<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
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
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
[ ] Confidential, for the Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
</TABLE>
Public Service Enterprise Group Incorporated
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
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 0-11.
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
<PAGE> 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 21, 1998
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 the New Jersey Performing
Arts Center, One Center Street, Newark, New Jersey, on April 21, 1998, at 2:00
P.M., for the following purposes:
1. To elect four members of Class II of the Board of Directors to hold
office until the Annual Meeting of Stockholders in 2001, and one
member of Class III to hold office until the Annual Meeting of
Stockholders in 1999, in each case until their respective successors
are elected and qualified;
2. To consider and act upon the ratification of the appointment of
Deloitte & Touche LLP as independent auditors for the year 1998;
3. To consider and act upon a stockholder proposal relating to the Salem
Nuclear Generating Station, described in the accompanying Proxy
Statement, if the proponent presents the proposal at the meeting; and
4. 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 25, 1998.
By order of the Board of Directors,
EDWARD J. BIGGINS, JR.
Secretary
March 3, 1998
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 (1997).................. 10
Aggregated Option Exercises in Last Fiscal Year (1997) and
Fiscal Year-End Option Values (12/31/97)............... 11
Employment Contracts and Arrangements..................... 12
Compensation Committee Interlocks and Insider
Participation.......................................... 12
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
RATIFICATION OF THE APPOINTMENT OF INDEPENDENT AUDITORS
(Proposal 2).............................................. 16
STOCKHOLDER PROPOSAL (Proposal 3)........................... 17
LEGAL PROCEEDING............................................ 19
DATE FOR SUBMISSION OF STOCKHOLDER PROPOSALS................ 19
MISCELLANEOUS............................................... 20
APPENDIX: FINANCIAL STATEMENTS..............................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................... A-1
CONSOLIDATED STATEMENTS OF INCOME......................... A-21
CONSOLIDATED BALANCE SHEETS............................... A-22
CONSOLIDATED STATEMENTS OF CASH FLOWS..................... A-24
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY.... A-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................ A-26
FINANCIAL STATEMENT RESPONSIBILITY........................ A-67
INDEPENDENT AUDITORS' REPORT.............................. A-68
</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 1998 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 (973) 430-7000. The approximate date on which this
Proxy Statement and the accompanying proxy were first sent or given to security
holders was March 9, 1998.
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.
This year, Enterprise requests that if a stockholder plans to attend the
Annual Meeting, he or she should indicate so on the proxy form. An admission
ticket will then be mailed to each stockholder who indicates an intention to
attend. Please note the new location at The New Jersey Performing Arts Center,
in Newark, New Jersey. Maps and information regarding directions may be found at
the back of this Proxy Statement.
A proxy given in the form which accompanies this Proxy Statement is
revocable. However, by law, the presence at the Annual Meeting of a stockholder
who has given such a proxy will not revoke the proxy, unless the stockholder
files a written notice of such revocation with the Secretary of Enterprise prior
to the voting of the proxies at the meeting, or the stockholder votes the shares
subject to the proxy by written ballot.
Included in the Appendix to this Proxy Statement are the 1997 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 25, 1998 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 Enterprise Dividend Reinvestment and
Stock Purchase Plan) and the Enterprise Employee Stock Purchase Plan.
Participants in the PSE&G Thrift and Tax Deferred Savings Plan or PSE&G
Employee Savings Plan will receive a separate direction card from each plan's
trustee for shares that have been allocated to their accounts under the
Enterprise Common Stock Fund 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 II of the Board
of Directors, E. James Ferland, Irwin Lerner, Marilyn M. Pfaltz and Richard J.
Swift, expire at the 1998 Annual Meeting. Messrs. Ferland, Lerner and Swift and
Ms. Pfaltz have each been nominated to serve as a director in Class II for a new
three-year term, which will expire at the 2001 Annual Meeting.
In addition, the term of Conrad K. Harper, who was initially elected a
director by the Board of Directors effective May 1997, will expire at the 1998
Annual Meeting. Mr. Harper has been nominated to serve as a director in Class
III, for a one-year term, which will expire at the 1999 Annual Meeting.
Therefore, at this year's meeting directors will be elected to fill four
positions in Class II to serve until the 2001 Annual Meeting and one position in
Class III, to serve until the 1999 Annual Meeting, in each case until their
respective successors are elected and qualified. All the nominees, except Mr.
Harper, were elected to their present terms by the stockholders. The present
term of Class I of the Board of Directors expires at the 2000 Annual Meeting,
and the present term of Class III expires at the 1999 Annual Meeting. Other than
Mr. Harper, directors in Class I and Class III will not be elected at the 1998
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 currently fixed at
11.
The Board of Directors of Enterprise holds regular monthly meetings, except
in August, and meets on other occasions when circumstances require. The Board
met 14 times in 1997, 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 14 times and the EDHI Board met 11 times in 1997. Committee membership and
membership on the PSE&G and EDHI Boards are shown in the biographies under
"Election of Directors".
Under the retirement policy for directors, directors who have never been
employees of the Enterprise group of companies and directors who are former
chief executive officers of Enterprise may not serve as directors beyond the
Annual Meeting of Stockholders following their seventieth birthday. Directors
who are former employees, other than chief executive officers, may not serve as
directors beyond the Annual Meeting of Stockholders following termination of
active employment with the Enterprise group of companies.
COMMITTEES OF THE BOARD
The committees of the Enterprise Board and their principal functions are as
follows:
Audit Committee
Makes recommendations to the Board of Directors regarding the selection of
independent auditors. Reviews independence of independent auditors, services
provided by them, their fees and peer review reports of their performance.
Reviews annual audit reports of both independent and internal auditors. Reviews
planned scope of future audits. Ascertains implementation of auditors'
recommendations. Reviews internal auditing procedures and internal accounting
controls. Reviews adequacy and implementation of policies and practices relating
to accounting,
2
<PAGE> 6
financial reporting, internal auditing, operating controls, business conduct
compliance program and business ethics. Meets periodically with management as
well as with representatives of the independent and internal auditors. Reviews
results of environmental and safety compliance programs and meets with
environmental auditors. The Committee held four meetings in 1997.
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 1997.
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
four meetings in 1997.
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 1997.
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 eight meetings in 1997.
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 1997.
3
<PAGE> 7
PROPOSAL 1
ELECTION OF DIRECTORS
At the 1998 Annual Meeting of Stockholders, four members of Class II of the
Board of Directors are to be elected to hold office until the Annual Meeting of
Stockholders in 2001 and one member of Class III of the Board of Directors is to
be elected to hold office until the Annual Meeting of Stockholders in 1999, in
each case until their respective successors are elected and qualified.
The nominees listed below were selected by the Board of Directors of
Enterprise upon the recommendation of the Nominating Committee. Proxies in the
accompanying form will be voted for these nominees, unless authority to vote for
one or more of them shall have been withheld by so marking the enclosed proxy.
If at the time of the meeting any of the nominees listed below should be
unable to serve, which is not anticipated, it is the intention of the persons
designated as proxies to vote, in their discretion, for other nominees, unless
the number of directors constituting a full board is reduced.
There is shown as to each nominee, and as to each director whose term of
office will continue after the 1998 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 1997, 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 II -- NOMINEES FOR TERMS EXPIRING IN 2001
<TABLE>
<S> <C>
E. JAMES FERLAND has been a director since 1986, and
Chairman of the Board, President and Chief Executive Photo of E. James
Officer of Enterprise since July 1986, Chairman of the Board Ferland
and Chief Executive Officer of PSE&G since September 1991,
and Chairman of the Board and Chief Executive Officer of E. James Ferland
EDHI since June 1989. Age 56. Chairman of Executive
Committee. Director of Enterprise's subsidiaries, PSE&G and
EDHI. Director of Foster Wheeler Corporation and The HSB
Group, Inc.
IRWIN LERNER has been a director since 1981. Age 67.
Chairman of Organization and Compensation Committee and Photo of Irwin
member of Executive Committee, Nominating Committee and Lerner
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., AXYS Pharmaceuticals, Inc., Medarex
Inc. and Covance Inc.
MARILYN M. PFALTZ has been a director since 1980. Age 65.
Chair of Nominating Committee and member of Audit Photo of Marilyn M.
Committee and Finance Committee. Director of Enterprise's Pfaltz
subsidiary, PSE&G. Has been a partner of P and R Associates,
Summit, New Jersey (communication specialists), since 1968. Marilyn M. Pfaltz
Director of AAA National Association.
RICHARD J. SWIFT has been a director since 1994. Age 53.
Chairman of Audit Committee and member of Nominating Photo of Richard J.
Committee and Nuclear Committee. Director of Enterprise's Swift
subsidiary, EDHI. Has been Chairman of the Board, President
and Chief Executive Officer of Foster Wheeler Corporation, Richard J. Swift
Clinton, New Jersey (provides design, engineering,
construction, manufacturing, management, plant operations
and environmental services) since May 1994. Was President
and Chief Operating Officer of Foster Wheeler Corporation
from December 1992 to May 1994. Director of Foster Wheeler
Corporation and Ingersoll-Rand Company.
</TABLE>
5
<PAGE> 9
NOMINEES FOR ELECTION AS DIRECTOR (CONTINUED)
CLASS III -- NOMINEE FOR TERM EXPIRING IN 1999
<TABLE>
<C> <S>
CONRAD K. HARPER has been a director since May 1997. Age 57.
Photo of Conrad K. Member of Audit Committee, Finance Committee and
Harper Organization and Compensation Committee. Director of
Enterprise's subsidiary, PSE&G. Has been a partner in the
Conrad K. Harper law firm of Simpson Thacher & Bartlett, New York, New York,
since October 1996 and from 1974 to May 1993. Was Legal
Adviser, U.S. Department of State from May 1993 to June
1996. Director of New York Life Insurance Company.
</TABLE>
DIRECTORS WHOSE TERMS CONTINUE BEYOND THE 1998 ANNUAL MEETING
AND WHO ARE NOT SUBJECT TO ELECTION THIS YEAR
CLASS I -- DIRECTORS WHOSE TERMS EXPIRE IN 2000
<TABLE>
<C> <S>
LAWRENCE R. CODEY has been a director since 1991. Age 53.
Photo of Lawrence R. Member of Executive Committee and Finance Committee. Has
Codey been President and Chief Operating Officer of PSE&G since
September 1991. Director of Enterprise's subsidiary, PSE&G.
Lawrence R. Codey 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 61.
Photo of Ernest H. Member of Nuclear Committee and Organization and
Drew Compensation Committee. Director of Enterprise's subsidiary,
EDHI. Was Chief Executive Officer of Industries and
Ernest H. Drew Technology Group -- Westinghouse Electric Corporation, from
July 1997 to December 1997. Was a Member, Board of
Management, Hoechst AG, Frankfurt, Germany (manufactures
pharmaceuticals, chemicals, fibers, film, specialties and
advanced materials) from January 1995 to June 1997. 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 67.
Photo of Forrest J. Chairman of Nuclear Committee and member of Audit Committee
Remick and Nominating Committee. Director of Enterprise's
subsidiary, PSE&G. Has been an engineering consultant since
Forrest J. Remick 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>
6
<PAGE> 10
DIRECTORS WHOSE TERMS CONTINUE BEYOND THE 1998 ANNUAL MEETING
AND WHO ARE NOT SUBJECT TO ELECTION THIS YEAR (CONTINUED)
CLASS III -- DIRECTORS WHOSE TERMS EXPIRE IN 1999
<TABLE>
<C> <S>
T. J. DERMOT DUNPHY has been a director since 1980. Age 66.
Photo of T. J. Chairman of Finance Committee and member of Audit Committee
Dermot Dunphy and Organization and Compensation Committee. Director of
Enterprise's subsidiary, EDHI. Has been Chairman of the
T. J. Dermot Dunphy Board and Chief Executive Officer of Sealed Air 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 57.
Photo of Raymond v. Member of Finance Committee and Organization and
Gilmartin Compensation Committee. Director of Enterprise's subsidiary,
EDHI. Has been Chairman of the Board, President and Chief
Raymond V. Gilmartin Executive Officer of Merck & Co., Inc., Whitehouse, New
Jersey (discovers, develops, produces and markets human and
animal health products) since November 1994. Was President
and Chief Executive Officer of Merck & Co., Inc. from June
1994. to November 1994. Was Chairman of the Board, President
and Chief Executive Officer of Becton Dickinson and Company
from November 1992 to June 1994. Director of Merck & Co.,
Inc. and General Mills, Inc.
JOSH S. WESTON has been a director since 1984. Age 69.
Photo of Josh S. Member of Executive Committee, Nuclear Committee and
Weston Organization and Compensation Committee. Director of
Enterprise's subsidiary, EDHI. Has been Chairman of the
Josh S. Weston Board of Automatic Data Processing Inc., Roseland, New
Jersey since August 1996 and was Chairman of the Board and
Chief Executive Officer from April 1986 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 25, 1998, 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....................................... 80,811(1)
Robert J. Dougherty, Jr. ............................... 73,280(2)
Ernest H. Drew.......................................... 3,989
T. J. Dermot Dunphy..................................... 49,704
Leon R. Eliason......................................... 24,108(3)
E. James Ferland........................................ 183,057(4)
Raymond V. Gilmartin.................................... 3,989
Conrad K. Harper........................................ 300
Irwin Lerner............................................ 10,367
Robert C. Murray........................................ 46,179(5)
Marilyn M. Pfaltz....................................... 7,601
Forrest J. Remick....................................... 2,213
Richard J. Swift........................................ 3,073
Josh S. Weston.......................................... 9,467
All directors and executive
officers as a group (21 persons)...................... 597,816(6)
-------
</TABLE>
- --------------------------------------------------------------------------------
(1) Includes options to purchase 65,700 shares, 3,500 of which are
currently exercisable.
(2) Includes the equivalent of 801 shares held under PSE&G Thrift and
Tax-Deferred Savings Plan. Includes options to purchase 63,700
shares, 2,500 of which are currently exercisable.
(3) Includes the equivalent of 8 shares held under PSE&G Thrift and
Tax-Refund Savings Plan. Includes options to purchase 20,500
shares, 2,500 of which are currently exercisable.
(4) Includes the equivalent of 10,989 shares held under PSE&G Thrift
and Tax-Deferred Savings Plan. Includes options to purchase
130,300 shares, 5,800 of which are currently exercisable.
(5) Includes the equivalent of 1,179 shares held under PSE&G Thrift
and Tax-Deferred Savings Plan. Includes options to purchase 36,000
shares, 2,000 of which are currently exercisable.
(6) Includes the equivalent of 15,894 shares held under PSE&G Thrift
and Tax-Deferred Savings Plan. Includes options to purchase
401,600 shares, 19,500 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, 1997 for all services rendered to Enterprise
and its subsidiaries and affiliates during each year indicated.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------- ------- -------
BONUS/ANNUAL LTIP ALL OTHER
SALARY INCENTIVE OPTIONS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) AWARD($)(1) (#)(2) ($)(3) ($)(4)
- -------------------------------- ---- ------- ------------ ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
E. James Ferland................ 1997 712,261 (5) 118,000 108,702 15,747
Chairman of the Board, President 1996 712,261 279,811 6,500 168,084 10,994
and CEO of Enterprise 1995 682,377 225,411 5,800 246,288 8,681
Lawrence R. Codey............... 1997 435,327 (5) 59,200 50,325 5,459
President and Chief 1996 435,327 141,968 3,000 81,144 5,934
Operating Officer of PSE&G 1995 418,392 141,931 2,800 118,746 5,756
Robert J. Dougherty, Jr. ....... 1997 383,525 (5) 58,600 36,234 4,470
President and Chief Operating 1996 379,586 110,360 2,600 57,960 4,444
Officer of EDHI 1995 322,759 111,259 2,500 70,368 4,269
Robert C. Murray................ 1997 345,671 (5) 32,000 36,234 5,260
Vice President and Chief 1996 332,721 83,887 2,000 57,960 5,248
Financial Officer of Enterprise 1995 318,775 117,577(6) 2,000 70,368 5,169
Leon R. Eliason................. 1997 336,706 65,000(5)(10) 15,500 36,234 7,505
President-Nuclear Business 1996 336,706 180,839(7) 2,500 34,776 6,239
Unit and Chief Nuclear 1995 323,755 229,168(8) 2,500 26,388 3,242
Officer of PSE&G(9)
</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 are payable in one lump sum.
(2) Includes grants of options to purchase 8,000 and 10,000; 4,200 and 5,000;
3,600 and 5,000; 3,000 and 4,000; and 3,000 and 2,500 shares of Enterprise
Common Stock in January and December, respectively, to Messrs. Ferland,
Codey, Dougherty, Murray and Eliason, respectively, 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. Also includes options to purchase 100,000;
50,000; 50,000; 25,000 and 10,000 shares of Enterprise Common Stock granted
to Messrs. Ferland, Codey, Dougherty, Murray and Eliason, respectively,
under LTIP not in tandem with performance units and dividend equivalents.
(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.
9
<PAGE> 13
(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 MURRAY ELIASON
-------------- -------------- ------------- ------------- -------------
THRIFT MICP THRIFT MICP THRIFT MICP THRIFT MICP THRIFT MICP
------ ----- ------ ----- ------ ---- ------ ---- ------ ----
($) ($) ($) ($) ($) ($) ($) ($) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997.................. 4,801 1,122 4,802 657 4,003 467 4,802 458 519 0
1996.................. 4,150 2,861 4,502 1,432 3,750 694 4,502 746 2,678 212
1995.................. 3,752 2,383 4,502 1,254 3,754 515 4,502 667 1,795 0
</TABLE>
In addition, 1997, 1996 and 1995 amounts include for Mr. Ferland $9,824
$3,983 and $2,546 and for Mr. Eliason $6,986, $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 1997 MICP award amount has not yet been determined. The target award is
50% of salary for Mr. Ferland, 40% for Messrs. Codey, Dougherty and Eliason
and 35% for Mr. Murray. The target award is adjusted as described in the
Organization and Compensation Committee Report on Executive Compensation.
(6) Includes $25,000 paid pursuant to Mr. Murray's employment agreement.
(7) Includes $100,000 paid pursuant to Mr. Eliason's employment agreement.
(8) Includes $165,000 paid pursuant to Mr. Eliason's employment agreement.
(9) Mr. Eliason is scheduled to retire effective April 30, 1998.
(10) Amount paid pursuant to Mr. Eliason's employment agreement.
OPTION GRANTS IN LAST FISCAL YEAR (1997)
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION GRANT DATE
NAME GRANTED(1)(2)(3) FISCAL YEAR ($/SH) DATE PRESENT VALUE($)(4)
---- ---------------- ------------ ----------- ---------- -------------------
<S> <C> <C> <C> <C> <C>
E. James Ferland............. 8,000(1) 2.2 27.625 01/03/07 69,600
10,000(2) 2.7 29.563 12/16/07 100,800
100,000(3) 27.0 29.563 12/16/07 262,000
Lawrence R. Codey............ 4,200(1) 1.1 27.625 01/03/07 36,540
5,000(2) 1.3 29.563 12/16/07 50,400
50,000(3) 13.5 29.563 12/16/07 131,000
Robert J. Dougherty, Jr...... 3,600(1) 1.0 27.625 01/03/07 31,320
5,000(2) 1.3 29.563 12/16/07 50,400
50,000(3) 13.5 29.563 12/16/07 131,000
Robert C. Murray............. 3,000(1) 0.8 27.625 01/03/07 26,100
4,000(2) 1.1 29.563 12/16/07 40,320
25,000(3) 6.7 29.563 12/16/07 65,500
Leon R. Eliason.............. 3,000(1) 0.8 27.625 01/03/07 26,100
2,500(2) 0.7 29.563 12/16/07 25,200
10,000(3) 2.7 29.563 12/16/07 26,200
</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
10
<PAGE> 14
companies and dividend payments by Enterprise, to assist recipients in
exercising options, with exercisability commencing January 1, 2000. 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) Granted under LTIP in tandem with equal number of performance units and
dividend equivalents, as described in Note (1) above, but with
exercisability commencing January 1, 2001.
(3) Granted under LTIP not in tandem with performance units and dividend
equivalents, with exercisability commencing December 16, 1998, December 16,
1999 and December 16, 2000, respectively, with respect to one-third of the
options at each such date.
(4) Determined using the Black-Scholes model, incorporating the following
material assumptions and adjustments for the grants expiring January 3, 2007
and December 16, 2007, respectively: (a) exercise prices of $27.625 and
$29.563, equal to the fair market value of the underlying Enterprise Common
Stock on the dates of grant; (b) an option term of ten years on all grants;
(c) interest rates of 6.58% and 5.81% that represent the interest rates on
U.S. Treasury securities on the dates of grant with a maturity date
corresponding to that of the option terms; (d) volatilities of 17.847% and
18.948% calculated using daily Enterprise Common Stock prices for the
one-year period prior to the grant dates; (e) a dividend yield of 0% with
respect to the dividend equivalent feature of the tandem grants, since
dividend payments accrue while the option is held; (f) a dividend yield of
7.31% on the non-tandem grants; and (g) reductions of approximately 11.51%
and 7.8% for the non-tandem and tandem grants, respectively, to reflect the
probability of forfeiture due to termination prior to vesting, and
approximately 26.3%, 17.36%, and 1.75% for the grant expiring January 3,
2007 and each of the grants expiring December 16, 2007, respectively, to
reflect the probability of a shortened option term due to termination of
employment prior to the option expiration date. Actual values which may be
realized, if any, upon any exercise of such options, will be based on the
market price of Enterprise Common Stock at the time of any such exercise and
thus are dependent upon future performance of Enterprise Common Stock. There
is no assurance that any such value realized will be at or near the value
estimated by the Black-Scholes model utilized.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR (1997) AND
FISCAL YEAR-END OPTION VALUES (12/31/97)
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FY-END(#)(1) AT FY-END($)(3)
ACQUIRED VALUE --------------------------- ---------------------------
ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (#)(1) ($)(2) (#) (#) ($) ($)
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
E. James Ferland..................... 5,400 0 0 130,300 0 300,839
Lawrence R. Codey.................... 2,500 0 700 65,000 5,206 138,623
Robert J. Dougherty, Jr. ............ 1,800 0 0 63,700 0 136,991
Robert C. Murray..................... 1,800 0 0 36,000 0 77,048
Leon R. Eliason...................... 1,800 0 0 20,500 0 42,806
</TABLE>
- ---------------
(1) Does not reflect any options granted and/or exercised after year-end
(12/31/97). 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 (12/31/97).
Such amounts may not necessarily be realized. Actual values which
11
<PAGE> 15
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, Murray and
Eliason at the time of their employment. For Mr. Ferland, the remaining
applicable provisions of the agreement provides for additional credited service
for retirement benefits purposes in the amount of 22 years. The principal
remaining applicable terms of the agreement with Mr. Murray, as modified in
1998, provide for additional years of credited service for retirement purposes
for allied work experience of five years after completion of five years of
service, and up to seventeen years after completion of approximately nine years
of service. The principal remaining applicable terms of the agreement with Mr.
Eliason provide for a lump sum cash payment of $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 at his scheduled retirement date of April 30, 1998.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1997, 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. During 1997,
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 1997, 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 1997.
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. Shares
held by each non-employee director are included in the table above under the
heading Security Ownership of Directors and Management.
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
12
<PAGE> 16
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>
LENGTH OF SERVICE
AVERAGE FINAL -----------------------------------------
COMPENSATION 30 YEARS 35 YEARS 40 YEARS 45 YEARS
- ------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
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
1,100,000 660,000 715,000 770,000 825,000
1,200,000 720,000 780,000 840,000 900,000
</TABLE>
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 Murray will have accrued approximately 48, 41, 48
and 41 years of credited service, respectively, as of age 65. Mr. Eliason is
scheduled to retire at age 59 with 23 years of credited service.
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 1997, the Committee consisted solely of
non-employee directors, each of whom is named below. Effective March 2, 1998,
following the adoption of this report, the Committee membership was adjusted as
part of a general rotation of assignments to the various committees of the
Board. Ernest H. Drew and Conrad K. Harper joined and Marilyn M. Pfaltz left the
Committee. Policies and plans developed by the Committee are approved by the
full Board of Directors. Administration of the plans is the responsibility of
the Committee.
The Committee's philosophy on executive compensation is to base
compensation on the value and level of performance of the executive and to link
compensation to shareholder value. To achieve this result, 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, employer 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, only 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
13
<PAGE> 17
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. Generally, for 1997, base salaries remained the same or, depending on
the particular executive officer, were only slightly increased from 1996 levels,
because of the increase in annual incentive targets, in an effort to increase
the percentage of total compensation which is performance based, as discussed
below.
For fiscal year 1997, the base salary of E. James Ferland, Chairman of the
Board, President and Chief Executive Officer, was not increased from that paid
in 1996, due to the increase in his target incentive award. Mr. Ferland's base
salary for 1996, 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 20% to
50%, established by the Committee. The target percentages were increased in 1997
to better align executive officers with industry practice. 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
1997 and 1996 were based upon a comparison of Enterprise's return on capital
compared to the median return on capital of a group of utilities which comprise
the Dow Jones Utilities Index and a comparison of PSE&G's change in customer
costs for electricity and gas compared to a panel of other utilities.
The corporate goal is computed by assigning an award factor of between 0
and 1.5 based upon the comparison of return on capital adjusted by adding or
subtracting a factor ranging from -0.5 to +0.5 to reflect the electric and gas
cost comparison. No award is granted if Enterprise's return on capital falls
below a threshold amount which is one percentage point below the median return
of the comparison group. A return of one 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 1997 and 1996 these corporate factors
were financial performance, nuclear performance, cost savings, regulatory and
public policy strategies, new business development, customer satisfaction,
business strategy and restructuring and business systems integration.
Annual awards are determined within 120 days of the end of the fiscal year.
Awards for 1997, including Mr. Ferland's, have not yet been determined. Mr.
Ferland's 1996 annual incentive award was determined in 1997 based upon fiscal
year 1996 performance and reflects that (i) Enterprise's 1996 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 1996 was slightly higher
than that of the comparison utilities and (iii) improvements were made in
certain of Enterprise's operating activities. For each of 1997 and 1996, Mr.
Ferland's target award was set at 50% of salary and for 1996 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
1996, the corporate goal factor was 0.910 and Mr. Ferland's individual goal
factor was 1.075. For each of those years, Mr. Ferland's specific objectives
primarily reflected the individual goals of the executive officers of
Enterprise, including the various corporate factors noted above.
The Long-Term Incentive Plan is designed to provide a direct linkage
between the executive's interests and increases in shareholder value by
encouraging certain executives of Enterprise and its subsidiaries to increase
their
14
<PAGE> 18
ownership of Enterprise Common Stock. It is also designed to motivate and reward
executives for meeting corporate objectives that are intended 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 in tandem with
performance units and dividend equivalents, as well as the granting of options
not in tandem with performance units and dividend equivalents. In the case of
tandem grants, cash payment is made only if the specified performance level is
achieved, dividend equivalents have accrued and options are exercised. Any such
payment is based on the value 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. 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 1997, additional non-tandem stock options were
granted in order to strengthen the linkage of compensation to stock ownership
and performance, increase stock ownership of executive officers and better align
their total compensation with the competitive market.
In 1997, the total value of the grant of options and 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 1997, Mr. Ferland was granted 118,000 options, including
18,000 options granted in tandem with performance units and dividend
equivalents, based on his ability to influence long-term results for the benefit
of shareholders and market data for individuals at comparable salary levels. The
total grant of tandem and non-tandem stock options to Mr. Ferland was at
approximately the median of the comparative market data.
In 1997, the performance unit value was determined by Enterprise's total
return to shareholders, over a three-year performance period, as compared to the
companies in the Dow Jones Utilities Index. The higher the ranking of Enterprise
in the group, the greater the value of the performance unit. If Enterprise ranks
in the top three out of fifteen in the group, executives receive 125% of the
target award. If Enterprise ranks as the fourth company, executives receive 100%
of the target award, with decreasing awards from 90% down to 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 1997, Enterprise's long-term performance as measured by the total return
to shareholders over the 1994 through 1996 period placed it as the eleventh
company. Therefore, performance unit awards equal to 30% 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. Mr. Ferland was the only executive officer for whom
compensation paid in 1997 for Federal income tax purposes exceeded $1 million.
The Committee and Enterprise have determined that the amount as to which a
deduction is not allowed by reason of Section 162(m) is not sufficient to
warrant taking any action at this time to modify the compensation program, 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, 1992 in Enterprise Common Stock, the S&P
500 Composite Stock Price Index and the Dow Jones Utilities Index.
PERFORMANCE GRAPH SHOWN HERE
<TABLE>
<CAPTION>
Measurement Period
(Fiscal Year Covered) Enterprise S&P 500 Dow Jones Utilities
<S> <C> <C> <C>
1992 100.00 100.00 100.00
1993 110.45 110.08 109.63
1994 99.11 111.53 92.87
1995 123.37 153.45 122.57
1996 118.75 188.68 133.72
1997 150.08 251.63 164.47
</TABLE>
PROPOSAL 2
RATIFICATION 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 1998, subject to the
ratification of the stockholders entitled to vote for the election of directors,
by a majority of the votes cast on the question of such ratification, 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
Annual Meeting and will be afforded an opportunity to make a statement if they
so desire and to respond to appropriate questions.
16
<PAGE> 20
PROPOSAL 3
The proposal set forth below has been submitted by a stockholder. For the
reasons stated, the Board of Directors of Enterprise has concluded that it
cannot support the proposal. This does not mean, however, that stockholder
proposals are not welcomed. Enterprise receives many suggestions from
stockholders, some as formal stockholder proposals. All are given careful
attention and Enterprise has adopted a number of the suggestions made.
STOCKHOLDER PROPOSAL
Citizen Lobby, Inc., 11 North Willow Street, Trenton, NJ 08603, owner of 41
shares of Enterprise Common Stock, has informed Enterprise that it intends to
propose the following resolution at the Annual Meeting:
The proposed resolution and supporting statement, for which the Board of
Directors and Enterprise accept no responsibility, are as follows:
"WHEREAS, Public Service Gas and Electric [sic] (PSE&G) is operator and
owner of 42.59% of the Salem Nuclear Generating Station Unit 1 and Unit 2
(Salem), and is liable to shareholders for the continued economic viability of
the facility;
WHEREAS, we believe the burden of a poorly performing electricity producer
operated by PSE&G will degrade the general value of shareholder stock;
WHEREAS, only five of the existing 108 U.S. nuclear reactors have averaged
a lower lifetime capacity factor than Salem Unit 2, and only eleven have
performed worse than Salem Unit 1;
WHEREAS, through 1996, the Salem reactor had a lifetime capacity factor of
52 percent, which is 25 percent less productive that [sic] the average nuclear
plant during that same time period;
WHEREAS, for the past five years Salem Unit 1 and Salem Unit 2 have had
more down time than all but one other nuclear power generator in the entire
country, the Indian Point Three reactor;
WHEREAS, PSE&G spent $491 million in 1995 and 1996 repairing and
maintaining the Salem reactors, roughly one third of which was for new capital
additions, for which shareholders could be held financially liable;
WHEREAS, Komanoff Energy Associates and Resource Insight, Inc. in
conjunction with the Pace University School of Law, estimates losses from
operating Salem after 1997 and into the next century range from $167 million to
$2.5 billion, and [sic] average $944 million, the burden of which may be borne
by PSE&G shareholders or executive salary compensation packages;
WHEREAS, PSE&G's basis for continued operation and investment in the Salem
nuclear reactors follows the assumption that the Salem Unit 1 and Unit 2
reactors will operate at a 75% capacity factor, a level more than 40% above the
facility's lifetime average;
RESOLVED: the shareholders request that PSE&G provide a full report to
shareholders no later than 6 months after the next annual meeting, documenting a
complete financial assessment of the cost of decommissioning Salem immediately
and replacing it with alternative sources verses [sic] continued operation for
the full licensed duration, including such costs as:
a. forward going capital costs;
b. operation and maintenance costs;
c. decommissioning and waste disposal costs;
d. costs of potential accidents;
e. cost and savings of alternative electricity production sources;
17
<PAGE> 21
f. and including an analysis of the level of operation at which
continued operation of Salem is not economically feasible.
The following is the statement submitted in support of this proposal:
"Past performance and general understanding demonstrate that costs for
continued operation, maintenance, and capital repairs will not be borne by
executive compensation packages. We believe an assessment of the above
comparative costs is essential for realistic and responsible planning."
If you agree, please mark your proxy FOR; if you disagree mark AGAINST.
NOTE: PROXY OR PROXIES NOT MARKED WILL BE VOTED AGAINST THIS RESOLUTION."
------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST THE FOREGOING PROPOSAL FOR
THE FOLLOWING REASONS:
Your Board of Directors believes that the Proposal is not in the best
interests of stockholders. Rather, it constitutes a part of an organized
campaign by the proponent to reduce electric rates through closure of Salem
without commensurate compensation to Enterprise, PSE&G or stockholders.
The proponent, also known as New Jersey Public Interest Research Group
("NJPIRG") has, since its formation in 1972, consistently and continuously
advocated the shutdown and decommissioning of Salem at the expense of
stockholders.
To such end, it has intervened or attempted to intervene in numerous
regulatory proceedings before the New Jersey Board of Public Utilities
("NJBPU"). NJPIRG has consistently taken positions adverse to stockholders in
legal proceedings involving Enterprise and PSE&G. For example, in 1996,
following the NJBPU investigation into the outage resulting from PSE&G's
decision to remove Salem 1 and Salem 2 from service in 1995, discussed below,
NJPIRG unsuccessfully tried to overturn a settlement between PSE&G and the NJBPU
and to require stockholders to bear a greater share of the outage costs.
Currently, NJPIRG, as part of an ad hoc coalition, is seeking to deny
PSE&G's recovery of its investment in Salem (and thus the investment of
Enterprise and its stockholders) in the NJBPU's Energy Master Plan Proceeding
("EMP Proceeding") to restructure the electric power industry in New Jersey. As
part of its campaign to reduce electric rates, NJPIRG is also lobbying local New
Jersey government officials to boycott the purchase of all electric power sold
by PSE&G in the deregulated market unless it permanently closes Salem.
Notwithstanding what your Board of Directors believes to be NJPIRG's
political motivation, Enterprise and PSE&G believe that the substance of the
proposal is moot since the financial assessment requested by the proposal has
been completed and has been made publicly available, as more fully described
below.
As a matter of prudent management of its generating units, including its
nuclear units, PSE&G periodically evaluates the economics, environmental
emissions characteristics, system reliability requirements and other factors of
its generating units and the price and availability of electricity for purchase,
to assure that it maintains an economic and environmental supply of electricity.
Following PSE&G's decision to remove Salem 1 and Salem 2 from service in
1995, PSE&G engaged in a thorough assessment of each of these units to identify
the work necessary to achieve safe, sustained, reliable and economic operation.
As a result of this comprehensive review, Salem 1's steam generator tubes were
found to be defective. In reaching a decision to replace the steam generator at
Salem 1, in 1996 PSE&G performed a comprehensive study which involved an
intensive analysis of the technical, operational and economic issues related to
this business decision.
18
<PAGE> 22
The principal options considered for Salem 1 (all of which are equally
applicable to its twin, Salem 2) were: (1) replacement of the generator during
the Salem Outage; (2) repair now and replace the generator in a future outage;
(3) repair the generator and then retire the entire unit or (4) decommissioning
the unit immediately. In the retirement case, the energy and capacity required
to replace the unit were valued at market prices, with assumed additions of the
optimal "least-cost" competitive merchant electric generating plants in the
Pennsylvania-Jersey-Maryland Interconnection. PSE&G considered the present worth
of incremental capital and operation and maintenance spending and replacement
power costs incurred by it; sophisticated electric power market modeling
incorporating replacement power simulation and replacement capacity costs;
federal income tax impact and decommissioning costs.
This comprehensive evaluation concluded that immediate replacement of the
steam generator was the most economic alternative. This study was made publicly
available in the EMP Proceeding in which NJPIRG is participating as a member of
a coalition. Enterprise and PSE&G believe that the study included all of the
data and incorporated all of the material factors contemplated by the financial
assessment requested in the Proposal and remains valid. Therefore, the report
requested by the Proposal is duplicative, costly, unnecessary and serves no
valid purpose.
Your Board of Directors recommends that you vote AGAINST the Proposal.
LEGAL PROCEEDING
As previously disclosed in Enterprise's reports filed with the Securities
and Exchange Commission pursuant to the Securities Exchange Act of 1934, in
October 1995, Enterprise received a letter from a representative of a purported
shareholder demanding that it commence legal action against certain of its
officers and directors with regard to nuclear operations of PSE&G's Salem and
Hope Creek generating stations. 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 then 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 and attempts to appeal were unsuccessful.
Pursuant to Court Order, the defendants have filed motions for summary judgment
to dismiss two of the cases, which motions are pending. In the other two cases,
one of the plaintiffs has sold her shares and is seeking to withdraw from the
litigation. Another of the plaintiffs (a profit sharing plan) has been
dissolved, and one of the individual participants in the plan is seeking to
maintain the litigation in his individual name. Discovery in these latter two
cases is continuing. 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 November 3, 1998.
19
<PAGE> 23
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 1997, which has been filed with the Securities
and Exchange Commission. Any such request should be made in writing to Morton A.
Plawner, Treasurer, Public Service Enterprise Group Incorporated, 80 Park Plaza,
T6B, 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
March 3, 1998
20
<PAGE> 24
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE> 25
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-21
CONSOLIDATED BALANCE SHEETS................................. A-22
CONSOLIDATED STATEMENTS OF CASH FLOWS....................... A-24
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY...... A-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................. A-26
FINANCIAL STATEMENT RESPONSIBILITY.......................... A-67
INDEPENDENT AUDITORS' REPORT................................ A-68
</TABLE>
<PAGE> 26
PUBLIC SERVICE ENTERPRISE 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 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 within 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
projects in the generation, transmission and distribution of energy, including
cogeneration and independent power production (IPP) facilities, electric
distribution companies, exempt wholesale generators (EWGs) and foreign utility
companies (FUCOs); Public Service Resources Corporation (PSRC), which has made
primarily passive investments; Energis Resources Incorporated (Energis) which
provides a variety of energy related 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's operating subsidiaries, except
Energis, 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 PSRC, CEA and their subsidiaries, which debt
is guaranteed by EDHI, but without direct support from Enterprise. EGDC has been
conducting a controlled exit from its real estate business since 1993. In July
1996, EDHI sold Energy Development Corporation (EDC), an oil and gas subsidiary.
As of December 31, 1997 and 1996, PSE&G comprised 83% and 88%,
respectively, of Enterprise's assets. For each of the years 1997, 1996 and 1995,
PSE&G revenues were approximately 96%, 96%, and 97%, respectively, of
Enterprise's revenues and PSE&G's earnings available to Enterprise for such
years were 92%, 87% and 88%, respectively, of Enterprise's net income.
OVERVIEW OF 1997
A major event which will impact Enterprise and PSE&G in the future occurred
in April 1997 when the New Jersey Board of Public Utilities (BPU) unveiled its
final report regarding Phase II of the New Jersey Energy Master Plan (Energy
Master Plan) (final Phase II report) addressing wholesale and retail electric
competition in New Jersey. The final Phase II report required PSE&G and other
New Jersey electric utilities to develop rate and service plans to give
customers a choice of suppliers. PSE&G filed its proposal in July 1997 and
hearings before the BPU are in progress (see Note 2. Rate Matters of Notes to
Consolidated Financial Statements (Notes)). PSE&G cannot predict the outcome of
the Energy Master Plan proceedings. The outcome of these proceedings could have
a material adverse impact on Enterprise's and PSE&G's financial condition,
results of operations and net cash flows.
Another significant event in 1997 was the progress made at the Salem
Nuclear Generating Station (Salem). As previously reported, Salem Units 1 and 2
(Salem 1 and 2) were taken out of service in mid-1995. During these outages,
PSE&G made significant changes and improvements related to the people, processes
and equipment at Salem to improve the long-term reliability of the units. Salem
2 returned to service in August 1997. Salem 1 is
A-1
<PAGE> 27
scheduled to restart, subject to Nuclear Regulatory Commission (NRC) approval,
during the first quarter of 1998 (see Nuclear Operations).
To further Enterprise's strategy to develop its non-utility business
through international expansion, CEA established strategic partnerships with
other companies, expanding as a developer and operator of electric generation
projects and an operator of distribution systems. CEA was successful in
expanding operations in its various targeted regions in South America,
particularly Brazil and Argentina. In 1997, CEA's assets quadrupled to about
$1.2 billion, bringing the level of its portfolio at December 31, 1997 to 26
generation projects and two distribution ventures around the world (see
Liquidity and Capital Resources).
RESULTS OF OPERATIONS
Earnings per share of Enterprise common stock (Common Stock) was $2.41 in
1997, representing a decrease of $0.11 per share or 4% from 1996. Earnings per
share was $2.52 in 1996, a decrease of $0.19 per share or 7% from 1995.
PSE&G's contribution to earnings per share in 1997 decreased $0.07 compared
to 1996 due to higher administrative costs attributable to systems modifications
for Year 2000 readiness, legal fees associated with the settlement of the Salem
co-owner litigation and a gain recorded in the second quarter of 1996 from the
repurchase of a portion of PSE&G's outstanding cumulative preferred stock at
discounts to par. These decreases were partially offset by lower operation and
maintenance expenses at Salem and the Hudson generating station. Salem's
refueling outage expenses and restart activities declined while Hudson's
expenses benefited from a decrease in the workforce as well as a reduction of
outage work performed in 1997. Earnings per share in 1997 and 1996 were each
negatively impacted by charges related to the shutdown of Salem 1 and 2 which
began in 1995. The settlement of the lawsuits filed by the co-owners of Salem
negatively impacted 1997 earnings by $0.27 per share and refunds required by the
BPU's December 31, 1996 Order (December 31st Order) which resolved Salem and
other outstanding regulatory issues negatively impacted 1996 earnings by $0.25
per share (see Note 2. Rate Matters of Notes).
EDHI's contribution to earnings per share in 1997 decreased $0.14 compared
to 1996 primarily due to the absence of 1996 earnings of $0.10 per share related
to the discontinued operations of EDC and higher operating expenses of Energis
as it continued to grow.
As a result of Enterprise's stock repurchase program which began in July
1996, earnings per share of Common Stock for 1997 increased $0.10 from 1996. A
total of 12.7 million shares were repurchased at a cost of $350 million under
this program which concluded in January 1997.
In 1996, PSE&G's contribution to earnings per share decreased $0.22
compared to 1995 due to the refunds required by the December 31st Order (see
Note 2. Rate Matters of Notes). Other factors that decreased earnings per share
in 1996 were increased operation and maintenance expenses related to the outages
at Salem and Hope Creek Nuclear Generating Station (Hope Creek) and increased
depreciation due to additional plant in service. The earnings per share decrease
was partially offset by higher gas sales in early 1996 due to favorable weather
conditions and the gain on the repurchase of certain of PSE&G's outstanding
cumulative preferred stock at a discount to par.
EDHI's contribution to earnings per share in 1996 increased $0.01 compared
to 1995 principally due to increased investment income from PSRC.
Earnings per share of Common Stock in 1996 increased $0.02 as a result of
Enterprise's stock repurchase program, described above.
A-2
<PAGE> 28
PSE&G -- REVENUES
ELECTRIC
Revenues increased $244 million or 6% in 1997 and decreased $77 million or
2% in 1996. The increase in 1997 was primarily due to an increase in energy
sales to wholesale customers and 1996 refunds required by the December 31st
Order, partially offset by lower kilowatt sales from unfavorable weather.
GAS
Revenues increased $56 million or 3% and $195 million or 12% in 1997 and
1996, respectively. The 1996 increase was primarily due to a higher recovery of
fuel costs and favorable weather conditions in early 1996.
PSE&G -- EXPENSES
FUEL FOR ELECTRIC GENERATION AND INTERCHANGED POWER
Fuel for Electric Generation and Interchanged Power increased $260 million
or 28% in 1997 and $27 million or 3% in 1996. The increases in both years were
primarily due to increases in energy sales to wholesale customers. To the extent
fuel revenue and expense flow through the Electric Levelized Energy Adjustment
Clause (LEAC) mechanism, variances in fuel revenues and expenses offset and thus
have no direct effect on earnings. For a discussion of fuel related revenue and
expense included in the LEAC, see Note 1. Organization and Summary of
Significant Accounting Policies of Notes.
GAS PURCHASED
Gas purchased decreased $17 million or 2% in 1997 and increased $156
million or 16% in 1996. The 1996 increase was due to an increase in energy sales
to wholesale customers. Due to the operation of the Levelized Gas Adjustment
Clause (LGAC) mechanism, variances in fuel revenues and expenses offset, and
have no direct effect on earnings.
FEDERAL INCOME TAXES
Federal income taxes increased $42 million or 16% in 1997 and decreased $56
million or 17% in 1996. The 1997 taxes were higher due to an increase in pre-tax
operating income while 1996 taxes were lower due to a decrease in pre-tax
operating income.
NET LOSS (GAIN) ON PREFERRED STOCK REDEMPTIONS
Net Loss (Gain) on Preferred Stock Redemptions decreased $21 million in
1997 from the comparable 1996 period. The decrease was primarily due to an $18
million net gain on the repurchase of certain of PSE&G's outstanding cumulative
preferred stock at discounts to par in the second quarter of 1996 (see External
Financings -- PSE&G).
YEAR 2000 EXPENSES -- ENTERPRISE AND PSE&G
Many of Enterprise's and PSE&G's systems must be modified due to computer
program limitations in recognizing dates beyond 1999. If not corrected, the
systems could fail or cause erroneous results by, at or after January 1, 2000.
Substantial changes to, and some replacements of, Enterprise's and PSE&G's
present systems are being made in an effort to mitigate potential Year 2000
issues. Costs are being expensed as incurred in accordance with Emerging Issues
Task Force (EITF) Issue No. 96-14, "Accounting for the Costs Associated with
Modifying Computer Software for the Year 2000." During 1997, $8 million of costs
related to Year 2000 readiness were
A-3
<PAGE> 29
incurred. Management estimates the total cost of this effort to be about $92
million to be incurred from 1997 through 2001, of which $41 million is expected
to be incurred in 1998.
Enterprise and PSE&G have assembled a cross-functional team to inventory,
assess and identify and implement solutions for Enterprise's and PSE&G's
systems. Plans provide for 80% of critical systems to be Year 2000 ready in
1998, with the remaining critical systems to be ready by July 1999. By the end
of 1999, plans call for 80% of non-critical systems to be Year 2000 ready with
the remainder of those systems to be Year 2000 ready in 2000.
Additionally, the team has surveyed Enterprise's and PSE&G's top 3000
vendors to assess their plans for Year 2000 readiness. The team has also been
working with critical suppliers and the Pennsylvania -- New Jersey -- Maryland
Interconnection (PJM) on their plans for Year 2000 readiness.
An inability of Enterprise, PSE&G, their subsidiaries, members of PJM or
Enterprise's or PSE&G's critical suppliers to meet the Year 2000 deadline could
have a material adverse impact on Enterprise's and PSE&G's operations, financial
condition, results of operations and net cash flows. For a discussion of the NRC
proposal regarding Year 2000 readiness, see Note 10. Commitments and Contingent
Liabilities.
EDHI -- NET INCOME
<TABLE>
<CAPTION>
INCREASE OR (DECREASE)
----------------------------------------------
1997 VS. 1996 1996 VS. 1995
--------------------- ---------------------
PER PER
AMOUNT SHARE AMOUNT SHARE
--------- -------- --------- --------
(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CEA.................................................... $ 4 $ .02 $ (2) $(.01)
PSRC................................................... 3 .01 22 .09
EGDC................................................... (5) (.02) (1) --
Energis................................................ (12) (.05) (6) (.02)
---- ----- ---- -----
Continuing Operations.................................. (10) (.04) 13 .06
Discontinued Operations -- EDC
Income from Operations............................... (11) (.04) (24) (.11)
Gain on Sale......................................... (13) (.06) 13 .06
---- ----- ---- -----
Total........................................ $(34) $(.14) $ 2 $ .01
==== ===== ==== =====
</TABLE>
CONTINUING OPERATIONS
EDHI's income from continuing operations was $47 million for 1997, a $10
million decrease from 1996. The loss for Energis increased due to higher
selling, general and administrative expenditures as Energis continued to grow.
PSRC's income increased primarily due to income from new lease investments,
partially offset by lower income from partnership investments. CEA's income
increased due to improved financial performance of several projects.
EDHI's income from continuing operations was $57 million in 1996, a $13
million increase over 1995. The 1996 increase was due to PSRC's increased income
from partnership investments. Energis' income decreased due to increased
administrative and general expenditures (startup costs) and lower margins
related to retail gas marketing. Energis was formed on December 31, 1996 by
consolidating the operations of two former PSRC subsidiaries, U.S. Energy
Partners and Enterprise Strategic Energy Solutions.
A-4
<PAGE> 30
DISCONTINUED OPERATIONS
EDC was sold on July 31, 1996. Income related to EDC operations was $11
million in 1996, a $24 million decrease from 1995. 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.
LIQUIDITY AND CAPITAL RESOURCES
ENTERPRISE
Enterprise is a public utility holding company and as such, has no
operations of its own. The following discussion of Enterprise's liquidity and
capital resources is on a consolidated basis, noting the uses and contributions
of Enterprise's two direct subsidiaries, PSE&G and EDHI.
Cash generated from PSE&G's operations is expected to provide the major
source of funds for PSE&G's business. EDHI's growth will be funded through
external financings, cash generated from its operations, and equity capital.
Cash and cash equivalents totaled $83 million at the end of 1997 compared with
$279 million at the end of 1996.
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.
Dividend payments on Common Stock were $2.16 per share and totaled $501
million for the year ended December 31, 1997. Since 1986, PSE&G has made regular
cash payments to Enterprise in the form of dividends on outstanding shares of
PSE&G's common stock. PSE&G has paid quarterly dividends on its common stock in
each year commencing in 1948, the year of the distribution of PSE&G's common
stock by Public Service Corporation of New Jersey, the former parent of PSE&G.
From 1992 through 1996, EDHI made regular cash payments to Enterprise in the
form of dividends on outstanding shares of EDHI's common stock. Due to the
growth in EDHI investment activities, no dividends on EDHI's common stock were
paid in 1997 or are anticipated for 1998.
Enterprise has paid quarterly dividends in each year commencing with the
corporate restructuring of PSE&G when Enterprise became the owner of all the
outstanding common stock of PSE&G. While a key objective of the Board of
Directors of Enterprise is to keep the Common Stock dividend secure, amounts and
dates of such dividends as may be declared will necessarily be dependent upon
Enterprise's future earnings, financial requirements and other factors including
the receipt of dividend payments from its subsidiaries.
Enterprise and PSE&G have issued Deferrable Interest Subordinated
Debentures in connection with the issuance of tax deferred preferred securities.
If and for as long as payments on those Deferrable Interest Subordinated
Debentures have been deferred, or Enterprise or PSE&G has defaulted on the
indenture related thereto or its guarantee thereof, neither Enterprise nor PSE&G
may pay any dividends on their common and preferred stock (see Note 6. Schedule
of Consolidated Capital Stock and Other Securities of Notes).
PSE&G paid dividends of $523 million and $524 million to Enterprise during
the years ended December 31, 1997 and 1996, respectively. EDHI paid dividends of
$369 million during the year ended December 31, 1996 primarily from proceeds of
the sale of EDC.
Cash provided by operating activities totaled $1.095 billion in 1997, down
from $1.470 billion in 1996. The major contributor in 1997 was net income of
$560 million, which included $630 million of non-cash deductions for
depreciation and amortization (see Results of Operations).
Cash provided by operating activities totaled $1.470 billion in 1996, down
from $1.518 billion in 1995. The major contributor in 1996 was net income of
$612 million, which included $607 million of non-cash deductions for
depreciation and amortization (see Results of Operations).
A-5
<PAGE> 31
Cash used in investing activities totaled $1.614 billion in 1997, up from
$9 million in 1996. The primary use of cash in 1997 was a net increase in
long-term investments of $914 million, including CEA's investments in
distribution and generation companies of $852 million, PSRC's net increase in
investments of $97 million and utility plant additions, excluding Allowance for
Funds Used During Construction (AFDC), of $542 million at PSE&G (see Capital
Requirements -- PSE&G).
Cash used in investing activities totaled $9 million in 1996, down from
$935 million in 1995. The proceeds from the sale of EDC were almost fully offset
by PSE&G's additions to utility plant (see Capital Requirements -- PSE&G). Net
proceeds from the EDC sale were $704 million.
Cash provided by financing activities was $323 million in 1997 as compared
to $1.244 billion of cash used in financing activities in 1996. Major
contributors in 1997 were an increase in short-term debt by PSE&G of $468
million, EDHI of $267 million and Enterprise of $75 million, primarily used to
fund certain scheduled long-term debt maturities, CEA's investments and a net
increase in long-term debt of $85 million, partially offset by the payment of
dividends on Common Stock of $501 million. PSE&G's long-term debt decreased $287
million in 1997 while EDHI's long-term debt increased $372 million.
Cash used in financing activities was $1.244 billion in 1996, up from $586
million in 1995. The primary use of cash in 1996 was the payment of dividends on
Common Stock of $523 million, the retirement of Common Stock of $307 million,
and a net decrease in long-term debt $434 million.
As of December 31, 1997, Enterprise's capital structure consisted of 48.4%
common equity, 45.3% long-term debt and 6.3% preferred securities. The capital
structure as of December 31, 1996 consisted of 49.8% common equity, 43.7%
long-term debt and 6.5% preferred securities.
As a result of the 1992 focused audit of Enterprise's non-utility
businesses (Focused Audit), the BPU approved a plan which, among other things,
provides that: (1) Enterprise will not permit EDHI's non-utility investments to
exceed 20% of Enterprise's consolidated assets without prior notice to the BPU
(such investments at December 31, 1997 were approximately 16% of assets); (2)
the PSE&G Board of Directors include non-employee Enterprise directors, with an
annual certification by such Board that the business and financing plans of EDHI
will not adversely affect PSE&G; (3) Enterprise agree to (a) limit debt
supported by the minimum net worth maintenance agreement between Enterprise and
Capital to $750 million and (b) make a good-faith effort to eliminate such
support over a six to ten year period from April 1993; and (4) EDHI pay PSE&G an
affiliation fee of up to $2 million a year to be applied by PSE&G through its
LGAC and its LEAC to reduce utility rates. Beginning in 1995, the debt supported
by the minimum net worth maintenance agreement was limited to $650 million and
the affiliation fee has been proportionately reduced as such supported debt is
reduced. Enterprise and EDHI and its subsidiaries continue to reimburse PSE&G
for the costs of all services provided to them by employees of PSE&G.
As a result of Enterprise's intent that EDHI and its subsidiaries provide
the primary growth vehicles for Enterprise, financing requirements connected
with continued growth of EDHI, changes to the utility industry resulting from
the final outcome of the Energy Master Plan proceedings and potential accounting
impacts resulting from the deregulation of the generation of electricity,
modifications will be required to certain of the restrictions agreed to by
Enterprise with the BPU in response to the Focused Audit. Enterprise expects
that these modifications will be addressed in conjunction with the Energy Master
Plan proceedings. The resolution of these matters could impact the future
relative size and financing of the non-utility businesses and may affect
Enterprise's future financial position, results of operations and net cash flows
(see Note 2. Rate Matters of Notes).
EDHI
CEA, PSRC and Energis are expected to be the growth vehicles for EDHI and
Enterprise. During the next five years, EDHI's capital requirements are expected
to be provided from additional debt financing, operational cash flows and equity
capital. A significant portion of CEA's growth is expected to occur in the
international arena due to
A-6
<PAGE> 32
the current and anticipated growth in electric capacity required in certain
regions of the world. PSRC will continue its focus on investments related to the
energy business. Energis is expected to expand upon the current energy related
services being provided to industrial and commercial customers.
EDHI's cash provided by (used in) operating, investing and financing
activities was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Operating Activities:
CEA.................................................. $ (9) $ 9 $ 9
PSRC................................................. 130 164 58
Other................................................ (23) (16) 12
----- ----- -----
Continuing Operations................................ 98 157 79
EDC.................................................. -- 78 138
----- ----- -----
Total Operating Activities................... $ 98 $ 235 $ 217
===== ===== =====
Investing Activities:
CEA.................................................. $(852) $ (8) $ (27)
PSRC................................................. (97) 2 (49)
Other................................................ (2) 12 53
----- ----- -----
Continuing Operations................................ (951) 6 (23)
EDC.................................................. -- 653 (113)
----- ----- -----
Total Investing Activities................... $(951) $ 659 $(136)
===== ===== =====
Financing Activities:
Debt................................................. $ 638 $(380) $ 2
Equity............................................... 78 (369) (87)
----- ----- -----
Total Financing Activities................... $ 716 $(749) $ (85)
===== ===== =====
</TABLE>
For a discussion of the source of EDHI's funds, see External Financings.
Over the next several years, EDHI and its subsidiaries will be required to
refinance their maturing debt and provide additional debt and equity financing
for growth. Any inability to obtain required additional external capital or to
extend or replace maturing debt and/or existing agreements at current levels and
interest rates may affect future earnings. As of December 31, 1997 and 1996,
EDHI's embedded cost of debt of its finance subsidiaries was approximately 8.2%
and 8.9%, respectively. During 1997, EDHI's finance subsidiaries provided
additional long-term debt financing of $265 million at an average interest rate
of 6.8%.
CEA
During 1997, CEA's investment activities included:
- Acquisition of approximately 30% of a Brazilian electric distribution
company serving customers in the State of Rio Grande Do Sul, located in
Southern Brazil. The total purchase price was $1.49 billion of which
CEA's share was $498 million. This investment is an exempt FUCO.
- Acquisition of a 50% interest in a 200 Megawatt (MW) natural gas-fired
power plant located in Colombia, South America which is expected to
become operational in the first quarter of 1998. This investment is a
foreign EWG.
A-7
<PAGE> 33
- Acquisition with a partner of a 90% interest in two Argentine electric
distribution companies serving the Buenos Aires Province for $565
million. CEA's indirect ownership of the two companies is 30%. Each of
these investments is an exempt FUCO.
- Acquisition of a 49% interest in an operating 180 MW oil-fired
cogeneration plant located on the island of Oahu in Hawaii. This
investment is a U.S. domestic QF.
- Acquisition of an 80% interest in a 30 MW coal-fired cogeneration plant
in the Jiangsu Province of China which is currently under construction.
This investment is a foreign EWG.
- Acquisition of 27% and 50% ownership interests in energy development
companies located in the Philippines and Thailand, respectively. The
project in the Philippines is a foreign EWG and the Thai investment is a
power development company.
The aggregate investment made in 1997 was approximately $852 million, of
which $233 million was financed with non-recourse debt.
PSRC
During 1997, PSRC entered into leveraged leases of four power plants: one
located in the United Kingdom and three in the Netherlands. The aggregate of
these investments was approximately $145 million.
During 1997, PSRC's investments in certain collateralized bond obligation
securities and its equity investment in the underlying limited partnership were
liquidated. Also in 1997, PSRC sold a DC10 aircraft, which was subject to a
direct financing lease. The aggregate proceeds from these asset sales was
approximately $62 million, which approximated the book cost of the assets sold.
On January 2, 1998, the lessee of one of PSRC's leveraged leases exercised
an early buyout option contained in the lease. As a result, in 1998, PSRC
received approximately $59 million of proceeds resulting in an after-tax gain of
approximately $6 million.
ENERGIS
Energis continued to expand its customer base to more than 5,000 businesses
and increased its capabilities in providing energy services to customers,
including:
- Securing over 800 new business customers during a Pennsylvania Electric
Pilot Program.
- Acquiring, in January 1998, a diversified mechanical service contractor
which provides services to commercial and industrial clients in
Pennsylvania, New Jersey and Delaware.
- Entering into a strategic alliance to market and service compact,
portable generators.
CAPITAL REQUIREMENTS -- PSE&G
PSE&G had utility plant additions of $557 million, $603 million and $686
million, for 1997, 1996 and 1995, respectively, including AFDC of $15 million,
$17 million and $36 million, respectively. Construction expenditures were
related to improvements in PSE&G's existing power plants (including acquisition
of nuclear fuel), transmission and distribution system, gas system and common
facilities. PSE&G also expended $28 million, $34 million and $30 million for the
cost of plant removal (net of salvage) in 1997, 1996 and 1995, respectively.
Construction expenditures from 1998 through 2002 are expected to aggregate $3.1
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
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<PAGE> 34
Capital Requirements Forecast below.) The decision to make these improvements
will depend, in part, upon the outcome of the Energy Master Plan proceeding.
PSE&G expects that it will be able to internally generate all of its
construction and capital requirements over the next five years, assuming
adequate and timely recovery of costs, as to which no assurances can be given
(see Note 2. Rate Matters and Note 10. Commitments and Contingent Liabilities of
Notes).
CONSTRUCTION AND CAPITAL REQUIREMENTS FORECAST
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 TOTAL
------ ------ ------ ------ ------ ------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Construction and Investment Requirements
(Estimate):
PSE&G.................................. $ 606 $ 613 $ 619 $ 626 $ 652 $3,116
EDHI................................... 284 182 293 195 313 1,267
------ ------ ------ ------ ------ ------
Total Construction and Investment
Requirements........................ 890 795 912 821 965 4,383
------ ------ ------ ------ ------ ------
Mandatory Retirement of Securities:
PSE&G.................................. 118 100 635 100 300 1,253
EDHI................................... 222 314 105 162 157 960
------ ------ ------ ------ ------ ------
Total Retirement of Securities......... 340 414 740 262 457 2,213
------ ------ ------ ------ ------ ------
Total Capital Requirements..... $1,230 $1,209 $1,652 $1,083 $1,422 $6,596
====== ====== ====== ====== ====== ======
</TABLE>
The projected effect of securitization, as included in PSE&G's Energy
Master Plan proposal, is not included in the above forecast (see Note 2. Rate
Matters of Notes).
EXTERNAL FINANCINGS
ENTERPRISE
At December 31, 1997 and 1996, Enterprise had a $75 million and a $25
million uncommitted line of credit, respectively, with a bank. At December 31,
1997, Enterprise had $75 million outstanding under this line of credit. At
December 31, 1997, Enterprise had a committed $150 million revolving credit
facility which expires in December 2002. At December 31, 1997, Enterprise had no
debt outstanding under this revolving credit facility.
In January 1998, Enterprise Capital Trust I, a special purpose statutory
business trust controlled by Enterprise, issued $225 million of 7.44% Trust
Originated Preferred Securities (Guaranteed Preferred Beneficial Interest in
Enterprise's Debentures). Proceeds were lent to Enterprise and are evidenced by
deferrable interest subordinated debentures. Enterprise used the proceeds to
make a $218 million equity investment in EDHI. The debentures and their related
indenture constitute a full and unconditional guarantee by Enterprise of the
Preferred Securities issued by the trust. If and for as long as payments on
Enterprise's debentures have been deferred, or Enterprise has defaulted on the
indenture related thereto or its guarantee thereof, Enterprise may not pay any
dividends on its Common Stock. Also in January 1998, Enterprise paid off the $75
million outstanding under its line of credit.
PSE&G
PSE&G has obtained BPU approval through December 31, 1998 to
opportunistically refinance essentially all of its long-term debt and to refund
up to $250 million of matured debt. 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, 1997, the Mortgage would
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<PAGE> 35
permit up to $3.3 billion aggregate principal amount of new Bonds to be issued
against previous additions and improvements. At December 31, 1997, the coverage
ratio under PSE&G's Mortgage was 3.45:1.
In February 1997, PSE&G Capital 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 redeemed all 750,000 shares
of its 7.44% Cumulative Preferred Stock $100 par value at $103.72 per share in
June 1997.
In April 1997, PSE&G issued $25 million of Variable Rate Pollution Control
Bonds, Series X, due 2031. PSE&G also issued $19 million of Variable Rate
Pollution Control Notes due 2027 in June 1997. The proceeds of each of these
issuances were used to redeem prior debt related to pollution control facilities
of PSE&G.
In June 1997, PSE&G issued $235 million of 6.50% Bonds, Series XX, due
2000. The proceeds were used primarily to refund $117 million of its 8.50%
Bonds, Series LL, due 2022 and to reimburse its treasury for the purchase of
other Bonds in the open market. Also in June 1997, PSE&G's 6.875% Bonds, Series
KK, of $150 million matured.
On November 1, 1997, $150 million of PSE&G's 7.125% Bonds, Series GG,
matured. The redemption of these bonds was funded by the issuance of commercial
paper. Also in November 1997, PSE&G issued $9 million of Secured MTNs, Series A
at 7.04% and redeemed $9 million of its 9.25% Bonds, Series CC.
In January 1998, $100 million of PSE&G's 6.00% Bonds, Series NN, matured.
To provide liquidity for its commercial paper program, PSE&G has a $650
million revolving credit agreement expiring in June 1998 and a $650 million
revolving credit agreement expiring in June 2002 with a group of commercial
banks, which provide for borrowings of up to one year. On December 31, 1997,
there were no borrowings outstanding under these credit agreements.
The BPU has authorized PSE&G to issue and have outstanding at any one time
through January 2, 1999, not more than $1.3 billion of short-term obligations,
consisting of commercial paper and other unsecured borrowings from banks and
other lenders. On December 31, 1997, PSE&G had $1.026 billion of short-term debt
outstanding, including $74 million borrowed against its uncommitted bank lines
of credit which lines of credit totaled $174 million as of December 31, 1997.
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 on June
28, 2001. PSE&G has guaranteed repayment of Fuelco's respective obligations
under this program. As of December 31, 1997, Fuelco had commercial paper of $80
million outstanding under the program.
EDHI
The minimum net worth maintenance agreement between Capital and Enterprise
provides, among other things, that Enterprise (1) maintain its ownership,
directly or indirectly, of all outstanding common stock of Capital, (2) cause
Capital to have at all times a positive tangible net worth of at least $100,000
and (3) make sufficient contributions of liquid assets to Capital in order to
permit it to pay its debt obligations. In 1993, Enterprise agreed with the BPU
to make a good-faith effort to eliminate such Enterprise support within six to
ten years. Effective January 31, 1995, Capital notified the BPU of its intention
not to have more than $650 million of debt outstanding at any time. Capital's
assets consist principally of demand notes of CEA and PSRC. Intercompany
borrowing rates are established based upon Capital's cost of funds. At December
31, 1997, Capital had total debt outstanding of $611 million, including $573
million of MTNs. In October 1997, Capital issued $165 million of MTNs with an
average interest rate of 6.75%, which was used to fund CEA's investments.
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<PAGE> 36
As of December 31, 1997, Funding had $300 million and $150 million
revolving credit facilities with two groups of banks and had $128 million of
Senior Notes outstanding. Funding makes short-term investments only if the funds
cannot be employed in intercompany loans. Intercompany borrowing rates are
established based upon Funding's cost of funds. Funding is providing both long
and short-term capital for PSRC and CEA and their subsidiaries on the basis of
an unconditional guaranty from EDHI, but without direct support from Enterprise.
As of December 31, 1997, Funding had $395 million of total debt outstanding.
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, 1997 and 1996, EDHI had consolidated debt to equity ratios of
1.80:1 and 1.05:1 respectively, and for the years ended December 31, 1997, 1996
and 1995, EBIT coverage ratios, as defined to exclude the effects of EGDC and
the gain on the sale of EDC, of 2.20:1, 2.45:1 and 2.47:1, respectively.
Compliance with applicable financial covenants will depend upon future financial
position and levels of earnings, as to which no assurance can be given. In
addition, EDHI's ability to continue to grow its business will depend upon
Enterprise's and EDHI's ability to obtain additional financing beyond current
levels.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in Enterprise's market risk sensitive instruments
and positions is the potential loss arising from adverse changes in commodity
prices, equity security prices, interest rates and foreign currency exchange
rates as discussed below. Enterprise's policy is to use physical forward and
options contracts, and to a lesser extent, financial derivatives for the purpose
of managing risk consistent with its business plans and prudent practices.
Enterprise has a Risk Management Committee made up of executive officers and an
independent risk oversight function to enhance its risk management practices.
Enterprise is exposed to credit losses in the event of non-performance or
non-payment by counterparties. Enterprise has a credit management process which
is used to assess, monitor and mitigate counterparty exposure for PSE&G and
EDHI. Management does not expect counterparty defaults to materially impact the
financial condition, results of operations and net cash flows of Enterprise and
PSE&G.
COMMODITIES -- PSE&G
The availability and price of energy commodities are subject to
fluctuations from factors such as weather, environmental policies, changes in
demand and state and Federal regulatory policies. To reduce price risk caused by
market fluctuations, PSE&G enters into physical forward and options contracts
and, to a lesser extent, financial derivatives including forwards, futures,
swaps and options with approved counterparties to hedge its anticipated demand.
These contracts, in conjunction with owned electric generating capacity, are
designed to cover estimated electric and gas customer commitments. Gains and
losses resulting from physical forward and options contracts and financial
derivatives are recognized as a component of fuel revenue and expense upon
maturity of these contracts. Additionally, PSE&G enters into physical forward
and options contracts that are speculative in nature which are immaterial to
PSE&G's market portfolio and do not have a material impact on PSE&G's financial
condition, results of operations and net cash flows (see Note 1. Organization
and Summary of Significant Accounting Policies of Notes).
PSE&G uses a value-at-risk model to assess the market risk of its commodity
business. This model includes fixed price sales commitments, owned generation,
native load requirements, physical contracts and financial derivative
instruments. Value-at-risk represents the potential gains or losses for
instruments or portfolios due to changes in market factors, for a specified time
period and confidence level. PSE&G estimates value-at-risk across its commodity
business using a model with historical volatilities and correlations. The
measured value-at-risk using a variance/covariance model with a 97.5 percent
confidence level and assuming a one week horizon at December 31,
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<PAGE> 37
1997 was approximately $7 million. PSE&G's calculated value-at-risk exposure
represents an estimate of potential net losses that could be recognized on its
portfolio of physical and financial derivative instruments assuming historical
movements in future market rates. These estimates, however, are not necessarily
indicative of actual results which may occur, since actual future gains and
losses will differ from those historical estimates, based upon actual
fluctuations in market rates, operating exposures, and the timing thereof, and
changes in PSE&G's portfolio of hedging instruments during the year.
COMMODITIES -- EDHI
During 1997, Energis entered into futures contracts to buy natural gas
related to fixed-price natural gas sales commitments. Such contracts hedged
approximately 97% of its fixed price sales commitments at December 31, 1997. As
of December 31, 1997, Energis had a net unrealized hedge loss of $2 million.
During 1997, Energis entered into fixed price electricity sales
commitments. Physical purchase contracts hedged approximately 10% of such fixed
price sales commitments at December 31, 1997.
Energis estimates value-at-risk across its electric and natural gas
commodities using a model with historical volatilities and correlations. The
measured value-at-risk using a variance/co-variance model with a 97.5 percent
confidence level and assuming a one-week horizon at December 31, 1997 was
approximately $0.2 million. Energis' calculated value-at-risk exposure
represents an estimate of potential losses that could be recognized on its
portfolio of physical and financial derivative instruments assuming historical
movements in future market prices. These estimates, however, are not necessarily
indicative of actual results which may occur, since actual future gains and
losses will differ from those historical estimates, based upon actual
fluctuations in market rates, operating exposures, and the timing thereof, and
changes in Energis' portfolio of hedging instruments during the year.
NUCLEAR DECOMMISSIONING TRUST FUNDS -- PSE&G
Contributions made into the Nuclear Decommissioning Trust Funds are
invested in debt and equity securities. These marketable debt and equity
securities are recorded at a fair value of $458 million at December 31, 1997 and
have exposure to price risk. The potential change in fair value resulting from a
hypothetical 10% change in quoted market prices of these securities amounts to
$46 million. All realized gains on Nuclear Decommissioning Trust Fund
investments are recorded as a component of accumulated depreciation while
unrealized gains are recorded as deferred credits and neither affects earnings.
EQUITY SECURITIES -- EDHI
PSRC has investments in equity securities and partnerships which invest in
equity securities. The aggregate amount of such investments which have available
market prices at December 31, 1997 are recorded at fair value of $185 million
and have exposure to price risk. A sensitivity analysis has been prepared to
estimate EDHI's exposure to market sensitivity of these investments. The
potential change in fair value resulting from a hypothetical 10% change in
quoted market prices of these investments amounts to $15 million.
INTEREST RATES -- PSE&G
PSE&G is subject to the risk of fluctuating interest rates in the normal
course of business. PSE&G's policy is to manage interest rates through the use
of fixed and, to a lesser extent, floating rate debt. PSE&G's interest rate risk
related to existing fixed, long-term debt is not significant as PSE&G has BPU
approval to issue long-term debt for opportunistic refinancing purposes. As of
December 31, 1997, a hypothetical 10% change in interest rates would result in a
$8 million change in interest costs related to short-term and floating rate
debt.
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<PAGE> 38
INTEREST RATES -- EDHI
EDHI is subject to the risk of fluctuating interest rates in the normal
course of business. EDHI's policy is to manage interest rates through the use of
fixed rate debt, floating rate debt and interest rate swaps. As of December 31,
1997, a hypothetical 10% change in interest rates would result in a $2 million
change in interest costs related to short-term and floating rate debt.
In June 1997, an indirect subsidiary of CEA entered into an agreement to
swap floating rate borrowings into fixed rate borrowings. The interest
differential to be received or paid under the interest rate swap agreement is
recorded over the life of the agreement as an adjustment to the interest expense
of the related borrowing. The swap terminates on May 28, 1999.
The notional amounts and interest rates are as follows:
<TABLE>
<CAPTION>
PAY-FIXED SWAP
--------------
<S> <C>
Notional amount............................................. $43.5 million
Pay rate.................................................... 6.65%
Average receive rate........................................ 5.73%
Year-end receive rate....................................... 5.91%
</TABLE>
FOREIGN CURRENCIES -- EDHI
CEA has non-recourse debt of $135 million which is denominated in Brazilian
Reals that is indexed to a basket of currencies including U.S. dollars. As a
result, it is subject to foreign currency exchange rate risk due to the effect
of exchange rate movements between the indexed foreign currencies and the
Brazilian Real. Exchange rate changes ultimately impact the debt level
outstanding in the denominated currency and result in foreign currency
transactions in accordance with current accounting guidance. Any related
transaction gains or losses resulting from such exchange rate changes are
included in determining net income for the period. The potential change in
non-recourse debt resulting from a hypothetical 10% change in exchange rates
amounts to approximately $9 million.
NUCLEAR OPERATIONS
As previously reported, Salem 1 and 2 were taken out of service by PSE&G in
the second quarter of 1995. In June 1995, the Nuclear Regulatory Commission
(NRC) issued a Confirmatory Action Letter (CAL) which documented commitments of
PSE&G to keep each unit off line until it is satisfied that the unit is ready to
return to service and to operate reliably over the long term and until the NRC
agrees that the unit is sufficiently prepared to restart. Salem 2 returned to
service on August 30, 1997. The NRC amended the CAL to require a final
assessment of Salem 2 after approximately two months of full power operation. A
meeting was held with the NRC on December 4, 1997 which satisfied this final CAL
requirement for Salem 2.
Installation of Salem 1 steam generators has been completed and that unit
is expected to return to service around the end of the first quarter of 1998.
Restart of Salem 1 is subject to completion of the requirements of the restart
plan to the satisfaction of PSE&G and the NRC. The cost of the steam generator
replacement, including installation, was approximately $170 million (PSE&G's
share was $72 million). In addition, the cost of disposal of the four old steam
generators was $16 million (PSE&G's share was $7 million). Restart of Salem 1 is
also subject to completion of the requirements of the restart plan to the
satisfaction of PSE&G and the NRC. The NRC's Readiness Assessment Team
Inspection (RATI) of Salem 1 (a requirement for restart) commenced on February
10, 1998. PSE&G expects that the NRC will complete its inspection in February
1998. The inability to successfully return Salem 1 to operation could have a
material adverse impact on the financial condition, results of operations and
net cash flows of Enterprise and PSE&G (see Forward Looking Statements).
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<PAGE> 39
PSE&G's share of total operating and maintenance expenses for both Salem
units for 1997 was $115 million and capital costs were $65 million, which
includes $19 million for steam generator replacement and excludes $13 million
related to the ACE settlement described below. The outage of a Salem unit causes
PSE&G to incur replacement power costs of approximately $4 to $5 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.
PSE&G and ACE entered into an operating agreement which resulted in the
dismissal of a lawsuit initiated by ACE related to Salem performance. Under the
agreement, ACE paid a portion of its share of the 1997 operation and maintenance
expenses based on the amount of generation of the Salem units. PSE&G incurred
approximately $13 million of ACE's share of 1997 operation and maintenance
expenses since Salem 2 did not operate for the first eight months of 1997 and
Salem 1 did not return to service during 1997.
At the January 1997 semi-annual NRC Senior Management Meeting, the NRC
placed Salem 1 and 2 on the NRC Watch List and designated them as Category 2
facilities (i.e., a plant that is authorized to operate, but one that the NRC
will monitor closely), noting that this action was not due to any performance
problems or decline during its current evaluation period but rather that Salem
should have been placed on the NRC Watch List earlier. The letter stated that
the NRC staff was satisfied with the overall approach being taken by PSE&G to
return the Salem units to service. Salem 1 and 2 remain on the NRC Watch List as
a Category 2 plant.
For information on Salem litigation, see Note 10. Commitments and
Contingent Liabilities of Notes.
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 1997 and early 1998. See Note 2. Rate Matters of Notes for
information on the final Phase II report and the Energy Master Plan proceedings.
FERC ORDER NO. 888 (ORDER NO. 888)
Order No. 888 became effective in July 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 which they provide to themselves. Intra-pool transactions for power
pools were also required to be under a nondiscriminatory, pool-wide open access
tariff by March 1, 1997. Numerous parties, including PSE&G, filed requests
seeking rehearing and clarification of various aspects of Order No. 888. As a
result of those requests, FERC issued Orders No. 888-A and 888-B. Orders No.
888-A and 888-B clarified and largely reaffirmed the legal and policy bases on
which Order No. 888 was grounded. Orders No. 888-A and 888-B also provided
clarifications and modifications to the FERC's original pro forma open access
transmission tariff and process for recovery of stranded costs from wholesale
customers ordered as a result of Order No. 888. Numerous parties, including
PSE&G, have filed petitions for judicial review of these orders and these
petitions are currently pending before the United States Courts of Appeals for
the District of Columbia and the Second Circuits (see PJM).
As a result of open access mandated by Order No. 888, PSE&G and other New
Jersey utilities are facing 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, are able to
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.
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<PAGE> 40
On October 27, 1997, Old Dominion Electric Cooperative (ODEC) filed a
Complaint at FERC seeking to modify its 1992 Agreement with PSE&G for a ten-year
sale of 150 MW of capacity and energy. ODEC's Complaint argues that given the
restructuring of PJM, particularly PJM's new regional rate design which
effectively eliminates rate "pancaking" for transmission that traverses more
than one transmission system, it is unreasonable to leave intact existing
bilateral agreements that have the same effect. It therefore urges FERC to
reduce ODEC's contract capacity rate with PSE&G (reducing PSE&G's revenue by
$3-$5 million per year) to eliminate the imputed transmission charge. In an
answer filed December 1, 1997, PSE&G responded that the contract rates were
negotiated at arm's length, are fully cost justified and cannot legally be
modified absent an overriding public interest. Although it has not yet acted on
these filings, FERC appears to have summarily decided the issue in ODEC's favor
in its November 25, 1997 PJM Restructuring Order (November 25th Order) (see
discussion below). PSE&G has requested rehearing and clarification of the
November 25th Order.
PENNSYLVANIA -- NEW JERSEY -- MARYLAND INTERCONNECTION (PJM)
PSE&G is a member of PJM which integrates the bulk power generation and
transmission supply operations of 11 utilities in Pennsylvania, New Jersey,
Delaware, Maryland, Virginia and the District of Columbia, and, in turn, is
interconnected with other major electric utility companies in the northeastern
part of the United States. PJM is operated as one system and provides for the
purchase and sale of power among members on the basis of reliability of service
and operating economy. As a result, the most economical mix of generating
capability available is used to meet PJM hourly load requirements. PSE&G's
output, as shown under Electric Fuel Supply and Disposal, reflects significant
amounts of purchased power because at times it is more economical for PSE&G to
purchase power from PJM and others than to produce it. As of December 31, 1997,
the aggregate installed generating capacity of the PJM companies was 57,216 MW.
The all time record peak one-hour demand experienced by PJM was 49,406 MW which
occurred on July 15, 1997. PSE&G's capacity obligations to the PJM system vary
from year to year due to changes in system characteristics. PSE&G expects to
have sufficient installed capacity to meet its obligations during the 1998-2002
period.
PSE&G is also a party to the Mid-Atlantic Area Reliability Council which
provides for review and evaluation of plans for generation and transmission
facilities and other matters relevant to reliability of the bulk electric supply
systems in the Mid-Atlantic area.
In July 1996, the member companies of PJM, including PSE&G but excluding
PECO Energy, filed a proposal to reorganize PJM into an Independent System
Operator (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 Energy filed a separate proposal with FERC. On November 13, 1996, FERC
announced that it was rejecting the restructuring proposals of both PECO Energy
and the other PJM companies (the PJM Supporting 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. FERC issued an order on February 28, 1997, accepting
most of the PJM Supporting Companies' proposal on an interim basis, effective
April 1, 1997.
On June 2, 1997, the PJM member companies, except for PECO Energy, filed a
revised proposal with the FERC to reorganize PJM into an ISO. On June 9, 1997,
PECO Energy filed a competing proposal that continued to advocate a different
design of the energy market and transmission tariffs.
In its November 25th Order, FERC conditionally approved, effective January
1, 1998, the PJM Supporting Companies' proposal to restructure the PJM power
pool and establish an ISO consistent with the requirements of Order No. 888. The
November 25th Order specifically approved a two-tier governance structure under
which an independent 7-member Board of Managers (PJM Board) would be responsible
for supervision and oversight of the day-to-day operations of PJM; while a
Members Committee, consisting of five sectors representing generation owners,
other suppliers, transmission owners, electric distribution and end-use
customers would elect, and provide
A-15
<PAGE> 41
advice to, the PJM Board. The order also accepted the proposed zonal rate
design, subject to its being replaced by a more uniform, regional rate design
within five years. FERC also accepted the proposed locational marginal pricing
(LMP) methodology for recovery of transmission congestion costs, but
acknowledged that the lack of price certainty is a limitation of LMP and ordered
the ISO to initiate a process to address this concern. FERC subsequently
approved the ISO's request to defer implementation of LMP until April 1, 1998.
The November 25th Order also introduced a new issue that could have an
impact of approximately $3 to $5 million annually on PSE&G. FERC ordered that
all existing power sales and wheeling agreements, such as between PSE&G and
ODEC, be modified to eliminate multiple transmission charges to be consistent
with the restructured PJM. PSE&G separately, and along with the other PJM
Supporting Companies, has requested rehearing and clarification regarding this
issue and is vigorously contesting this issue. PSE&G cannot predict the final
outcome of these proceedings.
A further potential impact of PJM restructuring relates to the operation of
the Keystone-Conemaugh coal-fired electric power plants which are owned by a
joint venture consisting of PSE&G and nine other utilities. In order to assure
that the joint venture's proposed operation of these plants in the context of
the new PJM energy exchange would be consistent with antitrust law requirements,
the Antitrust Division of the DOJ was requested to indicate that it has no
present intention of taking enforcement action with respect to the joint
venture's proposed plan of operation. The DOJ responded on January 30, 1998
indicating no antitrust concerns.
NEW JERSEY GROSS RECEIPTS AND FRANCHISE TAX (NJGRT) REFORM
For a discussion of NJGRT Reform, see Note 2. Rate Matters of Notes.
GAS UNBUNDLING
For a discussion of Gas Unbundling, see Note 2. Rate Matters of Notes.
ENERGY RESOURCES AND TRADING
PSE&G has established an energy resources and trading organization to
engage in wholesale transactions in electricity and gas. For additional
information, see Qualitative and Quantitative Disclosures About Market Risk.
ENERGIS
Energis has been formed to better position Enterprise to enter the rapidly
deregulating energy market by marketing a variety of energy related products and
services to industrial and commercial customers throughout the Northeast and
Mid-Atlantic states. Energis offers 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. Energis' customers
include small businesses, department stores, schools, hospitals and
manufacturers from Maine to Maryland. For additional information, see
Qualitative and Quantitative Disclosures About Market Risk.
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 in order to
minimize surprises and give 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 Enterprise's and PSE&G's bond ratings (see Item 1.
General -- Credit Ratings).
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<PAGE> 42
RATE MATTERS
For discussions of the Energy Master Plan, Stranded Costs, Securitization,
Depreciation, NJGRT Reform, Settlement of Certain Regulatory Issues, the LGAC,
the LEAC, the Demand Side Adjustment Factor, the Remediation Adjustment Charge,
Consolidated Tax Benefits, OPEB, and other rate matters, see Note 2. Rate
Matters of Notes.
ACCOUNTING ISSUES
For a discussion of significant accounting policies in regard to regulation
of PSE&G, including discussion of Statement of Financial Accounting Standards
(SFAS) 71, "Accounting for the Effects of Certain Types of Regulation," and
Emerging Issues Task Force (EITF) Issue 97-4, "Deregulation for the Pricing of
Electricity -- Issues Related to the Application of FASB Statements No. 71 and
101," see Note 1. Organization and Summary of Significant Accounting Policies of
Notes.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
130, "Reporting Comprehensive Income" (SFAS 130), which is effective for fiscal
years beginning after December 15, 1997. SFAS 130 requires that all items
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement displayed with the
same prominence as other financial statements. It also requires that an
enterprise classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position.
Also in June 1997, the FASB issued SFAS 131, "Disclosures about Segments of
an Enterprise and Related Information" (SFAS 131), which is effective for
financial statements for periods beginning after December 15, 1997. This
Statement need not be applied to interim financial statements in the initial
year of its application. SFAS 131 supersedes SFAS 14, "Financial Reporting for
Segments of a Business Enterprise" and requires that companies disclose segment
data based on how management makes decisions about allocating resources to
segments and measuring their performance.
The adoption of SFAS 130 and SFAS 131 is not expected to have a material
impact on the financial condition, results of operations and net cash flows of
Enterprise or PSE&G.
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. 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 and net cash flows (see Note
10. Commitments and Contingent Liabilities of Notes).
FUTURE OUTLOOK
Enterprise and PSE&G will face additional challenges with the continuing
emergence of competition in 1998. Depending upon the BPU's actions in the Energy
Master Plan proceedings, PSE&G's customers could begin choosing their energy
suppliers as early as October 1998 with their choices becoming effective January
1999. In light of this, Enterprise and PSE&G are seeking to ensure that the new
rules for electric industry restructuring provide
A-17
<PAGE> 43
customer choice and lower cost without endangering public safety or compromising
New Jersey's stringent environmental standards or the reliability of electric
service.
Further expansion in the non-regulated businesses of Enterprise will be
necessary to allow Enterprise to achieve its future growth objectives. To this
end, Enterprise's strategy will be to rely to a large extent on CEA, PSRC and
Energis. CEA will continue to focus on the international market. PSRC plans to
continue to make investments in the energy sector. Energis plans to continue to
market new and existing energy products and services to commercial and
industrial business customers throughout the Northeast and Mid-Atlantic states.
Deregulation will also place a greater emphasis on lowering electricity
prices and costs. If PSE&G's Energy Master Plan proposal is adopted, rates will
be frozen for seven years. PSE&G will continue to bear the risk of changes in
fuel costs. Enterprise's wholesale energy trading and resource organization will
continue to develop strategies to reduce costs, increase profits and manage both
commodity and financial risks. Expansion of other non-traditional utility areas,
such as the appliance service business within and outside of New Jersey, will
also be key to the future of Enterprise and PSE&G.
Enterprise is continuing to emphasize operational excellence as a key
business objective. While Enterprise and PSE&G have improved productivity and
efficiencies, efforts continue to improve response speed, reliability, employee
safety, customer satisfaction, quality, cost management and
cost-competitiveness.
Enterprise has paid quarterly dividends in each year commencing with the
corporate restructuring of PSE&G when Enterprise became the owner of all the
outstanding common stock of PSE&G. While a key objective of the Board of
Directors of Enterprise is to keep the Common Stock dividend secure, amounts and
dates of such dividends as may be declared will necessarily be dependent upon
Enterprise's future earnings, financial requirements and other factors including
the receipt of dividend payments from its subsidiaries.
Enterprise and PSE&G cannot predict the ultimate outcome of the ongoing
changes in the utility industry. Decisions in the Energy Master Plan proceedings
including those which will impact PSE&G's recovery of stranded costs and ability
to use securitization could have a material adverse impact on Enterprise's and
PSE&G's financial condition, results of operations and net cash flows.
Enterprise and PSE&G believe that the end result will involve a fundamental
change in the way their businesses are conducted. 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 (see Note 1. Organization and
Summary of Significant Accounting Policies and Note 2. Rate Matters of Notes).
FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the Act) provides a
"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", "hypothetical", "potential" 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-18
<PAGE> 44
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.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Information relating to quantitative and qualitative disclosures about
market risk is set forth under the caption "Qualitative and Quantitative
Disclosures About Market Risk" in Management's Discussion and Analysis of
Financial Condition and Results of Operations and "Financial Instruments" in
Note 1. Organization and Summary of Significant Accounting Policies of the Notes
to Consolidated Financial Statements. Such information is incorporated herein by
reference.
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<PAGE> 45
(THIS PAGE INTENTIONALLY LEFT BLANK)
A-20
<PAGE> 46
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
OPERATING REVENUES
Electric.................................................. $ 4,188 $ 3,944 $ 4,021
Gas....................................................... 1,937 1,881 1,686
Nonutility Activities..................................... 245 216 186
-------- -------- --------
TOTAL OPERATING REVENUES.......................... 6,370 6,041 5,893
-------- -------- --------
OPERATING EXPENSES
Operation
Fuel for Electric Generation and Interchanged Power....... 1,179 919 892
Gas Purchased............................................. 1,101 1,118 962
Other..................................................... 1,082 1,053 1,008
Maintenance................................................. 282 318 313
Depreciation and Amortization............................... 630 607 597
Taxes
Federal Income Taxes (Note 12)............................ 329 290 338
New Jersey Gross Receipts Taxes........................... 576 598 613
Other..................................................... 76 81 77
-------- -------- --------
TOTAL OPERATING EXPENSES.......................... 5,255 4,984 4,800
-------- -------- --------
OPERATING INCOME............................................ 1,115 1,057 1,093
-------- -------- --------
OTHER INCOME AND DEDUCTIONS
Settlement of Salem Litigation -- Net of Applicable Taxes
of $29................................................. (53) -- --
Other -- net.............................................. 7 (2) 13
-------- -------- --------
Total Other Income and Deductions................. (46) (2) 13
-------- -------- --------
INCOME BEFORE INTEREST CHARGES AND DIVIDENDS ON PREFERRED
SECURITIES................................................ 1,069 1,055 1,106
-------- -------- --------
INTEREST EXPENSE AND PREFERRED DIVIDENDS
Interest Expense (Note 7)................................. 470 453 464
Allowance for Funds Used During Construction -- Debt and
Capitalized Interest................................... (20) (18) (33)
Preferred Securities Dividend Requirements (Note 6)....... 56 50 48
Net Loss (Gain) on Preferred Stock Redemptions (Note 6)... 3 (18) --
-------- -------- --------
Total Interest Expense and Preferred Dividends.... 509 467 479
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS........................... 560 588 627
Discontinued Operations -- Net of taxes (Note 16):
Discontinued Operations................................... -- 11 35
Gain on Sale of Discontinued Operations................... -- 13 --
-------- -------- --------
NET INCOME.................................................. $ 560 $ 612 $ 662
======== ======== ========
AVERAGE SHARES OF COMMON STOCK
(OUTSTANDING) (000's)..................................... 231,986 242,401 244,698
EARNINGS PER AVERAGE SHARE (Basic and Diluted)
Income From Continuing Operations......................... $ 2.41 $ 2.42 $ 2.57
Income From Discontinued Operations....................... -- 0.04 0.14
Gain on Sale of Discontinued Operations................... -- 0.06 --
-------- -------- --------
TOTAL EARNINGS PER AVERAGE SHARE.................. $ 2.41 $ 2.52 $ 2.71
======== ======== ========
DIVIDENDS PAID PER SHARE OF COMMON STOCK.................... $ 2.16 $ 2.16 $ 2.16
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
A-21
<PAGE> 47
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS
ASSETS
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
<S> <C> <C>
UTILITY PLANT -- Original cost (Note 15)
Electric.................................................. $13,692 $13,314
Gas....................................................... 2,697 2,556
Common.................................................... 558 530
------- -------
Total............................................. 16,947 16,400
Less: Accumulated depreciation and amortization........... 6,463 5,889
------- -------
Net............................................... 10,484 10,511
Nuclear Fuel in Service, net of accumulated
amortization -- 1997, $302; 1996, $259................. 216 199
------- -------
Net Utility Plant in Service...................... 10,700 10,710
Construction Work in Progress, including Nuclear Fuel in
Process -- 1997, $60; 1996, $70........................ 326 445
Plant Held for Future Use................................. 24 24
------- -------
Net Utility Plant................................. 11,050 11,179
------- -------
INVESTMENTS AND OTHER NONCURRENT ASSETS (Notes 4, 5, 8 and
11)
Long-Term Investments, net of amortization -- 1997, $21;
1996, $13, and net of valuation allowances -- 1997,
$10; 1996, $10......................................... 2,873 1,854
Nuclear Decommissioning and Other Special Funds........... 492 382
Other Noncurrent Assets, net of amortization -- 1997, $16;
1996, $12.............................................. 167 116
------- -------
Total Investments and Other Noncurrent Assets..... 3,532 2,352
------- -------
CURRENT ASSETS
Cash and Cash Equivalents (Note 9)........................ 83 279
Accounts Receivable:
Customer Accounts Receivable........................... 520 520
Other Accounts Receivable.............................. 293 225
Less: Allowance for Doubtful Accounts.................. 41 46
Unbilled Revenues......................................... 270 248
Fuel, at average cost..................................... 310 313
Materials and Supplies, at average cost, net of inventory
valuation reserves -- 1997, $12; 1996, $16............. 142 148
Miscellaneous Current Assets.............................. 86 57
------- -------
Total Current Assets.............................. 1,663 1,744
------- -------
DEFERRED DEBITS (Notes 2 and 3)
Unamortized Debt Expense.................................... 136 139
Deferred OPEB Costs......................................... 289 226
Unrecovered Environmental Costs............................. 122 126
Underrecovered Electric Energy and Gas Costs................ 167 176
Unrecovered SFAS 109 Deferred Income Taxes (Note 12)........ 725 752
Deferred Demand Side Management Costs....................... 116 40
Other....................................................... 143 181
------- -------
Total Deferred Debits..................................... 1,698 1,640
------- -------
Total............................................. $17,943 $16,915
======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
A-22
<PAGE> 48
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
<S> <C> <C>
CAPITALIZATION (Notes 6 and 7)
Common Stockholders' Equity:
Common Stock........................................... $ 3,603 $ 3,627
Retained Earnings...................................... 1,623 1,586
Foreign Currency Translation Adjustment................ (15) --
------- -------
Total Common Stockholders' Equity................. 5,211 5,213
Subsidiaries' Preferred Securities:
Preferred Stock Without Mandatory Redemption........... 95 114
Preferred Stock With Mandatory Redemption.............. 75 150
Monthly Guaranteed Preferred Beneficial Interest in
PSE&G's Subordinated Debentures....................... 210 210
Quarterly Guaranteed Preferred Beneficial Interest in
PSE&G's Subordinated Debentures....................... 303 208
Long-Term Debt............................................ 4,873 4,580
------- -------
Total Capitalization.............................. 10,767 10,475
------- -------
OTHER LONG-TERM LIABILITIES
Decontamination and Decommissioning Costs (Note 11)....... 43 47
Environmental Costs (Notes 2 and 10)...................... 73 86
Capital Lease Obligations (Note 5)........................ 52 52
------- -------
Total Other Long-Term Liabilities................. 168 185
------- -------
CURRENT LIABILITIES
Long-Term Debt due within one year........................ 340 548
Commercial Paper and Loans (Note 7)....................... 1,448 638
Accounts Payable.......................................... 686 697
Other..................................................... 353 389
------- -------
Total Current Liabilities......................... 2,827 2,272
------- -------
DEFERRED CREDITS
Deferred Income Taxes (Note 12)........................... 3,394 3,250
Deferred Investment Tax Credits........................... 343 361
Deferred OPEB Costs (Notes 1, 2 and 14)................... 289 226
Other..................................................... 155 146
------- -------
Total Deferred Credits............................ 4,181 3,983
------- -------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 10)............ -- --
------- -------
Total............................................. $17,943 $16,915
======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE> 49
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 560 $ 612 $ 662
Adjustments to reconcile net income to net cash flows from
operating activities:
Depreciation and Amortization........................... 630 607 597
Amortization of Nuclear Fuel............................ 60 60 75
Recovery (deferral) of Electric Energy and Gas
Costs -- net........................................... 9 (5) 2
Unrealized Earnings on Investments -- net............... (56) (7) (47)
Provision for Deferred Income Taxes -- net.............. 47 65 134
Investment Tax Credits -- net........................... (17) (29) (20)
Allowance for Funds Used During Construction -- Debt and
Equity (AFDC), and Capitalized Interest................ (20) (18) (38)
Proceeds from Leasing Activities........................ 71 89 38
Changes in certain current assets and liabilities:
Net increase in Accounts Receivable and Unbilled
Revenues............................................. (95) (12) (169)
Net decrease (increase) in Inventory -- Fuel and
Materials and Supplies............................... 9 (64) 19
Net (decrease) increase in Accounts Payable........... (11) 60 99
Net (decrease) increase in Provision for Rate
Refund............................................... (80) 75 (8)
Net change in Prepaid/Other Accrued Taxes............. 22 1 (18)
Net change in Other Current Assets and Liabilities.... (7) 11 20
Other................................................... (27) (29) 68
Net cash provided by operating
activities -- Discontinued Operations.................. -- 54 104
------- ------- ------
Net cash provided by operating activities............. 1,095 1,470 1,518
------- ------- ------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Utility Plant, excluding AFDC................ (542) (586) (650)
Net (increase) decrease in Long-Term Investments and Real
Estate.................................................. (914) 5 (66)
Contribution to Decommissioning Funds and Other Special
Funds................................................... (63) (29) (29)
Cost of Plant Removal -- net.............................. (28) (34) (30)
Other..................................................... (67) (18) (47)
Net Proceeds from the Sale of Discontinued Operations..... -- 704 --
Change in Net Assets -- Discontinued Operations........... -- (51) (113)
------- ------- ------
Net cash used in investing activities................. (1,614) (9) (935)
------- ------- ------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in Short-Term Debt........................... 810 71 358
Issuance of Long-Term Debt................................ 785 374 156
Redemption of Long-Term Debt.............................. (700) (808) (556)
Long-Term Debt Issuance and Redemption Costs.............. (11) (40) (14)
Redemption of Preferred Stock............................. (94) (212) (60)
Issuance of Preferred Securities of Subsidiaries.......... 95 208 60
Retirement of Common Stock................................ (43) (307) --
Cash Dividends Paid on Common Stock....................... (501) (523) (528)
Other..................................................... (18) (7) (2)
------- ------- ------
Net cash provided by (used in) financing activities... 323 (1,244) (586)
------- ------- ------
Net (decrease) increase in Cash and Cash Equivalents........ (196) 217 (3)
Cash and Cash Equivalents at Beginning of Period............ 279 62 65
------- ------- ------
Cash and Cash Equivalents at End of Period.................. $ 83 $ 279 $ 62
======= ======= ======
Income Taxes Paid........................................... $ 170 $ 157 $ 185
Interest Paid............................................... $ 416 $ 463 $ 481
</TABLE>
See Notes to Consolidated Financial Statements.
A-24
<PAGE> 50
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
FOREIGN
CURRENCY
COMMON RETAINED TRANSLATION
STOCK EARNINGS ADJUSTMENT TOTAL
------ -------- ----------- ------
<S> <C> <C> <C> <C>
BALANCE AS OF JANUARY 1, 1995............................ $3,801 $1,505 $ -- $5,306
Net Income............................................. -- 662 -- 662
Cash Dividends on Common Stock......................... -- (528) -- (528)
Preferred Securities Issuance Expenses................. -- (2) -- (2)
------ ------ ---- ------
BALANCE AS OF DECEMBER 31, 1995.......................... 3,801 1,637 -- 5,438
------ ------ ---- ------
Net Income............................................. -- 612 -- 612
Cash Dividends on Common Stock......................... -- (523) -- (523)
Retirement of Common Stock............................. (174) (133) -- (307)
Preferred Securities Issuance Expenses................. -- (7) -- (7)
------ ------ ---- ------
BALANCE AS OF DECEMBER 31, 1996.......................... 3,627 1,586 -- 5,213
------ ------ ---- ------
Net Income............................................. -- 560 -- 560
Cash Dividends on Common Stock......................... -- (501) -- (501)
Retirement of Common Stock............................. (24) (19) -- (43)
Currency Translation Adjustment........................ -- -- (15) (15)
Preferred Securities Issuance Expenses................. -- (3) -- (3)
------ ------ ---- ------
BALANCE AS OF DECEMBER 31, 1997.......................... $3,603 $1,623 $(15) $5,211
====== ====== ==== ======
</TABLE>
- ---------------
Note: The ability of Enterprise to declare and pay dividends is contingent upon
its receipt of dividends 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, 1997, 1996 and 1995 was $10
million. There are no restrictions on EDHI's retained earnings.
See Notes to Consolidated Financial Statements.
A-25
<PAGE> 51
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Public Service Enterprise Group Incorporated (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 within 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
projects in the generation, transmission and distribution of energy, including
cogeneration and independent power production (IPP) facilities, electric
distribution companies, exempt wholesale generators (EWGs) and foreign utility
companies (FUCOs); Public Service Resources Corporation (PSRC), which has made
primarily passive investments; Energis Resources Incorporated (Energis), which
provides a variety of energy related services to industrial and commercial
customers both within and outside of PSE&G's traditional service territory 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's operating subsidiaries, except Energis, 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
PSRC, CEA and their subsidiaries, which debt is guaranteed by EDHI, but without
direct support from Enterprise. EGDC 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 (SFAS) 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 charged or
credited to income (see Note 3. Regulatory Assets and Liabilities). PSE&G
continues to meet the requirements for application of SFAS 71.
The regulatory changes proposed in the New Jersey Energy Master Plan
(Energy Master Plan) will create a shift from regulated pricing to competitive
market pricing for electric generation. Assuming enactment of the required
enabling legislation, these proposed changes will limit Enterprise's and PSE&G's
ability to continue to meet the applicable criteria of SFAS 71 for the
generation portion of PSE&G's business. If PSE&G were to discontinue the
application of SFAS 71, there could be an extraordinary, non-cash charge to
operations that could
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<PAGE> 52
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
be material to the financial position and results of operations of Enterprise
and PSE&G. However, if PSE&G's proposal in response to the Energy Master Plan is
approved by the BPU as filed, PSE&G does not expect such a charge to occur.
In response to the continuing deregulation of the electric utility
industry, the Financial Accounting Standards Board (FASB), through its Emerging
Issues Task Force (EITF), undertook an initiative designated as EITF Issue 97-4,
"Deregulation of the Pricing of Electricity -- Issues Related to the Application
of FASB Statements No. 71 and No. 101" (EITF 97-4). The purpose of this
initiative was to develop guidance for the application of SFAS 101, "Regulated
Enterprises Accounting for the Discontinuation of Application of FASB Statement
No. 71" (SFAS 101). SFAS 101 addresses how an enterprise that ceases to meet the
criteria for application of SFAS 71 to all or part of its operations should
report that event in its general-purpose financial statements.
The EITF's consensus on this issue is that an enterprise is required to
discontinue the application of SFAS 71 for the deregulated portion of its
business once legislation is passed or a rate order is issued which contains a
sufficiently detailed plan to transition from regulated pricing to market
pricing. In addition, the EITF concluded that an enterprise may continue to
carry on its books the regulatory assets and liabilities of the portion of the
business to which SFAS 101 is being applied, provided that regulators have
approved a regulated cash flow stream. This also applies to costs or obligations
not yet recorded as regulatory assets or liabilities regardless of when
incurred. The discontinuance of SFAS 71 also requires an enterprise to
reevaluate the impact of SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121). SFAS
121 requires that regulatory assets be written off once they are no longer
probable of recovery and that impairment losses be recorded for long-lived
assets when related future cash flows or appraised value are less than the
carrying value of the assets.
The impact to Enterprise and PSE&G will be determined based on the outcome
of the Energy Master Plan proceedings, including PSE&G's proposal filed in
response to those proceedings. Under its proposal, PSE&G would have the
opportunity, through various mechanisms, to recover its electric generation
related potentially stranded costs. Management cannot predict the outcome of the
Energy Master Plan proceeding, its related legislative process or the related
impact of EITF 97-4 on Enterprise's and PSE&G's future financial condition,
results of operations and net cash flows. However, depending on legislative and
regulatory actions taken in New Jersey with respect to electric utility
deregulation, there could be a material adverse effect on such results (see Note
2. Rate Matters).
PSE&G has certain regulatory assets resulting from the use of a level of
depreciation expense in the ratemaking process that differs from 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 and
net cash flows of Enterprise and PSE&G could be material (see Note 2. Rate
Matters).
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 did not have a
material impact on the financial condition, results of operations and net cash
flows of Enterprise and PSE&G. For additional information concerning certain of
PSE&G's Environmental Remediation Liabilities, see Note 2. Rate Matters and Note
10. Commitments and Contingent Liabilities.
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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. Enterprise and its subsidiaries consolidate those entities
in which they have a controlling interest. All significant intercompany accounts
and transactions are eliminated in consolidation. Those entities in which
Enterprise does not have a controlling interest are being accounted for under
the equity method of accounting. For investments in which significant influence
does not exist, the cost method of accounting is applied. 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 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 1997 and 1996
and 3.52% in 1995 (see Note 2. Rate Matters).
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 11. 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 (see Note 2. Rate Matters and Note 11. PSE&G
Nuclear Decommissioning).
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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 1997, 1996 and 1995 were
5.71%, 5.83% and 6.98%, 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. The fuel component of the LEAC rate was frozen for 1997 and
1998 as part of the December 31st Order and PSE&G bears all risks associated
with fuel prices (see Note 2. Rate Matters).
Any Electric Levelized Energy Adjustment Clause (LEAC) and Levelized Gas
Adjustment Clause (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. Effective January
1, 1998, the amount included for LEAC under/overrecovery represents the
difference between fuel related revenues and fuel related expenses which are
comprised of the cost of generation and interchanged power at the
Pennsylvania -- New Jersey -- Maryland Interconnection (PJM) market clearing
price (see Note 2. Rate Matters).
FINANCIAL INSTRUMENTS -- PSE&G
Under its commodity hedging program, PSE&G may enter into certain contracts
with counterparties to manage exposure to electric and natural gas price
volatility. These contracts, in conjunction with owned electric generating
capacity, are designed to cover estimated electric and gas customer commitments.
PSE&G's accounting policy for physical instruments is to recognize gains and
losses in income upon settlement of the contracts. PSE&G's accounting policy for
financial instruments is to mark-to-market and record unrealized gains and
losses on hedged transactions as a component of stockholder's equity while
unrealized gains and losses on speculative transactions are recorded in results
of operations. These financial instruments and the effect of marking to market
do not have a material impact on PSE&G's financial condition, results of
operations and net cash flows. PSE&G does not hold any financial instruments of
a leveraged nature.
FINANCIAL INSTRUMENTS -- EDHI
Gains and losses on hedges of existing assets or liabilities are included
in the carrying amounts of those assets and liabilities and are ultimately
recognized in income as part of those carrying amounts. Gains and losses related
to qualifying hedges of firm commitments or anticipated transactions also are
deferred and recognized in income or as adjustments of carrying amounts when the
hedged transaction occurs (see Note 8. Financial Instruments).
FOREIGN CURRENCY TRANSLATION -- EDHI
The assets and liabilities of EDHI's foreign operations are translated into
U.S. dollars at current exchange rates and revenues and expenses are translated
at average exchange rates for the year. Resulting translation adjustments are
reflected as a separate component of stockholders' equity.
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PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Transaction gains and losses that arise from exchange rate fluctuations on
transactions denominated in a currency other than the functional currency,
except those transactions which operate as a hedge of an identifiable foreign
currency commitment or as a hedge of a foreign currency investment position, are
included in the results of operations as incurred.
INCOME TAXES
Enterprise and its subsidiaries file a consolidated Federal income tax
return and income taxes are allocated to Enterprise's subsidiaries based on the
taxable income or loss of each subsidiary. Investment tax credits were deferred
in prior years and are being 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 commenced employment after January 1, 1997
and certain employees of PSE&G's affiliated companies are covered by a cash
balance pension plan. The policy is to fund pension costs accrued. The funding
policy for the plan year 1997 was modified to provide annual funding not to
exceed the maximum tax deductible amount. Contributions will be made each year
based on targeted funding levels for the plan (see Note 13. Pension Plan).
In 1993, Enterprise and PSE&G adopted SFAS 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 income during the years in which employees render service
(see Note 2. Rate Matters and Note 14. Postretirement Benefits Other Than
Pensions).
IMPAIRMENT OF LONG-LIVED ASSETS
On January 1, 1996, Enterprise and PSE&G adopted 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 and 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.
STOCK-BASED COMPENSATION
SFAS No. 123 "Accounting for Stock-Based Compensation" (SFAS 123) was
effective for fiscal years commencing 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 pro forma 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 the methodology prescribed in SFAS 123, there would
have been a charge to earnings of approximately $0.1 million with no impact on
earnings per share.
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PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS PER SHARE
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share", which
is effective for financial statements issued after December 15, 1997. Under the
new standard, basic earnings per share is computed as earnings available to
common stockholders divided by weighted average shares outstanding excluding the
dilutive effect of potential common shares. Diluted earnings per share includes
the dilutive effect of potential common shares. Enterprise has an existing stock
option plan which allows for options to be granted on a periodic basis. These
potential common shares had no impact on diluted earnings per share for the
years ended December 31, 1997, 1996 and 1995.
NOTE 2. RATE MATTERS
NEW JERSEY ENERGY MASTER PLAN (ENERGY MASTER PLAN)
On April 30, 1997, the BPU issued its final report regarding Phase II
(final Phase II report) of the Energy Master Plan addressing wholesale and
retail electric competition in New Jersey. The final Phase II report was
approved by the Governor and Legislature in July 1997. In accordance with the
final Phase II report, PSE&G filed a proposal regarding competition and rates
with the BPU on July 15, 1997. The BPU is in the process of reviewing the filing
and holding public hearings. The hearings on PSE&G's proposal commenced in early
February 1998 and are expected to conclude during the second quarter of 1998,
with a decision expected by July 1998. Legislation providing the BPU with
requisite authority to implement such competition is necessary.
The final Phase II report included the following key provisions:
- Beginning January 1, 1999, 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 continuing to be 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 continue to be regulated by the
BPU.
- The phase-in period for customers' choice of energy suppliers is to
include 10% in October 1998, 20% by January 1999, 35% by April 1999, 50%
by October 1999, 75% by April 2000, and 100% by July 2000.
- 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 services, such as equipment repair and service contracts, in a
competitive marketplace.
- 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 activities to be functionally separated and
operated at arms length from the transmission, distribution and customer
service activities 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 proposed that
retail competition in New Jersey be
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PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
introduced approximately 12 to 18 months after the implementation of full
wholesale competition as provided by FERC Order No. 888.
- Customer protections will 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 will have an opportunity for a limited number of years to
recover through rates stranded costs associated with generating capacity
investment and independent power contract costs made prior to the advent
of competition. Utilities are obligated to take all reasonably available
measures to mitigate stranded costs caused by the introduction of retail
competition. A market transition charge is to be established for a
limited time of 4-8 years to provide for the recovery of non-mitigated
stranded costs and would be a separate component of a customer's electric
bill.
- The issue of securitization of stranded costs is to be explored.
- There is a 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.
- Near-term rate reductions in retail electric rates of 5-10% are required.
- A rate unbundling plan, stranded cost status report and restructuring
plan to be filed by each utility by July 15, 1997.
- The final Phase II report endorsed environmental disclosure by power
suppliers to provide consumers with information necessary to choose
cleaner sources of power available in the marketplace. The information
will enable verification of claimed emission rates, which will be
explored by a Consumer Protection Task Force.
PSE&G's proposal in response to the final Phase II report of the Energy
Master Plan included the following key elements:
- A rate decrease of between 5% and 10%, effective January 1, 1999,
dependent upon BPU approval of several key elements of the proposal.
- Allowing all customers in all classes to register for their choice of
energy supplier beginning October 1, 1998. Those customers choosing a
supplier other than PSE&G would be permitted to switch effective January
1, 1999.
- A transition period of seven years with basic tariff rates capped during
that period. During the transition period, PSE&G would maintain
responsibility for system reliability of energy and capacity supply.
- Recovery of transition costs through asset securitization, restructuring
of certain non-utility generation contracts and depreciation accounting
changes (see Stranded Costs, Securitization and Depreciation below).
- Recovery of mandated societal costs, such as nuclear decommissioning and
Demand Side Management (DSM), would be adjusted based on changes in these
costs.
- Discontinuation of PSE&G's LEAC effective December 31, 1998. PSE&G would
be responsible for all risks associated with fuel prices, changes in
operation and maintenance expenses and mitigation of the transition costs
of non-securitized generation production assets within the price capped
rates.
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PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- Transfer of PSE&G's nuclear and fossil generation assets, at net book
value, to a separate entity functionally independent of PSE&G at the
conclusion of the transition period.
- PSE&G would file a rate case or a plan for a form of alternative
regulation for its electric distribution delivery service functions one
year prior to the end of the transition period.
- At the end of the transition period, responsibility for generation
reliability would shift to the marketplace and PSE&G would retain its
obligation to connect and deliver energy and would offer basic generation
service.
Pursuant to actions taken by the BPU under its Energy Master Plan
proceeding, various BPU-sponsored working groups have been created to address
and recommend solutions regarding certain issues regarding restructuring. PSE&G
is participating in these working groups including the Consumer Protection Task
Force, Phase-In Mechanisms Working Group, Customer Services Working Group and
DSM and Renewables Working Group. In addition, PSE&G is participating in BPU
proceedings dealing with certain generic issues, including exit fees, market
power, affiliate relationships, mechanics of customer phase-in and fair
competition. The working groups and the generic issues proceedings are running
concurrently with the Energy Master Plan proceedings.
In an Order dated June 25, 1997, the BPU commenced management audits of all
New Jersey electric utilities, with the assistance of one or more consulting
firms, under the direction of its own audit staff. The audit process included,
but was not limited to, focused reviews of electric utility filings in response
to the Energy Master Plan. The management audit process for PSE&G was concluded
in December 1997 with a report filed by the management consulting firms which
performed the audit on behalf of the BPU. A second report on restructuring is
yet to be filed. The audit report, which was approved by the BPU on January 29,
1998, among other things:
- Supported a consumer rate reduction target of 8.4% to 11.7% and the use
of an energy and capacity credit mechanism on customers' bills.
- Substantiated $2.9 billion of PSE&G's $3.9 billion stranded cost
estimate, challenging certain assumptions as well as $230 million of
capital additions incurred since 1992.
- Agreed with the use of securitization as a means of financing stranded
costs in order to obtain rate reductions, recommending $2.2 billion
(compared to the $2.5 billion requested by PSE&G) of securitization.
- Noted that an incentive or true-up mechanism may be appropriate to reduce
the risk of significant overrecovery of stranded costs given the
uncertainty surrounding load, market prices and the potential for
mitigation.
The BPU can adopt, reject or modify the audit report's results in its
decision on PSE&G's proposal. PSE&G cannot predict to what extent the BPU will
rely on the results of the audit report nor what the ultimate outcome of the
Energy Master Plan proceedings will be. The decision of the BPU in the Energy
Master Plan proceeding and the legislation to be adopted by the New Jersey
Legislature required to implement certain aspects of electric restructuring in
the State will establish the industry rules for the future. These actions are
expected to fundamentally change the electric industry in the State by
introducing retail competition to replace the utilities' former monopoly
position and potentially requiring or resulting in the separation or sale of
generation assets. Depending upon the outcome of these proceedings, these
fundamental industry changes could have a material adverse effect on
Enterprise's and PSE&G's financial condition, results of operations and net cash
flows. Enterprise and PSE&G cannot predict the outcome of this matter.
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PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STRANDED COSTS
Stranded costs represent the portion of the book value of generation
related assets or the portion of payments under power purchase contracts which
are in excess of their value in a competitive deregulated marketplace. PSE&G has
identified its potentially stranded costs associated with fossil and nuclear
generating stations at $3.9 billion, based on certain assumptions, including
future market prices of electricity and performance of generating units. Changes
in these assumptions could materially alter the estimated amount of potentially
stranded costs.
Recoverability of these costs is largely dependent on the transition rules
to be established by regulators. PSE&G has proposed to securitize $2.5 billion
of these costs, with the remainder to be mitigated through cost saving measures
during a transition period of seven years. In addition, PSE&G is seeking to
restructure certain of its BPU approved contracts with Non-utility Generators
(NUGs), which are estimated to be $1.6 billion above assumed future market
prices. As presently proposed, the Energy Master Plan would allow recovery of
these restructuring costs in rates. Since the Energy Master Plan proceeding is
still in progress, the issue of securitization and the extent of its application
have not been determined; and recognizing the potential need for legislative
action, management cannot predict the extent to which regulators will allow
recovery of such costs. As noted above, the management audit report identified
$2.9 billion of stranded costs as compared to the $3.9 billion estimated by
PSE&G. The decision of the BPU in this matter could have a material adverse
effect on Enterprise's and PSE&G's financial condition, results of operations
and net cash flows.
SECURITIZATION
In its Energy Master Plan proposal, PSE&G has proposed to securitize $2.5
billion of its potentially stranded costs through the issuance of transition
bonds with an estimated term of 15 years. Securitization is a method of
refinancing potentially stranded costs with lower cost debt. The credit quality
of the debt would be enhanced via enabling State legislation and approval by the
BPU of an irrevocable, non-bypassable charge to service the interest and
principal payments on the debt. The use of securitization as a means to reduce
rates depends on enabling legislation, which the New Jersey Legislature is not
expected to consider prior to the second quarter of 1998. If legislative
approval is not granted, PSE&G will alter its Energy Master Plan proposal and
projected rate reduction range. Since the Energy Master Plan proceeding is still
in progress, the issue of securitization and the extent of its application have
not been determined; and recognizing the potential need for legislative action,
management cannot predict the extent to which regulators will allow the use of
such securitization for recovery of stranded costs. As noted above, the
management audit report recommended $2.2 billion of securitization. The decision
of the BPU and/or the related legislative action required in this matter could
have a material adverse effect on Enterprise's and PSE&G's financial condition,
results of operations and net cash flows.
DEPRECIATION
In its Energy Master Plan proposal, PSE&G has proposed to lengthen the
depreciable lives of its electric distribution assets from 28 to 45 years. These
assets are expected to remain regulated. The excess depreciation reserve,
calculated based on this change in depreciable lives, would be amortized over a
seven year transition period. If PSE&G's plan is adopted as proposed, it would
result in a reduction of annual depreciation expense of $116 million during such
transition period and $35 million thereafter over the remaining life of these
assets.
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PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 (Ratepayer Advocate) addressing (1) the cost impact of the
1995 shutdown of Salem Nuclear Generating Station (Salem) Units 1 and 2 (Salem 1
and 2), including the "used and useful" issue related to the units through
December 31, 1998; (2) the recovery of certain replacement power costs
associated with the 1994 Salem 1 outage; and (3) 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 recorded a charge of
$83.9 million for bill credits to electric customers who received credits in
January and February 1997. PSE&G also agreed to forego recovery of $12 million
associated with energy costs that previously had been deferred. The resulting
after-tax earnings loss of $62 million or 26 cents per share of Enterprise
Common Stock was previously recorded ($59 million or 25 cents per share in the
third quarter of 1996 and $3 million or 1 cent per share in 1995).
Under the terms of the December 31st Order, Salem 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 Generating Station (Hope
Creek) and Peach Bottom Atomic Power Station (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 10. Commitments and Contingent Liabilities). In addition, the
energy component of PSE&G's LEAC was fixed at its existing level with no
increase to customers until at least January 1999 (see Electric Levelized Energy
Adjustment Clause/Demand Side Adjustment Factor below) with PSE&G responsible
for all risks associated with fuel prices. 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 million ($91
million as of December 31, 1997) 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 (see discussion of the Energy Master
Plan above).
In addition to the resolution of the Salem "used and useful" issue, the
December 31st Order addressed 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 1 in
1994. The December 31st Order required PSE&G to reduce its underrecovered LEAC
balance by $7 million related to that outage. 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 during January and February 1997. In addition, PSE&G reduced its
underrecovered LEAC balance by $5 million related to the recovery of capacity
costs.
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 created a $30 million revolving
economic development fund with emphasis on stimulating jobs and developing high
technology projects in urban
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PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
areas. Second, PSE&G will continue to provide incentives to encourage local
public housing authorities to replace up to 4,000 refrigerators a year. Third,
PSE&G committed $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. Notices of
Dismissal of Appeal were filed by the Intervenor's group on August 1, 1997 with
the Superior Court of New Jersey, Appellate Division.
LEVELIZED GAS ADJUSTMENT CLAUSE (LGAC)
In November 1996, the BPU approved an approximate $80 million increase
based upon a modified Interim Stipulation in the LGAC proceeding. The monthly
pricing methodology for Large Volume Gas (LVG) and General Service Gas (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 over collection of gas costs from those customer classes and was
apportioned based on those customers' billed usage during that period. On April
2, 1997, the BPU approved PSE&G's LGAC stipulation. The interim residential LGAC
charge, approved in November 1996, continued through December 31, 1997.
On July 30, 1997, the BPU authorized PSE&G to hedge or lock-in up to 50% of
its residential natural gas portfolio, which may be accomplished using either
physical or financial hedging mechanisms, beginning with the 1997-1998 heating
season. Such hedges are intended to provide price stability for residential
customers (see Note 8. Financial Instruments).
On November 14, 1997, PSE&G filed its 1997/98 LGAC petition with the BPU
requesting a $45 million increase on an annual basis in its LGAC for the period
January 1, 1998 to December 31, 1998. This increase, as filed, amounts to
approximately 4.8% on a typical residential bill. Public hearings were held on
February 3, 1998. On February 18, 1998, the BPU approved a Stipulation agreed to
by the parties in the proceeding. The Stipulation provides for an interim
increase in LGAC revenues of approximately $31 million, excluding State sales
and use tax. This represents an increase of 3.5% on a typical residential bill.
The parties will continue to litigate and PSE&G cannot predict the final outcome
of this proceeding.
ELECTRIC LEVELIZED ENERGY ADJUSTMENT CLAUSE (LEAC)/DEMAND SIDE ADJUSTMENT FACTOR
(DSAF)
As discussed above, the December 31(st) Order has fixed the energy
component of the LEAC as of December 31, 1996 (see Settlement of Certain
Regulatory Issues). Additionally, under PSE&G's Energy Master Plan proposal, if
approved, the LEAC would be discontinued. Certain components of the LEAC would
become part of the societal benefits clause under PSE&G's proposal. No
assurances can be given as to the outcome of the Energy Master Plan proceedings.
On February 24, 1997, PSE&G filed with the BPU for an increase in the DSAF
component of the LEAC, to become effective on or before May 1, 1997. The filing
was to be effective for the period from May 1997 through December 1998 and
requested an annualized increase of $151.8 million. The filing included 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
incurred through December 31, 1998. At December 31, 1997, PSE&G had an
A-36
<PAGE> 62
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
underrecovered balance, including interest, of approximately $122 million
related to these programs. Such amount is included in Deferred Debits on PSE&G's
balance sheet.
A hearing was held before the Office of Administrative Law (OAL) in
September 1997 and on December 5, 1997, the Administrative Law Judge recommended
in his initial decision that the BPU approve $150.1 million of the $151.8
million requested. On January 19, 1998, the BPU extended its period of review to
accept, reject or modify the Judge's decision. Approval of this filing by the
BPU would result in recovery of this balance, as well as the costs of these
programs through 2000. PSE&G cannot predict the outcome of this matter.
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) 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. In
November 1996, the BPU approved an Interim LGAC Stipulation regarding costs
incurred during the period August 1, 1995 through July 31, 1996. On July 30,
1997, the BPU approved the recovery of remediation program costs incurred during
the period August 1, 1995 through July 31, 1996 on a final basis.
On August 1, 1997, PSE&G requested that the BPU approve recovery of $6.8
million through PSE&G's RAC for manufactured gas plant remediation costs. This
represents an increase in the amount of PSE&G's recovery of such costs by
approximately $2 million over current rate levels. On October 9, 1997, this
matter was transferred to the OAL. PSE&G cannot predict the outcome of this
proceeding.
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 12. Federal Income Taxes).
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<PAGE> 63
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (OPEB)
In August 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 (see Note 3. Regulatory Assets and Liabilities and Note 14. Postretirement
Benefits Other Than Pensions).
OTHER RATE MATTERS
INTERIM COMPETITIVE TRANSITION CHARGE (ICTC)
In September 1996, PSE&G filed a petition with the BPU to establish an ICTC
which is designed to recover stranded costs which will 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. On April 24, 1997, the BPU issued a
generic order to investigate policy issues related to whether customers who
cease to receive electric service from a utility and go to on-site generation
should be charged an exit fee. PSE&G's petition and motions concerning its
September 1996 ICTC filing have been placed in abeyance pending the conclusion
of the separate generic proceeding on this issue. The generic ICTC matter
continues to be reviewed by the BPU. PSE&G cannot predict the outcome of this
proceeding.
GAS UNBUNDLING
PSE&G's unbundled gas transportation tariffs, which have been in place
since 1994, allow any nonresidential customer, regardless of size, to purchase
its own gas, transport it to PSE&G pipelines and require PSE&G to deliver such
gas to the customer's facility. To date, approximately 17,000 commercial and
industrial customers, of approximately 180,000 such customers eligible, have
elected to utilize this service. It is expected that this number will not
significantly increase with the changes in the law affecting the gross receipts
and franchise tax which became effective on January 1, 1998. Those changes now
apply sales tax to sales by marketers, putting a similar tax burden on them as
borne by PSE&G (see NJGRT Reform below).
Current transportation rate schedules produce the same non-fuel revenue per
therm as existing sales tariff rate schedules. Thus, to date, PSE&G's earnings
have been unaffected by whether the customers remain on sales tariffs or convert
to transportation service. Enterprise's indirect subsidiary, Energis, provides
non-utility gas marketing services operating in New Jersey and several other
states.
In April 1997, the BPU approved PSE&G's proposal for a residential gas
unbundling pilot program known as SelectGas. The pilot program allows 65,000
residential natural gas customers to participate in the competitive marketplace.
To date, of the 65,000 eligible customers, none has subscribed to the program.
PSE&G cannot predict the future impact of this program on its financial
condition, results of operations and net cash flows.
PSE&G also participates in a retail pilot program of the New Jersey Natural
Gas Company (New Jersey Natural) to provide unbundled gas transportation to
former residential customers of New Jersey Natural. PSE&G has enrolled over
1,300 former residential gas customers of New Jersey Natural.
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<PAGE> 64
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NEW JERSEY GROSS RECEIPTS AND FRANCHISE TAX (NJGRT) REFORM
On July 14, 1997, Governor Whitman signed legislation eliminating the
NJGRT, effective January 1, 1998. This legislation replaces the NJGRT with a
combination of the corporate business tax, the State sales and use tax and a
Transitional Energy Facility Assessment (TEFA). The TEFA will be phased out over
five years. While PSE&G was subject to approximately 13% tax under the NJGRT,
after the phase out of the TEFA, the tax rate will be substantially reduced. The
new tax structure is expected to improve the competitive position of PSE&G
vis-a-vis non-utility energy providers in New Jersey who were not subject to the
NJGRT. On September 15, November 18 and December 24, 1997, PSE&G filed revised
tariff schedules and other pertinent information, in compliance with the
legislation. On December 31, 1997, the BPU accepted PSE&G's filings with
revisions for the purpose of implementing interim rates with regard to the new
tax structure effective with service rendered on and after January 1, 1998. The
BPU continues its administrative review of the filings of all utilities and is
expected to approve permanent rates no later than April 1, 1998.
NOTE 3. REGULATORY ASSETS AND LIABILITIES
Regulatory assets and liabilities are recorded in accordance with the
provisions of SFAS 71 (see Note 1. Organization and Summary of Significant
Accounting Policies and Note 2. Rate Matters). At December 31, 1997 and 1996,
PSE&G had deferred the following regulatory assets on the Consolidated Balance
Sheet:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------ ------
(MILLIONS OF
DOLLARS)
<S> <C> <C>
Unamortized Debt Expense.................................... $ 135 $ 138
Deferred OPEB Costs......................................... 289 226
Unrecovered Environmental Costs............................. 122 126
Underrecovered Electric Energy and Gas Costs................ 167 176
Unrecovered SFAS 109 Income Taxes........................... 725 752
Deferred Demand Side Management Costs....................... 116 40
Deferred Decontamination and Decommissioning Costs.......... 43 47
Property Abandonments....................................... 37 52
Unrecovered Plant and Regulatory Study Costs................ 34 34
Oil and Gas Property Write-Down............................. 26 31
------ ------
Total Regulatory Assets........................... $1,694 $1,622
====== ======
</TABLE>
UNAMORTIZED DEBT EXPENSE: Represents bond issuance costs, premiums,
discounts and losses on reacquired long-term debt. Bond issuance costs and
associated premiums and discounts are generally amortized over the life of the
debt issuance. In accordance with FERC regulations, costs to reacquire debt are
amortized over the remaining original life of the retired debt. When refinancing
debt, the unamortized portion of the original debt issuance costs of the debt
being retired must be amortized over the life of the replacement debt.
DEFERRED OPEB COSTS: Includes costs associated with adoption of SFAS 106
which are deferred in accordance with EITF Issue 92-12. For a discussion of OPEB
Costs, see Note 14. Postretirement Benefits Other Than Pensions and Note 2. Rate
Matters.
A-39
<PAGE> 65
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNRECOVERED ENVIRONMENTAL COSTS: Represents environmental costs which are
probable of recovery in future rates. For discussion of unrecovered
environmental costs, see Note 2. Rate Matters.
UNDERRECOVERED ELECTRIC ENERGY AND GAS COSTS: 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, 1997 and 1996 reflect underrecovered
costs as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1996
---- ----
(MILLIONS OF
DOLLARS)
<S> <C> <C>
Underrecovered Electric Energy Costs........................ $ 91 $151
Underrecovered Gas Fuel Costs............................... 76 25
---- ----
Total............................................. $167 $176
==== ====
</TABLE>
PSE&G has 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 million without any change in the current
energy component of the LEAC charge. Management believes that it will recover
this amount by December 31, 1998 and continues to follow deferred accounting
treatment for the LEAC. For additional discussion, see Note 2. Rate Matters.
UNRECOVERED SFAS 109 INCOME TAXES: Represents regulatory asset related to
the implementation of SFAS 109, "Accounting for Income Taxes" in 1993 (see Note
12. Federal Income Taxes).
DEFERRED DEMAND SIDE MANAGEMENT COSTS: Recoveries of DSM/conservation
costs (related to BPU-approved programs) are determined by the BPU. PSE&G's
deferred DSM balance as of December 31, 1997 and 1996, respectively, reflects
underrecovered/(overrecovered) costs as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1996
---- ----
(MILLIONS OF
DOLLARS)
<S> <C> <C>
Deferred DSM(Including Interest) -- Electric................ $122 $ 45
Deferred DSM(Including Interest) -- Gas..................... (6) (5)
---- ----
Total............................................. $116 $ 40
==== ====
</TABLE>
The increase in the electric balance is primarily due to the ongoing
underrecovery of DSM costs. In February 1997, PSE&G filed for an increase in the
DSAF, which is a component of the LEAC. Approval of the filing would result in
recovery of the existing deferred DSM balance as well as the estimated costs of
these programs through December 1998 (see Note 2. Rate Matters).
DEFERRED DECONTAMINATION AND DECOMMISSIONING COSTS: Represents amounts
related to decontamination and decommissioning which are probable of recovery in
future rates. For discussion of decontamination and decommissioning costs, see
Note 11. PSE&G Nuclear Decommissioning.
PROPERTY ABANDONMENTS: The BPU has authorized PSE&G to recover after-tax
property abandonment costs from its customers. The table of Regulatory Assets
above reflects 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%.
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<PAGE> 66
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.
NOTE 4. LONG-TERM INVESTMENTS
Long-Term Investments are primarily those of EDHI.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
--------- ---------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Lease Agreements (see Note 5. Leasing Activities):
Leveraged Leases.......................................... $1,143 $ 932
Direct-Financing Leases................................... 2 33
Other Leases.............................................. 2 3
------ ------
Total............................................. 1,147 968
------ ------
Partnerships:
General Partnerships...................................... 142 138
Limited Partnerships...................................... 534 495
------ ------
Total............................................. 676 633
------ ------
Corporate Joint Ventures.................................... 885 75
Securities.................................................. 28 48
Other Investments........................................... 137 130
------ ------
Total Long-Term Investments....................... $2,873 $1,854
====== ======
</TABLE>
PSRC's leveraged leases are reported net of principal and interest on
non-recourse 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 and corporate joint ventures are those of PSRC,
EGDC and CEA.
Other Investments, above, relate primarily to Public Service Conservation
Resources Corporation (PSCRC), a wholly-owned subsidiary of PSE&G. PSCRC's
investment in DSM projects had balances at December 31, 1997 and 1996 of
approximately $84 million and $98 million, respectively.
A-41
<PAGE> 67
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. LEASING ACTIVITIES
AS LESSOR
PSRC's net investments in leveraged and direct financing leases are
composed of the following elements:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------ ------------------------------
(MILLIONS OF DOLLARS) (MILLIONS OF DOLLARS)
DIRECT DIRECT
LEVERAGED FINANCING LEVERAGED FINANCING
LEASES LEASE TOTAL LEASES LEASES TOTAL
--------- --------- ------ --------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Lease rents receivable................. $1,498 $ 3 $1,501 $1,094 $ 35 $1,129
Estimated residual value............... 635 -- 635 638 8 646
------ --- ------ ------ ---- ------
2,133 3 2,136 1,732 43 1,775
Unearned and deferred income........... (990) (1) (991) (800) (10) (810)
------ --- ------ ------ ---- ------
Total investments.................... 1,143 2 1,145 932 33 965
Deferred taxes......................... (670) -- (670) (530) (10) (540)
------ --- ------ ------ ---- ------
Net investments...................... $ 473 $ 2 $ 475 $ 402 $ 23 $ 425
====== === ====== ====== ==== ======
</TABLE>
PSRC's other capital leases are with various regional, state and city
authorities for transportation equipment and aggregated $2 million and $3
million as of December 31, 1997 and 1996, respectively.
AS LESSEE
The Consolidated Balance Sheets include assets and related obligations
applicable to capital leases under which PSE&G is a lessee. The total
amortization of the leased assets and interest on the lease obligations equals
the net minimum lease payments included in rent expense for capital leases.
Capital leases of PSE&G relate primarily to its corporate headquarters and other
capital equipment. Certain of the leases contain renewal and purchase options as
well as escalation clauses. Enterprise and its other subsidiaries are not
lessees in any capitalized leases.
Utility plant includes $52 million for capital leases net of accumulated
amortization at December 31, 1997 and 1996. Rent expense included in Operating
Expenses for 1997, 1996 and 1995 was $34 million, $32 million and $34 million,
respectively.
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<PAGE> 68
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. SCHEDULE OF CONSOLIDATED CAPITAL STOCK AND OTHER SECURITIES
<TABLE>
<CAPTION>
CURRENT
REDEMPTION
OUTSTANDING PRICE DECEMBER 31, DECEMBER 31,
SHARES PER SHARE 1997 1996
----------- ---------- ------------ ------------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
Enterprise Common Stock (no par)(A)
Authorized 500,000,000 shares; issued and
outstanding at December 31, 1997,
231,957,608 shares, at December 31,
1996, 233,470,291 shares and at December
31, 1995, 244,697,930 shares............ $3,603 $3,627
Enterprise Preferred Securities(B)
PSE&G Cumulative Preferred Stock(C) without
Mandatory Redemption(D)(E) $100 par
value series
4.08%................................... 146,221 103.00 $ 15 $ 15
4.18%................................... 116,958 103.00 12 12
4.30%................................... 149,478 102.75 15 15
5.05%................................... 104,002 103.00 10 10
5.28%................................... 117,864 103.00 12 12
6.80%................................... -- -- -- 19
6.92%................................... 160,711 -- 16 16
$25 par value series
6.75%................................... 600,000 -- 15 15
------ ------
Total Preferred Stock without Mandatory
Redemption.............................. $ 95 $ 114
====== ======
With Mandatory Redemption(D)(F) $100 par
value series
7.44%................................... -- -- $ -- $ 75
5.97%................................... 750,000 -- 75 75
------ ------
Total Preferred Stock with Mandatory
Redemption.............................. $ 75 $ 150
====== ======
Monthly Guaranteed Preferred Beneficial
Interest in PSE&G's Subordinated
Debentures(D)(F)(H)
9.375%.................................. 6,000,000 -- $ 150 $ 150
8.00%................................... 2,400,000 -- 60 60
------ ------
Total Monthly Guaranteed Preferred
Beneficial Interest in PSE&G's
Subordinated Debentures............... $ 210 $ 210
====== ======
Quarterly Guaranteed Preferred Beneficial
Interest in PSE&G's Subordinated
Debentures(D)(F)(G)(H)
8.625%.................................. 8,320,000 -- $ 208 $ 208
8.125%.................................. 3,800,000 -- 95 --
------ ------
Total Guaranteed Preferred Beneficial
Interest in PSE&G's Subordinated
Debentures............................ $ 303 $ 208
====== ======
</TABLE>
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<PAGE> 69
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
1997 and 1996, 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, 1997, there were aggregates of 5,954,766 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, 1997, the annual dividend requirement and embedded dividend
rate for Preferred Stock without mandatory redemption was $10,886,758 and
5.18%, respectively, and for Preferred Stock with mandatory redemption was
$4,477,500 and 6.02%, respectively.
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, 1997 and 1996, 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, 1997 and 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
$25,658,750 and 5.70% and $17,940,000 and 5.80%, respectively.
(E) During 1996, 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 8.
Financial Instruments.
(G) In February 1997, PSE&G Capital Trust II issued $95 million of 8.125%
Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated
Debentures.
(H) PSE&G Capital L.P., PSE&G Capital Trust I and PSE&G Capital Trust II were
formed and are controlled by PSE&G for the purpose of issuing Monthly and
Quarterly Income Preferred Securities (Monthly and Quarterly Guaranteed
Preferred Beneficial Interest in PSE&G's Subordinated Debentures). The
proceeds were lent to PSE&G and are 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 indentures related thereto or its guarantees thereof, PSE&G
may not pay any dividends on its common and preferred stock. The
Subordinated Debentures and the indentures constitute a full and
unconditional guarantee by PSE&G of the Preferred Securities issued by the
partnership and the trusts.
A-44
<PAGE> 70
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. SCHEDULE OF CONSOLIDATED DEBT
<TABLE>
<CAPTION>
LONG-TERM
DECEMBER 31,
----------------------
INTEREST RATES MATURITY 1997 1996
- -------------- -------- --------- ---------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
PSE&G
First and Refunding Mortgage
Bonds(A)
6.875% -- 7.125% 1997............................. $ -- $ 300
6.00% 1998............................. 100 100
8.75% 1999............................. 100 100
6.00% -- 7.625% 2000............................. 635 400
7.875% 2001............................. 100 100
6.125% 2002............................. 300 300
6.25% -- 9.125% 2003-2007........................ 1,050 1,050
6.80% -- 6.90% 2008-2012........................ 3 26
Variable 2008-2012........................ 66 66
6.75% -- 7.375% 2013-2017........................ 375 400
6.45% -- 9.25% 2018-2022........................ 139 267
Variable 2018-2022........................ 14 14
5.55% -- 7.50% 2023-2027........................ 568 571
5.70% -- 6.55% 2028-2032........................ 499 499
Variable 2028-2032........................ 25 --
5.00% -- 8.00% 2033-2037........................ 160 160
Medium-Term Notes
7.10% -- 7.13% 1997............................. -- 100
8.10% -- 8.16% 2008-2012........................ 60 60
7.04% 2018-2022........................ 9 --
7.15% -- 7.18% 2023-2027........................ 41 41
------ ------
Total First and Refunding Mortgage Bonds............................ 4,244 4,554
------ ------
Debenture Bonds Unsecured
6.00% 1998............................. 18 18
Variable(B) 19 --
------ ------
Total Debenture Bonds............................................... 37 18
------ ------
Principal Amount Outstanding(C)....................................... 4,281 4,572
Amounts Due Within One Year(D)........................................ (118) (424)
Net Unamortized Discount.............................................. (37) (41)
------ ------
Total Long-Term Debt of PSE&G(E).................................... $4,126 $4,107
====== ======
</TABLE>
A-45
<PAGE> 71
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
LONG-TERM
DECEMBER 31,
----------------------
INTEREST RATES MATURITY 1997 1996
- -------------- -------- --------- ---------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
EDHI
CAPITAL
Senior Notes(F)
9.875% -- 10.05% 1998............................. $ 38 $ 80
Medium-Term Notes
5.79% -- 5.92% 1997............................. -- 27
9.00% 1998............................. 75 75
8.95% -- 9.93% 1999............................. 155 155
6.54% 2000............................. 78 78
6.74% 2001............................. 135 --
6.80% -- 7.00% 2002............................. 130 --
------ ------
Principal Amount Outstanding(C)....................................... 611 415
Amounts Due Within One Year(D)........................................ (113) (69)
Net Unamortized Discount.............................................. (2) (1)
------ ------
Total Long-Term Debt of Capital..................................... 496 345
------ ------
FUNDING(G)
6.85% -- 9.59% 1997............................. -- 55
9.95% 1998............................. 83 83
7.58% 1999............................. 45 45
------ ------
Principal Amount Outstanding(C)....................................... 128 183
Amounts Due Within One Year(D)........................................ (83) (55)
------ ------
Total Long-Term Debt of Funding..................................... 45 128
------ ------
CEA
Non-recourse Debt
7.995% -- Bank Loan 1999............................. 87 --
12.82% -- Bank Loan 2002............................. 135 --
14.00% -- Minority Interest Loan 2027............................. 10 --
------ ------
Principal Amount Outstanding(C)....................................... 232 --
Amounts Due Within One Year........................................... (26) --
------ ------
Total Long-Term Debt of CEA.................................... 206 --
------ ------
Total Long-Term Debt of EDHI................................... $ 747 $ 473
====== ======
Consolidated Long-Term Debt(H).............................. $4,873 $4,580
====== ======
</TABLE>
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PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- ---------------
(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 $117 million of its
8.50% Series LL First and Refunding Mortgage Bonds (Bonds). In April 1997,
PSE&G issued $25 million of Variable Rate Pollution Control Bonds, Series
X, due 2031. In June 1997, PSE&G issued $235 million of its 6.50% Series XX
Bonds due 2000 and in November 1997, PSE&G issued $9 million of 7.04%
Medium Term Notes. Also in November 1997, PSE&G redeemed $9 million of its
9.25% Series CC Bonds.
(B) PSE&G issued $19 million of Variable Rate Pollution Control Notes due 2027
in June 1997.
(C) For information concerning fair value of financial instruments, see Note 8.
Financial Instruments.
(D) The aggregate principal amounts of mandatory requirements for sinking funds
and maturities for each of the five years following December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
SINKING FUNDS MATURITIES
--------------- -----------------------------------
YEAR CAPITAL CEA PSE&G CAPITAL FUNDING CEA TOTAL
---- ------- ---- ------ ------- ------- --- ------
<S> <C> <C> <C> <C> <C> <C> <C>
1998......................... $38 $ 26 $ 118 $ 75 $ 83 -- $ 340
1999......................... -- 27 100 155 45 $87 414
2000......................... -- 27 635 78 -- -- 740
2001......................... -- 27 100 135 -- -- 262
2002......................... -- 27 300 130 -- -- 457
--- ---- ------ ---- ---- --- ------
$38 $134 $1,253 $573 $128 $87 $2,213
=== ==== ====== ==== ==== === ======
</TABLE>
(E) At December 31, 1997 and 1996, PSE&G's annual interest requirement on
long-term debt was $291 million and $317 million, of which $283 million and
$302 million, respectively, was the requirement for Bonds. The embedded
interest cost on long-term debt on such dates was 7.44% and 7.45%,
respectively. The embedded interest cost on long-term debt due within one
year at December 31, 1997 was 7.14%.
(F) Capital has provided up to $750 million debt financing for EDHI's
businesses, except Energis, on the basis of a net worth maintenance
agreement with Enterprise. Effective January 31, 1995, Capital has limited
its borrowings to no more than $650 million.
(G) Funding provides debt financing for PSRC, CEA and their subsidiaries on the
basis of an unconditional guarantee from EDHI.
(H) At December 31, 1997 and 1996, the annual interest requirement on long-term
debt was $378 million and $370 million, of which $283 million and $302
million, respectively, was the requirement for Bonds. The embedded interest
cost on long-term debt on such dates was 7.64% and 7.62%, respectively.
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PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SHORT-TERM (COMMERCIAL PAPER AND BANK 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.
ENTERPRISE
At December 31, 1997, Enterprise had a committed $150 million revolving
credit facility which expires in December 2002. At December 31, 1997 and 1996,
Enterprise had a $75 million and a $25 million uncommitted line of credit,
respectively, with a bank. At December 31, 1997, Enterprise had $75 million
outstanding under this line of credit with an interest rate of 6.2%. The
consolidated weighted-average, short-term debt rate of Enterprise was 6.2%, 5.7%
and 6.0% for the years ended December 31, 1997, 1996 and 1995, respectively.
PSE&G
<TABLE>
<CAPTION>
1997 1996 1995
------ ---- ----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Principal amount outstanding at year end, primarily
commercial paper.......................................... $1,106 $638 $567
Weighted average interest rate for short-term debt at year
end....................................................... 6.07% 5.70% 5.93%
</TABLE>
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.
The $1.3 billion commercial paper program (Program) is supported by a $650
million revolving credit agreement expiring in June 1998 and a $650 million
revolving credit agreement expiring in June 2002 with a group of commercial
banks. As of December 31, 1997 and 1996, PSE&G had $952 million and $443
million, respectively, outstanding under the Program, which amounts are included
in the table above. As of December 31, 1997, there was no debt outstanding under
the revolving credit agreements.
PSE&G has $174 million in uncommitted lines of credit facilities extended
by a number of banks to primarily support short-term borrowings, of which $74
million was outstanding on December 31, 1997 and is 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, 1997, letters of
credit were issued in the amount of $21 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 on June
28, 2001. PSE&G has guaranteed repayment of Fuelco's respective obligations. As
of December 31, 1997 and 1996, Fuelco had commercial paper of $80 million and
$83 million, respectively, outstanding under the commercial paper program, which
amounts are included in the table above. As of December 31, 1997, there was no
debt outstanding under the revolving credit facility.
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PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PSE&G has entered into standby financing arrangements with banks totaling
$124 million. These facilities support long-term tax-exempt multi-mode mortgage
bond financings done through the New Jersey Economic Development Authority, The
Pollution Control Financing Authority of Salem County (New Jersey), the York
County (Pennsylvania) Industrial Development Authority and the Indiana County
(Pennsylvania) Industrial Development Authority. As of December 31, 1997, no
amounts were outstanding under such arrangements.
EDHI
<TABLE>
<CAPTION>
1997 1996 1995
----- ---- -----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Principal amount outstanding at year end.................... $267 -- $182(A)
Weighted average interest rate for short-term debt at year
end....................................................... 6.92% -- 6.26%
</TABLE>
- ---------------
(A) Amounts included in Net Assets of Discontinued Operations.
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. In November 1997, Funding entered into an additional
$150 million revolving credit agreement with a group of banks. Such agreement
terminates in November 1998.
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PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value was determined using the market quotations or
values of instruments with similar terms, credit ratings, remaining maturities
and redemptions at the end of 1997 and 1996, respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1997 1996
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- ------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
Long-Term Debt(A):
EDHI.............................................. $ 969 $ 978 $ 597 $ 606
PSE&G............................................. 4,244 4,389 4,531 4,592
Preferred Securities Subject to Mandatory
Redemption:
PSE&G Cumulative Preferred Securities............. 75 78 150 152
Monthly Guaranteed Preferred Beneficial Interest
in PSE&G's Subordinated Debentures............. 210 221 210 220
Quarterly Guaranteed Preferred Beneficial Interest
in PSE&G's Subordinated Debentures............. 303 316 208 211
</TABLE>
- ---------------
(A) Includes current maturities and an interest rate swap of $44 million for
EDHI.
NATURAL GAS HEDGING -- EDHI
As of December 31, 1997 and 1996, Energis had outstanding futures contracts
to buy natural gas related to fixed-price natural gas sales commitments. Such
contracts hedged approximately 97% and 95% of its fixed price sales commitments
at December 31, 1997 and 1996, respectively. As of December 31, 1997, Energis
had a net unrealized hedge loss of $2 million and as of December 31, 1996,
Energis had a net unrealized hedge gain of $4 million.
NUCLEAR DECOMMISSIONING TRUST FUNDS
Contributions made into the Nuclear Decommissioning Trust Funds are
invested in debt and equity securities. The carrying value of these funds
approximates the fair market value of $458 million and $375 million as of
December 31, 1997 and 1996, respectively.
EQUITY SECURITIES -- EDHI
PSRC has investments in equity securities and partnerships which invest in
equity securities. The aggregate carrying value approximates the fair market
value of $185 million and $131 million as of December 31, 1997 and 1996,
respectively.
NOTE 9. CASH AND CASH EQUIVALENTS
The December 31, 1997 and 1996 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.
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PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. COMMITMENTS AND CONTINGENT LIABILITIES
NUCLEAR PERFORMANCE STANDARD (NPS)
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 December 31st Order
provides that the NPS will not apply to PSE&G for the period January 1, 1996
through December 31, 1998 (see Note 2. Rate Matters).
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 FOR A
TYPE AND SOURCE OF COVERAGES TOTAL SITE COVERAGES SINGLE INCIDENT
---------------------------- -------------------- -----------------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Public Liability (Primary Layer):
American Nuclear Insurers............................ $ 200.0 N/A
Nuclear Liability (Excess Layer):
Price-Anderson Act................................... 8,720.3(A) $210.2
-------- ------
Nuclear Liability Total........................... $8,920.3(B) $210.2
======== ======
Nuclear Worker Liability (Primary Layer):
American Nuclear Insurers............................ $ 200.0(C) $ 8.0
Property Damage (Primary Layer):
American Nuclear Insurers (Peach Bottom)............. $ 500.0 N/A
Nuclear Mutual Limited (Salem/Hope Creek)............ 500.0 $ 9.7
Property Damage (Excess Layer):
Nuclear Electric Insurance Limited (NEIL II)......... 2,250.0 13.7
-------- ------
Property Damage Total (Per Site).................. $2,750.0 $ 23.4
======== ======
Replacement Power:
Nuclear Mutual Limited (NML)......................... $ 21.0(D) N/A
Nuclear Electric Insurance Limited (NEIL I).......... 473.2(E) $ 11.3
-------- ------
Replacement Power Total (Salem/Hope Creek)........ $ 494.2(F) $ 11.3
======== ======
</TABLE>
- ---------------
(A) Retrospective premium program under the Price-Anderson liability provisions
of the Atomic Energy Act of 1954, as amended. PSE&G is 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
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PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
five years. The last adjustment was effective as of August 20, 1993. This
retrospective program is excess over the Public and Nuclear Worker Liability
primary layers.
(B) Limit of liability under the Price-Anderson Act for each nuclear incident.
(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.
(D) After a waiting period, NML insured sites may receive a weekly indemnity of
$3.5 million for six weeks.
(E) Aggregate indemnity limit for a weekly indemnity of $3.5 million for 52
weeks followed by 80% of the weekly indemnity for 104 weeks. Also,
represents limit of coverage for Peach Bottom which does not purchase
insurance from NML.
(F) Combined aggregate limit of NML and NEIL I coverages available to co-owners
of Salem and Hope Creek for each plant. Of this limit, PSE&G is covered for
its percent ownership in each plant.
The Price-Anderson Act sets the "limit of liability" for claims that could
arise from an incident involving any licensed nuclear facility in the nation.
The "limit of liability" is based on the number of licensed nuclear reactors and
is adjusted at least every five years based on the Consumer Price Index. The
current "limit of liability" is $8.9 billion. All utilities owning a nuclear
reactor, including PSE&G, have provided for this exposure through a combination
of private insurance and mandatory participation in a financial protection pool
as established by the Price-Anderson Act. Under the Price-Anderson Act, 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. This does not include the $8.0 million that could be assessed
under the nuclear worker policies.
Further, a recent decision by the U.S. Supreme Court, 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 an industry mutual insurance company, NEIL, which, as
of January 1, 1998, was consolidated with NML. NEIL provides all the coverages
formerly provided by NML, including the primary property insurance at Salem and
Hope Creek. Also, NEIL continues to provide excess property insurance through
its NEIL II policy and replacement power coverage through its NEIL I policy.
Both NEIL and NML policies 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 provisions in the
NEIL policies 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.
SETTLEMENT OF SALEM LITIGATION
On May 12, 1997, PSE&G settled the lawsuit brought against it by PECO
Energy Company (PECO Energy) and Delmarva Power & Light Company (DP&L), two
co-owners of the Salem Units, related to alleged damages resulting from the
outage of the facility. This settlement, which totaled $82 million, resulted in
an after-tax charge
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PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to earnings, recorded in the first quarter of 1997, of $53 million or $0.23 per
share of Enterprise Common Stock and was paid in December 1997. This settlement
also obligates PSE&G to pay $1.4 million for each reactor month that the outage
continues beyond an aggregate outage of 64 reactor months, up to a maximum
payment under this provision of $17 million. As of January 31, 1998, an
aggregate of 59 reactor months had accumulated due to Salem outages. PSE&G does
not expect to make any payments under this provision. Salem 2 returned to
service on August 30, 1997. Salem 1 is expected to return to service around the
end of the first quarter of 1998.
PECO Energy, DP&L and PSE&G have also agreed to an operating performance
standard through December 31, 2011 for Salem and through December 31, 2007 for
Peach Bottom which is operated by PECO Energy. Under this standard, the operator
of each respective station would be required to make payments to the
non-operating owners if the three-year capacity factor, determined annually, of
such station falls below 40 percent, subject to a maximum of $25 million per
year. The initial three-year period begins on January 1, 1998 for Peach Bottom
and on the date the later of the two Salem units (Salem 1) returns to service
for Salem. The parties have further agreed to forego litigation in the future,
except for limited cases in which the operator would be responsible for damages
of no more than $5 million per year.
YEAR 2000
Many of Enterprise's and PSE&G's systems must be modified due to computer
program limitations in recognizing dates beyond 1999. If not corrected, the
systems could fail or cause erroneous results by, at or after January 1, 2000.
Substantial changes to, and some replacements of, Enterprise's and PSE&G's
present systems are being made in an effort to mitigate potential Year 2000
issues. Costs are being expensed as incurred in accordance with EITF 96-14,
"Accounting for the Costs Associated with Modifying Computer Software for the
Year 2000." During 1997, $8 million of costs related to Year 2000 readiness were
incurred. Management estimates the total cost of this effort to be about $92
million to be incurred from 1997 through 2001, of which $41 million is expected
to be incurred in 1998.
Enterprise and PSE&G have assembled a cross-functional team to inventory,
assess and identify and implement solutions for Enterprise's and PSE&G's
systems. Plans provide for 80% of critical systems to be Year 2000 ready in
1998, with the remaining critical systems to be ready by July 1999. By the end
of 1999, plans call for 80% of non-critical systems to be Year 2000 ready with
the remainder of those systems to be Year 2000 ready in 2000.
Additionally, the team has surveyed Enterprise's and PSE&G's top 3000
vendors to assess their plans for Year 2000 readiness. The team has also been
working with critical suppliers and Pennsylvania -- New Jersey -- Maryland
Interconnection (PJM) on their plans for Year 2000 readiness.
On January 29, 1998, the NRC proposed to issue a generic letter which would
require all nuclear plant operators to provide the agency with information
concerning their programs, planned or implemented, to address Year 2000 computer
and systems issues at their facilities. In particular, operators would be asked
to provide confirmation of implementation of their programs and certification
that their facilities are Year 2000 ready and in compliance with the terms and
conditions of their licenses and NRC regulations. Licensees would be required to
submit a written response indicating the status of their Year 2000 readiness
program including scope, assessment process and plans for corrective action.
Further, upon completion of their Year 2000 readiness program and no later than
July 1, 1999, licensees would be required to confirm to the NRC that their
facility is Year 2000 ready, together with a status report of work necessary to
be Year 2000 compliant. Year 2000 ready means computer systems and applications
are suitable for continued use into 2000. Year 2000 compliant means that such
systems and applications
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<PAGE> 79
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accurately process date/time data beyond 2000. PSE&G cannot predict if this or
any proposal will be adopted by the NRC.
An inability of Enterprise, PSE&G, their subsidiaries, members of PJM or
Enterprise's or PSE&G's critical suppliers to meet the Year 2000 deadline could
have a material adverse impact on Enterprise's and PSE&G's operations, financial
condition, results of operations and net cash flows.
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 resource
plan (Resource Plan), PSE&G periodically reevaluates its forecasts of future
customers, load and peak growth, sources of electric generating capacity and DSM
to meet such projected growth, including the need to construct new electric
generating capacity. The Resource Plan 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
$3.1 billion during the years 1998 through 2002, which includes $457 million for
nuclear fuel and excludes 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 1998
through 2002.
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 actual or potential threat to human health 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 investigation and
remediation of these potentially hazardous sites is receiving 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 Remediation Program,
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PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Enterprise and PSE&G do not expect its expenditures for any such site to have a
material effect on financial condition, results of operations and net cash
flows.
The NJDEP has recently revised regulations concerning site investigation
and remediation. These regulations will require an ecological evaluation of
potential injuries to natural resources in connection with a remedial
investigation of contaminated sites. The NJDEP is presently working with the
utility industry to develop procedures for implementing these regulations. These
regulations may substantially increase the costs of remedial investigations and
remediations, where necessary, particularly at sites situate on surface water
bodies. PSE&G and predecessor companies owned and/or operated certain facilities
situate on surface water bodies, certain of which are currently the subject of
remedial activities. The financial impact of these regulations on these projects
is not currently estimable. PSE&G does not anticipate that the compliance with
these regulations will have a material adverse 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 manufactured
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 remediation technologies. The cost of the Remediation Program cannot
be reasonably estimated, but experience to date indicates that costs of
approximately $20 million per year could be incurred over a period of about 30
years and that the overall cost could be material to Enterprise's and PSE&G's
financial condition, results of operations and net cash flows.
Costs incurred through December 31, 1997 for the Remediation Program
amounted to $122 million. In addition, at December 31, 1997, PSE&G's estimated
liability for remediation costs through 2000 aggregated $73 million.
Expenditures beyond 2000 cannot be reasonably estimated (see Note 1.
Organization and Summary of Significant Accounting Policies and Note 2. Rate
Matters).
NOTE 11. 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. On December 17, 1997,
the BPU accepted PSE&G's decommissioning cost updates and found that the current
funding requirements as presented in PSE&G's 1996 Nuclear Decommissioning Trust
Fund Report, dated May 15, 1997, appear adequate.
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PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Although PSE&G's Energy Master Plan proposal continues
this treatment, no assurances can be given as to the outcome of the Energy
Master Plan proceedings (see Note 2. Rate Matters). At December 31, 1997 and
1996, the accumulated provision for depreciation and amortization included
reserves for nuclear decommissioning for PSE&G's nuclear units of $428 million
and $338 million, respectively. As of December 31, 1997 and 1996, PSE&G had
contributed $279 million and $249 million, respectively, into independent,
external, qualified and non-qualified nuclear decommissioning trust funds. The
fair market value of these funds as of December 31, 1997 and 1996 was $458
million and $375 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 materially 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 all, or any of which, could have a material adverse
effect on Enterprise's and PSE&G's financial condition, results of operations
and net cash flows (see Note 2. Rate Matters).
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 $70 million
(adjusted for inflation). Since 1993, PSE&G has paid $27 million, resulting in a
balance due of $43 million. PSE&G has deferred the expenditures incurred to date
as part of underrecovered electric energy costs (see Note 2. Rate Matters).
SPENT NUCLEAR FUEL DISPOSAL COSTS
In accordance with the Nuclear Waste Policy Act (NWPA), PSE&G has entered
into contracts with the 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 2. Rate Matters).
DOE construction of a permanent disposal facility has not begun and DOE has
announced that it does not expect a facility to be available until 2010 at the
earliest. Accordingly, legislation which would have the DOE establish a
centralized interim spent fuel storage facility has been introduced in Congress.
In cases brought by PSE&G, 32 other utilities and many state and local
governments, the United States Court of Appeals for the District of Columbia
Circuit reaffirmed DOE's unconditional obligation to begin spent fuel acceptance
by January 31, 1998. In November 1997, the court ruled that the utilities had
fulfilled their obligations under their respective contracts with DOE by
contributing to the Nuclear Waste Fund. The court further ruled that DOE's
argument of unavoidable delay to meet its obligation was without merit. However,
the court did not order DOE to commence spent fuel acceptance by January 31,
1998; instead, it decided that the standard contract provided a
A-56
<PAGE> 82
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
potentially adequate remedy in the form of payment of damages if DOE failed its
obligations. Consequently, PSE&G is working with the utility industry to develop
a methodology for determining damages incurred as a result of DOE's failure to
meet its obligation and a strategy for its implementation. PSE&G is presently
studying options to recover damages from DOE. The decision of the Court of
Appeals has been appealed to the U.S. Supreme Court by the U.S. Department of
Justice. No assurances can be given as to the ultimate availability of a
facility.
NOTE 12. 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>
1997 1996 1995
---- ---- ------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Net Income.................................................. $560 $612 $ 662
Preferred securities (net).................................. 15 5 34
Discontinued Operations..................................... -- (24) (35)
---- ---- ------
Subtotal.......................................... $575 $593 $ 661
---- ---- ------
Federal income taxes:
Operating income:
Current provision...................................... 185 124 208
Provision for deferred income taxes -- net(A).......... 164 187 152
Investment tax credits -- net.......................... (20) (21) (22)
---- ---- ------
Total included in operating income................ 329 290 338
Miscellaneous other income:
Current provision...................................... (24) 1 (10)
Provision for deferred income taxes(A)................. -- -- 10
SFAS 90 deferred income taxes(A)....................... 1 2 2
---- ---- ------
Total Federal income tax provisions............... 306 293 340
---- ---- ------
Pretax income............................................... $881 $886 $1,001
==== ==== ======
</TABLE>
A-57
<PAGE> 83
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reconciliation between total Federal income tax provisions and tax computed
at the statutory tax rate on pretax income:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Tax computed at the statutory rate.......................... $ 308 $ 310 $ 351
Increase (decrease) attributable to flow through of certain
tax adjustments:
Depreciation.............................................. 27 11 16
Amortization of investment tax credits.................... (20) (22) (22)
Other..................................................... (9) (6) (5)
----- ----- -----
Subtotal............................................... (2) (17) (11)
----- ----- -----
Total Federal income tax provisions.................... $ 306 $ 293 $ 340
===== ===== =====
Effective Federal income tax rate........................... 34.7% 33.1% 34.0%
</TABLE>
- ---------------
(A) The provision for deferred income taxes represents the tax effects of the
following items:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Deferred Credits:
Additional tax depreciation and amortization.............. $ 34 $ 39 $134
Leasing Activities........................................ 114 136 64
Conservation Costs........................................ 27 15 (1)
Deferred Fuel Costs -- net................................ (4) 6 (4)
Other..................................................... (6) (7) (29)
---- ---- ----
Total.................................................. $165 $189 $164
==== ==== ====
</TABLE>
Between the years 1987 and 1994, Enterprise's Federal Alternative Minimum
Tax (AMT) liability exceeded its regular Federal income tax liability. This
excess was carried forward to offset regular income tax liability in future
years. Enterprise used these AMT credits as a reduction against regular tax
liability for 1995, 1996 and 1997. There were no remaining credits as of
December 31, 1997.
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,
1997, PSE&G had a deferred tax liability and an offsetting regulatory asset of
$725 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 enacted Federal
income tax rate of 35% and State income tax rate of 9%.
A-58
<PAGE> 84
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 1997 1996
--------------------- --------- ---------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Assets:
Current (net)............................................. $ 25 $ 23
------ ------
Non-current:
Unrecovered Investment Tax Credits..................... 117 123
Nuclear Decommissioning................................ 33 27
Construction Period Interest and Taxes................. 15 16
Vacation Pay........................................... 7 7
AMT Credit............................................. -- 88
Real Estate Impairment................................. 6 3
Other.................................................. 33 24
------ ------
Total Non-current................................. 211 288
------ ------
Total Assets...................................... 236 311
------ ------
Liabilities:
Non-current:
Plant Related Items.................................... 2,349 2,361
Leasing Activities..................................... 720 669
Conservation Costs..................................... 39 12
Hope Creek O&M Costs................................... 21 22
Underrecovered Electric Energy and Gas Costs........... 60 63
Unamortized Debt Expense............................... 44 40
Taxes Recoverable Through Future Rates (net)........... 249 259
Other.................................................. 123 112
------ ------
Total Non-current................................. 3,605 3,538
------ ------
Total Liabilities................................. 3,605 3,538
------ ------
Summary -- Accumulated Deferred Income Taxes
Net Current Assets........................................ 25 23
Net Non-current Liability................................. 3,394 3,250
------ ------
Total............................................. $3,369 $3,227
====== ======
</TABLE>
A-59
<PAGE> 85
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13. PENSION PLAN
The discount rates, expected long-term rates of return on assets and
average compensation growth rates used in determining the qualified Pension
Plans' funded status and net pension cost as of December 31, 1997 and 1996 were
as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Funded Status:
Discount Rate used to Determine Benefit Obligations....... 7.25% 7.50%
Average Compensation Growth to Determine Benefit
Obligations............................................ 4.50% 4.50%
Net Pension Cost:
Discount Rate............................................. 7.50% 8.00%
Expected Long-Term Return on Assets....................... 9.00% 8.50%
Average Compensation Growth............................... 4.50% 4.50%
</TABLE>
The following table shows the qualified Pension Plans' funded status:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
--------- ---------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested benefits
of $1,602 in 1997 and $1,474 in 1996...................... $(1,711) $(1,572)
Effect of projected future compensation..................... (374) (459)
------- -------
Projected benefit obligations............................... (2,085) (2,031)
Plan assets at fair value, primarily listed equity and debt
securities................................................ 1,959 1,687
------- -------
Projected benefit obligations in excess of plan assets...... (126) (344)
Unrecognized net (gain) loss from past experience and
effects of changes in assumptions......................... (5) 151
Prior service cost not yet recognized in net pension cost... 119 131
Unrecognized net obligations being recognized over 16.7
years..................................................... 45 53
------- -------
Prepaid (Accrued) pension cost.............................. $ 33 $ (9)
======= =======
</TABLE>
The net pension cost for the qualified Pension Plans for the years ended
December 31, 1997, 1996 and 1995, includes the following components:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Service cost -- benefits earned during year................. $ 52 $51 $37
Interest cost on projected benefit obligations.............. 148 136 124
Return on assets............................................ (296) (206) (312)
SFAS 88 early retirement (A)................................ 2 2 --
Net amortization and deferral............................... 164 93 223
---- ---- ----
Total............................................. $ 70 $76 $72
==== ==== ====
</TABLE>
See Note 1. Organization and Summary of Significant Accounting Policies.
A-60
<PAGE> 86
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- ---------------
(A) Effective May 1, 1996, PSE&G's qualified 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 was available to
employees who had attained age 50 and had completed 30 or more years of
service. SFAS No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits"
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 resulted in an immediate
expense applicable to the employees who, as of April 30, 1997, had accepted
the offer.
The discount rates and average compensation growth rates used in
determining the non-qualified Pension Plans' funded status and net pension cost
as of December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996(A)
---- -------
<S> <C> <C>
Funded Status:
Discount Rate used to Determine Benefit Obligations....... 7.25% 7.50%
Average Compensation Growth to Determine Benefit
Obligations............................................ 4.50% 4.50%
Net Pension Cost:
Discount Rate............................................. 7.50% --
Average Compensation Growth............................... 4.50% --
</TABLE>
The following table shows the non-qualified Pension Plans' funded status:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996(A)
------- ----------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested benefits
of $25 in 1997 and $22 in 1996............................ $(34) $(30)
Effect of projected future compensation..................... (4) (4)
---- ----
Projected benefit obligations............................... (38) (34)
Plan assets at fair value................................... -- --
---- ----
Projected benefit obligations in excess of plan assets...... (38) (34)
Unrecognized net (gain) loss from past experience and
effects of changes in assumptions......................... 2 --
Prior service cost not yet recognized in net pension cost... 31 34
Additional minimum liability................................ (29) --
---- ----
Prepaid (Accrued) pension cost.............................. $(34) $ --
==== ====
</TABLE>
A-61
<PAGE> 87
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net pension cost for the non-qualified Pension Plans for the years
ended December 31, 1997, 1996 and 1995, includes the following components:
<TABLE>
<CAPTION>
1997(A)
---------------------
(MILLIONS OF DOLLARS)
<S> <C>
Service cost -- benefits earned during year................. $2
Interest cost on projected benefit obligations.............. 2
Net amortization and deferral............................... 3
--
Total............................................. $7
==
</TABLE>
- ---------------
(A) Beginning in 1997, SFAS 87 was applied to the non-qualified Pension Plans.
Prior to that date, because the plans amounts were considered immaterial,
SFAS 87 was not applied.
NOTE 14. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Upon adoption of SFAS 106, PSE&G elected to amortize, over 20 years, its
unfunded obligation of $609 million at January 1, 1993. The following table
discloses the significant components of the net periodic postretirement benefit
cost:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996 1995
----- ----- -----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Service cost................................................ $ 12 $ 10 $ 9
Interest on accumulated postretirement obligation........... 54 51 48
Amortization of transition obligation....................... 30 31 31
Prior service cost.......................................... 2 -- --
Amortization of Net (Gain)/Loss (A)......................... (2) (1) (4)
Deferral of current expense................................. (63) (59) (51)
---- ---- ----
Total............................................. $ 33 $ 32 $ 33
==== ==== ====
</TABLE>
- ---------------
(A) Reflects change in Plan Assumptions.
The discount rate used in determining the PSE&G net periodic postretirement
benefit cost was 7.5% and 8.0% for 1997 and 1996, 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 $6
million, or 10.5%, and increase the accumulated postretirement benefit
obligation as of December 31, 1997 by $57 million, or 9.4%.
The assumed health care cost trend rates used in measuring the accumulated
postretirement benefit obligation in 1997 were: medical costs for pre-age
sixty-five retirees -- 11.5%, medical costs for post-age sixty-five retirees --
7.5% and dental costs -- 5.5%; such rates are assumed to decrease by 0.5% per
year until they reach 5.0% and then remain constant. The medical costs above
include a provision for prescription drugs.
From January 1, 1993 through December 31, 1997, PSE&G accounted for the
differences between its SFAS 106 accrual cost and the cash cost currently
recovered through rates as a regulatory asset in accordance with
A-62
<PAGE> 88
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS 71 and EITF 92-12. OPEB costs expensed and capitalized during 1997 were $33
million and accrued OPEB costs deferred were $63 million. The amount of the
unfunded liability, at December 31, 1997, as shown below, is $724 million.
In 1993, the FASB's 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, which was December 31,
1997, for financial reporting purposes, with any cost deferrals recovered in
approximately twenty years. On December 17, 1997, the BPU ruled that PSE&G's
current rates are sufficient to recover both the ongoing OPEB costs and the
amortization of the deferred regulatory asset created by the accounting change
from the cash basis of accounting to the accrual basis of accounting in
accordance with SFAS 106 and EITF 92-12. As a result of the BPU's decision,
PSE&G will amortize the regulatory asset over 15 years beginning January 1,
1998. Also effective January 1, 1998, PSE&G will record the annual SFAS 106 OPEB
cost.
In accordance with SFAS 106 disclosure requirements, a reconciliation of
the funded status of the plan is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
-------- --------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Accumulated Postretirement Benefit Obligation:
Retirees.................................................... $(496) $(493)
Fully eligible active plan participants..................... (32) (36)
Other active plan participants.............................. (196) (206)
----- -----
Total............................................. (724) (735)
Plan assets at fair value................................... -- --
----- -----
Accumulated postretirement benefit obligation in excess of
plan assets............................................... (724) (735)
Unrecognized net (gain)/loss from past experience different
from that assumed and from changes in assumptions......... (26) 15
Unrecognized prior service cost............................. 32 34
Unrecognized transition obligation.......................... 429 460
----- -----
Accrued postretirement obligation........................... $(289) $(226)
===== =====
</TABLE>
The discount rate used in determining the accumulated postretirement
benefit obligation was 7.25% and 7.50% for 1997 and 1996, respectively.
A-63
<PAGE> 89
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15. FINANCIAL INFORMATION BY BUSINESS SEGMENTS
Information related to the segments of Enterprise's business is detailed
below:
<TABLE>
<CAPTION>
NON-UTILITY
ELECTRIC GAS ACTIVITIES(A) TOTAL
-------- ------ ------------- -------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
For the Year Ended December 31, 1997:
Total Operating Revenues........................... $ 4,188 $1,937 $ 245 $ 6,370
------- ------ ------ -------
Depreciation and Amortization...................... 531 85 14 630
Operating Income Before Income Taxes............... 978 328 144 1,450
Capital Expenditures............................... 426 131 953 1,510
As of December 31, 1997:
Net Utility Plant.................................. 9,352 1,698 -- 11,050
Other Corporate Assets............................. 3,096 774 3,023 6,893
------- ------ ------ -------
Total Assets....................................... $12,448 $2,472 $3,023 $17,943
======= ====== ====== =======
For the Year Ended December 31, 1996:
Total Operating Revenues........................... $ 3,944 $1,881 $ 216 $ 6,041
------- ------ ------ -------
Depreciation and Amortization...................... 517 87 3 607
Operating Income Before Income Taxes............... 978 234 140 1,352
Capital Expenditures............................... 463 140 47 650
As of December 31, 1996:
Net Utility Plant.................................. 9,566 1,613 -- 11,179
Other Corporate Assets............................. 2,840 780 2,116 5,736
------- ------ ------ -------
Total Assets....................................... $12,406 $2,393 $2,116 $16,915
======= ====== ====== =======
For the Year Ended December 31, 1995:
Total Operating Revenues........................... $ 4,021 $1,686 $ 186 $ 5,893
------- ------ ------ -------
Depreciation and Amortization...................... 503 88 6 597
Operating Income Before Income Taxes............... 1,140 179 121 1,440
Capital Expenditures............................... 546 140 140 826
As of December 31, 1995:
Net Utility Plant.................................. 9,652 1,536 -- 11,188
Other Corporate Assets............................. 2,730 669 2,230 5,629
------- ------ ------ -------
Total Assets....................................... $12,382 $2,205 $2,230 $16,817
======= ====== ====== =======
</TABLE>
- ---------------
(A) The Non-utility Activities include amounts applicable to Enterprise, the
parent corporation, and EDHI.
A-64
<PAGE> 90
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,
-----------------------------
1997 1996 1995
------- ------- -------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Utility Plant -- Original Cost
Electric Plant in Service:
Steam Production...................................... $ 1,840 $ 1,843 $ 1,791
Nuclear Production.................................... 6,162 6,001 5,992
Transmission.......................................... 1,163 1,146 1,127
Distribution.......................................... 3,315 3,171 3,045
Other................................................. 1,212 1,153 1,140
------- ------- -------
Total Electric Plant in Service.................. 13,692 13,314 13,095
------- ------- -------
Gas Plant in Service:
Transmission.......................................... 67 67 65
Distribution.......................................... 2,472 2,358 2,251
Other................................................. 158 131 127
------- ------- -------
Total Gas Plant in Service....................... 2,697 2,556 2,443
------- ------- -------
Common Plant in Service:
Capital Leases........................................ 59 59 59
General............................................... 499 471 458
------- ------- -------
Total Common Plant in Service.................... 558 530 517
------- ------- -------
Total....................................... $16,947 $16,400 $16,055
======= ======= =======
</TABLE>
NOTE 16. DISCONTINUED OPERATIONS
On July 31, 1996, EDHI sold 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 resulting in an after-tax gain of $13
million. As a result, Consolidated Financial Statements previously issued have
been restated to give effect to the classification of EDC as discontinued
operations.
Operating results of EDC for 1996 (7 months) and 1995 are summarized in the
following table:
<TABLE>
<CAPTION>
(7 MONTHS)
1996 1995
------------ ------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Revenues.................................................... $128 $270
Operating income............................................ 24 81
Earnings before income taxes................................ 9 53
Income taxes................................................ (2) 18
Net income.................................................. 11 35
</TABLE>
A-65
<PAGE> 91
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED)
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, 1997
-----------------------------------------------------
OWNERSHIP PLANT IN ACCUMULATED PLANT UNDER
INTEREST SERVICE DEPRECIATION CONSTRUCTION
--------- -------- ------------ ------------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
Coal Generating
Conemaugh................................. 22.50% $ 201 $ 49 $2
Keystone.................................. 22.84% 124 40 3
Nuclear Generating
Peach Bottom.............................. 42.49% 785 367 26
Salem..................................... 42.59% 1,195 425 52
Hope Creek................................ 95.00% 4,142 1,312 15
Nuclear Support Facilities................ Various 191 46 3
Pumped Storage Facilities
Yards Creek............................... 50.00% 28 11 4
Transmission Facilities..................... Various 128 41 --
Merrill Creek Reservoir..................... 13.91% 37 15 --
Linden SNG Plant............................ 90.00% 16 22 --
</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,
---------------- ---------------- ---------------- ----------------
1997 1996(A) 1997 1996(A) 1997 1996(A) 1997 1996(A)
------ ------- ------ ------- ------ ------- ------ -------
(MILLIONS WHERE APPLICABLE)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Revenues................. $1,733 $1,798 $1,323 $1,337 $1,568 $1,335 $1,746 $1,571
Operating Income................... 309 309 219 237 301 265 286 246
Net Income......................... 140 194 91 135 176 156 153 127
Earnings per Average Share of
Common Stock (Basic and
Diluted)......................... 0.60 0.79 0.39 0.55 0.76 0.64 0.66 0.54
Average Shares of Common Stock
Outstanding...................... 232 245 232 245 232 243 232 237
</TABLE>
- ---------------
(A) See Note 16. Discontinued Operations.
A-66
<PAGE> 92
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, 1997, 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 13, 1998
A-67
<PAGE> 93
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, 1997 and 1996, and the related consolidated statements of income,
common stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1997. 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, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 13, 1998
A-68
<PAGE> 94
The New Jersey Performing Arts Center (NJPAC) is located on the riverfront at
McCarter Highway and Center Street, near the Gateway Center and Penn Station. A
total of 1,600 parking spaces are available in three surface lots and the newly
renovated underground Military Park garage.
<TABLE>
<S> <C> <C> <C>
FROM THE SOUTH FROM THE NORTH FROM THE WEST FROM NEW YORK
VIA THE NEW JERSEY VIA THE NEW JERSEY TURNPIKE: VIA ROUTE 280: Take Route VIA THE NEW JERSEY TURNPIKE:
TURNPIKE: (Northbound) (Southbound) 280 East to Exit 15 (Route Leave the city through the
Take the New Jersey Turnpike Take the New Jersey Turnpike 21 South-Downtown). At the Lincoln Tunnel and continue
North to Exit 15W South to Exit 15W or 15E traffic light at the bottom west on Route 495, staying
(Newark/The Oranges) for (Newark/The Oranges). After of the ramp, make a right left for the entrance to the
Route 280 westbound. After the toll booth, follow Route onto Route 21 South (aka New Jersey Turnpike. Take
the toll booth, follow Route 280 West to Exit 15A (Route McCarter Highway). Continue the turnpike south to Exit
280 West to Exit 15A (Route 21 South -- Downtown). on Route 21 South to Center 15W (Newark/The Oranges).
21 South -- Downtown). Follow signs to Route 21 Street, make a right on After the toll booth, follow
Follow signs to Route 21 (aka McCarter Highway) and Center Street and turn left Route 280 West to Exit 15A
(aka McCarter Highway) and turn south onto Route 21. at Mulberry Street for (Route 21 South-Downtown.
turn south onto Route 21. Follow Route 21 to Center surface lots or continue two Follow signs to Route 21
Follow Route 21 to Center Street, make a right on blocks to the Military Park (aka McCarter Highway) and
Street, make a right on Center Street and turn left garage, also located on the make a right onto Route 21
Center Street and turn left at Mulberry Street for left. South. Follow Route 21 to
at Mulberry Street for surface lots or continue two Center Street, make a right
surface lots or continue two blocks to the Military Park on Center Street and turn
blocks to the Military Park garage, also located on the left at Mulberry Street for
garage, also located on the left. surface lots or continue two
left. blocks to the Military Park
garage, also located on the
left.
VIA THE GARDEN STATE VIA THE GARDEN STATE VIA ROUTE 78: VIA MASS TRANSIT:
PARKWAY: (Northbound) PARKWAY: (Southbound) Take Route 78 East until it Board the train at New
Follow the Garden State Take the Garden State splits near Newark Airport. York's Penn Station and
Parkway north to Exit 142 Parkway South to Exit 145. Stay right and follow Route travel to Penn Station,
(Route 78). Take Route 78 Follow signs to Route 280 1 and 9 to Route 21 (aka Newark. Take the new shuttle
East. Stay right and follow eastbound. Take Route 280 McCarter Highway). Travel bus, dubbed "The Loop" to
Route 1 and 9 north to route East to Exit 15 (Route 21 across the viaduct into the NJPAC. To walk, exit the
21 (aka McCarter Highway). South-Downtown). At the downtown Newark. Stay in the station via Raymond
Travel across the viaduct traffic light at the bottom left-turn lanes and turn Boulevard and continue two
into downtown Newark. Stay of the ramp, make a right left at the second light. blocks west to Mulberry
in the left-turn lanes and onto Route 21 South (aka Continue one block and turn Street. Turn right on
turn left at the second McCarter Highway). Continue right onto Broad Street. Mulberry and walk two blocks
light. Continue one block on Route 21 South to Center Follow Broad Street 18 north to the NJPAC.
and turn right onto Broad Street, make a right on blocks to Park Place. Bear
Street. Follow Broad Street Center Street and turn left right at Park Place and
18 blocks to Park Place. at Mulberry Street for enter the Military Park
Bear right at Park Place and surface lots or continue two garage to the left or turn
enter the Military Park blocks to the Military Park right onto Center Street and
garage to the left or turn garage, also located on the right again at Mulberry
right onto Center Street and left. Street to enter surface
right again at Mulberry lots.
Street to enter surface
lots.
</TABLE>
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, 732, 973 and
908 in New Jersey, 1-800-582-5946 from area code 609 in New Jersey and
1-973-762-5100 from outside of the State.
<PAGE> 95
[PSEG LOGO]
Public Service Enterprise Group Incorporated
80 Park Plaza, Newark, New Jersey 07101-1171
[NJPAC MAP]
[NJ MAP]
Arrangements have been made to provide free parking within close proximity to
the New Jersey Performing Arts Center at locations designated (OE)P 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 shown above will be reimbursed.
Detailed directions appear on the immediately preceding page.
<PAGE> 96
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
APRIL 21, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE
BOARD OF DIRECTORS OF ENTERPRISE.
The undersigned hereby appoints E. JAMES FERLAND, RAYMOND V. GILMARTIN AND JOSH
S. WESTON, and each or any of them, proxies of the undersigned, each with full
power of substitution, to vote in their discretion (subject to any directions
indicated on the reverse side of this proxy) at the Annual Meeting of
Stockholders of Public Service Enterprise Group Incorporated (Enterprise) to be
held on April 21, 1998 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.
Shares represented by this proxy will be voted in accordance with
recommendations of the Board of Directors of Enterprise as stated on the
reverse side, unless otherwise indicated on the reverse, in which case they
will be voted as marked. Information pertaining to each proposal is included in
the Proxy Statement under proposals corresponding to the item numbers set forth
on the reverse side.
Please mark your proxy on the reverse side, sign it and date it, and return it
promptly in the envelope provided.
<PAGE> 97
March 3, 1998
You are cordially invited to join us at the 1998 Annual Meeting of
Stockholders of Public Service Enterprise Group Incorporated. This year's
meeting will be held at the New Jersey Performing Arts Center, One Center
Street, Newark, New Jersey on April 21, 1998, starting at 2:00 P.M. At the
meeting we will: (1) elect directors to fill terms that expire; (2) vote on the
ratification of Deloitte & Touche LLP as independent auditors; (3) if presented
by the proponent at the meeting, consider and act upon a stockholder proposal
relating to the Salem Nuclear Generating Station; and (4) transact such other
business as may properly come before the meeting.
It is important that your shares be voted whether or not you plan to be
present at the meeting. Please specify your choices by marking the appropriate
boxes on the proxy form below, and date, sign and return it in the enclosed
envelope promptly. 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.
If you plan to attend the Annual Meeting of Stockholders, please
indicate so by marking the appropriate box shown below. An admission ticket
will then be mailed to you. Maps and directions to reach our new meeting
location can be found at the back of the enclosed Proxy Statement. I look
forward to seeing many of you at the meeting.
Sincerely,
E. James Ferland
(Continued from other side)
PLEASE MARK ALL
ACCOUNT NUMBER SEQUENCE NUMBER CHOICES LIKE THIS [X]
- ------------------------------------------------------------------------------!
! The Board of Directors recommends a vote ! The Board of Directors !
! FOR proposals 1 and 2 ! recommends a vote AGAINST !
! ! proposal 3 !
! (1) ELECTION OF DIRECTORS: ! !
! Nominees for Class II terms expiring ! !
! in 2001 are: E. James Ferland, Irwin !(3) Stockholder Proposal-Salem!
! Lerner, Marilyn M. Pfaltz, Richard ! Nuclear Generating Station!
! J. Swift ! FOR AGAINST ABSTAIN !
! Nominee for Class III term expiring in ! [ ] [ ] [ ] !
! 1999: Conrad K. Harper ! !
! FOR WITHHOLD ! !
! all nominees listed above [ ] authority [ ] ! !
! (except as marked to the to vote for all! !
! contrary below) nominees listed! !
! above ! !
! ---------------------------------------------! !
! (INSTRUCTIONS: To withhold authority to vote ! !
! for any individual nominee, write that ! !
! nominee's name on the line provided above.) ! !
! ! !
! FOR AGAINST ABSTAIN !
! (2) Ratification of Deloitte & ! !
! Touche LLP as Independent ! !
! Auditors for the year 1998 [ ] [ ] ! [ ] !
!----------------------------------------------!------------------------------!
! If you plan to attend the Annual ! Stop annual report mailings !
! Meeting, please mark this box. [ ] ! to this account since !
! If you wish to include comments, ! duplicate copies now come !
! please mark this box and write ! to this address. [ ]!
! your comments on the reverse side ! !
! of this form. [ ] ! For change of address only, !
! ! please mark this box and !
! ! make changes to the address !
! ! below. [ ]!
!-----------------------------------------------------------------------------!
Please date and sign exactly as your
name appears hereon. When signing as
an attorney, executor, administrator,
trustee, guardian, etc., give your full
title as such. If stock is held jointly,
each joint owner should sign.
SIGNATURE __________________DATE ______
SIGNATURE __________________DATE ______
