SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
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Rule 14a-11(c) or Rule 14a-12
Public Service Enterprise Group Incorporated
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(Name of Registrant as Specified In Its Charter)
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[LOGO] PSEG
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
80 PARK PLAZA, P.O. BOX 1171, NEWARK, NEW JERSEY 07101-1171
================================================================================
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 18, 2000
AND
PROXY STATEMENT
To the Stockholders of Public Service Enterprise Group Incorporated:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Public
Service Enterprise Group Incorporated will be held at the New Jersey Performing
Arts Center, One Center Street, Newark, New Jersey, on April 18, 2000, at 2:00
P.M., for the following purposes:
1. To elect three members of Class I of the Board of Directors
to hold office until the Annual Meeting of Stockholders in
2003 and until their respective successors are elected and
qualified; and to elect one member of Class II of the Board
of Directors to hold office until the Annual Meeting of
Stockholders in 2001 and until his successor is elected and
qualified;
2. To consider and act upon the ratification of the
appointment of Deloitte & Touche LLP as independent
auditors for the year 2000; 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 25, 2000.
By order of the Board of Directors,
EDWARD J. BIGGINS, JR.
Secretary
March 1, 2000
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.
<PAGE>
TABLE OF CONTENTS
PAGE
----
INTRODUCTION .............................................................. 1
VOTING SECURITIES ......................................................... 1
BOARD OF DIRECTORS ........................................................ 2
Committees of the Board ................................................. 3
ELECTION OF DIRECTORS (Proposal 1) ........................................ 4
SECURITY OWNERSHIP OF DIRECTORS AND MANAGEMENT ............................ 8
EXECUTIVE COMPENSATION .................................................... 9
Summary Compensation Table .............................................. 9
Option Grants in Last Fiscal Year (1999) ................................ 10
Aggregated Option Exercises in Last Fiscal Year (1998)
and Fiscal Year-End Option Values (12/31/99) .......................... 11
Employment Contracts and Arrangements ................................... 11
Compensation Committee Interlocks and Insider Participation ............. 12
Compensation of Directors and Certain Business Relationships ............ 12
Compensation Pursuant to Pension Plans .................................. 12
ORGANIZATION AND COMPENSATION COMMITTEE REPORT ON EXECUTIVE
COMPENSATION ............................................................ 13
PERFORMANCE GRAPH ......................................................... 15
RATIFICATION OF THE APPOINTMENT OF INDEPENDENT AUDITORS (Proposal 2) ...... 15
LEGAL PROCEEDINGS ......................................................... 16
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-21
CONSOLIDATED BALANCE SHEETS ............................................. A-22
CONSOLIDATED STATEMENTS OF CASH FLOWS ................................... A-24
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY .................. A-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS .............................. A-26
FINANCIAL STATEMENT RESPONSIBILITY ...................................... A-61
INDEPENDENT AUDITORS' REPORT ............................................ A-62
<PAGE>
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 2000 Annual Meeting of
Stockholders of PSEG. PSEG is a public utility holding company that owns
directly four subsidiaries: Public Service Electric and Gas Company (PSE&G),
which is an operating electric and gas utility; PSEG Power LLC (Power), an
electric generation and wholesale energy marketing and trading company; which
upon further restructuring of the New Jersey electric utility industry, will own
and operate the electric generation assets currently owned by PSE&G; PSEG PSEG
Energy Holdings Inc. (Energy Holdings), the owner of PSEG's other energy
- -related business which directly owns the other non-utility of PSE&G;es and PSEG
Services Corporation (Services), which provides management and administrative
services to PSEG and its subsidiaries. The complete mailing address of the
principal executive offices of PSEG is 80 Park Plaza, P.O. Box 1171, Newark, New
Jersey 07101-1171, telephone (973) 430-7000. The approximate date on which this
Proxy Statement and the accompanying proxy were first sent or given to security
holders was March 7, 2000.
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 1999 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 216,417,218 shares of Common Stock of PSEG
outstanding at the close of business on February 25, 2000 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 names listed
thereon in Enterprise Direct (formerly the Enterprise Dividend Reinvestment and
Stock Purchase Plan) and the Enterprise Employee Stock Purchase Plan.
Participants in the PSEG Thrift and Tax Deferred Savings Plan or PSEG
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.
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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.
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
Corporate GoveranceNominating Committee in accordance with its customary
standards, subject to the retirement policy for directors mentioned below.
The present terms of the three directors included in Class I of the Board
of Directors, Lawrence R. Codey, Ernest H. Drew and Forrest J. Remick, expire at
the 2000 Annual Meeting. Dr. Drew has been nominated to serve as a director in
Class I for a new three-year term, which will expire at the 2003 Annual Meeting.
Dr. Remick has been nominated to serve as a director in Class II for a one-year
term which will expire at the 2001 Annual Meeting.
Lawrence R. Codey, who retired from his position as President of PSE&G on
February 29, 2000, will retire as a Director at the expiration of his term at
this year's Annual Meeting. The Board wishes to thank Mr. Codey for his many
years of dedicated service.
In order that the three classes of directors be divided into as nearly
equal numbers of directors as possible, as provided by the By-Laws of PSEG, E.
James Ferland and Marilyn M. Pfaltz, who currently serve as directors in Class
III, with terms expiring at the 2002 Annual Meeting, have each been nominated to
serve as a director in Class I for a new three-year term, which will expire at
the 2003 Annual Meeting.
Therefore, at this year's meeting directors will be elected to fill three
positions in Class I to serve until the 2003 Annual Meeting and one position in
Class II to serve until the 2001 Annual Meeting, in each case until their
respective successors are elected and qualified. All the nominees were elected
to their present terms by the stockholders. The present term of Class II of the
Board of Directors expires at the 2001 Annual Meeting, and the present term of
Class III expires at the 2002 Annual Meeting. Directors in Class II, other than
Dr. Remick, and Class III will not be elected at the 2000 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 10, but
will be reduced to 9 effective upon the retirement of Mr. Codey.
The Board of Directors of PSEG held regular monthly meetings in 1999,
except in August, and met on other occasions when circumstances required. The
Board met 13 times in 1999, and, on average, the meetings lasted approximately
two hours. Beginning in 2000, the Board will hold regular monthly meetings,
except in February, May and August, and meetings are anticipated to last
approximately four hours. Directors spend additional time preparing for Board
and committee meetings they attend and they are called upon for counsel between
meetings. In addition, during 1999, each director served 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 1999. Effective December 31, 1999, as part of a corporate
governance reorganization, the directors of Energy Holdings, except Mr. Ferland
and Robert J. Dougherty, Jr., resigned from those positions, which are now
filled by executive officers of PSEG. Committee membership and membership on the
PSE&G Board is 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.
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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 four meetings
in 1999.
Corporate Governance Committee
Effective January 1, 2000, the Nominating Committee was re-designated as
the Corporate Governance Committee to recognize that its role and function now
also includes duties pertaining to corporate governance matters of the Board.
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 1999.
The Corporate Governance Committee will consider stockholders'
recommendations for nominees for election to the Board of Directors. Such
recommendations must be submitted in writing to Edward J. Biggins, Jr.,
Secretary, T4B, Public Service Enterprise Group Incorporated, 80 Park Plaza,
P.O. Box 1171, Newark, New Jersey 07101-1171. Nominations must be accompanied by
the written consent of any such person to serve if nominated and elected and by
biographical material to permit evaluation of the individual recommended. In
addition, the By-Laws of PSEG require that shareholder nominations must be
submitted at least 90 days in advance of an Annual Meeting.
The Corporate Governance Committee seeks candidates with an attained
positions of leadership in their fields 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.
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 1999.
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' trust funds of PSEG plans and nuclear
decommissioning trust fund of PSE&G. The Committee held four meetings in 1999.
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 four meetings in 1999.
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
3
<PAGE>
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 incentive compensation programs for officers and other
key employees and certain benefit plans for directors and officers. Administers
certain benefit plans for directors and officers. The Committee held three
meetings in 1999.
PROPOSAL 1
ELECTION OF DIRECTORS
At the 2000 Annual Meeting of Stockholders, three members of Class I of the
Board of Directors are to be elected to hold office until the Annual Meeting of
Stockholders in 2003 and one member of Class II of the Board of Directors is to
be elected to hold office until the Annual Meeting of Stockholders in 2001, in
each case 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 Corporate Governance 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 2000 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
at least the last five years and other present directorships. Beneficial
ownership of PSEG Common Stock is shown under Security Ownership of Directors
and Management. During 1999, 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 I--NOMINEES FOR TERMS EXPIRING IN 2003
- ------------------ ERNEST H. DREW has been a director since 1993. Age
63. Member of Nuclear Committee and Organization and
Compensation Committee. Until retirement, was Chief
[PHOTO] 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., Unique
Mobility Inc. and Johns Manville Corporation.
- ------------------ 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, Chairman of the Board and Chief
Executive Officer of Energy Holdings since June 1989,
- ------------------ Chairman of the Board and Chief Executive Officer of
E. James Ferland Power since June 1999 and Chairman of the Board and,
President and Chief Executive Officer of Services
since November 1999. Age 58. Chairman of Executive
Committee. Director of Foster Wheeler Corporation and
The HSB Group, Inc.
- ------------------ MARILYN M. PFALTZ has been a director since 1980. Age
67. Chair of Corporate Governance Committee and
member of Audit Committee and Finance Committee.
[PHOTO] Director of PSEG's 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
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NOMINEE FOR ELECTION AS DIRECTOR
CLASS II--NOMINEE FOR TERM EXPIRING IN 2001
- ------------------ FORREST J. REMICK has been a director since 1995. Age
69. Chairman of Nuclear Committee and member of Audit
Committee and Corporate Governance Committee.
[PHOTO] Director of 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
Forrest J. Remick Associate Vice President-Research and Professor of
Nuclear Engineering at Pennsylvania State University,
from 1985 to 1989.
DIRECTORS WHOSE TERMS CONTINUE BEYOND THE 2000 ANNUAL MEETING
AND WHO ARE NOT SUBJECT TO ELECTION THIS YEAR
CLASS II--DIRECTORS WHOSE TERMS EXPIRE IN 2001
- ------------------ IRWIN LERNER has been a director since 1981. Age 69.
Chairman of Organization and Compensation Committee
and member of Executive Committee, Corporate
[PHOTO] Governance 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
Irwin Lerner pharmaceuticals, vitamins and fine chemicals, and
diagnostic products and 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.
- ------------------ RICHARD J. SWIFT has been a director since 1994. Age
55. Chairman of Audit Committee and member of
Corporate Governance Committee and Nuclear Committee.
[PHOTO] 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
Richard J. Swift operations and 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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DIRECTORS WHOSE TERMS CONTINUE BEYOND THE 2000 ANNUAL MEETING
AND WHO ARE NOT SUBJECT TO ELECTION THIS YEAR
CLASS III--DIRECTORS WHOSE TERMS EXPIRE IN 2002
- ------------------ T. J. DERMOT DUNPHY has been a director since 1980.
Age 68. Chairman of Finance Committee and member of
Audit Committee and Organization and Compensation
[PHOTO] Committee. Has been Chairman of Sealed Air
Corporation, Saddle Brook, New Jersey (manufactures
protective packaging products and systems), since
- ------------------ February 2000. Was Chairman of the Board and Chief
T.J. Dermot Dunphy Executive Officer from November 1996 until February
2000 and was President and Chief Executive Officer
from 1971 to November 1996. Director of Sealed Air
Corporation, Summit Bancorp and Summit Bank.
------------------ RAYMOND V. GILMARTIN has been a director since 1993.
Age 59. Member of Finance Committee and Organization
and Compensation Committee. Has been Chairman of the
[PHOTO] 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
59. 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 October 1974 to May
- ------------------ 1993. Was Legal Adviser, U.S. Department of State
Conrad K. Harper from May 1993 to June 1996. Director of New York Life
Insurance Company.
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SECURITY OWNERSHIP OF DIRECTORS AND MANAGEMENT
The following table sets forth, as of February 25, 2000, 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.
AMOUNT AND NATURE
NAME OF BENEFICIAL OWNERSHIP
---- -----------------------
Frank Cassidy .......................................... 160,317(1)
Lawrence R. Codey ...................................... 252,756(2)
Robert J. Dougherty, Jr. ............................... 235,909(3)
Ernest H. Drew ......................................... 5,711
T. J. Dermot Dunphy .................................... 57,465
E. James Ferland ....................................... 699,227(4)
Raymond V. Gilmartin ................................... 5,711
Conrad K. Harper ....................................... 1,843
Irwin Lerner ........................................... 12,630
Robert C. Murray ....................................... 171,475(5)
Marilyn M. Pfaltz ...................................... 9,618
Forrest J. Remick ...................................... 4,079
Richard J. Swift ....................................... 4,732
All directors and executive officers
as a group (16 persons) .............................. 1,853,090(6)
- ----------
(1) Includes the equivalent of 1,600 shares held under PSEG Thrift and
Tax-Deferred Savings Plan. Includes options to purchase 153,000 shares,
21,670 of which are exercisable as of February 25, 2000.
(2) Includes the equivalent of 45 shares held under PSEG Thrift and
Tax-Deferred Savings Plan. Includes options to purchase 230,000 shares,
58,340 of which are exercisable as of February 25, 2000.
(3) Includes the equivalent of 886 shares held under PSEG Thrift and
Tax-Deferred Savings Plan. Includes options to purchase 213,333 shares,
41,673 of which are exercisable as of February 25, 2000.
(4) Includes the equivalent of 12,180 shares held under PSEG Thrift and
Tax-Deferred Savings Plan. Includes options to purchase 475,000 shares,
116,680 of which are exercisable as of February 25, 2000. Includes 150,000
shares of restricted stock, which vest as described in the Summary
Compensation Table, note 5.
(5) Includes the equivalent of 1,475 shares held under PSEG Thrift and
Tax-Deferred Savings Plan. Includes options to purchase 154,000 shares,
33,337 of which are exercisable as of February 25, 2000.
(6) Includes the equivalent of 21,982 shares held under PSEG Thrift and
Tax-Deferred Savings Plan. Includes options to purchase 1,433,933 shares,
305,371 of which are exercisable as of February 25, 2000.
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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, 1999 for all services rendered to PSEG and its
subsidiaries and affiliates during each year indicated.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------- --------------------------------
BONUS/ANNUAL AWARDS PAYOUTS
---------------------- -------
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 .................. 1999 815,000 733,500 0 215,000 304,720 29,292
Chairman of the Board, 1998 762,070 621,400 5,184,375(5) 150,000 92,684 28,647
President and CEO of 1997 712,261 425,200 0 118,000 108,702 15,747
PSEG
Lawrence R. Codey ................. 1999 480,000 288,000 0 100,000 140,640 8,283
President and Chief 1998 455,250 274,200 0 75,000 44,744 7,408
Operating Officer of PSE&G (6) 1997 435,327 249,400 0 59,200 50,325 6,530
Robert J. Dougherty, Jr. .......... 1999 425,000 255,000 0 100,000 121,888 4,003
President and Chief 1998 403,449 242,200 0 75,000 39,950 4,190
Operating Officer of Energy 1997 383,525 196,500 0 58,600 36,234 4,470
Holdings
Robert C. Murray .................. 1999 390,000 234,000 0 75,000 93,760 4,802
Vice President and Chief 1998 373,564 225,000 0 50,000 31,960 4,962
Financial Officer of PSEG 1997 345,671 154,900 0 32,000 36,234 5,260
Frank Cassidy ..................... 1999 302,500 195,000 0 100,000 70,320 4,004
President and Chief 1998 273,000 117,600 0 35,000 23,970 4,109
Operating Officer of Power (7) 1997 249,000 50,800 0 20,500 0 4,256
</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 1999 and 1998, all options
granted were non-tandem. For 1997, of the options granted to Messrs.
Ferland, Codey, Dougherty, Murray and Cassidy, respectively, 100,000;
50,000; 50,000; 25,000 and 15,000 were non-tandem and 18,000; 9,200; 8,600;
7,000 and 5,500 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.
9
<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 CASSIDY
-------------- ------------- -------------- -------------- -------------
THRIFT MICP THRIFT MICP THRIFT MICP THRIFT MICP THRIFT MICP
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
($) ($) ($) ($) ($) ($) ($) ($) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999 ...... 4,801 0 6,218 0 4,003 0 4,802 0 4,004 0
1998 ...... 4,801 383 4,802 241 4,001 189 4,805 157 4,003 106
1997 ..... 4,801 1,122 4,802 657 4,003 467 4,802 458 4,001 255
</TABLE>
In addition, 1999, 1998 and 1997 amounts include for Mr. Ferland $24,491,
$23,463 and $9,824, and for Mr. Codey, $2,065, $2,365 and $1,071,
respectively, representing earnings credited on compensation deferred under
PSEG's Deferred Compensation Plan in excess of 120% of the applicable
federal long-term interest rate as prescribed under Section 1274(d) of the
Internal Revenue Code. Prior to January 1, 2000, under PSEG's Deferred
Compensation Plan, earnings were credited at prime rate plus 1/2%, adjusted
quarterly. Effective January 1, 2000, the Plan was amended to permit
participants to select from among four additional investment options for
compensation that is deferred.
(5) Value as of original grant date, based on the closing price on the New York
Stock Exchange on June 16, 1998, with respect to an award to Mr. Ferland of
150,000 shares of restricted stock, of which 60,000 shares vest in 2002;
20,000 shares vest in 2003; 30,000 shares vest in 2004; and 40,000 shares
vest in 2005. Dividends on the entire grant are paid in cash from the date
of grant.
(6) Mr. Codey retired effective February 29, 2000.
(7) Mr. Cassidy became President of Power on July 1, 1999. He had served as
President of Energy Holdings' subsidiary, PSEG Energy Technologies Inc.,
since November 1996.
OPTION GRANTS IN LAST FISCAL YEAR (1999)
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
------------------------------------------
NUMBER OF % OF TOTAL EXERCISE GRANT DATE
SECURITIES OPTIONS GRANTED OR BASE PRESENT
UNDERLYING TO EMPLOYEES PRICE EXPIRATION VALUE
NAME OPTIONS GRANTED IN FISCAL YEAR ($/SH) DATE ($) (2)
---- --------------- -------------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
E. James Ferland ....................... 215,000(1) 15.8 33.1250 12/21/09 761,100
Lawrence R. Codey ...................... 100,000(1) 7.3 33.1250 12/21/09 354,000
Robert J. Dougherty, Jr. ............... 100,000(1) 7.3 33.1250 12/21/09 354,000
Robert C. Murray ....................... 75,000(1) 5.5 33.1250 12/21/09 265,500
Frank Cassidy .......................... 100,000(1) 7.3 33.1250 12/21/09 354,000
</TABLE>
- --------------
(1) Granted under LTIP not in tandem with performance units and dividend
equivalents, with exercisability commencing December 21, 2000, December 21,
2001 and December 21, 2002, respectively, with respect to one-third of the
options at each such date.
(2) Determined using the Black-Scholes model, incorporating the following
material assumptions and adjustments: (a) exercise price $33.1250, equal to
the fair market value of the underlying PSEG Common Stock on the date of
grant; (b) an option term of ten years on all grants; (c) interest rate of
6.28% that represents the interest rate on U.S. Treasury securities on the
date of grant with a maturity date corresponding to that of the option
terms; (d) volatility of 19.01% calculated using daily PSEG Common Stock
prices for the one-year period prior to the grant date; (e) dividend yield
of 6.52% and (f) reductions of approximately 7.79%, to reflect the
probability of forfeiture due to termination prior to vesting, and
approximately 5.49% to reflect the probability of a shortened option term
due to termination of employment prior to the option expiration date.
Actual values which may be realized, if any, upon any exercise of such
options, will be based on the market price of PSEG Common Stock at the
time of any such exercise and thus are dependent upon future performance of
PSEG Common Stock. There is no assurance that any such value realized will
be at or near the value estimated by the Black-Scholes model utilized.
10
<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR (1999) AND
FISCAL YEAR-END OPTION VALUES (12/31/99)
SHARES
ACQUIRED
ON VALUE
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (#)(1) ($)(2) (#) (#) ($)(3) ($)(3)
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
E. James Ferland .......................... 6,500 49,969 116,680 366,320 350,017 647,795
Lawrence R. Codey ......................... 3,000 23,062 58,340 175,860 175,009 312,679
Robert J. Dougherty, Jr. .................. 19,267 216,954 41,673 175,260 87,507 308,366
Robert C. Murray .......................... 2,000 13,750 33,337 123,663 87,502 212,873
Frank Cassidy ............................. 1,500 11,156 21,670 133,830 52,505 228,714
</TABLE>
- --------------
(1) Does not reflect any options granted and/or exercised after year-end
(12/31/99). 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 (12/31/99).
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 awarded
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 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.
In 1999, PSE&G entered into an Employment Agreement with Mr. Codey, which
provided for the granting of ten additional years of credited service for
retirement purposes if Mr. Codey remained employed by PSE&G through February 28,
2000. The Agreement also provided that if PSEG or PSE&G so requested, Mr. Codey
shall provide consulting services to PSEG during the period of twenty-four
months following termination of employment at a rate to be agreed. The Agreement
provided that Mr. Codey is prohibited from competing with or recruiting
employees from PSE&G or its subsidiaries or affiliates for two years after
termination of employment. Violation of these provisions requires a forfeiture
of the additional retirement benefit provided by the Agreement. Mr. Codey
retired effective February 29, 2000.
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.
11
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1999, 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 and Conrad K. Harper. During 1999, 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 1999, Mr.
Codey served as a director of Sealed Air Corporation, during which time T.J.
Dermot Dunphy served as the Chairman of the Board and Chief Executive Officer,
as well as a director and member of the Organization and Compensation Committee
of PSEG.
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 or PSE&G. 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. Each Committee Chair receives 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 600 shares
of restricted stock for each year of service as a director. Such shares held by
each non-employee director are included in the table above under the heading
Security Ownership of Directors and Management.
The restrictions on the stock granted under the Stock Plan for Outside
Directors provide that the shares are subject to forfeiture if the director
leaves service at any time prior to the Annual Meeting of Stockholders following
his or her 70th birthday. This restriction would be deemed to have been
satisfied if the director's service were terminated 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.
COMPENSATION PURSUANT TO PENSION PLANS
The table below illustrates annual retirement benefits for executive
officers expressed in terms of single life annuities based on the average final
compensation and service shown and retirement at age 65. A person's annual
retirement benefit is based upon a percentage that is equal to years of credited
service plus 30, but not more than 75%, times average final compensation at the
earlier of retirement, attainment of age 65 or death. These amounts are reduced
by Social Security benefits and certain retirement benefits from other
employers. Pensions in the form of joint and survivor annuities are also
available.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
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
1,400,000 .................. 840,000 910,000 980,000 1,050,000
1,500,000 .................. 900,000 975,000 1,050,000 1,125,000
</TABLE>
12
<PAGE>
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, Dougherty, Murray and Cassidy will have accrued approximately 48, 48,
41 and 48 years of credited service, respectively, as of age 65. Mr. Codey
retired February 29, 2000 with 37 years of credited service.
ORGANIZATION AND COMPENSATION COMMITTEE
REPORT ON EXECUTIVE COMPENSATION
The compensation program for executive officers of PSEG and its
subsidiaries is administered by the Organization and Compensation Committee of
the PSEG Board of Directors. During 1999, the Committee consisted solely of
non-employee directors. 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 common stock as compensation to increase the
linkage of executive compensation with long-term shareholder value. Also
included as compensation are earnings on 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. For Power, data for energy services and relevant general industry is
utilized, 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 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 1999, base salaries were increased from 1998
levels to reflect general market adjustments for comparable positions.
For fiscal year 1999, 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 comparably-sized utilities. 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 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 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 60%, established
by the Committee. The target percentage for Mr. Ferland was increased from 55%
to 60% for 1999 to better align 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 1999
was based upon a comparison of PSEG return on capital of a group of utilities
which comprise the Dow Jones Utilities Index and results measured against a
target in PSE&G's Customer Satisfaction Management Survey Weighted Average
Index, which surveys satisfaction among five customer classes.
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
13
<PAGE>
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 1999 these corporate
factors were financial and business performance, regulatory and public policy
strategies, restructuring, recapitalization, new business development, business
strategy, safety, nuclear performance and cost savings.
Annual awards are determined within 120 days of the end of the fiscal year.
Awards for 1999 performance, including Mr. Ferland's, were determined in January
2000. Mr. Ferland's 1999 annual incentive award, as determined in January 2000
based upon 1999 performance, reflects that (i) PSEG's 1999 return on capital,
adjusted to reflect accounting effects of the decision by the Board of Public
Utilities of the State of New Jersey in its Energy Master Plan proceedings,
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 1999, Mr. Ferland's target award was set at 60% 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 1999, the corporate goal factor was 1.475 and Mr. Ferland's
individual goal factor was 1.2099. 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 1999,
only 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, cash payment is made only if
the specified performance level is achieved, dividend equivalents have accrued
and options are exercised. Grant levels are determined annually 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 Committee does not consider the current level of options held by executive
officers when determining option grants.
In 1999, the total value of the grant of options 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 1999, Mr. Ferland was granted 215,000 non-tandem options.
The grant of stock options to Mr. Ferland was at approximately the median of the
comparative market data.
The performance unit value is 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 1999, PSEG's
long-term performance as measured by the total return to shareholders over the
1996 through 1998 period placed it as the sixth company. Therefore, performance
unit awards equal to 80% of the target award were granted in respect of tandem
options granted in 1996.
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.
14
<PAGE>
Section 162(m) of the Internal Revenue Code, which became effective January
1, 1994, generally denies a deduction for Federal income tax purposes for
compensation in excess of $1 million for persons named in the proxy statement,
except for compensation pursuant to stockholder-approved performance-based plans
and for compensation that is paid pursuant to certain contracts entered into
prior to February 1993. Mr. Ferland and Mr. Dougherty were the only executive
officers for whom compensation in 1999 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
PERFORMANCE GRAPH
The graph below shows a comparison of the five-year cumulative total return
assuming $100 invested on December 31, 1994 in PSEG Common Stock, the S&P 500
Composite Stock Price Index, the Dow Jones Utilities Index and the S&P Electric
Companies Index.
[GRAPHICAL REPRESENTATION OF CHART]
1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ ------
PSEG 100.00 124.48 119.81 151.42 201.52 185.58
S&P 500 Stock Index 100.00 137.62 167.91 223.92 287.91 348.49
Dow Jones Utilities 100.00 131.28 141.90 174.75 207.62 195.56
S&P Electric Utilities 100.00 130.45 129.24 163.25 188.60 151.96
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 2000, 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.
15
<PAGE>
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 1995 and
1996, four shareholder derivative suits on behalf of PSEG shareholders were
filed against certain directors and officers. This litigation generally relates
to PSE&G's operation of the Salem and Hope Creek Nuclear Generating Stations and
seeks recovery of damages for alleged losses, removal of certain executive
officers, changes in the composition of the Board of Directors and other relief.
In March 1996, the Board concluded a five-month investigation regarding the
allegations in the complaints and determined that the litigation should not have
been instituted and should be terminated. Following discovery, on July 28, 1999,
the court granted defendants' Motions for Summary Judgment dismissing all four
derivative actions. The plaintiffs have appealed. One of the plaintiffs in the
shareholder derivative actions also filed two complaints against the directors
of PSEG, and PSEG as a nominal defendant, alleging that the 1996, 1997, 1998 and
1999 Proxy Statements provided to shareholders of PSEG were false and misleading
in respect of nuclear operations and seeking to set aside the election of
directors and other actions voted upon at the annual meetings held in those
years. The Court in those matters granted defendants' Motions to Dismiss with
respect to the 1996, 1997 and 1999 Proxy Statements and granted defendants'
Motion for Summary Judgment with respect to the 1998 Proxy Statement. The
plaintiff has appealed the dismissal of the Complaint related to the 1999 Proxy
Statement.
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 7, 2000.
DISCRETIONARY PROXY VOTING AUTHORITY
If PSEG is not notified by January 22, 2001 of any proposal intended to be
presented for consideration at the 2001 Annual Meeting of Stockholders, then the
proxies named by PSEG 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.
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 year 1999, 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 1, 2000
16
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APPENDIX
FINANCIAL STATEMENTS
PAGE
----
Management's Discussion and Analysis of
Financial Condition and Results of Operation ........................ A - 1
Consolidated Statements of Income ..................................... A - 21
Consolidated Balance Sheets ........................................... A - 22
Consolidated Statements of Cash Flows ................................. A - 24
Consolidated Statements of Common Stockholders' Equity ................ A - 25
Notes to Consolidated Financial Statements ............................ A - 26
Financial Statement Responsibility .................................... A - 61
Independent Auditors' Report .......................................... A - 62
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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 three principal direct wholly-owned operating subsidiaries:
Public Service Electric and Gas Company (PSE&G), PSEG Power LLC (Power) and PSEG
Energy Holdings Inc. (Energy Holdings). In 1999, PSEG formed PSEG Services
Corporation (Services) to provide management and administrative services to PSEG
and its subsidiaries.
PSE&G is an operating public utility providing electric and gas service in
certain areas within the State of New Jersey. Following the anticipated sale of
its generation-related assets to Power, PSE&G will continue to own and operate
its transmission and distribution businesses. Within this discussion, the
results of operations of the generation business for 1999 have been included
within PSE&G since PSE&G continued to own and operate the generation-related
assets throughout the year.
Power and its subsidiaries were formed in 1999 to acquire, own and operate
the electric generation-related assets of PSE&G pursuant to the Final Decision
and Order (Final Order) issued by the New Jersey Board of Public Utilities (BPU)
under the New Jersey Energy Master Plan Proceedings. Through its subsidiaries,
Power will provide energy and capacity to PSE&G under certain contracts and
market electricity, natural gas, capacity and ancillary services throughout the
Eastern United States. Power has three direct wholly-owned subsidiaries: PSEG
Fossil LLC (Fossil), PSEG Nuclear LLC (Nuclear) and PSEG Energy Resources &
Trade LLC (ER&T).
Energy Holdings is the parent of three energy-related lines of business
through its wholly-owned subsidiaries: PSEG Global Inc. (Global), which
develops, acquires, owns and operates electric generation and distribution
facilities and engages in power production and distribution, including wholesale
and retail sales of electricity, in selected domestic and international markets;
PSEG Resources Inc. (Resources), which invests in energy-related financial
transactions and manages a diversified portfolio of investments including
leveraged leases, leveraged buyout (LBO) funds, limited partnerships and
marketable securities; and PSEG Energy Technologies Inc. (Energy Technologies),
an energy management company that constructs, operates and maintains heating,
ventilating and air conditioning (HVAC) systems for, and provides energy-related
engineering, consulting and mechanical contracting services to, industrial and
commercial customers in the Northeastern and Middle Atlantic United States.
Energy Holdings also has a finance subsidiary, 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. Energy Holdings is also the parent of
Enterprise Group Development Corporation (EGDC), a nonresidential real estate
property management business and has been conducting a controlled exit from the
real estate business since 1993.
OVERVIEW OF 1999 AND FUTURE OUTLOOK
The electric and gas utility industries in the United States and around
the world continue to experience significant change. Deregulation,
restructuring, privatization and consolidation are creating opportunities and
risks for PSEG, PSE&G, Power and Energy Holdings. At the same time, competitive
pressures are increasing.
Following the passage of the Energy Competition Act, the BPU rendered its
summary decision relating to PSE&G's rate unbundling, stranded costs and
restructuring proceedings (Summary Order) and subsequently issued its Final
Order in these matters. The New Jersey Electric Discount and Energy Competition
(Energy Competition
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Act), the BPU's Summary Order and Final Order and the related BPU proceedings
are referred to as the Energy Master Plan Proceedings. These proceedings opened
the New Jersey energy markets to competition by allowing all New Jersey retail
electric customers to select their electric supplier commencing August 1, 1999
and all New Jersey retail gas customers to select their gas supplier commencing
January 1, 2000.
In October and November 1999, appeals of the Final Order and of the BPU's
order approving PSE&G's petition relating to the proposed securitization
transaction for an irrevocable Bondable Stranded Costs Rate Order (Finance
Order) were filed in the Appellate Division of the New Jersey Superior Court on
behalf of several customers. While PSEG and PSE&G believe that the appeals are
without merit, no assurances can be given at this time as to the timing or
outcome of these proceedings. Accordingly, neither PSEG nor PSE&G are able to
predict whether such appeals will have a material adverse effect on their
financial condition, results of operations or cash flows.
As a result of the Summary Order, PSE&G concluded that it no longer met
the requirements of Statement of Financial Accounting Standards (SFAS) 71,
"Accounting for the Effects of Certain Types of Regulation" (SFAS 71), for the
electric generation portion of its business. As a result, PSE&G recorded an
extraordinary charge to earnings of $804 million, net of tax, which reflects the
impairment of PSE&G's electric generation-related assets calculated in
accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" (SFAS 121). In addition to the
impairment of PSE&G's electric generating stations, the extraordinary charge
consisted of various accounting adjustments to reflect the absence of cost of
service regulation in the electric generation portion of the business in the
future. The adjustments primarily related to materials and supplies, general
plant items and liabilities for certain contractual and environmental
obligations.
For further discussion of the Energy Master Plan Proceedings, including
the appeals, the related extraordinary charge to earnings and securitization,
see Note 2. Regulatory Issues and Note 3. Extraordinary Charge and Other
Accounting Impacts of Deregulation of Notes and Liquidity and Capital Resources.
As set forth in the Final Order, PSE&G has been directed to sell all of
its electric generation-related assets and all associated rights and liabilities
to a separate corporate entity to be owned by PSEG. The Final Order specifies a
purchase price of $2.443 billion plus the book value of PSE&G's other
generation-related assets, including materials, supplies and fuel. As a result,
PSEG organized Power to acquire and manage PSE&G's electric generation-related
assets. Assuming a favorable outcome of the appeals, PSEG and PSE&G expect that
the transfer of such assets will occur later in 2000. Prior to the execution of
such transfer, Power must obtain approval from the New Jersey Department of
Environmental Protection (NJDEP) to transfer certain liabilities and the
Pennsylvania Public Utility Commission (PPUC) to transfer PSE&G's assets in
Pennsylvania. In September 1999, the Federal Energy Regulatory Commission (FERC)
approved PSE&G's proposed sale of its generating units to Power. In December
1999, FERC approved exempt wholesale generator (EWG) status for Fossil and
Nuclear. In February 2000, the Nuclear Regulatory Commission (NRC) gave approval
to transfer PSE&G's nuclear licenses to Nuclear, conditioned upon BPU approval.
The Final Order requires PSE&G to provide, through July 31, 2002, basic
generation service (BGS) for all customers who do not select a different
supplier. PSE&G is also required to provide BGS for customers whose third party
suppliers (TPS) are not able to satisfy their obligations. Once the
generation-related asset sale to Power is complete, pursuant to a contractual
relationship, Power will provide PSE&G with the energy and capacity required to
meet its BGS and off-tariff rate agreement (OTRA) obligations. BGS will be
competitively bid for the year beginning August 1, 2002 and thereafter.
PSE&G's earnings and, following the anticipated sale of generation-related
sale to Power, Power's earnings, will be exposed to the risks of the competitive
wholesale electricity market to the extent that Power has to purchase energy
and/or capacity or generate energy to meet its obligations to supply power to
PSE&G at market prices or costs, respectively, which approach or exceed the BGS
contract rate. To mitigate this risk, Power's policy will be to use derivatives,
consistent with its business plans and prudent practices and build and purchase
additional capacity in the PJM and surrounding regions. This risk will be
further mitigated due to customer migration from BGS to TPS. Power will also
participate in the competitive wholesale electricity market for other items such
as energy, capacity and ancillary services.
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The Energy Master Plan Proceedings have dramatically reshaped the utility
industry in New Jersey and have directly affected how PSEG will conduct
business, and therefore, its financial prospects in the future. PSEG has
realigned its organizational structure to address the competitive environment
brought about by the deregulation of the electric generation industry in New
Jersey and the Northeast. PSEG has been engaged in the competitive energy
business for a number of years through certain of its unregulated subsidiaries;
however, competitive businesses now constitute a much larger portion of PSEG's
activities. It is expected that by July 31, 2003, the end of the transition
period under the Energy Master Plan Proceedings, PSEG's unregulated subsidiaries
(Energy Holdings and Power) will contribute between 65% and 75% of PSEG's
earnings as compared to 1999 when PSE&G comprised approximately 90% of PSEG's
earnings, excluding the extraordinary charge. Additionally, PSEG will be more
dependent on cash flows generated from its unregulated operations for its
capital needs. As the unregulated portion of the business continues to grow,
financial risks and rewards will be greater, financial requirements will change
and the volatility of earnings and cash flows will increase.
In 1999, PSE&G's operations were highlighted by the commencement of the
transition into a competitive, deregulated environment. This included the
discontinuation of SFAS 71 for the electric generation portion of PSE&G's
business, the start of customer choice, the implementation of the initial 5%
electric rate reduction and changes to customers' bills.
In 1999, Energy Holdings continued to implement its strategy to develop
its business through international expansion as Global made its first
investments in Europe with a major stake in several generation projects in Italy
and plans to build a combined heat-power facility in Poland. Global also
continued its growth in Latin America through the acquisition of a majority
interest in electric distribution companies in Chile and Peru and completing
financing for a power plant in Argentina. Additionally, Global acquired a
majority stake in a generation facility in India and is building two 1,000
megawatt (MW) plants in Texas. Resources also continued its investment strategy
with its investments in several leveraged leases on energy-related assets.
Going forward, PSEG expects to continue to pursue its strategies to grow
its family of energy-related businesses as well as consider opportunities for
expansion through business combinations. More emphasis will be placed on finding
opportunities for expansion outside of its traditional utility services and
markets. Power's business strategy is to size its fleet of generation assets to
take advantage of market opportunities in the Northeast U.S., while seeking to
increase its value and manage commodity price risk through its wholesale trading
activity. PSE&G's transmission and distribution objective is to provide
cost-effective, high quality, reliable service. PSEG has positioned Energy
Holdings as a major part of its planned growth strategy. In order to achieve
this strategy, Global will focus on generation and distribution investments
within targeted high-growth regions of the worldwide energy market. Resources
will utilize its market access, industry knowledge and transaction structuring
capabilities to expand its energy-related financial investment portfolio. Energy
Technologies will continue to provide HVAC contracting and other energy-related
services to industrial and commercial customers in the Northeastern and Middle
Atlantic United States.
To the extent that the discussion that follows reports on business
conducted under full monopoly regulation of the utility businesses, it must be
understood that such businesses have changed due to the deregulation of the
electric generation and natural gas commodity sales businesses. Past results are
not an indication of future business prospects or financial results.
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RESULTS OF OPERATIONS
EARNINGS (LOSSES)
----------------------------
YEAR ENDED
DECEMBER 31,
----------------------------
1999 1998 1997
----- ----- -----
(MILLIONS OF DOLLARS)
PSE&G, Before Extraordinary Item $ 644 $ 593 $ 513
PSE&G Extraordinary Item (804) -- --
----- ----- -----
Total PSE&G (160) 593 513
Energy Holdings 83 51 47
PSEG* (4) -- --
----- ----- -----
Total PSEG $ (81) $ 644 $ 560
===== ===== =====
CONTRIBUTION TO EARNINGS PER SHARE
(BASIC AND DILUTED)
----------------------------
YEAR ENDED
DECEMBER 31,
----------------------------
1999 1998 1997
----- ----- -----
PSE&G, Before Extraordinary Item $2.93 $2.57 $2.21
PSE&G Extraordinary Item (3.66) -- --
----- ----- -----
Total PSE&G (0.73) 2.57 2.21
Energy Holdings 0.38 0.22 0.20
PSEG* (0.02) -- --
----- ----- -----
Total PSEG $(0.37) $2.79 $2.41
===== ===== =====
* Interest on certain financing transactions.
In 1999, PSE&G recorded an extraordinary charge to earnings of $804
million, net of tax, as a result of the BPU's Summary Order in the Energy Master
Plan Proceedings. For further discussion, see Note 3. Extraordinary Charge and
Other Accounting Impacts of Deregulation of Notes. Excluding that extraordinary
charge, basic and diluted earnings per share of Common Stock were $3.29 in 1999,
representing an increase of $0.50 per share, or 18% from 1998.
Excluding the extraordinary charge, PSE&G's contribution to earnings per
share of Common Stock in 1999 increased $0.36 from 1998, including $0.14 of
accretion as a result of PSEG's stock repurchase program. This increase was
primarily due to increased sales of gas and electricity resulting from favorable
weather conditions in 1999 augmented by positive economic factors in New Jersey
and profits realized from wholesale energy activities. In addition,
generation-related depreciation expenses were lower for a portion of 1999 as a
result of the SFAS 121 impairment write-down, partially offset by changes in
depreciation and capitalization policies stemming from the discontinuation of
SFAS 71. The increase in earnings was also partially offset by the 5% electric
rate reduction, beginning August 1, 1999, associated with the BPU's Final Order,
coupled with higher operating and maintenance expenses, including higher
transmission, distribution and wholesale energy costs, than those incurred in
1998.
Energy Holdings' contribution to earnings per share of Common Stock in
1999 increased $0.16 from 1998 primarily due to the better overall performance
of Resources, Global and Energy Technologies and $0.02 of accretion due to
PSEG's stock repurchase program. The improvements were attributable largely to
Resources which benefited from an upturn in the equity markets as compared to
1998. In addition, Energy Holdings' results reflect Global's gain from the sale
of its interest in a co-generation facility partially offset by impairment
write-downs of other investments in Global's portfolio.
PSE&G's contribution to earnings per share of Common Stock in 1998
increased $0.36 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
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third quarter of 1998 and wholesale power activities of PSE&G. These increases
were partially offset by lower gas sales in 1998 due to mild winter weather
during the 1998 heating seasons.
Energy Holdings' contribution to earnings per share in 1998 increased
$0.02 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.
PSE&G -- REVENUES
The presentation of revenues on the Consolidated Statements of Income has
changed effective August 1, 1999, due to the change in regulation as required by
the Final Order. PSE&G's generation business has been deregulated and, starting
August 1, 1999, earns revenues by providing the energy and capacity necessary to
meet PSE&G's BGS obligations as well as through sales of wholesale energy,
capacity and ancillary services. PSE&G's transmission and distribution
businesses remain regulated and will continue to earn revenues based on its
approved tariffs under which it provides transmission and distribution services
for its residential, commercial and industrial customers in New Jersey. The
rates charged for transmission and distribution are regulated by FERC and the
BPU, respectively. Revenues are also generated from a variety of other
activities such as sundry sales, wholesale transmission services and other
miscellaneous services. For more information, see Note 1. Organization, Basis of
Presentation and Summary of Significant Accounting Policies and Note 2.
Regulatory Issues of Notes. Because historical information is not available for
the Electric Generation and Electric Transmission and Distribution Revenues,
variances in Electric Revenues will be discussed in the aggregate. For estimates
of historical Electric Generation and Electric Transmission and Distribution
Revenues, see Note 16. Financial Information by Business Segments of Notes.
Certain of the below listed year-to-year variances did not impact earnings
as there was an offsetting variance in expense. To the extent fuel revenue and
expense flowed through the Electric Levelized Energy Adjustment Clause (LEAC)
through July 31, 1999, the Levelized Gas Adjustment Clause (LGAC), the Societal
Benefits Clause (SBC) or the non-utility generation market transition charge
(NTC) mechanisms, variances in certain revenues and expenses offset and thus had
no effect on earnings. These include base fuel revenues through July 31, 1999,
demand side management (DSM) revenue and Remediation Adjustment Charge (RAC)
revenue. On August 1, 1999, the LEAC mechanism was eliminated as a result of the
Final Order. This is likely to increase earnings volatility since PSE&G and
Power now bear the full risks and rewards of changes in nuclear and fossil
generating fuel costs and replacement power costs. See Note 2. Regulatory Issues
and Note 4. Regulatory Assets and Liabilities of Notes for a discussion of LEAC,
LGAC, SBC, NTC, RAC and DSM and their status under the Energy Master Plan
Proceedings.
ELECTRIC
Revenues increased $164 million or 4% in 1999 as compared to 1998
primarily due to favorable weather conditions in 1999 augmented by positive
economic factors in New Jersey. These factors increased both generation and
transmission and distribution revenues; however, the increase in generation
revenues was partially offset by the 5% rate reduction, effective on August 1,
1999, which decreased generation revenues by approximately $80 million through
December 31, 1999. The increase was also due to stronger profits realized from
wholesale energy activities than in 1998. Also, higher DSM revenues in 1999 than
in 1998 contributed to increased distribution revenues.
Customers selecting a third party supplier (TPS) will result in lower BGS
revenues. However, it also creates the opportunity for the generation business
to mitigate the price risk of the BGS contract and to sell available energy and
capacity into the wholesale market. The degree to which net generation revenues
will be impacted will depend on the volume of sales and the amount by which
market prices vary from prices under the BGS contract.
Electric revenues increased $113 million or 3% in 1998 as compared to
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 13. Income Taxes
of Notes. Collection of New Jersey Gross Receipts and Franchise Tax (NJGRT) was
reflected in revenue and expense in prior
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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.
GAS
Revenues increased $158 million or 10% in 1999 as compared to 1998. The
increase was primarily due to increased revenues from gas service contracts and
higher sales to large commercial and industrial customers than in 1998.
Additionally, more favorable weather in 1999 contributed to the increases. The
potential loss of residential customers due to the opening of competition in
2000 could reduce future revenues.
Gas revenues decreased $378 million or 20% in 1998 as compared to 1997.
The decrease in 1998 is primarily due to lower therm sales resulting from milder
winter weather in 1998 and energy tax reform (see Note 13. Income Taxes of
Notes).
PSE&G -- EXPENSES
ELECTRIC ENERGY COSTS
Electric Energy Costs increased $13 million or 1% in 1999 as compared to
1998. The increase was primarily due to an increase in electric sales volumes
due to hot summer weather in 1999. Beginning in August 1999, lower prices for
power purchases helped to offset the increase.
Electric Energy Costs increased $36 million or 4% in 1998 as compared to
1997. This increase 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.
Due to the elimination of the LEAC on August 1, 1999, these historical
trends can not be considered an indication of future Electric Energy Costs.
Given the elimination of the LEAC, the lifting of the requirements that electric
energy offered for sale in the PJM not exceed the variable cost of producing
such energy (capped at $1,000 per megawatt-hour), the absence of a PJM price cap
in situations involving emergency purchases and the potential for plant outages,
price movements could have a material impact on PSEG's and PSE&G's financial
condition, results of operations or net cash flows.
GAS COSTS
Gas Costs increased $68 million or 7% in 1999 as compared to 1998 due to
higher sales to large commercial and industrial customers and increased sales of
gas resulting from colder weather in the first and second quarters of 1999 than
in 1998.
Gas Costs decreased $131 million or 12% in 1998 as compared to 1997. This
decrease 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 $188 million or 14% in 1999 as
compared to 1998. The increase was primarily due to the change in the
capitalization policy for PSE&G's electric generation business (see Note 1.
Organization, Basis of Presentation and Summary of Significant Accounting
Policies of Notes) and higher costs related to wholesale power activities. The
change in capitalization policy will result in significant increases in future
Operation and Maintenance expenses associated with the electric generation
business. This increase in Operation and Maintenance expense was $57 million
during 1999 (commencing with the change in policy effective April 1, 1999).
These increases will be partially offset in the future by lower depreciation
expense due to the lower level of generation-related capitalized costs.
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In addition, there were higher information technology costs, including
costs related to Year 2000 readiness, and higher material and outside services
costs in 1999 attributable to several factors, including restoration work
required in the wake of Tropical Storm Floyd and the flooding and damage it
caused. Also contributing to the increase were higher costs associated with the
preparation for deregulation and higher DSM recovery of previously deferred
expenses in 1999 than in 1998.
Operation and Maintenance expense increased $78 million or 6% in 1998 as
compared to 1997. This increase 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.
Through July 31, 1999, DSM costs were recoverable through the demand side
adjustment factor of the LEAC and recorded in both expense and revenue and
therefore, had no direct effect on earnings.
DEPRECIATION AND AMORTIZATION
Depreciation and Amortization expense decreased $120 million or 18% in
1999 as compared to 1998 and increased $42 million or 7% in 1998 as compared to
1997. The 1999 decrease was due to lower net book value balances of PSE&G's
generation-related assets which were reduced as a result of the impairment
write-down recorded pursuant to SFAS 121. These decreases were partially offset
by higher depreciation rates for generation-related assets beginning April 1,
1999 due to the change in depreciation policy for generation-related assets and
by higher depreciation expense related to capital additions to the transmission
and distribution business.
Despite the higher depreciation rates for generation-related assets, the
net decrease in generation-related depreciation expense will continue due to the
reduced asset balances. Additionally, beginning in 2000, electric distribution
asset-related depreciation will be further reduced due to the amortization of
the excess electric distribution depreciation reserve over the period from
January 1, 2000 to July 31, 2003. See Note 4. Regulatory Assets and Liabilities
of Notes for a discussion of the amortization schedule. Once the securitization
transaction is complete, the regulatory asset recorded for PSE&G's stranded
costs will be amortized with such amortization expense partially offsetting
these decreases.
INCOME TAXES
Income Taxes increased $106 million or 26% in 1999 as compared to 1998.
The increase is primarily due to higher pre-tax operating income.
Income Taxes increased $148 million or 58% in 1998 as compared to 1997.
This increase was primarily due to the addition 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
13. Income Taxes of Notes.
TAXES OTHER THAN INCOME TAXES
Taxes Other Than Income Taxes include the Transitional Energy Facility
Assessment (TEFA) and the New Jersey Gross Receipts and Franchise Tax (NJGRT).
Taxes Other Than Income Taxes decreased $14 million or 7% in 1999 as compared to
1998 and $398 million or 66% in 1998 as compared to 1997. The 1999 decrease is
due to New Jersey energy tax reform and the five-year phase out of the TEFA
commencing in January 1999. For 1998, the amount represents TEFA unit-based
taxes while the 1998 amount represents NJGRT unit-based taxes. The TEFA unit tax
rates are approximately 30% of the NJGRT unit tax rates. See Note 13. Income
Taxes of Notes for other impacts of New Jersey energy tax reform.
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SETTLEMENT OF SALEM LITIGATION
In January and February 1997, the settlement of litigation by the
co-owners of Salem against PSE&G related to the 1995 shutdown of Salem Nuclear
Station which reduced Other Income and Deductions by $82 million, or $53
million, net of tax, was recorded. For a further discussion of the Salem
settlement, see Note 11. Commitments and Contingent Liabilities of Notes.
ENERGY HOLDINGS -- EARNINGS (LOSSES)
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
----- ----- -----
(MILLIONS OF DOLLARS)
EARNINGS BEFORE INTEREST, TAXES AND
PREFERRED DIVIDENDS:
Resources $ 169 $ 135 $ 134
Global 117 72 46
Energy Technologies (8) (15) (25)
Other (7) (3) (9)
----- ----- -----
Sub-total 271 189 146
INTEREST, TAXES AND PREFERRED DIVIDENDS (188) (138) (99)
----- ----- -----
EARNINGS $ 83 $ 51 $ 47
===== ===== =====
Energy Holdings' earnings in 1999 were $83 million, an increase of $32
million compared to 1998. The increase in Energy Holdings' earnings was
primarily due to the better overall performance of Resources, Global and Energy
Technologies. The improvements were attributable largely to Resources which
benefited from an upturn in the equities markets as compared to 1998 and
additionally from income from new capital leases. In addition, Energy Holdings'
results reflect Global's gain from the sale of its interest in a co-generation
facility and income from new investments in distribution assets in Chile and
Peru, partially offset by write-downs of other investments in Global's portfolio
and by higher expenses associated with project development. Energy Technologies'
losses narrowed due to higher revenues from recent acquisition activities
partially offset by higher operating expenses.
Energy Holdings' earnings in 1998 were $51 million, a $4 million increase
as compared to 1997. This increase in Energy Holdings' earnings was primarily
attributed to PSEG Resources due to the strong overall performance of its
investment portfolio. Although Global's 1998 operating earnings increased due to
the investments made in three Latin American distribution companies in 1997, the
increase was more than offset by the negative impact of the loss on the sale of
its investment in an electric generating facility located in Colombia and higher
financing costs due to investing activities.
ENERGY HOLDINGS -- REVENUES
Revenues increased $167 million from $440 million to $607 million in 1999
as compared to 1998. The increase was due to an increase of $34 million at
Resources due to higher income from financial investments and higher income from
new capital lease investments, a $115 million increase in revenues at Energy
Technologies due to the addition of revenues from acquisitions of various HVAC
companies in 1999 and a $18 million increase in revenues at Global primarily due
to improvement in revenues from domestic generation assets as well as the
addition of revenues from the distribution companies in Chile and Peru acquired
in June 1999. Global's revenue includes its share of the net income from joint
ventures recorded under the equity method of accounting (see Note 1.
Organization, Basis of Presentation and Summary of Significant Accounting
Policies of Notes).
Revenues increased $98 million from $342 million to $440 million in 1998
as compared to 1997. This increase was primarily due to an increase in revenues
at Energy Technologies of $67 million from the acquisition of a mechanical
contracting firm which added $58 million in revenue. In addition, Global's
revenues increased $33 million due to the addition of revenue from investments
made in three Latin American distribution companies in 1997.
Global is a 50% partner in six generating facilities in California.
Beginning in 2000, revenue from these facilities will be reduced due to lower
energy prices to be paid by the purchaser under the energy contracts
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associated with the plants. Four of the facilities in which Global has an
interest will change from fixed energy pricing by December 31, 2000, with the
remainder changing in 2001. Global's share of annual income before income taxes
from these facilities is projected to decrease by approximately $30 million to
$35 million when all such contracts reflect the lower energy pricing. Global's
projects in operation, construction and development are expected to offset this
revenue shortfall; however, no assurances of that result can be given.
ENERGY HOLDINGS -- EXPENSES
OPERATION AND MAINTENANCE
Operation and Maintenance expense increased $120 million from $249 million
to $369 million in 1999 as compared to 1998. The increase was primarily due to
higher operating expenses from the entities acquired by Energy Technologies in
1999 and, to a lesser degree, by higher development expenses at Global.
Operation and Maintenance expense increased $53 million from $196 million
to $249 million in 1998 as compared to 1997. The increase was primarily due to
the acquisition of a mechanical contracting firm by Energy Technologies in
January 1998 which added $55 million in operating expenses.
INTEREST EXPENSE AND PREFERRED DIVIDENDS
Interest Expense and Preferred Dividends increased $10 million from $110
million to $120 million in 1999 as compared to 1998. The increase was
primarily due to financing 1999 investment and acquisition activities.
Interest Expense and Preferred Dividends increased $37 million from $73
million to $110 million in 1998 as compared to 1997. The increase was
primarily due to financing 1998 investment and acquisition activities.
INCOME TAXES
Income Taxes increased $39 million from $30 million to $69 million in 1999
as compared to 1998. The increase was primarily due to higher pre-tax income
for the year ended December 31, 1999.
Income Taxes increased $4 million from $26 million to $30 million in 1998
as compared to 1997. The increase was primarily due to higher pre-tax income
for the year ended December 31, 1998.
ENERGY HOLDINGS -- OTHER INCOME (LOSS)
Other Income increased $34 million from a loss of $1 million to income of
$33 million in 1999 as compared to 1998 and decreased $2 million to a loss of $1
million in 1998 from income of $1 million in 1997. The 1999 increases were
primarily due to a gain on the sale of Global's interest in a co-generation
facility as discussed above, partially offset by write-downs on other
investments, as discussed below.
In the third quarter of 1999, Global completed a comprehensive review of
its existing assets and development activities focusing on rationalizing the
portfolio to ensure efficient capital deployment. Global's management has
decided that it will not commit additional resources to its investments in
Thailand and the Philippines and will focus its current Asian development
activities in China. As a result, Global recorded an $8 million write-down, net
of tax, to adjust the carrying value of such assets to net realizable value. In
addition, the projected substantial decline in revenue, discussed above, related
to energy contracts for six generation facilities in California resulted in a
$19 million write-down, net of tax, of Global's equity investment in such
facilities.
PSEG -- PREFERRED SECURITIES DIVIDEND REQUIREMENTS OF SUBSIDIARIES
Preferred Securities Dividend Requirements increased $14 million or 18% in
1999 as compared to 1998 and $21 million or 36% in 1998 as compared to 1997. The
increases were due to the issuance of trust preferred securities in aggregate
principal amount of $525 million in January, June and July 1998.
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LIQUIDITY AND CAPITAL RESOURCES
PSEG AND PSE&G
PSEG is a holding company and, as such, has no operations of its own. The
following discussion of PSEG's liquidity and capital resources is on a
consolidated basis, noting the uses and contributions of PSEG's two direct
operating subsidiaries in operation in 1999, PSE&G and Energy Holdings. In 2000,
Power is expected to be an operating subsidiary which will impact PSEG's
liquidity and capital resources.
As of December 31, 1999, PSEG's capital structure consisted of 40.9%
common equity, 46.8% long-term debt and 12.3% preferred stock and other
preferred securities. 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. As of December 31, 1999, PSE&G's capital structure consisted of
49.8% common equity, 41.1% long-term debt and 9.1% preferred stock and other
preferred securities. As of December 31, 1998, PSE&G's capital structure
consisted of 49.0% common equity, 43.6% long-term debt and 7.4% preferred stock
and other preferred securities.
On September 17, 1999, the BPU issued its Finance Order which authorized,
among other things, the imposition of a non-bypassable transition bond charge on
PSE&G's customers; the sale of PSE&G's property right in such charge created by
the Energy Competition Act to a bankruptcy-remote financing entity; the issuance
and sale of $2.525 billion of transition bonds by such entity as consideration
for such property right, including an estimated $125 million of transaction
costs; and the application by PSE&G of the transition bond proceeds to retire
outstanding debt and/or equity. Assuming a favorable outcome of the previously
discussed appeals, PSEG and PSE&G expect such sale of transition bonds and the
receipt of proceeds in 2000.
For a discussion of the pending appeals of the Final Order and the Finance
Order, see Overview of 1999 and Future Outlook and Note 2. Regulatory Issues of
Notes.
Both the right of PSE&G to receive the bondable transition charge pursuant
to the securitization transaction and the proceeds from the transfer of its
generation-related assets to Power are property subject to the lien of PSE&G's
First and Refunding Mortgage (Mortgage). All such property will be released from
the lien of the Mortgage at the time of sale. In accordance with the provisions
of the Mortgage, the net proceeds from the sale of such released property will
be deposited with the Trustee.
The Mortgage authorizes PSE&G to exercise one or more of the following
options as to the application of proceeds of such released property, at its sole
discretion:
1. Withdraw funds for corporate use by utilizing additions and
improvements. (Option 1)
2. Direct the Trustee to invest the proceeds in U.S. Government
Securities. (Option 2)
3. Direct the Trustee to purchase its Mortgage Bonds at the lowest
prices obtainable, at or below par value. If the Trustee is unable
to purchase sufficient Mortgage Bonds to exhaust such proceeds
deposited with it, the balance may be applied on a pro rata basis
towards the redemption of eligible series of Mortgage Bonds
outstanding at par. (Option 3)
At December 31, 1999, PSE&G had a total of $3.727 billion of Mortgage
Bonds outstanding, of which $2.935 billion are taxable registered Mortgage Bonds
subject to the special redemption provisions outlined in Option 3 (Redeemable
Bonds). $623 million of these Redeemable Bonds are scheduled to mature within
twelve months. $777 million of the Mortgage Bonds outstanding are tax-exempt
Pollution Control Bonds and $15 million are two series of taxable coupon
Mortgage Bonds due 2037 (Coupon Bonds). Neither the Pollution Control Bonds nor
the Coupon Bonds are subject to the special redemption provisions outlined in
Option 3.
PSE&G has not yet made a final decision as to the amount and the manner in
which it will retire or redeem its Mortgage Bonds. Such a decision will be made
on or about the time the proceeds from securitization and the sale of the
generation-related assets to Power are deposited with the Trustee, on the basis
of market conditions and other
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factors existing at that time. However, based on current information, a likely
utilization of the options available to PSE&G, as noted above, could be as
follows:
A. Withdraw $2.4 billion of net proceeds from securitization under
Option 1, above. These proceeds would be used to:
i. Tender for all Coupon Bonds;
ii. Redeem $123.5 million of Pollution Control Bonds now
redeemable;
iii. Retire up to an additional $100 million of Redeemable Bonds
through various means, such as maturities, open market
purchases and make-whole calls;
iv. Reduce PSE&G's short-term debt; and
v. Reduce PSE&G common and/or preferred equity with the balance
of proceeds, if any.
B. Apply proceeds ($2.4 billion to $2.8 billion) from the
generation-related asset sale to Power under Option 3 against any
remaining taxable Mortgage Bonds outstanding.
As previously reported, in anticipation of securitization, PSEG's Board of
Directors has authorized the repurchase of up to an aggregate of 30 million
shares of Common Stock in the open market. At December 31, 1999, PSEG had
repurchased approximately 15.8 million shares of Common Stock, at a cost of
approximately $607 million, under this authorization. The repurchased shares
have been held as treasury stock or used for other corporate purposes. In
December 1999, PSEG entered into a Forward Purchase Agreement with an
intermediary, who has purchased and held shares on behalf of PSEG. The
repurchase of these shares will not be reflected on PSEG's balance sheet until
settlement of the transaction which is expected in the second quarter of 2000.
Market conditions and the availability of alternative investments will dictate
if and when more shares of Common Stock will be repurchased under this
authorization.
Going forward, cash generated from PSE&G's regulated business is expected
to provide the majority of the funds for PSE&G's business needs. Following
Power's initial external financing, Power's capital needs will be dictated by
its growth strategy and will be funded with cash generated from operations.
Energy Holdings' growth will be funded through external financings, equity
infusions from PSEG and cash generated from operations.
Dividend payments on Common Stock were $2.16 per share and totaled
approximately $474 million and $499 million during the years ended December 31,
1999 and 1998, respectively. PSEG has not increased its dividend rate in eight
years in order to retain additional capital for reinvestment and to reduce its
payout ratio as earnings grow. 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 paid common stock dividends of $629 million and $503 million to PSEG
during the years ended December 31, 1999 and 1998, respectively. These amounts
were used to fund PSEG's Common Stock dividends, and in 1999, to support a
portion of PSEG's stock repurchase program.
PSEG believes that it will have adequate earnings and cash flow in the
future from PSE&G and Power to maintain dividends at the current level. However,
the amounts and dates of such dividends on Common Stock declared in the future
will necessarily be dependent upon PSEG's future earnings, cash flows, financial
requirements and other factors. Earnings and cash flows required to support the
dividend will become more volatile as PSEG's business changes from one that is
principally regulated to one that is principally competitive.
PSEG and PSE&G have each issued Deferrable Interest Subordinated
Debentures in connection with the issuance of their respective tax deductible
preferred securities. If payments on those Deferrable Interest Subordinated
Debentures are deferred, or PSEG or PSE&G defaults on the applicable indenture
related thereto or its guarantee thereof, neither PSEG nor PSE&G may pay any
dividends on its common or preferred stock until such default is cured.
Currently, there has been no deferral nor default.
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, provided
that: (1) PSEG would not permit Energy Holdings' non-utility investments to
exceed 20% of PSEG's consolidated assets without prior notice to the BPU; (2)
the PSE&G Board of Directors would provide an annual certification that the
business and financing plans of Energy Holdings will not
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adversely affect PSE&G; (3) PSEG would (a) limit debt supported by the minimum
net worth maintenance agreement between PSEG and PSEG Capital Corporation (PSEG
Capital) to $650 million and (b) make a good-faith effort to eliminate such
support by April 2003; and (4) Energy Holdings would pay PSE&G an affiliation
fee of up to $2 million a year to be applied by PSE&G to reduce utility rates.
As a result of the final outcome and the accounting impacts resulting from
the deregulation of the electric generation business in New Jersey, PSEG and
PSE&G do not believe that the Focused Audit provision requiring notification to
the BPU if PSEG's non-utility assets exceed 20% of its consolidated assets (such
investments at December 31, 1999 were approximately 22% of PSEG's consolidated
assets) remains appropriate and believe that modifications will be required. The
Final Order addressed the Focused Audit, noting that PSEG's non-regulated assets
would likely exceed 20% of total PSEG assets once the utility's generating
assets were sold to a non-regulated subsidiary and directed PSE&G to file a
petition with the BPU to maintain the existing regulatory parameters or to
propose modifications to the Focused Audit order no later than the end of the
first quarter of 2000. The Final Order also recognized that, due to significant
changes in the industry and, in particular, PSEG's corporate structure as a
result of the Final Order, modifications to or relief from the Focused Audit
might be warranted. For discussion of the Energy Master Plan Proceedings, see
Overview of 1999 and Future Outlook and Note 2. Regulatory Issues of Notes.
Regulatory oversight by the BPU to ensure that there is no harm to utility
customers from PSEG's non-utility investments is expected to continue. PSEG and
PSE&G believe that these issues will be satisfactorily resolved, although no
assurances can be given. In addition, if PSEG were no longer exempt under the
Public Utility Holding Company Act (PUHCA), PSEG and its subsidiaries would be
subject to additional regulation by the SEC with respect to financing and
investing activities, including the amount and type of non-utility investments.
PSEG believes, however, that this would not have a material adverse impact on
PSEG and its subsidiaries.
ENERGY HOLDINGS
As noted above, it is expected that Global and Resources will provide
earnings and cash flow for long-term growth for Energy Holdings and PSEG.
Resources' investments are designed to produce immediate earnings and cash flow
that enable Global and Energy Technologies to focus on longer investment
horizons.
Energy Holdings plans to continue the growth of Global and Resources
through further investments made by these subsidiaries. Energy Holdings will
assess the growth prospects and opportunities for Energy Technologies before
committing additional capital. Investing activity in 2000 will be subject to
periodic review and revision and may vary depending on the opportunities
presented. During the next five years, Energy Holdings' will need significant
capital to fund its planned growth. Factors affecting actual expenditures and
investments include availability of capital and suitable investment
opportunities, market volatility and economic trends. 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.
In June 1999, PSEG contributed approximately $200 million of additional
equity to Energy Holdings, which was used by Energy Holdings to pay down
short-term debt that was used to acquire its interest in the Chilean and
Peruvian distribution companies.
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.
It is Global's policy to limit its financial exposure to each project and
to mitigate development and operating risk, including fuel and foreign currency
exposure, through contracts. In addition, the project loan agreements are
structured on a non-recourse basis. Further, Global structures project financing
so that a default under one project's loan agreement will have no effect on the
loan agreements of other projects or the debt of 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 reasonable interest rates may affect PSEG's and
Energy Holdings' financial condition, results of operations and cash flows.
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GLOBAL
In August 1999, Global sold its 50% partnership interest in a 137 MW
gas-fired combined-cycle co-generation facility in Newark, New Jersey and
received net cash proceeds of approximately $70 million resulting in an
after-tax gain of approximately $40 million.
In June 1999, Global and a partner acquired 90% of a Chilean distribution
company, which at the time owned a 37% interest in a distribution company in
Peru, together providing electric and gas service to approximately one million
customers. The acquisition was made in a 50/50 joint venture arrangement.
Global's equity investment was approximately $268 million, including fees and
closing costs. In addition, Global's portion of the acquisition was financed
with $160 million of debt that is non-recourse to Global, Energy Holdings and
PSEG, which is consolidated on the Global balance sheet. Global and its partner
later acquired additional interests in the Peruvian and Chilean distribution
companies resulting in total combined ownership shares of approximately 85% and
99%, respectively. Global's investment in connection with the additional
Peruvian distribution company acquisition was approximately $108 million.
RESOURCES
In 1999, Resources, through the sale of a portion of its equity interests
in an LBO fund, the early buy-outs of three leveraged leases and the sale of its
interest in a limited partnership, received cash proceeds totaling approximately
$235 million resulting in an after-tax gain of approximately $38 million.
In 1999, Resources invested approximately $380 million in six leveraged
lease transactions of energy-related assets: gas distribution networks in the
Netherlands, cogeneration plants in Germany, a generation facility in the United
States and a liquefied natural gas storage facility in the United States.
ENERGY TECHNOLOGIES
During 1999, Energy Technologies acquired six mechanical, HVAC and
building service contractors in New Jersey, Rhode Island and Virginia for a
total cost of approximately $63 million, including debt assumed.
CAPITAL REQUIREMENTS
PSE&G (INCLUDING POWER)
PSE&G has substantial commitments as part of its ongoing construction
program. PSE&G's construction program is continuously reviewed and periodically
revised as a result of changes in economic conditions, revised load forecasts,
business strategies, site changes, cost escalations under construction
contracts, requirements of regulatory authorities and laws, the timing of and
amount of electric and gas transmission and/or distribution rate changes and the
ability of PSE&G to raise necessary capital.
In 2000, Power announced that it will construct a 500 MW natural
gas-fired, combined-cycle electric generating plant at Bergen generating station
at a cost of approximately $290 million with completion expected in June 2002.
Power will also install four new combustion turbines at Burlington generating
station and two new combustion turbines at Linden generating station, adding 186
MW and 164 MW, respectively of electric generating capacity, at a cost of
approximately $155 million. The new combustion turbines are expected to be
installed and operational by July 2000.
On October 6, 1999, Power announced an agreement with Niagara Mohawk Power
Corporation (Niagara Mohawk), to purchase its 400 MW oil and gas-fired electric
generating station in Albany, New York (Albany Steam Station) for $47.5 million.
On September 30, 1999, Power announced that it has signed an agreement to
acquire all of Conectiv's interests in the Salem Nuclear Generating Station
(Salem) and the Hope Creek Nuclear Generating Station (Hope Creek) and half of
Conectiv's interest in the Peach Bottom Atomic Power Station (Peach Bottom),
totaling 544 MW for an aggregate purchase price of $15.4 million plus the net
book value of nuclear fuel at closing. For further discussion, see Note 11.
Commitments and Contingent Liabilities of Notes.
For the years ended December 31, 1999, 1998 and 1997, PSE&G had plant
additions of $468 million, $547 million and $557 million, respectively,
including Allowance for Funds Used During Construction (AFDC) and capitalized
interest of $7 million, $12 million and $15
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million, respectively. The 1999 decrease is primarily due to PSE&G's
capitalization policy change for the electric generation portion of its
business. See Note 1. Organization, Basis of Presentation and Summary of
Significant Accounting Policies of Notes for further discussion regarding the
capitalization policy change.
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 $20 million, $10 million and $28
million for the cost of plant removal (net of salvage) in 1999, 1998 and 1997,
respectively. Projected construction and investment expenditures for PSE&G from
2000 to 2004 range from approximately $350 million to $400 million per year,
excluding AFDC and capitalized interest. Power's projected construction and
investment expenditures, excluding AFDC and capitalized interest, for 2000 and
2001 are approximately $440 million and $285 million, respectively. From 2002 to
2004, Power's projected expenditures range from approximately $130 million to
$160 million per year. 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
and the expansion of existing generation sites and acquisition of other
generation sites as discussed above.
ENERGY HOLDINGS
During 1999, Energy Holdings' subsidiaries made investments totaling
approximately $963 million. These investments include acquisitions and other
investments made by Global, Resources and Energy Technologies. Projected
investment expenditures for 2000 to 2004 are approximately $700 million per
year, comprised of investments in generation and distribution facilities and
projects and leveraged lease transactions. Energy Holdings has approximately
$175 million of debt principal payments due in 2000 which are expected to be
refinanced or funded through existing credit facilities and operating cash flow.
These expenditures could be partially offset by investment liquidations.
GLOBAL
In February 2000, Global and a partner closed on project financing of $329
million for a 1,000 MW gas-fired combined-cycle electric generation facility to
be located near Odessa, Texas. The total cost of the facility is estimated to be
approximately $528 million, of which Global's investment, including loans and
guarantees, is estimated at $190 million.
In November 1999, Global announced that it plans to build a combined heat
and power plant of 220 MW of electricity and 500 MW of thermal energy capacity
utilizing circulating fluidized bed technology in Poland. Total project cost is
estimated at $320 million with commercial operation targeted for the first
quarter of 2003.
In October 1999, Global closed on the acquisition of a 70% interest in a
power project development company in Italy specializing in renewable energy. The
company currently has approximately 550 MW of power projects either in
development or under construction. Global's acquisition and equity investment
requirements over the next two years are expected to be approximately $80
million.
In August 1999, Global and its partners closed project financing for a 471
MW gas-fired combined-cycle electric generating facility in Rades, Tunisia.
Construction of the facility is expected to be completed in the summer of 2001
at a total cost of approximately $261 million. Upon completion, the facility is
expected to qualify as a foreign utility company (FUCO). Global's equity
investment for its 35% interest is expected to be approximately $27 million
including contingencies.
In June 1999, Global and a partner closed the project financing for an 830
MW gas-fired combined-cycle electric generating facility to be constructed in
San Nicolas, Argentina. The new facility will be adjacent to an existing 650 MW
facility also owned by Global and its partner. Construction began in August 1999
and is expected to be completed by 2001 at a total cost of approximately $448
million. Global's equity investment for its 33% interest, including
contingencies, is expected to be approximately $86 million.
In May 1999, Global acquired a 63% equity interest in a company which is
developing a 525 MW coal-fired electric generating facility to be constructed in
Ennore, Tamil Nadu, India. Upon scheduled completion in 2003, Global will be the
operator of the plant. The total project cost is expected to be approximately
$633 million, of
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which Global's maximum equity investment, including contingencies, is expected
to be approximately $180 million. Global plans to close financing for this
project and commence construction in the second quarter of 2000.
In April 1999, Global and a partner entered into a joint venture agreement
to develop, construct and operate a 1,000 MW gas-fired combined-cycle electric
generating facility in Guadalupe County in south central Texas. 500 MW of this
facility is expected to be operational in late 2000 and is expected to qualify
as an EWG. Global's maximum equity investment for its 50% interest is expected
to be approximately $193 million, including loans and guarantees. In October
1999, Global closed on a $312 million non-recourse project financing, consisting
of a $260 million term loan and $52 million in letter of credit facilities for
the Guadalupe facility. At the completion of construction (approximately fifteen
months), the loan will convert to a five-year term loan.
Also in April 1999, Global and a partner announced the formation of a
joint venture to construct and operate up to three gas-fired electric generating
facilities with total installed capacity of 200 MW and associated distribution
systems to serve, under contract, industrial customers in Venezuela. Global
expects the first two facilities, which are in construction, to be operational
in 2000. The total cost of these facilities is expected to be approximately $140
million and Global's equity investment, including contingencies, for its 50%
interest, is expected to be approximately $70 million. Global has been advised
that litigation has been instituted against it by a Venezuelan state-owned
electricity company, alleging that operation of one of the facilities would
damage the state-owned company's installations and that the facility does not
meet certain Venezuelan legal requirements. On February 4, 2000, the Superior
Court in Maracay, Venezuela issued an injunction prohibiting the start-up of the
plant. Global believes that all legal requirements have been met and has been
advised that the appeal of this decision is likely to be heard by the Supreme
Court of Venezuela, and a decision is expected to be rendered within 30 days of
the appeal. Settlement discussions are underway. Global cannot predict the
outcome of this matter, however, a final decision preventing operation of the
facility involved could affect the ability to complete and operate the other two
facilities.
RESOURCES
In January and February 2000, Resources invested $73 million in two
leveraged lease transactions including a gas distribution system in the
Netherlands and an electric power plant in the United States.
EXTERNAL FINANCINGS
The changes in the utility industry are attracting increased attention
from bond rating agencies which regularly assess business and financial matters
including how utility companies are meeting competition. Given the changes in
the industry and the anticipated use of securitization, attention and scrutiny
of PSEG's, PSE&G's, Power's and Energy Holdings' competitive strategies by
rating agencies will likely continue. These changes could affect the bond
ratings, cost of capital and market prices of their respective securities. 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 Liquidity and Capital Resources.
PSEG, PSE&G, Power and Energy Holdings are analyzing their future capital
and financing needs in light of securitization, the anticipated sale of
generation-related assets to Power and their business strategies. However, it is
expected that following completion of securitization and the generation-related
asset sale, PSE&G will refinance a portion of its debt and reduce its equity
level, which will not substantially alter its existing capitalization ratios.
PSEG
At December 31, 1999 and 1998, PSEG had a committed $150 million revolving
credit facility which expires in December 2002. At December 31, 1999, PSEG had
$120 million outstanding under this revolving credit facility. On September 8,
1999, PSEG entered into an uncommitted line of credit with a bank for an
unlimited amount. At December 31, 1999, PSEG had $25 million outstanding under
this line of credit.
In November 1998, PSEG issued $100 million of Extendible Notes, Series A,
due November 22, 2000. These Notes were automatically tendered to the
remarketing agent for remarketing in February 2000. The interest rate through
maturity is at the three-month London Interbank Offered Rate (LIBOR) plus 0.22%,
reset quarterly.
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Also in November 1998, PSEG issued $175 million of Extendible Notes,
Series B, due November 22, 2000. These Notes were automatically tendered to the
remarketing agent for remarketing in November 1999. The interest rate is at the
three-month LIBOR plus 0.60%, reset quarterly. These Notes will be automatically
tendered to the remarketing agent for remarketing in May 2000.
In June 1999, PSEG issued $300 million of Extendible Notes, Series C, due
June 15, 2001 with interest at the three-month LIBOR plus 0.40%, reset
quarterly. These Notes will be automatically tendered to the remarketing agent
for remarketing in March 2000. PSEG used the net proceeds to make an equity
investment in Energy Holdings and to reimburse its treasury for expenditures
made to repurchase shares of its Common Stock.
PSE&G
In addition to the petition filed with the BPU to effectuate the
securitization transaction, PSE&G will need to file petitions with the BPU for
authorization for any additional debt financing needed. PSE&G is currently
evaluating the potential uses of the proceeds of securitization (see Liquidity
and Capital Resources).
Under its Mortgage, PSE&G may issue new First and Refunding Mortgage Bonds
against previous additions and improvements and/or retired Mortgage 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, 1999, the Mortgage would
permit up to $3.9 billion aggregate principal amount of new Mortgage Bonds to be
issued against previous additions and improvements, the level of which will be
impacted by the actions ultimately taken in connection with securitization and
the sale of generation-related assets to Power. At December 31, 1999, PSE&G's
Mortgage coverage ratio was 4.8:1. 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.
On July 1, 1999, $100 million of PSE&G's 8.750% Bonds, Series Z, matured.
On November 12, 1999, PSE&G redeemed its $2.990 million of 6.9% Pollution
Control Bonds, Series C, due September 1, 2009. Also, during 1999, PSE&G
purchased $319 million of its Mortgage Bonds in the open market. On February 1,
2000, $100 million of PSE&G's 7.625% Bonds, Series II, matured.
To provide liquidity for its commercial paper program, PSE&G has an $850
million revolving credit agreement expiring in June 2000 and a $650 million
revolving credit agreement expiring in June 2002 with a group of commercial
banks, which provide for borrowings of up to one year. On December 31, 1999,
there were no borrowings outstanding under these credit agreements.
The BPU has authorized PSE&G to issue and have outstanding at any one time
through January 2, 2001, not more than $2.0 billion of short-term obligations,
consisting of commercial paper and other unsecured borrowings from banks and
other lenders. PSE&G has several uncommitted lines of credit with banks. On
December 31, 1999, PSE&G had $1.407 billion of short-term debt outstanding,
including $90 million borrowed against its uncommitted bank lines of credit.
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, 1999, Fuelco had commercial paper of $73
million outstanding. Once the purchase of PSE&G's generation-related assets is
completed, it is anticipated that Fuelco's commercial paper program will be
discontinued and financing of Peach Bottom nuclear fuel will be funded through
Power.
ENERGY HOLDINGS
In February 2000, Energy Holdings issued $300 million of 9.125% Senior
Notes due February 2004. The proceeds were used for the repayment of short-term
debt. Energy Holdings plans to file a registration statement with the SEC
relating to an exchange offer for, or the resale of, these Senior Notes later in
2000.
Also in February 2000, Energy Holdings closed on a $190 million letter of
credit facility to support a future equity investment in a generation project in
Texas.
A-16
<PAGE>
In October 1999, Energy Holdings issued $400 million of 10.0% Senior Notes
due October 2009. The proceeds were used for the repayment of short-term debt
outstanding under revolving credit facilities. Borrowings under the revolving
credit facilities were used to finance investments and acquisitions and for
general corporate purposes. In January 2000, Energy Holdings filed a
registration statement with the SEC relating to an exchange offer for these
Senior Notes. At December 31, 1999, Energy Holdings had total debt outstanding
of $1.7 billion, including debt at PSEG Capital as discussed below and
consolidated debt that is non-recourse to PSEG, Energy Holdings and Global.
In September 1999, Energy Holdings closed on a $150 million letter of
credit facility to support a future equity investment in a generation project in
Texas.
In May 1999, Energy Holdings closed on two separate revolving credit
facilities, with a syndicate of banks, a $165 million, 364-day revolving credit
facility and a $495 million, five-year revolving credit and letter of credit
facility. At December 31, 1999, Energy Holdings had $351 million outstanding
under existing revolving credit facilities totaling $660 million. The facilities
replaced existing revolving credit facilities at Enterprise Capital Funding
Corporation (Funding), a financing subsidiary of Energy Holdings, totaling $450
million. Since May 1999, Funding has not been used as a financing vehicle for
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 by April 2003. 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. Energy Holdings believes it is capable of
eliminating PSEG support of PSEG Capital debt within the time period set forth
in the Focused Audit.
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. In March and June 1999, PSEG Capital issued $252
million of 6.25% MTNs due May 2003 and $35 million of 6.73% MTNs due June 2001,
respectively. The proceeds were used to repay $100 million of PSEG Capital MTNs
which matured in February 1999 and $35 million which matured in May 1999 and to
reduce Energy Holdings' short-term debt. At December 31, 1999, PSEG Capital had
total debt outstanding of $630 million, all of which was comprised of MTNs with
maturities between 2000 and 2003.
Compliance with applicable financial covenants will depend upon Energy
Holdings' future financial position and levels of earnings and cash flow, as to
which no assurances can be given. In addition, Energy Holdings' ability to
continue to grow its business will depend to a significant degree on PSEG's
ability to access capital and Energy Holdings' ability to obtain additional
financing beyond current levels.
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, pollution credits, 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 comprised of executive officers which utilizes
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 PSEG and its
subsidiaries. In the event of non-performance or non-payment by a major
counterparty, there may be a material adverse impact on PSEG's and its
subsidiaries' financial condition, results of operations or net cash
A-17
<PAGE>
flows. For discussion of interest rates and Energy Holdings' commodity-related
instruments, equity securities and foreign currency risks, see Note 9. Financial
Instruments and Risk Management of Notes.
COMMODITY-RELATED INSTRUMENTS -- PSE&G (INCLUDING POWER)
The availability and price of energy commodities are subject to
fluctuations from factors such as weather, environmental policies, changes in
supply and demand and state and Federal regulatory policies. 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 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 and financial contracts.
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 95%
confidence level over a one-week time horizon at December 31, 1999 was
approximately $3 million, compared to the December 31, 1998 level of $4 million.
PSE&G's calculated value-at-risk represents an estimate of the potential change
in the value of its portfolio of physical and financial derivative instruments.
These estimates, however, are not necessarily indicative of actual results,
which may differ due to the fact that actual market rate fluctuations may differ
from forecasted fluctuations and due to the fact that the portfolio of hedging
instruments may change over the holding period.
As discussed in Results of Operations, PSE&G's wholesale power activities
positively impacted the results of operations for each year since their
inclusion in 1997. Certain other generators and power marketers 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.
Given the absence of a PJM price cap in situations involving emergency
purchases and the potential for plant outages, extreme price movements can occur
and could have a material impact on PSEG's, PSE&G's and Power's financial
condition, results of operations and net cash flows. For discussion of changes
in the pricing of electric energy offered for sale in the PJM interchange energy
market, see PJM Interconnection, L.L.C.
FOREIGN OPERATIONS
In accordance with their growth strategies, Global and Resources have
approximately $1.4 billion and $1.0 billion, respectively, of international
investments. For a discussion of foreign currency risk, see Note 9. Financial
Instruments and Risk Management of Notes.
YEAR 2000 READINESS
Many of PSEG's and its subsidiaries' systems, which include information
technology applications, plant control and telecommunications infrastructure
systems, were modified due to computer program limitations in recognizing dates
beyond 1999. PSEG has had a formal project in place since 1997 to address Year
2000 issues. All mission critical systems were ready before January 1, 2000.
PSEG's and its subsidiaries' Year 2000 preparations allowed for a smooth
transition into the new millennium. PSEG and its subsidiaries did not experience
any major problems or Year 2000-related service interruptions as their systems
rolled over from 1999 to 2000. PSEG and its subsidiaries expect most material
Year 2000 compliance problems would have arisen on or immediately after January
1, 2000. To date, PSEG and its subsidiaries are not aware of any material Year
2000-related problems associated with their internal systems or software or with
the software and systems of their vendors, distributors or suppliers. It is
possible, however, that further Year 2000-related problems may arise. For
example, the date February 29, 2000 could potentially present further problems.
Based on testing of their systems for Year 2000 problems and pending a
successful rollover from February 29, 2000 to March 1, 2000, PSEG and its
subsidiaries do not expect future problems to arise related to the Year 2000.
A-18
<PAGE>
PSEG and its subsidiaries, including their domestic and international
investments, have no outstanding litigation relating to Year 2000 issues. The
likelihood of future Year 2000-related liabilities cannot be determined at this
time.
PSEG's and its subsidiaries' total cost related to Year 2000 readiness was
approximately $67 million, which was incurred from 1997 through 1999. $32
million was incurred in 1999, $27 million was incurred in 1998 and $8 million
was incurred in 1997. A portion of these costs was not incremental to PSEG or
its subsidiaries, but rather, represented a redeployment of existing
personnel/resources. PSEG and its subsidiaries expect that expenses related to
remediating any remaining noncompliant non-critical systems will not be
material.
ACCOUNTING ISSUES
For a discussion of significant accounting matters including SFAS 71; SFAS
121; Emerging Issues Task Force (EITF) Issue No. 97-4, "Deregulation of the
Pricing of Electricity-Issues Related to the Application of FASB Statements No.
71 and No. 101" (EITF 97-4); SFAS 101, "Regulated Enterprises-Accounting for the
Discontinuation of Application of FASB Statement No. 71" (SFAS 101); changes in
capitalization, depreciation and asset retirement policies; discontinuation of
deferral accounting for fuel revenues and expenses; and EITF 98-10, "Accounting
for Energy Trading and Risk Management Activities" (EITF 98-10); see Note 1.
Organization, Basis of Presentation and Summary of Significant Accounting
Policies of Notes.
For a discussion of the impact of new accounting pronouncements including
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133) and SFAS 137, "Accounting for Derivative Instruments and Hedging Activities
- - Deferral of the Effective Date of FASB Statement No. 133" (SFAS 137), see Note
19. Accounting Matters of Notes.
FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, certain of the
matters discussed in this report constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are subject to risks and uncertainties which could
cause actual results to differ materially from those anticipated. 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", "intend", "estimate", "believe", "expect", "plan",
"hypothetical", "potential", variations of such words and similar expressions
are intended to identify forward-looking statements. 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 following review
of factors 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 Private Securities Litigation Reform Act of 1995.
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 and the establishment of a
competitive energy marketplace for products and services; managing rapidly
changing wholesale energy trading operations in conjunction with electricity and
gas production, transmission and distribution systems; managing foreign
investments and electric generation and distribution operations 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 PSE&G service
A-19
<PAGE>
territory; ability to complete development or acquisition of current and future
investments; partner and counterparty risk; exposure to market price
fluctuations and volatility of fuel and power supply, power output, marketable
securities, among others; ability to obtain adequate and timely rate relief,
cost recovery, and other necessary regulatory approvals; ability to obtain
securitization proceeds; Federal, state and foreign regulatory actions;
regulatory oversight with respect to utility and non-utility affiliate relations
and activities; operating restrictions, increased cost and construction delays
attributable to environmental regulations; nuclear decommissioning and the
availability of 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 debt and
equity market concerns associated with these issues.
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, Basis of Presentation and Summary of Significant
Accounting Policies of the Notes to Consolidated Financial Statements. Such
information is incorporated herein by reference.
A-20
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(MILLIONS OF DOLLARS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
OPERATING REVENUES
Electric Revenues *
Bundled $ 2,480 $ 4,009 $ 3,896
Generation 1,005 -- --
Transmission and Distribution 688 -- --
--------- --------- ---------
Total Electric Revenues 4,173 4,009 3,896
Gas Distribution 1,717 1,559 1,937
Other 607 442 344
--------- --------- ---------
Total Operating Revenues 6,497 6,010 6,177
--------- --------- ---------
OPERATING EXPENSES
Electric Energy Costs 972 960 911
Gas Costs 1,107 1,034 1,175
Operation and Maintenance 1,849 1,547 1,405
Depreciation and Amortization 536 660 630
Taxes Other Than Income Taxes 196 205 605
--------- --------- ---------
Total Operating Expenses 4,660 4,406 4,726
--------- --------- ---------
OPERATING INCOME 1,837 1,604 1,451
Other Income and Deductions 33 18 (16)
Settlement of Salem Litigation -- -- (82)
Interest Expense (490) (470) (450)
Preferred Securities Dividend Requirements (94) (80) (59)
--------- --------- ---------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 1,286 1,072 844
Income Taxes (563) (428) (284)
--------- --------- ---------
INCOME BEFORE EXTRAORDINARY ITEM 723 644 560
Extraordinary Item (Net of Tax of $345) (804) -- --
--------- --------- ---------
NET INCOME (LOSS) $ (81) $ 644 $ 560
========= ========= =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (000's) 219,814 230,974 231,986
========= ========= =========
EARNINGS (LOSSES) PER SHARE (BASIC AND DILUTED):
Income Before Extraordinary Item $ 3.29 $ 2.79 $ 2.41
Extraordinary Item (Net of Tax) (3.66) -- --
--------- --------- ---------
Net Income (Loss) $ (0.37) $ 2.79 $ 2.41
========= ========= =========
DIVIDENDS PAID PER SHARE OF COMMON STOCK $ 2.16 $ 2.16 $ 2.16
========= ========= =========
</TABLE>
* Note: Bundled revenues were recorded based on the bundled rates in effect
through 7/31/99. Commencing with the unbundling of rates on 8/1/99,
revenues are disaggregated between Generation Revenue and Transmission and
Distribution Revenue.
See Notes to Consolidated Financial Statements.
A-21
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS
ASSETS
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 259 $ 139
Accounts Receivable:
Customer Accounts Receivable 646 506
Other Accounts Receivable 371 205
Allowance for Doubtful Accounts (40) (38)
Unbilled Revenues 241 255
Fuel 311 331
Materials and Supplies, net of valuation reserves - 1999, $11; 1998, $12 130 167
Prepayments 53 61
Miscellaneous Current Assets 72 35
-------- --------
Total Current Assets 2,043 1,661
-------- --------
PROPERTY, PLANT AND EQUIPMENT
Electric - Generation 2,510 9,942
Electric - Transmission and Distribution 5,093 4,953
Gas - Distribution 3,019 2,882
Other 534 550
-------- --------
Total 11,156 18,327
Accumulated depreciation and amortization (4,078) (7,392)
-------- --------
Net Property, Plant and Equipment 7,078 10,935
-------- --------
NONCURRENT ASSETS
Regulatory Assets 5,041 1,579
Long-Term Investments, net of accumulated amortization
and net of valuation allowances - 1999, $65; 1998, $46 3,848 3,029
Nuclear Decommissioning Fund 631 524
Other Special Funds 148 125
Other Noncurrent Assets, net of accumulated amortization -
1999, $12; 1998, $8 226 138
-------- --------
Total Noncurrent Assets 9,894 5,395
-------- --------
TOTAL $ 19,015 $ 17,991
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
A-22
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND CAPITALIZATION
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
CURRENT LIABILITIES
Long-Term Debt Due Within One Year $ 1,073 $ 418
Commercial Paper and Loans 1,972 1,056
Accounts Payable 738 684
Other 394 299
-------- --------
Total Current Liabilities 4,177 2,457
-------- --------
NONCURRENT LIABILITIES
Deferred Income Taxes and ITC 2,928 3,701
Regulatory Liability - Excess Depreciation Reserve 569 --
Nuclear Decommissioning 491 --
OPEB Costs 390 344
Other 681 420
-------- --------
Total Noncurrent Liabilities 5,059 4,465
-------- --------
COMMITMENTS AND CONTINGENT LIABILITIES -- --
-------- --------
CAPITALIZATION:
LONG-TERM DEBT 4,575 4,763
-------- --------
SUBSIDIARIES' PREFERRED SECURITIES:
Preferred Stock Without Mandatory Redemption 95 95
Preferred Stock With Mandatory Redemption 75 75
Guaranteed Preferred Beneficial Interest in Subordinated
Debentures 1,038 1,038
-------- --------
Total Subsidiaries' Preferred Securities 1,208 1,208
-------- --------
COMMON STOCKHOLDERS' EQUITY:
Common Stock, issued; 231,957,608 shares 3,604 3,603
Treasury Stock, at cost; 1999 - 15,540,390 shares,
1998 - 5,314,100 shares (597) (207)
Retained Earnings 1,193 1,748
Accumulated Other Comprehensive Income (Loss) (204) (46)
-------- --------
Total Common Stockholders' Equity 3,996 5,098
-------- --------
Total Capitalization 9,779 11,069
-------- --------
TOTAL $ 19,015 $ 17,991
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
A-23
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (81) $ 644 $ 560
Adjustments to reconcile net income (loss) to net cash flows from
operating activities:
Extraordinary Loss - net of tax 804 -- --
Depreciation and Amortization 536 660 630
Amortization of Nuclear Fuel 92 93 60
Recovery of Electric Energy and Gas Costs - net 61 132 9
Provision for Deferred Income Taxes and ITC - net (215) (55) 22
Investment Distributions 134 73 73
Equity Income from Partnerships (53) (39) (39)
Gains on Investments (63) (40) (40)
Leasing Activities 6 (20) 71
Net Changes in certain current assets and liabilities:
Accounts Receivable and Unbilled Revenues (236) 113 (111)
Inventory - Fuel and Materials and Supplies 9 (46) 9
Prepayments 8 (12) 17
Accounts Payable 57 (34) 99
Provision for Rate Refund -- -- (80)
Other Current Assets and Liabilities 59 (63) (63)
Other 114 93 (33)
------- ------- -------
Net Cash Provided By Operating Activities 1,232 1,499 1,184
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Property, Plant and Equipment,
excluding Capitalized Interest and AFDC (582) (531) (536)
Net Change in Long-Term Investments (980) (92) (1,078)
Contribution to Decommissioning Funds and Other Special Funds (70) (115) (63)
Other -- (10) (94)
------- ------- -------
Net Cash Used In Investing Activities (1,632) (748) (1,771)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Change in Short-Term Debt 916 (431) 879
Issuance of Long-Term Debt 1,143 525 785
Redemption/Purchase of Long-Term Debt (676) (557) (700)
Issuance of Preferred Securities -- 525 95
Redemption of Preferred Stock -- -- (94)
Purchase of Treasury Stock (400) (207) --
Retirement of Common Stock -- -- (43)
Cash Dividends Paid on Common Stock (474) (499) (501)
Other 11 (51) (29)
------- ------- -------
Net Cash Provided By (Used In) Financing Activities 520 (695) 392
------- ------- -------
Net Change In Cash And Cash Equivalents 120 56 (195)
Cash And Cash Equivalents At Beginning Of Period 139 83 278
------- ------- -------
Cash And Cash Equivalents At End Of Period $ 259 $ 139 $ 83
======= ======= =======
Income Taxes Paid $ 534 $ 426 $ 170
Interest Paid $ 494 $ 469 $ 416
</TABLE>
See Notes to Consolidated Financial Statements.
A-24
<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 (LOSS) TOTAL
-------------- ------------------ -------- ------------- -------
SHS. AMOUNT SHS. AMOUNT
---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AS OF JANUARY 1, 1997 234 $ 3,627 -- -- $ 1,586 -- $ 5,213
Net Income -- -- -- -- 560 -- 560
Other Comprehensive Income (Loss), net of tax:
Currency Translation Adjustment, net of tax of $(2) -- -- -- -- -- (15) (15)
-------
Other Comprehensive Income (Loss) -- -- -- -- -- -- (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 (Loss), 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 (Loss) -- -- -- -- -- -- (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
-------------- ------------------ -------- ------------- -------
Net Income (Loss) -- -- -- -- (81) -- (81)
Other Comprehensive Income (Loss), net of tax:
Currency Translation Adjustment, net of tax of $(17) -- -- -- -- -- (158) (158)
-------
Other Comprehensive Income (Loss) -- -- -- -- -- -- (158)
-------
Comprehensive Income (Loss) -- -- -- -- -- -- (239)
Cash Dividends on Common Stock -- -- -- -- (474) -- (474)
Purchase of Treasury Stock -- -- (11) (400) -- -- (400)
Other -- 1 -- 10 -- -- 11
-------------- ------------------ -------- ------------- -------
BALANCE AS OF DECEMBER 31, 1999 232 $ 3,604 (16) $ (597) $ 1,193 $ (204) $ 3,996
============== ================== ======== ============= =======
</TABLE>
See Notes to Consolidated Financial Statements.
A-25
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
ORGANIZATION
PSEG has three principal direct wholly-owned operating subsidiaries:
Public Service Electric and Gas Company (PSE&G), PSEG Power LLC (Power) and PSEG
Energy Holdings Inc. (Energy Holdings). In 1999, PSEG formed PSEG Services
Corporation (Services) to provide management and administrative services to PSEG
and its subsidiaries.
PSE&G is an operating public utility providing electric and gas service
within certain areas in the State of New Jersey. Power was formed in 1999 and is
anticipated to be the owner and operator of PSEG's generation business once the
sale of PSE&G's generation-related assets is completed in 2000. Power and its
subsidiaries were established to acquire, own and operate the electric
generation-related assets of PSE&G pursuant to the Final Decision and Order
(Final Order) issued August 24, 1999 by the New Jersey Board of Public Utilities
(BPU) under the New Jersey Energy Master Plan Proceedings and the New Jersey
Electric Discount and Energy Competition Act (Energy Competition Act). After the
sale of its generation-related assets to Power, PSE&G will continue to own and
operate its transmission and distribution businesses.
Energy Holdings is the parent of three energy-related lines of business
through its wholly-owned subsidiaries: PSEG Global Inc. (Global), which
develops, acquires, owns and operates electric generation and distribution
facilities in selected domestic and international markets; PSEG Resources Inc.
(Resources), which invests in energy-related financial transactions; and PSEG
Energy Technologies Inc. (Energy Technologies), an energy management company.
Energy Holdings also has a finance subsidiary, PSEG Capital Corporation
(PSEG Capital), which provides privately-placed debt financing to Energy
Holdings' operating subsidiaries on the basis of a minimum net worth maintenance
agreement with PSEG. Energy Holdings is also the parent of Enterprise Group
Development Corporation (EGDC), a nonresidential real estate development and
investment business and has been conducting a controlled exit from this business
since 1993.
BASIS OF PRESENTATION
Effective August 1, 1999, the presentation of revenues in the Consolidated
Statements of Income has changed, due to the deregulation of the electric
generation business by the BPU in PSE&G's rate unbundling, stranded costs and
restructuring proceedings. Effective with that date, electric rates charged to
customers have been unbundled and the generation, transmission, distribution and
other components of the total rate have become separate charges. As a result,
the presentation of revenues has also changed. PSE&G's generation business earns
revenues by providing the energy and capacity to meet PSE&G's basic generation
service (BGS) obligation. Generation revenues are also produced by a variety of
wholesale energy and capacity sales and sales of other ancillary services.
PSE&G's transmission and distribution businesses remain rate regulated and will
continue to earn revenues based on PSE&G's regulated rate tariffs under which
PSE&G provides transmission and distribution services for its residential,
commercial and industrial customers in New Jersey. The rates charged for
transmission and distribution are regulated by the Federal Energy Regulatory
Commission (FERC) and the BPU, respectively. Transmission and distribution
revenues are also generated from a variety of other activities such as sundry
sales, the appliance service business, wholesale transmission services and other
miscellaneous services. Revenues earned prior to August 1, 1999 continue to be
presented as Bundled Electric revenues on the Consolidated Statements of Income
as they were earned based upon bundled electric rates prior to the deregulation
of PSE&G's generation business. For more information on deregulation and PSE&G's
rate unbundling, stranded costs and restructuring proceedings, including the
BPU's Final Order, see Note 2. Regulatory Issues.
A-26
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 BPU and the FERC. As a result, PSE&G maintains its accounts
for its regulated operations 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 the transmission and
distribution portion of 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 economic effects of regulation. As a result, a regulated
utility is required to 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
future rates. 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 is charged or credited to income unless
recovery mechanisms are approved by the regulator. PSE&G's transmission and
distribution businesses continue to meet the requirements for application of
SFAS 71.
Effective April 1, 1999, PSE&G discontinued the application of SFAS 71 for
the electric generation portion of its business. PSE&G calculated an
extraordinary charge consistent with the requirements of Emerging Issues Task
Force (EITF) Issue No. 97-4, "Deregulation of the Pricing of Electricity -
Issues Related to the Application of FASB Statements No. 71 and No. 101" (EITF
97-4) and SFAS 101, "Regulated Enterprises--Accounting for the Discontinuation
of Application of FASB Statement No. 71" (SFAS 101). The portion of the
extraordinary charge related to an impairment of long-lived assets was
calculated in accordance with SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121). The
discontinuation of the application of SFAS 71 had a material impact on PSEG's
and PSE&G's financial condition and results of operations. For further
discussion, see Note 2. Regulatory Issues and Note 3. Extraordinary Charge and
Other Accounting Impacts of Deregulation.
In concert with the discontinuation of SFAS 71, PSE&G revised a number of
accounting policies related to its electric generation business. Under the
revised capitalization policy, PSE&G will only capitalize costs which increase
the capacity or extend the life of an existing generation-related asset,
represent a newly acquired or constructed asset or represent the replacement of
a retired asset. Under the revised depreciation policy, PSE&G will calculate
depreciation consistent with revised asset lives determined by PSE&G policy
rather than using depreciation rates prescribed by the BPU in rate proceedings.
Finally, under the revised asset retirement policy, when a generation-related
asset is retired, the remaining net carrying amount will be included in the
determination of net earnings.
CONSOLIDATION
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. 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. All significant intercompany accounts and
transactions are eliminated in consolidation.
RECLASSIFICATIONS
Certain reclassifications of prior period data have been made to conform
with the current presentation.
A-27
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 FERC
regulations, PSE&G's 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. For PSEG's unregulated
businesses, gains and losses on reacquired debt are 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.
PLANT, PROPERTY AND EQUIPMENT -- PSE&G
For PSE&G's regulated transmission and distribution businesses, additions
to plant, property and equipment 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.
For its unregulated generation business, PSE&G only capitalizes costs
which increase the capacity or extend the life of an existing asset, represent a
newly acquired or constructed asset or represent the replacement of a retired
asset. Also, under its revised asset retirement policy, the portion of future
retirements which have not been fully depreciated will impact earnings for
PSE&G's generation business.
DEPRECIATION AND AMORTIZATION
For PSE&G's regulated transmission and distribution businesses,
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 3.52%, 3.52% and 3.53%
in 1999, 1998 and 1997, respectively. PSE&G has certain regulatory assets and
liabilities resulting from the use of a level of depreciation expense in the
ratemaking process that differs from the amount that is recorded under GAAP for
non-regulated companies.
For its generation operations, under the revised depreciation policy,
PSE&G will calculate depreciation consistent with revised asset lives determined
by PSE&G policy rather than using depreciation rates prescribed by the BPU in
rate proceedings.
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.
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.
A-28
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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. Effective August 1, 1999, these
costs are recovered through the distribution rates established under the Final
Order.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFDC) -- PSE&G
For PSE&G's regulated operations, 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
1999, 1998 and 1997 were 5.29%, 6.06% and 5.71%, respectively. Effective April
1, 1999, PSEG no longer calculates AFDC for the electric generation portion of
its business.
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.
Prior to August 1, 1999, fuel revenue and expense flowed through the
Electric Levelized Energy Adjustment Clause (LEAC) mechanism and variances in
fuel revenues and expenses were subject to deferral accounting and had no direct
effect on earnings. The fuel component of the LEAC rate was frozen for 1997 and
1998 as part of the BPU's Order dated December 31, 1996 and PSE&G bore all risks
associated with fuel prices. Due to the discontinuation of the LEAC mechanism on
August 1, 1999, earnings volatility will increase since the unregulated electric
generation portion of PSEG's business ceased to follow deferral accounting.
PSE&G and Power now bear the full risks and rewards of changes in nuclear and
fossil generating fuel costs and replacement power costs.
Under the LEAC and the Levelized Gas Adjustment Clause (LGAC), any LEAC
and 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 represented 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. For discussion of the status of the LEAC and the LGAC,
see Note 4. Regulatory Assets and Liabilities.
MATERIALS AND SUPPLIES AND NUCLEAR FUEL-PSE&G
For PSE&G's regulated operations, materials and supplies are carried on
the books at cost in accordance with rate based regulation. The carrying value
of the materials and supplies and nuclear fuel for PSE&G's generation operations
is valued at lower of cost or market.
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, PSE&G uses natural gas futures and
swaps to manage the price risk associated with gas supply to customers.
A-29
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Effective January 1, 1999, PSEG and PSE&G adopted EITF 98-10, "Accounting
for Contracts Involved in Energy Trading and Risk Management Activities" (EITF
98-10). 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 or footnotes. Previously, the gains and losses associated
with these contracts were recorded upon settlement. The adoption of EITF 98-10
did not have a material impact on the financial condition, results of operations
or net cash flows of PSEG or PSE&G.
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.
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 when the related asset or liability is realized or settled.
Gains and losses related to qualifying hedges of firm commitments or anticipated
transactions also are deferred and recognized in income 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
New Jersey Gross Receipts and Franchise Taxes (NJGRT), see Note 13. Income
Taxes.
CAPITAL LEASES AS LESSEE -- PSE&G
The Consolidated Balance Sheets include assets and related obligations
applicable to capital leases under which the entity 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.
A-30
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
IMPAIRMENT OF LONG-LIVED ASSETS
SFAS 121 requires review for possible impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Upon deregulation, PSE&G evaluated the recoverability of its
assets and recorded an extraordinary, non-cash charge to earnings. For the
impact of the application of SFAS 121, see Note 3. Extraordinary Charge and
Other Accounting Impacts of Deregulation.
NOTE 2. REGULATORY ISSUES
NEW JERSEY ENERGY MASTER PLAN PROCEEDINGS AND RELATED ORDERS
In January 1999, the State Legislature passed the Energy Competition Act
which was signed into law by the Governor on February 9, 1999. Following the
passage of the Energy Competition Act, the BPU rendered its summary decision
relating to PSE&G's rate unbundling, stranded costs and restructuring
proceedings (Summary Order) on April 21, 1999 and subsequently issued its Final
Order in these matters on August 24, 1999. The Energy Competition Act and the
related BPU proceedings are hereinafter defined as the Energy Master Plan
Proceedings. For discussion of the extraordinary charge to earnings recorded as
a result of the deregulation of PSE&G's generation business, see Note 3.
Extraordinary Charge and Other Accounting Impacts of Deregulation. 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.
As a result of this restructuring of the energy industry, the distribution
business will remain regulated by the BPU, the transmission business will remain
regulated by the FERC and electric generation has become a competitive business.
In October and November 1999, two appeals of the Final Order and two
appeals of the BPU's order approving PSE&G's petition relating to the proposed
securitization transaction for an irrevocable Bondable Stranded Costs Rate Order
(Finance Order) were filed in the Appellate Division of the New Jersey Superior
Court on behalf of several customers. The Court granted PSE&G's requests to
accelerate the appeals and ordered that the matters be consolidated. All briefs
have been filed and oral argument on the consolidated matters has been set for
March 8, 2000. While PSEG and PSE&G believe that the appeals are without merit,
no assurances can be given at this time as to the timing or outcome of these
proceedings. Accordingly, neither PSEG nor PSE&G are able to predict whether
such appeals will have a material adverse effect on their financial condition,
results of operations or net cash flows.
NOTE 3. EXTRAORDINARY CHARGE AND OTHER ACCOUNTING IMPACTS OF DEREGULATION
In accordance with EITF 97-4, PSE&G determined that SFAS 71 was no longer
applicable to the electric generation portion of its business as of April 1999.
Therefore, PSE&G recorded an extraordinary charge to earnings of $804 million
(net of tax). PSE&G accounted for this charge consistent with the requirements
of SFAS 101.
The extraordinary charge recorded in 1999 consisted primarily of the
write-down of PSE&G's nuclear and fossil generating stations in accordance with
SFAS 121. PSE&G performed a discounted cash flow analysis on a unit-by-unit
basis to determine the amount of the impairment. As a result of this impairment
analysis, the net book value of the generating stations was reduced by
approximately $5.0 billion (pre-tax) or approximately $3.1 billion (net of tax).
This amount was offset by the creation of a $4.057 billion (pre-tax), or $2.4
billion (net of tax)
A-31
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
regulatory asset related to the future receipt of securitization proceeds, as
provided for in the Summary Order and affirmed in the Final Order.
In addition to the impairment of PSE&G's electric generating stations, the
extraordinary charge consisted of various accounting adjustments to reflect the
absence of cost of service regulation in the electric generation portion of the
business in the future. The adjustments primarily related to materials and
supplies, general plant items and liabilities for certain contractual and
environmental obligations.
In its Final Order, the BPU directed PSE&G to seek a private letter ruling
from the Internal Revenue Service (IRS) to determine if the $235 million of
investment tax credits (ITC), which were used to offset the extraordinary
charge, can be credited to customers without violating the tax normalization
rules of the Internal Revenue Code. An adverse resolution to this matter would
result in an additional extraordinary charge to income up to the amount of the
ITC, which would have a material adverse impact on PSEG's and PSE&G's financial
condition, results of operations and cash flows, however, based on PSE&G's
analysis, an adverse outcome does not appear to be likely.
Other accounting impacts of the discontinuation of SFAS 71 included
reclassifying the Accrued Nuclear Decommissioning Reserve and the Accrued Cost
of Removal for generation-related assets from Accumulated Depreciation to
Long-Term Liabilities. In accordance with the Final Order, PSE&G also
reclassified a $569 million excess depreciation reserve related to PSE&G's
electric distribution assets from Accumulated Depreciation to a Regulatory
Liability. Such amount will be amortized in accordance with the terms of the
Final Order over the period from January 1, 2000 to July 31, 2003.
NOTE 4. REGULATORY ASSETS AND LIABILITIES
At December 31, 1999 and December 31, 1998, respectively, PSEG and PSE&G
had deferred the following regulatory assets and liabilities on the Consolidated
Balance Sheets:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
------------ ------------
1999 1998
------------ ------------
(MILLIONS OF DOLLARS)
<S> <C> <C>
REGULATORY ASSETS
Regulatory Asset--Stranded Costs ....................... $4,057 $ --
SFAS 109 Income Taxes .................................. 286 704
OPEB Costs ............................................. 237 270
Regulatory Asset--Societal Benefits Charges (SBC) ...... 130 --
Demand Side Management Costs ........................... 7 150
Environmental Costs .................................... 94 139
Unamortized Loss on Reacquired Debt and Debt Expense ... 117 135
Underrecovered Gas Costs ............................... -- 35
Other .................................................. 113 146
------ ------
Total Regulatory Assets ........................... $5,041 $1,579
====== ======
REGULATORY LIABILITIES
Regulatory Liability--Excess Depreciation Reserve ...... $ 569 $ --
Regulatory Liability--NTC .............................. 20 --
Overrecovered Gas Costs ................................ 15 --
Overrecovered Electric Energy Costs .................... -- 39
Other Stranded Cost Recovery Offsets ................... -- 4
------ ------
Total Regulatory Liabilities ...................... $ 604 $ 43
====== ======
</TABLE>
REGULATORY ASSET -- STRANDED COSTS: PSE&G has recorded this regulatory
asset to reflect the future revenues which will be collected via the
securitization transition charge which was authorized by the Final Order.
A-32
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
SFAS 109 INCOME TAXES: This amount represents the regulatory asset related
to the recognition of deferred income taxes arising from the implementation of
SFAS 109, "Accounting for Income Taxes" (SFAS 109). Due to the discontinuation
of SFAS 71 for the electric generation portion of PSE&G's business, the deferred
taxes related to these assets have been reduced and included in the
determination of the Extraordinary Item.
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. See Note 14.
Pension, Other Postretirement Benefit and Savings Plans for additional
information.
REGULATORY ASSET -- SBC: The SBC includes costs related to: 1) social
programs which include the universal service fund; 2) nuclear plant
decommissioning; 3) demand side management (DSM) programs 4) manufactured gas
plant remediation; and 5) consumer education. Before creation of the SBC, the
electric DSM and manufactured gas plant remediation costs were included in DSM
and Environmental Costs, respectively, as listed above.
DEMAND SIDE MANAGEMENT COSTS: Recoveries of DSM/conservation costs
(related to BPU-approved programs) are determined by the BPU. Electric DSM costs
are included in the SBC balance at December 31, 1999.
ENVIRONMENTAL COSTS: Represents environmental investigation and
remediation costs which are probable of recovery in future rates.
UNAMORTIZED LOSS ON REACQUIRED DEBT AND DEBT EXPENSE: Represents bond
issuance costs, premiums, discounts and losses on reacquired long-term debt.
OTHER: Includes Decontamination and Decommissioning Costs, Plant and
Regulatory Study Costs, Repair Allowance Tax Deficiencies and Interest, Property
Abandonments and Oil and Gas Property Write-Down.
REGULATORY LIABILITY -- EXCESS DEPRECIATION RESERVE: As required by the
BPU, PSE&G reduced its depreciation reserve for its electric distribution assets
by $569 million and recorded such amount as a regulatory liability to be
amortized over the period from January 1, 2000 to July 31, 2003. In 2000 and
2001, $125 million will be amortized each year. In 2002 and 2003, $135 million
and $184 million will be amortized, respectively.
REGULATORY LIABILITY -- NON-UTILITY GENERATION MARKET TRANSITION CHARGE
(NTC): Clause established to account for above market costs related to
non-utility generation contracts. The charge for the stranded NTC recovery will
be initially set at the 1999 level of $183 million annually. Any Non-utility
Generator (NUG) contract costs and/or buyouts will also be charged to the NTC
and will be subject to deferral accounting. Proceeds from the sale of the energy
and capacity purchased under these NUG contracts will also be credited to this
account.
REGULATORY LIABILITY -- OVERRECOVERED ELECTRIC ENERGY COSTS: As provided
by the BPU in the Final Order, PSE&G continued to follow deferral accounting
treatment for the LEAC through July 31, 1999. At July 31, 1999, Overrecovered
Electric Energy Costs were $59 million. Pursuant to the Final Order, the
overrecovered balance as of July 31, 1999 was applied as a credit to the
starting deferred balance of the NTC.
A-33
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 5. LONG-TERM INVESTMENTS
Long-Term Investments are primarily those of Energy Holdings.
DECEMBER 31,
------------------
1999 1998
------ ------
(MILLIONS OF DOLLARS)
Leveraged Leases ........................... $1,765 $1,396
Partnerships:
General Partnerships ................ 60 77
Limited Partnerships ................ 437 526
------ ------
Total ......................... 497 603
------ ------
Corporate Joint Ventures ................... 1,427 874
Securities ................................. 14 25
Other Investments .......................... 145 131
------ ------
Total Long-Term Investments ... $3,848 $3,029
====== ======
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.
Partnership investments and corporate joint ventures are those of
Resources, Global and EGDC.
Other Investments relate primarily to Energy Technologies' investment in
DSM projects and had balances of approximately $60 million and $73 million at
December 31, 1999 and 1998, respectively.
NOTE 6. LEASING ACTIVITIES
AS LESSOR
Resources' net investments in leveraged leases are composed of the
following elements:
DECEMBER 31, 1999 DECEMBER 31, 1998
--------------------- ---------------------
(MILLIONS OF DOLLARS) (MILLIONS OF DOLLARS)
LEVERAGED LEVERAGED
LEASES LEASES
---------- ----------
Lease rents receivable ............ $ 2,643 $ 1,924
Estimated residual value .......... 660 665
------- -------
3,303 2,589
Unearned and deferred income ...... (1,538) (1,193)
------- -------
Total investments .......... 1,765 1,396
Valuation Allowances .............. (6) (7)
Deferred taxes .................... (844) (731)
------- -------
Net investments ............ $ 915 $ 658
======= =======
A-34
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 7. SCHEDULE OF CONSOLIDATED CAPITAL STOCK AND OTHER SECURITIES
<TABLE>
<CAPTION>
CURRENT
REDEMPTION
OUTSTANDING PRICE DECEMBER 31, DECEMBER 31,
SHARES PER SHARE 1999 1998
----------- ---------- ------------ ------------
(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, 1999, 216,417,218 shares and at December 31, 1998,
226,643,508 shares $3,007 $3,396
PSEG Preferred Securities (B)
PSEG Quarterly Guaranteed Preferred Beneficial Interest in
PSEG's Subordinated Debentures (D) (E) (G)
7.44%............................................................ 9,000,000 -- $225 $225
Floating Rate.................................................... 150,000 -- 150 150
7 1/4%........................................................... 6,000,000 -- 150 150
-------- --------
Total Quarterly Guaranteed Preferred Beneficial Interest in
PSEG's Subordinated Debentures................................... $525 $525
======== ========
PSE&G Preferred Securities
PSE&G Cumulative Preferred Stock (C) without Mandatory
Redemption (D) (E) $100 par value series
4.08%............................................................ 146,221 103.00 $15 $15
4.18%............................................................ 116,958 103.00 12 12
4.30%............................................................ 149,478 102.75 15 15
5.05%............................................................ 104,002 103.00 10 10
5.28%............................................................ 117,864 103.00 12 12
6.92%............................................................ 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) (F)
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)
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) In anticipation of securitization of PSE&G's stranded costs afforded by
the Energy Competition Act, the Board of Directors of PSEG authorized the
repurchase of up to 30 million shares of its common stock (Common Stock).
Under the authorization, repurchases were made in the open market at the
discretion of PSEG. At December 31, 1999, PSEG had repurchased
approximately 15.8 million shares of Common Stock at a cost of
approximately $607 million, under this authorization. The repurchased
shares have been held as treasury stock or used for other corporate
purposes.
A-35
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Total authorized and unissued shares include 7,302,488 shares of Common
Stock reserved for issuance through PSEG's Dividend Reinvestment and Stock
Purchase Plan and various employee benefit plans. In 1999 and 1998, no
shares of 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, 1999, 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, 1999 and 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.
At December 31, 1999 and 1998, the annual dividend requirement and
embedded dividend rate for PSE&G's Preferred Stock without mandatory
redemption was $10,886,758 and 5.18%, respectively, and for PSE&G's
Preferred Stock with mandatory redemption was $4,477,500 and 6.02%,
respectively.
At December 31, 1999 and 1998, 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%, respectively.
At December 31, 1999 and 1998, 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%, respectively.
(E) For information concerning fair value of financial instruments, see Note
9. Financial Instruments and Risk Management.
(F) 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.
(G) 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 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.
A-36
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 8. SCHEDULE OF CONSOLIDATED DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
LONG-TERM ----------------------------------------
INTEREST RATES MATURITY 1999 1998
----------------- ---------------- ----------------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
PSEG
Extendible Notes (A)
LIBOR plus 0.22% - 0.60% 2000............ $275 $275
LIBOR plus 0.40% 2001............ 300 --
---------------- ----------------
Principal Amount Outstanding (C)............................................ 575 --
Amounts Due Within One Year (D).................................................. (275) --
---------------- ----------------
Total Long-Term Debt of PSEG (H)............................................ $300 $275
================ ================
PSE&G
First and Refunding Mortgage Bonds (B)
8.75% 1999............ $ -- $100
6.00%-7.625% 2000............ 623 635
7.875% 2001............ 100 100
6.125% 2002............ 257 300
6.875%-8.875% 2003............ 300 300
6.50% 2004............ 286 --
6.25%-9.125% 2005-2007....... 385 750
6.80%-6.90% 2008-2012....... -- 3
Variable 2008-2012....... 66 66
6.75%-7.375% 2013-2017....... 330 375
6.45%-9.25% 2018-2022....... 139 139
Variable 2018-2022....... 14 14
5.20%-7.50% 2023-2027....... 434 573
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....... 39 41
---------------- ----------------
Total First and Refunding Mortgage Bonds..................................... 3,726 4,149
---------------- ----------------
Unsecured Bonds
Variable 2027............ 19 19
---------------- ----------------
Total Unsecured Bonds........................................................ 19 19
---------------- ----------------
Principal Amount Outstanding (C)................................................. 3,745 4,168
Amounts Due Within One Year (D).................................................. (623) (100)
Net Unamortized Discount......................................................... (23) (23)
---------------- ----------------
Total Long-Term Debt of PSE&G (E)............................................ $3,099 $4,045
================ ================
</TABLE>
A-37
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
MATURITY 1999 1998
---------------- ----------------- ------------------
<S> <C> <C> <C>
ENERGY HOLDINGS
Senior Notes
10% 2009............ $400 $--
Net Unamortized Discount.......................................................... (4) --
----------------- ------------------
396 --
----------------- ------------------
PSEG CAPITAL (F)
Medium-Term Notes
8.95%-9.93% 1999............ -- 155
6.54% 2000............ 78 78
6.74% 2001............ 135 135
6.73% 2001............ 35 --
6.80%-7.00% 2002............ 130 130
6.25% 2003............ 252 --
----------------- ------------------
Principal Amount Outstanding (C).................................................. 630 498
Amounts Due Within One Year (D)................................................... (78) (155)
Net Unamortized Discount.......................................................... (2) (2)
----------------- ------------------
Total Long-Term Debt of PSEG Capital.......................................... 550 341
----------------- ------------------
ENTERPRISE CAPITAL FUNDING CORPORATION
7.58% 1999............ -- 45
----------------- ------------------
Principal Amount Outstanding (C).................................................. -- 45
Amounts Due Within One Year (D)................................................... -- (45)
----------------- ------------------
Total Long-Term Debt of Funding............................................... -- --
----------------- ------------------
GLOBAL (G)
Non-recourse Debt
7.721% - Bank Loan 1999............. -- 87
11.08%-Bank Loan 2000............. 67 --
13.73% and 13.23%, respectively- Bank Loan 2000-2002........ 90 123
9.04% - Bank Loan 2001............. 85 --
9.42% - Bank Loan 2001-2003........ 28 --
9.42% - Bank Loan 2001-2004........ 47 --
14.00% - Minority Interest Loan 2027............. 10 10
----------------- ------------------
Principal Amount Outstanding (C).................................................. 327 220
Amounts Due Within One Year (D)................................................... (97) (118)
----------------- ------------------
Total Long-Term Debt of Global............................................. 230 102
----------------- ------------------
Total Long-Term Debt of Energy Holdings.................................... $1,176 $443
================= ==================
Consolidated Long-Term Debt............................................. $4,575 $4,763
================= ==================
</TABLE>
(A) In June 1999, PSEG issued $300 million of Extendible Notes, Series C, due
June 15, 2001 with interest at LIBOR plus 0.40%, reset quarterly, which
will be automatically tendered to the remarketing agent for remarketing on
March 15, 2000. At December 31, 1999, the interest rates on Series A, B
and C were 6.00%, 6.03% and 5.65%, respectively.
(B) PSE&G's First and Refunding Mortgage (Mortgage), securing the Bonds,
constitutes a direct first mortgage lien on substantially all of PSE&G's
property and franchises.
During 1999, PSE&G purchased on the open market $319 million of its
Mortgage Bonds. In July 1999, $100 million of PSE&G's 8.34% Bonds, Series
Z, matured.
(C) For information concerning fair value of financial instruments, see Note
9. Financial Instruments and Risk Management.
(D) The aggregate principal amounts of mandatory requirements for sinking
funds and maturities for each of the five years following December 31,
1999 are as follows:
A-38
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
SINKING
FUNDS MATURITIES
--------- ---------------------------------------------------------------
PSEG
YEAR GLOBAL PSEG PSE&G CAPITAL GLOBAL TOTAL
--------------- ---------- ---------- ------------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
2000......... $30 $275 $623 $78 $67 $1,073
2001......... 41 300 100 170 85 696
2002......... 45 -- 257 130 -- 432
2003......... 29 -- 300 252 -- 581
2004......... 20 -- 286 -- -- 306
---------- --------- ------------- -------- ----------- -------------
$165 $575 $1,566 $630 $152 $3,088
========== ========= ============= ======== =========== =============
</TABLE>
(A) At December 31, 1999 and 1998, PSE&G's annual interest requirement on
long-term debt was $254 million and $282 million, of which $246 million
and $274 million, respectively, was the requirement for Mortgage Bonds.
The embedded interest cost on long-term debt on such dates was 7.34% and
7.35%, respectively. The embedded interest cost on long-term debt due
within one year at December 31, 1999 was 7.78%.
(B) 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.
(C) 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 three consolidated subsidiaries which have equity investments in
distribution facilities in Argentina, Brazil, Chile and Peru. Global's
capital at risk on the projects is limited to its original equity
investment. The non-recourse debt appears as long-term debt and long-term
investments in PSEG's consolidated balance sheets.
(D) At December 31, 1999 and 1998, PSEG's annual interest requirement on
long-term debt was $409 million and $365 million, of which $246 million
and $274 million, respectively, was the requirement for Extendible Notes.
The embedded interest cost on long-term debt on such dates was 7.59% and
7.32%, respectively.
SHORT-TERM (COMMERCIAL PAPER AND BANK LOANS)
PSEG
At December 31, 1999, PSEG had a committed $150 million revolving credit
facility which expires in December 2002. On September 8, 1999, PSEG entered into
an uncommitted line of credit with a bank for an unlimited amount. At December
31, 1999, PSEG had $145 million outstanding under these facilities. The
weighted-average, short-term debt rate of PSEG was 6.7%, 5.6% and 6.2% for the
years ended December 31, 1999, 1998 and 1997, respectively.
PSE&G
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Principal amount outstanding at year end, primarily commercial paper....... $1,475 $850 $1,106
Weighted average interest rate for short-term debt at year end............. 6.56% 5.91% 6.07%
</TABLE>
A-39
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
PSE&G has authorization from the BPU to issue and have outstanding not
more than $2.0 billion of its short-term obligations at any one time, consisting
of commercial paper and other unsecured borrowings from banks and other lenders.
This authorization expires January 2, 2001.
PSE&G has a $1.5 billion commercial paper program (Program) supported by
an $850 million revolving credit agreement expiring in June 2000 and a $650
million revolving credit agreement expiring in June 2002 with a group of
commercial banks. As of December 31, 1999 and 1998, PSE&G had $1.407 billion and
$655 million, respectively, outstanding under the Program, which amounts are
included in the table above. As of December 31, 1999, there was no debt
outstanding under the revolving credit agreements.
On September 9, 1999, PSE&G entered into an uncommitted line of credit
with a bank for an unlimited amount. PSE&G also had additional uncommitted lines
of credit totaling $70 million provided to primarily support short-term
borrowings. As of December 31, 1999, PSE&G had $90 million outstanding under
these lines of credit which 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, 1999,
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, 1999, Fuelco had commercial paper of $73 million
outstanding under the commercial paper program, which amounts are included in
the table above. As of December 31, 1999, 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, 1999, no amounts were
outstanding under such arrangements.
ENERGY HOLDINGS
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Principal amount outstanding at year end.............................. $351 $206 $306
Weighted average interest rate for short-term debt at year end........ 7.60% 6.46% 6.92%
</TABLE>
In 1999, Energy Holdings closed on two separate senior revolving credit
facilities. These facilities, a $495 million, five year revolving credit and
letter of credit facility and a $165 million, 364 day revolving credit facility,
replaced credit facilities at Funding totaling $450 million which expired in
1999. As of December 31, 1999, there was $351 million outstanding under these
facilities, which is included in the table above.
NOTE 9. 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.
A-40
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 December 31, 1999 and December 31, 1998, respectively. Note
that certain future events in connection with securitization and the anticipated
sale by PSE&G of generation-related assets to Power will trigger certain
redemption features of certain PSE&G mortgage bonds.
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------ -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
Long-Term Debt (A):
PSEG ................................................ $575 $574 $275 $275
Energy Holdings ..................................... 1,351 1,346 761 769
PSE&G ............................................... 3,722 3,658 4,145 4,389
Preferred Securities Subject to Mandatory Redemption:
PSE&G Cumulative Preferred Securities ............... 75 67 75 77
Monthly Guaranteed Preferred Beneficial Interest in
PSE&G's Subordinated Debentures .................. 210 200 210 213
Quarterly Guaranteed Preferred Beneficial Interest in
PSE&G's Subordinated Debentures .................. 303 277 303 315
Quarterly Guaranteed Preferred Beneficial Interest in
PSEG's Subordinated Debentures ................... 525 420 525 518
</TABLE>
(A) Includes current maturities. Includes interest rate swaps with notional
amounts of of $34 million and $150 million for Energy Holdings and PSEG,
respectively, for the year ended December 31, 1999 and interest rate swaps
with notional amounts of $44 million and $150 million for Energy Holdings
and PSEG, respectively, for the period ended December 31, 1998.
Global has $67 million of project debt that is non-recourse to PSEG,
Global and Energy Holdings associated with investments in Argentina that
were refinanced in June 1999 for a term of one year. An interest rate swap
was entered into which effectively converts 50% of the floating rate
obligation into a fixed rate obligation. The interest rate differential to
be received or paid under the agreement is recorded over the life of the
agreement as an adjustment to interest expense. The pricing on the loan is
indexed to the London Interbank Offered Rate (LIBOR).
COMMODITY-RELATED INSTRUMENTS -- PSE&G (INCLUDING POWER)
At December 31, 1999 and December 31, 1998, PSE&G held or issued commodity
and financial instruments that reduce exposure to price 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 uses futures, forwards, swaps and options to manage and hedge
price risk related to these market exposures.
At December 31, 1999, PSE&G had outstanding commodity financial
instruments with a notional contract quantity of 36.1 million megawatt-hours
(mWh) of electricity and 25.5 million MMBTU (million British thermal units) of
natural gas. 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. Notional amounts are indicative only of
the volume of activity and are not a measure of market risk.
A-41
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
As discussed in Note 1. Organization, Basis of Presentation and Summary of
Significant Accounting Policies, PSE&G implemented EITF 98-10 effective January
1, 1999. As a result, PSE&G's energy trading contracts have been marked to
market and gains and losses from such contracts were included in earnings. PSE&G
recorded $42 million and $23 million of gains in the years ended December 31,
1999 and 1998, respectively.
COMMODITY-RELATED INSTRUMENTS -- ENERGY HOLDINGS
Energy Technologies' policy is to enter into natural gas and electricity
futures contracts and forward purchases to lock in prices related to future
fixed sales commitments. Whenever possible, Energy Technologies attempts to be
100% hedged on its electric and gas sales positions. During the years ended
December 31, 1999 and 1998, Energy Technologies entered into futures contracts
to buy natural gas and electricity related to fixed-price sales commitments.
Energy Technologies had 64% and 90% of its fixed price natural gas sales
commitments hedged and 85% and 63% of its fixed price electric commodity sales
commitments hedged at December 31, 1999 and 1998, respectively. As of December
31, 1999 and 1998, Energy Technologies had net unrealized losses of
approximately $0.1 million and $5.0 million, respectively, related to its
electric and gas hedges.
CREDIT RISK
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.
EQUITY SECURITIES -- ENERGY HOLDINGS
Resources directly and indirectly has investments in equity securities.
Resources carries its investments in equity securities at their approximate fair
value. 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 liquidity and market
volatility factors, where appropriate. The aggregate fair values of such
investments which had available market prices at December 31, 1999 and 1998 were
$131 million and $204 million, respectively. The decrease in fair value was
primarily due to the sale of certain investments during 1999. The potential
change in fair value resulting from a hypothetical 10% change in quoted market
prices of these investments amounted to $11 million at December 31, 1999 and $17
million at December 31, 1998.
FOREIGN CURRENCIES -- ENERGY HOLDINGS
In accordance with their growth strategies, Global and Resources have made
international investments of approximately $1.4 billion and $1.0 billion,
respectively.
Resources' international investments are primarily leveraged leases of
assets located in Australia, the Netherlands and the United Kingdom with
associated revenues denominated in U.S. dollars and, therefore, not subject to
foreign currency risk.
Global's international investments are primarily in projects that generate
or distribute electricity in Argentina, Brazil, Chile, China, India, Peru and
Venezuela. Investing in foreign countries involves certain risks. Economic
conditions that result in higher comparative rates of inflation in foreign
countries likely result in declining values in such countries' currencies. As
currencies fluctuate against the U.S. dollar, there is a corresponding change in
Global's investment value in terms of the U.S. dollar. Such change is reflected
as an increase or decrease in other comprehensive income, a separate component
of stockholders' equity. Cumulatively, net foreign currency
A-42
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
devaluations have reduced the reported amount of PSEG's total stockholders'
equity by $200 million, $170 million of which was caused by the devaluation of
the Brazilian Real, for the year ended December 31, 1999.
In January 1999, Brazil abandoned its managed devaluation strategy and
allowed its currency, the Real, to float against other currencies. As of
December 31, 1999, the Real had devalued approximately 33% against the U.S.
dollar since December 31, 1998, affecting the carrying value of Global's
investment in a Brazilian distribution company. For additional information, see
Note 16. Financial Information by Business Segments.
Higher comparative rates of inflation in foreign economies also means that
borrowing costs in local currency will be higher than in the United States. When
warranted, Global has financed certain foreign investments with U.S. dollar
denominated debt. While less costly to service in terms of U.S. dollars, such
debt is exposed to currency risk because a devaluation would cause repayment to
be more expensive in local currency terms since more units of local currency
would be required to repay the debt. Dollar denominated debt was incurred by
Global in Argentina, Chile and Peru to finance the acquisition of interests in
rate regulated distribution entities. These entities may be able to recover
higher costs incurred as a result of a devaluation specifically through the
terms of the concession agreement or as a pass through of higher inflation costs
in rates over time, although no assurances can be given that this will occur. In
evaluating its investment decisions, Global considers the social, economic,
political and currency risks associated with each potential project; and, if
warranted, assumes a certain level of currency devaluation when making its
investment decisions. In Argentina, the currency is pegged 1:1 with the U.S.
dollar and a legislative act is required to de-couple the currency from the
dollar.
Global had consolidated project debt totaling $90 million as of December
31, 1999 associated with Global's investment in a Brazilian distribution company
that is non-recourse to Global, Energy Holdings and PSEG. The debt is
denominated in the Brazilian Real and is indexed to a basket of currencies,
approximately 50% of which is the U.S. dollar. Global is subject to foreign
currency exchange rate risk as a result of exchange rate movements between the
indexed foreign currencies and Real and between the Real and the U.S. dollar.
Exchange rate changes ultimately impact the debt level outstanding in the
reporting currency and result in foreign currency gains or losses. Gains or
losses resulting from such exchange rate movements are included in other income
for the period and amounted to gains of $2 million and a loss of $3 million for
the years ended December 31, 1999 and 1998, respectively.
Although Global generally seeks to structure power purchase contracts and
other project revenue agreements to provide for payments to be made in, or
indexed to, U.S. dollars or a currency freely convertible into U.S. dollars, its
ability to do so in all cases may be limited. As Energy Holdings continues to
invest internationally, the financial statements of PSEG will be increasingly
affected by changes in the global economy. PSEG cannot predict foreign currency
exchange rate movements and, therefore, cannot predict the impact of such
movements on PSEG's financial condition, results of operations or net cash
flows.
INTEREST RATES
PSEG, PSE&G and Energy Holdings are subject to the risk of fluctuating
interest rates in the normal course of business. Their policy is to manage
interest rate risk through the use of fixed rate debt, floating rate debt and
interest rate swaps. As of December 31, 1999, a hypothetical 10% change in
market interest rates would result in a $5 million, $14 million and $3 million
change in annual interest costs related to short-term and floating rate debt at
PSEG, PSE&G and Energy Holdings, respectively.
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 issued in June 1998. The Floating Rate Capital
Securities were issued 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 hedges the underlying debt for 10 years at an effective rate of 7.2%.
A-43
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NUCLEAR DECOMMISSIONING TRUST FUNDS
Contributions made into the Nuclear Decommissioning Trust Funds are
invested in debt and equity securities. These marketable debt and equity
securities are recorded at $631 million which approximates their fair market
value. Those securities have exposure to market price risk. The potential change
in fair value resulting from a hypothetical 10% change in quoted market prices
of these securities amounts to $63 million. PSE&G anticipates transferring the
ownership of the Nuclear Decommissioning Trust Funds to Power with the transfer
of the generation-related assets to Power.
NOTE 10. CASH AND CASH EQUIVALENTS
The December 31, 1999 and 1998 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.
NOTE 11. 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) $9.1
Nuclear Liability (Excess Layer):
Price-Anderson Act.................................. 9,338.1 (B) 233.6
-------- ------
Nuclear Liability Total....................... $9,538.1 (C) $242.7
======== ======
Property Damage (Primary Layer):
Nuclear Electric Insurance Limited (NEIL) Primary
(Salem/Hope Creek/Peach Bottom)............... $500.0 $10.3
Property Damage (Excess Layer):
NEIL II (Salem/Hope Creek/Peach Bottom)............. 2,250.0 10.7
-------- -----
Property Damage Total (Per Site).................... $2,750.0 $21.0
======== =====
Replacement Power:
NEIL I (Salem and Peach Bottom)..................... $ 202.8 (D) $5.8
NEIL I (Hope Creek)................................. 449.5 3.1
-------- ----
Replacement Power Total ...................... $ 652.3 $8.9
======== ====
</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 Industry Credit
Rating Plan (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
A-44
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
five years. The last adjustment was effective as of August 20, 1998. This
retrospective program is in excess over the Public and Nuclear Worker
Liability primary layers.
(C) Limit of liability under the Price-Anderson Act for each nuclear incident.
(D) 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.
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 $9.5 billion. All utilities owning a nuclear
reactor, including PSE&G, have provided for this exposure through a combination
of private insurance and mandatory participation in a financial protection pool
as established by the Price-Anderson Act. Under the Price-Anderson Act, each
party with an ownership interest in a nuclear reactor can be assessed its share
of $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 $9.1 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, Nuclear
Electric Insurance Limited (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.
PENDING ASSET PURCHASES
PSEG has entered into contracts to purchase combustion turbines to expand
capacity at certain generating sites. PSEG's commitment under these contracts is
approximately $392 million to be expended through December 2001. Through
December 31, 1999, payments of approximately $91 million were made under these
contracts.
On October 6, 1999, Power announced an agreement with Niagara Mohawk Power
Corporation (Niagara Mohawk) to purchase its 400 MW oil and gas-fired electric
generating station in Albany, New York (Albany Steam Station) for $47.5 million.
Payment of Power's obligation under such agreement has been guaranteed by PSEG.
Niagara Mohawk could also receive up to an additional $11.5 million if Power
chooses to pursue redevelopment of the Albany Steam Station. Under a transition
power supply contract in place through September 2003, Niagara Mohawk will
purchase electricity from Power at prices consistent with those established in
Niagara Mohawk's regulatory agreement with the New York Public Service
Commission (NYPSC). The purchase is subject to approval by the NYPSC and Federal
agencies including FERC. Power expects to complete the transaction in 2000.
A-45
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
On September 30, 1999, Power announced that it has signed an agreement to
acquire all of Conectiv's interests in Salem and Hope Creek and half of
Conectiv's interest in Peach Bottom for an aggregate purchase price of $15.4
million plus the net book value of nuclear fuel at closing. Payment of Power's
obligation under such agreement has been guaranteed by PSEG. Conectiv is the
parent of Atlantic City Electric Company (ACE) and Delmarva Power & Light
Company (DP&L). Power will purchase Conectiv's 14.82% interest (328 MW) in
Salem, Conectiv's 5% interest (52 MW) in Hope Creek and half of Conectiv's
15.02% interest (164 MW) in Peach Bottom. Once completed, PSEG would own a
57.41% interest (1,270 MW) in Salem, a 100% interest (1,031 MW) in Hope Creek
and a 50% interest (1,094 MW) in Peach Bottom. The purchases are subject to
approval by the BPU, the Delaware Public Service Commission, the Maryland Public
Service Commission, the Pennsylvania Public Utility Commission (PPUC) and
Federal agencies including the NRC and FERC. Power expects to complete the
purchases in 2000.
NUCLEAR OPERATING PERFORMANCE STANDARD (OPS)
As part of the May 1997 settlement of litigation, PECO Energy, DP&L and
PSE&G, three of the co-owners of Salem and Peach Bottom, 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 ACE) 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%. The average capacity factors for the 1998-1999 period
were 75%, 81%, 87% and 89% for Salem 1, Salem 2, Peach Bottom 2 and Peach Bottom
3, respectively. 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.
As noted above, Power has announced that it has signed an agreement to
acquire all of Conectiv's interests in Salem and Hope Creek and half of
Conectiv's interest in Peach Bottom. Once the purchases are completed, DP&L will
no longer have an interest in the OPS agreement.
HAZARDOUS WASTE
The New Jersey Department of Environmental Protection (NJDEP) regulations
concerning site investigation and remediation 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
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 situated on surface water
bodies. PSE&G and predecessor companies owned and/or operated certain facilities
situated on surface water bodies, certain of which are currently the subject of
remedial activities. The financial impact of these regulations on these projects
is not currently estimable. PSE&G does not anticipate that the compliance with
these regulations will have a material adverse effect on its financial position,
results of operations or net cash flows.
PSE&G MANUFACTURED GAS PLANT REMEDIATION PROGRAM
Since 1988, 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 conditions 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 long-term costs 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. The Energy
Competition Act provides for the continuation of RAC programs. The Final Order
provides for the recovery of costs for this remediation effort through the SBC.
A-46
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Net of recoveries, costs incurred through December 31, 1999 for the
Remediation Program amounted to $94 million. In addition, at December 31, 1999,
PSE&G's estimated liability for remediation costs through 2002 aggregated $62
million. Expenditures beyond 2002 cannot be reasonably estimated.
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 the
Federal Comprehensive Environmental Response, Compensation and Liability Act of
1980 (CERCLA) and that, to date, at least thirteen corporations, including
PSE&G, may be potentially liable for performing required remedial actions to
address potential environmental pollution at the Passaic River "facility". In a
separate matter, PSE&G and certain of its predecessors operated industrial
facilities at properties within the Passaic River "facility", including the
former Harrison Gas Plant and Essex Generating Station. PSE&G cannot predict
what action, if any, the EPA or any third party may take against PSE&G with
respect to these matters, or in such event, what costs PSE&G may incur to
address any such claims. However, such costs may be material.
NOTE 12. PSE&G NUCLEAR DECOMMISSIONING
PSE&G has an ownership interest in five nuclear units. 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. 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 $29.6 million of such
costs are to be collected through PSE&G's base rates and the LEAC. Per the Final
Order, such costs will now be collected through the SBC, since the LEAC was
discontinued on July 31, 1999. As of December 31, 1999 and 1998, PSE&G had
contributed $338 million and $303 million, respectively, into independent,
external, qualified and non-qualified nuclear decommissioning trust funds. The
fair market value of these funds as of December 31, 1999 and 1998 was $631
million and $542 million, respectively.
NOTE 13. INCOME TAXES
The 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
A-47
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
year's phase out of the TEFA. Effective January 1, 2000, revised rates became
effective which reflect two 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 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, 1999 and
1998. On December 23, 1999, the BPU issued an order implementing TEFA reductions
and other rate adjustments. This order mandates PSE&G to implement a permanent
base rate reduction of $1.3 million to reflect the gas cash working capital
impact of energy tax reform act and a one time credit of $2.7 million in 2000 to
reflect the gas cash working capital reduction defined in 1999 and 1998, with
interest.
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>
1999 1998 1997
------- ------- -------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Net Income (Loss) ........................................ $(81) $644 $560
Extraordinary Item (Net of Tax of $345) ............. 804 -- --
------- ------- -------
Net Income before Extraordinary Item ..................... 723 644 560
Preferred securities (net) ............................... 9 9 15
------- ------- -------
Subtotal ................................... 732 653 575
------- ------- -------
Income taxes:
Operating income:
Federal - Current ................................. 398 336 160
Deferred (A) .......................... 63 4 139
ITC ................................... (12) (21) (20)
------- ------- -------
Total Federal .................... 449 319 279
------- ------- -------
State - Current ................................... 132 121 4
Deferred (A) ............................. (13) (9) 3
------- ------- -------
Total State ...................... 119 112 7
------- ------- -------
Foreign - Current ................................. -- -- --
Deferred (A) .......................... (5) (3) (2)
------- ------- -------
Total Foreign .................... (5) (3) (2)
------- ------- -------
------- ------- -------
Total included in operating income ......... 563 428 284
------- ------- -------
Pretax income ............................................ $1,295 $1,081 $859
======= ======= =======
</TABLE>
A-48
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Reconciliation between total income tax provisions and tax computed at the
statutory tax rate on pretax income:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Tax computed at the statutory rate ......................................... $453 $378 $301
Increase (decrease) attributable to flow through of certain tax adjustments:
Depreciation ........................................................ 35 23 27
Amortization of investment tax credits .............................. (12) (21) (20)
New Jersey Corporate Business Tax ................................... 84 63 2
Other ............................................................... 3 (15) (26)
----- ----- -----
Subtotal ..................................................... 110 50 (17)
----- ----- -----
Total income tax provisions .................................. $563 $428 $284
===== ===== =====
Effective income tax rate .................................................. 43.5% 39.6% 33.1%
</TABLE>
(A) The provision for deferred income taxes represents the tax effects of the
following items:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Deferred Credits:
Additional tax depreciation and amortization ........................ $(17) $(33) $34
Leasing Activities .................................................. 94 39 114
Conservation Costs .................................................. 29 36 27
Deferred Fuel Costs--net ............................................ (19) (60) (32)
Pension Cost ........................................................ (34) 26 8
New Jersey Corporate Business Tax ................................... (13) (5) --
Severance Pay ....................................................... 8 -- 3
Other ............................................................... (3) (11) (14)
----- ----- -----
Total ........................................................ $45 $(8) $140
===== ===== =====
</TABLE>
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,
1999, PSE&G had a deferred tax liability and an offsetting regulatory asset of
$286 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%. During 1999, PSE&G's
accumulated deferred income tax liability was reduced, reflecting the impact of
the impairment writedown of the book basis of PSE&G's generating facilities.
This was offset by the establishment of a deferred tax liability representing
the future taxes payable applicable to the recovery of the stranded costs.
A-49
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The following is an analysis of deferred income taxes:
DECEMBER 31,
-----------------
1999 1998
------ ------
(MILLIONS OF DOLLARS)
DEFERRED INCOME TAXES
Assets:
Current (net) .................................... $33 $30
------ ------
Non-current:
Unrecovered Investment Tax Credits ............ 23 110
Nuclear Decommissioning ....................... 26 26
Construction Period Interest and Taxes ........ 13 13
Deferred Electric Energy and Gas Costs ........ 18 --
New Jersey Corporate Business Tax ............. 493 15
Vacation Pay .................................. 6 6
Development Fees .............................. 16 16
Foreign Currency Translation .................. 22 5
Other ......................................... 14 30
------ ------
Total Non-current ...................... 631 221
------ ------
Total Assets ........................... 664 251
------ ------
Liabilities:
Non-current:
Plant Related Items ........................... 655 2,212
Securitization-EMP ............................ 1,657 --
Leasing Activities ............................ 797 702
Partnership Activities ........................ 118 154
Conservation Costs ............................ 95 75
Hope Creek O&M Costs .......................... -- 19
Unamortized Debt Expense ...................... 39 45
Taxes Recoverable Through Future Rates (net) .. 87 242
Other ......................................... 36 181
------ ------
Total Non-current ...................... 3,484 3,630
------ ------
Total Liabilities ...................... 3,484 3,630
------ ------
Summary -- Accumulated Deferred Income Taxes
Net Current Assets ............................... 33 30
Net Non-current Liability ........................ 2,853 3,409
------ ------
Total ...................................... $2,820 $3,379
====== ======
A-50
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 14. PENSION, OTHER POSTRETIREMENT BENEFIT AND SAVINGS PLANS
PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS (A)
---------------- --------------------
(MILLIONS OF DOLLARS) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit Obligation at Beginning of Year $ 2,488 $ 2,123 $ 782 $ 724
Service Cost 68 60 13 15
Interest Cost 163 158 51 56
Actuarial (Gain)/Loss (195) 287 (120) 16
Benefits Paid (140) (140) (35) (29)
------- ------- ------- -------
Benefit Obligation at End of Year 2,384 2,488 691 782
------- ------- ------- -------
CHANGE IN PLAN ASSETS
Fair Value of Assets at Beginning of Year 2,223 1,959 13 --
Actual Return on Plan Assets (Net of Expenses) 368 249 4 1
Employer Contributions 75 155 47 41
Benefits Paid (140) (140) (35) (29)
------- ------- ------- -------
Fair Value of Assets at End of Year 2,526 2,223 29 13
------- ------- ------- -------
RECONCILIATION OF FUNDED STATUS
Funded Status 142 (265) (662) (769)
Unrecognized Net
Transition Obligation 29 37 368 398
Prior Service Cost 120 134 27 30
(Gain)/Loss (155) 212 (128) (9)
------- ------- ------- -------
Net Amount Recognized $ 136 $ 118 $ (395) (350)
======= ======= ======= =======
AMOUNTS RECOGNIZED IN STATEMENT OF FINANCIAL POSITION
Prepaid Benefit Cost 152 129 -- --
Accrued Benefit Cost (44) (42) (395) (350)
Intangible Asset 23 26 N/A N/A
Accumulated Other Comprehensive Income 5 5 N/A N/A
------- ------- ------- -------
Net Amount Recognized $ 136 $ 118 $ (395) $ (350)
======= ======= ======= =======
SEPARATE DISCLOSURE FOR PENSION PLANS WITH ACCUMULATED BENEFIT
OBLIGATION IN EXCESS OF PLAN ASSETS:
Projected Benefit Obligation at End of Year $ 52 $ 49
Accumulated Benefit Obligation at End of Year $ 44 $ 42
Fair Value of Assets at End of Year $ -- $ --
</TABLE>
A-51
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
OTHER
POSTRETIREMENT
PENSION BENEFITS BENEFITS (A)
---------------- ---------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
Service Cost $ 68 $ 60 $ 13 $ 15
Interest Cost 163 158 52 56
Expected Return on Plan Assets (197) (176) (2) --
Amortization of Net
Transition Obligation 8 8 30 30
Prior Service Cost 14 14 2 2
(Gain)/Loss 1 -- (3) (1)
----- ----- ----- -----
Net Periodic Benefit Cost $ 57 $ 64 $ 92 $ 102
===== ===== ===== =====
COMPONENTS OF TOTAL BENEFIT EXPENSE
Net Periodic Benefit Cost $ 57 $ 64 $ 92 $ 102
Effect of Regulatory Asset -- -- 19 19
Total Benefit Expense Including Effect of Regulatory
----- ----- ----- -----
Asset $ 57 $ 64 $ 111 $ 121
===== ===== ===== =====
COMPONENTS OF OTHER COMPREHENSIVE INCOME
Decrease in Intangible Asset $ 3 $ (1)
Increase in Additional Minimum Liability (4) (4)
----- -----
Other Comprehensive Income $ (1) $ (5) N/A N/A
----- -----
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount Rate 7.50% 6.75% 7.50% 6.75%
Expected Return on Plan Assets 9.00% 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 11.00% 11.50%
Ultimate Rate 5.00% 5.00%
Year Ultimate Rate Reached 2011 2011
Post-65 Medical Costs
Immediate Rate 7.00% 7.50%
Ultimate Rate 5.00% 5.00%
Year Ultimate Rate Reached 2003 2003
Dental Costs
Immediate Rate 5.00% 5.50%
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 $ 5
Postretirement Benefit Obligation $ 46 $ 60
Effect of a 1% Decrease On
Total of Service Cost and Interest Cost $ (4) $ (4)
Postretirement Benefit Obligation $ (39) $ (51)
</TABLE>
(A) 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
A-52
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 1999 were
$111 million, including $19 million of amortization. At December 31, 1999,
the amount of the unfunded liability was $663 million.
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 1999, $12 million was funded, as allowed.
Remaining OPEB costs will not be funded in an external trust, as mandated by the
BPU.
In October 1999, PSE&G created deferred assets and liabilities associated
with the payment and collection of co-owner related OPEB costs. Such costs will
be amortized over the remainder of the twenty-year period, in accordance with
SFAS 106. Any impairment to such costs as a result of the Conectiv asset
purchase will be recognized in Power's financial statements in 2000. No
assurances for recovery of such assets and liabilities can be given.
401K PLANS
PSEG sponsors two defined contribution plans. Represented employees of
PSE&G, Power and Services are eligible for participation in the PSEG Employee
Savings Plan (Savings Plan), while non represented employees of PSE&G, Power,
Energy Holdings and Services are eligible for participation in the PSEG Thrift
and Tax-Deferred Savings Plan (Thrift Plan). These plans are 401(k) plans to
which eligible employees may contribute up to 25% of their compensation.
Employee contributions up to 7% for Savings Plan participants and up to 8% for
Thrift Plan participants are matched with employer contributions of cash or PSEG
common stock equal to 50% of such employee contributions related to employee
contributions. Employer contributions, related to participant contributions in
excess of 5% and up to 7%, are made in shares of PSEG common stock for Savings
Plan participants. Employer contributions, related to participant contributions
in excess of 6% and up to 8%, are made in shares of PSEG common stock for Thrift
Plan participants. PSEG billed its subsidiary companies for their portions of
employer contributions. The amount expensed for the matching provision of the
plans was approximately $21 million, $14 million and $15 million in 1999, 1998
and 1997, respectively.
NOTE 15. 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 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 1999, there were no options granted in tandem
with performance units and dividend equivalent rights and in 1998, there were
4,600 options granted in tandem with performance units and dividend equivalent
rights. No compensation cost has been recognized for fixed stock option grants
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 "Accounting for
Stock-Based Compensation," there would have been a charge to PSEG's net income
of approximately $1.8 million, $0.4 million and $0.1 million in 1999, 1998 and
1997, respectively, with a $(0.01) impact on earnings per share in 1999 and no
impact on earnings per share in 1998 and 1997.
A-53
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
PSEG's Long Term Incentive Plan (LTP) 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. 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. 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 LTP originally provided for the issuance of up to 500,000 options to
purchase shares of common stock and was subsequently amended to increase the
amount to 5,000,000. At December 31, 1999, there were 2,270,700 options
available for future grants under the LTP.
Since the LTP's inception, PSEG has purchased shares on the open market to
meet the exercise of stock options. The difference between the cost of the
shares (generally 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, 1999 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------- --------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------------------------- --------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Beginning of year 1,243,800 $36.01 430,300 $29.26 84,000 $29.38
Granted 1,367,000 33.13 841,600 39.16 371,000 29.36
Exercised (44,167) 30.37 (28,100) 26.76 (21,500) 31.38
Canceled (4,750) 28.01 -- -- (3,200) 28.70
---------- ---------- ---------- ---------- ---------- ----------
End of year 2,561,883 34.60 1,243,800 36.01 430,300 29.26
---------- ---------- ---------- ---------- ---------- ----------
Exercisable at end of year 412,738 $35.07 100,963 $29.47 6,000 $26.45
---------- ---------- ---------- ---------- ---------- ----------
---------------------------------------------------------------------------------------------
Weighted average fair value of
options granted during the year $4.20 $4.83 $3.60
========== ========== ==========
</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 1999, 1998 and 1997,
respectively: expected volatility of 21.45%, 21.41% and 17.15%, risk free
interest rates of 6.16%, 4.48% and 5.14%, expected lives of 4 years, 4 years and
3.75 years, respectively. Additional weighted averages assumptions include for
grants in 1999, 1998 and 1997 a dividend yield of 0% with respect to the
dividend equivalent feature of the tandem grants. There was a dividend yield of
6.52% in 1999, 5.51% in 1998 and 7.31% in 1997 on the non-tandem grants.
A-54
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The following table provides information about options outstanding at
December 31, 1999:
<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, 1999 CONTRACTUAL LIFE PRICE DECEMBER 31, 1999 PRICE
- --------------------------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C>
$24.00-$30.00 363,283 7.81 years $29.34 179,069 $29.57
$30.01-$35.00 1,371,600 9.94 years 33.13 -- --
$35.01-$40.00 827,000 8.93 years 39.31 233,669 39.31
- --------------------------------------------------------------------- ------------------------------
$24.00-$40.00 2,561,883 9.30 years $34.60 412,738 $35.07
- --------------------------------------------------------------------- ------------------------------
</TABLE>
In June 1998, the Committee granted 150,000 shares of restricted common
stock to a key executive. 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, 1999 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, 600 shares of common stock, increased from 300
shares per year 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 has 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 1999, 1998 and 1997, employees purchased 98,099, 102,387 and
144,377 shares at an average price of $38.21, $36.36 and $26.39 per share,
respectively. At December 31, 1999, 1,191,681 shares were available for future
issuance under this plan.
STOCK REPURCHASE PROGRAM
The PSEG Board of Directors has authorized the repurchase of up to 30
million shares of its common stock from time to time, subject to market
conditions and other relevant factors affecting PSEG. Share repurchases are
planned when market and business conditions are deemed favorable. The
repurchased shares have been held as treasury stock or used for corporate
purposes. As of December 31, 1999, PSEG had repurchased 15.8 million shares at a
cost of approximately $607 million.
In December 1999, PSEG entered into a Forward Purchase Agreement with an
intermediary, who has purchased and held shares on behalf of PSEG. These shares
will not be reflected on PSEG's balance sheet until settlement of the
transaction which is expected in the second quarter of 2000. Market conditions
and the availability of alternative investments will dictate if and when more
shares of Common Stock will be repurchased under this authorization.
A-55
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 16. FINANCIAL INFORMATION BY BUSINESS SEGMENTS
BASIS OF ORGANIZATION
The reportable segments disclosed herein were determined based on a
variety of factors including the regulatory environment of each of PSEG's lines
of business and the types of products and services offered. Effective with the
unbundling of PSE&G's rates on August 1, 1999 and the deregulation of the
electric generation portion of PSE&G's business, the basis of segment reporting
has changed beginning with the third quarter of 1999. The generation and energy
trading portions of PSE&G's business are now separate reportable segments,
whereas they previously had been part of the Electric segment. Note that
estimates have been used to separate historical, pre-August 1, 1999, electric
segment data into the Generation, Energy Resources and Trade and Transmission
and Distribution segments of PSE&G's business.
GENERATION
The generation segment of PSE&G's business earns revenue through the sale
of its energy and capacity. This segment consists of the power plants that will
be sold to Power.
ENERGY RESOURCES AND TRADE
The Energy Resources and Trade segment of PSE&G's business earns revenues
through sales of wholesale energy, capacity sales and other ancillary services.
TRANSMISSION AND DISTRIBUTION (T&D)
This segment represents regulated utility services provided by PSE&G. The
electric transmission and electric and gas distribution segment of PSE&G's
business generates revenue from its tariffs under which it provides electric
transmission and electric and gas distribution services to residential,
commercial and industrial customers in New Jersey. The rates charged for
electric transmission are regulated by FERC while the rates charged for electric
and gas distribution are regulated by the BPU. Revenues are also generated from
a variety of other activities such as sundry sales, the appliance service
business, wholesale transmission services and other miscellaneous services.
RESOURCES
Resources earns revenues from its passive investments in leveraged leases,
limited partnerships, leveraged buyout funds and marketable securities.
GLOBAL
Global earns revenues from its investment in and operation of projects in
the generation and distribution of energy, both domestically and
internationally.
OTHER
PSEG's other activities generate revenues from Energy Technologies and
Enterprise Group Development Corporation (EGDC). Energy Technologies is an
energy management company that constructs, operates and maintains HVAC systems
for, and provides energy-related engineering, consulting and mechanical
contracting services to, industrial and commercial customers in the Northeastern
and Middle Atlantic United States. EGDC, which has been conducting a controlled
exit from the real estate business since 1993, earns revenues from its
nonresidential real estate property management business. Other activities also
include amounts applicable to PSEG and Energy Holdings, excluding Resources and
Global.
A-56
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Information related to the segments of PSEG's business is detailed below:
<TABLE>
<CAPTION>
ENERGY
RESOURCES CONSOLIDATED
GENERATION AND TRADE T & D RESOURCES GLOBAL OTHER TOTAL
---------- --------- ----- --------- ------ ----- ------------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1999:
Total Operating Revenues ................. $2,618 $76 $3,196 $179 $142 $286 $6,497
Depreciation and Amortization ............ 224 -- 305 1 1 5 536
Interest Income .......................... -- -- 12 1 -- 2 15
Net Interest Charges ..................... 203 -- 184 46 48 9 490
Operating Income Before Income Taxes ..... 521 56 586 123 69 (69) 1,286
Income Taxes ............................. 213 23 274 50 24 (21) 563
Net income from equity method subsidiaries -- -- -- 78 129 -- 207
Segment Income before Extraordinary Item . 308 33 312 66 28 (24) 723
Extraordinary Item (A) ................... (3,204) -- 2,400 -- -- -- (804)
Segment Net Income (Loss) ................ (2,896) 33 2,712 66 28 (24) (81)
AS OF DECEMBER 31, 1999:
Total Assets (A) ......................... $2,583 $313 $11,828 $2,096 $1,715 $480 $19,015
Investments in equity method subsidiaries -- -- -- 279 1,635 10 1,924
Gross Additions to Long-Lived Assets ..... 202 -- 277 -- 1 99 579
FOR THE YEAR ENDED DECEMBER 31, 1998:
Total Operating Revenues ................. $2,524 $50 $2,994 $145 $124 $173 $6,010
Depreciation and Amortization ............ 381 -- 268 2 1 8 660
Interest Income .......................... -- -- 20 9 1 2 32
Net Interest Charges ..................... 204 -- 174 49 41 2 470
Operating Income Before Income Taxes ..... 364 41 601 86 31 (51) 1,072
Income Taxes ............................. 145 16 243 27 12 (15) 428
Net income from equity method subsidiaries -- -- -- 35 114 -- 149
Segment Net Income (Loss) ................ 219 25 358 56 7 (21) 644
AS OF DECEMBER 31, 1998:
Total Assets ............................. $7,881 $164 $6,624 $1,809 $1,124 $389 $17,991
Investments in equity method subsidiaries -- -- -- 383 1,059 34 1,476
Gross Additions to Long-Lived Assets ..... 265 -- 270 -- 2 8 545
FOR THE YEAR ENDED DECEMBER 31, 1997:
Total Operating Revenues ................. $2,529 $23 $3,281 $144 $91 $109 $6,177
Depreciation and Amortization ............ 360 -- 247 1 2 20 630
Interest Income .......................... -- -- 14 4 -- 3 21
Net Interest Charges ..................... 211 -- 169 46 22 2 450
Operating Income Before Income Taxes ..... 292 18 474 88 24 (52) 844
Income Taxes ............................. 101 6 149 29 10 (11) 284
Net income from equity method subsidiaries -- -- -- 49 78 -- 127
Segment Net Income (Loss) ................ 191 12 325 59 14 (41) 560
AS OF DECEMBER 31, 1997:
Total Assets ............................. $8,069 $114 $6,661 $1,616 $1,170 $349 $17,979
Investments in equity method subsidiaries -- -- -- 407 1,119 34 1,560
Gross Additions to Long-Lived Assets ..... 166 -- 376 -- -- 6 548
</TABLE>
(A) See Note 3. Extraordinary Charge and Other Accounting Impacts of
Deregulation for discussion of the extraordinary charge recorded by the
Generation segment and the related regulatory asset for securitization
recorded by the T&D segment.
A-57
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Geographic information for PSEG is disclosed below. The foreign
investments and operations noted below were made through Energy Holdings. PSE&G
does not have foreign investments or operations.
<TABLE>
<CAPTION>
REVENUES (1) IDENTIFIABLE ASSETS
------------------------------ ------------------------------------
YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
------------------------------ -------------- -----------------
1999 1998 1999 1998
------------ ------------ -------------- -----------------
(Millions of Dollars) (Millions of Dollars)
<S> <C> <C> <C> <C>
United States............................ $6,348 $5,901 $16,595 $16,388
Foreign Countries (2).................... 149 109 2,420 1,603
------------ ------------ -------------- -----------------
Total.............................. $6,497 $6,010 $19,015 $17,991
============ ============ ============== =================
Identifiable investments in foreign countries include:
Argentina $356 $304
Brazil (3) $330 $480
Chile and Peru $520 $ --
Netherlands $623 $400
</TABLE>
- --------------------------------------------------------------------------------
(1) Revenues are attributed to countries based on the locations of the
investments. Global's revenue includes its share of the net income from
joint ventures recorded under the equity method of accounting.
(2) Total assets are net of foreign currency translation adjustment of $(222)
million (pre-tax) as of December 31, 1999 and $(48) million (pre-tax) as
of December 31, 1998.
(3) Amount is net of foreign currency translation adjustment of $(189) million
(pre-tax) as of December 31, 1999 and $(43) million (pre-tax) as of
December 31, 1998.
Information related to Property, Plant and Equipment of PSE&G is detailed below:
DECEMBER 31,
-------------------------------
1999 1998 1997
------- ------- -------
(MILLIONS OF DOLLARS)
Property, Plant and Equipment
Electric Plant in Service:
Fossil Production (A) ................ $1,628 $2,802 $1,840
Nuclear Production (A) ............... 110 6,246 6,162
Transmission ......................... 1,169 1,200 1,163
Distribution ......................... 3,862 3,545 3,315
Other ................................ -- 276 1,212
------- ------- -------
Total Electric Plant in Service 6,769 14,069 13,692
------- ------- -------
Gas Plant in Service:
Transmission ......................... -- 69 67
Distribution ......................... 3,019 2,608 2,472
Other ................................ -- 170 158
------- ------- -------
Total Gas Plant in Service .... 3,019 2,847 2,697
------- ------- -------
Common Plant in Service:
Capital Leases ....................... 59 59 59
General .............................. 363 519 499
------- ------- -------
Total Common Plant in Service . 422 578 558
------- ------- -------
Total ................... $10,210 $17,494 $16,947
======= ======= =======
(A) See Note 3. Extraordinary Charge and Other Accounting Impacts of
Deregulation for discussion of the extraordinary charge recorded by the
Generation segment and the related regulatory asset for securitization
recorded by the T&D segment.
A-58
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 17. JOINTLY OWNED FACILITIES -- PROPERTY, PLANT AND EQUIPMENT
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, 1999
----------------------------------------------------------------
OWNERSHIP PLANT IN ACCUMULATED PLANT UNDER
INTEREST SERVICE DEPRECIATION CONSTRUCTION
--------- -------- ------------ ------------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
Coal Generating
Conemaugh............................... 22.50% $198 $56 $--
Keystone................................ 22.84% 122 42 --
Nuclear Generating
Peach Bottom............................ 42.49% 23 12 --
Salem................................... 42.59% 797 679 --
Hope Creek.............................. 95.00% 763 652 --
Nuclear Support Facilities.............. Various 15 2 --
Pumped Storage Facilities
Yards Creek............................. 50.00% 28 10 --
Transmission Facilities........................ Various 95 31 --
Merrill Creek Reservoir........................ 13.91% 2 -- --
Linden SNG Plant............................... 90.00% 16 14 --
</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,
------------------ ------------------- ------------------- ------------------
1999 1998 1999 1998 1999 1998 1999 1998
------ ------ ------ ------ ------ ------ ------ ------
(MILLIONS WHERE APPLICABLE)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Revenues ............. $1,795 $1,659 $1,436 $1,362 $1,606 $1,439 $1,660 $1,550
Operating Income ............... 461 449 437 341 503 450 436 364
Income before Extraordinary Item 188 191 181 122 221 180 133 151
Extraordinary Item ............. -- -- (790) -- (14) -- -- --
Net Income ..................... 188 191 (609) 122 207 180 133 151
Earnings per Share
(Basic and Diluted) ......... 0.85 0.82 (2.77) 0.53 0.95 0.78 0.61 0.66
Weighted Average Common
Shares and Potential
Dilutive Effect of Stock
Options Outstanding ......... 223 232 220 232 219 232 218 228
</TABLE>
A-59
<PAGE>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONCLUDED
NOTE 19. ACCOUNTING MATTERS
In June 1999, the FASB issued SFAS 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133" (SFAS 137) to defer the effective date of SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) for
one year. Consequently, SFAS 133 will now be effective for all fiscal quarters
beginning after January 1, 2001. The FASB also decided to defer by one year the
transition date regarding embedded derivatives in SFAS 133.
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.
A-60
<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 Appendix is also the
responsibility of management and is consistent with these consolidated financial
statements and related notes.
The firm of Deloitte & Touche LLP, independent auditors, is engaged to
audit 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 Services 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, 1999, the
corporation's system of internal accounting controls was 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 11, 2000
A-61
<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, 1999 and 1998, 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, 1999. 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 audit 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 as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company discontinued application of Statement of Financial Accounting Standards
No. 71, Accounting for the Effects of Certain Types of Regulation, for the
electric generation portion of its business effective April 1, 1999.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 11, 2000
A-62
<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.
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.
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.
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 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.
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.
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.
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.
<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-63
<PAGE>
[LOGO]PSEG PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
- --------------------------------------------------------------------------------
E. JAMES FERLAND 80 PARK PLAZA, NEWARK, NJ 07101
MAILING ADDRESS/P.O. BOX 1171, NEWARK, NJ
Chairman of the Board 07101-1171
President and Chief
Executive Officer
March 1, 2000
Dear Shareholder:
You are cordially invited to join us at the 2000 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 18, 2000, starting at 2:00 P.M. At the
meeting we will: (1) elect three directors in Class I and one director in Class
II; (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, 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 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
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(Continued from other side)
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<S> <C> <C>
ACCOUNT NUMBER SEQUENCE NUMBER PLEASE MARK ALL CHOICES LIKE THIS [X]
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|THE BOARD OF DIRECTORS RECOMMEND A VOTE FOR PROPOSALS 1 AND 2 |
| |
|(1) ELECTION OF DIRECTORS: Nominees for Class I terms expiring in 2003 are 01) Ernest H. Drew, |
| 2) E. James Ferland, 03) Marilyn M. Pfaltz |
| Nominee for Class II term expiring in 2001 is: 04) Forrest J. Remick |
| |
| FOR AGAINST ABSTAIN |
| --- ------- ------- |
| FOR WITHHOLD |
|all nominees listed above authority to vote for all (2) Ratification of Deloitte & |
|(except as marked to the [ ] nominees listed above [ ] Touche LLP as Independent [ ] [ ] [ ] |
|contrary below) Auditors for the year 2000 |
| |
| |
|--------------------------------------------------------------- |
| |
| |
|(INSTRUCTIONS: To withhold authority to vote for any individual |
|moninee, write that nominee's name on the line provided above.) |
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| If you wish to access the Annual Report and Proxy |
|If you plan to attend the Annual Meeting, please mark Statement via the Internet and no longer receive |
|this box. [ ] them in the mail, please mark this box. [ ] |
| |
|If you wish to include comments, please mark this box |
|and write your comments on the reverse side of this form. [ ] For change of address, please mark this box |
| and make changes to the address below [ ] |
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Please date and sign exactly as your name appears hereon. When signing as an
attorney, executor, admnistrator, trustee, guardian, etc., give your full title
as such. If stock is held jointly, each joint owner should sign.
SIGNATURE DATE
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SIGNATURE DATE
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<PAGE>
VOTE BY TELEPHONE OR INTERNET QUICK***EASY***IMMEDIATE
Public Service Enterprise Group Incorporated invites you take advantage of two
convenient ways to vote your shares for matters to be covered at the 2000 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.
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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:
htt://www.proxyvoting.com/pseg
CALL TOLL-FREE ON A TOUCH-TONE PHONE |--------------------------------|
1-888-892-7873 | CONTROL NUMBER |
THERE IS NO CHARGE FOR THIS CALL | 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
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<S> <C>
PROXY FOR ANNUAL MEETING OF STOCK HOLDERS THIS PROXY IS SOLICITED ON BEHALF OF THE
April 18, 2000 BOARD OF DIRECTORS OF PSEG
The undersigned hereby appoints E. James Ferland, Ernest H. Drew and 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 18, 2000 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, reciept 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.
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