410 337,481 28,822
Salem.......................................... 42.59% 1,052,143 394,752 136,019
Hope Creek..................................... 95.00% 4,127,669 1,189,222 15,045
Nuclear Support Facilities..................... Various 186,685 39,958 2,788
Pumped Storage Generating
Yards Creek.................................... 50.00% 27,628 9,955 3,750
Transmission Facilities.......................... Various 122,264 38,847 818
Merrill Creek Reservoir.......................... 13.91% 37,241 13,731 --
Linden Gas Plant................................. 90.00% 15,853 20,495 --
</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>
CALENDAR QUARTER ENDED
-----------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
----------------------- ----------------------- ----------------------- -----------------------
1996 1995 1996 1995 1996 1995 1996 1995
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(THOUSANDS WHERE APPLICABLE)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Revenues........ $1,797,245 $1,629,792 $1,335,892 $1,274,410 $1,333,957 $1,432,848 $1,574,155 $1,556,612
Operating Income.......... 307,387 326,499 235,029 225,645 263,023 307,337 251,520 235,709
Net Income................ 194,104 212,592 134,538 110,667 155,833 186,782 127,121 152,282
Earnings Per Share of
Common Stock............ 0.79 0.87 0.55 0.45 0.64 0.76 0.54 0.63
Average Shares of Common
Stock Outstanding....... 244,698 244,698 244,698 244,698 243,114 244,698 237,143 244,698
</TABLE>
See Note 2 -- Discontinued Operations of Notes.
A-53
<PAGE> 75
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 Annual Report 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, where appropriate, recommends
to management 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, 1996, 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 all times.
<TABLE>
<S> <C>
E. JAMES FERLAND ROBERT C. MURRAY
Chairman of the Board, Vice President and
President and Chief Executive Officer Chief Financial Officer
PATRICIA A. RADO
Vice President and Controller
Principal Accounting Officer
</TABLE>
February 14, 1997
A-54
<PAGE> 76
INDEPENDENT AUDITORS' REPORT
To the Stockholders and 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, 1996 and 1995, and the related consolidated statements of income,
retained earnings, and cash flows for each of the three years in the period
ended December 31, 1996. 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, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 14, 1997
A-55
<PAGE> 77
[PSEG MAP]
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> 78
[PSEG LOGO] PUBLIC SERVICE ENTERPRISE
GROUP INCORPORATED
E. James Ferland 80 Park Plaza, Newark, NJ 07101
Chairman of the Board MAILING ADDRESS/P.O. Box 1171,
President and Chief Newark, NJ 07101-1171
Executive Officer
February 26, 1997
You are cordially invited to join us at the 1997 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
15, 1997, 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.
Again this year, we have included the detailed 1996 Enterprise financial
statements, as well as Management's Discussion and Analysis of Financial
Condition and Results of Operations in the Proxy Statement, rather than in the
Annual Report, which 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,
/s/ E. James Ferland
Fold and Detach Here Fold and Detach Here
- -------------------------------------------------------------------------------
(Continued from other side)
<TABLE>
<CAPTION>
PLEASE MARK ALL
ACCOUNT NUMBER SEQUENCE NUMBER CHOICES LIKE THIS [X]
- -------------------------------------------------------------------------------------------------------------------------------
The Board of Directors recommends a vote FOR the proposals regarding:
(1) ELECTION OF DIRECTORS: Nominees for Class I terms expiring in 2000 are: Lawrence R. Codey, Ernest H. Drew,
Forrest J. Remick
<S> <C> <C>
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
(2) Appointment of Deloitte & FOR AGAINST ABSTAIN for any individual nominee, write that
Touche LLP as Independent nominee's name on the line provided above)
Auditors for the year 1997 [ ] [ ] [ ]
If you wish to include comments, please mark this box Stop annual report mailings to this account
and write your comments on the reverse side of this form. [ ] since duplicate copies now 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.
</TABLE>
SIGNATURE DATE
--------------------------------------- ------------------
SIGNATURE DATE
--------------------------------------- ------------------
<PAGE> 79
Tear Here
- ------------------------------------------------------------------------------
PROXY FORM [PSEG LOGO]
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS THIS PROXY IS SOLICITED ON
APRIL 15, 1997 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 15, 1997 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.
