SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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:
[_] Preliminary Proxy Statement [_] Confidential, For Use of the
Commission Only (as permitted
by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to
Rule 14a-11(c) or Rule 14a-12
Public Service Enterprise Group Incorporated
------------------------------------------------
(Name of Registrant as Specified In Its Charter)
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[PSEG 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 20, 1999
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 April20, 1999, at 2:00
P.M., for the following purposes:
1. To elect three members of Class III of the Board of Directors to
hold office until the Annual Meeting of Stockholders in 2002 and 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 1999; and
3. To transact such other business as may properly come before said
meeting or any adjournment thereof.
Stockholders entitled to vote at the meeting are the holders of Common
Stock of record at the close of business on February 26, 1999.
By order of the Board of Directors,
EDWARD J. BIGGINS, JR.
Secretary
March 2, 1999
YOUR VOTE IS IMPORTANT. PLEASE SIGN, DATE AND MAIL THE ACCOMPANYING PROXY
FORM PROMPTLY. TELEPHONE AND ELECTRONIC VOTING ARE ALSO AVAILABLE. PLEASE
USE THE TOLL-FREE TELEPHONE NUMBER OR THE INTERNET ADDRESS SHOWN ON THE
PROXY FORM.
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<TABLE>
TABLE OF CONTENTS
<CAPTION>
Page
----
<S> <C>
INTRODUCTION ................................................................... 1
VOTING SECURITIES .............................................................. 1
BOARD OF DIRECTORS ............................................................. 2
Committees of the Board ....................................................... 2
ELECTION OF DIRECTORS (Proposal 1) ............................................. 3
SECURITY OWNERSHIP OF DIRECTORS, MANAGEMENT AND CERTAIN
BENEFICIAL OWNERS ............................................................. 7
Directors and Management ...................................................... 7
Certain Beneficial Owners ..................................................... 7
EXECUTIVE COMPENSATION ......................................................... 8
Summary Compensation Table .................................................... 8
Option Grants in Last Fiscal Year (1998) ...................................... 9
Aggregated Option Exercises in Last Fiscal Year (1998) and Fiscal Year-End
Option Values (12/31/98) ..................................................... 10
Employment Contracts and Arrangements ......................................... 10
Compensation Committee Interlocks and Insider Participation ................... 11
Compensation of Directors and Certain Business Relationships .................. 11
Compensation Pursuant to Pension Plans ........................................ 12
ORGANIZATION AND COMPENSATION COMMITTEE REPORT ON EXECUTIVE
COMPENSATION .................................................................. 12
PERFORMANCE GRAPH .............................................................. 15
RATIFICATION OF THE APPOINTMENT OF INDEPENDENT AUDITORS (Proposal 2) ........... 15
LEGAL PROCEEDINGS .............................................................. 15
DATE FOR SUBMISSION OF STOCKHOLDER PROPOSALS ................................... 16
DISCRETIONARY PROXY VOTING AUTHORITY ........................................... 16
MISCELLANEOUS .................................................................. 16
APPENDIX: FINANCIAL STATEMENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ........................................................ A-1
CONSOLIDATED STATEMENTS OF INCOME .............................................A-23
CONSOLIDATED BALANCE SHEETS ...................................................A-24
CONSOLIDATED STATEMENTS OF CASH FLOWS .........................................A-26
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY ........................A-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ....................................A-28
FINANCIAL STATEMENT RESPONSIBILITY ............................................A-74
INDEPENDENT AUDITORS' REPORT ..................................................A-75
</TABLE>
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INTRODUCTION
This Proxy Statement is furnished in connection with the solicitation of
proxies by Public Service Enterprise Group Incorporated (PSEG or Enterprise) on
behalf of its Board of Directors to be voted at the 1999 Annual Meeting of
Stockholders of PSEG. PSEG 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 PSEG
Energy Holdings Incorporated (Energy Holdings), which directly owns the
non-utility businesses of PSEG. The complete mailing address of the principal
executive offices of PSEG is 80 Park Plaza, P.O.Box1171, 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, 1999.
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. In addition, this year, stockholders of record may vote
their proxies using the toll-free telephone number listed on the proxy form or
via the Internet, at the electronic address also listed on the proxy form. When
a proxy form is returned properly dated and signed, or properly voted by
telephone or electronically, 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. Stockholders voting by telephone or electronically should follow the
directions given during the call or on the computer screen. A control number
printed on the proxy form is designed to verify stockholder identity and confirm
that voting instructions are properly recorded.
For shares held in the name of a bank or broker, stockholders should follow
the voting instructions on the form received. For such shares, the availability
of telephone or Internet voting will depend on the voting processes of the
relevant bank or broker.
PSEG requests that if a stockholder plans to attend the Annual Meeting, he
or she should indicate so on the proxy form or in voting shares by telephone or
electronically. An admission ticket will then be mailed to each stockholder who
indicates an intention to attend. Maps and information regarding directions to
the meeting location at The New Jersey Performing Arts Center, in Newark, New
Jersey, may be found at the back of this Proxy Statement.
A proxy given in the form which accompanies this Proxy Statement or a vote
by telephone or electronically 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 PSEG 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 1998 Consolidated
Financial Statements of PSEG, 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 221,892,608 shares of Common Stock of PSEG
outstanding at the close of business on February 26, 1999 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 PSEG 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
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BOARD OF DIRECTORS
Management of PSEG 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 III of the Board
of Directors, T. J. Dermot Dunphy, Raymond V. Gilmartin, Conrad K. Harper and
Josh S. Weston, expire at the 1999 Annual Meeting. Messrs. Dunphy, Gilmartin and
Harper have each been nominated to serve as a director in Class III for a new
three-year term, which will expire at the 2002 Annual Meeting.
Josh S. Weston will retire as a Director at the expiration of his term at
this year's Annual Meeting. The Board wishes to thank Mr. Weston for his many
years of dedicated service.
Therefore, at this year's meeting directors will be elected to fill three
positions in Class III to serve until the 2002 Annual Meeting and until their
respective successors are elected and qualified. All the nominees were elected
to their present terms by the stockholders. The present term of Class I of the
Board of Directors expires at the 2000 Annual Meeting, and the present term of
Class II expires at the 2001 Annual Meeting. Directors in Class I and Class II
will not be elected at the 1999 Annual Meeting.
The By-Laws of PSEG 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, but
will be reduced to 10 effective upon the retirement of Mr. Weston.
The Board of Directors of PSEG holds regular monthly meetings, except in
August, and meets on other occasions when circumstances require. The Board met
15 times in 1998, 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 Energy Holdings,
except for Mr. Ferland, who serves on the Boards of both. The PSE&G Board met 12
times and the Energy Holdings Board met 15 times in 1998. Committee membership
and membership on the PSE&G and Energy Holdings Boards are shown in the
biographies under "Election of Directors".
Under the retirement policy for directors, directors who have never
been employees of the PSEG group of companies and directors who are former chief
executive officers of PSEG 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 PSEG group of companies.
COMMITTEES OF THE BOARD
The committees of the PSEG 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 as well
as environmental health and safety auditors. Reviews planned scope of future
audits. Ascertains implementation of auditors' recommendations. Reviews internal
auditing procedures and internal accounting controls. Reviews adequacy and
implementation of policies and practices relating to accounting, financial
reporting, internal auditing, operating controls, business conduct compliance
program (including environmental health and safety compliance) and business
ethics. Meets privately with representatives of the independent auditors,
internal auditors and environmental auditors. The Committee held five meetings
in 1998.
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 1998.
2
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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 the pension plans and nuclear decommissioning trust fund of
PSE&G. The Committee held six meetings in 1998.
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 1998.
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, 80Park 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 PSEG
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 PSEG 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 six meetings in 1998.
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 seven
meetings in 1998.
PROPOSAL 1
ELECTION OF DIRECTORS
At the 1999 Annual Meeting of Stockholders, three members of Class III of
the Board of Directors are to be elected to hold office until the Annual Meeting
of Stockholders in 2002 and until their respective successors are elected and
qualified.
The nominees listed below were selected by the Board of Directors of PSEG
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 or so
indicating when voting by telephone or Internet.
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 further reduced.
There is shown as to each nominee, and as to each director whose term of
office will continue after the 1999 Annual Meeting, the period of service as a
director of PSEG (and PSE&G prior to the formation of PSEG), 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
PSEG Common Stock is shown under Security Ownership of Directors and Management.
During 1998, 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.
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NOMINEES FOR ELECTION AS DIRECTOR
CLASS III--NOMINEES FOR TERMS EXPIRING IN 2002
- ----------------------- T. J. DERMOT DUNPHY has been a director since 1980.
| | Age 67. Chairman of Finance Committee and member of
| | Audit Committee and Organization and Compensation
| [PHOTO] | Committee. Director of PSEG's subsidiary, Energy
| | Holdings. Has been Chairman of the Board and Chief
| | Executive Officer of Sealed Air Corporation, Saddle
| | Brook, New Jersey (manufactures protective packaging
- ----------------------- products and systems), since November 1996 and was
T. J. Dermot Dunphy 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 58. Member of Finance Committee and Organization
| | and Compensation Committee. Director of PSEG's
| [PHOTO] | subsidiary, Energy Holdings. Has been Chairman of the
| | Board, President and Chief Executive Officer of Merck
| | & Co., Inc., Whitehouse, New Jersey (discovers,
| | develops, produces and markets human and animal
- ----------------------- health products) since November 1994. Was President
Raymond V. Gilmartin 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.
- ----------------------- CONRAD K. HARPER has been a director since 1997. Age
| | 58. Member of Audit Committee, Finance Committee and
| | Organization and Compensation Committee. Director of
| [PHOTO] | PSEG's subsidiary, PSE&G. Has been a partner in the
| | 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
Conrad K. Harper Insurance Company.
4
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DIRECTORS WHOSE TERMS CONTINUE BEYOND THE 1999 ANNUAL MEETING
AND WHO ARE NOT SUBJECT TO ELECTION THIS YEAR
CLASS I--DIRECTORS WHOSE TERMS EXPIRE IN 2000
- ----------------------- LAWRENCE R. CODEY has been a director since 1991. Age
| | 54. Member of Executive Committee and Finance
| | Committee. Has been President and Chief Operating
| [PHOTO] | Officer of PSE&G since September 1991. Director of
| | PSEG's subsidiary, PSE&G. Director of Sealed Air
| | Corporation, The Trust Company of New Jersey, United
| | Water Resources Inc. and Horizon Blue Cross Blue
- ----------------------- Shield of New Jersey.
Lawrence R. Codey
- ----------------------- ERNEST H. DREW has been a director since 1993. Age
| | 62. Member of Nuclear Committee and Organization and
| | Compensation Committee. Director of PSEG's
| [PHOTO] | subsidiary, Energy Holdings. Until retirement, was
| | Chief Executive Officer of Industries and Technology
| | Group-Westinghouse Electric Corporation, from July
| | 1997 to December 1997. Was a Member, Board of
- ----------------------- Management, Hoechst AG, Frankfurt, Germany
Ernest H. Drew (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, Ashland Inc. and Johns
Manville Corporation.
- ----------------------- FORREST J. REMICK has been a director since 1995. Age
| | 68. Chairman of Nuclear Committee and member of Audit
| | Committee and Nominating Committee. Director of
| [PHOTO] | PSEG's subsidiary, PSE&G. Has been an engineering
| | consultant since July 1994. Was Commissioner, United
| | States Nuclear Regulatory Commission, from December
| | 1989 to June 1994. Was Associate Vice
- ----------------------- President-Research and Professor of Nuclear
Forrest J. Remick Engineering at Pennsylvania State University, from
1985 to 1989.
5
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DIRECTORS WHOSE TERMS CONTINUE BEYOND THE 1999 ANNUAL MEETING
AND WHO ARE NOT SUBJECT TO ELECTION THIS YEAR
CLASS II--DIRECTORS WHOSE TERMS EXPIRE IN 2001
- ----------------------- E. JAMES FERLAND has been a director since 1986, and
| | Chairman of the Board, President and Chief Executive
| | Officer of PSEG since July 1986, Chairman of the
| [PHOTO] | Board and Chief Executive Officer of PSE&G since
| | September 1991, and Chairman of the Board and Chief
| | Executive Officer of Energy Holdings since June 1989.
| | Age 57. Chairman of Executive Committee. Director of
- ----------------------- PSEG's subsidiaries, PSE&G and Energy Holdings.
E. James Ferland Director of Foster Wheeler Corporation and The HSB
Group, Inc.
- ----------------------- IRWIN LERNER has been a director since 1981. Age 68.
| | Chairman of Organization and Compensation Committee
| | and member of Executive Committee, Nominating
| [PHOTO] | Committee and Nuclear Committee. Director of PSEG's
| | subsidiary, PSE&G. Until retirement, was Chairman,
| | Board of Directors of Hoffmann-La Roche Inc., Nutley,
| | New Jersey (prescription pharmaceuticals, vitamins
- ----------------------- and fine chemicals, and diagnostic products and
Irwin Lerner services) from January 1993 to September 1993 and
President and Chief Executive Officer from 1980 to
December 1992. Director of Humana Inc., AXYS
Pharmaceuticals, Inc., Medarex Inc., VI Technologies,
Inc. and Covance Inc.
- ----------------------- MARILYN M. PFALTZ has been a director since 1980. Age
| | 66. Chair of Nominating Committee and member of Audit
| | Committee and Finance Committee. Director of PSEG's
| [PHOTO] | subsidiary, PSE&G. Has been a partner of P and R
| | Associates, Summit, New Jersey (communication
| | specialists), since 1968. Director of AAA National
| | Association and Beacon Trust Company.
- -----------------------
Marilyn M. Pfaltz
- ----------------------- RICHARD J. SWIFT has been a director since 1994. Age
| | 54. Chairman of Audit Committee and member of
| | Nominating Committee and Nuclear Committee. Director
| [PHOTO] | of PSEG's subsidiary, Energy Holdings. Has been
| | Chairman of the Board, President and Chief Executive
| | Officer of Foster Wheeler Corporation, Clinton, New
| | Jersey (provides design, engineering, construction,
- ----------------------- manufacturing, management, plant operations and
Richard J. Swift environmental services) since April 1994. Was
President and Chief Operating Officer of Foster
Wheeler Corporation from December 1992 to April 1994.
Director of Foster Wheeler Corporation and
Ingersoll-Rand Company.
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SECURITY OWNERSHIP OF DIRECTORS, MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
DIRECTORS AND MANAGEMENT
The following table sets forth, as of February26, 1999, beneficial
ownership of PSEG 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 .................................................... 155,816(1)
Robert J. Dougherty, Jr. ............................................. 148,951(2)
Ernest H. Drew ....................................................... 4,717
T. J. Dermot Dunphy .................................................. 50,451
E. James Ferland ..................................................... 483,578(3)
Raymond V. Gilmartin ................................................. 4,717
Conrad K. Harper ..................................................... 940
Harold W. Keiser ..................................................... 37,512(4)
Irwin Lerner ......................................................... 11,359
Robert C. Murray ..................................................... 96,322(5)
Marilyn M. Pfaltz .................................................... 8,473
Forrest J. Remick .................................................... 2,838
Richard J. Swift ..................................................... 3,770
Josh S. Weston ....................................................... 10,369
All directors and executive officers as a group (20 persons) ......... 1,231,205(6)
</TABLE>
- ----------
(1) Includes the equivalent of 5 shares held under PSE&G Thrift and
Tax-Deferred Savings Plan. Includes options to purchase 134,200 shares,
13,670 of which are currently exercisable.
(2) Includes the equivalent of 839 shares held under PSE&G Thrift and
Tax-Deferred Savings Plan. Includes options to purchase 136,200 shares,
16,670 of which are currently exercisable.
(3) Includes the equivalent of 11,531 shares held under PSE&G Thrift and
Tax-Deferred Savings Plan. Includes options to purchase 268,000 shares,
26,840 of which are currently exercisable. Includes 150,000 shares of
restricted stock, which vest as described in the Summary Compensation
Table, note 5.
(4) Includes the equivalent of 12 shares held under PSE&G Thrift and
Tax-Defined Savings Plan. Includes options to purchase 37,500 shares, 3,334
of which are currently exercisable.
(5) Includes the equivalent of 1,322 shares held under PSE&G Thrift and
Tax-Deferred Savings Plan. Includes options to purchase 82,000 shares,
6,335 of which are currently exercisable.
(6) Includes the equivalent of 23,370 shares held under PSE&G Thrift and
Tax-Deferred Savings Plan. Includes options to purchase 839,200 shares,
78,352 of which are currently exercisable.
CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of February26, 1999, beneficial
ownership by any person or group known to PSEG to be the beneficial owner of
more than five percent of PSEG Common Stock. According to the Schedule 13G filed
by the owner with the Securities and Exchange Commission, these securities were
acquired in the ordinary course of business and were not acquired for the
purpose of and do not have the effect of changing or influencing the control of
PSEG and were not acquired in connection with or as a participant in any
transaction having such purpose or effect.
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL OWNERSHIP PERCENT
---------------- ----------------------- -------
Barclays Bank, PLC(1)(2) 16,742,826(1)(3) 7.2(1)(4)
- ----------
(1) As reported on Schedule 13G dated February 12, 1999.
(2) Address: 54 Lombard Street, London, England EC3P 3AH. Includes Barclays
Funds Limited; Barclays Global Investors, LTD; Barclays Life Assurance
Company Limited; Barclays Trust and Banking Company (Japan) Ltd.; Barclays
Global Investors, N.A.; Barclays Global Fund Advisors.
(3) Includes 16,108,871 shares with sole power to vote or to direct the vote
and 789 shares with shared power to vote or to direct the vote. As to all
shares, sole power to dispose or to direct the disposition.
(4) Based on 221,892,608 shares outstanding on February 26, 1999, percent of
ownership is 7.5.
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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 PSEG as of December 31, 1998 for all services rendered to PSEG and its
subsidiaries and affiliates during each year indicated.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------- -------------------------------
BONUS/ AWARDS PAYOUTS
ANNUAL -------------------- -------
INCENTIVE RESTRICTED LTIP ALL OTHER
NAME AND PRINCIPAL SALARY AWARD STOCK OPTIONS PAYOUTS COMPENSATION
POSITION YEAR ($) ($)(1) ($) (#)(2) ($)(3) ($)(4)
- ------------------ ---- ------- -------- ----------- ------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
E. James Ferland .................. 1998 762,070 621,400 5,184,375(5) 150,000 92,684 28,647
Chairman of the Board, 1997 712,261 425,200 0 118,000 108,702 15,747
President and CEO of 1996 712,261 279,811 0 6,500 168,084 10,994
PSEG
Lawrence R. Codey ................. 1998 455,250 274,200 0 75,000 44,744 5,043
President and Chief 1997 435,327 249,400 0 59,200 50,325 5,459
Operating Officer of PSE&G 1996 435,327 141,968 0 3,000 81,144 5,934
Robert J. Dougherty, Jr. .......... 1998 403,449 242,200 0 75,000 39,950 4,190
President and Chief 1997 383,525 196,500 0 58,600 36,234 4,470
Operating Officer of Holdings 1996 379,586 110,360 0 2,600 57,960 4,444
Robert C. Murray .................. 1998 373,564 225,000 0 50,000 31,960 4,962
Vice President and Chief 1997 345,671 154,900 0 32,000 36,234 5,260
Financial Officer of PSEG 1996 332,721 83,887 0 2,000 57,960 5,248
Harold W. Keiser .................. 1998 308,047 155,400 0 37,500 0 5,888
Chief Nuclear Officer and
President-Nuclear Business
Unit of PSE&G(6)
</TABLE>
- --------------
(1) Amount awarded in given year was earned under Management Incentive
Compensation Plan (MICP) and determined and paid in following year based on
individual performance and financial and operating performance of PSEG and
PSE&G, including comparison to other companies.
(2) All grants of options to purchase shares of PSEG Common Stock were made
under the Long-Term Incentive Plan (LTIP). For 1998, all options granted
were non-tandem (as described below), except for 2,500 options granted to
Mr. Keiser. For 1997, of the options granted to Messrs. Ferland, Codey,
Dougherty and Murray, respectively, 100,000; 50,000; 50,000 and 25,000 were
non-tandem and 18,000; 9,200; 8,600 and 7,000 were tandem. For 1996, all
options granted were tandem. Tandem grants are made with an equal number of
performance units and dividend equivalents which may provide cash payments,
dependent upon future financial performance of PSEG in comparison to other
companies and dividend payments by PSEG, to assist recipients in exercising
options granted. The tandem 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. Non-tandem grants are made without
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.
8
<PAGE>
(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 KEISER
-------------- -------------- -------------- -------------- ---------------
THRIFT MICP THRIFT MICP THRIFT MICP THRIFT MICP THRIFT MICP
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
($) ($) ($) ($) ($) ($) ($) ($) ($) ($)
1998 4,801 383 4,802 241 4,001 189 4,805 157 5,888 0
1997 4,801 1,122 4,802 657 4,003 467 4,802 458 -- --
1996 4,150 2,861 4,502 1,432 3,750 694 4,502 746 -- --
</TABLE>
In addition, 1998, 1997 and 1996 amounts include for Mr. Ferland $23,463,
$9,824 and $3,983, respectively, representing interest on compensation
deferred under PSE&G's Deferred Compensation Plan in excess of 120% of the
applicable federal long-term rate as prescribed under Section 1274(d) of
the Internal Revenue Code. Under PSE&G's Deferred Compensation Plan,
interest is paid at prime rate plus 1/2%, adjusted quarterly.
(5) Value as of original grant date, based on the closing price on the New York
Stock Exchange on June 16, 1998, with respect to an award to Mr. Ferland of
150,000 shares of restricted stock, of which 60,000 shares vest in 2002;
20,000 shares vest in 2003; 30,000 shares vest in 2004; and 40,000 shares
vest in 2005. Dividends on the entire grant are paid in cash from the date
of grant.
(6) Mr. Keiser was first employed in January 1998.
OPTION GRANTS IN LAST FISCAL YEAR (1998)
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
------------------------------------------
NUMBER OF % OF TOTAL EXERCISE GRANT DATE
SECURITIES OPTIONS GRANTED OR BASE PRESENT
UNDERLYING TO EMPLOYEES PRICE EXPIRATION VALUE
NAME OPTIONS GRANTED IN FISCAL YEAR ($/SH) DATE ($) (4)
---- --------------- ------------------------ -------- -----------
<S> <C> <C> <C> <C> <C>
E. James Ferland ..................... 150,000(1) 17.8 39.3125 12/03/08 657,000
Lawrence R. Codey .................... 75,000(1) 8.9 39.3125 12/03/08 328,500
Robert J. Dougherty, Jr. ............. 75,000(1) 8.9 39.3125 12/03/08 328,500
Robert C. Murray ..................... 50,000(1) 5.9 39.3125 12/03/08 219,000
Harold W. Keiser ..................... 25,000(1) 3.0 39.3125 12/03/08 109,500
10,000(2) 1.2 29.5625 1/20/08 34,800
2,500(3) 0.3 31.5625 1/21/08 25,325
</TABLE>
- ----------
(1) Granted under LTIP not in tandem with performance units and dividend
equivalents, with exercisability commencing December3, 1999, December3,
2000 and December3, 2001, respectively, with respect to one-third of the
options at each such date.
(2) 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.
(3) 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 PSEG in comparison to other companies and dividend
payments by PSEG, to assist recipients in exercising options, with
exercisability commencing January 1, 2001. 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.
(4) Determined using the Black-Scholes model, incorporating the following
material assumptions and adjustments for the grants expiring January 20,
2008, January 21, 2008 and December 3, 2008, respectively: (a) exercise
prices of $29.5625, $31.5625 and $39.3125, equal to the fair market value
of the underlying PSEG Common Stock on the date of
9
<PAGE>
grant (or as of December 16, 1997 for the grant expiring January 20, 2008),
to replicate grants previously given to other executive officers for
similar performance periods); (b) an option term of ten years on all
grants; (c) interest rates of 5.54%, 5.81% and 4.65% that represent the
interest rates on U.S. Treasury securities on the dates of grant (or
December 16, 1997 for the grant expiring January 20, 2008) with a maturity
date corresponding to that of the option terms; (d) volatilities of 19.12%,
19.12% and 20.17% calculated using daily PSEG 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 (expiring
January 21, 2008), since dividend payments accrue while the option is held;
(f) dividend yields of 6.84% and 5.49% on the non-tandem grants (expiring
January 20, 2008 and December 3, 2008); and (g) reductions of approximately
7.8% and 7.82% for the non-tandem and 11.53% for the tandem grants,
respectively, to reflect the probability of forfeiture due to termination
prior to vesting, and approximately 2.4%, 20% and 6.23% for the grants
expiring January 20, 2008, January 21, 2008 and December 3, 2008,
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 PSEG
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.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR (1998) AND
FISCAL YEAR-END OPTION VALUES (12/31/98)
VALUE OF UNEXERCISED
SHARES NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED OPTIONS AT FY-END (#)(1) AT FY-END (3)
ON VALUE -------------------------- --------------------------
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (#)(1) ($)(2) (#) (#) ($) ($)
---- --------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
E. James Ferland ......................... 5,800 63,075 33,340 241,160 347,986 1,061,576
Lawrence R. Codey ........................ 2,800 18,375 17,370 120,530 185,018 530,982
Robert J. Dougherty, Jr. ................. 2,500 14,563 16,670 119,530 173,993 519,907
Robert C. Murray ......................... 2,000 21,875 8,335 75,665 86,997 305,441
Harold W. Keiser ......................... 0 0 3,334 34,166 34,799 107,858
</TABLE>
- ---------------
(1) Does not reflect any options granted and/or exercised after year-end
(12/31/98). 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 PSEG
Common Stock on date of exercise.
(3) Represents difference between market price of PSEG Common Stock and the
respective exercise prices of the options at fiscal year-end (12/31/98).
Such amounts may not necessarily be realized. Actual values which may be
realized, if any, upon any exercise of such options will be based on the
market price of PSEG Common Stock at the time of any such exercise and thus
are dependent upon future performance of PSEG Common Stock.
EMPLOYMENT CONTRACTS AND ARRANGEMENTS
PSEG has entered into an employment agreement dated as of June 16, 1998
with Mr. Ferland covering his employment as Chief Executive Officer through
March 31, 2005. Under the Agreement, Mr. Ferland has agreed not to retire prior
to March 31, 2002, but may retire thereafter. The Agreement provides that Mr.
Ferland will be renominated for election as a Director during his employment
under the Agreement. The Agreement provides that Mr. Ferland's base salary,
target annual incentive bonus and long term incentive bonus will be determined
based on compensation practices for CEOs of similar companies and that his
annual salary will not be reduced during the term of the Agreement, and awards
him 150,000 shares of restricted PSEG Stock, of which 60,000 shares vest 2002;
20,000 shares vest in 2003; 30,000 shares vest in 2004; and 40,000 shares vest
in 2005. Any non-vested shares are forfeited upon his retirement unless the
Board of Directors, in its discretion, determines to make payment. The Agreement
provides for the granting of 22 years of pension credit for Mr. Ferland's prior
service, which was awarded at the time of his employment. The Agreement further
provides that if Mr. Ferland is terminated without "Cause" or resigns for "Good
Reason" (as those terms are defined in the Agreement) during the term of the
Agreement, the entire stock award becomes vested, he will be paid a benefit of
two times base salary and target bonus, and welfare benefits will be continued
for two years unless sooner employed. In the event such a termination occurs
after a "Change in Control" (as defined), the payment to Mr. Ferland becomes
three times the sum of salary and
10
<PAGE>
target bonus, continuation of welfare benefits for three years unless sooner
reemployed, payment of the net present value of providing three years additional
service under PSEG's retirement plans, and a gross-up for excise taxes on any
termination payments due under the Internal Revenue Code. The Agreement provides
that Mr. Ferland is prohibited from competing with or recruiting employees from
PSEG or its subsidiaries or affiliates for two years after termination of
employment. Violation of these provisions requires a forfeiture of a portion of
the restricted stock grant and certain other benefits.
The principal remaining applicable terms of an employment agreement entered
into with Mr. Murray at the time of his employment, as modified in 1998, provide
for the grant of additional years of credited service for retirement purposes in
light of allied work experience of five years after completion of five years of
employment, and up to seventeen years after completion of approximately nine
years of employment.
The principal remaining applicable terms of an employment agreement entered
into with Mr. Keiser at the time of his employment provide that his salary may
not be decreased during the first five years of employment, if discharged
without cause during such period he will be paid his salary for a twelve-month
period or the remainder of the five year period, whichever is less, and the
grant of twenty years of additional credited service for retirement purposes
after completion of five years of employment, in light of allied work
experience.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During all or part of 1998, each of the following individuals served as a
member of the Organization and Compensation Committee: Irwin Lerner, Chairman,
Ernest H. Drew, T.J. Dermot Dunphy, Raymond V. Gilmartin, Conrad K. Harper,
Marilyn M. Pfaltz and Josh S. Weston. During 1998, no member of the Organization
and Compensation Committee was an officer or employee or a former officer or
employee of the PSEG group of companies. During 1998, 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 PSEG during 1998.
COMPENSATION OF DIRECTORS AND CERTAIN BUSINESS RELATIONSHIPS
A director who is not an officer of PSEG 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 PSEG, PSE&G or Energy Holdings. Fifty percent of the annual
retainer is paid in PSEG Common Stock. No additional retainer is paid for
service as a director of PSE&G or Energy Holdings. Beginning in 1999, each
Committee Chair will receive an additional annual retainer of $3,000.
PSEG also maintains a Stock Plan for Outside Directors pursuant to which
directors who are not employees of PSEG or its subsidiaries receive 300 shares
of restricted stock for each year of service as a director. Beginning in 1999,
this amount will be increased to 600 shares annually. Such 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 70thbirthday. This restriction would be deemed to have been satisfied
if the director's service were terminated after a "change in control" as defined
in the Plan or if the director were to die in office. PSEG 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.
11
<PAGE>
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 age65 or death. These amounts are reduced
by Social Security benefits and certain retirement benefits from other
employers. Pensions in the form of joint and survivor annuities are also
available.
<TABLE>
PENSION PLAN 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
1,300,000 ......................... 780,000 845,000 910,000 975,000
</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, Murray and Keiser will have accrued approximately 48,
41, 48, 41and 30 years of credited service, respectively, as of age65.
ORGANIZATION AND COMPENSATION COMMITTEE
REPORT ON EXECUTIVE COMPENSATION
The compensation program for executive officers of PSEG, PSE&G and Energy
Holdings is administered by the Organization and Compensation Committee of the
PSEG Board of Directors. During 1998, the Committee consisted solely of
non-employee directors. Effective March 2, 1998, the Committee membership
changed 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. Over the past
several years, the Committee has shifted the relationship of these elements to
place a higher proportion on stock options to increase the linkage of executive
compensation with long-term shareholder value. 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 Energy Holdings positions, relevant 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
12
<PAGE>
corporate performance criteria include attainment of business unit plans and
financial targets as well as individual measures for each executive officer
related to such person's area of responsibility. In addition, factors such as
leadership ability, managerial skills and other personal aptitudes and
attributes are considered. Base salaries for satisfactory performance are
targeted at the median of the competitive market. Generally, for 1998, base
salaries were increased from 1997 levels to reflect general market adjustments
for comparable positions.
For fiscal year 1998, the base salary of E. James Ferland, Chairman of the
Board, President and Chief Executive Officer, based on overall performance and
consideration of market data, was set at a rate which was slightly below the
median of comparable size utilities and 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 Energy Holdings 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 Energy Holdings 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 25% to 55%, established by the Committee. The target
percentages were increased for 1998 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 goal for 1998 was based upon a comparison of PSEG
return on capital of a group of utilities which comprise the Dow Jones Utilities
Index and results against target in PSE&G's Customer Satisfaction Management
Survey Weighted Average Index, which surveys satisfaction among five customer
classes. Beginning in 1998, the return on capital was measured as of September
30, rather than December 31, in order to permit award determinations to be made
and paid closer in time to year-end.
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 results of the
Customer Satisfaction Management Survey. No award is granted if PSEG'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 1998 these corporate
factors were financial performance, nuclear performance, cost savings,
regulatory and public policy strategies, new business development, customer
satisfaction, business strategy, safety, restructuring and business systems
integration.
Annual awards are determined within 120 days of the end of the fiscal year.
Awards for 1998 performance, including Mr. Ferland's, were determined in
February 1999. Mr. Ferland's 1998 annual incentive award, as determined in
February 1999 based upon 1998 performance, reflects that (i) PSEG's 1998 return
on capital ranked above the median of the comparison group, the Dow Jones
Utilities Index, (ii) the results of the Customer Satisfaction Management Survey
exceeded the target and (iii) improvements were made in certain of PSEG's
operating activities. For 1998, Mr. Ferland's target award was set at 55% of
salary and 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 1998, the corporate goal factor was 1.3 and Mr.
Ferland's individual goal factor was 1.136. For each of those years, Mr.
Ferland's specific objectives primarily reflected the individual goals of the
executive officers of PSEG, 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 PSEG and its subsidiaries to increase their
ownership of PSEG 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 PSEG'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 1998,
primarily 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 the case of tandem grants, as to which a grant to
only one executive officer was made in 1998, cash payment is made only if the
specified performance level is achieved, dividend equivalents have accrued and
options are exercised. Any
13
<PAGE>
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 PSEG 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 1998, 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 1998, Mr. Ferland was granted 150,000 non-tandem options.
The grant of stock options to Mr. Ferland was at approximately the median of the
comparative market data.
In 1998, the performance unit value was determined by PSEG'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 PSEG in
the group, the greater the value of the performance unit. If PSEG ranks in the
top three out of fifteen in the group, executives receive 125% of the target
award. If PSEG ranks as the fourth company, executives receive 100% of the
target award, with decreasing awards from 90% down to 10%, if PSEG is the fifth
through the thirteenth company, respectively. No award is given if PSEG's total
return to shareholders falls below the thirteenth company out of fifteen.
In 1998, PSEG's long-term performance as measured by the total return to
shareholders over the 1995 through 1997 period placed it as the twelfth company.
Therefore, performance unit awards equal to 20% of the target award were
granted.
Mr. Ferland was awarded 150,000 shares of restricted PSEG Common Stock
under an Employment Agreement entered into in 1998, which shares vest in stages
annually through 2005. The award was designed to align his interests with an
increase in shareholder value and to incent him to remain with PSEG as CEO
through March 31, 2005.
Section 162(m) of the Internal Revenue Code, which became effective
January1, 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 1998 for Federal income tax purposes exceeded $1 million.
The Committee and PSEG 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:
Irwin Lerner, Chairman Raymond V. Gilmartin
Ernest H. Drew Conrad K. Harper
T. J. Dermot Dunphy Josh S. Weston
14
<PAGE>
PERFORMANCE GRAPH
The graph below shows a comparison of the five-year cumulative total return
assuming $100 invested on December 31, 1993 in PSEG Common Stock, the S&P 500
Composite Stock Price Index and the Dow Jones Utilities Index.
O PSEG
O S & P 500
O Dow Jones Utilities
[GRAPHICAL REPRESENTATION OF LINE CHART]
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
PSEG 100.00 89.74 111.70 107.51 135.87 180.83
S&P 500 Stock Index 100.00 101.32 139.40 171.40 228.59 293.91
Dow Jones Utilities 100.00 84.71 111.80 121.98 150.03 178.35
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 PSEG for 1999, 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.
LEGAL PROCEEDINGS
As previously disclosed in PSEG's reports filed with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934, in October
1995, PSEG 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 PSEG 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 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
15
<PAGE>
to appeal were unsuccessful. The defendants have filed motions for summary
judgment to dismiss all four of the cases, which motions are pending. One of the
plaintiffs has sold her shares and has withdrawn from the litigation. Another of
the plaintiffs (a profit sharing plan) has been dissolved, and one of the
individual participants in the plan is maintaining the litigation in his
individual name. 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 PSEG and certain changes in
the composition of PSEG's Board of Directors. Discovery in all four cases is
proceeding to permit plaintiffs to respond to the defendants' motions for
summary judgment.
As previously disclosed in PSEG's reports filed with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934, on June 25,
1998, a complaint was filed against the directors of PSEG, and PSEG as a nominal
defendant, by the same purported shareholder of PSEG who instituted the December
1995 shareholder derivative suit, alleging that the 1996, 1997 and 1998 proxy
statements provided to shareholders of PSEG were false and misleading by reason,
among other things, of failure to disclose certain material facts relating to
(i) the controls over and oversight of PSEG's nuclear operations, (ii) the
condition of problems at and reserves with respect to PSEG's nuclear operations,
(iii) the demand letter and derivative litigation disclosed above, (iv) PSEG's
liabilities to the Salem co-owners as a result of the shutdown of the Salem
plants and (v) a shareholder proposal relating to operations of Salem 1 and 2
which was voted upon at the 1998 annual meeting of shareholders. The complaint
sought to have the 1996, 1997 and 1998 proxy statements declared to be in
violation of law, and to set aside the elections of directors of PSEG, the
ratification of the selection of Deloitte & Touche LLP as PSEG's auditors at
those annual meetings and the other matters voted upon at the 1996, 1997 and
1998 annuals meetings, and to require PSEG to conduct a special meeting of
shareholders providing for election of directors following timely dissemination
of a proxy statement approved by the Court hearing this matter, which should
include as nominees for election as directors persons having no previous
relationship with PSEG or the current directors, and other relief. A motion to
dismiss the complaint was granted by the Court on November 10, 1998, except with
respect to allegations concerning the 1998 shareholder proposal and with respect
to the disclosure in the 1998 proxy statement of the settlement of litigation
between PSE&G and the Salem co-owners. Following the filing of an amended
complaint and a second amended complaint, the Court, on January 19, 1999, again
granted defendants' motion to dismiss the second amended complaint, again except
to the extent set forth in the Court's November 10, 1998 decision. Discovery on
the two remaining claims has commenced.
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 12, 1999.
DISCRETIONARY PROXY VOTING AUTHORITY
If PSEG is not notified by January 25, 2000 of any proposal intended to
be presented for consideration at the 2000 Annual Meeting of Stockholders, then
the proxies named by PSEG management with respect to that meeting shall have
discretionary voting authority with respect to such proposal if presented at the
meeting.
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. As of the date of this Proxy Statement, the
Board of Directors and the management of PSEG did not know of any other matters
which might be presented for stockholder action at the meeting, except for
matters omitted from this Proxy Statement pursuant to rules of the Securities
and Exchange Commission.
The cost of soliciting proxies in the form accompanying this Proxy
Statement will be borne by PSEG. In addition to solicitation by mail, proxies
may be solicited by directors, officers and employees of PSEG and its
subsidiaries, in person or by telephone, telegraph or facsimile. PSEG 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. PSEG 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
16
<PAGE>
year 1998, 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 PSEG'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 PSEG 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 2, 1999
17
<PAGE>
APPENDIX
FINANCIAL STATEMENTS
PAGE
----
Management's Discussion and Analysis of
Financial Condition and Results of Operations ......................... A-1
Consolidated Statements of Income ....................................... A-23
Consolidated Balance Sheets ............................................. A-24
Consolidated Statements of Cash Flows ................................... A-26
Consolidated Statements of Common Stockholders' Equity .................. A-27
Notes to Consolidated Financial Statements .............................. A-28
Financial Statement Responsibility ...................................... A-74
Independent Auditors' Report ............................................ A-75
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PSEG
This discussion refers to the Consolidated Financial Statements and
related Notes of Public Service Enterprise Group Incorporated (PSEG) and should
be read in conjunction with such statements and notes.
CORPORATE STRUCTURE
PSEG has two principal direct wholly-owned subsidiaries: Public Service
Electric and Gas Company (PSE&G) and PSEG Energy Holdings Inc. (Energy
Holdings), formerly Enterprise Diversified Holdings Incorporated. PSEG's largest
subsidiary, PSE&G, is an operating public utility providing electric and gas
service in certain areas within the State of New Jersey.
Energy Holdings is the parent of PSEG's non-utility businesses: PSEG
Global Inc. (Global), formerly Community Energy Alternatives Incorporated, an
investor in and developer and operator of projects in the generation and
distribution of energy, including cogeneration and independent power production
(IPP) facilities, electric distribution companies, exempt wholesale generators
(EWGs) and foreign utility companies (FUCOs); PSEG Resources Inc. (Resources),
formerly Public Service Resources Corporation, which has made primarily passive
investments; PSEG Energy Technologies Inc. (Energy Technologies), formerly
Energis Resources Incorporated, 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. Energy Holdings also has two finance subsidiaries: PSEG Capital
Corporation (PSEG Capital), which provides privately-placed debt financing to
Energy Holdings' operating subsidiaries, except Energy Technologies, on the
basis of a minimum net worth maintenance agreement with PSEG and Enterprise
Capital Funding Corporation (Funding), which provides privately-placed debt
financing to Resources, Global and their subsidiaries, which debt is guaranteed
by Energy Holdings,
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but without direct support from PSEG. EGDC has been conducting a controlled exit
from its real estate business since 1993. In July 1996, Energy Holdings sold
Energy Development Corporation (EDC), an oil and gas subsidiary.
As of December 31, 1998 and 1997, PSE&G comprised 82% and 83%,
respectively, of PSEG's assets. For each of the years 1998, 1997 and 1996, PSE&G
revenues were approximately 94%, 96%, and 96%, respectively, of PSEG's revenues
and PSE&G's earnings available to PSEG for such years were 92%, 92% and 87%,
respectively, of PSEG's net income.
OVERVIEW OF 1998 AND FUTURE OUTLOOK
In 1998, energy industry restructuring continued to advance in New Jersey
as PSE&G completed the evidentiary hearings related to the Energy Master Plan
and the Office of Administrative Law filed its decision providing its
recommendations to the New Jersey Board of Public Utilities (BPU). On February
9, 1999, the New Jersey Electric Discount and Energy Competition Act (Energy
Competition Act) was enacted. It provides that all New Jersey retail electric
customers may select their electric supplier commencing August 1, 1999 and all
New Jersey retail gas customers may select their gas suppliers commencing
January 1, 2000, thus fully opening the New Jersey energy markets to
competition. The Energy Competition Act also:
o Requires electric rate decreases of at least 10%, to be phased in
over a period of up to 36 months.
o Allows utilities to have an opportunity to recover up to 100% of
electric-related stranded (above market) costs.
o Allows securitization of up to 75% of electric-related stranded
costs.
o Permits the BPU to require the functional separation or divestiture
of generating assets if required for competition to develop.
o Provides for customer account services (e.g., metering, billing and
related administrative services) to become competitive in one year.
o Authorizes private and municipal aggregation of customers to
collectively choose their electric supplier.
o Authorizes "shopping credits" or discounts for customers that switch
from their current electric utility supplier.
o Requires disclosure of the environmental impact of generation used
for supplying electric customers.
o Authorizes the collection of costs of certain social programs,
nuclear plant decommissioning, demand side management, manufactured
gas plant clean up costs and consumer education through a
non-bypassable Societal Benefits Charge.
The BPU has been conducting related proceedings pursuant to the New Jersey
Energy Master Plan (Energy Master Plan), under which the BPU is expected to
issue a series of orders that will decide both generic issues for the energy
industry (e.g., affiliate standards) and company specific matters (e.g. the
levels of rate decrease, shopping credit, stranded asset recovery and
securitization) for each utility. The BPU has set a target date of March 31,
1999 for issuing an electric restructuring order, but has yet to establish a
target date for the gas restructuring order. For further discussion of the
aforementioned BPU activities, the Energy Competition Act and the forthcoming
BPU proceedings (collectively, the Energy Master Plan Proceedings), see Note 2.
Regulatory Issues of Notes to Consolidated Financial Statements (Notes). These
decisions will fundamentally change the energy industry in New Jersey and will
result in competitive markets for electric and gas supply and for customer
services. The transmission and distribution businesses will remain regulated.
The outcome of these proceedings could have a material adverse impact on PSEG's
and PSE&G's financial condition, results of operations and net cash flows
including a potentially material impact resulting from the discontinuation of
the regulated accounting model currently used by PSE&G. For discussion of
potential accounting changes resulting from deregulation, see Note 19.
Accounting Matters of Notes.
PSEG has been engaged in the competitive energy business for a number of
years through certain of its non-utility subsidiaries. Due to the regulatory
changes outlined above, in the future, PSEG will include a larger component of
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<PAGE>
competitive businesses. As the unregulated component of the business continues
to grow, potential financial risks and rewards will be greater, financial
requirements will change, and the volatility of earnings will increase. The
pending regulatory decisions and the business experience PSEG has acquired in
operating non-regulated energy business will be significant components in
determining future success.
As part of its Energy Master Plan proposal, PSE&G has proposed to recover
$2.5 billion of its potentially stranded costs through the issuance of its
transition bonds, referred to as securitization. The Energy Competition Act
provides that the net proceeds from securitization must be used to reduce
utility debt and equity. Dependent upon the level of securitization authorized
by the BPU in the Energy Master Plan Proceedings, PSE&G may use a number of
alternatives to reduce utility debt and equity, including purchasing outstanding
PSEG common stock and the redemption, tender or purchase of outstanding PSE&G
mortgage bonds and PSE&G preferred stock. For further discussion of
securitization, see Note 2. Regulatory Issues of Notes.
To the extent that recovery of stranded costs occasioned by deregulation
are not probable of recovery and not eligible for deferred accounting treatment
under Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation" (SFAS 71) and 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), PSE&G would incur an
extraordinary, non-cash charge to operations, which could be material to the
financial position and results of operations of PSEG and PSE&G. For discussion
of potential accounting changes due to deregulation, see Note 19. Accounting
Matters of Notes.
PSEG and PSE&G believe that the end result of the Energy Master Plan
Proceedings 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, write down of asset values, reduction in dividend
payments and adverse impacts on revenues due to the mandated electric rate cut,
electric and gas retail choice and fuel and energy price risks. 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.
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 are affecting how PSEG conducts business and its financial
prospects in the future. Competitive changes in the utility industry continued
to occur in 1998 and will continue to occur in 1999. For discussions of the New
Jersey Energy Master Plan Proceedings and other rate matters, see Note 2.
Regulatory Issues and Note 3. Regulatory Assets and Liabilities of Notes.
The New Jersey Gross Receipts and Franchise Tax (NJGRT) was eliminated
effective January 1, 1998 and replaced with a combination of the New Jersey
Corporate Business Tax which is a State income tax, the State sales and use tax
and a Transitional Energy Facility Assessment (TEFA), with no material impact on
the financial condition, results of operations and net cash flows of PSEG and
PSE&G. As a result of such tax reform, after the phase out of the TEFA, the
effective state tax rate applicable to PSE&G will be substantially reduced,
putting PSE&G on a more level playing field with competitors. For additional
discussion of energy tax reform, see Note 12. Income Taxes of Notes.
To the extent that the discussion that follows reports on business
conducted under full monopoly regulation of the utility business, it must be
understood that such business will change in 1999 and that past results are not
necessarily an indication of future business prospects or financial results.
In 1998, PSE&G's operations were highlighted by the return to service of
Salem 1 and the overall successful operation of the nuclear generation program.
Complimenting PSE&G's generation capability was the activity of its wholesale
energy operations which positively contributed to PSE&G's results and, through
its risk management policies, mitigated PSE&G's exposure to the dramatic price
volatility and credit concerns seen throughout the energy commodity markets
during the summer of 1998 (see Qualitative and Quantitative Disclosures About
Market Risk).
In 1998, Energy Holdings continued to implement its strategy to develop its
business through international expansion as Global made its first investment in
India and continued its growth in Latin America through the acquisition of its
third
A-3
<PAGE>
Argentine electric distribution company. Resources also continued its investment
strategy through its investments in several leveraged leases on energy-related
assets in Europe. For discussion of related risks, see Qualitative and
Quantitative Disclosures About Market Risk and Foreign Operations.
Going forward, PSEG will continue to pursue its strategies to grow its
family of businesses. As previously reported, more emphasis will be placed on
finding opportunities for expansion outside of its traditional utility services
and markets. PSE&G's strategy is to size its electric generation fleet in New
Jersey to meet its anticipated needs, while seeking to increase its value and
manage commodity price risk through its wholesale trading activity. PSE&G will
also seek to capitalize on synergies which may exist with its natural gas
purchasing and trading activities. PSE&G's transmission and distribution
strategy, both gas and electric, is to provide cost-effective, high quality
service. PSEG will also consider opportunities for expansion through business
combinations. Global's strategy is to invest in both generation and distribution
facilities worldwide with the goal of creating long-term value. Resources'
strategy is to continue focusing on passive investments in the energy sector
worldwide seeking to provide earnings and economic value. Energy Technologies'
strategy is to expand upon the current energy related services it provides to
industrial and commercial customers to create long-term value and to participate
in the retail energy marketplace.
Successful implementation of these strategies, coupled with the
restructuring of the electric and gas industries will shift more of the assets
and earnings of the PSEG companies from regulated to competitive businesses. As
a result of the deregulation of the electric utility industry, PSE&G could be
required to separate its electric generation services, and potentially other
competitive services, from its regulated utility operations and to possibly
transfer those operations to an entity functionally independent from PSE&G.
RESULTS OF OPERATIONS
Basic and diluted earnings per share of PSEG common stock (Common Stock)
were $2.79 in 1998, representing an increase of $0.38 per share or 16% from
1997. Basic and diluted earnings per share were $2.41 in 1997, a decrease of
$0.11 per share or 4% from 1996.
PSE&G's contribution to earnings per share of Common Stock in 1998
increased $0.37 or 17% compared to 1997 primarily due to the settlement of the
lawsuits filed by the co-owners of Salem which negatively impacted 1997 earnings
by $0.27 per share, an increase in electric revenues resulting from considerably
warmer weather in the third quarter of 1998 and wholesale power activities of
PSE&G (see Item 7A. Qualitative and Quantitative Disclosures About Market Risk).
These increases were partially offset by lower gas sales in 1998 due to mild
winter weather during the 1998 heating seasons. It is expected that PSE&G's 1999
earnings will be impacted by the outcome of the Energy Master Plan Proceedings.
Energy Holdings' contribution to earnings per share in 1998 increased
$0.01 or 5% compared to 1997. Energy Holdings' earnings were primarily those of
PSEG Resources due to the strong overall performance of its investment
portfolio, including leveraged leases, limited partnerships, leveraged buyout
funds and marketable securities. Global's 1998 earnings were negatively impacted
by the loss on the sale of its investment in an electric generating facility
located in Colombia. Global's 1999 earnings will be negatively impacted as a
result of the recent economic developments in Brazil, including the devaluation
of its currency, however, this is not expected to have a material adverse effect
on the results of operations for PSEG. For further discussion, see Foreign
Operations and Note 20. Subsequent Events of Notes.
PSE&G's contribution to earnings per share in 1997 decreased $0.07 or 3%
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. For discussion of the December 31st Order, see Note 2.
Regulatory Issues of Notes.
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<PAGE>
Energy Holdings' contribution to earnings per share in 1997 decreased
$0.14 or 17% compared to 1996 primarily due to the inclusion in 1996 of earnings
of $0.10 per share related to the discontinued operations of EDC and higher
operating expenses of Energy Technologies as it continued to grow.
As a result of PSEG'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.
PSE&G--REVENUES
Certain of the below listed year to year variances did not impact earnings
as there was a corresponding variance in expense. To the extent fuel revenue and
expense flowed through the LEAC and LGAC mechanisms, variances in fuel revenues
and expenses offset and thus had no direct effect on earnings. These include
base fuel revenues, demand side management (DSM) revenue and Remediation
Adjustment Charge (RAC) revenue. See Note 2. Regulatory Issues and Note 3.
Regulatory Assets and Liabilities of Notes for a discussion of LEAC, LGAC, RAC
and DSM and their current and proposed status under the Energy Competition Act.
ELECTRIC
Electric revenues increased $113 million or 3% in 1998 and decreased $26
million or 1% in 1997. The increase in 1998 was primarily due to higher sales
resulting from considerably warmer weather in the third quarter of 1998
augmented by positive economic factors in New Jersey. Additionally, revenue from
wholesale power activities and DSM revenue were higher in 1998 than in 1997.
These increases were partially offset by a decrease to revenue caused by New
Jersey energy tax reform in 1998. For a discussion of energy tax reform, see
Note 12. Income Taxes of Notes. Collection of New Jersey Gross Receipts and
Franchise Tax (NJGRT) was reflected in revenue and expense in prior years. As a
result of energy tax reform, the portion of NJGRT replaced by the New Jersey
sales and use tax is no longer reflected in revenue or expense on the income
statement. State sales and use tax is a liability of the customer, collected by
PSE&G and remitted to the State and is recorded in Other Current Liabilities on
the Consolidated Balance Sheets.
The decrease in 1997 was primarily due to lower kilowatt sales from
unfavorable weather partially offset by 1996 refunds required by the December
31st Order.
GAS
Gas revenues decreased $378 million or 20 % in 1998 and increased $56
million or 3% in 1997. The decrease in 1998 is primarily due to lower therm
sales resulting from milder winter weather in 1998 and energy tax reform.
PSE&G--EXPENSES
NET INTERCHANGED POWER AND FUEL FOR ELECTRIC GENERATION
Net Interchanged Power and Fuel for Electric Generation increased $36
million or 4% in 1998 and decreased $10 million or 1% in 1997. The increase in
1998 was primarily due to increased sales of electricity resulting in increased
purchases of fuel for electric generation and purchases of power from the PJM
Interconnection, L.L.C. (PJM) pool. Effective January 1, 1998, the amount
included for the 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 PJM market clearing price. Effective
April 1, 1998, PJM, as independent system operator (ISO), replaced the PJM
uniform market clearing price with locational marginal pricing (LMP) for
determining the market clearing pricing to energy providers. Experience to date
shows no material adverse impact of this change to LMP on PSE&G's cost of Net
Interchanged Power and Fuel for Electric Generation.
To the extent fuel revenue and expense flow through the LEAC mechanism,
variances in fuel revenues and expenses offset and thus have no direct effect on
earnings. In 1999, the LEAC mechanism will be discontinued as a result of the
Energy Master Plan Proceedings. This may increase earnings volatility
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and fuel and energy price risk since PSE&G will bear the full risks and rewards
of changes in nuclear and fossil generating fuel costs and replacement power
costs. For a discussion of fuel related revenue and expense included in the LEAC
and for the current status of the LEAC, see Note 1. Organization and Summary of
Significant Accounting Policies, Note 2. Regulatory Issues and Note 3.
Regulatory Assets and Liabilities of Notes.
GAS PURCHASED
Gas Purchased decreased $131 million or 12% and $17 million or 2% in 1998
and 1997, respectively. The decrease in 1998 was primarily due to the milder
winter weather in 1998. Due to the operation of the Levelized Gas Adjustment
Clause (LGAC) mechanism, variances in fuel revenues and expenses offset and had
no direct effect on earnings.
OPERATION AND MAINTENANCE
Operation and Maintenance expense increased $81 million or 6% in 1998 and
decreased $23 million or 2% in 1997. The increase in 1998 was primarily due to
higher DSM recovery resulting in a greater recognition of previously deferred
expenses, higher information technology costs in 1998 due to Year 2000
remediation work, higher marketing costs, and higher administrative and general
cost related to wholesale power activities. These increases were partially
offset by lower nuclear operation and maintenance costs due to restart expenses
in 1997 for Salem. DSM costs are currently recoverable through the demand side
adjustment factor of the LEAC and are recorded in both expense and revenue and
therefore, have no direct effect on earnings. For discussion of DSM under the
Energy Master Plan Proceedings, see Note 2. Regulatory Issues of Notes.
INCOME TAXES
Income Taxes increased $91 million or 30% and $42 million or 16% in 1998
and 1997, respectively. The 1998 increase was primarily due to inclusion of New
Jersey State income tax of $103 million in 1998. PSE&G became subject to New
Jersey State income tax, effective January 1, 1998, due to energy tax reform in
the State of New Jersey. For more detail on energy tax reform and changes in New
Jersey taxes, see Note 12. Income Taxes of Notes. Partially offsetting the
increase in 1998 was a decrease from 1997 in Federal income tax due to
adjustments of prior year taxes. The 1997 taxes were higher due to an increase
in pre-tax operating income.
TRANSITIONAL ENERGY FACILITY ASSESSMENT (TEFA) / NEW JERSEY GROSS RECEIPTS
AND FRANCHISE TAX (NJGRT)
TEFA/NJGRT decreased $405 million or 70% and $22 million or 4% in 1998 and
1997, respectively. The 1998 decrease is due to New Jersey energy tax reform.
For 1998, the amount represents TEFA unit-based taxes while the 1997 amount
represents NJGRT unit-based taxes. The TEFA unit tax rates are approximately 30%
of the NJGRT unit tax rates. See Note 12. Income Taxes of Notes for other
impacts of New Jersey energy tax reform.
SETTLEMENT OF SALEM LITIGATION
In January and February 1997, the settlement of the Salem litigation
related to the 1995 shutdown was recorded. That settlement reduced Other Income
and Deductions by $53 million, net of taxes of $29 million, in 1997. For a
further discussion of the Salem settlement, see Note 2. Regulatory Issues of
Notes.
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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.
ENERGY HOLDINGS--NET INCOME
<TABLE>
<CAPTION>
INCREASE OR (DECREASE)
----------------------------------------------------------
1998 VS. 1997 1997 VS. 1996
--------------------------- ----------------------------
PER PER
AMOUNT SHARE AMOUNT SHARE
------------ ------------- ------------- ------------
(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Global.............................. $(6) $(.03) $4 $.02
Resources........................... (3) (.01) 3 .01
EGDC................................ 6 .03 (5) (.02)
Energy Technologies................. 5 .02 (12) (.05)
------------ ------------- ------------- ------------
Continuing Operations............... 2 .01 (10) (.04)
Discontinued Operations--EDC
Income from Operations............ -- -- (11) (.04)
Gain on Sale...................... -- -- (13) (.06)
------------ ------------- ------------- ------------
Total....................... $ 2 $.01 $(34) $(.14)
============ ============= ============= ============
</TABLE>
CONTINUING OPERATIONS
Energy Holdings' income from continuing operations was $49 million, a $2
million increase from 1997. Energy Holdings' earnings were primarily those of
PSEG Resources due to the strong overall performance of its investment
portfolio, including leveraged leases, limited partnerships, leveraged buyout
funds and marketable securities. Global's 1998 earnings were negatively impacted
by the loss on the sale of its investment in an electric generating facility
located in Colombia. Global's 1999 earnings will be negatively impacted as a
result of the recent economic developments in Brazil, including the devaluation
of its currency, however, at present, this is not expected to have a material
adverse effect on the results of operations for PSEG. For further discussion,
see Foreign Operations and Note 20. Subsequent Events of Notes.
Energy Holdings' income from continuing operations was $47 million for
1997, a $10 million decrease from 1996. The loss for Energy Technologies
increased due to higher selling, general and administrative expenditures as
Energy Technologies continued to grow. Resources' income increased primarily due
to income from new lease investments, partially offset by lower income from
partnership investments. Global's income increased due to improved financial
performance of several projects.
DISCONTINUED OPERATIONS
EDC was sold on July 31, 1996. Income related to EDC operations was $11
million in 1996. Additionally, a gain of $13 million was recorded on the sale in
1996. For a discussion of discontinued operations, see Note 16. Discontinued
Operations.
LIQUIDITY AND CAPITAL RESOURCES
PSEG AND PSE&G
PSEG is an exempt public utility holding company and, as such, has no
operations of its own. The following is a discussion of PSEG's liquidity and
capital resources on a consolidated basis, noting the uses and contributions of
PSEG's two direct operating subsidiaries, PSE&G and Energy Holdings.
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Cash generated from PSE&G's operations is expected to continue to provide
the major source of funds for PSE&G's operating needs. Energy Holdings' growth
will be funded through external financings and cash generated from operations.
PSEG's cash and cash equivalents totaled $140 million at the end of 1998
compared with $83 million at the end of 1997.
PSEG and PSE&G believe that the deregulation of the utility industry will
impact the sources and uses of cash in 1999 and beyond. Securitization as
proposed in PSE&G's Energy Master Plan proposal and authorized in the Energy
Competition Act will change the sources of cash flows. The cash received by
PSE&G from the net proceeds of securitization is required by the Energy
Competition Act to be applied to reduce outstanding debt and equity of the
utility. The outcome of the Energy Master Plan Proceedings could have a material
impact on the cash flows of PSEG and PSE&G. For further discussion of
securitization, see Note 2. Regulatory Issues of Notes.
On September 15, 1998, in anticipation of securitization of PSE&G's
stranded costs afforded by the then proposed Energy Competition Act, the Board
of Directors of PSEG authorized the repurchase of up to 10 million shares of
Common Stock. Under the authorization, repurchases were made in the open market
at the discretion of PSEG. The repurchased shares have been held as treasury
stock. At December 31, 1998, PSEG had repurchased approximately 5.3 million
shares of Common Stock at a cost of $207 million, under this authorization. As
of February 8, 1999, PSEG had repurchased a total of 10 million shares at a cost
of approximately $391 million under this program. On February 16, 1999, the
Board of Directors of PSEG authorized the expansion of the repurchase program up
to an aggregate of 20 million shares under substantially the same terms and
conditions as the program which began in September 1998.
Dividend payments on Common Stock were $2.16 per share and totaled $499
million for the year ended December 31, 1998. Amounts and dates of such
dividends on Common Stock as may be declared in the future will necessarily be
dependent upon PSEG's future earnings, cash flows, financial requirements, the
outcome of the Energy Master Plan Proceedings (see Note 2. Regulatory Issues and
Note 3. Regulatory Assets and Liabilities of Notes), the receipt of dividend
payments from its subsidiaries and other factors. Since 1986, PSE&G has made
regular cash payments to PSEG 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.
PSE&G has not increased its dividend rates in seven years in order to retain
additional capital for reinvestment and to reduce its payout ratio.
PSE&G paid common stock dividends of $503 million and $523 million to PSEG
during the years ended December 31, 1998 and 1997, respectively. Changes in
PSE&G's financial condition that could result from the Energy Master Plan
Proceedings could have a material adverse effect on the ability to maintain the
dividend at such level. For discussion of the Energy Master Plan Proceedings,
see Note 2. Regulatory Issues of Notes. Due to the growth in Energy Holdings
investment activities, no dividends on Energy Holdings' common stock were paid
in 1998 or are anticipated for 1999. From 1992 through 1996, Energy Holdings
made regular cash payments to PSEG in the form of dividends on outstanding
shares of Energy Holdings' common stock.
PSEG and PSE&G, respectively, have issued Deferrable Interest Subordinated
Debentures in connection with the issuance of their respective tax deductible
preferred securities. If, and for as long as, payments on those Deferrable
Interest Subordinated Debentures have been deferred, or PSEG or PSE&G,
respectively, has defaulted on the applicable indenture related thereto or its
guarantee thereof, neither PSEG nor PSE&G, respectively, may pay any dividends
on its common or preferred stock. For detail on the capital securities of PSEG
and PSE&G, see Note 6. Schedule of Consolidated Capital Stock and Other
Securities of Notes.
As shown on the Consolidated Statements of Cash Flows, net cash provided
by operating activities totaled $1.422 billion in 1998, up from $1.095 billion
in 1997. The major contributor in 1998 was net income of $644 million, which
included $669 million of non-cash deductions for depreciation and amortization.
Net 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.
Net cash used in investing activities totaled $712 million in 1998, down
from $1.614 billion in 1997. The primary use of such cash in 1998 was for
utility plant additions, excluding Allowance for Funds Used During Construction
(AFDC), of
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<PAGE>
$535 million at PSE&G. Additionally there was a net increase in long-term
investments of $58 million, including Resources' net increase in investments of
$136 million, partially offset by Global's net decrease in investments primarily
from the sale of investments in generation and co-generation companies of $47
million, and contributions made by PSE&G to the pension and nuclear
decommissioning trust funds of $115 million.
Net cash used in investing activities totaled $1.614 billion in 1997, up
from $9 million in 1996. The primary use of such cash in 1997 was a net increase
in long-term investments of $914 million, including Global's investments in
distribution and generation companies of $852 million, Resources' 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.
Net cash used in financing activities was $653 million in 1998 as compared
to $323 million of cash provided by financing activities in 1997. Major uses of
such cash in 1998 were a decrease in short-term debt by PSE&G of $256 million,
Energy Holdings of $61 million and PSEG of $75 million, the payment of dividends
on Common Stock of $499 million and the purchase of Common Stock of $207
million. These uses were partially funded by cash provided by the issuance of
preferred securities by PSEG's Enterprise Capital Trust I, II and III of $525
million. PSE&G's long-term debt (primarily Mortgage Bonds) decreased $99 million
in 1998 while Energy Holdings' long-term debt decreased $208 million. PSEG's
long-term debt at the holding company level increased $275 million in 1998 due
to the issuance of Extendible Notes.
Net 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, Energy Holdings of $267 million and PSEG of $75 million, primarily used
to fund certain scheduled long-term debt maturities, Global'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 Energy Holdings' long-term debt increased $372
million.
As of December 31, 1998, PSEG's capital structure consisted of 46.1%
common equity, 43.0% long-term debt and 10.9% preferred securities. The capital
structure as of December 31, 1997 consisted of 48.4% common equity, 45.3%
long-term debt and 6.3% preferred securities.
As a result of the 1992 focused audit of PSEG's non-utility businesses
(Focused Audit), the BPU approved a plan which, among other things, provides
that: (1) PSEG will not permit Energy Holdings' non-utility investments to
exceed 20% of PSEG's consolidated assets without prior notice to the BPU (such
investments at December 31, 1998 were approximately 17% of assets); (2) the
PSE&G Board of Directors will provide an annual certification that the business
and financing plans of Energy Holdings will not adversely affect PSE&G; (3) PSEG
will (a) limit debt supported by the minimum net worth maintenance agreement
between PSEG and PSEG Capital to $650 million and (b) make a good-faith effort
to eliminate such support over a six to ten year period from April 1993; and (4)
Energy Holdings will 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. PSEG
and Energy Holdings 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 PSEG's intent that Energy Holdings and its subsidiaries be
its long-term growth vehicles, financing requirements connected with the
continued growth of Energy Holdings, changes to the utility industry expected
from the final outcome of the Energy Master Plan Proceedings and potential
accounting impacts resulting from the deregulation of the generation of
electricity and the unbundling of the utility business, modifications will be
required to certain of the restrictions agreed to by PSEG with the BPU in
response to the Focused Audit. Inability to achieve satisfactory resolution of
these matters could impact the future relative size and financing of Energy
Holdings and accordingly, PSEG's future prospects, including financial
condition, results of operations and net cash flows. For discussion of the
Energy Master Plan Proceedings and potential impacts see Note 2. Regulatory
Issues and Note 3. Regulatory Assets and Liabilities of Notes.
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<PAGE>
ENERGY HOLDINGS
As noted above, Global, Resources and Energy Technologies are expected to
provide long-term growth for Energy Holdings and PSEG. Resources' investments
are designed to produce immediate earnings and cash flows, which enable Global
and Energy Technologies to focus on longer-term growth. During the next five
years, Energy Holdings' capital requirements are expected to be provided from
additional debt financing and operating cash flows. A significant portion of
Global's growth is expected to occur internationally due to the current and
anticipated growth in electric capacity required in certain regions of the
world. Resources will continue its focus on investments related to energy
infrastructure. Energy Technologies is expected to expand upon the current
energy related services being provided to industrial and commercial customers.
Energy Holdings' cash provided by (used in) operating, investing and
financing activities was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Operating Activities:
Global.................................... $(26) $(9) $9
Resources................................. 23 130 164
Energy Technologies....................... (25) -- --
Other..................................... (5) (23) (16)
------------ ------------ ------------
Continuing Operations..................... (33) 98 157
EDC....................................... -- -- 78
------------ ------------ ------------
Total Operating Activities............ $(33) $98 $235
============ ============ ============
Investing Activities:
Global.................................... $47 $(852) $(8)
Resources................................. (136) (97) 2
Energy Technologies....................... (40) -- --
Other..................................... 30 (2) 12
------------ ------------ ------------
Continuing Operations..................... (99) (951) 6
EDC....................................... -- -- 653
------------ ------------ ------------
Total Investing Activities............ $(99) $(951) $659
============ ============ ============
Financing Activities:
Debt...................................... $(287) $638 $(380)
Preferred Equity (A)...................... 416 78 (369)
------------ ------------ ------------
Total Financing Activities............ $129 $716 $(749)
============ ============ ============
</TABLE>
(A) Preferred stock issued internally to PSEG by Energy Holdings.
For a discussion of the source of Energy Holdings' funds, see External
Financings. Over the next several years, Energy Holdings 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 PSEG's and Energy
Holdings' financial condition, results of operations and net cash flows. As of
December 31, 1998, 1997 and 1996, Energy Holdings' embedded cost of debt of its
finance subsidiaries was approximately 7.4%, 8.2% and 8.9%, respectively. Energy
Holdings' finance subsidiaries did not provide any additional long-term debt
financing during 1998.
In January, June and July 1998, PSEG invested $217 million, $147 million
and $145 million, respectively, in Energy Holdings which issued to PSEG like
amounts of its 5.01%, 4.80% and 4.875% Cumulative Preferred Stock and made
additional equity investments in Global and Resources. PSEG funded its
additional investment in Energy Holdings through the sale of tax deductible
preferred securities, issued by Enterprise Capital Trust I, II and III, special
purpose statutory business trusts controlled by PSEG, representing Guaranteed
Preferred Beneficial Interests in PSEG's Debentures.
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<PAGE>
CAPITAL REQUIREMENTS
Capital resources and capital requirements will be affected by the outcome
of the Energy Master Plan Proceedings. For a discussion of the potential impact
of the Energy Master Plan Proceedings on PSE&G's future prospects, including
financial condition, results of operations and net cash flows, see Note 2.
Regulatory Issues and Note 3. Regulatory Assets and Liabilities of Notes.
PSE&G
PSE&G had utility plant additions of $547 million, $557 million and $603
million for 1998, 1997 and 1996, respectively, including AFDC of $12 million,
$15 million and $17 million, respectively. Construction expenditures were
related to improvements in PSE&G's existing power plants (including the
replacement of Salem 1 steam generators in 1997 and acquisition of nuclear
fuel), transmission and distribution system, gas system and common facilities.
PSE&G also expended $10 million, $28 million and $34 million for the cost of
plant removal (net of salvage) in 1998, 1997 and 1996, respectively.
Construction expenditures from 1999 through 2003 are expected to aggregate $2.8
billion, excluding 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. Decision with regard to these improvements will depend, in part,
upon the outcome of the Energy Master Plan Proceedings.
Dependent upon the outcome of the Energy Master Plan Proceedings, PSE&G
expects that it will be able to internally generate the majority 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,
with the balance to be provided by issuance of debt to replace maturities. For
discussion of the Energy Master Plan Proceedings and their potential impacts and
potential contingent liabilities, see Note 2. Regulatory Issues and Note 10.
Commitments and Contingent Liabilities of Notes.
ENERGY HOLDINGS
GLOBAL
In May 1998, Global sold its 50% interests in two domestic cogeneration
plants, resulting in proceeds to Energy Holdings of approximately $70 million.
In July 1998, Global sold its 5% interest in a domestic cogeneration plant and
in August 1998, sold its 50% interest in a natural gas-fired generating station
in Colombia for aggregate proceeds of approximately $70 million. The aggregate
proceeds of all 1998 sales of $140 million approximated book value.
In November 1998, Global acquired a 30% interest in an Argentine electric
distribution company serving a population of 750,000 in the northeast corner of
the Province of Buenos Aires at a cost of approximately $60 million. In December
1998, Global acquired a 20% equity share of a 330 megawatt power plant to be
constructed in India, for which Global will be the operations and maintenance
contractor.
RESOURCES
In the first quarter of 1998, Resources received proceeds of $120 million
from investment liquidations resulting from the exercise of an early buyout
option by the lessee in a leveraged lease and from sales of investments held in
leveraged buyout and venture capital partnerships.
In March 1998, Resources entered into a leveraged lease of a natural gas
distribution network in the Netherlands and, in April 1998, acquired a lease of
a domestic gas-fired steam electric generating station. The aggregate amount of
these investments was approximately $132 million. In July 1998, Resources
purchased a 33.3% interest in a leveraged lease of a natural gas-fired
generating station in the United Kingdom for approximately $40 million and in
September 1998, purchased a 100% interest in a leveraged lease of several gas
distribution networks in the Netherlands for approximately $45 million. In
December 1998, Resources closed on an additional investment in a gas
distribution network leveraged lease in the Netherlands for approximately $34
million.
ENERGY TECHNOLOGIES
Energy Technologies continued to implement its growth strategy in the
regional energy service arena through its acquisition of two mechanical service
contractors and by participating in the deregulating energy markets in the
Northeast.
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<PAGE>
EGDC
In June 1998, EGDC continued its controlled exit from the real estate
business and sold its 75% interest in one of its properties for approximately $5
million, which approximated book value.
CONSTRUCTION AND CAPITAL REQUIREMENTS FORECAST
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 TOTAL
--------- --------- --------- -------- ---------- ---------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Construction and Investment Requirements
(Estimate):
PSE&G.......................................... $572 $591 $576 $558 $544 $2,841
Energy Holdings................................ 359 263 233 152 260 1,267
--------- --------- --------- -------- ---------- ---------
Total Construction and Investment Requirements. 931 854 809 710 804 4,108
--------- --------- --------- -------- ---------- ---------
Mandatory Retirement of Debt:
PSEG........................................... -- 275 -- -- -- 275
PSE&G.......................................... 100 635 100 300 300 1,435
Energy Holdings................................ 318 109 166 160 -- 753
--------- --------- --------- -------- ---------- ---------
Total Retirement of Debt....................... 418 1,019 266 460 300 2,463
--------- --------- --------- -------- ---------- ---------
Total Capital Requirements.................. $1,349 $1,873 $1,075 $1,170 $1,104 $6,571
========= ========= ========= ======== ========== =========
</TABLE>
The projected effect of securitization, as included in PSE&G's Energy
Master Plan proposal, is not included in the above forecast. For discussion of
securitization and the Energy Master Plan Proceedings, see Note 2. Regulatory
Issues of Notes.
EXTERNAL FINANCINGS
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 changes in the industry and the potential use of
securitization, attention and scrutiny of PSE&G's competitive strategies by
rating agencies will likely continue. These changes could result in changes to
PSEG's and PSE&G's bond ratings and significantly alter the capital structures
of both PSEG and PSE&G.
In addition, the impact of the use of securitization proceeds, capital
structure changes and other actions which might be taken by PSEG and PSE&G in
connection with energy industry restructuring is likely to affect the market
prices of their respective securities. For discussion of the use of proceeds of
securitization see Note 2. Regulatory Issues of Notes.
PSEG
At December 31, 1998, PSEG had a committed $150 million revolving credit
facility which expires in December 2002. At December 31, 1998, PSEG had no debt
outstanding under this revolving credit facility. At December 31, 1998 and 1997,
PSEG had a $25 million and a $75 million uncommitted line of credit,
respectively, with a bank. At December 31, 1998, PSEG had no debt outstanding
under this line of credit.
In January 1998, Enterprise Capital Trust I, a special purpose statutory
business trust controlled by PSEG, issued $225 million of 7.44% Trust Originated
Preferred Securities (Guaranteed Preferred Beneficial Interest in PSEG's
Debentures). In June 1998, Enterprise Capital Trust II, a special purpose
statutory business trust controlled by PSEG, issued $150 million of Floating
Rate Capital Securities, Series B at three-month London Interbank Offered Rate
(LIBOR) plus 1.22% reset quarterly. At the time of issuance, PSEG's floating
rate obligation under its debentures was swapped for a fixed rate payment
resulting in an effective rate of 7.2%. For more detail, see Note 8. Financial
Instruments and Risk Management of Notes. In July 1998, Enterprise Capital Trust
III, a special purpose statutory business trust controlled by PSEG, issued $150
million of its 7.25% Trust Originated Preferred Securities, Series C. Proceeds
of these issues were loaned to PSEG and are evidenced by its deferrable interest
subordinated debentures. PSEG used the proceeds of these issues to make $509
million
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<PAGE>
preferred equity investments in Energy Holdings. The debentures and their
related indentures constitute a full and unconditional guarantee by PSEG of the
preferred securities issued by the trusts. If, and for as long as, payments on
PSEG's debentures have been deferred, or PSEG has defaulted on the indentures
related thereto or its guarantee thereof, PSEG may not pay any dividends on its
Common Stock. For a discussion of dividends, see Liquidity and Capital Resources
- -- PSEG.
In November 1998, PSEG issued $275 million of Extendible Notes in two
series, $100 million principal amount of Series A with interest at LIBOR plus
0.75%, reset quarterly, and automatically tendered to the remarketing agent for
remarketing on May 24, 1999 and $175 million principal amount of Series B with
interest at LIBOR plus 0.78%, reset quarterly, and automatically tendered to the
remarketing agent for remarketing on November 22, 1999. PSEG used the net
proceeds of these issuances to repurchase shares of its Common Stock and to
reimburse its treasury for expenditures made for that purpose.
As previously disclosed, PSEG and PSE&G have issued a total of
approximately $525 million and $513 million, respectively, of deferrable
interest subordinated debentures which are treated as debt to the issuer for
Federal income tax purposes and as preferred equity for financial accounting and
rating agency purposes. In a case not involving PSEG or PSE&G, the Internal
Revenue Service (IRS) had proposed to disallow interest deductions claimed by
Enron Corp. (Enron) on two issues of similar long-term subordinated debentures
and brought that issue to litigation. Although in December 1998, the IRS
conceded this issue in the Enron litigation, there can be no assurance as to
whether the IRS nevertheless will not seek to disallow the deductions that PSEG
and PSE&G have taken and will claim for interest paid on such debentures. The
annualized interest expense for these debentures for PSEG and PSE&G together is
approximately $83 million. In total for 1994 through 1997, PSEG and PSE&G
claimed approximately $89 million in interest deductions for these debentures,
which equates to approximately $31 million in tax benefits. If challenged by the
IRS, PSEG and PSE&G would expect to vigorously defend the deductibility of the
interest payments taken as deductions on previously filed Federal tax returns.
In the event of the occurrence of a Tax Event as defined in the respective
debenture indentures, such as the receipt of an opinion of counsel that there is
a more than insubstantial risk that interest payable on the debentures will not
be tax deductible, PSEG and PSE&G have the right to redeem the preferred
securities and issue the debentures to the preferred securities holders or to
refinance such obligations as allowed in the respective debenture indentures.
PSE&G
PSE&G has filed with the BPU for approval, which it expects to obtain, to
opportunistically refinance essentially all of its long-term debt through
January 4, 2000. 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 calculated in
accordance with its Mortgage is at least 2:1. As of December 31, 1998, the
Mortgage would permit up to $3.6 billion aggregate principal amount of new Bonds
to be issued against previous additions and improvements. At December 31, 1998,
PSE&G's Mortgage coverage ratio was 3.98:1. PSE&G expects to apply for and
receive necessary BPU authorization for external financings to meet its
requirements over the next five years, as needed.
In January 1998, $100 million of PSE&G's 6.00% Bonds, Series NN, matured.
In April 1998, $8 million of PSE&G's 7.50% Bonds, Series OO, were
purchased in the open market. On August 3, 1998, the remaining outstanding $234
million of the 7.50% Series OO Bonds were redeemed.
In May 1998, PSE&G sold $250 million of its Bonds, Remarketable Series YY,
due 2023, Mandatorily Tendered 2008. The Series YY Bonds bear interest at the
rate of 6.375% per annum until May 1, 2008. PSE&G also entered into a
Remarketing Agreement with a third party that granted the third party the option
to call and remarket the Series YY Bonds on May 1, 2008 for the remaining term
of the Series YY Bonds. If not called by the third party, the Bonds must be put
by the holders to PSE&G. The proceeds of the sale were used primarily to redeem
PSE&G's 7.50% Series OO Bonds.
On July 1, 1998, $18 million of PSE&G's 6% Debenture Bonds matured.
To provide liquidity for its commercial paper program, PSE&G has a $650
million revolving credit agreement expiring in June 1999, which PSE&G expects to
be able to renew, and a $650 million revolving credit agreement expiring
A-13
<PAGE>
in June 2002 with a group of commercial banks, which provide for borrowings of
up to one year. On December 31, 1998, 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 4, 2000, not more than $1.5 billion of short-term obligations,
consisting of commercial paper and other unsecured borrowings from banks and
other lenders. On December 31, 1998, PSE&G had $770 million of short-term debt
outstanding, including $115 million borrowed against its uncommitted bank lines
of credit which lines of credit totaled $150 million as of December 31, 1998.
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, 1998, Fuelco had commercial paper of $80
million outstanding.
ENERGY HOLDINGS
The minimum net worth maintenance agreement between PSEG Capital and PSEG
provides, among other things, that PSEG (1) maintain its ownership, directly or
indirectly, of all outstanding common stock of PSEG Capital, (2) cause PSEG
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 PSEG Capital in order
to permit it to pay its debt obligations. In 1993, PSEG agreed with the BPU to
make a good-faith effort to eliminate such PSEG support within six to ten years.
Effective January 31, 1995, PSEG Capital notified the BPU of its intention not
to have more than $650 million of debt outstanding at any time. PSEG Capital has
a $650 million Medium Term Note (MTN) program which provides for the
private-placement of MTNs without registration. PSEG Capital's assets consist
principally of demand notes of Global and Resources. Intercompany borrowing
rates are established based upon PSEG Capital's cost of funds. At December 31,
1998, PSEG Capital had total debt outstanding of $498 million, all of which were
comprised of MTNs. On February 16, 1999, PSEG Capital issued $252 million of
6.25% MTNs due May 2003. The proceeds were used to repay $100 million of PSEG
Capital MTNs which matured February 16, 1999 and to reduce Energy Holdings'
short-term debt. At February 16, 1999, total debt outstanding under the MTN
program was $650 million.
As of December 31, 1998, Funding had $150 million and $300 million
revolving credit facilities with two groups of banks which expire in July and
November 1999, respectively. Funding expects to be able to renew both credit
facilities. 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 Resources and Global and their subsidiaries on the basis
of an unconditional guaranty from Energy Holdings, but without direct support
from PSEG. As of December 31, 1998, Funding had $251 million of total debt
outstanding, including $45 million of privately-placed Senior Notes which mature
in March 1999.
For a discussion of the non-recourse debt of Global, a wholly-owned
subsidiary of Energy Holdings, see Note 7. Schedule of Consolidated Debt of
Notes.
Energy Holdings, Global and Resources are subject to restrictive business
and financial covenants contained in existing debt agreements. Energy Holdings
is required to maintain a debt to equity ratio of no more than 2.00:1 and a
twelve-months earnings before interest and taxes to interest (EBIT) coverage
ratio of at least 1.50:1. As of December 31, 1998 and 1997, Energy Holdings had
consolidated debt to equity ratios of 0.89:1 and 1.80:1, respectively, and for
the years ended December 31, 1998, 1997 and 1996, EBIT coverage ratios, as
defined to exclude the effects of EGDC and the gain on the sale of EDC, of
2.10:1, 2.20:1 and 2.45:1, respectively. The 1998 debt to equity ratio decreased
primarily due to the equity investment by PSEG of $509 million, evidenced by the
like amount of preferred stock issued by Energy Holdings to PSEG. 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,
Energy Holdings' ability to continue to grow its business will depend to a
significant degree on PSEG's and Energy Holdings' ability to obtain additional
financing beyond current levels.
A-14
<PAGE>
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in PSEG'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. PSEG's policy is to use derivatives to manage risk
consistent with its business plans and prudent practices. PSEG has a Risk
Management Committee made up of executive officers and an independent risk
oversight function to ensure compliance with corporate policies and prudent risk
management practices.
PSEG is exposed to credit losses in the event of non-performance or
non-payment by counterparties. PSEG also has a credit management process which
is used to assess, monitor and mitigate counterparty exposure for PSE&G and
Energy Holdings. In the event of nonperformance or nonpayment by a major
counterparty, there may be a material adverse impact on PSEG's and PSE&G's
financial condition, results of operations and net cash flows.
COMMODITIES--PSE&G
The availability and price of energy commodities are subject to
fluctuations from factors such as weather, environmental policies, changes in
supply and demand, state and Federal regulatory policies and other events. To
reduce price risk caused by market fluctuations, PSE&G enters into derivative
contracts, including forwards, futures, swaps and options with approved
counterparties, to hedge its anticipated demand. These contracts, in conjunction
with owned electric generating capacity and physical gas supply contracts, are
designed to cover estimated electric and gas customer commitments.
PSE&G currently has levelized energy adjustment clauses in its rate
structure in place for both electricity (LEAC) and natural gas (LGAC). These
clauses were established to minimize the impact of major commodity price swings
on customer prices. They also reduce the risk to PSE&G by permitting PSE&G to
defer price increases and decreases until regulatory treatment can be
determined. In accordance with the December 31st Order, PSE&G is utilizing
deferred accounting for electricity supply costs, however, overrecoveries during
the LEAC period will be used to mitigate stranded costs to be determined in the
Energy Master Plan Proceedings while underrecoveries will be recognized in
results of operations. PSE&G's proposal in the BPU's restructuring proceedings
would cap basic tariff rates for seven years and discontinue the LEAC upon
commencement of customer choice. For discussion of the levelized energy
adjustment clauses, see Note 2. Regulatory Issues of Notes.
During the summer of 1998, the eastern electricity commodity markets
experienced severe volatility resulting from extremely hot weather and electric
capacity and energy shortages in the Midwest. Certain electric power marketers
defaulted, ultimately resulting in their bankruptcy. FERC issued a report on
September 22, 1998 addressing the causes of these severe price movements in the
summer of 1998. The report focused on the activity in the Midwest where the most
extreme movements resulted causing surrounding pools to experience higher than
expected prices and volatilities The report concluded that "the particular
combination of factors that led to the June event was quite unusual." The report
stated further, "This combination of factors was not typical, is not likely to
recur, and is not representative of how wholesale electricity markets usually
work. However, price increases and decreases may be expected in the future
depending upon the balance of demand and supply." PSE&G cannot predict whether
similar events that may lead to extreme price movements will occur again. Given
the impending regulatory change and the dissolution of the LEAC, the absence of
a PJM price cap in situations involving emergency purchases, and the potential
for plant outages, extreme price movements could have a material impact on
PSE&G's financial condition, results of operations and net cash flows.
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/co-variance model with a 97.5%
confidence level and assuming a one week horizon at December 31, 1998 was
approximately $4 million, compared to the December 31, 1997 level of $7 million,
due to a reduction in net exposure during volatile months. 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.
A-15
<PAGE>
As discussed in Results of Operations, wholesale power activities at PSE&G
positively impacted the results of operations for 1998. Certain other utilities
and power marketers have experienced significant losses in their wholesale power
operations during that period. These losses were primarily attributable to
extreme market volatility, counterparty defaults and unavailability of
generation.
COMMODITIES--ENERGY HOLDINGS
During 1998, Energy Technologies entered into futures contracts to buy
natural gas related to fixed-price natural gas sales commitments. Such contracts
hedged approximately 90% of its fixed price sales commitments at December 31,
1998. As of December 31, 1998, Energy Technologies had a net unrealized hedge
loss of $5 million.
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 $524 million with a fair market value of $542 million
at December 31, 1998 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 $54 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. Under the Energy Master Plan Proceedings, it is
expected that the recovery of these investments will be continued as part of the
societal benefits charge, as to which no assurances can be given.
EQUITY SECURITIES--ENERGY HOLDINGS
Resources has investments in equity securities and partnerships, in which
Resources is a limited partner, which invest in equity securities. Resources
carries its investments in equity securities at their approximate fair value as
of the reporting date. Consequently, the carrying value of these investments is
affected by changes in the fair value of the underlying securities. Fair value
is determined by adjusting the market value of the securities for liquidation
and market volatility factors, where appropriate. The aggregate amount of such
investments which have available market prices at December 31, 1998 and 1997 are
recorded at fair value of $204 million and $185 million, respectively, and have
exposure to price risk. A sensitivity analysis has been prepared to estimate
Energy Holdings' 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 $17 million.
INTEREST RATES--PSEG
PSEG is subject to the risk of fluctuating interest rates in the normal
course of business. PSEG's policy is to manage interest rates through the use of
interest rate swaps and fixed and floating rate debt. As of December 31, 1998, a
hypothetical 10% change in market interest rates would result in a $2 million
change in interest costs related to floating rate debt, in addition to that
noted in Interest Rates--PSE&G and Interest Rates--Energy Holdings below.
PSEG entered into an interest rate swap on June 26, 1998 to hedge
Enterprise Capital Trust II's $150 million of Floating Rate Capital Securities,
Series B, due 2028, which were sold to a group of institutional investors in
June 1998. The Floating Rate Capital Securities were offered to institutional
investors at an annual rate equal to three-month LIBOR plus 1.22%, reset
quarterly. Enterprise Capital Trust II is a special purpose statutory business
trust controlled by PSEG. The basis for both the interest rate swap and the
Floating Rate Capital Securities is the quarterly LIBOR. This interest rate swap
effectively hedges the underlying debt for 10 years at an effective rate of
7.2%.
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 expects to
receive BPU approval to issue long-term debt for opportunistic refinancing
purposes. Additionally, PSE&G would also use interest rate swap instruments to
hedge interest
A-16
<PAGE>
rate risk, when appropriate. As of December 31, 1998, a hypothetical 10% change
in market interest rates would result in a $6 million change in interest costs
related to short-term and floating rate debt.
INTEREST RATES--ENERGY HOLDINGS
Energy Holdings is subject to the risk of fluctuating interest rates in
the normal course of business. Energy Holdings' policy is to manage interest
rates through the use of fixed rate debt, floating rate debt and interest rate
swaps. As of December 31, 1998, a hypothetical 10% change in market interest
rates would result in a $3 million change in interest costs related to
short-term and floating rate debt.
In June 1997, an indirect subsidiary of Global entered into an interest
rate swap on 50% of its floating rate borrowings of $87 million. The basis for
the interest rate swap is six month LIBOR. The interest rate swap effectively
hedges the underlying debt through its scheduled maturity in May 1999 at the
current effective rate of 7.76%. 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.
FOREIGN CURRENCIES--ENERGY HOLDINGS
Global had consolidated non-recourse debt of $123 million as of December
31, 1998 which is denominated in the Brazilian Real 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 and between the Brazilian
Real and the U.S. Dollar. 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 (losses)/gains resulting from such exchange rate changes are
included in determining net income for the period and amounted to $(3) million
and $1 million for the years ended December 31, 1998 and 1997, respectively. For
more information on foreign operations and the devaluation of foreign
currencies, see below and Note 20. Subsequent Events of Notes.
FOREIGN OPERATIONS
In accordance with their growth strategies, Global and Resources have made
approximately $919 million and $691 million, respectively, of international
investments. These investments represent 9% of PSEG's consolidated assets and
contribute 2% of consolidated revenues. Resources investments are primarily in
leveraged leases in the Netherlands and the United Kingdom with associated
revenues denominated in U.S. dollars, and, therefore bear no foreign currency
risk. Global's investments are primarily in projects that generate or distribute
electricity in Brazil, Argentina and China. As a primary vehicle for PSEG's
growth, Global is expected to continue to invest in competitive power markets.
Where possible, Global structures its investments to manage the risk associated
with project development, including foreign currency devaluation and
fluctuations. PSEG has evaluated the current economic conditions in these
regions and has determined that its investments have not been impaired. Net
foreign currency devaluations, caused primarily by the Brazilian Real, have
reduced Global's total assets by $43 million as of December 31, 1998 with an
offsetting charge to cumulative foreign currency translation adjustment (a
separate component of stockholders' equity).
In January 1999, Brazil abandoned its managed devaluation strategy and
allowed its currency, the Real, to float against other currencies. As of January
31, 1999, the Real has devalued approximately 40% against the U.S. dollar since
December 31, 1998. Based on the December 31, 1998 Brazilian investment balance
of $482 million, there was a 40% devaluation as of January 31, 1999 which
resulted in a charge of $172 million to cumulative foreign currency translation
adjustment (a separate component of stockholders' equity). PSEG cannot predict
to what extent, if any, further devaluation may occur, and, therefore, cannot
predict the impact of potential devaluation of currencies on PSEG's results of
operations, financial condition and net cash flows. However, assuming no further
significant devaluation, PSEG does not expect this to have a material adverse
effect on its 1999 results of operations, financial condition or net cash flows.
For additional information, see Note 20. Subsequent Events and Note 15.
Financial Information by Business Segment of Notes. As PSEG increases its
international investments, the financial statements of PSEG will be increasingly
affected by changes in the global economy.
A-17
<PAGE>
YEAR 2000 READINESS DISCLOSURE
Many of PSEG's and PSE&G's systems, which include information technology
applications, plant control and telecommunications infrastructure systems, must
be modified due to computer program limitations in recognizing dates beyond
1999. PSEG and PSE&G have had a formal project in place since 1997 to address
Year 2000 issues. Based upon project progress to date, all mission critical
systems are expected to be ready by January 1, 2000. Future progress is
dependent on a wide number of variables, including the continued availability of
trained resources and vendors meeting commitments to PSEG and PSE&G.
YEAR 2000 READINESS STATUS
PSEG and PSE&G have established a three-phase program to achieve Year 2000
readiness. The initial phase (Inventory) identifies systems having potential
Year 2000 issues and sets priorities for assessing and remediating those
systems. The second phase (Assessment) determines whether systems are
digital/date sensitive and the extent of date related issues. The third phase
(Remediation/Testing) repairs programming code, upgrades or replaces systems and
validates that code repairs were implemented as intended.
PSEG's and PSE&G's Year 2000 readiness program addresses issues relating
to three principal types of systems:
o Information technology systems, which include such business
applications as the customer information, administrative and "back
office" systems.
o Process control and monitoring systems, which include embedded
devices as well as real time systems such as energy management
systems (EMS) and the supervisory control systems for gas and
electric (SCADA).
o Infrastructure systems, which include such devices as servers,
routers, etc.
Inventory is more than 99% complete for all information technology,
infrastructure and process control/monitoring systems. Substantial Assessment
work has been completed on the information technology, infrastructure systems
and process control systems. Remediation/Testing is in progress on information
technology, process control and infrastructure systems.
PSEG and PSE&G have completed required Year 2000 readiness work for more
than 80% of their critical systems by the end of 1998. The work required by the
remaining critical systems is expected to be completed by July 1999, except for
certain systems operated by PSE&G's nuclear operations, as discussed below. By
the end of 1999, a majority of PSEG's and PSE&G's non-critical systems are also
expected to be Year 2000 ready with the remainder of such non-critical systems
to be ready in 2000. Energy Holdings and its subsidiaries have essentially
completed Inventory on all systems impacted by Year 2000 readiness issues and
substantial Assessment work has been completed on such systems.
Remediation/Testing is expected to be completed in 1999 on all such systems.
As previously reported, on May 11, 1998, the NRC issued a Generic Letter
requiring submission of a written response within 90 days of that date
indicating whether or not nuclear plant operators have pursued and continue to
pursue Year 2000 programs and addressing the programs' scope, assessment
process, plans for corrective actions, quality assurance measures, contingency
plans and regulatory compliance. Additionally, the Generic Letter required
submission of a written response upon completion of the operators' Year 2000
program or no later than July 1, 1999 confirming that their facilities are Year
2000 ready, or will be Year 2000 ready, by 2000 with regard to compliance with
the terms and conditions of their licenses and NRC regulations. On July 23,
1998, PSE&G provided its written response to the first requirement noted above,
outlining for the NRC its nuclear operations' Year 2000 program and indicating
that planned implementation will allow PSE&G's nuclear operations to be Year
2000 ready and in compliance with the terms and conditions of its licenses and
NRC regulation by January 1, 2000. As of December 31, 1998, PSE&G's nuclear
operations' Year 2000 effort is on schedule to have all mission critical systems
ready by January 1, 2000. Additionally, at a meeting held on September 29, 1998,
PECO informed PSE&G that Peach Bottom's Year 2000 effort is on schedule to meet
the July 1999 NRC response schedule. During the week of October 26, 1998, the
NRC conducted an audit of the nuclear operations' Hope Creek Year 2000 Project.
The audit report states that the nuclear operations' Year 2000 project plan is
comprehensive and is receiving the appropriate management support and oversight.
A-18
<PAGE>
PSEG and PSE&G are continuing to work with their supplier base to assess
the Year 2000 readiness status of vendors who provide critical materials and
services (key vendors). Sufficient information has not yet been received from
all key vendors to confirm their preparedness for Year 2000. PSEG and PSE&G are
aggressively pursuing the key vendors who have been unresponsive. However, PSEG
and PSE&G are not yet able to determine whether all of their key vendors will be
able to meet Year 2000 requirements. Failure of key vendors to meet these
requirements could result in material adverse impacts to PSEG's and PSE&G's
operations, financial condition, results of operations and net cash flows.
YEAR 2000 COSTS
For a discussion of Year 2000 Costs, see Note 10. Commitments and
Contingent Liabilities of Notes.
YEAR 2000 RISKS
The North American Electric Reliability Council (NERC) has been asked by
the Department of Energy (DOE) to lead national efforts for electric utility
industry Year 2000 readiness. In its report issued in September 1998, NERC
evaluated potential risks for the industry from both an impact and probability
basis. PSEG's and PSE&G's internal analyses of the risks posed by the Year 2000
are consistent with the risk assessment prepared by NERC. PSEG and PSE&G expect
that the Year 2000 project (specifically remediation and contingency planning
efforts) will mitigate these risks and allow PSEG and PSE&G to meet their
fiduciary, regulatory and safety commitments.
The following risks defined by NERC were assumed only for the purpose of
planning and preparing for operations. None of the risks identified in this plan
are predictions of Year 2000 events:
<TABLE>
<CAPTION>
====================================================================================================
NERC NERC
PROBABILITY IMPACT
NERC DEFINED SCENARIO FOR INDUSTRY FOR INDUSTRY
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Loss of generation High High
- ----------------------------------------------------------------------------------------------------
Loss of EMS, SCADA Systems High High
- ----------------------------------------------------------------------------------------------------
Loss of leased communications lines High High
- ----------------------------------------------------------------------------------------------------
Generation Restart/Loss of Load/Unusual load High Low
- ----------------------------------------------------------------------------------------------------
Environmental control or monitoring Medium Medium
- ----------------------------------------------------------------------------------------------------
Loss of internal communications Medium Medium
- ----------------------------------------------------------------------------------------------------
Loss of gas or oil supply Medium High
- ----------------------------------------------------------------------------------------------------
Sabotage Medium High
- ----------------------------------------------------------------------------------------------------
Distribution system failure/DC Tie Failure/Under-frequency or Low High
under-frequency voltage load shed failure/Loss of system
protection/Loss of transmission/Loss of security coordinator
functions
- ----------------------------------------------------------------------------------------------------
Voltage control device failure Low High
- ----------------------------------------------------------------------------------------------------
Loss of control center access Low Medium
- ----------------------------------------------------------------------------------------------------
Loss of coal Low Medium
- ----------------------------------------------------------------------------------------------------
Operating Personnel/Generation and Transmission Information Low Low
Sharing System (OASIS) Failure/Loss of non-critical operating
data/DSM failure/Supplies
====================================================================================================
</TABLE>
PSEG's and PSE&G's efforts have focused on reducing the "High" and
"Medium" probability scenarios and mitigating the effects of "High" and "Medium"
impacts.
PSEG and PSE&G have identified some and will continue working to determine
the most reasonably likely, worst case scenarios arising from Year 2000
readiness issues. Such scenarios may include, among others, significant
reductions in key customers' power needs due to their own Year 2000 readiness
issues or temporary disruption of service from the effect of disruptions caused
by other entities whose electrical systems are connected to PSE&G's through PJM.
The results of such analysis will depend, in part, on the results of information
currently being obtained from key vendors as to their Year 2000 readiness and
the readiness of PJM and trading partners, among others.
A-19
<PAGE>
PSEG and PSE&G have no outstanding litigation relating to Year 2000
issues. The likelihood of future Year 2000 related liabilities cannot be
determined at this time. PSEG and PSE&G have not been subject to specific or
general Year 2000 regulatory action, other than responding to inquiries from
regulatory bodies such as the BPU and the NRC.
CONTINGENCY PLANS
PSEG and PSE&G are developing contingency plans in accordance with NERC
and NRC guidelines. The cornerstone of the guidance is to use a "defense in
depth" strategy by creating multiple defense barriers to reduce the risk of
catastrophic results to extremely small probability levels. Other areas covered
by NERC and PSEG's and PSE&G's responses include:
================================================================================
GUIDANCE PSEG'S AND PSE&G'S CONTINGENCY PLAN
- --------------------------------------------------------------------------------
Identify and fix known Year 2000 PSEG and PSE&G have focused their
problems. resources on the remediation of
non-compliant systems.
- --------------------------------------------------------------------------------
Identify most probable and credible PSEG and PSE&G are currently
worst case scenarios. evaluating.
- --------------------------------------------------------------------------------
Plan for the probable, prepare for the PSEG and PSE&G will develop special
worst. Develop special operating procedures and will conduct both
procedures, conduct training and system internal drills and participate in
wide drills. industry efforts.
- --------------------------------------------------------------------------------
Operate systems in a precautionary PSEG & PSE&G are working with the
posture during critical Year 2000 Mid-Atlantic Area Council (MAAC) and
periods. This may include reducing with PJM for detailed planning.
voluntary bulk transfers, ensuring that
adequate generation facilities are in
service and increasing staffing.
================================================================================
The nature of contingency plans will include 1) using existing redundant
assets, such as PSE&G's mix of generating assets; 2) leveraging existing
business continuity plans, such as storm preparedness plans; 3) using manual
work-arounds; 4) using rapid-reaction teams and 5) development of risk
mitigation approaches to reduce overall dependency on vendors. PSEG and PSE&G's
emerging strategy calls for the deployment of these plans in the following
manner (using risk scenarios shown above that NERC evaluated to have a high
probability and a high impact):
================================================================================
SCENARIO INITIAL PLAN
- --------------------------------------------------------------------------------
Loss of generation Use existing redundant assets. Have
available a varied mix of generating
assets, with sufficient reserve
capacity, to ensure that if certain
stations are unable to function, the
reserve can meet generating needs.
- --------------------------------------------------------------------------------
Loss of EMS, SCADA Systems Use manual work-arounds and rapid
reaction teams.
- --------------------------------------------------------------------------------
Loss of leased communications lines Use existing redundant assets such as
existing radio and back-up
communications systems.
================================================================================
PSEG and PSE&G have adopted NERC's timetable, guidelines and detailed
requirements for developing these contingency plans. The planning process is an
iterative one. PSEG and PSE&G have completed their preliminary contingency
plans. The second version of their contingency plans will be completed by June
30, 1999, consistent with NERC's timetable. PSEG and PSE&G will participate,
with internal drills to be completed beforehand, in NERC's industry-coordinated
Year 2000 readiness drills on April 8-9, 1999 and September 8-9, 1999. PSEG and
PSE&G will evaluate plan updates, as needed, from September 1999 through January
2000.
PSEG and PSE&G expect that with completion of the Year 2000 project and
implementation of programs from SAP America, Inc. (SAP), the possibility of
significant interruptions of normal operations should be reduced. However, if
PSEG, PSE&G, their domestic and international subsidiaries, the other members of
PJM, PJM trading partners supplying power through PJM or PSEG's or PSE&G's
critical vendors and/or customers are unable to meet the Year 2000 deadline,
such inability could have a material adverse impact on PSEG's and PSE&G's
operations, financial condition, results of operations and net cash flows.
A-20
<PAGE>
RATE MATTERS
For discussions of the Energy Master Plan Proceedings, 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. Regulatory Issues of Notes.
ACCOUNTING ISSUES
For a discussion of significant accounting policies, including those
regarding regulation of PSE&G such as 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 and Note 19. Accounting Matters of Notes.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
For a discussion of the impact of new accounting pronouncements including
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133), Emerging Issues Task Force (EITF) Issues 98-10, "Accounting for Energy
Trading and Risk Management Activities" (EITF 98-10), Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" (SOP 98-1) and SOP 98-5, "Reporting on the Costs of Start-Up
Activities" (SOP 98-5), see Note 19. Accounting Matters of Notes.
SITE RESTORATIONS AND OTHER ENVIRONMENTAL COSTS
For discussion of potential environmental and other remediation costs, see
Note 10. Commitments and Contingent Liabilities of Notes.
A-21
<PAGE>
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; managing rapidly changing energy trading operations in conjunction
with electricity and gas production, transmission and distribution systems;
managing foreign investments and electric generation and distribution operation
in locations outside of the traditional utility service territory; political and
foreign currency risks; an increasingly competitive energy marketplace; sales
retention and growth potential in a mature service territory and a need to
reduce operating and capital costs; ability to obtain adequate and timely rate
relief, cost recovery, including stranded costs, and other necessary regulatory
approvals; Federal and state regulatory actions; costs of construction; Year
2000 issues; 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; the ability to economically and safely operate nuclear facilities in
accordance with regulatory requirements; environmental concerns; and market risk
and credit market concerns. PSEG 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 PSEG 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.
A-22
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
OPERATING REVENUES
Electric $ 4,031 $ 3,918 $ 3,944
Gas 1,559 1,937 1,881
Nonutility Activities 341 245 216
--------- --------- ---------
Total Operating Revenues 5,931 6,100 6,041
--------- --------- ---------
OPERATING EXPENSES
Net Interchanged Power and Fuel for Electric Generation 945 909 919
Gas Purchased 970 1,101 1,118
Operation and Maintenance 1,501 1,364 1,371
Depreciation and Amortization 669 630 607
Taxes (Note 12)
Income Taxes 420 334 295
Transitional Energy Facility Assessment/New Jersey
Gross Receipts Taxes 171 576 598
Other 69 71 76
--------- --------- ---------
Total Operating Expenses 4,745 4,985 4,984
--------- --------- ---------
OPERATING INCOME 1,186 1,115 1,057
--------- --------- ---------
OTHER INCOME AND DEDUCTIONS
Settlement of Salem Litigation - Net of Applicable
Taxes of $29 -- (53) --
Other - net 6 7 (2)
--------- --------- ---------
Total Other Income and Deductions 6 (46) (2)
--------- --------- ---------
INCOME BEFORE INTEREST CHARGES AND
DIVIDENDS ON PREFERRED SECURITIES 1,192 1,069 1,055
--------- --------- ---------
INTEREST CHARGES AND PREFERRED SECURITIES
DIVIDENDS
Interest Expense (Note 7) 481 470 453
Allowance for Funds Used During Construction -
Debt and Capitalized Interest (13) (20) (18)
Preferred Securities Dividend Requirements of Subsidiaries (Note 6) 80 56 50
Net Loss (Gain) on Preferred Stock Redemptions (Note 6) -- 3 (18)
--------- --------- ---------
Total Interest Charges and Preferred Securities Dividends 548 509 467
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 644 560 588
Discontinued Operations (Note 16):
Discontinued Operations - Net of Taxes -- -- 11
Gain on Sale of Discontinued Operations -- -- 13
--------- --------- ---------
NET INCOME $ 644 $ 560 $ 612
========= ========= =========
WEIGHTED AVERAGE COMMON SHARES AND
POTENTIAL DILUTIVE EFFECT OF STOCK OPTIONS
OUTSTANDING (000's) 230,974 231,986 242,401
EARNINGS PER SHARE (Basic and Diluted)
Income From Continuing Operations $ 2.79 $ 2.41 $ 2.42
Income From Discontinued Operations -- -- 0.04
Gain on Sale of Discontinued Operations -- -- 0.06
--------- --------- ---------
TOTAL EARNINGS PER SHARE $ 2.79 $ 2.41 $ 2.52
========= ========= =========
DIVIDENDS PAID PER SHARE OF COMMON STOCK $ 2.16 $ 2.16 $ 2.16
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
A-23
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS
ASSETS
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
UTILITY PLANT - Original cost
Electric $ 14,069 $ 13,692
Gas 2,847 2,697
Common 578 558
---------- ----------
Total 17,494 16,947
Less: Accumulated depreciation and amortization 7,048 6,463
---------- ----------
Net 10,446 10,484
Nuclear Fuel in Service, net of accumulated amortization -
1998, $312; 1997, $302 187 216
---------- ----------
Net Utility Plant in Service 10,633 10,700
Construction Work in Progress, including Nuclear Fuel in
Process - 1998, $72; 1997, $60 219 326
Plant Held for Future Use 24 24
---------- ----------
Net Utility Plant 10,876 11,050
---------- ----------
INVESTMENTS AND OTHER NONCURRENT ASSETS
Long-Term Investments, net of amortization - 1998, $28; 1997,
$21, and net of valuation allowances - 1998, $18; 1997, $23 3,034 2,873
Nuclear Decommissioning and Other Special Funds 649 492
Other Noncurrent Assets, net of amortization - 1998, $29; 1997, $16,
and net of valuation allowances - 1998, $10; 1997, $7 150 167
---------- ----------
Total Investments and Other Noncurrent Assets 3,833 3,532
---------- ----------
CURRENT ASSETS
Cash and Cash Equivalents 140 83
Accounts Receivable:
Customer Accounts Receivable 506 520
Other Accounts Receivable 219 293
Less: Allowance for Doubtful Accounts 38 41
Unbilled Revenues 255 270
Fuel, at average cost 331 310
Materials and Supplies, at average cost, net of inventory valuation
reserves - 1998, $12; 1997, $12 148 142
Miscellaneous Current Assets 93 86
---------- ----------
Total Current Assets 1,654 1,663
---------- ----------
DEFERRED DEBITS (Note 3)
SFAS 109 Income Taxes 704 725
OPEB Costs 270 289
Demand Side Management Costs 150 116
Environmental Costs 139 122
Unamortized Loss on Reacquired Debt and Debt Expense 135 136
Electric Energy and Gas Costs 35 167
Other 201 143
-----------------------
Total Deferred Debits 1,634 1,698
---------- ----------
TOTAL $ 17,997 $ 17,943
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
A-24
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
CAPITALIZATION
Common Stockholders' Equity:
Common Stock, issued; 231,957,608 shares $ 3,603 $ 3,603
Treasury Stock, at cost; 5,314,100 shares (207) --
Retained Earnings 1,748 1,623
Accumulated Other Comprehensive Income (46) (15)
---------- ----------
Total Common Stockholders' Equity 5,098 5,211
Subsidiaries' Preferred Securities:
Preferred Stock Without Mandatory Redemption 95 95
Preferred Stock With Mandatory Redemption 75 75
Guaranteed Preferred Beneficial Interest in Subordinated
Debentures (Note 6) 1,038 513
Long-Term Debt 4,763 4,873
---------- ----------
Total Capitalization 11,069 10,767
---------- ----------
OTHER LONG-TERM LIABILITIES
Accrued OPEB 344 289
Decontamination and Decommissioning Costs 39 43
Environmental Costs (Note 10) 84 73
Capital Lease Obligations 50 52
---------- ----------
Total Other Long-Term Liabilities 517 457
---------- ----------
CURRENT LIABILITIES
Long-Term Debt due within one year 418 340
Commercial Paper and Loans 1,056 1,448
Accounts Payable 655 686
Other 329 353
---------- ----------
Total Current Liabilities 2,458 2,827
---------- ----------
DEFERRED CREDITS
Income Taxes 3,384 3,394
Investment Tax Credits 322 343
Other 247 155
---------- ----------
Total Deferred Credits 3,953 3,892
---------- ----------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 10) -- --
---------- ----------
TOTAL $ 17,997 $ 17,943
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
A-25
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 644 $ 560 $ 612
Adjustments to reconcile net income to net cash flows from
operating activities:
Depreciation and Amortization 669 630 607
Amortization of Nuclear Fuel 94 60 60
Recovery (Deferral) of Electric Energy and Gas Costs - net 132 9 (5)
Unrealized Gains on Investments - net (51) (56) (7)
Proceeds from Leasing Activities (20) 71 89
Changes in certain current assets and liabilities:
Net change in Accounts Receivable and Unbilled Revenues 100 (95) (12)
Net change in Inventory - Fuel and Materials and Supplies (27) 9 (64)
Net change in Prepayments (13) (15) 6
Net change in Accounts Payable (31) (11) 60
Net change in Provision for Rate Refund -- (80) 75
Net change in Other Current Assets and Liabilities (18) (7) 11
Other (57) 20 (16)
Net cash provided by operating activities - Discontinued Operations -- -- 54
---------- ---------- ----------
Net Cash Provided By Operating Activities 1,422 1,095 1,470
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Utility Plant, excluding AFDC (535) (542) (586)
Net change in Long-Term Investments (58) (914) 5
Contribution to Decommissioning Funds and Other Special Funds (115) (63) (29)
Other (4) (95) (52)
Net Proceeds from Sale of Discontinued Operations -- -- 704
Change in Net Assets - Discontinued Operations -- -- (51)
---------- ---------- ----------
Net Cash Used In Investing Activities (712) (1,614) (9)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in Short-Term Debt (392) 810 71
Issuance of Long-Term Debt 525 785 374
Redemption of Long-Term Debt (557) (700) (808)
Redemption of Preferred Stock -- (94) (212)
Issuance of Preferred Securities 525 95 208
Purchase of Treasury Stock (207) -- --
Retirement of Common Stock -- (43) (307)
Cash Dividends Paid on Common Stock (499) (501) (523)
Other (48) (29) (47)
---------- ---------- ----------
Net Cash (Used In) Provided By Financing Activities (653) 323 (1,244)
---------- ---------- ----------
Net Change In Cash And Cash Equivalents 57 (196) 217
Cash And Cash Equivalents At Beginning Of Year 83 279 62
---------- ---------- ----------
Cash And Cash Equivalents At End Of Year $ 140 $ 83 $ 279
========== ========== ==========
Income Taxes Paid $ 426 $ 170 $ 157
Interest Paid $ 469 $ 416 $ 463
</TABLE>
See Notes to Consolidated Financial Statements.
A-26
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(MILLIONS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON TREASURY RETAINED COMPREHENSIVE
STOCK STOCK EARNINGS INCOME TOTAL
--------------- ----------------- -------- ------------- -------
SHS. AMOUNT SHS. AMOUNT
---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AS OF JANUARY 1, 1996 245 $ 3,801 -- $ -- $ 1,637 $ -- $ 5,438
Net Income -- -- -- -- 612 -- 612
Other Comprehensive Income -- -- -- -- -- -- --
-------
Comprehensive Income -- -- -- -- -- -- 612
-------
Cash Dividends on Common Stock -- -- -- -- (523) -- (523)
Retirement of Common Stock (11) (174) -- -- (133) -- (307)
Preferred Securities Issuance Expenses -- -- -- -- (7) -- (7)
--------------- ----------------- -------- ------------- -------
BALANCE AS OF DECEMBER 31, 1996 234 3,627 -- -- 1,586 -- 5,213
--------------- ----------------- -------- ------------- -------
Net Income -- -- -- -- 560 -- 560
Other Comprehensive Income, net of tax:
Currency Translation Adjustment, net of tax of $(2) -- -- -- -- -- (15) (15)
-------
Other Comprehensive Income -- -- -- -- -- -- (15)
-------
Comprehensive Income -- -- -- -- -- -- 545
-------
Cash Dividends on Common Stock -- -- -- -- (501) -- (501)
Retirement of Common Stock (2) (24) -- -- (19) -- (43)
Preferred Securities Issuance Expenses -- -- -- -- (3) -- (3)
--------------- ----------------- -------- ------------- -------
BALANCE AS OF DECEMBER 31, 1997 232 3,603 -- -- 1,623 (15) 5,211
--------------- ----------------- -------- ------------- -------
Net Income -- -- -- -- 644 -- 644
Other Comprehensive Income, net of tax:
Pension Plan Additional
Minimum Liability, net of tax of $(2) -- -- -- -- -- (3) (3)
Currency Translation Adjustment, net of tax of $(3) -- -- -- -- -- (28) (28)
-------
Other Comprehensive Income -- -- -- -- -- -- (31)
-------
Comprehensive Income -- -- -- -- -- -- 613
-------
Cash Dividends on Common Stock -- -- -- -- (499) -- (499)
Purchase of Treasury Stock -- -- (5) (207) -- -- (207)
Restricted Stock Award -- -- -- -- (5) -- (5)
Preferred Securities Issuance Expenses -- -- -- -- (15) -- (15)
--------------- ----------------- -------- ------------- -------
BALANCE AS OF DECEMBER 31, 1998 232 $ 3,603 (5) $ (207) $ 1,748 $ (46) $ 5,098
=============== ================= ======== ============= =======
</TABLE>
Note: The ability of PSEG to declare and pay dividends is contingent upon its
receipt of dividends from its subsidiaries. PSE&G, PSEG'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 indentures supplemental to its Mortgage and certain other
indentures. However, none of these restrictions presently limits the
payment of dividends out of current earnings. The amount of PSE&G's
restricted retained earnings at December 31, 1998, 1997 and 1996 was $10
million. There are no restrictions on Energy Holding's retained earnings.
See Notes to Consolidated Financial Statements.
A-27
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
PSEG has two principal direct wholly-owned subsidiaries: Public Service
Electric and Gas Company (PSE&G) and PSEG Energy Holdings Inc. (Energy
Holdings), formerly Enterprise Diversified Holdings Incorporated. PSEG's largest
subsidiary, PSE&G, is an operating public utility providing electric and gas
service within certain areas in the State of New Jersey.
Energy Holdings is the parent of PSEG's non-utility businesses: PSEG
Global Inc. (Global), formerly Community Energy Alternatives Incorporated, an
investor in and developer and operator of projects in the generation and
distribution of energy, including cogeneration and independent power production
(IPP) facilities, electric distribution companies, exempt wholesale generators
(EWGs) and foreign utility companies (FUCOs); PSEG Resources Inc. (Resources),
formerly Public Service Resources Corporation, which has made primarily passive
investments; PSEG Energy Technologies Inc. (Energy Technologies), formerly
Energis Resources, 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. Energy
Holdings also has two finance subsidiaries: PSEG Capital Corporation (PSEG
Capital), which provides privately-placed debt financing to Energy Holdings'
operating subsidiaries, except Energy Technologies, on the basis of a minimum
net worth maintenance agreement with PSEG and Enterprise Capital Funding
Corporation (Funding), which provides privately-placed debt financing to
Resources, Global and their subsidiaries, which debt is guaranteed by Energy
Holdings, but without direct support from PSEG. EGDC has been conducting a
controlled exit from the real estate business since 1993. In July 1996, Energy
Holdings sold Energy Development Corporation (EDC), an oil and gas subsidiary.
For more information on EDC, see Note 16. Discontinued Operations.
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 and recoveries, which will be amortized over various
future 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 unless recovery mechanisms are approved by the
BPU. PSE&G continues to meet the requirements for application of SFAS 71.
However, once the BPU issues an order with respect to PSE&G in the New
Jersey Energy Master Plan (Energy Master Plan) Proceedings, currently scheduled
for March 31, 1999, it is expected that PSE&G will no longer meet the
requirements for application of SFAS 71 for its then deregulated operations. See
Note 2. Regulatory Issues and Note 19. Accounting Matters for further discussion
of deregulation and the potential accounting impacts caused by deregulation.
A-28
<PAGE>
CONSOLIDATION POLICY
The consolidated financial statements include the accounts of PSEG and its
subsidiaries. PSEG 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 PSEG 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.
RECLASSIFICATIONS
Certain reclassifications of prior period data have been made to conform
with the current presentation.
UNAMORTIZED LOSS ON REACQUIRED DEBT AND DEBT EXPENSE
Bond issuance costs and associated premiums and discounts are generally
amortized over the life of the debt issuance. In accordance with Federal Energy
Regulatory Commission (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.
Upon deregulation, gains and losses on reacquired debt associated with the
deregulated portion of PSE&G's operations will be reflected in the statement of
operations as incurred. Gains and losses on reacquired debt associated with
PSE&G's regulated operations will continue to be deferred and amortized to
interest expense over the period approved for ratemaking purposes.
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. Upon
deregulation, PSE&G will record a gain or loss on the retirement, sale or
disposal of assets in the deregulated portion of its business.
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 1998, 1997
and 1996.
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 (GAAP) for
non-regulated companies. Upon issuance of a BPU order, PSE&G will no longer
calculate depreciation in accordance with BPU guidance for the deregulated
portion of PSE&G's business. Depreciation for those assets will be calculated
based on estimated plant lives rather than regulatory guidance. PSE&G cannot
presently quantify what the financial statement impact might 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 PSEG and PSE&G
could be material.
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.
A-29
<PAGE>
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.
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 1998, 1997 and 1996 were
6.06 %, 5.71% and 5.83%, respectively. Upon deregulation, PSE&G will no longer
calculate AFDC for the deregulated portion of PSE&G's business. Interest (cost
of debt only) related to capital projects for generation projects will be
capitalized in accordance with SFAS No. 34, "Capitalization of Interest Cost."
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 BPU's Order dated December 31, 1996 (December 31st Order)
and PSE&G bore all risks associated with fuel prices.
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 PJM
Interconnection, L.L.C. (PJM) market clearing price. Effective April 1, 1998,
PJM, as independent system operator (ISO), replaced the PJM uniform market
clearing price with locational marginal pricing (LMP) for determining the market
clearing pricing to energy providers. For discussion of the current and proposed
status of the LEAC and the LGAC, see Note 2. Regulatory Issues and Note 3.
Regulatory Assets and Liabilities.
INVENTORY--MATERIALS AND SUPPLIES AND NUCLEAR FUEL
Inventory is carried on the books at cost in accordance with rate based
regulation. When portions of PSE&G's business become deregulated, the carrying
value of its inventory for its unregulated operations will be valued at a lower
of cost or market basis which could have a material adverse impact on PSEG's and
PSE&G's financial position, results of operations and net cash flows to the
extent that any write downs are not recovered through regulatory mechanisms
approved by the BPU.
COMMODITY CONTRACTS--PSE&G
PSE&G engages in electricity and natural gas commodity forwards, futures,
swaps and options purchases and sales with counterparties to manage exposure to
electricity and natural gas price risk. Certain contracts, in conjunction with
owned electric generating capacity, are designed to provide for estimated
electric customer commitments. Similarly,
A-30
<PAGE>
PSE&G uses natural gas futures and swaps to manage the price risk associated
with gas supply to customers. PSE&G's accounting policy for these contracts is
to recognize the gains and losses in income upon settlement of the contracts.
PSE&G also enters into forwards, futures, swaps and options that are not
used to manage price risk exposure for commitments to customers. As these are
considered to be trading contracts, PSE&G's accounting policy has been to mark
the contracts to market and record unrealized gains and losses in income. These
contracts 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.
For discussion of SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities" (SFAS 133), and Emerging Issues Task Force Issue No. 98-10,
"Accounting for Energy Trading and Risk Management Activities" (EITF 98-10), see
Note 19. Accounting Matters.
FINANCIAL INSTRUMENTS--ENERGY HOLDINGS
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.
EQUITY INVESTMENTS--ENERGY HOLDINGS
Resources carries its investments in equity securities at their
approximate fair market values as of the reporting date.
FOREIGN CURRENCY TRANSLATION/TRANSACTIONS--ENERGY HOLDINGS
The assets and liabilities of Energy Holdings' 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.
Transaction gains and losses that arise from exchange rate fluctuations on
normal operating 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
PSEG and its subsidiaries file a consolidated Federal income tax return
and income taxes are allocated to PSEG'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. For discussion of energy tax reform and its impact on
NJGRT, see Note 12. Income Taxes.
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. Beginning with the plan year 1997, the funding policy 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.
In 1993, PSEG 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, also referred to as other postretirement benefits (OPEB), be charged
to income during the years in which employees render
A-31
<PAGE>
service. PSE&G deferred a portion of these costs as a regulatory asset from 1993
until 1997 when a BPU order was received stipulating that current rates were
sufficient to recover such costs. Therefore, on January 1, 1998, PSE&G began
amortizing its regulatory asset for OPEB over 15 years and recording the annual
SFAS 106 OPEB cost. In 1998, PSE&G began funding its annual OPEB obligation in
an external trust to the maximum extent allowable under Section 401(h) of the
Internal Revenue Code.
CAPITAL LEASES 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.
IMPAIRMENT OF LONG-LIVED ASSETS
On January 1, 1996, PSEG 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 PSEG or PSE&G. However, future developments in the electric and
gas industries could have a material impact on the carrying value of certain
investments. Upon deregulation, PSE&G will reevaluate the potential impairment
of its assets which may result in recording an extraordinary, non-cash charge to
earnings that could have a material adverse impact on PSEG's and PSE&G's
financial condition and results of operations to the extent that any impairments
are not recovered through regulatory mechanisms approved by the BPU.
EARNINGS PER SHARE
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share",
which was 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. PSEG 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, 1998, 1997 and 1996.
NOTE 2. REGULATORY ISSUES
NEW JERSEY ENERGY MASTER PLAN PROCEEDINGS
In 1998 and continuing into 1999, energy industry restructuring continued
to advance in New Jersey. In 1998, evidentiary hearings related to PSE&G's
proposal in connection with the BPU's New Jersey Energy Master Plan were
completed and the Office of Administrative Law filed its decision providing its
recommendations on such proposal with the BPU. In January 1999, the State
Legislature passed the New Jersey Electric Discount and Competition Act (Energy
Competition Act) which was signed into law by the Governor on February 9, 1999.
The Energy Competition Act and the related BPU proceedings are hereinafter
defined as the Energy Master Plan Proceedings. Among other things, the Energy
Competition Act provides that all New Jersey retail electric customers may
select their electric supplier commencing August 1, 1999 and all New Jersey
retail gas customers may select their gas suppliers commencing January 1, 2000,
thus fully opening the New Jersey energy markets to customer choice and
competition.
The Energy Competition Act provides the BPU requisite authority to
implement certain aspects of retail electric and gas competition in New Jersey.
The BPU is currently engaged in proceedings to implement the Energy Competition
Act, the result of which will fundamentally change the electric and gas
industries in New Jersey by, among other things, introducing retail competition
to replace the monopoly position of regulated public utilities, potentially
requiring or resulting in the separation or sale of utilities' electric
generation assets and establishing a number of generic rules related to
deregulation, including governing regulated utilities' relationships with their
affiliates.
A-32
<PAGE>
Under the Energy the Competition Act, the distribution business will
remain regulated by the BPU. The transmission business will remain regulated by
the FERC. With deregulation, electric generation will become a competitive
business. Succeeding as a competitive generator will depend on many factors such
as fuel cost, production costs including labor cost, environmental constraints
and related expenses, transmission availability and rates, marketing ability and
quality of service, among others. The outcome of these proceedings will have a
profound effect on PSEG and PSE&G.
On February 11, 1999, the BPU adopted a schedule for the resolution of
each New Jersey electric utility's filings for rate unbundling, stranded cost
and restructuring proceedings. With respect to PSE&G, the BPU indicated that it
is encouraging the parties to the case to undertake discussions in an attempt to
reach consensus on the litigated issues in the rate unbundling, stranded cost
and, on limited issues, the restructuring proceedings. The BPU further indicated
that, in lieu of a negotiated settlement of the case among the parties, it has
scheduled a final vote on the PSE&G filing at its March 31, 1999 agenda meeting.
To that end, the BPU has set a deadline of March 3, 1999 for the submission of
any negotiated settlement.
Shortly thereafter, the BPU is expected to issue a series of orders that
will decide generic issues related to deregulation of the industry in the
State (e.g., affiliate standards). The BPU has yet to set a timetable related to
a gas restructuring order. Once the March 31, 1999 BPU Order is issued, PSE&G
will no longer meet the requirements of SFAS 71 for the electric generation
portion of its business. While PSE&G cannot predict the outcome of the Energy
Master Plan Proceedings, when PSE&G discontinues the application of SFAS 71 and
if full recovery were not probable through recovery mechanisms approved by the
BPU, there could be an extraordinary, non-cash charge to operations that could
be material to the financial position and results of operations of PSEG and
PSE&G. See Note 19. Accounting Matters for further discussion of the potential
accounting impacts caused by deregulation.
THE ENERGY COMPETITION ACT
Key features of the Energy Competition Act, as passed, include:
o Competitive choice for electric service will begin on August 1,
1999. Competitive choice for gas service must be fully implemented
by December 31, 1999. For further discussion of gas competition, see
Gas Unbundling.
o Mandates that an electric rate reduction of at least 10%, phased in
over a period of up to thirty-six months, will be provided to
consumers. The rate reduction will be based on the level of rates in
effect as of April 30, 1997. Rates must be reduced by no less than
5% effective August 1, 1999. When coupled with reductions from the
1998 change in New Jersey energy taxes, the total rate reductions
for consumers could total 16%, not including an additional 3.5%
reduction due to an interim DSM rate increase.
o Authorizes "shopping credits" or discounts for customers that switch
from their current electric utility supplier to encourage
competition.
o Utilities have an opportunity to recover stranded costs associated
with generation assets through a market transition charge (MTC) that
could last up to eight years. Costs associated with above-market
power purchase contracts with other utilities and with non-utility
generators (NUGs) will be recovered over the remaining life of those
contracts. Mitigation by the utility of its stranded costs, to the
extent possible, is required.
o Securitization is limited to 75% of utility generation-related
stranded costs. Transition bonds with a maximum scheduled
amortization of 15 years can be issued if the proceeds are used to
recover eligible stranded costs. Power purchase contracts can also
be securitized in an effort to buy out or buy down contracts.
o On or after the starting date of implementation of retail choice,
the BPU may require functional separation of a utility's
non-competitive business functions from its competitive electric
generation service and require that those competitive services be
provided by a related competitive business segment of a public
utility holding company. The related competitive business segment of
the public utility holding company will not be subject to regulation
under New Jersey utility law but may be subject to FERC regulation.
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o While the Energy Competition Act does not mandate divestiture of
electric generation assets, it gives the BPU the right to examine
market conditions and requires divestiture if the BPU finds market
power would impede development of competition.
o Competitive services may be offered by a public utility or a
competitive business segment of a public utility only with the
written approval of the BPU. Tariffs for competitive services will
be required and subject to review and approval by the BPU. The
competitive business segment must not adversely impact the ability
of the utility to offer non-competitive services to customers in a
safe, adequate and proper manner. The price for services must not be
less than the fully allocated cost of providing such services.
Cross-subsidization is prohibited and standards for affiliate
relationships will be established. The BPU will be required to apply
50% of the net revenues earned from competitive services offered by
an electric public utility as an offset to stranded costs or a
reduction of rates for the period of time that the utility collects
transition bond charges.
o Utility holding companies are permitted to offer competitive
electric generation service to existing utility retail customers
subject to affiliate relations standards to be established by the
BPU. A utility holding company's competitive business entity
utilizing utility assets, including personnel and equipment other
than the delivery network or certain shared corporate overhead or
administrative services, to provide competitive services is subject
to a 50% sharing of net revenues from such services. Unless the
utility ratepayers receive full market value for the use of such
utility assets pursuant to a contract between the parties filed with
the BPU, those revenues will be used to offset transition charges
and/or distribution rates for a period of time.
o The BPU is required to initiate a proceeding and adopt interim
technical standards to ensure the safety, reliability and accuracy
of metering equipment provided to electric and gas customers. The
BPU is required to issue an order providing customers the
opportunity to choose a supplier for some or all customer services
(such as metering and billing) not later than one year from the
start of retail competition. Until that time, customers are given
the option with affirmative consent to receive two bills, one from
the utility and one from the supplier.
o The BPU is required to adopt interim consumer protection standards
for electric and gas suppliers to prevent slamming, protect customer
privacy and provide customers necessary information to make informed
decisions.
o Simultaneously with the implementation of retail choice, the BPU may
permit recovery of certain costs through a Societal Benefits Charge
which would be a component of rates for all retail customers. These
costs will include social programs for which rate recovery was
approved prior to April 30, 1997; nuclear decommissioning costs;
demand side management program costs, manufactured gas plant clean
up costs and potentially the cost of a statewide consumer education
program. The BPU is authorized to use the existing funds for social
programs to create a universal service fund for low income energy
assistance.
o Utilities will serve customers for at least three years as the
energy provider of last resort, providing basic electric generation
and gas services. The BPU is required to decide, no later than three
years after the start of retail choice, whether to allow other,
non-utility, suppliers to offer basic generation service on a
competitive basis.
o Businesses, cities, towns and counties are able to aggregate their
own power demands and other energy needs for which marketers may bid
to serve. Customers will control their inclusion in any such group.
Aggregation by municipalities to serve residents and businesses
within those municipalities can also begin at the start of retail
choice.
o Electric suppliers must disclose information about fuels used to
generate the electricity that they sell and emissions from their
portfolio of electricity suppliers on customers' bills or in
marketing materials. The BPU and New Jersey Department of
Environmental Protection (NJDEP) may adopt an emission control
portfolio standard for all retail suppliers if the BPU finds that a
standard is necessary to meet Clean Air Act rules and that regional
and Federal actions would not achieve compliance with those rules,
or if two other states using the PJM power pool comprising 40% of
the retail electric usage in PJM adopt such standards.
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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. In its
initial proposal, PSE&G had 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.
To the extent that any portion of its stranded costs are not probable of
recovery upon the conclusion of the Energy Master Plan Proceedings, and thus
ineligible for deferral as a regulatory asset under Statement of Financial
Accounting Standards (SFAS) 71, "Accounting for the Effects of Certain Types of
Regulation" (SFAS 71), PSE&G would incur an extraordinary, non-cash charge to
income that could be material to the financial position and results of
operations of PSEG and PSE&G. For additional discussion related to the Energy
Master Plan Proceedings, see Note 3. Regulatory Assets and Liabilities.
Recoverability of these costs is largely dependent on the order to be
issued by the BPU at the conclusion of the Energy Master Plan Proceedings. PSE&G
has proposed to securitize $2.5 billion of these costs, with the remainder to be
recovered through a market transition charge during a proposed transition period
of seven years. In addition, PSE&G is seeking to negotiate the restructuring of
certain of its BPU approved contracts with Non-utility Generators (NUGs), which,
in PSE&G's initial proposal, were estimated to be $1.6 billion above assumed
future market prices. These costs are being recovered through the LEAC and are
expected to continue to be recovered through successor mechanisms to be
determined by the outcome of the Energy Master Plan Proceedings as to which no
assurances can be given. PSEG and PSE&G cannot predict the outcome of these
proceedings. However, such proceedings could have a material adverse effect on
PSEG's and PSE&G's financial condition, results of operations and net cash flows
and could adversely affect the carrying values of PSEG's and PSE&G's assets and
the ability to declare dividends on PSEG's common stock.
SECURITIZATION
In accordance with the provisions of the Energy Competition Act, it is
expected that the BPU will issue an order authorizing securitization of up to
75% of PSE&G's generation-related stranded costs. Securitization is a
refinancing technique, whereby the interest and principal payments on the
securitized debt which is issued will be serviced by an irrevocable,
non-bypassable charge to utility customers. The Energy Competition Act provides
that net proceeds from any authorized securitization of a utility's stranded
costs must be used to reduce that utility's debt and equity.
Dependent upon market conditions and the level of securitization
authorized by the BPU in the Energy Master Plan Proceedings, PSE&G may use a
number of alternatives to reduce its debt and equity, including the redemption,
tender or purchase of its outstanding Mortgage Bonds and preferred stock.
In anticipation of an application of the use of proceeds of securitization,
PSEG has been engaged in a program to repurchase its Common Stock, as
discussed below.
Since the Energy Master Plan Proceedings are still in progress, PSE&G
cannot predict the extent to which regulators will allow the use of such
securitization for recovery of stranded costs. PSE&G's decision as to the manner
in which the proceeds of securitization will be utilized to reduce debt and
equity is dependent upon the BPU's decision in the Energy Master Plan
Proceedings. The decision of the BPU required in this matter could have a
material adverse effect on PSEG's and PSE&G's financial condition, results of
operations and net cash flows. The use of securitization proceeds to reduce debt
and equity is likely to affect the market prices of the related securities.
Additionally, the use of securitization could impact PSEG's and PSE&G's bond
ratings and the cost of other debt for PSEG and PSE&G.
On September 15, 1998, in anticipation of securitization of PSE&G's
stranded costs afforded by the then proposed Energy Competition Act, the Board
of Directors of PSEG authorized the repurchase of up to 10 million shares of its
Common Stock. Under the authorization, repurchases were made in the open market
at the discretion of
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PSEG. The repurchased shares have been held as treasury stock. At December 31,
1998, PSEG had repurchased approximately 5.3 million shares of Common Stock at a
cost of approximately $207 million, under this authorization. As of February 8,
1999, PSEG had repurchased a total of 10 million shares at a cost of
approximately $391 million under this program.
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
proposed 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.
ADMINISTRATIVE LAW JUDGE'S RECOMMENDATIONS
Previously, in connection with its Energy Master Plan Proceedings, the BPU
requested the Office of Administrative Law to hold evidentiary hearings
regarding stranded costs and unbundling issues. Hearings were held before an
Administrative Law Judge (ALJ) and on August 17, 1998, the ALJ filed his
decision providing its recommendations to the BPU. The BPU can adopt, reject or
modify the ALJ's recommendations in its decision on PSE&G's proposal which was
filed as part of these proceedings. PSE&G cannot predict the extent to which the
BPU will rely on the ALJ's decision in evaluating PSE&G's proposal. The ALJ's
decision on PSE&G's competition and rate proposal:
o Recommended the adoption of PSE&G's request to securitize up to $2.5
billion of its after-tax stranded costs through the issuance of
revenue bonds, which would mature over a 15 year period.
o Recommended the recovery of $1.6 billion of PSE&G's above-market
price contracts to purchase power from non-utility generators
(NUGs).
o Recommended a rate cut of between 10% and 12%, exclusive of the
impact of energy tax reform.
o Supported PSE&G's request for a seven year transition period. PSE&G
had proposed a transition period of seven years, starting on the
effective date of the BPU's final decision in these proceedings,
with basic tariff rates capped during that seven year period. During
the transition period, PSE&G would maintain responsibility for
system reliability of energy and capacity supply.
o Accepted PSE&G's approach/methodology of quantifying stranded costs
without quantifying the amount of such costs.
o Recommended a review of PSE&G's actual electric fuel costs, which
would apply any potential savings from the elimination of the
Electric Levelized Energy Adjustment Clause (LEAC) to mitigate
stranded costs.
o Supported PSE&G's Societal Benefits Clause proposal, but proposed to
exclude non-utility generators (NUG) costs from the Societal
Benefits Clause. A separate NUG charge would be created.
o Recommended adding an amount, known as a "retail adder," to the
proposed market-based energy credit on customers' bills to give
customers who choose another energy supplier credits for more than
the market price for power.
On October 2, 1998, PSE&G filed exceptions to the ALJ's decision. These
exceptions addressed issues identified in the ALJ's decision including the
validity of capital additions made by PSE&G after the conclusion of its 1992
base rate case, the relevance of PSE&G's methodology regarding stranded costs,
mitigation strategies, the adoption of securitization and the unbundling of
costs and rates. Other parties to the proceeding have also filed exceptions to
the ALJ's decision. PSE&G filed its reply exceptions to the other parties'
exceptions to the ALJ's decision on October 30, 1998.
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Hearings at the BPU addressing other restructuring issues such as market
power, functional separation and consumer protection concluded on May 28, 1998.
Briefs have been filed by the parties in these hearings. As previously
discussed, these generic issues are expected to be decided shortly after the
March 31, 1999 BPU Order.
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 PSEG 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 continued in
base rates without being subject to further refund and PSE&G assumed 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)
did not apply to PSE&G from January 1, 1996 through December 31, 1998. In
addition, the energy component of PSE&G's LEAC was fixed at its then existing
level with no increase to customers until at least January 1999 with PSE&G
responsible for all risks associated with fuel prices. Any underrecovered or
overrecovered LEAC balance existing on December 31, 1998 would not be considered
in any LEAC review subsequent to that date. Any overrecovery at that date would
be applied to reduce any potential stranded costs and any underrecovered balance
will be charged to income in the period identified. For an update on the current
status of the LEAC, see Note 3. Regulatory Assets and Liabilities.
The December 31st Order provided 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 without
any change in the current energy component of the LEAC charge. This balance was
fully recovered and the overrecovery of $39 million at December 31, 1998 is
being carried as a regulatory liability to offset stranded costs.
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 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 committed to developing a
computer system which has been developed to assist low income residents in
identifying government and community programs from which they would be eligible
to receive benefits.
On November 10, 1998, the BPU requested PSE&G to identify its intention
with regard to a new LEAC filing before the BPU, in accordance with the December
31st Order. On November 20, 1998, PSE&G responded and addressed the issue
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of a new LEAC by stating that it intends to follow its Energy Master Plan
filing, wherein it proposed to discontinue the LEAC effective with the
commencement of retail electric competition. PSE&G intends to continue the
utilization of deferred accounting for the LEAC until commencement of customer
choice. Assuming that retail access will commence on or about August 1, 1999, as
mandated in the Energy Competition Act, any overrecovery that exists as of that
date would be utilized as an offset to the proposed $3.9 billion of stranded
costs. As of December 31, 1998, PSE&G established a deferred regulatory
liability in the amount of $39 million which represents an overrecovery of LEAC
fuel costs, to be applied as an offset to stranded costs.
ELECTRIC LEVELIZED ENERGY ADJUSTMENT CLAUSE (LEAC)/DEMAND SIDE ADJUSTMENT FACTOR
(DSAF)
As discussed above, the December 31st Order fixed the energy component of
the LEAC as of December 31, 1996. 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. For further discussion, see Note 3. Regulatory Assets and
Liabilities and Note 11. PSE&G Nuclear Decommissioning.
On February 24, 1997, PSE&G requested an annualized increase of $151.8
million in the DSAF component of the LEAC effective for the period from May 1997
through December 1998, representing an increase on a typical residential bill of
approximately 3.5%. The request included recovery of electric 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. On April 1, 1998, the BPU approved $150.8 million of PSE&G's
requested increase. This increase was effective for service rendered on or after
April 3, 1998. The Division of the Ratepayer Advocate has appealed the BPU's
order, seeking to overturn the BPU's decision. Initial Briefs on Appeal were
filed on October 14, 1998. PSE&G cannot predict the outcome of that appeal. If
such an appeal is successful, there could be a material adverse impact on PSEG's
and PSE&G's financial condition, results of operations and net cash flows.
At December 31, 1998, PSE&G had an underrecovered balance, including
interest, of approximately $150 million related to these programs. Such amount
is included in Deferred Debits on PSE&G's balance sheet.
PSE&G's most recent DSM Resource Plan (1995 Plan) was approved by the BPU
in 1995 and was designed to encourage investment in energy-saving DSM
activities. BPU approval of the 1995 Plan included a requirement to file the
next DSM Plan by July 1, 1997. In April of 1997 PSE&G filed a request with the
BPU to extend the 1995 Plan for one year and to defer filing the next DSM Plan
until July 1, 1998, which requests were granted with the condition that the Core
Programs would continue until the next DSM Plan was approved. The BPU further
directed that PSE&G also extend existing project acceptance and in-service
deadline dates by one year. On June 29, 1998, PSE&G filed with the BPU the 1999
Interim Demand Side Management Plan which included Core programs and the
Standard Offer, and hearings on the filing were conducted. No action has been
taken by the BPU leaving no mechanism open at this time for the accepting of new
Standard Offer project proposals. It is anticipated that there will be BPU
action on the 1999 Interim Plan in the near future, but PSE&G cannot predict the
outcome of such action.
The Energy Competition Act provides for the continued ability to recover
costs related to the DSM programs through a societal benefits charge initially
set at the level in rates for DSM cost recovery in place on February 9, 1999.
Within the subsequent twelve months, the BPU is required to complete a statewide
comprehensive resource analysis of energy efficiency and renewable energy
programs and determine the appropriate level of funding for each utility based
on this analysis. PSEG and PSE&G cannot predict the final outcome of DSM and
other mandated societal costs recovery under the Energy Master Plan Proceedings.
Inability to recover such amounts could have a material adverse impact on PSEG's
and PSE&G's financial condition, results of operations and net cash flows. For
further discussion of the potential impact on PSEG and PSE&G of the Energy
Master Plan Proceedings, see New Jersey Energy Master Plan Proceedings.
LEVELIZED GAS ADJUSTMENT CLAUSE (LGAC)
On July 10, 1998, PSE&G filed a motion with the BPU requesting a $27
million annual increase in its LGAC for the period October 1, 1998 to September
30, 1999, representing an increase on a typical residential bill of
approximately 2.8%. Also included in the revised LGAC rate is an increase in the
Remediation Adjustment Clause (RAC) component, a decrease in the Demand Side
Adjustment Factor (DSAF) and a request to change, on a monthly basis, the
over/under collection
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component of the LGAC rate for residential customers. On October 15, 1998,
PSE&G, BPU Staff and the Ratepayer Advocate executed an Interim Stipulation
which allows the filed LGAC rates to become effective, subject to refund. On
November 4, 1998, the BPU approved an Order adopting the Interim Stipulation.
On December 22, 1998, the Board approved a Final Stipulation in the LGAC
which provided for the following:
1) All previously approved interim rates became final.
2) All margins (prospectively) from PSE&G's participation in the New
Jersey Natural Gas Company (New Jersey Natural) residential
unbundling pilot program were to be returned 100% to PSE&G's firm
gas customers.
3) PSE&G was allowed to hedge up to 115bcf (approximately 80%) of its
residential gas supply through physical or financial transactions,
with a limit on the financial transactions of 75% of the total to be
hedged.
4) The LGAC rate can now be changed (increased or decreased) monthly,
within certain limits, during November through April to reflect
changes in the projected over/under collection.
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 provided 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.
On June 26, 1998, an Order was executed by the BPU making the terms of the
interim Stipulation final, without modification.
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.
On July 10, 1998, PSE&G filed a motion before the BPU requesting a $1.5
million annual increase in its RAC for the period August 1, 1997 to July 31,
1998, representing an increase on a typical residential bill of approximately
0.03%. On November 4, 1998, the BPU issued an Order approving the rate increase
on an interim basis, subject to refund. On December 22, 1998, the BPU approved
the rate increase on a final basis.
The Energy Competition Act provides for the continued ability to recover
costs related to the Remediation Program through a societal benefits charge. No
assurances can be given as to the outcome of the Energy Master Plan Proceedings.
CONSOLIDATED TAX BENEFITS
In a case affecting another utility in which neither PSEG 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 PSEG 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 PSEG's revenues, net income or net cash flows. In addition, an
unfavorable resolution may adversely impact PSEG's non-utility investment
strategy. PSEG 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 PSEG 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 PSEG nor PSE&G is able to
predict what action, if any, the BPU may take concerning consolidation of tax
benefits in future rate proceedings.
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POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (OPEB)
On October 21, 1998, the BPU ordered PSE&G to fund in an external trust
its annual OPEB obligation to the maximum extent allowable under Section 401(h)
of the Internal Revenue Code. For 1998, the amount funded was $12 million.
Remaining OPEB costs will not be funded in an external trust.
OTHER REGULATORY ISSUES
NON-UTILITY GENERATION BUYDOWN
PSE&G is seeking to restructure certain of its BPU approved contracts with
NUGs, which are estimated to be $1.6 billion above assumed future market prices.
Under Federal and State regulations, utilities have been required to enter into
long-term power purchase agreements with NUGs at prices which have subsequently
proven to be above market. In June 1998, PSE&G and the Union County Utilities
Authority (UCUA) announced an agreement to amend their Power Purchase and
Interconnection Agreement and in July 1998, the BPU approved this amendment.
Under this amendment, PSE&G has paid UCUA a lump sum amount of $7.75 million in
exchange for a $15.6 million savings to ratepayers on a net present value basis.
The payment of $7.75 million by PSE&G is being recovered through the LEAC and is
expected to continue to be recovered through successor mechanisms to be
determined by the outcome of the Energy Master Plan Proceedings as to which no
assurances can be given.
ORDER ADOPTING AUCTION STANDARDS
On June 16, 1998, the BPU adopted standards applicable to the auction
processes being used by two other New Jersey utilities to divest themselves of
certain of their generating plants by sale to unrelated entities. At this time,
PSEG's strategy is to retain its generation assets. The BPU order adopting these
auction standards indicated that the standards would be reviewed and possibly
modified if deemed appropriate. Should PSE&G decide or be required to sell its
generation assets, PSE&G would determine at such time whether to seek such
review or modification.
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. The Energy
Competition Act does not require that on-site generators pay any fees equivalent
to the societal benefits charge or recovery of utility stranded costs (market
transition charge or transition bond charges) provided that the energy load
served by the on-site generators does not reduce the utility's distributed
kilowatt hours below 92.5% of the kilowatt hours distributed by the utility in
1999. If that trigger is exceeded, then on-site generators will pay such
charges. PSE&G cannot predict the impact this may have on its financial
condition, results of operations and net cash flows.
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 and require PSE&G to deliver such gas to the
customer's facility. Under the Energy Competition Act, utilities are required to
offer all of their customers the choice to buy the gas commodity from alternate
suppliers by December 31, 1999. The Energy Competition Act also applies similar
rules to the gas industry as to the electric industry addressing affiliate
relations, consumer protections, among others.
To date, approximately 17,700 commercial and industrial customers, of
approximately 180,000 such customers eligible, have elected to utilize unbundled
gas service. PSE&G cannot predict, in light of restructuring and with the
changes in the law affecting the gross receipts and franchise tax which became
effective on January 1, 1998, whether additional customers will use this
service. 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).
In April 1997, the BPU approved PSE&G's proposal for a residential gas
unbundling pilot program (SelectGas), which allowed approximately 65,000
residential natural gas customers, out of a total of 1.4 million residential gas
customers, to participate in the competitive marketplace effective May 1, 1997.
On April 30, 1998, PSE&G filed a report with the BPU
A-40
<PAGE>
on SelectGas and proposed refinements for a permanent residential gas unbundling
program (SelectGas Plus). Under SelectGas Plus, as proposed, a total of 300,000
residential customers would be permitted to choose their gas supplier on a
first-come, first-served basis. This expanded program would commence sixty days
after a BPU order authorizing this program. PSE&G's proposal would permit its
remaining residential customers to choose their gas supplier by July 1, 1999 or
such alternate date as may be established by the BPU. On December 22, 1998,
PSE&G, the BPU and the Ratepayer Advocate executed an Interim Stipulation for
Phase I of PSE&G's Residential Gas Transportation Program (Program). In
accordance with the Interim Stipulation, residential customers would not be
eligible to register (sign-up) for the Program until 60 days after the BPU's
Energy Master Plan Proceedings written order. The Interim Stipulation mandates
that residential customers who return to PSE&G's bundled sales service after a
designated period would be served gas which is market- priced under PSE&G's
Market Price Gas Service (MPGS) tariff.
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
1,700 former residential gas customers of New Jersey Natural.
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. PSEG's indirect subsidiary, Energy
Technologies, provides non-utility gas marketing services operating in New
Jersey and several other states.
NEW JERSEY GROSS RECEIPTS AND FRANCHISE TAX (NJGRT) REFORM
For a discussion of New Jersey energy tax reform and its impact on the
NJGRT, see Note 12. Income Taxes.
NOTE 3. REGULATORY ASSETS AND LIABILITIES
Regulatory assets and liabilities are recorded in accordance with the
provisions of 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 are being 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. Through
1998 and into 1999, PSE&G continues to meet the requirements for application of
SFAS 71. Once the BPU issues its March 31, 1999 order in the Energy Master Plan
Proceedings, PSE&G will no longer meet the requirements for application of SFAS
71 for its then deregulated operations. It is expected that the existing
regulatory assets, listed below, will continue in the regulated portion of
PSE&G's business and will continue to be subject to SFAS 71.
At December 31, 1998 and 1997, PSE&G had deferred the following regulatory
assets and liabilities on the Consolidated Balance Sheets:
DECEMBER 31,
-----------------------
1998 1997
---------- ----------
REGULATORY ASSETS (MILLIONS OF DOLLARS)
SFAS 109 Income Taxes $ 704 $ 725
OPEB Costs 270 289
Demand Side Management Costs 150 116
Environmental Costs 139 122
Unamortized Loss on Reacquired Debt and
Debt Expense 135 135
Decontamination and Decommissioning Costs 39 43
Underrecovered Gas Costs 35 76
Plant and Regulatory Study Costs 32 34
Repair Allowance Tax Deficiencies and
Interest 26 --
Property Abandonments 21 37
Oil and Gas Property Write-Down 21 26
A-41
<PAGE>
Underrecovered Electric Energy Costs -- 91
Other 7 --
---------- ----------
Total Regulatory Assets $ 1,579 $ 1,694
========== ==========
REGULATORY LIABILITIES
Overrecovered Electric Energy Costs $ 39 $ --
Other Stranded Cost Recovery Offsets 4 --
---------- ----------
Total Regulatory Liabilities $ 43 $ --
========== ==========
UNAMORTIZED LOSS ON REACQUIRED DEBT AND DEBT EXPENSE: Represents bond issuance
costs, premiums, discounts and losses on reacquired long-term debt.
OPEB COSTS: Includes costs associated with adoption of SFAS 106 which were
deferred in accordance with EITF Issue 92-12. Beginning January 1, 1998, PSE&G
commenced the amortization of the regulatory asset over 15 years.
ENVIRONMENTAL COSTS: Represents environmental costs which are probable of
recovery in future rates.
UNDERRECOVERED ELECTRIC ENERGY COSTS/OVERRECOVERED ELECTRIC ENERGY COSTS: PSE&G
had 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. At December 31, 1998, PSE&G has fully recovered its December
31, 1996 underrecovered LEAC balance. The LEAC is in an overrecovered position
of $39 million at December 31, 1998. This overrecovered amount will be used to
offset stranded costs per the BPU's December 31st Order in the Salem settlement.
PSE&G continues to follow deferred accounting treatment for the LEAC until the
BPU rules on PSE&G's Energy Master Plan proposal. The potential discontinuance
of the LEAC which may result from the Energy Master Plan Proceedings may cause
increased earnings volatility since PSE&G will bear the full risks and rewards
of changes in nuclear and fossil generating fuel costs and replacement power
costs. No assurances can be given as to the outcome of the New Jersey Energy
Master Plan Proceedings.
SFAS 109 INCOME TAXES: Represents regulatory asset related to the implementation
of SFAS 109, "Accounting for Income Taxes" in 1993. For further discussion
including flow-through impacts, see Note 12. Income Taxes.
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, 1998 and 1997, respectively, reflects
underrecovered/(overrecovered) costs as follows:
A-42
<PAGE>
DECEMBER 31,
--------------------
1998 1997
-------- --------
(MILLIONS OF DOLLARS)
Deferred DSM (Including
Interest)--Electric $ 151 $ 122
Deferred DSM (Including
Interest)--Gas (1) (6)
-------- --------
Total $ 150 $ 116
======== ========
DECONTAMINATION AND DECOMMISSIONING COSTS: Represents amounts related to
decontamination and decommissioning at Federal government sites which are
probable of recovery in future rates.
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.
REPAIR ALLOWANCE TAX DEFICIENCIES AND INTEREST: Represents Federal income tax
deficiencies and interest thereon applicable to deductions under the repair
allowance provisions of the Internal Revenue Code, disallowed upon IRS audit.
The BPU has allowed recovery of these costs in rates.
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%.
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 Energy Holdings.
DECEMBER 31,
-----------------------
1998 1997
---------- ----------
(MILLIONS OF DOLLARS)
Lease Agreements (see Note 5
Leasing Activities):
Leveraged Leases ..................... $ 1,393 $ 1,143
Direct and Other Financing Leases .... -- 4
---------- ----------
Total ............................. 1,393 1,147
---------- ----------
Partnerships:
General Partnerships ................. 72 142
Limited Partnerships ................. 522 534
---------- ----------
Total ............................. 594 676
---------- ----------
Corporate Joint Ventures ................ 879 885
Securities .............................. 21 28
Other Investments ....................... 147 137
---------- ----------
Total Long-Term Investments ....... $ 3,034 $ 2,873
========== ==========
Resources' 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.
A-43
<PAGE>
Partnership investments and corporate joint ventures are those of
Resources, Global and EGDC.
Other Investments, above, relate primarily to Public Service Conservation
Resources Corporation (PSCRC), which at December 31, 1998 was a wholly-owned
subsidiary of PSE&G. On January 1, 1999, PSCRC was transferred to Energy
Technologies, a wholly-owned subsidiary of Energy Holdings. PSCRC's investment
in DSM projects had balances at December 31, 1998 and 1997 of approximately $72
million and $84 million, respectively.
NOTE 5. LEASING ACTIVITIES
AS LESSOR
Resources' net investments in leveraged leases are composed of the
following elements:
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------- ---------------------
(MILLIONS OF DOLLARS) (MILLIONS OF DOLLARS)
LEVERAGED LEVERAGED
LEASES LEASES
---------- ----------
Lease rents receivable ............ $ 1,921 $ 1,498
Estimated residual value .......... 665 635
---------- ----------
2,586 2,133
Unearned and deferred income ...... (1,193) (990)
---------- ----------
Total investments . ........... 1,393 1,143
Deferred taxes .................... (731) (670)
---------- ----------
Net investments ............... $ 662 $ 473
========== ==========
Resources' other capital leases are with various regional, state and city
authorities for transportation equipment and aggregated $0 million and $4
million as of December 31, 1998 and 1997, respectively.
A-44
<PAGE>
NOTE 6. SCHEDULE OF CONSOLIDATED CAPITAL STOCK AND OTHER SECURITIES
<TABLE>
<CAPTION>
CURRENT
REDEMPTION
OUTSTANDING PRICE DECEMBER 31, DECEMBER 31,
SHARES PER SHARE 1998 1997
----------- ---------- ------------ ------------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
PSEG Common Stock (no par) (A)
Authorized 500,000,000 shares; issued and
outstanding at December 31, 1998, 226,643,508
shares; at December 31, 1997, 231,957,608 shares
and at December 31, 1996, 233,470,291 shares ........ $3,396 $3,603
PSEG Preferred Securities (B)
PSEG Quarterly Guaranteed Preferred Beneficial
Interest in PSEG's Subordinated Debentures
(D) (E) (G) (I)
7.44% ........................................... 9,000,000 -- $225 $--
Floating Rate ..................................... 150,000 -- 150 --
7 1/4% .......................................... 6,000,000 -- 150 --
------------ ------------
Total Quarterly Guaranteed Preferred Beneficial
Interest in PSEG's Subordinated Debentures ........ $525 $--
============ ============
PSE&G Preferred Securities
PSE&G Cumulative Preferred Stock (C) without
Mandatory Redemption (D) $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
6.92% ............................................ 160,711 -- 16 16
$25 par value series
6.75% ............................................ 600,000 -- 15 15
============ ============
Total Preferred Stock without Mandatory Redemption .. $95 $95
============ ============
With Mandatory Redemption (D) (E) $100
par value series
5.97% ............................................ 750,000 102.99 $75 $75
============ ============
Total Preferred Stock with Mandatory Redemption ..... $75 $75
============ ============
PSE&G Monthly Guaranteed Preferred Beneficial
Interest in PSE&G's Subordinated Debentures
(D) (E) (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
============ ============
PSE&G Quarterly Guaranteed Preferred Beneficial
Interest in PSE&G's Subordinated Debentures
(D) (E) (F) (H)
8.625% ........................................ 8,320,000 -- $208 $208
8.125% ........................................ 3,800,000 -- 95 95
------------ ------------
Total Quarterly Guaranteed Preferred Beneficial
Interest in PSE&G's Subordinated Debentures ....... $303 $303
============ ============
</TABLE>
(A) On September 15, 1998, in anticipation of securitization of PSE&G's
stranded costs afforded by the Energy Competition Act and the ALJ's
decision, the Board of Directors of PSEG authorized the repurchase of up
to 10 million shares of its common stock (Common Stock). Under the
authorization, repurchases were made in the open market at the discretion
of PSEG. The repurchased shares have been held as treasury stock. At
December 31, 1998, PSEG had repurchased 5,314,100 shares of Common Stock
at a cost of approximately $207 million, under this authorization. As of
February 8, 1999, PSEG had repurchased a total of 10 million shares at a
cost of approximately $391 million under this program.
In July 1996, PSEG 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.
A-45
<PAGE>
Total authorized and unissued shares include 7,302,488 shares of PSEG
Common Stock reserved for issuance through PSEG's Dividend Reinvestment
and Stock Purchase Plan and various employee benefit plans. In 1998 and
1997, no shares of PSEG Common Stock were issued or sold through these
plans.
(B) PSEG has authorized a class of 50,000,000 shares of Preferred Stock
without par value, none of which is outstanding.
(C) At December 31, 1998, 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, 1998 and 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, 1998 and 1997, 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 5.50% and $18,862,500 and 6.04%, respectively.
At December 31, 1998 and 1997, 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 5.18% and $25,658,750 and 5.70%, respectively.
At December 31, 1998, the annual dividend requirement of PSEG's Trust
Preferred Securities (Guaranteed Preferred Beneficial Interest in PSEG's
Subordinated Debentures) and their embedded costs were $38,433,000 and
4.91%, respectively. There were no Trust Preferred Securities at PSEG at
December 31, 1997.
(E) For information concerning fair value of financial instruments, see Note
8. Financial Instruments and Risk Management.
(F) 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.
(G) In January 1998, Enterprise Capital Trust I issued $225 million of 7.44%
Quarterly Guaranteed Preferred Beneficial Interest in PSEG's Subordinated
Debentures. In June 1998, Enterprise Capital Trust II issued $150 million
of Floating Rate Capital Securities with a Quarterly Guaranteed Preferred
Beneficial Interest in PSEG's Subordinated Debentures. The Floating Rate
Capital Securities were offered to Institutional Investors at an annual
rate equal to 3-month LIBOR plus 1.22%, determined quarterly. PSEG entered
into an interest rate swap agreement which effectively fixes the rate on
this issue for 10 years at 7.2%. In July 1998, Enterprise Capital Trust
III issued $150 million of 7.25% Quarterly Guaranteed Preferred Beneficial
Interest in PSEG'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 loaned 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.
(I) Enterprise Capital Trust I, Enterprise Capital Trust II and Enterprise
Capital Trust III were formed and are controlled by PSEG for the purpose
of issuing Quarterly Trust Preferred Securities (Quarterly Guaranteed
Preferred
A-46
<PAGE>
Beneficial Interest in PSEG's Subordinated Debentures). The proceeds were
loaned to PSEG and are evidenced by PSEG's Deferrable Interest
Subordinated Debentures. If and for as long as payments on PSEG's
Deferrable Interest Subordinated Debentures have been deferred, or PSEG
has defaulted on the indentures related thereto or its guarantees thereof,
PSEG may not pay any dividends on its common and preferred stock. The
Subordinated Debentures and the indentures constitute a full and
unconditional guarantee by PSEG of the Preferred Securities issued by the
trusts.
NOTE 7. SCHEDULE OF CONSOLIDATED DEBT
<TABLE>
<CAPTION>
LONG-TERM DECEMBER 31,
-------------------------------
INTEREST RATES MATURITY 1998 1997
- -------------- ----------- ------------ --------------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
PSEG
Extendible Notes (A)
LIBOR plus 0.75% - 0.78% 2000....... $275 $--
------------ --------------
Total Long-Term Debt of PSEG................................... $275 $--
============ ==============
PSE&G
First and Refunding Mortgage Bonds (B)
6.00% 1998....... $-- $100
8.75% 1999....... 100 100
6.00%-7.625% 2000....... 635 635
7.875% 2001....... 100 100
6.125% 2002....... 300 300
6.875%-8.875% 2003....... 300 300
6.25%-9.125% 2004-2007.. 750 750
6.80%-6.90% 2008-2012.. 3 3
Variable 2008-2012.. 66 66
6.75%-7.375% 2013-2017.. 375 375
6.45%-9.25% 2018-2022.. 139 139
Variable 2018-2022.. 14 14
5.20%-7.50% 2023-2027.. 573 568
5.45%-6.55% 2028-2032.. 499 499
Variable 2028-2032.. 25 25
5.00%-8.00% 2033-2037.. 160 160
Medium-Term Notes
8.10%-8.16% 2008-2012.. 60 60
7.04% 2018-2022.. 9 9
7.15%-7.18% 2023-2027.. 41 41
------------ --------------
Total First and Refunding Mortgage Bonds......................... 4,149 4,244
------------ --------------
Unsecured Bonds (C)
6.00% 1998....... -- 18
Variable 2027....... 19 19
------------ --------------
Total Unsecured Bonds............................................ 19 37
------------ --------------
Principal Amount Outstanding (D).................................... 4,168 4,281
Amounts Due Within One Year (E)..................................... (100) (118)
Net Unamortized Discount............................................ (23) (37)
------------ --------------
Total Long-Term Debt of PSE&G (F)................................ $4,045 $4,126
============ ==============
ENERGY HOLDINGS
PSEG CAPITAL
Senior Notes (G)
9.875%--10.05% 1998....... $-- $38
Medium-Term Notes
9.00% 1998....... -- 75
8.95%-9.93% 1999....... 155 155
6.54% 2000....... 78 78
6.74% 2001....... 135 135
6.80%-7.00% 2002....... 130 130
------------ --------------
Principal Amount Outstanding (D).................................... 498 611
Amounts Due Within One Year (E)..................................... (155) (113)
Net Unamortized Discount............................................ (2) (2)
------------ --------------
Total Long-Term Debt of PSEG Capital............................. 341 496
------------ --------------
FUNDING (H)
9.95% 1998....... -- 83
7.58% 1999....... 45 45
------------ --------------
Principal Amount Outstanding (D).................................... 45 128
</TABLE>
A-47
<PAGE>
<TABLE>
<S> <C> <C> <C>
Amounts Due Within One Year (E)..................................... (45) (83)
------------ --------------
Total Long-Term Debt of Funding.................................. -- 45
------------ --------------
GLOBAL
Non-recourse Debt (I)
7.721% - Bank Loan 1999....... 87 87
13.23% - Bank Loan 2002....... 123 135
14.00% - Minority Interest Loan 2027....... 10 10
------------ --------------
Principal Amount Outstanding (D).................................... 220 232
Amounts Due Within One Year......................................... (118) (26)
------------ --------------
Total Long-Term Debt of Global................................. 102 206
------------ --------------
Total Long-Term Debt of Energy Holdings........................ $443 $747
============ ==============
Consolidated Long-Term Debt (J)............................. $4,763 $4,873
============ ==============
</TABLE>
(A) In November 1998, PSEG issued Series A and B of Extendible Notes due
November 2000 totaling $275 million. Series A in the amount of $100
million pays interest at LIBOR plus 0.75%, reset quarterly, and will be
automatically tendered to the remarketing agent for remarketing on May 24,
1999. Series B in the amount of $175 million pays interest at LIBOR plus
0.78%, reset quarterly, and will be automatically tendered to the
remarketing agent for remarketing on November 22, 1999. At December 31,
1998, the interest rates on Series A and B were 6.00% and 6.03%,
respectively.
(B) PSE&G's Mortgage, securing the Bonds, constitutes a direct first mortgage
lien on substantially all PSE&G's property and franchises.
During 1998, PSE&G reacquired on the open market $242 million of its 7.50%
Series OO First and Refunding Mortgage Bonds (Bonds). In May 1998, PSE&G
issued $250 million of its 6.375% Remarketable Series YY Bonds due 2023,
Mandatorily Tendered 2008. PSE&G also entered into a Remarketing Agreement
with a third party that granted the third party the option to call and
remarket the Series YY Bonds on May 1, 2008 for the remaining term of the
Series YY Bonds. In January 1998, $100 million of PSE&G's 6.00% Bonds,
Series NN, matured.
(C) On July 1, 1998, $18 million of PSE&G's 6% Unsecured Bonds matured.
(D) For information concerning fair value of financial instruments, see Note
8. Financial Instruments and Risk Management.
(E) The aggregate principal amounts of mandatory requirements for sinking
funds and maturities for each of the five years following December 31,
1998 are as follows:
<TABLE>
<CAPTION>
SINKING
FUNDS MATURITIES
----- ----------------------------------------------------------------------------
PSEG
YEAR GLOBAL PSEG PSE&G CAPITAL FUNDING GLOBAL TOTAL
- ------------ ---------- --------- ----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1999........ $31 -- $100 $155 $45 $87 $418
2000........ 31 $275 635 78 -- -- 1,019
2001........ 31 -- 100 135 -- -- 266
2002........ 30 -- 300 130 -- -- 460
2003........ -- -- 300 -- -- -- 300
----------- --------- ------------------------ ------------ ------------ -----------
$123 $275 $1,435 $498 $45 $87 $2,463
=========== ========= ======================== ============ ============ ===========
</TABLE>
(F) At December 31, 1998 and 1997, PSE&G's annual interest requirement on
long-term debt was $282 million and $291 million, of which $274 million
and $283 million, respectively, was the requirement for Bonds. The
embedded interest cost on long-term debt on such dates was 7.35% and
7.44%, respectively. The embedded interest cost on long-term debt due
within one year at December 31, 1998 was 8.83%.
(G) PSEG Capital has provided up to $750 million debt financing for Energy
Holdings' businesses, except Energy Technologies, on the basis of a net
worth maintenance agreement with PSEG. Effective January 31, 1995, PSEG
Capital has limited its borrowings to no more than $650 million.
A-48
<PAGE>
(H) Funding provides debt financing for Resources, Global and their
subsidiaries on the basis of an unconditional guarantee from Energy
Holdings.
(I) Global's projects are generally financed with non-recourse debt at the
project level, with the balance in the form of equity investments by the
partners in the project. The non-recourse debt shown in the above table is
that of two consolidated subsidiaries which have equity investments in
distribution facilities in Argentina and Brazil. Global's capital at risk
on the projects is limited to its original equity investment. The
non-recourse debt, through the process of consolidation, appears as
long-term debt and long-term investments in PSEG's consolidated balance
sheets.
(J) At December 31, 1998 and 1997, the annual interest requirement on
long-term debt was $365 million and $378 million, of which $274 million
and $283 million, respectively, was the requirement for Bonds. The
embedded interest cost on long-term debt on such dates was 7.32% and
7.64%, respectively.
PSEG
At December 31, 1998, PSEG had a committed $150 million revolving credit
facility which expires in December 2002. At December 31, 1998 and 1997, PSEG had
a $25 million and $75 million uncommitted line of credit, respectively, with a
bank. At December 31, 1998, PSEG had no debt outstanding under these facilities.
The weighted-average, short-term debt rate of PSEG was 5.6%, 6.2% and 5.7% for
the years ended December 31, 1998, 1997 and 1996, respectively.
PSE&G
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Principal amount outstanding at year end, primarily commercial paper....... $850 $1,106 $638
Weighted average interest rate for short-term debt at year end............. 5.91% 6.07% 5.70%
</TABLE>
PSE&G has authorization from the BPU to issue and have outstanding not
more than $1.5 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 4, 2000.
PSE&G has a $1.3 billion commercial paper program (Program) supported by a
$650 million revolving credit agreement expiring in June 1999 and a $650 million
revolving credit agreement expiring in June 2002 with a group of commercial
banks. As of December 31, 1998 and 1997, PSE&G had $655 million and $952
million, respectively, outstanding under the Program, which amounts are included
in the table above. As of December 31, 1998, there was no debt outstanding under
the revolving credit agreements.
PSE&G has $150 million in uncommitted lines of credit facilities extended
by a number of banks to primarily support short-term borrowings, of which $115
million was outstanding on December 31, 1998 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, 1998,
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, 1998 and 1997, Fuelco had commercial paper of
$80 million outstanding under the commercial paper program, which amounts are
included in the table above. As of December 31, 1998, there was no debt
outstanding under the revolving credit facility.
Pursuant to the BPU's authorization of long-term debt, 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, 1998, no amounts were
outstanding under such arrangements.
A-49
<PAGE>
ENERGY HOLDINGS
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Principal amount outstanding at year end................................... $206 $267 $--
Weighted average interest rate for short-term debt at year end............. 6.46% 6.92% --
</TABLE>
Funding has a $300 million credit facility expiring in July 1999 and a
$150 million revolving credit agreement expiring in November 1999. As of
December 31, 1998, there was $206 million outstanding under these facilities,
which is included in the table above.
NOTE 8. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
PSEG's operations give rise to exposure to market risks from changes in
commodity prices, interest rates, foreign currency exchange rates and securities
prices. PSEG's policy is to use derivative financial instruments for the purpose
of managing market risk consistent with its business plans and prudent business
practices.
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 1998 and 1997, respectively. Note that certain
events, in connection with the Energy Master Plan Proceedings could trigger
certain redemption features of certain PSE&G mortgage bonds which is not
reflected in the fair value estimations below, see Note 2. Regulatory Issues.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------
1998 1997
--------------------------- --------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------- ------------- --------------- ---------------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
Long-Term Debt (A):
PSEG.................................................. $275 $275 $-- $--
Energy Holdings....................................... 762 769 969 978
PSE&G................................................. 4,145 4,389 4,244 4,389
Preferred Securities Subject to Mandatory Redemption:
PSE&G Cumulative Preferred Securities................. 75 77 75 78
Monthly Guaranteed Preferred Beneficial Interest in
PSE&G's Subordinated Debentures.................... 210 213 210 221
Quarterly Guaranteed Preferred Beneficial Interest in
PSE&G's Subordinated Debentures.................... 303 315 303 316
Quarterly Guaranteed Preferred Beneficial Interest in
PSEG's Subordinated Debentures..................... 525 518 -- --
</TABLE>
(A) Includes current maturities and interest rate swaps of $44 million and
$150 million for Energy Holdings and PSEG, respectively, for the period
ended December 31, 1998. Includes current maturities and an interest rate
swap of $44 million for Energy Holdings for the period ended December 31,
1997.
A-50
<PAGE>
Global had consolidated non-recourse debt of $123 million as of December
31, 1998 which is denominated in the Brazilian Real 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
and between the Brazilian Real and the U.S. Dollar. 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 (losses)/gains resulting from
such exchange rate changes are included in determining net income for the
period and amounted to $(3) million and $1 million for the years ended
December 31, 1998 and 1997, respectively. For more information on foreign
operations and the devaluation of foreign currencies, see Note 20.
Subsequent Events.
COMMODITY INSTRUMENTS--PSE&G
At December 31, 1998 and 1997, PSE&G held or issued instruments that
reduce exposure to market fluctuations from factors such as weather,
environmental policies, changes in demand, changes in supply, state and Federal
regulatory policies and other events. These instruments, in conjunction with
owned electric generating capacity and physical gas supply contracts, are
designed to cover estimated electric and gas customer commitments. PSE&G
currently has levelized energy adjustment clauses, LEAC and LGAC, in place for
both electricity and natural gas pursuant to BPU orders. These clauses were
established to minimize the impact of major commodity price swings on energy
cost to customers. 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 net
purchased power at the locational marginal price. PSE&G uses futures, forwards,
swaps and options to manage and hedge price risk related to these market
exposures.
Energy commodity futures involve the buying or selling of electricity and
natural gas at a fixed price under the provisions of exchange regulations.
Energy commodity forwards involve the buying or selling of electricity and
natural gas at non-standardized terms that result from direct negotiation
between the buyer and the seller. Swap agreements require PSE&G to receive or
make payment based on the difference between a specified price and the actual
price of the underlying commodity. Energy commodity options provide the right,
but not the requirement, to buy or sell energy-related commodities at a fixed
price. PSE&G uses these instruments to manage commodity price risk.
At December 31, 1998, PSE&G had outstanding commodity financial
instruments with a notional contract quantity of 1.6 million MWH of electricity
and 65.2 million MMBTU of natural gas. At December 31, 1997, PSE&G had
outstanding commodity financial instruments with a notional contract quantity of
0.9 million MWH of electricity and 3.7 million MMBTU of natural gas. Notional
amounts are indicative only of the volume of activity and are not a measure of
market risk. At December 31, 1998 and 1997, PSE&G had current unrecognized net
gains of $5 million and $3 million, respectively, related to commodity
instruments.
NATURAL GAS HEDGING--ENERGY HOLDINGS
As of December 31, 1998 and 1997, Energy Technologies had outstanding
futures contracts to buy natural gas related to fixed-price natural gas sales
commitments. Such contracts hedged approximately 90% and 97% of its fixed price
sales commitments at December 31, 1998 and 1997, respectively. As of December
31, 1998 and 1997, Energy Technologies had a net unrealized hedge loss of $5
million and $2 million, respectively.
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 of
$524 million and $459 million approximates the fair market value as of December
31, 1998 and 1997, respectively.
A-51
<PAGE>
EQUITY SECURITIES--ENERGY HOLDINGS
Resources, a wholly-owned subsidiary of Energy Holdings, has investments
in equity securities and partnerships, in which Resources is a limited partner,
which invest in equity securities. Resources carries its investments in equity
securities at their approximate fair value as of the reporting date.
Consequently, the carrying value of these investments is affected by changes in
the fair value of the underlying securities. Fair value is determined by
adjusting the market value of the securities for liquidation and market
volatility factors, where appropriate. The aggregate amount of such investments
which have available market prices at December 31, 1998 and 1997 are recorded at
fair value of $204 million and $185 million, respectively, and have exposure to
market price risk. A sensitivity analysis has been prepared to estimate Energy
Holdings' 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 $17 million.
INTEREST RATE SWAPS--PSEG AND ENERGY HOLDINGS
PSEG entered into an interest rate swap on June 26, 1998 to hedge
Enterprise Capital Trust II's $150 million of Floating Rate Capital Securities,
Series B, due 2028. Enterprise Capital Trust II is a special purpose statutory
business trust controlled by PSEG. The basis for both the interest rate swap and
the Floating Rate Capital Securities is the quarterly London Interbank Offered
Rate (LIBOR). This interest rate swap effectively hedges the underlying debt for
10 years at an effective rate of 7.2%.
In June 1997, an indirect subsidiary of Global entered into an interest
rate swap on 50% of its floating rate borrowings of $87 million. The basis for
the interest rate swap is six month LIBOR. The interest rate swap effectively
hedges the underlying debt through its scheduled maturity in May 1999 at the
current effective rate of 7.76%. 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.
CREDIT RISK--PSE&G AND ENERGY HOLDINGS
Credit risk relates to the risk of loss that PSEG would incur as a result
of nonperformance by counterparties, pursuant to the terms of their contractual
obligations. PSEG has established credit policies that it believes significantly
minimizes PSEG's exposure to credit risk. These policies include an evaluation
of potential counterparties' financial condition (including credit rating),
collateral requirements under certain circumstances and the use of standardized
agreements, which may allow for the netting of positive and negative exposures
associated with a single counterparty.
NOTE 9. CASH AND CASH EQUIVALENTS
The December 31, 1998 and 1997 balances consist primarily of working funds
and highly liquid marketable securities (commercial paper and money market
funds) with a maturity of three months or less.
A-52
<PAGE>
NOTE 10. COMMITMENTS AND CONTINGENT LIABILITIES
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
TYPE AND SOURCE OF COVERAGES TOTAL SITE COVERAGES ASSESSMENTS
- ---------------------------- -------------------- -----------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Public and Nuclear Worker Liability (Primary Layer):
American Nuclear Insurers............................ $200.0 (A) $8.0
Nuclear Liability (Excess Layer):
Price-Anderson Act................................... $9,514.8 (B) $233.6
-------- ------
Nuclear Liability Total.......................... $9,714.8 (C) $241.6
======== ======
Property Damage (Primary Layer):
Nuclear Electric Insurance Limited (NEIL) Primary
(Salem/Hope Creek/Peach Bottom).................. $500.0 $11.6
Property Damage (Excess Layer):
NEIL II (Salem/Hope Creek/Peach Bottom).............. $2,250.0 $10.0
-------- -----
Property Damage Total (Per Site)..................... $2,750.0 $21.6
======== =====
Replacement Power:
NEIL Primary (Primary Layer at all sites)............ $21.0 (D) N/A
NEIL I (Excess Layer at Salem and Peach Bottom)...... $202.8 (E) $5.9
NEIL I (Excess Layer at Hope Creek).................. $449.5 $3.1
----
Replacement Power Total (Hope Creek)............. See (F) $9.0
====
</TABLE>
(A) The primary limit for Public Liability is a per site aggregate limit with
no potential for assessment. The Nuclear Worker Liability represents the
potential liability from workers claiming exposure to the hazard of
nuclear radiation. This coverage is subject to an industry aggregate
limit, includes annual automatic reinstatement if the ICRP Reserve Fund
exceeds $400 million, and has an assessment potential under former
canceled policies.
(B) 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 five years. The last
adjustment was effective as of August 20, 1998. This retrospective program
is excess over the Public and Nuclear Worker Liability primary layers.
(C) Limit of liability under the Price-Anderson Act for each nuclear incident.
(D) After a waiting period, NEIL Primary insured sites may receive a weekly
indemnity of $3.5 million for six weeks.
(E) Salem and Peach Bottom have an aggregate indemnity limit based on a weekly
indemnity of $1.5 million for 52 weeks followed by 80% of the weekly
indemnity for 104 weeks. Hope Creek has an aggregate indemnity limit based
on a weekly indemnity of $3.3 million for 52 weeks followed by 80% of the
weekly indemnity for 104 weeks.
(F) Combined aggregate limit of NEIL Primary and NEIL I coverages available
for Hope Creek is $470.5 million. For Salem and Peach Bottom the combined
aggregate limits are $223.8 million.
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 $9.7 billion. All utilities owning a nuclear
reactor, including PSE&G, have provided for this exposure through a combination
of private insurance
A-53
<PAGE>
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 their share of $88.1 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 $233.6
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 decision by the U.S. Supreme Court, not involving PSE&G, has
held that the Price-Anderson Act did not preclude awards based on state law
claims for punitive damages.
PSE&G is a member of an industry mutual insurance company, NEIL. NEIL
provides the primary property and decontamination liability insurance at
Salem/Hope Creek and Peach Bottom. NEIL also provides excess property insurance
through its decontamination liability, decommissioning liability, and excess
property policy and replacement power coverage through its business interruption
and/or extra expense policy. NEIL 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.
NUCLEAR OPERATING PERFORMANCE STANDARD (OPS)
PECO Energy Company (PECO Energy), Delmarva Power & Light Company (DP&L)
and PSE&G, three of the co-owners of the Salem Nuclear Generating Station Units
1 and 2 (Salem) and the Peach Bottom Atomic Power Station Units 2 and 3 (Peach
Bottom), have agreed to an OPS through December 31, 2011 for Salem and through
December 31, 2007 for Peach Bottom. Under the OPS, the station operator is
required to make payments to the non-operating owners (excluding Atlantic City
Electric Company) commencing in January 2001 if the three-year historical
average net maximum dependable capacity factor for that station, calculated as
of December 31 of each year commencing with December 31, 2000, falls below 40%.
Any such payment is limited to a maximum of $25 million per year. 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 PSEG's and PSE&G's systems, which include information technology
applications, plant control and telecommunications infrastructure systems, must
be modified due to computer program limitations in recognizing dates beyond
1999. Management estimates the total cost related to Year 2000 readiness will
approximate $83 million, to be incurred from 1997 through 2001, of which $8
million was incurred in 1997, $27 million was incurred in 1998 and approximately
$36 million is expected to be incurred in 1999. A portion of these costs is not
likely to be incremental to PSEG or PSE&G, but rather, represents a redeployment
of existing personnel/resources.
The schedule to replace certain systems was accelerated for Year 2000
purposes. Analysis is continuing and costs identified to date are approximately
$5 million, which are not included in the estimates above. Additionally, PSE&G
is installing programs (SAP) from SAP America, Inc. to replace certain major
business systems. SAP America, Inc. has represented that SAP is Year 2000
compliant, and thus, installation of SAP will eliminate the need to modify those
business systems for Year 2000 compliance. The phased implementation of SAP is
scheduled to be completed by January 1, 2000. The cost of implementing SAP is
not included in the above cost estimates since SAP implementation has not been
accelerated for Year 2000 purposes.
If PSEG, PSE&G, their domestic and international subsidiaries, other
members of the PJM Interconnection, L.L.C. (PJM), PJM trading partners supplying
power through PJM or PSEG's or PSE&G's critical vendors and/or customers are
unable to meet the Year 2000 deadline, such inability could have a material
adverse impact on PSEG's and PSE&G's operations, financial condition, results of
operations and net cash flows.
A-54
<PAGE>
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. The outcome of the Energy Master
Plan Proceedings and the use of alternative sources of generation may impact
PSE&G's construction program. For discussion of the Energy Master Plan
Proceedings, see Note 2. Regulatory Issues.
PSE&G's construction expenditures are expected to aggregate approximately
$2.8 billion during the years 1999 through 2003, which includes $414 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 generate the majority of funds necessary to satisfy its
construction expenditures over this period, assuming adequate and timely
recovery of costs which may be impacted by the outcome of the Energy Master Plan
Proceedings, 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 1999 through
2003.
SITE RESTORATIONS AND OTHER ENVIRONMENTAL COSTS
It is difficult to estimate the future financial impact of environmental
laws, including potential liabilities. PSEG and PSE&G accrue environmental
liabilities 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.
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. Based on current information, except as discussed below with respect to
its manufactured gas plant Remediation Program, PSEG and PSE&G do not expect its
expenditures for any such site, individually or all such current sites in the
aggregate, 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.
A-55
<PAGE>
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 PSEG's and PSE&G's
financial condition, results of operations and net cash flows.
Costs incurred through December 31, 1998 for the Remediation Program
amounted to $139 million. In addition, at December 31, 1998, PSE&G's estimated
liability for remediation costs through 2001 aggregated $84 million.
Expenditures beyond 2001 cannot be reasonably estimated.
The Energy Competition Act provides for the continuation of RAC programs.
The recovery of costs for RAC is to be through a societal benefits charge. No
assurances can be given as to the outcome of the Energy Master Plan Proceedings
(see Note 2. Regulatory Issues).
AIR POLLUTION CONTROL
In June 1998, NJDEP adopted regulations implementing a memorandum of
understanding among 11 Northeastern states and the District of Columbia,
establishing a regional plan for reducing nitrogen oxide (NOx) emissions from
utility and large industrial boilers. The extent of investment in control
technologies, operational changes and purchases of allowances required to comply
with these regulations will be directly related to the number of allowances
PSE&G receives. PSE&G expects to receive a preliminary allocation of allowances
in March 1999 and the final allocation is expected to be determined in
accordance with the NJDEP regulations in November 1999 which is subsequent to
the May 1, 1999 through September 30, 1999 period governed by the regulations.
PSE&G has attempted to minimize the uncertainty associated with the timing of
the allocation by purchasing allowances, upgrading control technologies and
estimating the expected allocation with as much precision as is practicable
using available data. However PSE&G's present analysis leads it to believe that
the potential costs for purchasing additional NOx budget allowances should not
exceed a total of $10 million through December 31, 2002. Expenditures associated
with installing control technology could result in an additional $72 million.
However, PSE&G is currently analyzing alternatives which could substantially
reduce the necessity of capital improvements.
PASSAIC RIVER SITE
The EPA has determined that a six mile stretch of the Passaic River in
Newark, New Jersey is a "facility" within the meaning of that term under CERCLA
and that, to date, at least thirteen corporations may be potentially liable for
performing required remedial actions to address potential environmental
pollution at the facility. The EPA anticipates identifying other potentially
responsible parties (PRP). One PRP (Cooperating Party) entered into a consent
decree with the EPA in 1994 obligating it to conduct a remedial investigation
and feasibility study of available and applicable corrective actions for the
site. The Cooperating Party has reported that it has incurred approximately $35
million to date in connection with the implementation of required remedial
actions for the site. Future costs for prospective remedial actions may be
material to PSE&G.
In a separate matter, PSE&G and certain of its predecessors operated
industrial facilities at properties along the stretch of the Passaic River
designated as the site. In April 1996, the EPA directed PSE&G to provide
information concerning the nature and quantity of raw materials, by-products and
wastes which may have been generated, treated, stored or disposed at certain of
these facilities. The facilities are PSE&G's former Harrison Gas Plant and Essex
Generating Station. PSE&G
A-56
<PAGE>
submitted responses to the EPA requests for these sites in August 1996. In July
1997, the EPA named PSE&G as a PRP for this site. PSE&G cannot predict what
action, if any, the EPA or any third party may take against PSE&G with respect
to this site, or in such event, what costs PSE&G may incur to address any such
claims. However, such costs may be material.
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.
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 the Energy Competition Act provides that the
societal benefits charge will be utilized to collect the necessary funding for
nuclear decommissioning, no assurances can be given as to the outcome of the
Energy Master Plan Proceedings. At December 31, 1998 and 1997, the accumulated
provision for depreciation and amortization included reserves for nuclear
decommissioning for PSE&G's nuclear units of $465 million and $428 million,
respectively. As of December 31, 1998 and 1997, PSE&G had contributed $303
million and $279 million, respectively, into independent, external, qualified
and non-qualified nuclear decommissioning trust funds. The fair market value of
these funds as of December 31, 1998 and 1997 was $542 million and $458 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 PSEG's and PSE&G's financial condition, results of operations and net
cash flows.
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<PAGE>
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 $32 million, resulting in a
balance due of $38 million. PSE&G has collected the expenditures incurred to
date as part of underrecovered electric energy costs and anticipates recovery of
such costs through a future regulatory mechanism. PSE&G believes that it should
not be subject to collection of any such fund payments under EPAct. It has filed
suit in the U.S. Court of Claims and petitioned the U.S. District Court,
Southern District of NY to recover these costs.
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 Net Interchanged Power and Fuel for Electric
Generation in the Statements of Income. Until the start of retail competition
pursuant to the Energy Competition Act, these costs are being recovered through
the LEAC. Thereafter, PSE&G will bear the risks of nuclear fuel disposal costs.
See Note 2. Regulatory Issues for the Energy Master Plan Proceedings and the
potential impact on the LEAC.
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. In 1998, legislation which would have the DOE establish a
centralized interim spent fuel storage facility was introduced in Congress.
However, Congress ultimately elected not to consider this legislation, and
whether or not similar legislation will be considered in the future is unknown.
In litigation brought by PSE&G, 40 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 potentially
adequate remedy in the form of payment of damages if DOE failed its obligations.
In May 1998 the court denied a petition to order DOE to begin spent fuel
acceptance immediately and declare that the utilities are allowed to escrow
their Nuclear Waste Fund fees until DOE begins spent fuel acceptance. Following
this decision, DOE offered a proposal to settle issues related to its failure to
meet its obligation, which the utilities unanimously rejected. PSE&G is
continuing to work 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. Some utilities have initiated litigation
against DOE to recover damages and this option, among others, is currently being
considered by PSE&G. No assurances can be given as to the ultimate availability
of a facility.
NOTE 12. INCOME TAXES
The New Jersey Gross Receipts and Franchise Tax (NJGRT) was eliminated
effective January 1, 1998 and replaced with a combination of the New Jersey
Corporate Business Tax which is a State income tax, the State sales and use tax
and a Transitional Energy Facility Assessment (TEFA), with no material impact on
the financial condition, results of operations and net cash flows of PSEG and
PSE&G. The TEFA, which is collected from customers, will be phased out over five
years. The corresponding phase out and reduction in rates will cause no material
impact on PSEG and PSE&G. While under NJGRT, PSE&G was subject to an effective
state tax on unit sales equal to approximately 13% of receipts. As a result of
such tax reform, after the phase out of the TEFA, the effective state tax rate
applicable to PSE&G will have been substantially reduced, putting PSE&G on a
more level playing field with competitors. Interim rates were implemented with
regard to the new tax structure effective with service rendered on and after
January 1, 1998. The BPU completed its administrative review of the filings of
all New Jersey utilities and approved permanent rates for 1998 on July 13, 1998
in a final Order. Effective January 1, 1999, revised rates became effective
which reflect one year's phase out of the TEFA.
On September 18, 1998 and October 15, 1998, PSE&G filed with the BPU
additional information necessary to 1) reconcile its NJGRT collections to its
liability through April 1998, 2) reflect the impact of cash working capital and
net
A-58
<PAGE>
negative deferred State income taxes on a separate electric and gas basis and 3)
provide actual and estimated tax collected and tax liability through December
31, 1998. On December 16, 1998, the BPU issued an "Order Implementing 1999
'TEFA' Reductions and Other Rate Adjustments." This order mandates PSE&G to
recognize the cash working capital impact on a separate electric and gas basis
and defer such impact as deferred balance sheet credits with interest. In
accordance with the order, PSE&G deferred $1.3 million at December 31, 1998. The
Order also requires the BPU Staff to perform audits of New Jersey energy
utilities for NJGRT tax payments and collections. The results of such audits are
to be reported to the BPU for further action. PSE&G does not expect these
adjustments, if any, to have a material impact on its financial condition,
results of operations and net cash flows.
A reconciliation of reported Net Income with pretax income and of 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>
1998 1997 1996
---------- ---------- ----------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Net Income .......................................................... $644 $560 $612
Preferred securities (net) .......................................... 9 15 5
Discontinued Operations ............................................. -- -- (24)
---------- ---------- ----------
Subtotal .................................................. 653 575 593
---------- ---------- ----------
Income taxes:
Operating income:
Current provision-Federal and State ............................ 441 187 127
Provision for deferred income taxes--net(A)-Federal and State .. -- 167 189
Investment tax credits--net .................................... (21) (20) (21)
---------- ---------- ----------
Total included in operating income ........................ 420 334 295
Miscellaneous other income:
Current provision-Federal and State ............................ 8 (24) 1
Provision for deferred income taxes(A)-Federal and State ....... (1) -- --
SFAS 90 deferred income taxes(A) ............................... 1 1 2
---------- ---------- ----------
Total income tax provisions ............................... 428 311 298
---------- ---------- ----------
Pretax income ....................................................... $1,081 $886 $891
========== ========== ==========
</TABLE>
Reconciliation between total income tax provisions and tax computed at the
statutory tax rate on pretax income:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Tax computed at the statutory rate ............................................ $378 $310 $312
Increase (decrease) attributable to flow through of certain tax adjustments:
Depreciation ............................................................. 23 27 11
Amortization of investment tax credits ................................... (21) (20) (22)
New Jersey Corporate Business Tax ........................................ 63 2 2
Other .................................................................... (15) (8) (5)
-------- -------- --------
Subtotal ............................................................ 50 1 (14)
-------- -------- --------
Total income tax provisions ......................................... $428 $311 $298
======== ======== ========
Effective income tax rate ..................................................... 39.6% 35.1% 33.4%
</TABLE>
(A) The provision for deferred income taxes represents the tax effects of the
following items:
A-59
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(MILLIONS OF DOLLARS)
Deferred Credits:
<S> <C> <C> <C>
Additional tax depreciation and amortization ... $(33) $34 $39
Leasing Activities ............................. 39 114 136
Conservation Costs ............................. 36 27 15
Deferred Fuel Costs--net ....................... (60) (4) 6
Pension Cost ................................... 26 8 3
New Jersey Corporate Business Tax .............. (5) 3 2
Other .......................................... (3) (14) (10)
-------- -------- --------
Total ..................................... $-- $168 $191
======== ======== ========
</TABLE>
Between the years 1987 and 1994, PSEG'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. PSEG
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.
PSEG 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,
1998, PSE&G had a deferred tax liability and an offsetting regulatory asset of
$704 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%.
The following is an analysis of deferred income taxes:
DECEMBER 31,
----------------------
1998 1997
-------- --------
DEFERRED INCOME TAXES (MILLIONS OF DOLLARS)
Assets:
Current (net) ................................ $30 $25
-------- --------
Non-current:
Unrecovered Investment Tax Credits ......... 110 117
Nuclear Decommissioning .................... 27 33
Construction Period Interest and Taxes ..... 13 15
New Jersey Corporate Business Tax .......... 15 --
Vacation Pay ............................... 6 7
Development Fees ........................... 15 14
Other ...................................... 32 27
-------- --------
Total Non-current ..................... 218 213
-------- --------
Total Assets .......................... 248 238
-------- --------
Liabilities:
Non-current:
Plant Related Items ........................ 2,180 2,246
Leasing Activities ......................... 702 667
Partnership Activities ..................... 155 159
Conservation Costs ......................... 75 39
Hope Creek O&M Costs ....................... 19 21
Deferred Electric Energy and Gas Costs ..... -- 60
Unamortized Debt Expense ................... 45 44
Taxes Recoverable Through Future Rates (net) 242 249
Other ...................................... 184 122
-------- --------
Total Non-current ..................... 3,602 3,607
-------- --------
Total Liabilities ..................... 3,602 3,607
-------- --------
Summary -- Accumulated Deferred Income Taxes
A-60
<PAGE>
Net Current Assets ........................... 30 25
Net Non-current Liability .................... 3,384 3,394
-------- --------
Total ................................... $3,354 $3,369
======== ========
NOTE 13. PENSION, OTHER POSTRETIREMENT BENEFIT AND SAVINGS PLANS
In February 1998, the FASB issued SFAS 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" (SFAS 132), which is effective for
financial statements for periods beginning after December 15, 1997. This
statement revises and standardizes disclosure requirements for pension and other
postretirement benefit plans but does not change the measurement or recognition
of those plans. Since SFAS 132 solely revises disclosure requirements, the
adoption of SFAS 132 did not have a material impact on the financial condition,
results of operations and net cash flows of PSEG and PSE&G. The disclosures
required by SFAS 132 are below.
PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
<TABLE>
<CAPTION>
PENSION BENEFITS (B) OTHER POSTRETIREMENT BENEFITS (C)
----------------------------- ---------------------------------
(MILLIONS OF DOLLARS) 1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit Obligation at Beginning of Year $ 2,123 $ 2,065 $ 724 $ 734
Service Cost 60 54 15 12
Interest Cost 158 150 56 54
Special Termination Benefits (A) -- 2 -- --
Actuarial (Gain)/Loss 287 (11) 16 (43)
Benefits Paid (140) (137) (29) (33)
---------- ---------- ---------- ----------
Benefit Obligation at End of Year 2,488 2,123 782 724
---------- ---------- ---------- ----------
CHANGE IN PLAN ASSETS
Fair Value of Assets at Beginning of Year 1,959 1,687 -- --
Actual Return on Plan Assets (Net of Expenses) 249 296 1 --
Employer Contributions 155 113 41 33
Benefits Paid (140) (137) (29) (33)
---------- ---------- ---------- ----------
Fair Value of Assets at End of Year 2,223 1,959 13 --
---------- ---------- ---------- ----------
RECONCILIATION OF FUNDED STATUS
Funded Status (265) (164) (769) (724)
Unrecognized Net
Transition Obligation 37 45 398 429
Prior Service Cost 134 148 30 32
(Gain)/Loss 212 (2) (9) (26)
---------- ---------- ---------- ----------
Net Amount Recognized $ 118 $ 27 $ (350) $ (289)
========== ========== ========== ==========
AMOUNTS RECOGNIZED IN STATEMENT OF FINANCIAL POSITION
Prepaid Benefit Cost 129 33 -- --
Accrued Benefit Cost (42) (34) (350) (289)
Intangible Asset 26 28 -- --
Accumulated Other Comprehensive Income 5 -- -- --
---------- ---------- ---------- ----------
Net Amount Recognized $ 118 $ 27 $ (350) $ (289)
========== ========== ========== ==========
SEPARATE DISCLOSURE FOR PENSION PLANS WITH
ACCUMULATED BENEFIT OBLIGATION IN EXCESS OF PLAN
ASSETS
Projected Benefit Obligation at End of Year $ 49 $ 39
Accumulated Benefit Obligation at End of Year 42 35
Fair Value of Assets at End of Year $ -- $ 1
</TABLE>
A-61
<PAGE>
<TABLE>
<CAPTION>
PENSION BENEFITS (B) OTHER POSTRETIREMENT BENEFITS (C)
----------------------------- -----------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
Service Cost $ 60 $ 54 $ 15 $ 12
Interest Cost 158 150 56 54
Expected Return on Plan Assets (176) (151) -- --
Amortization of Net
Transition Obligation 8 8 30 30
Prior Service Cost 14 14 2 2
(Gain)/Loss -- -- (1) (2)
---------- ---------- ---------- ----------
Net Periodic Benefit Cost $ 64 $ 75 $ 102 $ 96
========== ========== ========== ==========
COMPONENTS OF TOTAL BENEFIT EXPENSE
Net Periodic Benefit Cost $ 64 $ 75 $ 102 $ 96
Additional Expense Under FAS 88 Due to Special
Termination Benefits (A) -- 2 -- --
---------- ---------- ---------- ----------
Total Benefit Expense Before Effect of Regulatory
Asset $ 64 $ 77 $ 102 $ 96
---------- ---------- ---------- ----------
Effect of Regulatory Asset -- -- 19 (63)
---------- ---------- ---------- ----------
Total Benefit Expense Including Effect of
Regulatory
Asset $ 64 $ 77 $ 121 $ 33
========== ========== ========== ==========
COMPONENTS OF OTHER COMPREHENSIVE INCOME
Decrease in Intangible Asset $ (1) $ --
Increase in Additional Minimum Liability (4) --
---------- ----------
Other Comprehensive Income $ (5) $ --
---------- ----------
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount Rate 6.75% 7.25% 6.75% 7.25%
Expected Return on Plan Assets 9.00% 9.00% 9.00% --
Rate of Compensation Increase 4.69% 4.69% 4.69% 4.69%
Rate of Increase in Health Benefit Costs
Administrative Expense 5.00% 5.00%
Pre-65 Medical Costs
Immediate Rate 11.50% 12.00%
Ultimate Rate 5.00% 5.00%
Year Ultimate Rate Reached 2011 2011
Post-65 Medical Costs
Immediate Rate 7.50% 8.00%
Ultimate Rate 5.00% 5.00%
Year Ultimate Rate Reached 2003 2003
Dental Costs
Immediate Rate 5.50% 6.00%
Ultimate Rate 5.00% 5.00%
Year Ultimate Rate Reached 1999 1999
EFFECT OF A CHANGE IN THE ASSUMED RATE OF INCREASE IN HEALTH BENEFIT COSTS
Effect of a 1% Increase On
Total of Service Cost and Interest Cost 5 6
Postretirement Benefit Obligation 60 57
Effect of a 1% Decrease On
Total of Service Cost and Interest Cost (4) (not available)
Postretirement Benefit Obligation (51) (not available)
</TABLE>
See Note 1. Organization and Summary of Significant Accounting Policies.
(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
A-62
<PAGE>
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.
(B) 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.
(C) 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 SFAS 71
and EITF 92-12. 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 began amortizing the
regulatory asset over 15 years beginning January 1, 1998. Also effective
January 1, 1998, PSE&G began recording the annual SFAS 106 OPEB cost. OPEB
costs during 1998 were $121 million, including $19 million of
amortization. At December 31, 1998, the amount of the unfunded liability
was $769 million.
Also, on October 21, 1998, the BPU ordered PSE&G to fund in an external
trust its annual OPEB obligation to the maximum extent allowable under
Section 401(h) of the Internal Revenue Code. In 1998, $12 million was
funded, as allowed. Remaining OPEB costs will not be funded in an external
trust, as mandated by the BPU.
SAVINGS PLANS
PSE&G sponsors two defined contribution plans. Represented employees of
PSE&G and Energy Holdings are eligible for participation in the PSE&G Employee
Savings Plan while all other employees of PSE&G and Energy Holdings are eligible
for participation in the PSE&G Thrift and Tax-Deferred Savings Plan. The two
principal defined contribution plans are PSE&G sponsored 401(k) plans to which
eligible employees may contribute up to 25% of their compensation. Employee
contributions up to 7% for represented employees and up to 8% for all other
employees are matched with employer contributions of cash or PSEG common stock
equal to 50% of such employee contributions. Employer contributions in excess of
5% and up to 7% are made in shares of PSEG common stock for represented
employees. Employer contributions in excess of 6% and up to 8% are made in
shares of PSEG common stock for all other employees. PSE&G billed Energy
Holdings for its portion of employer contributions. The amount expensed for the
matching provision of the plans was approximately $14 million, $15 million and
$14 million in 1998, 1997 and 1996, respectively.
NOTE 14. STOCK OPTIONS, STOCK PURCHASE PLAN AND STOCK REPURCHASE PROGRAM
STOCK OPTIONS
PSEG and PSE&G apply APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations in accounting for its stock-based
compensation plans, which are described below. Accordingly, compensation expense
has been recognized for performance units and dividend equivalent rights issued
in tandem with an equal number of options under its fixed stock option grants.
Performance units and dividend equivalents provide cash payments, dependent upon
future financial performance of PSEG in comparison to other companies and
dividend payments by PSEG, to assist recipients in exercising options granted.
Prior to 1997, all options were granted in tandem with performance units and
dividend equivalent rights. In 1998 and 1997, there were 4,600 and 93,500
options, respectively, granted in tandem with performance units and dividend
equivalent rights. No compensation cost has been recognized for its fixed stock
option grants other than those previously described since the exercise price of
the stock options equals the market price of the underlying stock on the date of
grant. Had compensation costs for its stock option grants been determined based
on the fair value at the grant dates for awards under these plans in accordance
with SFAS No. 123
A-63
<PAGE>
"Accounting for Stock-Based Compensation," there would have been a charge to
PSEG's net income of approximately $0.4 million and $0.1 million in 1998 and
1997 respectively, with no impact on earnings per share.
In 1989, PSEG adopted a plan (Long Term Incentive Plan) under which
non-qualified options to acquire shares of common stock may be granted to
officers and other key employees selected by the Organization and Compensation
Committee of PSEG's Board of Directors, the plan's administrative committee (the
"Committee"). Payment by option holders upon exercise of an option may be made
in cash or, with the consent of the Committee, by delivering previously acquired
shares of PSEG common stock or surrendering other vested options. In instances
where an optionee tenders shares acquired from a grant previously exercised that
were held for a period of less than six months, an expense will be recorded for
the difference between the fair market value at exercise date and the option
price. (To date, no such transaction has occurred.) Options are exercisable over
a period of time designated by the Committee (but not prior to one year from the
date of grant) and are subject to such other terms and conditions as the
Committee determines. Vesting schedules may be accelerated upon the occurrence
of certain events, such as a change in control. Options may not be transferred
during the lifetime of a holder.
The Long Term Incentive Plan originally provided for the issuance of up to
500,000 shares of common stock and was subsequently amended to increase the
amount to 5,000,000. At December 31, 1998, there were 3,637,700 shares available
for future grants under the Long Term Incentive Plan.
Since the Long Term Incentive Plan's inception, PSEG has delivered
treasury shares upon the exercise of stock options. The difference between the
cost of the treasury shares (purchased on the date of exercise) and the exercise
price of the options has been reflected in Stockholder's Equity except where
otherwise discussed.
Changes in common shares under option for the three fiscal years in the
period ended December 31, 1998 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------- ---------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Beginning of year 430,300 $ 29.26 84,000 $ 29.38 77,200 $ 29.15
Granted 841,600 39.16 371,000 29.36 28,700 30.88
Exercised (28,100) 26.76 (21,500) 31.38 (21,900) 30.56
Canceled -- -- (3,200) 28.70 -- --
---------- ---------- ---------- ---------- ---------- ----------
End of year 1,243,800 36.01 430,300 29.26 84,000 29.38
---------- ---------- ---------- ---------- ---------- ----------
Exercisable at end of year 100,963 $ 29.47 6,000 $ 26.45 6,000 $ 26.45
---------- ---------- ---------- ---------- ---------- ----------
--------------------------------------------------------------------------------------------------
Weighted average fair
value of options granted
during the year $ 4.83 $ 3.60 $ 6.71
========== ========== ==========
</TABLE>
For this purpose, the fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants in 1998, 1997 and 1996,
respectively: expected volatility of 21.41%, 17.15% and 12.92%, risk free
interest rates of 4.48%, 5.14% and 5.28%, expected lives of 4 years, 3.75 years
and 3.75 years. Additional weighted averages assumptions include for grants in
1998, 1997 and 1996 a dividend yield of 0% with respect to the dividend
equivalent feature of the tandem grants. There was a dividend yield of 5.51% in
1998 and 7.31% in 1997 on the non-tandem grants. There were no non-tandem grants
issued in 1996.
A-64
<PAGE>
The following table provides information about options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------- -------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF OUTSTANDING AT REMAINING EXERCISE EXERCISABLE AT EXERCISE
EXERCISE PRICES DECEMBER 31, 1998 CONTRACTUAL LIFE PRICE DECEMBER 31, 1998 PRICE
- ----------------------------------------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C>
$24.00-$30.00 384,900 8.78 years $29.34 100,963 $29.47
$30.01-$35.00 31,900 7.24 years 31.04 -- --
$35.01-$40.00 827,000 9.93 years 39.31 -- --
- ----------------------------------------------------------------------- -------------------------------------
$24.00-$40.00 1,243,800 9.50 years $36.01 100,963 $29.47
- ----------------------------------------------------------------------- -------------------------------------
</TABLE>
In June 1998, the Committee granted 150,000 shares of common stock to a
key executive. As of December 31, 1998 all of the shares remained outstanding.
These shares are subject to restrictions on transfer and subject to risk of
forfeiture until earned by continued employment. The shares vest on a staggered
schedule beginning on March 31, 2002 and become fully vested on March 31, 2005.
The unearned compensation related to this restricted stock grant as of December
31, 1998 is approximately $5 million and is included in retained earnings on the
consolidated balance sheets.
PSEG's Stock Plan for Outside Directors provides non-employee directors,
as part of their annual retainer, 300 shares of common stock, which will be
increased to 600 shares beginning in 1999. With certain exceptions, the
restrictions on the stock provide that the shares are subject to forfeiture if
the individual ceases to be a director at any time prior to the Annual Meeting
of Stockholders following his or her 70th birthday. These shares are recorded as
compensation expense in the consolidated statements of income.
STOCK PURCHASE PLAN
PSEG and PSE&G have an employee stock purchase plan for all eligible
employees. Under the plan, shares of the common stock may be purchased at 95% of
the fair market value. Employees may purchase shares having a value not
exceeding 10% of their base pay. During 1998, 1997 and 1996, employees purchased
102,387, 144,377 and 153,810 shares at an average price of $36.36, $26.39 and
$27.24 per share, respectively. At December 31, 1998, 1,289,780 shares were
available for future issuance under this plan.
STOCK REPURCHASE PROGRAM
In September 1998, PSEG announced a stock repurchase program whereby the
Board of Directors authorized the repurchase of up to 10 million shares of its
common stock from time to time, subject to market conditions and other relevant
factors affecting PSEG and PSE&G. Share repurchases are planned when market and
business conditions are deemed favorable. The repurchased shares have been held
as treasury stock. As of December 31, 1998, PSEG had repurchased 5,314,100
shares at a cost of approximately $207 million. As of February 8, 1999, PSEG had
repurchased a total of 10 million shares at a cost of approximately $391 million
under this program.
NOTE 15. FINANCIAL INFORMATION BY BUSINESS SEGMENTS
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. 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. Since SFAS 131 solely revises disclosure requirements, the adoption
of SFAS 131 did not have a material impact on the financial condition, results
of operations and net cash flows of PSEG or PSE&G. The disclosure under SFAS 131
is below.
A-65
<PAGE>
BASIS OF ORGANIZATION
The reportable segments disclosed herein were determined based on a
variety of factors including the regulatory environment and the types of
products and services offered. With the transition into a deregulated
environment, it is likely that this basis of organization will change.
ELECTRIC
The electric segment of PSE&G's business generates revenue from its
bundled tariff rates under which it provides generation, transmission and
distribution energy services for its residential, commercial and industrial
customers in New Jersey. Revenues are also generated from a variety of wholesale
energy sales and other ancillary and miscellaneous services.
GAS
The gas segment of PSE&G's business generates revenue from its bundled
tariff rates under which it provides for the sale and distribution of gas to its
residential, commercial and industrial customers. Revenues are also generated
from a variety of other activities such as capacity sales, off-system sales,
sundry sales and other miscellaneous services.
RESOURCES
Resources receives revenues from its passive investments including
leveraged leases, limited partnerships, leveraged buyout funds and marketable
securities.
OTHER NON-UTILITY
PSEG's non-utility activities, other than Resources, generate revenues
from Global, Energy Technologies and EGDC. Global receives revenues from its
investment, development and operation of projects in the generation and
distribution of energy both domestically and internationally. Energy
Technologies receives revenues from a variety of energy related services to
industrial and commercial customers. EGDC receives revenues from its
nonresidential real estate development and investment business.
A-66
<PAGE>
Information related to the segments of PSEG's business is detailed below:
<TABLE>
<CAPTION>
OTHER
NON-UTILITY CONSOLIDATED
(MILLIONS OF DOLLARS) ELECTRIC GAS RESOURCES ACTIVITIES (A) TOTAL
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For the Year Ended December 31, 1998:
Total Operating Revenues .................... $ 4,031 $ 1,559 $ 145 $ 196 $ 5,931
Depreciation, Depletion and Amortization .... 565 93 1 10 669
Interest Income ............................. 19 1 9 3 32
Net Interest Charges ........................ 353 70 49 76 548
Income Taxes ................................ 359 39 27 (5) 420
Net income from equity method subsidiaries .. -- -- 35 114 149
Operating Income Before Income Taxes ........ 1,257 159 86 104 1,606
Segment Net Income (Loss) ................... $ 552 $ 52 $ 56 $ (16) $ 644
======== ======== ======== ======== ========
As of December 31, 1998:
Total Assets ................................ $ 12,266 $ 2,482 $ 1,809 $ 1,440 $ 17,997
Investments in equity method subsidiaries ... -- -- 383 143 526
Gross Additions to Long-Lived Assets ........ $ 383 $ 152 $ -- $ 10 $ 545
======== ======== ======== ======== ========
For the Year Ended December 31, 1997:
Total Operating Revenues .................... $ 3,918 $ 1,937 $ 144 $ 101 $ 6,100
Depreciation, Depletion and Amortization .... 531 85 1 13 630
Interest Income ............................. 13 1 4 3 21
Net Interest Charges ........................ 345 79 46 39 509
Income Taxes ................................ 224 84 29 (1) 336
Net income from equity method subsidiaries .. -- -- 49 79 128
Extraordinary items ......................... (53) -- -- -- (53)
Operating Income Before Income Taxes ........ 978 328 88 56 1,450
Segment Net Income (Loss) ................... $ 361 $ 167 $ 59 $ (27) $ 560
======== ======== ======== ======== ========
As of December 31, 1997:
Total Assets ................................ $ 12,448 $ 2,472 $ 1,616 $ 1,407 $ 17,943
Investments in equity method subsidiaries ... -- -- 407 274 681
Gross Additions to Long-Lived Assets ........ $ 395 $ 147 $ -- $ 6 $ 548
======== ======== ======== ======== ========
For the Year Ended December 31, 1996:
Total Operating Revenues .................... $ 3,944 $ 1,881 $ 143 $ 73 $ 6,041
Depreciation, Depletion and Amortization .... 517 87 2 1 607
Interest Income ............................. 4 1 11 4 20
Net Interest Charges ........................ 321 89 43 14 467
Income Taxes ................................ 217 48 28 2 295
Net income from equity method subsidiaries .. -- -- 73 48 121
Operating Income Before Income Taxes ........ 978 234 85 55 1,352
Segment Net Income .......................... $ 438 $ 97 $ 57 $ 20 $ 612
======== ======== ======== ======== ========
As of December 31, 1996:
Total Assets ................................ $ 12,406 $ 2,393 $ 1,443 $ 673 $ 16,915
Investments in equity method subsidiaries ... -- -- 408 225 633
Gross Additions to Long-Lived Assets ........ $ 463 $ 123 $ -- $ 3 $ 589
======== ======== ======== ======== ========
</TABLE>
(A) Other Non-utility Activities include amounts applicable to PSEG, the
parent corporation, and Energy Holdings, excluding Resources.
A-67
<PAGE>
Information related to Property, Plant and Equipment of PSE&G is detailed
below:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1998 1997 1996
---------- ---------- ----------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Utility Plant--Original Cost
Electric Plant in Service:
Fossil Production ..................... $ 2,802 $ 1,840 $ 1,843
Nuclear Production .................... 6,246 6,162 6,001
Transmission .......................... 1,200 1,163 1,146
Distribution .......................... 3,545 3,315 3,171
Other ................................. 276 1,212 1,153
---------- ---------- ----------
Total Electric Plant in Service .. 14,069 13,692 13,314
---------- ---------- ----------
Gas Plant in Service:
Transmission .......................... 69 67 67
Distribution .......................... 2,608 2,472 2,358
Other ................................. 170 158 131
---------- ---------- ----------
Total Gas Plant in Service ....... 2,847 2,697 2,556
---------- ---------- ----------
Common Plant in Service:
Capital Leases ........................ 59 59 59
General ............................... 519 499 471
---------- ---------- ----------
Total Common Plant in Service .... 578 558 530
---------- ---------- ----------
Total ....................... $ 17,494 $ 16,947 $ 16,400
========== ========== ==========
</TABLE>
Geographic Information for PSEG is disclosed below. PSE&G does not have
foreign investments or operations.
IDENTIFIABLE
REVENUES (1) ASSETS
---------- ----------
United States $ 5,831 $ 16,387
Foreign Countries 100 1,610
---------- ----------
Total $ 5,931 $ 17,997
========== ==========
Identifiable Assets from Foreign Countries include amounts from:
Argentina $307
Brazil (2) 482
Netherlands 400
(1) Revenues are attributed to countries based on the locations of the
investments.
(2) Amount is net of foreign currency translation adjustment of $39 million.
NOTE 16. DISCONTINUED OPERATIONS
On July 31, 1996, Energy Holdings 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.
A-68
<PAGE>
Operating results of EDC for 1996 (7 months) are summarized in the
following table:
(7 MONTHS)
----------
1996
----
(MILLIONS OF DOLLARS)
Revenues ............................... $ 128
Operating income ....................... 24
Earnings before income taxes ........... 9
Income taxes ........................... (2)
Net income ............................. 11
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.
<TABLE>
<CAPTION>
PLANT--DECEMBER 31, 1998
-------------------------------------------------------------
OWNERSHIP PLANT IN ACCUMULATED PLANT UNDER
INTEREST SERVICE DEPRECIATION CONSTRUCTION
------------ ------------ --------------- --------------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
Coal Generating
Conemaugh.................... 22.50% $199 $56 $2
Keystone..................... 22.84% 124 44 3
Nuclear Generating
Peach Bottom................. 42.49% 808 395 28
Salem........................ 42.59% 1,255 483 12
Hope Creek................... 95.00% 4,144 1,439 26
Nuclear Support Facilities... Various 201 52 7
Pumped Storage Facilities
Yards Creek.................. 50.00% 28 11 4
Transmission Facilities........... Various 124 43 --
Merrill Creek Reservoir........... 13.91% 37 17 --
Linden SNG Plant.................. 90.00% 16 23 --
</TABLE>
NOTE 18. SELECTED QUARTERLY DATA (UNAUDITED)
The information shown below, in the opinion of PSEG, 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,
-------------------- --------------------- -------------------- ---------------------
1998 1997 1998 1997 1998 1997 1998 1997
-------- -------- -------- -------- -------- -------- -------- --------
(MILLIONS WHERE APPLICABLE)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Revenues......... $1,632 $1,701 $1,348 $1,308 $1,425 $1,448 $1,526 $1,643
Operating Income........... 318 309 251 219 312 301 305 286
Net Income................. 191 140 122 91 180 176 151 153
Earnings per Share
(Basic and Diluted)...... 0.82 0.60 0.53 0.39 0.78 0.76 0.66 0.66
Weighted Average Common
Shares and Potential
Dilutive Effect of Stock
Options Outstanding..... 232 232 232 232 232 232 228 232
</TABLE>
A-69
<PAGE>
NOTE 19. ACCOUNTING MATTERS
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. This
authoritative pronouncement will dictate the timing for the accounting for the
outcome of the Energy Master Plan Proceedings.
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 of these accounting standards to PSEG and PSE&G will be
determined based on the outcome of the Energy Master Plan Proceedings. Under
PSE&G's proposal and the Energy Competition Act, 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 Proceedings on PSEG's and PSE&G's future financial condition,
results of operations and net cash flows. However, depending on regulatory
actions taken in New Jersey with respect to electric utility deregulation, there
could be a material adverse effect on such results.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133), which is effective for financial
statements for all fiscal quarters of fiscal years beginning after June 15,
1999. SFAS 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires an entity to recognize all
derivatives, within the scope of this statement, as assets or liabilities on the
balance sheet at fair value. Also, derivatives that are not hedges must be
adjusted to fair value through income. If a derivative is a hedge, changes in
the fair value of the derivative will either be offset against the change in
fair value of the hedged asset, liability or firm commitment through earnings or
be recognized in other comprehensive income until the hedged item is recognized
in earnings, depending on the nature of the hedge. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
PSEG and PSE&G are currently evaluating the impact of SFAS 133.
In November 1998, the EITF issued EITF 98-10, "Accounting for Contracts
Involved in Energy Trading and Risk Management Activities." EITF 98-10 is
effective for financial statements issued for fiscal years beginning after
December 15, 1998. EITF 98-10 requires that energy trading contracts be marked
to market with gains and losses included in earnings and separately disclosed in
the financial statements and footnotes. The EITF described indicators that
should be considered in determining whether an identifiable operation enters
into contracts that would fall under the scope of this issue. PSE&G has
determined that EITF 98-10 does apply to its operations and will be adopted in
January 1999. The impact of applying EITF 98-10 is not expected to have a
material adverse impact on the financial condition, results of operations and
net cash flows of PSEG and PSE&G.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" (SOP 98-1), which is
effective for financial statements for fiscal years beginning after December 15,
1998. SOP 98-1 provides criteria for capitalizing certain internal-use software
costs. The adoption of SOP 98-1 is not expected to have a material impact on the
financial condition, results of operations and net cash flows of PSEG and PSE&G.
A-70
<PAGE>
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities" (SOP 98-5), which is effective for financial
statements for fiscal years beginning after December 15, 1998. SOP 98-5 requires
the expensing of the costs of start-up activities as incurred. Additionally,
previously capitalized start-up costs must be written off as a Cumulative Effect
of a Change in Accounting Principle. The adoption of SOP 98-5 is not expected to
have a material impact on the financial condition, results of operations and net
cash flows of PSEG and PSE&G.
NOTE 20. SUBSEQUENT EVENTS
On January 1, 1999, the outstanding stock of PSCRC was dividended by PSE&G
to PSEG, which contributed such stock indirectly to Energy Technologies as an
additional equity investment. PSCRC had earnings/(losses) of $2 million, $0.2
million and $(9) million for the years ended December 31, 1998, 1997 and 1996,
respectively. At December 31, 1998 and 1997, PSCRC had assets of $89 million and
$117 million, respectively. Future earnings and assets will be reflected in the
consolidated financial statements of Energy Technologies, Energy Holdings and
PSEG.
In January 1999, Brazil abandoned its managed devaluation strategy and
allowed its currency, the Real, to float against other currencies. As of January
31, 1999, the Real has devalued approximately 40% against the U.S. dollar since
December 31, 1998. Based on the December 31, 1998 Brazilian investment balance
of $482 million, there was a 40% devaluation as of January 31, 1999 which
resulted in a charge of $172 million to cumulative foreign currency translation
adjustment (a separate component of stockholders' equity). PSEG cannot predict
to what extent, if any, further devaluation may occur, and, therefore, cannot
predict the impact of potential devaluation of currencies on PSEG's results of
operations, financial condition and net cash flows. However, assuming no further
significant devaluation, PSEG does not expect this to have a material adverse
effect on its 1999 results of operations, financial condition or net cash flows.
For additional information, see Note 15. Financial Information by Business
Segment. As PSEG increases its international investments, the financial
statements of PSEG will be increasingly affected by changes in the global
economy.
A-71
<PAGE>
FINANCIAL STATEMENT RESPONSIBILITY
Management of PSEG is responsible for the preparation, integrity and
objectivity of the consolidated financial statements and related notes of PSEG.
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 PSEG'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 PSEG'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 PSEG 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, 1998, the
Corporation's system of internal accounting controls is adequate to accomplish
the objectives discussed herein.
The Board of Directors of PSEG carries out its responsibility of financial
overview through its Audit Committee, which presently consists of five directors
who are not employees of PSEG 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.
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)
February 12, 1999
A-72
<PAGE>
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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 12, 1999
A-73
<PAGE>
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
underground Military Park garage.
FROM THE SOUTH
VIA THE NEW JERSEY TURNPIKE: (Northbound) Take the New Jersey Turnpike North to
Exit 15W (Newark/The Oranges) for Route 280 westbound. After the toll booth,
follow Route 280 West to Exit 15A (Route 21 South--Downtown). Follow signs to
Route 21 (aka McCarter Highway) and turn south onto Route 21. Follow Route 21 to
Center Street, make a right on Center Street and turn right at Mulberry Street
for adjacent parking or continue two blocks to the Military Park garage, located
on the left.
VIA THE GARDEN STATE
PARKWAY: (Northbound) Follow the Garden State Parkway North to Exit 142 (Route
78). Take Route 78 East. Stay right and follow Route 1 and 9 north to Route 21
(aka McCarter Highway). Travel across the viaduct into downtown Newark. Stay in
the left-turn lanes and turn left at the second light. Continue one block and
turn right onto Broad Street. Follow Broad Street 18 blocks to Park Place. Bear
right at Park Place and enter the Military Park garage to the left or turn right
onto Center Street and left at Mulberry Street for adjacent parking.
FROM THE NORTH
VIA THE NEW JERSEY TURNPIKE: (Southbound) Take the New Jersey Turnpike South to
Exit 15W or 15E (Newark/The Oranges). After the toll booth, follow Route 280
West to Exit 15A (Route 21 South--Downtown). Follow signs to Route 21 (aka
McCarter Highway) and turn south onto Route 21. Follow Route 21 to Center
Street, make a right on Center Street and turn right at Mulberry Street for
adjacent parking or continue two blocks to the Military Park garage, located on
the left.
VIA THE GARDEN STATE
PARKWAY: (Southbound) Take the Garden State Parkway South to Exit 145. Follow
signs to Route 280 eastbound. Take Route 280 East to Exit 15 (Route 21
South--Downtown). At the traffic light at the bottom of the ramp, make a right
onto Route 21 South (aka McCarter Highway). Continue on Route 21 South to Center
Street, make a right on Center Street and turn right at Mulberry Street for
adjacent parking or continue two blocks to the Military Park garage, located on
the left.
FROM THE WEST
VIA ROUTE 280: Take Route 280 East to Exit 15 (Route 21 South--Downtown). At the
traffic light at the bottom of the ramp, make a right onto Route 21 South (aka
McCarter Highway). Continue on Route 21 South to Center Street, make a right on
Center Street and turn right at Mulberry Street for adjacent parking or continue
two blocks to the Military Park garage, located on the left.
VIA ROUTE 78:
Take Route 78 East until it splits near Newark Airport. Stay right and follow
Route 1 and 9 to Route 21 (aka McCarter Highway). Travel across the viaduct into
downtown Newark. Stay in the left-turn lanes and turn left at the second light.
Continue one block and turn right onto Broad Street. Follow Broad Street 18
blocks to Park Place. Bear right at Park Place and enter the Military Park
garage to the left or turn right onto Center Street and left at Mulberry Street
for adjacent parking.
FROM NEW YORK
VIA THE NEW JERSEY TURNPIKE: Leave the city through the Lincoln Tunnel and
continue west on Route 495, staying left for the entrance to the New Jersey
Turnpike. Take the turnpike south to Exit 15W (Newark/The Oranges). After the
toll booth, follow Route 280 West to Exit 15A (Route 21 South--Downtown. Follow
signs to Route 21 (aka McCarter Highway) and make a right onto Route 21 South.
Follow Route 21 to Center Street, make a right on Center Street and turn right
at Mulberry Street for adjacent parking or continue two blocks to the Military
Park garage, located on the left.
VIA MASS TRANSIT:
Board the train at New York's Penn Station and travel to Penn Station, Newark.
Take the new shuttle bus, dubbed "The Loop" to the NJPAC. To walk, exit the
station via Raymond Boulevard and continue two blocks west to Mulberry Street.
Turn right on Mulberry and walk two blocks north to the NJPAC.
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.
A-74
<PAGE>
[PSEG LOGO]
Public Service Enterprise Group Incorporated
80 Park Plaza, Newark, New Jersey 07101-1171
[MAP]
[MAP]
Arrangements have been made to provide free parking within close proximity to
the New Jersey Performing Arts Center at locations designated (P) on the map
above.
Please bring your parking ticket with you to the meeting so that it can be
validated by PSEG. Reasonable parking expenses incurred at locations other than
those shown above will be reimbursed.
Detailed directions appear on the immediately preceding page.
A-75
<PAGE>
[Logo] PSEG Public Service Enterprise
E. James Ferland Group Incorporated
Chairman of the Board 80 Park Plaza Newark, NJ, 07101
President and Chief Executive Officer Mailing Address/P.O. Box 1171,
Newark, NJ 07101-1171
March 2, 1999
Dear Shareholder:
Your are cordially invited to join us at the 1999 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 20, 1999, 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; and (3) transact
other such 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. To make voting easier, I am pleased to announce that for
the first time you may also vote your proxy by toll-free touch-tone phone or
through the Internet. Please follow the instructions on the reverse side. You
can vote 24 hours a day, 7 days a week with these new options. If you choose to
vote by phone or Internet, please do not mail your proxy form.
If you choose to vote by mail instead of by phone or Internet, 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 and you vote by
phone or Internet, please indicate your plan to attend when asked during your
electronic voting. If you plan to attend and vote by mail, mark the appropriate
box on the proxy form below. We will then mail you an admission ticket. Maps and
directions to reach our 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,
/s/ 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 FOR proposals 1 and 2
(1) ELECTION OF DIRECTORS:
Nominees for Class III terms expiring in 2002 are: 01) T.J. Dermot Dunphy,
02) Raymond V. Gilmartin, 03) Conrad K. Harper
FOR WITHHOLD FOR AGAINST ABSTAIN
--- ------- -------
all nominees listed authority to vote (2) Ratification
above (except as /_/ for all nominees /_/ of Deloitte
marked to the listed above & Touche LLP /_/ /_/ /_/
contrary below) as Independent
Auditors for the
year 1999.
_____________________________________
(INSTRUCTIONS: To withhold authority to
vote for any Individual nominee, write
that nominee's name on the line provided
above.)
- --------------------------------------------------------------------------------
If you plan to attend the Annual Meeting, Stop annual report mailings to this
please mark this box. /_/ account since duplicate copies now
come to this address. /_/
If you wish to include comments, please For change of address only, please
mark this box and write your comments on mark this box and make changes to
the reverse side of this form. /_/ 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________________
<PAGE>
VOTE BY TELEPHONE OR INTERNET QUICK***EASY***IMMEDIATE
Public Service Enterprise Group Incorporated invites you to take advantage of
new and convenient ways to vote your shares for matters to be covered at the
1999 Annual Meeting of Stockholders. Your telephone or Internet vote authorizes
the named proxies to vote your shares in the same manner as if you marked,
signed and returned your proxy form.
VOTE BY PHONE: 1-888-892-7873
You will be asked to enter a CONTROL NUMBER
located in the middle of this form.
--------------------------------------------
Option A: To vote as the Board of Directors
recommends on ALL proposals: Press 1
--------------------------------------------
--------------------------------------------
Option B: If you choose to vote on each item
separately press 0. You will hear these
instructions:
--------------------------------------------
Item 1: To vote FOR ALL nominees, press 1;
to WITHHOLD FOR ALL nominees, press 9. To
WITHHOLD FOR AN INDIVIDUAL nominee, press 0
and listen to the instructions
Item 2: To vote FOR, press 1; AGAINST, press
9; ABSTAIN, press 0
When asked, you must confirm your vote by
pressing 1
VOTE BY INTERNET the web address is:
http://www.proxyvoting.com/pseg
CALL TOLL-FREE ON A TOUCH-TONE PHONE
1-888-892-7873 --------------------------------------
THERE IS NO CHARGE FOR THIS CALL CONTROL NUMBER
For telephone/Internet Voting
--------------------------------------
IF YOU VOTE BY PHONE OR VOTE USING THE INTERNET, PLEASE DO NOT MAIL THE PROXY
FORM
THANK YOU FOR VOTING
- --------------------------------------------------------------------------------
PROXY FORM (LOGO) PSEG Public Service Enterprise PROXY FORM
Group Incorporated
80 Park Plaza, P.O. Box 1171
Newark, NJ 07101-1171
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS THIS PROXY IS SOLICITED ON BEHALF
April 20, 1999 OF THE BOARD OF DIRECTORS OF PSEG
The undersigned hereby appoints E. JAMES FERLAND, ERNEST H. DREW, RICHARD
J. SWIFT, 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 (PSEG) to be held
on April 20, 1999 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 PSEG 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.
