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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission Registrant, State of Incorporation, I.R.S. Employer
File Number Address, and Telephone Number Identification No.
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1-9120 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED 22-2625848
(A New Jersey Corporation)
80 Park Plaza
P.O. Box 1171
Newark, New Jersey 07101-1171
973 430-7000
http://www.pseg.com
1-973 PUBLIC SERVICE ELECTRIC AND GAS COMPANY 22-1212800
(A New Jersey Corporation)
80 Park Plaza
P.O. Box 570
Newark, New Jersey 07101-0570
973 430-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
The number of shares outstanding of Public Service Enterprise Group
Incorporated's sole class of common stock, as of the latest practicable date,
was as follows:
Class: Common Stock, without par value
Outstanding at April 30, 1998: 231,957,608
As of April 30, 1998 Public Service Electric and Gas Company had issued and
outstanding 132,450,344 shares of common stock, without nominal or par value,
all of which were privately held, beneficially and of record by Public Service
Enterprise Group Incorporated.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Page
Public Service Enterprise Group Incorporated (Enterprise):
Consolidated Statements of Income for the Three
Months Ended March 31, 1998 and 1997............................ 1
Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997........................................... 2
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1998 and 1997............................ 4
Public Service Electric and Gas Company (PSE&G):
Consolidated Statements of Income for the Three
Months Ended March 31, 1998 and 1997............................ 5
Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997........................................... 6
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1998 and 1997............................ 8
Notes to Consolidated Financial Statements -- Enterprise.......... 9
Notes to Consolidated Financial Statements -- PSE&G............... 16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Enterprise...................................................... 17
PSE&G........................................................... 22
Item 3. Qualitative and Quantitative Disclosures About Market Risk. 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 24
Item 4. Submission of Matters to a Vote of Security Holders......... 25
Item 5. Other Information........................................... 26
Item 6. Exhibits and Reports on Form 8-K............................ 28
Signatures -- Enterprise............................................ 29
Signatures -- PSE&G................................................. 29
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(Millions of Dollars, except Per Share Data)
(Unaudited)
Three Months Ended
March 31,
--------- ---------
1998 1997
--------- ---------
OPERATING REVENUES
Electric ............................................................ $ 1,177 $ 960
Gas ................................................................. 612 734
Nonutility Activities ............................................... 112 38
--------- ---------
Total Operating Revenues ....................................... 1,901 1,732
--------- ---------
OPERATING EXPENSES
Operation
Fuel for Electric Generation and Interchanged Power ................. 486 248
Gas Purchased ....................................................... 391 422
Other ............................................................... 291 249
Maintenance ............................................................... 48 58
Depreciation and Amortization ............................................. 164 150
Taxes (Note 6)
Income Taxes ........................................................ 132 103
Transitional Energy Facility Assessment/New Jersey
Gross Receipts Taxes ........................................... 49 172
Other ............................................................... 22 21
--------- ---------
Total Operating Expenses ....................................... 1,583 1,423
--------- ---------
OPERATING INCOME .......................................................... 318 309
--------- ---------
OTHER INCOME AND DEDUCTIONS
Settlement of Salem Litigation - Net of Applicable
Taxes of $29 ........................................................... -- (53)
Other - net ............................................................. 6 2
--------- ---------
Total Other Income and Deductions ................................... 6 (51)
--------- ---------
INCOME BEFORE INTEREST CHARGES AND
DIVIDENDS ON PREFERRED SECURITIES ................................... 324 258
--------- ---------
INTEREST CHARGES AND PREFERRED SECURITIES DIVIDENDS
Interest Expense .................................................... 120 110
Allowance for Funds Used During Construction -
Debt and Capitalized Interest ..................................... (4) (6)
Preferred Securities Dividend Requirements of Subsidiaries .......... 17 14
--------- ---------
Total Interest Charges and Preferred Securities Dividends ...... 133 118
--------- ---------
NET INCOME ................................................................ $ 191 $ 140
========= =========
AVERAGE SHARES OF COMMON STOCK
OUTSTANDING (000's) ................................................. 231,958 232,072
EARNINGS PER AVERAGE SHARE (Basic and Diluted) ............................ $ 0.82 $ 0.60
========= =========
DIVIDENDS PAID PER SHARE OF COMMON STOCK .................................. $ 0.54 $ 0.54
========= =========
<FN>
See Notes to Consolidated Financial Statements.
</FN>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS
ASSETS
(Millions of Dollars)
(Unaudited)
March 31, December 31,
1998 1997
------- ------------
UTILITY PLANT - Original cost
Electric ..................................................................... $13,731 $13,692
Gas .......................................................................... 2,718 2,697
Common ....................................................................... 564 558
------- -------
Total ................................................................... 17,013 16,947
Less: Accumulated depreciation and amortization .............................. 6,606 6,463
------- -------
Net ..................................................................... 10,407 10,484
Nuclear Fuel in Service, net of accumulated amortization -
1998, $272; 1997, $302 .................................................... 208 216
------- -------
Net Utility Plant in Service ............................................ 10,615 10,700
Construction Work in Progress, including Nuclear Fuel in
Process - 1998, $53; 1997, $60 ............................................. 328 326
Plant Held for Future Use .................................................... 24 24
------- -------
Net Utility Plant ....................................................... 10,967 11,050
------- -------
INVESTMENTS AND OTHER NONCURRENT ASSETS
Long-Term Investments, net of amortization - 1998, $23; 1997,
$21, and net of valuation allowances - 1998, $10; 1997 $10 ................. 2,881 2,873
Nuclear Decommissioning and Other Special Funds ............................... 545 492
Other Noncurrent Assets, net of amortization - 1998, $17; 1997, $16, ......... 167 167
------- -------
Total Investments and Other Noncurrent Assets ........................... 3,593 3,532
------- -------
CURRENT ASSETS
Cash and Cash Equivalents .................................................... 77 83
Accounts Receivable:
Customer Accounts Receivable ............................................... 631 520
Other Accounts Receivable .................................................. 219 293
Less: Allowance for Doubtful Accounts ...................................... 45 41
Unbilled Revenues ............................................................ 189 270
Fuel, at average cost ........................................................ 170 310
Materials and Supplies, at average cost, net of inventory valuation
reserves - 1998, $12; 1997, $12 ............................................ 146 142
Miscellaneous Current Assets ................................................. 145 86
------- -------
Total Current Assets .................................................... 1,532 1,663
------- -------
DEFERRED DEBITS (Note 3)
Unamortized Debt Expense ..................................................... 130 136
Deferred OPEB Costs .......................................................... 285 289
Unrecovered Environmental Costs .............................................. 120 122
Underrecovered Electric Energy and Gas Costs ................................. 139 167
Unrecovered SFAS 109 Deferred Income Taxes ................................... 716 725
Deferred Demand Side Management Costs ........................................ 148 116
Other ........................................................................ 134 143
------- -------
Total Deferred Debits ................................................... 1,672 1,698
------- -------
TOTAL .......................................................................... $17,764 $17,943
======= =======
<FN>
See Notes to Consolidated Financial Statements.
</FN>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
(Millions of Dollars)
(Unaudited)
March 31, December 31,
1998 1997
--------- -----------
CAPITALIZATION
Common Stockholders' Equity:
Common Stock ............................................................... $ 3,603 $ 3,603
Retained Earnings .......................................................... 1,679 1,623
Foreign Currency Translation Adjustment .................................... (21) (15)
-------- --------
Total Common Stockholders' Equity ....................................... 5,261 5,211
Subsidiaries' Preferred Securities:
Preferred Stock Without Mandatory Redemption ............................... 95 95
Preferred Stock With Mandatory Redemption .................................. 75 75
Trust Originated Preferred Securities ...................................... 225 --
Monthly Guaranteed Preferred Beneficial Interest in PSE&G's
Subordinated Debentures ................................................. 210 210
Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's
Subordinated Debentures .................................................. 303 303
Long-Term Debt ............................................................... 4,733 4,873
-------- --------
Total Capitalization .................................................... 10,902 10,767
-------- --------
OTHER LONG-TERM LIABILITIES
Decontamination and Decommissioning Costs .................................... 43 43
Environmental Costs (Note 4) ................................................ 70 73
Capital Lease Obligations .................................................... 50 52
-------- --------
Total Other Long-Term Liabilities ....................................... 163 168
-------- --------
CURRENT LIABILITIES
Long-Term Debt due within one year ........................................... 358 340
Commercial Paper and Loans ................................................... 970 1,448
Accounts Payable ............................................................. 613 686
Other Accrued Taxes .......................................................... 254 70
Other ........................................................................ 329 283
-------- --------
Total Current Liabilities ............................................... 2,524 2,827
-------- --------
DEFERRED CREDITS
Deferred Income Taxes ........................................................ 3,335 3,394
Deferred Investment Tax Credits .............................................. 338 343
Deferred OPEB Costs .......................................................... 306 289
Other ........................................................................ 196 155
-------- --------
Total Deferred Credits .................................................. 4,175 4,181
-------- --------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 4) ............................... -- --
-------- --------
TOTAL .......................................................................... $ 17,764 $ 17,943
======== ========
<FN>
See Notes to Consolidated Financial Statements.
</FN>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
(Unaudited)
Three Months Ended March 31,
----------------------------
1998 1997
----- -----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................................... $ 191 $ 140
Adjustments to reconcile net income to net cash flows from
operating activities:
Depreciation and Amortization .............................................. 164 150
Amortization of Nuclear Fuel ............................................... 19 17
Recovery (deferral) of Electric Energy and Gas Costs - net ................. 28 (31)
Unrealized Losses (Gains) on Investments - net ............................. (35) 14
Proceeds from Leasing Activities ........................................... (59) 14
Changes in certain current assets and liabilities:
Net decrease in Accounts Receivable and Unbilled Revenues ................. 48 15
Net decrease in Inventory - Fuel and Materials and Supplies ............... 136 178
Net decrease in Accounts Payable .......................................... (73) (84)
Net change in Prepaid / Other Accrued Taxes ............................... 184 232
Net change in Other Current Assets and Liabilities ........................ (13) (121)
Other ...................................................................... (4) (5)
----- -----
Net cash provided by operating activities ............................... 586 519
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Utility Plant, excluding AFDC ................................... (81) (107)
Net decrease (increase) in Long-Term Investments and Real Estate ............. 51 (74)
Contribution to Decommissioning Funds and Other Special Funds ................ (29) (7)
Other ........................................................................ (17) (12)
----- -----
Net cash used in investing activities ................................... (76) (200)
----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in Short-Term Debt .............................................. (478) (96)
Redemption of Long-Term Debt ................................................. (122) (57)
Redemption of Preferred Stock ................................................ -- (19)
Issuance of Preferred Securities ............................................. 225 95
Retirement of Common Stock ................................................... -- (43)
Cash Dividends Paid on Common Stock .......................................... (125) (125)
Other ........................................................................ (16) (2)
----- -----
Net cash used in financing activities ................................... (516) (247)
----- -----
Net (decrease) increase in Cash and Cash Equivalents ........................... (6) 72
Cash and Cash Equivalents at Beginning of Period ............................... 83 279
----- -----
Cash and Cash Equivalents at End of Period ..................................... $ 77 $ 351
===== =====
Income Taxes Paid .............................................................. $ 50 $ 3
Interest Paid .................................................................. $ 109 $ 74
<FN>
See Notes to Consolidated Financial Statements.
</FN>
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Millions of Dollars)
(Unaudited)
Three Months Ended
March 31,
------- -------
1998 1997
------- -------
OPERATING REVENUES
Electric ................................................... $ 1,177 $ 960
Gas ........................................................ 612 734
------- -------
Total Operating Revenues ........................... 1,789 1,694
------- -------
OPERATING EXPENSES
Operation
Fuel for Electric Generation and Interchanged Power ....... 486 248
Gas Purchased .............................................. 391 422
Other ...................................................... 259 232
Maintenance ...................................................... 48 58
Depreciation and Amortization .................................... 162 149
Taxes (Note 6)
Income Taxes ............................................... 115 102
Transitional Energy Facility Assessment/New Jersey
Gross Receipts Taxes .................................... 49 172
Other ...................................................... 20 19
------- -------
Total Operating Expenses ........................... 1,530 1,402
------- -------
OPERATING INCOME ................................................. 259 292
------- -------
OTHER INCOME AND DEDUCTIONS
Settlement of Salem Litigation - Net of Applicable
Taxes of $29 ............................................ -- (53)
Other - net ................................................ 2 2
------- -------
Total Other Income and Deductions .................... 2 (51)
------- -------
INCOME BEFORE INTEREST CHARGES AND
DIVIDENDS ON PREFERRED SECURITIES .............................. 261 241
------- -------
INTEREST CHARGES AND PREFERRED SECURITIES DIVIDENDS
Interest Expense ........................................... 96 96
Allowance for Funds Used During Construction - Debt ........ (3) (5)
Preferred Securities Dividend Requirements of Subsidiaries . 11 10
------- -------
Total Interest Charges and Preferred Securities Dividends 104 101
------- -------
NET INCOME ....................................................... 157 140
------- -------
Preferred Stock Dividend Requirements ............................ 2 4
------- -------
EARNINGS AVAILABLE TO PUBLIC SERVICE ENTERPRISE
GROUP INCORPORATED ............................................. $ 155 $ 136
======= =======
<FN>
See Notes to Consolidated Financial Statements.
</FN>
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
(Millions of Dollars)
(Unaudited)
March 31, December 31,
1998 1997
------- ------------
UTILITY PLANT - Original cost
Electric ..................................................................... $13,731 $13,692
Gas .......................................................................... 2,718 2,697
Common ....................................................................... 564 558
------- -------
Total ................................................................... 17,013 16,947
Less: Accumulated depreciation and amortization .............................. 6,606 6,463
------- -------
Net ..................................................................... 10,407 10,484
Nuclear Fuel in Service, net of accumulated amortization -
1998, $272; 1997, $302 .................................................... 208 216
------- -------
Net Utility Plant in Service ............................................ 10,615 10,700
Construction Work in Progress, including Nuclear Fuel in
Process - 1998, $53; 1997, $60 ............................................. 328 326
Plant Held for Future Use .................................................... 24 24
------- -------
Net Utility Plant ....................................................... 10,967 11,050
------- -------
INVESTMENTS AND OTHER NONCURRENT ASSETS
Long-Term Investments, net of amortization - 1998, $23; 1997, $21,
and net of valuation allowances - 1998, $10; 1997, $10 ..................... 139 137
Nuclear Decommissioning and Other Special Funds .............................. 545 492
Other Noncurrent Assets ....................................................... 46 45
------- -------
Total Investments and Other Noncurrent Assets ........................... 730 674
------- -------
CURRENT ASSETS
Cash and Cash Equivalents .................................................... 18 17
Accounts Receivable:
Customer Accounts Receivable ............................................... 572 488
Other Accounts Receivable .................................................. 186 232
Less: Allowance for Doubtful Accounts ...................................... 43 41
Unbilled Revenues ............................................................ 189 270
Fuel, at average cost ........................................................ 170 310
Materials and Supplies, at average cost, net of inventory
valuation reserves - 1998, $12; 1997, $12 .................................. 146 142
Miscellaneous Current Assets ................................................. 73 81
------- -------
Total Current Assets .................................................... 1,311 1,499
------- -------
DEFERRED DEBITS (Note 3)
Unamortized Debt Expense ..................................................... 129 135
Deferred OPEB Costs .......................................................... 285 289
Unrecovered Environmental Costs .............................................. 120 122
Underrecovered Electric Energy and Gas Costs ................................. 139 167
Unrecovered SFAS 109 Deferred Income Taxes ................................... 716 725
Deferred Demand Side Management Costs ........................................ 148 116
Other ........................................................................ 134 143
------- -------
Total Deferred Debits ................................................... 1,671 1,697
------- -------
TOTAL .......................................................................... $14,679 $14,920
======= =======
<FN>
See Notes to Consolidated Financial Statements.
</FN>
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
(Millions of Dollars)
(Unaudited)
March 31, December 31,
1998 1997
-------- -----------
CAPITALIZATION
Common Stockholder's Equity:
Common Stock .......................................................... $ 2,563 $ 2,563
Contributed Capital ................................................... 594 594
Retained Earnings ..................................................... 1,382 1,352
------- -------
Total Common Stockholder's Equity .................................. 4,539 4,509
Preferred Stock Without Mandatory Redemption ............................ 95 95
Preferred Stock With Mandatory Redemption .............................. 75 75
Subsidiaries' Preferred Securities:
Monthly Guaranteed Preferred Beneficial Interest in PSE&G's
Subordinated Debentures ............................................ 210 210
Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's
Subordinated Debentures ............................................. 303 303
Long-Term Debt .......................................................... 4,123 4,126
------- -------
Total Capitalization ............................................... 9,345 9,318
------- -------
OTHER LONG-TERM LIABILITIES
Decontamination and Decommissioning Costs ............................... 43 43
Environmental Costs (Note 4) ........................................... 70 73
Capital Lease Obligations ............................................... 50 52
------- -------
Total Other Long-Term Liabilities .................................. 163 168
------- -------
CURRENT LIABILITIES
Long-Term Debt due within one year ...................................... 18 118
Commercial Paper and Loans .............................................. 822 1,106
Accounts Payable ........................................................ 584 608
Other Accrued Taxes ..................................................... 116 34
Other ................................................................... 255 234
------- -------
Total Current Liabilities .......................................... 1,795 2,100
------- -------
DEFERRED CREDITS
Deferred Income Taxes ................................................... 2,559 2,569
Deferred Investment Tax Credits ......................................... 328 333
Deferred OPEB Costs ..................................................... 306 289
Other ................................................................... 183 143
------- -------
Total Deferred Credits ............................................. 3,376 3,334
------- -------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 4) ........................... -- --
------- -------
TOTAL ..................................................................... $14,679 $14,920
======= =======
<FN>
See Notes to Consolidated Financial Statements.
</FN>
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
(Unaudited)
Three Months Ended March 31,
---------------------------
1998 1997
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .............................................................. $ 157 $ 140
Adjustments to reconcile net income to net cash flows from
operating activities:
Depreciation and Amortization ......................................... 162 149
Amortization of Nuclear Fuel .......................................... 19 17
Recovery (deferral) of Electric Energy and Gas Costs - net ............ 28 (31)
Changes in certain current assets and liabilities:
Net decrease in Accounts Receivable and Unbilled Revenues ............ 45 14
Net decrease in Inventory - Fuel and Materials and Supplies .......... 136 178
Net decrease in Accounts Payable ..................................... (24) (25)
Net change in Prepaid / Other Accrued Taxes .......................... 82 171
Net change in Other Current Assets and Liabilities ................... 29 (91)
Other ................................................................. (1) (16)
----- -----
Net cash provided by operating activities .......................... 633 506
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Utility Plant, excluding AFDC .............................. (81) (107)
Contribution to Decommissioning Funds and Other Special Funds ........... (29) (7)
Other ................................................................... (8) (10)
----- -----
Net cash used in investing activities .............................. (118) (124)
----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in Short-Term Debt ......................................... (284) (95)
Redemption of Long-Term Debt ............................................ (103) (25)
Redemption of Preferred Stock ........................................... -- (19)
Issuance of Preferred Securities ........................................ -- 95
Cash Dividends Paid ..................................................... (127) (131)
Other ................................................................... -- (3)
----- -----
Net cash used in financing activities .............................. (514) (178)
----- -----
Net increase in Cash and Cash Equivalents ................................. 1 204
Cash and Cash Equivalents at Beginning of Period .......................... 17 47
----- -----
Cash and Cash Equivalents at End of Period ................................ $ 18 $ 251
===== =====
Income Taxes Paid ......................................................... $ 28 $ 4
Interest Paid ............................................................. $ 105 $ 71
<FN>
See Notes to Consolidated Financial Statements.
</FN>
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The financial statements included herein have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC). Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. However, in the
opinion of management, the disclosures are adequate to make the information
presented not misleading. These consolidated financial statements and Notes to
Consolidated Financial Statements (Notes) should be read in conjunction with the
Registrant's Notes contained in the 1997 Annual Report on Form 10-K. These Notes
update and supplement matters discussed in the 1997 Annual Report on Form 10-K.
The unaudited financial information furnished reflects all adjustments
which are, in the opinion of management, necessary to fairly state the results
for the interim periods presented. The year-end consolidated balance sheets were
derived from the audited consolidated financial statements included in the 1997
Annual Report on Form 10-K. Certain reclassifications of the prior year's data
have been made to conform with the current presentation.
Note 2. Rate Matters
New Jersey Energy Master Plan
As reported in the 1997 Form 10-K, on April 30, 1997, the New Jersey Board
of Public Utilities (BPU) issued its final report regarding Phase II (final
Phase II report) of the Energy Master Plan addressing wholesale and retail
electric competition in New Jersey. In accordance with the final Phase II
report, Public Service Electric and Gas Company (PSE&G) filed a proposal
regarding competition and rates with the BPU on July 15, 1997. The BPU is in the
process of reviewing filings of all New Jersey electric utilities and is
currently holding hearings. The hearings on PSE&G's proposal commenced in early
February 1998 and are expected to conclude during the second quarter of 1998,
with a decision expected during the third quarter of 1998. The decision of the
BPU in the Energy Master Plan proceeding and the legislation required to
implement certain aspects of electric restructuring, if enacted into law, will
establish the industry rules for the future. These actions are expected to
fundamentally change the electric industry in the State by introducing retail
competition to replace the utilities' former monopoly position and potentially
requiring or resulting in the separation or sale of generation assets.
Also, as previously reported, by Order dated June 25, 1997, the BPU
commenced management audits of all New Jersey electric utilities, with the
assistance of one or more consulting firms, under the direction of its own audit
staff. The audit process included, but was not limited to, reviews of electric
utility filings in response to the Energy Master Plan. The management audit
process for PSE&G concluded in December 1997 with a report of the BPU's
management consultants relating to issues of stranded costs, securitization and
consumer rate reductions. A second report on restructuring was filed on February
27, 1998. These audit reports were approved for release by the BPU on January
29, 1998 and March 5, 1998, respectively, and are being considered as part of
the proceedings discussed below. The BPU can adopt, reject or modify the audit
reports' results in its decision on PSE&G's proposal. PSE&G cannot predict the
extent to which the BPU will rely on the results of these audit reports in
evaluating PSE&G's proposal.
The BPU requested the Office of Administrative Law (OAL) to hold
evidentiary hearings regarding stranded costs and unbundling issues. These
hearings concluded on March 18, 1998. The audit report released in January 1998
is being considered as part of this proceeding. Both initial and reply legal
briefs regarding those issues were filed with the OAL in April 1998. The OAL
Judge has 45 days from the filing of such briefs to render his advisory,
non-binding decision to the BPU.
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
--------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Hearings at the BPU began on April 27, 1998 addressing other restructuring
issues, such as market power, affiliate transactions and consumer protection.
The audit report released in March 1998, relating to these issues, is being
considered as part of this proceeding. Those hearings are expected to last one
month.
The BPU has indicated its intent to submit draft legislation to the
Governor later this Spring to provide it requisite authority to implement
wholesale and retail electric competition in New Jersey. Legislative leadership
has indicated that it probably will not consider passage of a legislative
package providing such authority until this Fall. The outcome of these
administrative and legislative proceedings could have a material adverse effect
on Public Service Enterprise Group Incorporated's (Enterprise) and PSE&G's
financial condition, results of operations and net cash flows. Enterprise and
PSE&G cannot predict the outcome of this matter.
Levelized Gas Adjustment Clause (LGAC)
On November 14, 1997, PSE&G filed an LGAC petition with the BPU requesting
a $45 million annual increase in its LGAC for the period January 1, 1998 to
December 31, 1998, which as filed would increase a typical residential bill by
approximately 4.8%. Public hearings were held on February 3, 1998. On February
18, 1998, the BPU approved a Stipulation agreed to by the parties in the
proceeding providing for an interim increase in LGAC revenues of approximately
$31 million, excluding State sales and use tax, or an increase of 3.5% on a
typical residential bill. The parties continue to litigate this matter. PSE&G
cannot predict the final outcome of this proceeding.
In April 1997, the BPU approved PSE&G's proposal for a residential gas
unbundling pilot program (SelectGas) allowing 65,000 residential natural gas
customers, out of a total of 1.4 million residential gas customers, to
participate in the competitive marketplace effective May 1, 1997. To date, of
the 65,000 eligible customers, none have subscribed to the program. On April 30,
1998, PSE&G filed a report with the BPU on SelectGas and its proposed
refinements for a permanent residential gas unbundling program. PSE&G has
proposed that under SelectGas 300,000 residential customers be permitted to
choose their gas supplier on a first-come, first-served basis. This expanded
program is expected to commence by the later of sixty days after a BPU order
resolving this matter or September 30, 1998. PSE&G proposes that the remaining
residential customers be eligible to choose their gas supplier by July 1, 1999
or such date set by the BPU.
Electric Levelized Energy Adjustment Clause (LEAC)/Demand Side Adjustment
Factor (DSAF)
On February 24, 1997, PSE&G requested an annualized increase of $151.8
million in the DSAF component of the LEAC effective for the period from May 1997
through December 1998. The request included recovery of electric Demand Side
Management (DSM)/conservation costs related to BPU-approved programs. On April
1, 1998, the BPU approved $150.8 million of PSE&G's requested increase. This
increase was effective for service rendered on or after April 3, 1998.
At March 31, 1998, PSE&G had an underrecovered balance, including interest,
of approximately $155 million related to electric DSM programs. Such amount is
included in Deferred Debits on Enterprise's and PSE&G's Consolidated Balance
Sheets (see Note 3. Regulatory Assets and Liabilities).
As reported in the 1997 Form 10-K, while PSE&G's proposal in response to
the final Phase II report of the Energy Master Plan provides for a transition
period of seven years with basic tariff rates being capped and the
discontinuation of the LEAC effective December 31, 1998, such proposal provides
for recovery of mandated societal costs, including DSM, to be adjusted based on
changes in such costs. PSE&G estimates that the underrecovered electric DSM
programs balance at December 31, 1998 will be approximately $130 million. For
further discussion of the potential impact on Enterprise and PSE&G of the Energy
Master Plan proceedings, see New Jersey Energy Master Plan.
Note 3. Regulatory Assets and Liabilities
Regulatory assets and liabilities are recorded in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS) 71, "Accounting
for the Effects of Certain Types of Regulation" (SFAS 71). At March 31, 1998 and
December 31, 1997, respectively, Enterprise and PSE&G had deferred the following
regulatory assets on the Consolidated Balance Sheets:
March 31, December 31,
1998 1997
--------- ------------
(Millions of Dollars)
Unamortized Debt Expense............................. $129 $135
Deferred OPEB Costs.................................. 285 289
Unrecovered Environmental Costs...................... 120 122
Underrecovered Electric Energy and Gas Costs......... 139 167
Unrecovered SFAS 109 Income Taxes.................... 716 725
Deferred Demand Side Management Costs................ 148 116
Deferred Decontamination and Decommissioning Costs... 43 43
Property Abandonments................................ 33 37
Unrecovered Plant and Regulatory Study Costs......... 33 34
Oil and Gas Property Write-Down...................... 24 26
------ ------
Total Regulatory Assets................... $1,670 $1,694
====== ======
Underrecovered Electric Energy and Gas Costs: Recoveries of electric energy
and gas costs are determined by the BPU under the LEAC and LGAC. PSE&G's
deferred fuel balances as of March 31, 1998 and December 31, 1997, respectively,
reflect underrecovered costs as follows:
March 31, December 31,
1998 1997
--------- ------------
(Millions of Dollars)
Underrecovered Electric Energy Costs......... $60 $91
Underrecovered Gas Fuel Costs................ 79 76
--- ---
Total...................................... $139 $167
==== ====
The BPU Order dated December 31, 1996 provides PSE&G the opportunity, but not
a guarantee, during the period January 1, 1997 through December 31, 1998, to
fully recover its December 31, 1996 underrecovered LEAC balance of $151 million
without any change in the current energy component of the LEAC charge.
Management believes that it will recover this amount by December 31, 1998 and
continues to follow deferred accounting treatment for the LEAC.
Deferred Demand Side Management Costs: Recoveries of DSM/conservation costs
(related to BPU-approved programs) are determined by the BPU. PSE&G's deferred
DSM balance as of March 31, 1998 and December 31, 1997, respectively, reflects
underrecovered/(overrecovered) costs as follows:
March 31, December 31,
1998 1997
--------- ------------
(Millions of Dollars)
Deferred DSM (Including Interest)--Electric... $155 $122
Deferred DSM (Including Interest)--Gas........ (7) (6)
---- ----
Total....................................... $148 $116
==== ====
The increase in the electric balance is primarily due to the ongoing
underrecovery of DSM costs (see Note 2. Rate Matters).
Note 4. Commitments and Contingent Liabilities
Settlement of Salem Litigation
As reported in the 1997 Form 10-K, on May 12, 1997, PSE&G settled the
lawsuit brought against it by PECO Energy Company (PECO Energy) and Delmarva
Power & Light Company (DP&L), two co-owners of Units 1 and 2 of the Salem
Nuclear Generating Station (Salem 1 and 2), related to alleged damages resulting
from the outage of the facility. One aspect of this settlement obligated PSE&G
to pay $1.4 million for each reactor month that the outage continued beyond an
aggregate outage of 64 reactor months, up to a maximum payment under this
provision of $17 million. PSE&G will not make any payments under this provision
since the aggregate Salem outage was 61 reactor months. Salem 2 returned to
service on August 30, 1997 and Salem 1 returned to service on April 17, 1998.
PECO Energy, DP&L and PSE&G have also agreed to an operating performance
standard (OPS) applicable to Salem and the Peach Bottom Atomic Power Station
Units 2 and 3 (Peach Bottom) through their retirements, now scheduled for
December 31, 2011 and December 31, 2007, respectively. PSE&G is the operator of
Salem and PECO Energy is the operator of Peach Bottom. Under the OPS, the
station operator is required to make payments to the non-operating owners
(excluding Atlantic Electric Company) commencing in January 2001 if the
three-year historical average maximum dependable capacity net capacity factor
(MDC) (defined below) for that station for the preceding year, calculated as of
December 31 of such year, falls below 40%. Any such payment is limited to a
maximum of $25 million per year. MDC is the gross electrical output for a
station measured at the output terminals of its turbine generators during the
most restrictive seasonal conditions, less the station's service load. The
initial three-year period for Peach Bottom began January 1, 1998 and will end
December 31, 2000. The initial three-year period for Salem began April 17, 1998
and will end December 31, 2000. Excluded from the three-year calculation is any
period of time to which force majeure (as defined in the OPS) is applicable. The
parties have further agreed to forego litigation in the future, except for
limited cases in which the operator would be responsible for damages of no more
than $5 million per year.
Year 2000
Many of Enterprise's and PSE&G's systems, which include information
technology applications, plant control and telecommunications infrastructure
systems, must be modified due to computer program limitations in recognizing
dates beyond 1999. During the first quarter of 1998, $5 million of costs related
to Year 2000 readiness were incurred. Management estimates the total cost of
this effort to be about $92 million to be incurred from 1997 through 2001, of
which $41 million is expected to be incurred in 1998. A portion of these costs
are not likely to be incremental to Enterprise or PSE&G, but rather, will
represent a redeployment of existing personnel/resources.
An inability of Enterprise, PSE&G, their subsidiaries, both domestic and
overseas holdings, members of the Pennsylvania--New Jersey--Maryland
Interconnection (PJM) or Enterprise's or PSE&G's critical suppliers to meet the
Year 2000 deadline could have a material adverse impact on Enterprise's and
PSE&G's operations, financial condition, results of operations and net cash
flows.
Hazardous Waste
Certain Federal and state laws authorize the U.S. Environmental Protection
Agency (EPA) and the New Jersey Department of Environmental Protection (NJDEP),
among other agencies, to issue orders and bring enforcement actions to compel
responsible parties to investigate and take remedial actions at any site that is
determined to present an actual or potential threat to human health or the
environment because of an actual or threatened release of one or more hazardous
substances. Because of the nature of PSE&G's business, including the production
of electricity, the distribution of gas and, formerly, the manufacture of gas,
various by-products and substances are or were produced or handled which contain
constituents classified as hazardous. PSE&G generally provides for the disposal
or processing of such substances through licensed independent contractors.
However, these statutory provisions impose joint and several responsibility
without regard to fault on all responsible parties, including the generators of
the hazardous substances, for certain investigative and remediation costs at
sites where these substances were disposed of or processed. PSE&G has been
notified with respect to a number of such sites and the investigation and
remediation of these potentially hazardous sites is receiving attention from the
government agencies involved. Generally, actions directed at funding such site
investigations and remediation include all suspected or known responsible
parties. Except as discussed below with respect to its Remediation Program,
Enterprise and PSE&G do not expect its expenditures for any such site to have a
material effect on financial condition, results of operations and net cash
flows.
The NJDEP has recently revised regulations concerning site investigation and
remediation. These regulations will require an ecological evaluation of
potential injuries to natural resources in connection with a remedial
investigation of contaminated sites. The NJDEP is presently working with the
utility industry to develop procedures for implementing these regulations. These
regulations may substantially increase the costs of remedial investigations and
remediations, where necessary, particularly at sites located on surface water
bodies. PSE&G and predecessor companies owned and/or operated facilities located
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 (Remediation Program)
In 1988, NJDEP notified PSE&G that it had identified the need for PSE&G,
pursuant to a formal arrangement, to systematically investigate and, if
necessary, resolve environmental concerns extant at PSE&G's former manufactured
gas plant sites. To date, NJDEP and PSE&G have identified 38 former manufactured
gas plant sites. PSE&G is currently working with NJDEP under a program to
assess, investigate and, if necessary, remediate environmental concerns at these
sites. The Remediation Program is periodically reviewed and revised by PSE&G
based on regulatory requirements, experience with the Remediation Program and
available remediation technologies. The cost of the Remediation Program cannot
be reasonably estimated, but experience to date indicates that costs of
approximately $20 million per year could be incurred over a period of about 30
years and that the overall cost could be material to Enterprise's and PSE&G's
financial condition, results of operations and net cash flows.
Note 5. Financial Instruments and Risk Management
Enterprise's operations give rise to exposure to market risks from changes in
commodity prices, interest rates, foreign currency exchange rates and prices of
security investments. Enterprise's policy is to use derivative financial
instruments for the purpose of managing market risk consistent with its business
plans and prudent business practices.
Equity Securities -- Enterprise Diversified Holdings Incorporated (EDHI)
Public Service Resources Corporation (PSRC), a wholly-owned subsidiary of
EDHI, has investments in equity securities and partnerships which invest in
equity securities. The aggregate carrying value approximates the fair market
value of $201 million and $185 million as of March 31, 1998 and December 31,
1997, respectively.
Natural Gas Hedging -- EDHI
As of March 31, 1998, Energis Resources Incorporated (Energis), a
wholly-owned subsidiary of EDHI, had outstanding futures contracts to buy
natural gas related to fixed-price natural gas sales commitments. Such contracts
hedged approximately 100% of its fixed price sales commitments at March 31,
1998. As of March 31, 1998, Energis had net unrealized hedge gains of $4
million.
Nuclear Decommissioning Trust Funds -- PSE&G
Contributions made into the Nuclear Decommissioning Trust Funds are invested
in debt and equity securities. The carrying value of $492 million and $459
million of these funds approximates the fair market value as of March 31, 1998
and December 31, 1997, respectively.
Note 6. Income Taxes
As reported in the 1997 Form 10-K, the New Jersey Gross Receipts and
Franchise Tax (NJGRT) was eliminated effective January 1, 1998 and replaced with
a combination of the New Jersey Corporate Business Tax which is a State income
tax, the State sales and use tax and a Transitional Energy Facility Assessment
(TEFA), with no material impact on the financial condition, results of
operations and net cash flows of Enterprise and PSE&G. The TEFA will be phased
out over five years. 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 be substantially reduced. Interim rates were
implemented with regard to the new tax structure effective with service rendered
on and after January 1, 1998. The BPU continues its administrative review of the
filings of all New Jersey utilities and is expected to approve permanent rates
no later than July 1, 1998.
Therefore, effective January 1, 1998, PSE&G became subject to the New Jersey
Corporate Business Tax. Consequently, the effective income tax rate differs from
the statutory Federal income tax rate as follows:
Quarter Ended Quarter Ended
March 31, 1998 March 31, 1997
---------------- ----------------
Federal tax provision at 35.0% 35.0%
statutory rate
New Jersey Corporate Business
Tax, net of Federal benefit 5.9% --
Other-- net 0.2% (0.4)%
----- ------
Effective Income Tax Rate 41.1% 34.6%
===== ======
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
--------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
Note 7. Accounting Matters
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
130, "Reporting Comprehensive Income" (SFAS 130), which is effective for fiscal
years beginning after December 15, 1997. SFAS 130 dictates that all items
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement displayed with the
same prominence as other financial statements. It also requires that an
enterprise classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position. Enterprise and PSE&G have
adopted SFAS 130 effective with this filing. The effects of adoption of SFAS 130
are not material for Enterprise or PSE&G.
In February 1998, the FASB issued SFAS 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" (SFAS 132), which is effective for
financial statements for periods beginning after December 15, 1997. This
statement revises and standardizes disclosure requirements for pension and other
postretirement benefit plans but does not change the measurement or recognition
of those plans. Since SFAS 132 solely revises disclosure requirements, the
adoption of SFAS 132 will not have a material impact on the financial condition,
results of operations and net cash flows of Enterprise and PSE&G.
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1), which is effective
for financial statements for fiscal years beginning after December 15, 1998. SOP
98-1 provides criteria for capitalizing certain internal-use software costs. The
adoption of SOP 98-1 is not expected to have a material impact on the financial
condition, results of operations and net cash flows of Enterprise and PSE&G.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities" (SOP 98-5), which is effective for financial statements for fiscal
years beginning after December 15, 1998. SOP 98-5 provides for the expensing of
the costs of start-up activities as incurred. Enterprise and PSE&G are currently
evaluating the impact, if any, of SOP 98-5.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
---------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Notes to Consolidated Financial Statements of Enterprise are incorporated
by reference insofar as they relate to PSE&G and its subsidiaries:
Note 1. Basis of Presentation
Note 2. Rate Matters
Note 3. Regulatory Assets and Liabilities
Note 4. Commitments and Contingent Liabilities
Note 5. Financial Instruments and Risk Management
Note 7. Accounting Matters
Note 6. Income Taxes
As reported in the 1997 Form 10-K, the New Jersey Gross Receipts and
Franchise Tax (NJGRT) was eliminated effective January 1, 1998 and replaced with
a combination of the New Jersey Corporate Business Tax which is a State income
tax, the State sales and use tax and a Transitional Energy Facility Assessment
(TEFA), with no material impact on the financial condition, results of
operations and net cash flows of Enterprise and PSE&G. The TEFA will be phased
out over five years. 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 be substantially reduced. Interim rates were
implemented with regard to the new tax structure effective with service rendered
on and after January 1, 1998. The BPU continues its administrative review of the
filings of all New Jersey utilities and is expected to approve permanent rates
no later than July 1, 1998.
Therefore, effective January 1, 1998, PSE&G became subject to the New Jersey
Corporate Business Tax. Consequently, the effective income tax rate differs from
the statutory Federal income tax rate as follows:
Quarter Ended Quarter Ended
March 31, 1998 March 31, 1997
-------------- --------------
Federal tax provision at statutory rate 35.0% 35.0%
New Jersey Corporate Business Tax,
net of Federal benefit 5.9% --
Other -- net 1.8% (0.2)%
----- ------
Effective Income Tax Rate 42.7% 34.8%
===== ======
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
-----------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Following are the significant changes in or additions to information
reported in the Public Service Enterprise Group Incorporated (Enterprise) 1997
Annual Report on Form 10-K affecting the consolidated financial condition and
the results of operations of Enterprise and its subsidiaries. This discussion
refers to the Consolidated Financial Statements (Statements) and related Notes
to Consolidated Financial Statements (Notes) of Enterprise and should be read in
conjunction with such Statements and Notes.
Results of Operations
Basic and diluted earnings per share of Enterprise common stock (Common
Stock) were $0.82 for the quarter ended March 31, 1998, representing an increase
of $0.22 or 37% per share from the comparable 1997 period.
Public Service Electric and Gas Company's (PSE&G) contribution to earnings
per share of Common Stock for the quarter ended March 31, 1998 increased $0.09
from the comparable 1997 period primarily due to the one-time charge to earnings
of $55 million or $0.24 per share in the first quarter of 1997 resulting from
the settlements of lawsuits filed by the co-owners of Salem. This increase was
partially offset by lower revenues due to the mild winter weather in the first
quarter of 1998 as well as higher operation and depreciation expenses.
Enterprise Diversified Holdings Incorporated's (EDHI) contribution to
earnings per share of Common Stock for the quarter ended March 31, 1998
increased $0.13 from the comparable 1997 period primarily due to greater
earnings of Public Service Resources Corporation (PSRC). PSRC's earnings
increase was due to higher income from investments in leveraged buyout and
venture capital partnerships, a gain resulting from the exercise of an early
buyout option by the lessee in a leveraged lease and higher earnings from new
leveraged lease investments.
PSE&G -- Revenues
Electric
Revenues increased $217 million or 23% for the quarter ended March 31, 1998
from the comparable period in 1997 primarily due to an increase in
energy trading activity and higher sales to large industrial customers. See
PSE&G -- Expenses -- Fuel for Electric Generation and Interchanged Power.
These increases were partially offset with a decrease to revenue caused by
New Jersey energy tax reform in 1998 (see Note 6. Income Taxes of Notes).
Collection of New Jersey Gross Receipts and Franchise Tax (NJGRT) was reflected
in revenue in 1997, but with energy tax reform, the portion of NJGRT replaced by
the State 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 Tax Collections
Payable which is included in Other Current Liabilities on the Consolidated
Balance Sheets.
Gas
Revenues decreased $122 million or 17% for the quarter ended March 31, 1998
from the comparable period in 1997. The decrease was primarily due to lower
recovery of fuel costs and decreased therm sales due to milder winter weather in
1998 and energy tax reform (see PSE&G -- Revenues -- Electric above).
PSE&G -- Expenses
Fuel for Electric Generation and Interchanged Power
Fuel for Electric Generation and Interchanged Power increased $238 million or
96% for the quarter ended March 31, 1998 from the comparable 1997 period
primarily due to an increase in energy trading activity. Effective January 1,
1998, the amount included for Electric Levelized Energy Adjustment Clause (LEAC)
under/overrecovery represents the difference between fuel-related revenues and
fuel-related expenses which are comprised of the cost of generation and
interchanged power at the PJM market clearing price. Effective April 1, 1998,
the PJM locational marginal price replaced the PJM market clearing price. To the
extent fuel revenue and expense flow through the LEAC mechanism, variances in
fuel revenues and expenses offset and thus have no direct effect on earnings.
Gas Purchased
Gas purchased decreased $31 million or 7% for the quarter ended March 31,
1998 from the comparable 1997 period. The decrease was primarily due to the mild
winter weather in 1998. Due to the operation of the Levelized Gas Adjustment
Clause (LGAC) mechanism, variances in fuel revenues and expenses offset, and
have no direct effect on earnings.
Income Taxes
PSE&G became subject to State income tax effective January 1, 1998 due to
energy tax reform in the State of New Jersey (see Note 6. Income Taxes of
Notes). Income Taxes increased $13 million or 13% for the quarter ended March
31, 1998 from the comparable 1997 period. This increase is due to the inclusion
of State income tax of $31 million, partially offset by a decrease in Federal
income tax of $18 million due to a decrease in pre-tax operating income.
Transitional Energy Facility Assessment (TEFA)/New Jersey Gross Receipts and
Franchise Tax (NJGRT)
TEFA/NJGRT decreased $123 million or 72% for the quarter ended March 31, 1998
from the comparable 1997 period due to New Jersey energy tax reform. For 1998,
the amount represents TEFA unit based taxes while the 1997 amount represents
NJGRT unit based taxes. The TEFA unit tax rates are approximately 30% of the
NJGRT unit tax rates. See PSE&G -- Revenues and Income Taxes above and Note 6.
Income Taxes of Notes for other impacts of New Jersey energy tax reform.
Year 2000 Expenses -- Enterprise and PSE&G
For a discussion of Year 2000 expenses, see Note 4. Commitments and
Contingent Liabilities of Notes.
EDHI -- Earnings
Increase (Decrease)
--------------------
Three Months Ended
March 31,
1998 vs. 1997
--------------------
(Millions of Dollars)
PSRC $31
Community Energy Alternatives Incorporated (CEA) 2
Energis Resources Incorporated (Energis) (1)
Enterprise Group Development Corporation (EGDC) --
---
Total $32
===
EDHI's earnings were $36 million for the quarter ended March 31, 1998, an
increase of $32 million from the comparable 1997 period. The increase was
primarily due to PSRC's higher income from investments in leveraged buyout and
venture capital partnerships, a gain resulting from the exercise of an early
buyout option by the lessee in a leveraged lease and higher earnings from new
leveraged lease investments.
Liquidity and Capital Resources
Enterprise
Enterprise is a public utility holding company and as such, has no operations
of its own. The following discussion of Enterprise's liquidity and capital
resources is on a consolidated basis, noting the uses and contributions of
Enterprise's two direct subsidiaries, PSE&G and EDHI.
Cash generated from PSE&G's operations is expected to provide the major
source of funds for PSE&G's business. EDHI's growth will be funded through
external financings, cash generated from EDHI's operations and equity capital.
Dividend payments on Common Stock were $0.54 per share and totaled $125
million for the quarter ended March 31, 1998. Since 1986, PSE&G has made regular
cash payments to Enterprise in the form of dividends on outstanding shares of
PSE&G's common stock. PSE&G has paid quarterly dividends on its common stock in
each year commencing in 1948, the year of the distribution of PSE&G's common
stock by Public Service Corporation of New Jersey, the former parent of PSE&G.
PSE&G paid dividends of $125 million to Enterprise during the quarter ended
March 31, 1998. From 1992 through 1996, EDHI made regular cash payments to
Enterprise in the form of dividends on outstanding shares of EDHI's common
stock. Due to the growth in EDHI investment activities, no dividends on EDHI's
common stock were paid in the first quarter of 1998 or are anticipated for 1998.
In the first quarter of 1998, EDHI paid $2 million of dividends related to its
preferred stock issued to Enterprise.
Enterprise has paid quarterly dividends in each year commencing with the
corporate restructuring of PSE&G in 1985 when Enterprise became the owner of all
the outstanding common stock of PSE&G. While a key objective of the Board of
Directors of Enterprise is to keep the Common Stock dividend secure, amounts and
dates of such dividends as may be declared will necessarily be dependent upon
Enterprise's future earnings, financial requirements and other factors including
the receipt of dividend payments from its subsidiaries.
Enterprise and PSE&G have issued Deferrable Interest Subordinated Debentures
in connection with the issuance of tax deferred preferred securities. If, and
for as long as, payments on those Deferrable Interest Subordinated Debentures
have been deferred, or Enterprise or PSE&G has defaulted on the indenture
related thereto or its guarantee thereof, neither Enterprise nor PSE&G may pay
any dividends on their common and preferred stock.
As of March 31, 1998, Enterprise's capital structure consisted of 48% common
equity, 44% long-term debt and 8% preferred stock and other preferred
securities.
As a result of the 1992 focused audit of Enterprise's non-utility
businesses (Focused Audit), the New Jersey Board of Public Utilities (BPU)
approved a plan which, among other things, provides that: (1) Enterprise will
not permit EDHI's non-utility investments to exceed 20% of Enterprise's
consolidated assets without prior notice to the BPU (such investments at March
31, 1998 were approximately 17% of assets); (2) the PSE&G Board of Directors
will provide an annual certification that the business and financing plans of
EDHI will not adversely affect PSE&G; (3) Enterprise will (a) limit debt
supported by the minimum net worth maintenance agreement between Enterprise and
Capital to $750 million and (b) make a good-faith effort to eliminate such
support over a six to ten year period from April 1993; and (4) EDHI will pay
PSE&G an affiliation fee of up to $2 million a year to be applied by PSE&G
through its LGAC and its LEAC to reduce utility rates. Beginning in 1995, the
debt supported by such minimum net worth maintenance agreement was limited to
$650 million and the affiliation fee has been proportionately reduced as such
supported debt is reduced. Enterprise and EDHI and its subsidiaries continue to
reimburse PSE&G for the cost of all services provided to them by employees of
PSE&G.
As a result of Enterprise's intent that EDHI and its subsidiaries provide
growth vehicles for Enterprise, financing requirements connected with the
continued growth of EDHI, changes to the utility industry expected from the
final outcome of the Energy Master Plan proceedings and potential accounting
impacts resulting from the deregulation of the generation of electricity,
modifications will be required to certain of the restrictions agreed to by
Enterprise with the BPU in response to the Focused Audit. Inability to achieve
satisfactory resolution of these matters could impact the future relative size
and financing of the non-utility businesses and accordingly Enterprise's future
prospects (see Note 2. Rate Matters of Notes).
PSE&G
For the quarter ended March 31, 1998, PSE&G had utility plant additions,
including Allowance for Funds Used During Construction (AFDC), of $84 million, a
$27 million decrease from the corresponding 1997 period. The decrease was
primarily due to the replacement of Salem 1 steam generators in 1997. PSE&G
expects that it will be able to internally generate all of its construction and
capital requirements over the next five years, assuming adequate and timely
recovery of costs, as to which no assurances can be given (see Note 2. Rate
Matters of Notes).
EDHI
CEA, PSRC and Energis are expected to be growth vehicles for EDHI and
Enterprise. During the next five years, EDHI's capital requirements are expected
to be provided from additional debt financing, operational cash flows and equity
capital. A significant portion of CEA's growth is expected to occur in the
international arena due to the current and anticipated growth in electric demand
and the privatization of electric transmission and distribution assets in
certain regions of the world. PSRC will continue its focus on investments
related to the energy business. Energis is expected to expand upon the current
energy related services being provided to industrial and commercial customers
(see Liquidity and Capital Resources - Enterprise).
In January 1998, EDHI sold $218 million of 5.01% Cumulative Preferred Stock
to Enterprise and used the proceeds to make additional equity investments in its
subsidiaries and to retire $75 million of its 4.10% Cumulative Preferred Stock
held by Enterprise.
In the first quarter of 1998, PSRC received proceeds from investment
liquidations resulting from the exercise of an early buyout option by the lessee
in a leveraged lease and from sales of investments held in leveraged buyout and
venture capital partnerships. In May 1998, CEA sold its 50% interests in two
domestic cogeneration plants. The aggregate proceeds to EDHI from the above
investment liquidations amounted to approximately $175 million.
In March and April 1998, EGDC entered into separate agreements to sell two of
its properties for a total of approximately $12 million.
In March 1998, PSRC entered into a leveraged lease of a natural gas
distribution network in the Netherlands and, in April 1998, acquired a lease of
a domestic gas-fired steam electric generating station. The aggregate of these
investments totaled approximately $130 million.
For a discussion of the source of EDHI's funds, see External Financings. Over
the next several years, EDHI and its subsidiaries will be required to refinance
their maturing debt and provide additional debt and equity financing for growth.
Any inability to obtain required additional external capital or to extend or
replace maturing debt and/or existing agreements at current levels and interest
rates may affect future earnings.
External Financings
Enterprise
On March 31, 1998, Enterprise had a $25 million line of credit with a bank
with no debt outstanding under this line of credit. Also, at March 31, 1998,
Enterprise had a committed $150 million revolving credit facility which expires
in December 2002 with no debt outstanding under this revolving credit facility.
In January 1998, Enterprise Capital Trust I, a special purpose statutory
business trust controlled by Enterprise, issued $225 million of its 7.44% Trust
Originated Preferred Securities. Proceeds were lent to Enterprise and are
evidenced by deferrable interest subordinated debentures. Enterprise used the
proceeds to make a $218 million equity investment in EDHI. The debentures and
their related indenture constitute a full and unconditional guarantee by
Enterprise of the preferred securities issued by the trust. If and for as long
as payments on Enterprise's debentures have been deferred, or Enterprise has
defaulted on the indenture related thereto or its guarantee thereof, Enterprise
may not pay any dividends on its Common Stock (see Liquidity and Capital
Resources -- Enterprise).
PSE&G
PSE&G has received authority from the BPU, through December 31, 1998, to
opportunistically refinance essentially all of its long-term debt and to refund
up to $250 million of matured debt.
Under its First and Refunding Mortgage (Mortgage), PSE&G may issue new First
and Refunding Mortgage Bonds (Bonds) against previous additions and improvements
and/or retired Bonds provided that its ratio of earnings to fixed charges is at
least 2:1. At March 31, 1998, the coverage ratio under PSE&G's Mortgage was
3.68:1. As of March 31, 1998, the Mortgage would permit up to $3.3 billion
aggregate principal amount of new Bonds to be issued against previous additions
and improvements.
In January 1998, $100 million of PSE&G's 6.00% Bonds, Series NN, matured.
In April 1998, $8 million of PSE&G's 7.50% Bonds, Series OO, were purchased
in the open market.
To provide liquidity for its commercial paper program, PSE&G has a $650
million revolving credit agreement expiring in June 1998 and a $650 million
revolving credit agreement expiring in June 2002 with a group of commercial
banks, which provide for borrowings of up to one year. On March 31, 1998, there
were no borrowings outstanding under these credit agreements. PSE&G expects to
be able to renew the credit agreement expiring in 1998.
The BPU has authorized PSE&G to issue and have outstanding at any one time
through January 2, 1999, not more than $1.3 billion of short-term obligations,
consisting of commercial paper and other unsecured borrowings from banks and
other lenders. On March 31, 1998, PSE&G had $748 million of short-term debt
outstanding, including $74 million borrowed against its uncommitted bank lines
of credit which lines of credit totaled $174 million at March 31, 1998.
PSE&G Fuel Corporation (Fuelco), a wholly-owned subsidiary of PSE&G, has a
$125 million commercial paper program to finance its 42.49% share of Peach
Bottom nuclear fuel, which program is supported by a $125 million revolving
credit facility expiring on June 28, 2001. PSE&G has guaranteed repayment of
Fuelco's obligations under this program. At March 31, 1998, Fuelco had
commercial paper of $74 million outstanding under this program.
EDHI
At March 31, 1998, PSEG Capital Corporation, a wholly-owned subsidiary of
EDHI, had total debt outstanding of $596 million, including $573 million of
Medium Term Notes and $23 million of Senior Notes.
As of March 31, 1998, Enterprise Capital Funding Corporation (Funding), a
wholly-owned subsidiary of EDHI, had $300 million and $150 million revolving
credit facilities with two groups of banks and had $128 million of Senior Notes
outstanding. As of March 31, 1998, Funding had $276 million of total debt
outstanding.
EDHI, PSRC and CEA are subject to restrictive business and financial
covenants contained in existing debt agreements. EDHI is required to maintain a
debt to equity ratio of no more than 2.00:1 and a twelve-months earnings before
interest and taxes to interest (EBIT) coverage ratio of at least 1.50:1. As of
March 31, 1998, EDHI had a consolidated debt to equity ratio of 1.29:1. For the
twelve months ended March 31, 1998, the EBIT coverage ratio, as defined to
exclude the effects of EGDC, was 2.68:1. Compliance with applicable financial
covenants will depend upon future financial position and levels of earnings, as
to which no assurance can be given. In addition, EDHI's ability to continue to
grow its business will depend to a significant degree on Enterprise's and EDHI's
ability to obtain additional financing beyond current levels (see Liquidity and
Capital Resources).
Nuclear Operations
As previously reported, PSE&G's Salem Units 1 and 2 (Salem 1 and 2) were
taken out of service in the second quarter of 1995 with Salem 2 returning to
service on August 30, 1997. Salem 1 returned to service on April 17, 1998. The
Nuclear Regulatory Commission (NRC) has stated that it will continue to closely
monitor activities at Salem. For a discussion of the operating performance
standard applicable to Salem, see Note 4. Commitments and Contingent Liabilities
of Notes.
Competitive Environment
Rate Matters
For discussions of the Energy Master Plan, the LGAC, the Demand Side
Adjustment Factor and other rate matters, see Note 2. Rate Matters of Notes.
Federal Regulatory Energy Commission (FERC) Order No. 888 (Order No. 888)
As previously reported, numerous parties, including PSE&G, have filed
petitions for judicial review of Orders No. 888, 888A and 888B before the Courts
of Appeals for the District of Columbia and the Second Circuits. In March 1998,
all of these appeals were consolidated in the Court of Appeals for the District
of Columbia Circuit (D.C. Circuit), Transmission Access Policy Study Group v.
Federal Energy Regulatory Commission, United States Court of Appeals in the
District of Columbia Circuit, Docket No. 97-1715. On April 30, 1998, the D.C.
Circuit entered an order permitting certain additional parties to intervene and
establishing certain procedural guidelines for the hearing of these appeals.
Pennsylvania--New Jersey--Maryland Interconnection (PJM)
Effective April 1, 1998, PJM implemented locational marginal pricing (LMP)
for congestion costs within the PJM control area pursuant to the FERC November
25, 1997 Order. LMP provides for an allocation of congestion costs to
transmission users within the PJM control area. Depending on operating
conditions, the use of LMP may have an effect on the cost of Fuel for Electric
Generation and Interchanged Power. Since LMP is in its infancy, its effect on
Enterprise's and PSE&G's financial condition, results of operations and net cash
flows is not presently determinable.
PSE&G
The information required by this item is incorporated herein by reference to
the following portions of Enterprise's Management's Discussion and Analysis of
Financial Condition and Results of Operations, insofar as they relate to PSE&G
and its subsidiaries: Results of Operations; Liquidity and Capital Resources;
External Financings; Nuclear Operations; and Competitive Environment.
Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 (the Act) provides a
"safe harbor" for forward-looking statements to encourage such disclosures
without the threat of litigation providing those statements are identified as
forward-looking and are accompanied by meaningful, cautionary statements
identifying important factors that could cause the actual results to differ
materially from those projected in the statement. Forward-looking statements
have been made in this report. Such statements are based on management's beliefs
as well as assumptions made by and information currently available to
management. When used herein, the words "will", "anticipate", "estimate",
"expect", "objective", "hypothetical", "potential" and similar expressions are
intended to identify forward-looking statements. In addition to any assumptions
and other factors referred to specifically in connection with such
forward-looking statements, factors that could cause actual results to differ
materially from those contemplated in any forward-looking statements include,
among others, the following: deregulation and the unbundling of energy supplies
and services; an increasingly competitive energy marketplace; sales retention
and growth potential in a mature service territory and a need to contain costs;
ability to obtain adequate and timely rate relief, cost recovery, including the
potential impact of stranded costs, and other necessary regulatory approvals;
Federal and State regulatory actions; costs of construction; operating
restrictions; increased cost and construction delays attributable to
environmental regulations; nuclear decommissioning and the availability of
reprocessing and storage facilities for spent nuclear fuel; licensing and
regulatory approval necessary for nuclear and other operating stations; market
risk; and credit market concerns. Enterprise and PSE&G undertake no obligation
to publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise. The foregoing review of factors
pursuant to the Act should not be construed as exhaustive or as any admission
regarding the adequacy of disclosures made by Enterprise and PSE&G prior to the
effective date of the Act.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
There are no material changes in or additions to information reported in the
Public Service Enterprise Group Incorporated (Enterprise) and the Public
Service Electric and Gas Company (PSE&G) 1997 Annual Report on Form 10-K
regarding qualitative and quantitative disclosures about market risk of
Enterprise, PSE&G and their subsidiaries.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Certain information reported under Item 3 of Part I of Public Service
Enterprise Group Incorporated's (Enterprise) and Public Service Electric and Gas
Company's (PSE&G) 1997Annual Report on Form 10-K is updated below.
(1) Form 10-K, Page 27. As previously reported, in October 1995, Enterprise
received a letter from a representative of a purported shareholder
demanding that it commence legal action against certain of its officers
and directors with regard to nuclear operations of Salem and Hope Creek
Nuclear Generating Stations (Salem and Hope Creek). The Board of
Directors promptly commenced an investigation and advised the purported
shareholder thereof. While the investigation was pending, the purported
shareholder nevertheless commenced, by complaint filed in December
1995, a shareholder derivative action against the then incumbent
directors, except Dr. Remick. Similar derivative complaints were filed
by two profit sharing plans and one individual in February and March
1996 against Messrs. Ferland, Codey, Eliason and others. On March 19,
1996, the Board's investigation was concluded, and the Board determined
that this litigation should not have been instituted and should be
terminated. On July 3, 1996, another individual purported shareholder
filed a similar complaint naming the same defendants as the first
derivative lawsuit. The four complaints generally seek recovery of
damages for alleged losses purportedly arising out of PSE&G's operation
of Salem and Hope Creek, together with certain other relief, including
removal of certain executive officers of PSE&G and Enterprise and
certain changes in the composition of Enterprise's Board of Directors.
On August 21, 1996, all defendants filed motions to dismiss all four
derivative actions, which motions were denied and attempts to appeal
were unsuccessful. Pursuant to Court Order, on December 31, 1997, the
defendants filed motions for summary judgment to dismiss two of the
cases. In one of the other two cases, separate motions for partial and
complete summary judgment were filed by the defendants on April 1,
1998. In the fourth case, on April 1, 1998 the defendants filed a
motion for partial summary judgment. All of these motions are pending.
On April 30, 1998, the Court issued a decision limiting discovery
solely to those issues relevant to summary judgment in the first two
cases. The defendants expect to file motions for complete summary
judgment in the remaining two cases. The outcome of these matters
cannot be predicted.
Other Matters. As previously reported, on March 18, 1997, Public Service
Conservation Resources Corporation (PSCRC), an indirect wholly-owned subsidiary
of Enterprise and a direct wholly-owned subsidiary of PSE&G, filed a collection
action against Sycom Enterprises Limited Partnership (SYCOM) in connection with
PSCRC's DSM business. PSCRC alleged that SYCOM has breached a number of
different loan agreements under which PSCRC is owed approximately $13 million in
principal and interest. On May 7, 1997, SYCOM filed a counterclaim against PSCRC
and a third-party complaint against an officer and certain consultants of PSCRC,
alleging damages of $750 million and asserting claims that pursuant to statute,
if successful, would have permitted treble damages. On July 11, 1997, the
Superior Court of New Jersey, Law Division, in response to a motion to dismiss
filed by PSCRC, dismissed the State Racketeering Influenced Corrupt Organization
Act (RICO) counts in SYCOM's counterclaim. Thereafter, the parties entered into
settlement discussions which culminated in the parties entering into a
comprehensive settlement agreement resolving all outstanding issues in the
dispute. On January 15, 1998, the Superior Court entered a consent order
dismissing the complaint, counterclaim and third party complaint with prejudice.
The settlement does not have a material effect on the financial condition,
results of operations and net cash flows of Enterprise or PSE&G. (Public Service
Conservation Resources Corporation v. Sycom Enterprises Limited Partnership,
Docket No. L-2744-97 Superior Court of New Jersey, Law Division, Middlesex
County).
In addition, see the following at the pages hereof indicated:
(1)Pages 9 and 10. Proceedings before the New Jersey Board of Public
Utilities (BPU) in the matter of the Energy Master Plan Phase II
Proceeding to investigate the future structure of the Electric Power
Industry, Docket Nos. EX94120585Y, EO97070462 and EO97070463.
(2)Page 9. Proceeding before the BPU in the Matter of the Board's
Determination a Management Audit be Performed on PSE&G, Docket No.
EA97060397.
(3)Page 10. Proceedings before the BPU relating to the Electric Levelized
Energy Adjustment Clause (LEAC) rate increase to recover Demand Side
Management (DSM) costs, Docket No. ER97020101.
(4)Page 10. Proceeding before the BPU relating to PSE&G's Levelized Gas
Adjustment Clause (LGAC) filed on November 14, 1997, Docket No.GR97110839.
(5)Page 22. Proceedings before the Federal Energy Regulatory Commission
(FERC) relating to competition and electric wholesale power markets.
(Inquiry Concerning the Pricing Policy for Transmission Services Provided
by Utilities Under the Federal Power Act, Docket No. RM93-19.)
(6)Page 22. Proceeding before FERC relating to the development by PSE&G and
other regional transmission owners in PJM of a new transmission service
tariff and an Independent System Operator, FERC Docket Nos.
OA97-261-000, et. al.
(7)Page 27. Proceedings before FERC relating to a declaratory judgment
action challenging PSE&G's interpretation of the capacity release rules,
Texas Eastern Transmission Corporation, FERC Docket No. RP98-83-000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Enterprise's Annual Meeting of Stockholders was held on April 21, 1998.
Proxies for the meeting were solicited pursuant to Regulation 14A under the
Securities Act of 1934. There was no solicitation of proxies in opposition to
management's nominees as listed in the proxy statement and all of management's
nominees were elected to the Board of Directors. Details of the voting are
provided below:
Votes For Votes Withheld
--------------- --------------------
Proposal 1 -- Election of Directors
Class II -- Term expiring 2001
E. James Ferland 186,232,059 4,820,546
Irwin Lerner 186,251,093 4,801,512
Marilyn M. Pfaltz 186,294,278 4,758,327
Richard J. Swift 186,456,176 4,596,429
Class III -- Term expiring 1999
Conrad K. Harper 186,070,164 4,982,441
Votes For Votes Against Abstentions
------------- -------------------- ---------------
Proposal 2 -- Ratification of the Appointment of
Deloitte & Touche LLP as Independent Auditors
for 1998 188,689,601 1,040,396 1,205,963
Votes Votes Broker
For Against Abstentions Non-Votes
------------- -------------------- --------------- --------------
Proposal 3 -- Stockholder proposal relating to
the Salem Nuclear Generating Station 21,040,358 130,833,390 12,229,248 26,949,609
With respect to Proposals 2 and 3, abstentions and/or broker non-votes are
not counted in the vote totals and, therefore, have no effect on the vote.
ITEM 5. OTHER INFORMATION
Certain information reported under Enterprise's and PSE&G's 1997 Annual
Report to the SEC is updated below. References are to the related pages of the
Form 10-K as printed and distributed.
Nuclear Operations
Form 10-K, Page 9
PECO Energy has advised PSE&G that Peach Bottom Unit 3 (Peach Bottom 3) was
shut down from March 13 through March 31, 1998 to repair cracks in three
recirculation system jet pump risers within the reactor vessel. Permanent
repairs have been completed, and Peach Bottom 3 has returned to full power
operation.
Form 10-K, Page 10
In a March 1998 letter to PSE&G, the Nuclear Regulatory Commission (NRC) said
that two issues identified at Hope Creek have resulted in two Level III
violations and an associated $55,000 civil penalty. PSE&G met with NRC officials
earlier this year and discussed these issues, including corrective actions and
improvements. These were implemented across the Nuclear Business Unit (NBU) to
ensure the continued safe, reliable operation of all three nuclear units. The
first issue was identified at Hope Creek during an NRC inspection in November
1997, while the unit was shut down for normal refueling maintenance. The NRC
noted that certain plant conditions required more strict procedure compliance
and management oversight than was provided. This resulted in one of the two
Level III violations and the civil penalty. The NRC issued the civil penalty
because a similar issue had been identified in 1996.
The second issue concerned the implementation of the Maintenance Rule, which
requires utilities to monitor the effectiveness of equipment reliability. The
NRC said that PSE&G's Maintenance Rule program did not include all necessary
equipment. Because this issue was self-identified and immediate corrective
actions were taken, the NRC issued a Level III violation with no civil penalty.
Form 10-K, Page 10
As previously reported, on December 9, 1997, predecisional enforcement
conferences were held to discuss two allegations concerning security program
issues which occurred at Salem and Hope Creek. On April 24, 1998, the NRC issued
a severity Level III violation for one of these matters and informed PSE&G that
it would await issuance of the Secretary of Labor's Administrative Review Board
decision before making an enforcement decision in the other matter. There was no
civil penalty issued by the NRC for this violation. PSE&G does not intend to
contest this violation. PSE&G cannot predict what other actions, if any, the NRC
may take in regard to the second matter.
Form 10-K, Page 27
As previously reported, a lawsuit filed by PECO Energy and DP&L as co-owners
of Salem in 1996 against Enterprise and PSE&G in the U.S. District Court for the
Eastern District of Pennsylvania alleging mismanagement by PSE&G in its
operation of Salem was settled on May 12, 1997. This settlement included an
obligation for PSE&G to pay $1.4 million for each reactor month that the outage
continued beyond an aggregate outage of 64 reactor months, up to a maximum
payment under this provision of $17 million. PSE&G will not make any payments
under this provision since the aggregate Salem outage was 61 reactor months.
Salem Unit 2 returned to service on August 30, 1997 and Salem Unit 1 returned to
service on April 17, 1998.
For a discussion of the operating performance standard, see Note 4.
Commitments and Contingent Liabilities of Notes.
Low Level Radioactive Waste (LLRW)
Form 10-K, Page 12
As previously reported, on February 10, 1998, the State agency responsible
for locating a site for a LLRW disposal facility recommended to the Governor
that this effort be abandoned. The Governor has accepted the agency's plan to
reduce the scope of siting activities since the development of a disposal
facility in New Jersey may not be economically feasible in light of current
out-of-state disposal options. As a result, the LLRW budget already adopted for
fiscal year 1999 and attention to the unspent funds paid by waste generators in
New Jersey to finance the siting process will be reconsidered.
Other State Regulatory Matters
Form 10-K, Page 4
As previously reported in the 1997 Form 10-K, on December 3, 1997, one of the
interstate pipeline companies from which PSE&G obtains service filed a
declaratory judgment action with FERC challenging PSE&G's interpretation of the
capacity release rules. Under the interpretation proposed by the interstate
pipeline company, PSE&G would be required to guarantee the performance of Public
Service Energy Trading Company (PSETC) under the transferred agreements. PSE&G
disagreed with these claims and filed a protest challenging the December 3, 1997
filing. On February 11, 1998, FERC ruled in favor of the interstate pipeline
company finding that it was not unreasonable for the pipeline company to refuse
to discharge PSE&G under the circumstances addressed in the order. On April 29,
1998, FERC issued an order on rehearing in which it denied PSE&G's request for a
rehearing. Management of Enterprise and PSE&G is reviewing its legal and
regulatory options.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) A listing of exhibits being filed with this document is as follows:
Enterprise
- -----------------------
Exhibit Number Document
4d(2) Supplemental Indenture between PSE&G and First Fidelity Bank,
National Association (now known as First Union National Bank), as
Trustee, dated September 1, 1995 providing for Deferrable
Interest Subordinated Debentures, Series B (relating to Monthly
Preferred Securities)
4e(1) Indenture between PSE&G and First Union National Bank, as
Trustee, dated June 1, 1996 providing for Deferrable Interest
Subordinated Debentures in Series (relating to Quarterly
Preferred Securities)
4e(2) Supplemental Indenture between PSE&G and First Union National
Bank, as Trustee, dated February 1, 1997 providing for Deferrable
Interest Subordinated Debentures, Series B (relating to Quarterly
Preferred Securities)
4f Indenture between Public Service Enterprise Group Incorporated
and First Union National Bank, as Trustee, dated January 1, 1998
providing for Deferrable Interest Subordinated Debentures in
Series (relating to Quarterly Preferred Securities)
12 Computation of Ratios of Earnings to Fixed Charges (Enterprise)
27(A) Financial Data Schedule (Enterprise)
PSE&G
- -----------------------
Exhibit Number Document
4d(2) Supplemental Indenture between PSE&G and First Fidelity Bank,
National Association (now known as First Union National Bank), as
Trustee, dated September 1, 1995 providing for Deferrable
Interest Subordinated Debentures, Series B (relating to Monthly
Preferred Securities)
4e(1) Indenture between PSE&G and First Union National Bank, as
Trustee, dated June 1, 1996 providing for Deferrable Interest
Subordinated Debentures in Series (relating to Quarterly
Preferred Securities)
4e(2) Supplemental Indenture between PSE&G and First Union National
Bank, as Trustee, dated February 1, 1997 providing for Deferrable
Interest Subordinated Debentures, Series B (relating to Quarterly
Preferred Securities)
12(A) Computation of Ratios of Earnings to Fixed Charges (PSE&G)
12(B) Computation of Ratios of Earnings to Fixed Charges plus
Preferred Stock Dividend Requirements (PSE&G)
27(B) Financial Data Schedule (PSE&G)
(B) Reports on Form 8K: None.
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused these reports to be signed on their respective
behalf by the undersigned thereunto duly authorized.
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
(Registrants)
By: PATRICIA A. RADO
---------------------------------
Patricia A. Rado
Vice President and Controller
(Principal Accounting Officer)
Date: May 13, 1998
EXHIBIT 12
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
12 Months
Ended
YEARS ENDED DECEMBER 31, March
31,
----------- ----------- ----------- ----------- -----------
1993 (B) 1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- ----------- ---------
(Millions of Dollars, where applicable)
Earnings as Defined in
Regulation S-K (A):
Income from Continuing
Operations (C) $549 $667 $627 $588 $560 $611
Income Taxes (D) 296 320 348 297 313 371
Fixed Charges 539 535 549 528 543 556
----------- ----------- ----------- ----------- --------- ---------
Earnings 1,384 1,522 1,524 1,413 $1,416 $1,538
=========== =========== =========== =========== ========== =========
Fixed Charges as Defined in
Regulation S-K (E):
Total Interest Expense (F) $471 $462 $464 $453 $470 $481
Interest Factor in Rentals 11 12 12 12 11 11
Subsidiaries' Preferred
Securities Dividend
Requirements -- 2 16 28 44 48
Preferred Stock Dividends 38 41 34 23 12 10
Adjustment to Preferred Stock
Dividends to state on a
pre-income tax basis 19 18 23 12 6 6
----------- ----------- ----------- ----------- ---------- ---------
Total Fixed Charges $539 $535 $549 $528 $543 $556
=========== =========== =========== =========== ========== =========
Ratio of Earnings to Fixed
Charges 2.57 2.84 2.78 2.68 2.61 2.77
=========== =========== =========== =========== ========== =========
<FN>
(A) The term "earnings" shall be defined as pretax income from continuing
operations. Add to pretax income the amount of fixed charges adjusted to
exclude (a) the amount of any interest capitalized during the period and
(b) the actual amount of any preferred stock dividend requirements of
majority-owned subsidiaries which were included in such fixed charges
amount but not deducted in the determination of pretax income.
(B) Excludes cumulative effect of $5.4 million credit to income reflecting a
change in income taxes.
(C) Excludes income from discontinued operations.
(D) Includes State income taxes and Federal income taxes for other income.
(E) Fixed Charges represent (a) interest, whether expensed or capitalized, (b)
amortization of debt discount, premium and expense, (c) an estimate of
interest implicit in rentals, and (d) preferred securities dividend
requirements of subsidiaries and preferred stock dividends, increased to
reflect the pre-tax earnings requirement for Public Service Enterprise
Group Incorporated.
(F) Excludes interest expense from discontinued operations.
</FN>
EXHIBIT 12 (A)
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
12
Months
Ended
YEARS ENDED DECEMBER 31, March
31,
--------- ---------- ---------- ---------- ----------
1993 1994 1995 1996 1997 1998
--------- ---------- ---------- ---------- ---------- --------
(Millions of Dollars, where applicable)
Earnings as Defined in
Regulation S-K (A):
Net Income $615 $659 $617 $535 $528 $546
Income Taxes (B) 307 302 326 268 286 329
Fixed Charges 401 408 419 438 450 450
--------- ---------- ---------- ---------- ---------- ---------
Earnings $1,323 $1,369 $1,362 $1,241 $1,264 $1,325
========= ========== ========== ========== ========== =========
Fixed Charges as Defined in
Regulation S-K (C):
Total Interest Expense $390 $396 $407 $399 $395 $395
Interest Factor in Rentals 11 12 12 11 11 11
Subsidiaries' Preferred Securities
Dividend Requirements -- -- -- 28 44 44
--------- ---------- ---------- ---------- ---------- ---------
Total Fixed Charges $401 $408 $419 $438 $450 $450
========= ========== ========== ========== ========== =========
Ratio of Earnings to Fixed Charges 3.30 3.35 3.25 2.83 2.81 2.94
========= ========== ========== ========== ========== =========
<FN>
(A) The term "earnings" shall be defined as pretax income from continuing
operations. Add to pretax income the amount of fixed charges adjusted to
exclude (a) the amount of any interest capitalized during the period and (b)
the actual amount of any preferred stock dividend requirements of
majority-owned subsidiaries which were included in such fixed charges amount
but not deducted in the determination of pretax income.
(B) Includes State income taxes and Federal income taxes for other income.
(C) Fixed Charges represent (a) interest, whether expensed or capitalized, (b)
amortization of debt discount, premium and expense, (c) an estimate of
interest implicit in rentals, and (d) Preferred Securities Dividend
Requirements of subsidiaries.
</FN>
EXHIBIT 12 (B)
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS
12 Months
Ended
YEARS ENDED DECEMBER 31, March 31,
---------- ---------- ---------- ---------- ----------
1993 1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ---------- ----------
(Millions of Dollars, where applicable)
Earnings as Defined in
Regulation S-K (A):
Net Income $615 $659 $617 $535 $528 $546
Income Taxes (B) 307 302 326 268 286 329
Fixed Charges 401 408 419 438 450 450
---------- ----------- ---------- ---------- ---------- ----------
Earnings $1,323 $1,369 $1,362 $1,241 $1,264 $1,325
========== =========== ========== ========== ========== ==========
Fixed Charges as Defined
in Regulation S-K (C):
Total Interest Expense $390 $396 $407 $399 $395 $395
Interest Factor in Rentals 11 12 12 11 11 11
Subsidiaries' Preferred
Securities Dividend
Requirements -- -- -- 28 44 44
Preferred Stock Dividends 38 42 49 23 12 10
Adjustment to Preferred Stock
Dividends to state on a
pre-income tax basis 19 19 24 12 6 6
---------- ----------- ---------- ---------- ---------- ----------
Total Fixed Charges $458 $469 $492 $473 $468 $466
========== =========== ========== ========== ========== ==========
Ratio of Earnings to Fixed
Charges 2.89 2.92 2.77 2.62 2.70 2.84
========== =========== ========== ========== ========== ==========
<FN>
(A) The term "earnings" shall be defined as pretax income from continuing
operations. Add to pretax income the amount of fixed charges adjusted to
exclude (a) the amount of any interest capitalized during the period and (b)
the actual amount of any preferred stock dividend requirements of
majority-owned subsidiaries which were included in such fixed charges amount
but not deducted in the determination of pretax income.
(B) Includes State income taxes and Federal income taxes for other income.
(C) Fixed Charges represent (a) interest, whether expensed or capitalized, (b)
amortization of debt discount, premium and expense, (c) an estimate of
interest implicit in rentals, and (d) preferred securities dividend
requirements of subsidiaries and preferred stock dividends, increased to
reflect the pre-tax earnings requirement for Public Service Electric and Gas
Company.
</FN>