-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VIpWv5Mfo26kJKVwB0x1aVeO+P4XNhcAE3nEuRvUyqut0E+ODfofJn+5eU99DmeC 9DI7hrQvScuzGjYrpWbjLg== 0000788784-97-000022.txt : 19971117 0000788784-97-000022.hdr.sgml : 19971117 ACCESSION NUMBER: 0000788784-97-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NYSE SROS: PHLX FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUBLIC SERVICE ENTERPRISE GROUP INC CENTRAL INDEX KEY: 0000788784 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 222625848 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09120 FILM NUMBER: 97721068 BUSINESS ADDRESS: STREET 1: 80 PARK PLZ STREET 2: P O BOX 1171 CITY: NEWARK STATE: NJ ZIP: 07101 BUSINESS PHONE: 2014307000 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUBLIC SERVICE ELECTRIC & GAS CO CENTRAL INDEX KEY: 0000081033 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 221212800 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-00973 FILM NUMBER: 97721069 BUSINESS ADDRESS: STREET 1: 80 PARK PLZ STREET 2: PO BOX 570 CITY: NEWARK STATE: NJ ZIP: 07101 BUSINESS PHONE: 2014307000 10-Q 1 FORM 10-Q ================================================================================ 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 September 30, 1997 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. - -------------------------------------------------------------------------------- 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 October 31, 1997: 231,957,608 As of October 31, 1997, 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. ================================================================================ TABLE OF CONTENTS Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Public Service Enterprise Group Incorporated (Enterprise): Consolidated Statements of Income for the Three and Nine Months Ended September 30, 1997 and 1996............................... 1 Consolidated Balance Sheets as of September 30, 1997 and December 31, 1996.................................................. 2 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1997 and 1996............................... 4 Consolidated Statements of Retained Earnings for the Three and Nine Months Ended September 30, 1997 and 1996............................... 5 Public Service Electric and Gas Company (PSE&G): Consolidated Statements of Income for the Three and Nine Months Ended September 30, 1997 and 1996............................... 7 Consolidated Balance Sheets as of September 30, 1997 and December 31, 1996.................................................. 8 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1997 and 1996............................... 10 Consolidated Statements of Retained Earnings for the Three and Nine Months Ended September 30, 1997 and 1996............................... 11 Notes to Consolidated Financial Statements - Enterprise.................. 12 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 ........................................................... 25 PART II. OTHER INFORMATION Item 1. Legal Proceedings............................................... 26 Item 5. Other Information............................................... 27 Item 6. Exhibits and Reports on Form 8-K................................ 30 Signatures - Public Service Enterprise Group Incorporated................ 31 Signatures - Public Service Electric and Gas Company..................... 31
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED CONSOLIDATED STATEMENTS OF INCOME (Millions of Dollars, except per share data) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, ------------------------------ ------------------------------ 1997 1996 1997 1996 ------------- ------------ ------------ ------------ OPERATING REVENUES Electric $ 1,227 $ 1,055 $ 3,133 $ 3,004 Gas 270 215 1,328 1,309 Nonutility Activities 71 65 162 157 ------------- ------------ ------------ ------------ Total Operating Revenues 1,568 1,335 4,623 4,470 ------------- ------------ ------------ ------------ OPERATING EXPENSES Operation: Fuel for Electric Generation and Interchanged Power 372 254 863 686 Gas Purchased 144 140 745 783 Other 281 237 798 744 Maintenance 69 62 197 245 Depreciation and Amortization 156 152 462 456 Taxes: Federal Income Taxes 93 70 245 224 New Jersey Gross Receipts Taxes 132 133 421 452 Other 20 22 63 68 ------------- ------------ ------------ ------------ Total Operating Expenses 1,267 1,070 3,794 3,658 ------------- ------------ ------------ ------------ OPERATING INCOME 301 265 829 812 OTHER INCOME AND DEDUCTIONS Settlement of Salem Litigation - Net of Applicable Taxes of $29 -- -- (53) -- Other - net 2 (3) 6 (7) ------------- ------------ ------------ ------------ Total Other Income and Deductions 2 (3) (47) (7) ------------- ------------ ------------ ------------ INCOME BEFORE INTEREST CHARGES AND DIVIDENDS ON PREFERRED SECURITIES 303 262 782 805 ------------- ------------ ------------ ------------ INTEREST EXPENSE AND PREFERRED DIVIDENDS Interest Expense 119 113 345 339 Allowance for Funds Used During Construction - Debt and Capitalized Interest (6) (4) (15) (13) Preferred Securities Dividend Requirements 14 13 42 38 Net Loss (Gain) on Preferred Stock Redemptions -- -- 3 (19) ------------- ------------ ------------ ------------ Total Interest Expense and Preferred Dividends 127 122 375 345 ------------- ------------ ------------ ------------ INCOME FROM CONTINUING OPERATIONS 176 140 407 460 Discontinued Operations: Discontinued Operations - Net of Taxes (Note 5) -- 3 -- 11 Gain on Sale of Discontinued Operations -- 13 -- 13 ------------- ------------ ------------ ------------ NET INCOME $ 176 $ 156 $ 407 $ 484 ============= ============ ============ ============ AVERAGE SHARES OF COMMON STOCK OUTSTANDING (000's) 231,958 243,114 231,995 244,166 EARNINGS PER AVERAGE SHARE Income From Continuing Operations $0.76 $0.57 $1.75 $1.88 Income From Discontinued Operations -- 0.01 -- 0.04 Gain on Sale of Discontinued Operations -- 0.06 -- 0.06 ------------- ------------ ------------ ------------ TOTAL EARNINGS PER AVERAGE SHARE $0.76 $0.64 $1.75 $1.98 ============= ============ ============ ============ DIVIDENDS PAID PER SHARE OF COMMON STOCK $0.54 $0.54 $1.62 $1.62 See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED CONSOLIDATED BALANCE SHEETS ASSETS (Millions of Dollars) (Unaudited) September 30, December 31, 1997 1996 ------------- ------------ UTILITY PLANT - Original cost Electric $13,605 $13,314 Gas 2,659 2,556 Common 559 530 ------- ------- Total 16,823 16,400 Less: Accumulated depreciation and amortization 6,353 5,889 ------- ------- Net 10,470 10,511 Nuclear Fuel in Service, net of accumulated amortization - 1997, $308; 1996, $259 147 199 ------- ------- Net Utility Plant in Service 10,617 10,710 Construction Work in Progress, including Nuclear Fuel in Process - 1997, $138; 1996, $70 405 445 Plant Held for Future Use 24 24 ------- ------- Net Utility Plant 11,046 11,179 ------- ------- INVESTMENTS AND OTHER NONCURRENT ASSETS Long-Term Investments, net of amortization - 1997, $19; 1996, $13, and net of valuation allowances - 1997, $12; 1996, $13 2,357 1,854 Nuclear Decommissioning and Other Special Funds 463 382 Other Noncurrent Assets 159 116 ------- ------- Total Investments and Other Noncurrent Assets 2,979 2,352 ------- ------- CURRENT ASSETS Cash and Cash Equivalents 88 279 Accounts Receivable: Customer Accounts Receivable 421 500 Other Accounts Receivable 229 245 Less: Allowance for Doubtful Accounts 39 46 Unbilled Revenues 169 248 Fuel, at average cost 325 313 Materials and Supplies, at average cost, net of inventory valuation reserves - 1997, $14; 1996, $16 147 148 Prepaid Gross Receipts Taxes 169 -- Miscellaneous Current Assets 82 57 ------- ------- Total Current Assets 1,591 1,744 ------- ------- DEFERRED DEBITS Property Abandonments 41 52 Oil and Gas Property Write-Down 27 31 Unamortized Debt Expense 138 139 Deferred OPEB Costs (Note 2) 297 226 Unrecovered Environmental Costs (Note 2) 125 126 Unrecovered Plant and Regulatory Study Costs 33 34 Underrecovered Electric Energy and Gas Costs (Note 6) 153 176 Unrecovered SFAS 109 Deferred Income Taxes 732 752 Deferred Decontamination and Decommissioning Costs 43 47 Deferred Demand Side Management Costs (Notes 2 and 6) 98 40 Other 3 17 ------- ------- Total Deferred Debits 1,690 1,640 ------- ------- Total $17,306 $16,915 ======= ======= See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED CONSOLIDATED BALANCE SHEETS CAPITALIZATION AND LIABILITIES (Millions of Dollars) (Unaudited) September 30, December 31, 1997 1996 ------------- ------------ CAPITALIZATION Common Equity: Common Stock $ 3,603 $ 3,627 Retained Earnings 1,596 1,586 ------- ------- Total Common Equity 5,199 5,213 Subsidiaries' Preferred Securities: Preferred Stock Without Mandatory Redemption 95 114 Preferred Stock With Mandatory Redemption 75 150 Monthly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures 210 210 Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures 303 208 Long-Term Debt 4,623 4,580 ------- ------- Total Capitalization 10,505 10,475 ------- ------- OTHER LONG-TERM LIABILITIES Decontamination and Decommissioning Costs 43 47 Environmental Costs 80 86 Capital Lease Obligations 52 52 ------- ------- Total Other Long-Term Liabilities 175 185 ------- ------- CURRENT LIABILITIES Long-Term Debt due within one year 471 548 Commercial Paper and Loans 1,060 638 Accounts Payable 665 697 Other Taxes Accrued 26 32 Interest Accrued 103 96 Other 177 261 ------- ------- Total Current Liabilities 2,502 2,272 ------- ------- DEFERRED CREDITS Deferred Income Taxes 3,357 3,250 Deferred Investment Tax Credits 348 361 Deferred OPEB Costs 297 226 Other 122 146 ------- ------- Total Deferred Credits 4,124 3,983 ------- ------- COMMITMENTS AND CONTINGENT LIABILITIES (Note 3) -- -- ------- ------- Total $17,306 $16,915 ======= ======= See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (Millions of Dollars) (Unaudited) Nine Months Ended September 30, ------------------------------- 1997 1996 ----- ------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 407 $ 484 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and Amortization 462 456 Amortization of Nuclear Fuel 47 43 Recovery (deferral) of Electric Energy and Gas Costs - net 23 (33) Unrealized Gains on Investments - net (37) (19) Provision for Deferred Income Taxes - net 16 25 Investment Tax Credits - net (13) (15) Allowance for Funds Used During Construction - Debt and Capitalized Interest (15) (13) Proceeds from Leasing Activities 76 58 Changes in certain current assets and liabilities: Net decrease in Accounts Receivable and Unbilled Revenues 167 215 Net increase in Inventory - Fuel and Materials and Supplies (11) (57) Net decrease in Accounts Payable (32) (38) Net change in Prepaid / Other Accrued Taxes (175) (99) Net change in Other Current Assets and Liabilities (102) 78 Other (35) (26) Net cash provided by operating activities - Discontinued Operations -- 54 ----- ------- Net cash provided by operating activities 778 1,113 ----- ------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to Utility Plant, excluding AFDC (383) (428) Net increase in Long-Term Investments and Real Estate (438) (14) Contribution to Decommissioning Funds and Other Special Funds (43) (18) Cost of Plant Removal - net (23) (20) Other (42) (15) Net Proceeds from the Sale of Discontinued Operations -- 707 Change in Net Assets - Discontinued Operations -- (395) ----- ------- Net cash used in investing activities (929) (183) ----- ------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in Short-Term Debt 422 76 Issuance of Long-Term Debt 454 370 Redemption of Long-Term Debt (488) (435) Long-Term Debt Issuance and Redemption Costs (8) (38) Redemption of Preferred Stock (94) (212) Issuance of Preferred Securities of Subsidiaries 95 208 Retirement of Common Stock (43) (105) Cash Dividends Paid on Common Stock (376) (395) Other (2) (7) ----- ------- Net cash used in financing activities (40) (538) ----- ------- Net (decrease) increase in Cash and Cash Equivalents (191) 392 Cash and Cash Equivalents at Beginning of Period 279 62 ===== ======= Cash and Cash Equivalents at End of Period $ 88 $ 454 ===== ======= Income Taxes Paid $ 118 $ 112 Interest Paid $ 302 $ 353 See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (Millions of Dollars) (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, -------------------------------- ------------------------------- 1997 1996 1997 1996 ------ ------ ------ ------ Balance at Beginning of Period $1,544 $1,695 $1,586 $1,637 Add: Net Income 176 156 407 484 ------ ------ ------ ------ Total 1,720 1,851 1,993 2,121 ------ ------ ------ ------ Deduct: Cash Dividends on Common Stock 124 131 376 395 Retirement of Common Stock -- 45 18 45 Preferred Securities Issuance Expenses -- -- 3 6 ------ ------ ------ ------ Total Deductions 124 176 397 446 ------ ------ ------ ------ Balance at End of Period $1,596 $1,675 $1,596 $1,675 ====== ====== ====== ====== See Notes to Consolidated Financial Statements.
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PUBLIC SERVICE ELECTRIC AND GAS COMPANY CONSOLIDATED STATEMENTS OF INCOME (Millions of Dollars) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- ------------------------------ 1997 1996 1997 1996 ------------ ------------ ------------ ------------ OPERATING REVENUES Electric $ 1,227 $ 1,055 $ 3,133 $ 3,004 Gas 270 215 1,328 1,309 ------------ ------------ ------------ ------------ Total Operating Revenues 1,497 1,270 4,461 4,313 ------------ ------------ ------------ ------------ OPERATING EXPENSES Operation: Fuel for Electric Generation and Interchanged Power 372 254 863 686 Gas Purchased 144 140 745 783 Other 259 220 736 698 Maintenance 69 62 197 245 Depreciation and Amortization 155 150 459 453 Taxes: Federal Income Taxes 84 60 231 204 New Jersey Gross Receipts Taxes 132 133 421 452 Other 18 21 58 63 ------------ ------------ ------------ ------------ Total Operating Expenses 1,233 1,040 3,710 3,584 ------------ ------------ ------------ ------------ OPERATING INCOME 264 230 751 729 OTHER INCOME AND DEDUCTIONS Settlement of Salem Litigation - Net of Applicable Taxes of $29 -- -- (53) -- Other - net 2 (4) 6 (6) ------------ ------------ ------------ ------------ Total Other Income and Deductions 2 (4) (47) (6) ------------ ------------ ------------ ------------ INCOME BEFORE INTEREST CHARGES AND DIVIDENDS ON PREFERRED SECURITIES 266 226 704 723 ------------ ------------ ------------ ------------ INTEREST EXPENSE AND PREFERRED SECURITIES DIVIDENDS Interest Expense 100 99 296 302 Allowance for Funds Used During Construction - Debt (4) (4) (12) (12) Preferred Securities Dividend Requirement of Subsidiaries 11 9 33 19 ------------ ------------ ------------ ------------ Total Interest Expense and Preferred Securities Dividends 107 104 317 309 ------------ ------------ ------------ ------------ NET INCOME 159 122 387 414 Preferred Stock Dividend Requirements 2 4 10 19 Net Loss (Gain) on Preferred Stock Redemptions -- -- 3 (19) ------------ ------------ ------------ ------------ EARNINGS AVAILABLE TO PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED $ 157 $ 118 $ 374 $ 414 ============ ============ ============ ============ See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY CONSOLIDATED BALANCE SHEETS ASSETS (Millions of Dollars) (Unaudited) September 30, December 31, 1997 1996 ------------- ------------ UTILITY PLANT - Original cost Electric $13,605 $13,314 Gas 2,659 2,556 Common 559 530 ------- ------- Total 16,823 16,400 Less: Accumulated depreciation and amortization 6,353 5,889 ------- ------- Net 10,470 10,511 Nuclear Fuel in Service, net of accumulated amortization - 1997, $308; 1996, $259 147 199 ------- ------- Net Utility Plant in Service 10,617 10,710 Construction Work in Progress, including Nuclear Fuel in Process - 1997, $138; 1996, $70 405 445 Plant Held for Future Use 24 24 ------- ------- Net Utility Plant 11,046 11,179 ------- ------- INVESTMENTS AND OTHER NONCURRENT ASSETS Long-Term Investments, net of amortization - 1997, $19; 1996, $13, and net of valuation allowances - 1997, $10; 1996, $10 136 134 Nuclear Decommissioning and Other Special Funds 463 382 Other Noncurrent Assets 19 19 ------- ------- Total Investments and Other Noncurrent Assets 618 535 ------- ------- CURRENT ASSETS Cash and Cash Equivalents 25 48 Accounts Receivable: Customer Accounts Receivable 421 500 Other Accounts Receivable 174 179 Less: Allowance for Doubtful Accounts 39 46 Accounts Receivable - Associated Companies - net -- 4 Unbilled Revenues 169 248 Fuel, at average cost 325 313 Materials and Supplies, at average cost, net of inventory valuation reserves - 1997, $14; 1996, $16 147 148 Prepaid Gross Receipts Taxes 169 -- Miscellaneous Current Assets 78 53 ------- ------- Total Current Assets 1,469 1,447 ------- ------- DEFERRED DEBITS Property Abandonments 41 52 Oil and Gas Property Write-Down 27 31 Unamortized Debt Expense 137 138 Deferred OPEB Costs (Note 2) 297 226 Unrecovered Environmental Costs (Note 2) 125 126 Unrecovered Plant and Regulatory Study Costs 33 34 Underrecovered Electric Energy and Gas Costs (Note 6) 153 176 Unrecovered SFAS 109 Deferred Income Taxes 732 752 Deferred Decontamination and Decommissioning Costs 43 47 Deferred Demand Side Management Costs (Notes 2 and 6) 98 40 Other 3 16 ------- ------- Total Deferred Debits 1,689 1,638 ------- ------- Total $14,822 $14,799 ======= ======= See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY CONSOLIDATED BALANCE SHEETS CAPITALIZATION AND LIABILITIES (Millions of Dollars) (Unaudited) September 30, December 31, 1997 1996 ----------------- ---------------- CAPITALIZATION Common Equity: Common Stock $ 2,563 $ 2,563 Contributed Capital from Enterprise 594 594 Retained Earnings 1,345 1,365 ------- ------- Total Common Equity 4,502 4,522 Preferred Stock Without Mandatory Redemption 95 114 Preferred Stock With Mandatory Redemption 75 150 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 303 208 Long-Term Debt 4,126 4,107 ------- ------- Total Capitalization 9,311 9,311 ------- ------- OTHER LONG-TERM LIABILITIES Decontamination and Decommissioning Costs 43 47 Environmental Costs 80 86 Capital Lease Obligations 52 52 ------- ------- Total Other Long-Term Liabilities 175 185 ------- ------- CURRENT LIABILITIES Long-Term Debt due within one year 268 424 Commercial Paper and Loans 928 638 Accounts Payable 594 627 Accounts Payable - Associated Companies - net 21 -- Other Taxes Accrued 33 33 Interest Accrued 83 87 Other 143 221 ------- ------- Total Current Liabilities 2,070 2,030 ------- ------- DEFERRED CREDITS Deferred Income Taxes 2,521 2,557 Deferred Investment Tax Credits 338 352 Deferred OPEB Costs 297 226 Other 110 138 ------- ------- Total Deferred Credits 3,266 3,273 ------- ------- COMMITMENTS AND CONTINGENT LIABILITIES (Note 3) -- -- ------- ------- Total $14,822 $14,799 ======= ======= See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Millions of Dollars) (Unaudited) Nine Months Ended September 30, -------------------------------- 1997 1996 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 387 $ 414 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and Amortization 458 452 Amortization of Nuclear Fuel 47 43 Recovery (deferral) of Electric Energy and Gas Costs - net 23 (33) Provision for Deferred Income Taxes - net (16) 6 Investment Tax Credits - net (14) (14) Allowance for Funds Used During Construction - Debt (12) (12) Changes in certain current assets and liabilities: Net decrease in Accounts Receivable and Unbilled Revenues 160 223 Net increase in Inventory - Fuel and Materials and Supplies (11) (57) Net decrease in Accounts Payable (12) (37) Net change in Prepaid / Other Accrued Taxes (169) (143) Net change in Other Current Assets and Liabilities (107) 72 Other (38) (20) -------- --------- Net cash provided by operating activities 696 894 -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to Utility Plant, excluding AFDC (383) (428) Net increase in Long-Term Investments (10) (37) Contribution to Decommissioning Funds and Other Special Funds (43) (18) Cost of Plant Removal - net (23) (20) -------- --------- Net cash used in investing activities (459) (503) -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in Short-Term Debt 290 76 Issuance of Long-Term Debt 279 370 Redemption of Long-Term Debt (416) (413) Long-Term Debt Issuance and Redemption Costs (7) (39) Redemption of Preferred Stock (94) (212) Net (Loss) Gain on Preferred Stock Redemptions (3) 19 Issuance of Preferred Securities of Subsidiaries 95 208 Cash Dividends Paid (401) (404) Other (3) (5) -------- --------- Net cash used in financing activities (260) (400) -------- --------- Net decrease in Cash and Cash Equivalents (23) (9) Cash and Cash Equivalents at Beginning of Period 48 32 -------- --------- Cash and Cash Equivalents at End of Period $ 25 $ 23 ======== ======== Income Taxes Paid $ 205 $ 163 Interest Paid $ 271 $ 295 See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (Millions of Dollars) (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, -------------------------------- ------------------------------- 1997 1996 1997 1996 ------- ------- ------- ------- Balance at Beginning of Period $ 1,327 $ 1,398 $ 1,365 $ 1,366 Add: Net Income 159 122 387 414 ------- ------- ------- ------- Total 1,486 1,520 1,752 1,780 ------- ------- ------- ------- Deduct: Cash Dividends on Common Stock 138 127 391 385 Preferred Stock, at required rates 3 4 10 19 Preferred Securities Issuance Expenses -- -- 3 6 ------- ------- ------- ------- Total Deductions 141 131 404 410 ------- ------- ------- ------- Net (Loss) Gain on Preferred Stock Redemptions -- -- (3) 19 ------- ------- ------- ------- Balance at End of Period $ 1,345 $ 1,389 $ 1,345 $ 1,389 ======= ======= ======= ======= See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED 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 financial statements and Notes to Consolidated Financial Statements (Notes) should be read in conjunction with the respective Registrant's Notes contained in the 1996 Annual Report on Form 10-K and the quarterly reports on Form 10-Q for the quarters ended March 31, 1997 and June 30, 1997. These Notes update and supplement matters discussed in the 1996 Annual Report on Form 10-K and the quarterly reports on Form 10-Q for the quarters ended March 31, 1997 and June 30, 1997. 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 1996 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 Interim Competition Transition Charge (ICTC) On April 24, 1997, the New Jersey Board of Public Utilities (BPU) issued a generic order to investigate policy issues related to whether customers who cease to receive electric service from a utility and go to on-site generation should be charged an exit fee. As a result, Public Service Electric and Gas Company's (PSE&G) petition and motions concerning its September 1996 ICTC filing have been placed in abeyance pending the conclusion of the separate generic proceeding on this issue. The generic ICTC matter continues to be reviewed by the BPU. PSE&G cannot predict the outcome of this proceeding. Levelized Gas Adjustment Charge (LGAC) On July 30, 1997, the BPU authorized PSE&G to hedge or lock-in up to 50% of its residential natural gas portfolio, which may be accomplished using either physical or financial hedging mechanisms, beginning with the 1997-1998 heating season. Such hedges are intended to provide price stability for residential customers (see Note 4 - Financial Instruments and Risk Management). On November 14, 1997, PSE&G filed its 1997/98 LGAC petition with the BPU requesting a $45 million increase on an annual basis in its LGAC for the period January 1, 1998 to December 31, 1998. Current rates will remain in effect until a change is approved by the BPU. This increase amounts to approximately 4.8% on a typical residential bill. Demand Side Adjustment Factor (DSAF) On February 24, 1997, PSE&G requested that the BPU grant a $151 million increase for its DSAF to reflect increases in the costs associated with PSE&G's Demand Side Management (DSM) Programs. That request is presently before the Office of Administrative Law (OAL). The increase had been requested to become effective on May 1, 1997 and continue through December 31, 1998. A hearing was held before the OAL on September 23, 1997 and this proceeding is currently in the briefing process. PSE&G cannot predict the outcome of this proceeding or the impact on PSE&G's future financial condition, results of operations and net cash flows (see Note 6 - Deferred Items). Remediation Adjustment Charge (RAC) On August 1, 1997, PSE&G requested that the BPU approve recovery of $6.8 million through PSE&G's RAC for manufactured gas plant remediation costs. This request represents an increase in the amount of PSE&G's recovery of such costs by approximately $2 million over current rate levels. On October 9, 1997, this matter was transferred to the OAL. PSE&G cannot predict the outcome of this proceeding. Postretirement Benefits Other Than Pensions (OPEB) BPU consideration of PSE&G's petition to resolve the regulatory and rate issues associated with Statement of Financial Accounting Standards No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions" (SFAS 106) continues. The petition requests the BPU to recognize that current base rates are sufficient to recover PSE&G's accrued and deferred OPEB costs. This petition was filed in response to a January 8, 1997 BPU Order which adopted a stipulation of the parties for determining accrual expense recognition under one of the rate mechanisms established in the BPU's August 1, 1996 Generic Proceeding. PSE&G cannot predict the outcome of this proceeding or the impact on PSE&G's future financial condition, results of operations and net cash flows. Note 3. Commitments and Contingent Liabilities Hazardous Waste Certain Federal and State laws authorize the U.S. Environmental Protection Agency (EPA) and the New Jersey Department of Environmental Protection (NJDEP), among other agencies, to issue orders and bring enforcement actions to compel responsible parties to investigate and take remedial actions at any site that is determined to present an imminent and substantial danger to the public or the environment because of an actual or threatened release of one or more hazardous substances. Because of the nature of PSE&G's business, including the production of electricity, the distribution of gas and, formerly, the manufacture of gas, various by-products and substances are or were produced or handled which contain constituents classified as hazardous. PSE&G generally provides for the disposal or processing of such substances through licensed independent contractors. However, these statutory provisions impose joint and several responsibility without regard to fault on all responsible parties, including the generators of the hazardous substances, for certain investigative and remediation costs at sites where these substances were disposed of or processed. PSE&G has been notified with respect to a number of such sites and the 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 the Manufactured Gas Plant Remediation Program (Remediation Program), Public Service Enterprise Group Incorporated (Enterprise) and PSE&G do not expect 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. PSE&G is presently unable to determine or estimate the impact of these revised regulations on its future financial condition, results of operations and net cash flows. PSE&G Manufactured Gas Plant Remediation Program PSE&G is currently working with the NJDEP under a program to assess, investigate and, if necessary, remediate environmental concerns at 38 former manufactured gas plant 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 more than 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 (see Note 2 - Rate Matters - Remediation Adjustment Charge). Settlement of Salem Litigation On May 12, 1997, PSE&G settled the lawsuit brought against it by PECO Energy Company (PECO) and Delmarva Power & Light Company (DP&L), two co-owners of the Salem Nuclear Generating Station (Salem), related to alleged damages resulting from the outage of the facility. Under the terms of the settlement, PSE&G will pay a total of $82 million to PECO and DP&L by December 31, 1997. This settlement resulted in an after-tax charge to earnings, recorded in the first quarter of 1997, of $53 million or $.23 per share of Enterprise common stock. PSE&G is also obligated to pay $1.4 million for each reactor month that the outage continues beyond an aggregate outage of 64 reactor months, up to a maximum payment under this provision of $17 million. As of October 31, 1997, an aggregate of approximately 56 reactor months had accumulated due to Salem outages. PSE&G does not expect to make any payments under this provision. Salem 2 returned to service on August 30, 1997 and is currently operating at 100% power. Salem 1 is expected to return to service in the first quarter of 1998. PECO, DP&L and PSE&G have also agreed to an operating performance standard through December 31, 2011 for Salem and through December 31, 2007 for the PECO operated Peach Bottom Atomic Power Station (Peach Bottom). Under this standard, the operator of each respective station would be required to make payments to the non-operating owners if the three-year capacity factor, determined annually, of such station falls below 40 percent, subject to a maximum of $25 million per year. The initial three-year period begins on January 1, 1998 for Peach Bottom and on the date the later of the two Salem units (Salem 1) returns to service for Salem. The parties have further agreed to forego litigation in the future, except for limited cases in which the operator would be responsible for damages of no more than $5 million per year. PSE&G and Atlantic City Electric Company (ACE) entered into an operating agreement which resulted in the dismissal of a lawsuit related to Salem performance initiated by ACE. Under the agreement, ACE pays a portion of its share of the 1997 operation and maintenance (O&M) expenses based on the amount of generation of the Salem units. PSE&G expects to incur approximately $13 million of ACE's share of 1997 O&M expenses, of which $10 million has been expensed as of September 30, 1997, since Salem 2 did not operate for the first eight months of 1997 and Salem 1 is not expected to return to service during 1997. Year 2000 Many of Enterprise's and PSE&G's computer systems must be modified due to computer program limitations in recognizing dates beyond 1999. Substantial changes to, and some replacements of, Enterprise's and PSE&G's present computer systems are being made to allow the information and operating systems to be "Year 2000" compliant. Costs, which may be material, are being expensed as incurred. An inability to meet this deadline could have a material adverse impact on Enterprise's and PSE&G's operations, financial condition, results of operations and net cash flows. Note 4. 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. Natural Gas Through September 30, 1997, Energis Resources Incorporated (Energis Resources), a subsidiary of Enterprise Diversified Holdings Incorporated (EDHI), entered into futures contracts to buy an aggregate of 13,060,000 mmbtu of natural gas at average prices of $2.37 per mmbtu related to fixed-price natural gas sales commitments. Such contracts, together with physical purchase contracts, hedged approximately 96% of its fixed-price sales commitments at September 30, 1997. Energis Resources had net unrealized hedge gains of $4 million at September 30, 1997. PSE&G enters into forward physical contracts and uses financial derivatives to mitigate its future natural gas price risk. During October 1997, PSE&G entered into contracts to hedge a limited quantity of gas against price movements in the winter months of 1997 - 1998 and 1998 - 1999 (see Note 2 - Rate Matters - Levelized Gas Adjustment Charge). Electricity PSE&G enters into forward physical contracts and uses financial derivatives to manage price risk related to forecasted electric sales to customers. These contracts, in conjunction with owned generating capacity, are designed to cover estimated electric retail customer commitments. Remaining requirements, if any, would be satisfied by power purchased from the Pennsylvania-New Jersey-Maryland Interconnection (PJM) spot market or through daily or weekly purchase contracts. Interest Rate Swap On June 2, 1997, an indirect subsidiary of EDHI entered into an agreement to swap floating rate borrowings into fixed rate borrowings. The interest differential to be received or paid under the interest rate swap agreement is recorded over the life of the agreement as an adjustment to the interest expense of the related borrowing. The swap terminates on May 28, 1999. The notional amount and interest rates are as follows: Pay-fixed swap Notional amount $43,522,000 Pay rate 6.65% Average receive rate - YTD 5.69% September 30, 1997 receive rate 5.73% Note 5. Discontinued Operations Prior year operating results of Energy Development Corporation (EDC) are summarized below: Three Months Ended Nine Months Ended September 30, 1996 September 30, 1996 ------------------ ------------------ (Millions of Dollars) Revenues $-- $126 Operating income -- 23 Earnings before income taxes -- 9 Income taxes (3) (2) Net income 3 11 * EDC was sold on July 31, 1996. Note 6. Deferred Items Underrecovered Electric Energy and Gas Costs Recoveries of electric energy and gas costs are determined by the BPU under the Electric Levelized Energy Adjustment Clause (LEAC) and the LGAC (see Note 2 - - Rate Matters - Levelized Gas Adjustment Charge). PSE&G's deferred fuel balances as of September 30, 1997 and December 31, 1996 reflect underrecovered costs as follows: September 30, December 31, 1997 1996 ------------- ------------ (Millions of Dollars) Underrecovered Electric Energy Costs $88 $151 Underrecovered Gas Fuel Costs 65 25 ------------- ------------ Total $153 $176 ============= ============ PSE&G has the opportunity, but no guarantee, during the period January 1, 1997 through December 31, 1998, to fully recover its December 31, 1996 underrecovered LEAC balance of $151 million without any change in the current energy component of the LEAC charge. While management believes that it will recover this amount by December 31, 1998 and continues to follow deferred accounting treatment for the LEAC, full recovery of this balance is dependent upon PSE&G's ability to successfully manage the cost of providing electricity. 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 September 30, 1997 and December 31, 1996, respectively, reflects underrecovered/(overrecovered) costs as follows: September 30, December 31, 1997 1996 ------------- ------------ (Millions of Dollars) Deferred DSM (Including Interest) - Electric $104 $45 Deferred DSM (Including Interest) - Gas (6) (5) ------------- ------------ Total $ 98 $40 ============= ============ The increase in the electric balance is primarily due to the ongoing underrecovery of DSM costs. In February 1997, PSE&G filed for an increase in the DSAF, which is a component of the LEAC. Approval of the filing would result in recovery of the current deferred DSM balance as well as the estimated costs of these programs through December 1998 (see Note 2 - Rate Matters - Demand Side Adjustment Factor). Note 7. Subsequent Events In October 1997, Community Energy Alternatives Incorporated (CEA), a subsidiary of EDHI, as part of a three-member consortium, acquired a Brazilian electric distribution company serving customers in the State of Rio Grande Do Sul, located in southern Brazil. CEA's ownership of the company is 30.25%. The total purchase price was $1.49 billion of which CEA's share was $498 million. A portion of CEA's share, $136 million, was financed with nonrecourse debt. This investment is considered an exempt foreign utility company. On October 21, 1997, Enterprise increased its uncommitted bank line of credit to $75 million from $25 million. Enterprise borrowed $75 million under this line of credit which was primarily used to purchase $75 million of 4.1% Cumulative Preferred Stock sold by EDHI to Enterprise. Also in October 1997, PSEG Capital Corporation issued an additional $165 million of MTNs with an average interest rate of 6.9%. Enterprise Capital Funding Corporation's debt outstanding increased from $260 million as of September 30, 1997 to $392 million as of October 31, 1997. On November 1, 1997, $150 million of PSE&G's 7 1/8% Series GG First and Refunding Mortgage Bonds matured. The redemption of these bonds was funded by the issuance of commercial paper. 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. Commitments and Contingent Liabilities Note 4. Financial Instruments and Risk Management Note 6. Deferred Items Note 7. Subsequent Events 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) 1996 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 Earnings per share of Enterprise common stock (Common Stock) was $.76 for the quarter ended September 30, 1997, representing an increase of $.12 or 19% per share from the comparable 1996 period. Earnings per share was $1.75 for the nine month period ended September 30, 1997 representing a decrease of $.23 or 12% per share from the comparable 1996 period. Public Service Electric and Gas Company's (PSE&G) contribution to earnings per share for the quarter ended September 30, 1997 increased $.16 from the comparable 1996 period due to the one-time charge to earnings, $.25 per share, in the third quarter of 1996 resulting from the resolution of certain regulatory issues with the BPU, including the "used and useful" issue related to the extended outage of the Salem Nuclear Generating Station (Salem). This increase was partially offset by higher nuclear operation and maintenance expenses (O&M) due to a refueling outage in the third quarter of 1997 at Hope Creek Nuclear Generating Station (Hope Creek) and higher 1997 administrative costs, including Year 2000 compliance and technology consulting services. PSE&G's contribution to earnings per share for the nine months ended September 30, 1997 decreased $.17 from the comparable 1996 period due to decreased revenues as a result of less favorable weather conditions in 1997, higher administrative costs attributable to legal fees associated with the settlement of Salem co-owner litigation and Year 2000 compliance and technology consulting services and a gain recorded in the second quarter of 1996 from the repurchase of a portion of PSE&G's outstanding cumulative preferred stock at discounts to par. These decreases were partially offset by lower 1997 O&M expenses at Hope Creek and Salem. The nine month periods ended September 30, 1997 and 1996 were each negatively impacted by one-time charges to earnings. The settlement of a lawsuit filed by two of the co-owners of Salem impacted the first quarter of 1997 by $.26 per share and the Salem regulatory issues settlement impacted the third quarter of 1996 by $.25 per share. Enterprise Diversified Holdings Incorporated's (EDHI) contribution to earnings per share for the quarter and nine months ended September 30, 1997 decreased $.08 and $.15, respectively, from the comparable 1996 periods primarily due to the absence of 1996 earnings related to the discontinued operations of Energy Development Corporation (EDC) and higher operating expenses of Energis Resources Incorporated (Energis Resources). Public Service Resources Corporation's (PSRC) earnings were lower for the nine months ended September 30, 1997 as a result of certain investment gains realized in 1996. As a result of Enterprise's stock repurchase program which concluded on January 17, 1997, earnings per share of Common Stock for the quarter and nine months ended September 30, 1997 increased $.04 and $.09, respectively, from the comparable 1996 periods. A total of 12.7 million shares were repurchased at a cost of $350 million under this program. PSE&G - Revenues Electric Increase (Decrease) Increase (Decrease) ------------------------ ---------------------- Three Months Ended Nine Months Ended September 30, September 30, 1997 vs. 1996 1997 vs. 1996 ------------------------ ---------------------- (Millions of Dollars) (Millions of Dollars) Kilowatt-hour revenues $ 49 $(35) Recovery of energy costs 123 183 Non-margin revenues (A) (7) (24) Other operating revenues 7 5 ---- ---- Total Electric Revenues $172 $129 ==== ==== Revenues increased $172 million or 16% for the quarter ended September 30, 1997 from the comparable period in 1996. Kilowatt-hour revenues increased primarily due to a charge to revenue in the third quarter of 1996 due to the Salem regulatory issues settlement. This increase was partially offset by a charge to revenue recorded in the third quarter of 1997 resulting from a change in estimates of unbilled electric revenue due to refinements of PSE&G's methodology. Recovery of energy costs increased primarily as a result of an increase in energy sales to wholesale customers. Revenues increased $129 million or 4% for the nine months ended September 30, 1997 from the comparable period in 1996, primarily due to higher recovery of energy costs resulting from an increase in energy sales to wholesale customers. (A) Non-margin revenues primarily reflect recoveries for Demand Side Management (DSM) Program costs, nuclear decommissioning costs, uncollectibles and NJ Gross Receipts and Franchise Taxes (NJGRT). Gas Increase (Decrease) Increase (Decrease) ------------------------ ---------------------- Three Months Ended Nine Months Ended September 30, September 30, 1997 vs. 1996 1997 vs. 1996 ------------------------ ---------------------- (Millions of Dollars) (Millions of Dollars) Therm revenues $45 $72 Recovery of fuel costs 5 (32) Non-margin revenues (B) 3 (22) Other operating revenues 2 1 --- --- Total Gas Revenues $55 $19 === === Revenues increased $55 million or 26% and $19 million or 1% for the quarter and nine months ended September 30, 1997, respectively, from the comparable periods in 1996. The increases were primarily due to higher therm revenues resulting from a change in estimates of unbilled gas revenue due to refinements of PSE&G's methodology. The increase for the nine months ended September 30, 1997 was partially offset by lower recovery of fuel costs due to milder winter weather in 1997. (B) Non-margin revenues primarily reflect recoveries for uncollectibles, DSM Program costs and NJGRT. PSE&G - Expenses Fuel for Electric Generation and Interchanged Power Fuel for Electric Generation and Interchanged Power increased $118 million or 47% and $177 million or 26% for the quarter and nine months ended September 30, 1997, respectively, from the comparable 1996 periods. The increases were primarily due to an increase in energy sales to wholesale customers. Due to the operation of the Electric Levelized Energy Adjustment Clause (LEAC) mechanism, variances in fuel revenues and expenses offset, with no direct effect on earnings. However, under the New Jersey Energy Master Plan, future changes in electric fuel and replacement power costs could impact earnings (see Competitive Environment). Other Operation and Maintenance Expenses Other operation and maintenance expenses increased $46 million or 16% for the quarter ended September 30, 1997, from the comparable 1996 period, primarily due to an increase in refueling outage expenses at Hope Creek and various administrative costs including Year 2000 compliance and technology consulting services. Net Loss (Gain) on Preferred Stock Redemptions Net Loss (Gain) on Preferred Stock Redemptions decreased $22 million for the nine months ended September 30, 1997 from the comparable 1996 period. The decrease was primarily due to an $18 million net gain on the repurchase of certain of PSE&G's outstanding cumulative preferred stock at discounts to par in the second quarter of 1996. EDHI - Net Income Increase (Decrease) Increase (Decrease) ------------------------ ---------------------- Three Months Ended Nine Months Ended September 30, September 30, 1997 vs. 1996 1997 vs. 1996 ------------------------ ---------------------- (Millions of Dollars) (Millions of Dollars) PSRC $ -- $ (8) CEA -- 2 Energis Resources (2) (9) Enterprise Group Development Corp.- EGDC -- 1 ----- ---- Continuing Operations (2) (14) Discontinued Operations - EDC (17) (24) ----- ----- Total $(19) $(38) ===== ===== Continuing Operations EDHI's income from continuing operations was $19 million for the quarter and $33 million for the nine months ended September 30, 1997, respectively. PSRC's earnings for the nine months decreased primarily due to certain investment gains which were realized in 1996. Community Energy Alternatives Incorporated's (CEA) income increased due to improved financial performance of several projects. The loss for Energis Resources increased due to higher selling, general and administrative expenditures. Discontinued Operations EDC was sold on July 31, 1996. Liquidity and Capital Resources Enterprise 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 and cash generated from EDHI's operations. As of September 30, 1997, Enterprise's capital structure consisted of 49.5% common equity, 44.0% long-term debt and 6.5% preferred stock and other preferred securities. Dividend payments on Common Stock were $1.62 per share and totaled $376 million for the nine months ended September 30, 1997. Since 1992, Enterprise has maintained a constant rate of dividends on Common Stock. A key Enterprise objective is to keep the Common Stock dividend secure. The ability of Enterprise to declare and pay dividends is contingent upon receipt of dividend payments from its subsidiaries. PSE&G paid dividends of $391 million and $385 million to Enterprise during the nine months ended September 30, 1997 and 1996, respectively. EDHI paid dividends of $354 million during the nine months ended September 30, 1996, primarily from proceeds from the sale of EDC. No dividends from EDHI to Enterprise were paid, or are contemplated, in 1997 due to the anticipated growth in EDHI subsidiary investment activities. PSE&G During the period January 1, 1997 through September 30, 1997, PSE&G had utility plant additions, including AFDC, of $395 million, primarily due to the replacement of the Salem 1 steam generators. EDHI In July 1997, PSRC entered into a leveraged lease of a waste-to-energy facility located in the Netherlands. The aggregate of PSRC's investments made in 1997 is approximately $150 million. In October 1997, CEA, as part of a three-member consortium, acquired a Brazilian electric distribution company serving customers in the State of Rio Grande Do Sul, located in southern Brazil. CEA's ownership of the company is 30.25%. The total purchase price was $1.49 billion of which CEA's share was $498 million. A portion of CEA's share, $136 million, was financed with nonrecourse debt. Additional funds were provided by EDHI's financing subsidiaries and by Enterprise (see External Financings). This investment is considered an exempt foreign utility company. The aggregate of CEA's investments made in 1997 is approximately $820 million, of which $233 million was financed with nonrecourse debt. In October 1997, EDHI sold $75 million of 4.1% Cumulative Preferred Stock to Enterprise. 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 future growth. Any inability to extend or replace maturing debt and/or existing agreements at current levels and interest rates may affect future earnings. As of September 30, 1997, EDHI's embedded cost of debt was approximately 8%. During 1997, EDHI provided additional long-term debt financing of $265 million at an average interest rate of 7%. External Financings Enterprise On October 21, 1997, Enterprise increased its uncommitted bank line of short-term credit to $75 million from $25 million. Enterprise borrowed $75 million under this line of credit which was primarily used to purchase $75 million of 4.1% Cumulative Preferred Stock of EDHI (see Liquidity and Capital Resources - EDHI). PSE&G PSE&G has New Jersey Board of Public Utilities (BPU) authority through the end of 1997 to issue approximately $4.455 billion aggregate amount of Bonds/Medium-Term Notes (MTNs)/Preferred Stock/Preferred Securities for refunding purposes. On November 14, 1997, PSE&G filed a petition with the BPU to extend such authority through December 31, 1998. 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 September 30, 1997, this Mortgage ratio of earnings to fixed charges was 3.07:1. As of September 30, 1997, the Mortgage would permit up to $3.2 billion aggregate principal amount of new bonds to be issued against previous additions and improvements. On November 1, 1997, $150 million of 7 1/8 % Series GG First and Refunding Mortgage Bonds matured. The redemption of these bonds was funded by the issuance of commercial paper. To provide liquidity for its commercial paper program, PSE&G has a $650 million one-year revolving credit agreement expiring in June 1998 and a $650 million five-year revolving credit agreement expiring in June 2002 with a group of commercial banks, which provide for borrowings of up to one year. On September 30, 1997, there were no borrowings outstanding under these credit agreements. The BPU has authorized PSE&G to issue and have outstanding at any one time through January 2, 1999, not more than $1.3 billion of short-term obligations, consisting of commercial paper and other unsecured borrowings from banks and other lenders. On September 30, 1997, PSE&G had $842 million of short-term debt outstanding, including $95 million borrowed against its uncommitted bank lines of credit which increased to $204 million from $114 million as of October 1, 1997. PSE&G Fuel Corporation (Fuelco) has a $125 million commercial paper program to finance a 42.49% share of Peach Bottom Atomic Power Station (Peach Bottom) nuclear fuel, supported by a $125 million revolving credit facility with a group of banks, which expires on June 28, 2001. PSE&G has guaranteed repayment of Fuelco's respective obligations under this program. As of September 30, 1997, Fuelco had commercial paper of $86 million outstanding under the program. EDHI PSEG Capital Corporation's (Capital) Medium-Term Note (MTN) program provides for an aggregate principal of up to $650 million. At September 30, 1997, Capital had total debt outstanding of $476 million, including $413 million of MTNs. In October 1997, Capital issued an additional $165 million of MTNs with an average interest rate of 6.9%, which was used to fund CEA's Brazilian investment. As of September 30, 1997, Enterprise Capital Funding Corporation (Funding) had a $300 million revolving credit facility with a consortium of banks and had $128 million of Senior Notes outstanding. As of September 30, 1997 and October 31, 1997, Funding had $260 million and $392 million of debt outstanding, respectively. Funds borrowed in October were used to fund CEA's Brazilian investment. 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 (EBIT) coverage ratio of at least 1.50:1. As of September 30, 1997, EDHI had a consolidated debt to equity ratio of 1.39:1. EDHI's consolidated debt to equity ratio as of October 31, 1997 was approximately 1.83:1. For the twelve months ended September 30, 1997, the EBIT coverage ratio, as defined to exclude the effects of EGDC, was 2.13:1. Compliance with applicable financial covenants will depend upon future financial position and levels of earnings, as to which no assurances 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, as to which no assurances can be given. Nuclear Operations PSE&G's Salem Units 1 and 2 were taken out of service in the second quarter of 1995. Salem 2 returned to service on August 30, 1997 and is currently operating at 100% power. The NRC has stated that it will continue to closely monitor activities at Salem 2 and will perform a final assessment in December 1997. The NRC's June 9, 1995 Confirmatory Action Letter was amended to include the condition that the NRC will perform the final assessment. Installation of Salem 1 steam generators has been completed and the unit is expected to return to service in the first quarter of 1998. Restart of Salem 1 is also subject to NRC approval. The inability to successfully return this unit to continuous, safe operation could have a material adverse impact on the financial condition, results of operations and net cash flows of Enterprise and PSE&G (see Forward Looking Statements). Competitive Environment New Jersey Energy Master Plan In accordance with the April 30, 1997 final report of the BPU on Phase II of the New Jersey Energy Master Plan (Energy Master Plan), PSE&G filed a proposal regarding competition and rates with the BPU on July 15, 1997. The BPU is expected to take at least a year to review and hold public hearings on PSE&G's proposal, rendering a decision by October 1998. The decision of the BPU in the Energy Master Plan proceeding, and the legislation to be adopted by the New Jersey Legislature required to implement certain aspects of the electric restructuring in the State, will establish the industry rules for the future. These actions are expected to fundamentally change the electric industry in the State by introducing retail competition to replace the utilities' former monopoly position and potentially requiring or resulting in the separation or sale of generation assets. Depending upon the outcome of these proceedings, these fundamental industry changes could have a material affect on PSE&G's operations, financial condition, results of operations, and net cash flows. Enterprise and PSE&G cannot predict the outcome of this matter. PSE&G's proposal in response to the Energy Master Plan includes the following key elements: A rate decrease of between 5% and 10%, effective January 1, 1999, dependent upon BPU approval of several key elements of the proposal. Allow all customers in all classes to register for their choice of energy supplier beginning October 1, 1998. Those customers choosing a supplier other than PSE&G would be permitted to switch effective January 1, 1999. A transition period of seven years with basic tariff rates capped during that period. During the transition period, PSE&G would maintain responsibility for system reliability of energy and capacity supply. Recovery of transition costs through asset securitization, restructuring of certain non-utility generation contracts and depreciation accounting changes (see Stranded Costs, Securitization and Depreciation below). Recovery of mandated societal costs, such as nuclear decommissioning and DSM, would be adjusted based on changes in these costs. Discontinuation of PSE&G's LEAC effective December 31, 1998. PSE&G would be responsible for all risks associated with fuel prices, changes in operation and maintenance expenses and mitigation of the transition costs of non-securitized generation production assets within the price capped rates. Transfer of PSE&G's nuclear and fossil generation assets, at net book value, to a separate entity functionally independent of PSE&G at the conclusion of the transition period. PSE&G would file a rate case or a plan for a form of alternative regulation for its electric distribution delivery service functions one year prior to the end of the transition period. At the end of the transition period, responsibility for generation reliability would shift to the marketplace and PSE&G would retain its obligation to connect and deliver energy and would offer basic generation service. Pursuant to actions taken by the BPU under its Energy Master Plan proceeding, various BPU-sponsored working groups have been created to resolve certain issues regarding restructuring. PSE&G is participating in these working groups including the Consumer Protection Task Force, Phase-In Mechanisms Working Group, Customer Services Working Group and DSM and Renewables Working Group. In addition, PSE&G is participating in BPU proceedings dealing with certain generic issues, including exit fees, market power, affiliate relationships, mechanics of customer phase-in and fair competition. The working groups and the generic issues proceedings are running concurrently with the Energy Master Plan proceedings. An evidentiary hearing schedule, before the Office of Administrative Law (OAL), has been established for the Stranded Cost Proceeding and Unbundled Rate Proceeding. Hearings are to be conducted and initial briefs and reply briefs are to be completed during the second quarter of 1998, with a non-binding decision from the Administrative Law Judge anticipated during the second quarter of 1998. Stranded Costs PSE&G has identified its potentially stranded costs associated with fossil and nuclear generating stations at $3.9 billion, based on certain assumptions, including future market prices of electricity and performance of generating units. Changes in these assumptions could materially alter the amount of estimated stranded costs. PSE&G is proposing to securitize $2.5 billion of these costs, with the remainder to be mitigated through cost saving measures during a transition period of seven years. In addition, PSE&G is seeking to restructure certain of its BPU approved contracts with Non-utility Generators (NUGs), which are estimated to be $1.6 billion above assumed future market prices. As presently proposed, the Energy Master Plan would allow recovery of these restructuring costs in rates (see Forward Looking Statements). Securitization PSE&G is proposing to securitize $2.5 billion of its potentially stranded costs through the issuance of transition bonds with an estimated term of 15 years. Securitization is a method of refinancing potentially stranded costs with lower cost debt. The credit quality of the debt would be enhanced via enabling state legislation and approval by the BPU of an irrevocable, non-bypassable charge to service the interest and principal payments on the debt. The use of securitization as a means to reduce rates depends on enabling legislation, which the New Jersey Legislature is not expected to consider prior to the second quarter of 1998. If legislative approval is not granted, PSE&G will alter its Energy Master Plan proposal and projected rate reduction range. Accounting treatment for securitization under current accounting guidance continues to evolve (see Accounting for the Effects of Regulation). Depreciation PSE&G is proposing to lengthen the depreciable lives of its electric distribution assets, which are expected to remain regulated, from 28 to 45 years. The excess depreciation reserve, calculated based on this change in depreciable lives, would be amortized over the seven year transition period. This adjustment is expected to result in a reduction of annual depreciation expense of $94 million a year during such transition period and $32 million a year thereafter over the remaining life of these assets. Additionally, within its Energy Master Plan proposal, PSE&G is requesting regulatory flexibility to make more timely adjustments in electric production-related depreciation rates to match changing service lives and other market measures and pressures over the seven year transition period. Accounting treatment for depreciation under current accounting guidance continues to evolve (see Accounting for the Effects of Regulation). New Jersey Gross Receipts and Franchise Tax (NJGRT) On July 14, 1997, Governor Whitman signed legislation eliminating the 13% NJGRT, effective on January 1, 1998. The NJGRT, collected by utilities from their customers, will be replaced with a combination of corporate business tax, state sales and use tax and a transitional tax assessment which will be phased out over five years. The new tax structure is expected to improve the competitive position of PSE&G vis-a-vis non-utility energy providers in New Jersey who are not subject to the NJGRT. On September 19, 1997, PSE&G filed tariff schedules and other pertinent information, in compliance with the legislation, to become effective on January 1, 1998, pending BPU approval. Electric and Magnetic Fields The New Jersey Commission on Radiation Protection voted in May 1997 to stop pursuing regulations to limit magnetic field levels from new and modified transmission lines operating at 100 kilovolts and higher. Accounting for the Effects of Regulation PSE&G accounts for the effects of regulation in accordance with Statement of Financial Accounting Standards (SFAS) 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71). In accordance with the provisions of SFAS 71, PSE&G defers certain expenses (regulatory assets) and revenues (regulatory liabilities) on the basis that they will be recovered from or paid to customers through the ratemaking process. The regulatory changes proposed in the Energy Master Plan will create a shift from regulated pricing to competitive market pricing for electric generation. These proposed changes will limit Enterprise's and PSE&G's ability to continue to meet the applicable criteria of SFAS 71 for the generation portion of PSE&G's business. In response to the continuing deregulation of the electric utility industry, the Financial Accounting Standards Board (FASB), through its Emerging Issues Task Force (EITF), undertook an initiative designated as EITF Issue 97-4, "Deregulation of the Pricing of Electricity" (EITF 97-4). The purpose of this initiative was to develop guidance for the application of SFAS 101, "Regulated Enterprises Accounting for the Discontinuation of Application of FASB Statement No. 71" (SFAS 101). SFAS 101 addresses how an enterprise that ceases to meet the criteria for application of SFAS 71 to all or part of its operations should report that event in its general-purpose financial statements. In May and July 1997, the EITF met to deliberate EITF 97-4. In its discussions, the EITF reached a consensus that an enterprise is required to discontinue the application of SFAS 71 for the deregulated portion of its business once legislation is passed or a rate order is issued which contains a sufficiently detailed plan to transition from regulated pricing to market pricing. In addition, the EITF concluded that an enterprise may continue to carry on its books the regulatory assets and liabilities of the portion of the business to which SFAS 101 is being applied, provided that regulators have approved a regulated cash flow stream. This also applies to costs or obligations not yet recorded as regulatory assets or liabilities regardless of when incurred. The discontinuance of SFAS 71 also requires an enterprise to reevaluate the impact of SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121). SFAS 121 requires that regulatory assets be written off once they are no longer probable of recovery and that impairment losses be recorded for long-lived assets when related future cash flows are less than the carrying value of the assets. The impact to Enterprise and PSE&G will be determined based on the outcome of PSE&G's proposal filed in response to the Energy Master Plan. Under its proposal, PSE&G would have the opportunity, through various mechanisms, to recover its electric generation related potentially stranded costs. Management cannot predict the outcome of the Energy Master Plan proceeding and the related impact of EITF 97-4 on Enterprise's and PSE&G's future financial condition, results of operations and net cash flows. However, depending on legislative and regulatory actions taken in New Jersey with respect to electric utility deregulation, there could be a material adverse effect on such results. Impact of New Accounting Pronouncements In March 1997, FASB issued SFAS 128, "Earnings per Share" (SFAS 128) which is effective for financial statements issued after December 15, 1997. SFAS 128 supersedes Accounting Principles Board Opinion 15, "Earnings per Share" (APB 15), and replaces the presentation of Primary EPS with a presentation of Basic EPS. It also requires presentation of Basic and Diluted EPS on the income statement for all entities with complex capital structures. In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income" (SFAS 130), which is effective for fiscal years beginning after December 15, 1997. SFAS 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. It also requires that an enterprise classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. Also in June 1997, FASB issued SFAS 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131), which is effective for financial statements for periods beginning after December 15, 1997. This Statement need not be applied to interim financial statements in the initial year of its application. SFAS 131 supersedes SFAS 14, "Financial Reporting for Segments of a Business Enterprise" (SFAS 14), and requires that companies disclose segment data based on how management makes decisions about allocating resources to segments and measuring their performance. The adoption of SFAS 128, SFAS 130 and SFAS 131 is not expected to have a material impact on the financial condition, results of operations and net cash flows of Enterprise and PSE&G. 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; Competitive Environment; Accounting for the Effects of Regulation; and Impact of New Accounting Pronouncements. 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" 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; 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. PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED PART II. OTHER INFORMATION Item 1. Legal Proceedings Certain information reported under Item 3 of Part I of Enterprise's and PSE&G's 1996 Annual Report on Form 10-K and the quarterly reports on Form 10-Q for the quarters ended March 31, 1997 and June 30, 1997 is updated below. (1) Form 10-K, Pages 17 and 25. The Environmental Protection Agency (EPA) has determined that a six mile stretch of the Passaic River in Newark, New Jersey (Site) is a "facility" within the meaning of that term under CERCLA and that approximately thirteen corporations may be potentially liable for performing required remedial actions to address this condition. The EPA anticipates identifying other potentially responsible parties. One potentially responsible party (Cooperating Party) has entered into a consent decree with the EPA in 1994 obligating it to conduct a remedial investigation and feasibility study of available and applicable corrective actions for the Site. The Cooperating Party has reported that it has incurred approximately $30 million to date in connection with the implementation of required remedial actions for the Site and that future costs for prospective remedial actions may be material. PSE&G and certain of its predecessors operated industrial facilities at properties along the Passaic River. In April 1996, the EPA directed PSE&G to provide information concerning the nature and quantity of raw materials, by-products and wastes which may have been generated, treated, stored or disposed of at certain PSE&G facilities located along the Passaic River Site. The facilities are PSE&G's former Harrison Gas Plant and Essex Generating Station. PSE&G submitted responses to the EPA requests in August 1996. In July 1997, the EPA named PSE&G as a potentially responsible party for the Site. PSE&G cannot predict what action, if any, the EPA or any third party may take against PSE&G with respect to the Site or, in such event, what costs PSE&G may incur to address any such claims. Such costs could be material. (2) Form 10-K, Page 24. In the shareholder derivative litigation, the Appellate Division sustained the trial court's denial of defendants' motions to dismiss the complaints. Defendants' appeal of this denial was recently dismissed by the New Jersey Supreme Court. On November 6, 1997, the Judge ordered that discovery be halted in two of the four cases and that the defendants file motions for summary judgment by December 31, 1997 to dismiss these two cases. Discovery in the remaining two cases is continuing. (3) Form 10-K, Page 24. PSE&G and the three other co-owners of Salem filed suit in February 1996 in the U.S. District Court for the District of New Jersey against Westinghouse Electric Corporation (Westinghouse) seeking damages to recover the cost of replacing the steam generators at Salem Units 1 and 2. The suit alleges fraud and breach of contract by Westinghouse in the sale, installation and maintenance of the generators. In April 1996, Westinghouse filed an answer and $2.5 million counterclaim for unpaid work related to services at Salem. Discovery is proceeding. On October 1, 1997, Westinghouse filed a motion for summary judgment. PSE&G cannot predict the outcome of these proceedings. Ernest H. Drew, a Director of Enterprise but not of PSE&G, became Chief Executive Officer - Industries and Technology Group of Westinghouse on July 1, 1997. (4) Form 10-K, Page 24. PSE&G settled the lawsuit brought against it by PECO and DP&L, two co-owners of Salem, relating to alleged damages resulting from the current outage of the facility. Under the terms of the settlement, PSE&G will pay a total of $82 million to PECO and DP&L by December 31, 1997. PSE&G is also obligated to pay $1.4 million for each reactor month that the outage continues beyond an aggregate outage of 64 reactor months, up to a maximum payment under this provision of $17 million. As of October 31, 1997, an aggregate of approximately 56 reactor months had accumulated due to Salem outages. PSE&G does not expect to make any payments under this provision. The parties have also agreed to an operating performance standard through December 31, 2007 for Peach Bottom (operated by PECO) and through December 31, 2011 for Salem. Under this standard, the operator of each respective station would be required to make payments to the non-operating owners if the three year capacity factor, determined annually, of such station falls below 40 percent, subject to a maximum of $25 million per year. The initial three-year period begins for Peach Bottom on January 1, 1998 and for Salem on the date the later of the two Salem units (Salem 1) returns to service. 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 (see Results of Operations of MD&A and Note 3 Commitments and Contingent Liabilities). March 31, 1997 Form 10-Q, Page 22 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. SYCOM voluntarily withdrew its Federal RICO counts. Consequently, SYCOM no longer has a statutory basis for requesting treble damages. PSCRC and SYCOM have jointly requested that the court stay future proceedings in this matter until December 5, 1997, in order to enable the parties to engage in settlement discussions. PSCRC believes that the remaining counts of SYCOM's counterclaim and third-party complaint are spurious and without merit and PSCRC will vigorously contest such claims. At September 30, 1997, Enterprise and PSE&G had aggregate investments in PSCRC of $95 million, including intercompany loans. (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) Page 12. Generic proceeding before the BPU relating to Competitive Transition Charges, Docket No. ET96090669. Form 10-K, Page 55. (2) Page 12. Proceedings before the BPU relating to PSE&G's Demand Side Adjustment Factor, Docket No. ER97020101. (3) Page 12. Proceedings before the BPU relating to PSE&G's Remediation Adjustment Charge (RAC) filed July 30, 1997, Docket No. GR97080573. (4) Page 12. Proceeding before the BPU relating to PSE&G's Levelized Gas Adjustment Clause, Docket No. GR96070554. Proceeding before the BPU relating to PSE&G's Levelized Gas Adjustment Clause filed on November 14, 1997, Docket No. to be assigned. (5) Page 13. General proceeding before the BPU relating to Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions" (SFAS-106), Docket No. ER97070470. (6) Page 20. Proceeding before the BPU relating to PSE&G's request for an extension of authority to issue debt, Docket No. to be assigned. (7) Page 29. Proceeding before the BPU in the Matter of the Board's Determination a Management Audit be Performed on PSE&G, Docket No. EA97060397. Item 5. Other Information Certain information reported under Enterprise's and PSE&G's 1996 Annual and 1997 Quarterly Reports to the SEC is updated below. References are to the related pages of the Form 10-K and the quarterly reports on Form 10-Q for the quarters ended March 31, 1997 and June 30, 1997 as printed and distributed. Nuclear Operations Form 10-K, Page 8 and June 30, 1997 Form 10-Q, Page 24 On July 8, 1997, a predecisional enforcement conference was held with the NRC to discuss apparent violations at Salem. These apparent violations, identified in May and June 1997, concern emergency core cooling system switchover and related residual heat removal system (RHR) flow issues, and Appendix R (fire protection) issues. In a letter dated October 8, 1997, the NRC informed PSE&G that a Level III violation was cited for the issues surrounding the RHR system and Level IV violations were cited for the two Appendix R issues. There was no civil penalty issued by the NRC. Form 10-K, Page 9 and March 31, 1997 Form 10-Q, Page 23 In 1990, General Electric (GE) reported that crack indications were discovered near the seam welds of the core shroud assembly in a GE Boiling Water Reactor (BWR) located outside the United States. As a result, GE issued a letter requesting that the owners of GE BWR plants take interim corrective actions. PSE&G (Hope Creek) participated in a GE BWR Owners' Group to evaluate this issue and develop long-term corrective actions. During its 1994 refueling outage, PSE&G inspected the shroud of Hope Creek in accordance with GE's recommendations and found no cracks. In June 1994, an industry group was formed and subsequently established generic inspection guidelines which were approved by the NRC. Hope Creek was initially placed in the lowest susceptibility category under these guidelines. Due to Hope Creek's operating time, it now falls into the intermediate susceptibility category. Another shroud inspection was performed by PSE&G during Hope Creek's current refueling outage in September 1997 and preliminary results from that inspection have been deemed to be satisfactory. Form 10-K, Page 9 and June 30, 1997 Form 10-Q, Page 24 A predecisional enforcement conference was held with the NRC on August 12, 1997 to discuss apparent violations at Hope Creek relating to the installation of cross-tie valves in the residual heat removal system at Hope Creek in 1994. On October 20, 1997, the NRC issued a severity Level III violation for this matter. There was no civil penalty issued by the NRC. Form 10-K, Page 10 and March 31, 1997 Form 10-Q, Page 23 In a separate matter, as a result of several BWRs experiencing clogging of some emergency core cooling system suction strainers, which supply water from the suppression pool for emergency cooling of the core and related structures, the NRC issued a Bulletin in May 1996 to operators of BWRs requesting that measures be taken to minimize the potential for clogging. The NRC has proposed three resolution options and requires that actions be completed by the end of the unit's first refueling outage after January 1, 1997. Alternative resolution options will be subject to NRC approval. PSE&G has responded to the NRC, indicating its intention to comply with the Bulletin. PSE&G installed a portion of the required large capacity passive strainers at Hope Creek during the current refueling outage. On October 31, 1997, the NRC agreed to permit PSE&G to defer installation of the remaining strainers until the next refueling outage, currently scheduled for February 1999. PECO has advised PSE&G that large capacity passive strainers were installed at Peach Bottom 3 during its refueling outage in October 1997. Passive strainers will be installed at Peach Bottom 2 during its next refueling outage in October 1998. PSE&G cannot predict what other actions, if any, the NRC may take in this matter. New Matter A predecisional enforcement conference has been scheduled for December 9, 1997 to discuss two allegations concerning security program issues which occurred at Salem and Hope Creek in 1996. PSE&G cannot predict what other actions, if any, the NRC may take in this matter. Nuclear Fuel Form 10-K, Page 11 The supply of fuel for nuclear generating units involves the mining and milling of uranium ore to uranium concentrate, conversion of the uranium concentrate to uranium hexafluoride, enrichment of the uranium hexafluoride gas, conversion of the enriched gas to fuel pellets and fabrication of fuel assemblies. PSE&G has several long-term contracts with ore operators to process uranium ore to uranium concentrate to meet the currently projected requirements for the Salem and Hope Creek units fully through the year 2001 and thereafter, 50% of their requirements through the year 2003. PSE&G has been advised by PECO that it has contracts for the purchase of uranium which will extend through 2002 to meet the requirements of Peach Bottom 2 and 3. Currently, there is an adequate supply of nuclear fuel for Salem, Hope Creek and Peach Bottom. Other State Regulatory Matters Form 10-K, Page 4 and June 30, 1997 Form 10-Q, Page 23 In an Order dated June 25, 1997, the BPU determined to commence 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 is to include, but not be limited to, focused reviews of electric utility filings in response to the Energy Master Plan. The management audit process is currently underway for PSE&G. Pennsylvania - New Jersey - Maryland Interconnection (PJM) Form 10-K, Page 6, March 31, 1997 Form 10-Q, Page 24 and June 30, 1997 Form 10-Q, Page 24 On July 14, 1997, PJM set a new record peak of 49,408 MW, making it the third largest power pool in the world. PJM has implemented a bid-based energy market. FERC continues to review the PJM filings submitted in June 1997. PJM is taking measures to support retail choice programs within the control area. Air Pollution Control Form 10-K, Page 15 and June 30, 1997 Form 10-Q, Page 24 On October 10, 1997, the EPA took steps to limit Nitrogen Oxide (NOx) emissions from 22 states located in the eastern half of the United States. The proposal recognizes NOx as one of the pollutants responsible for the formation of ground level ozone and is based upon recommendations from the Ozone Transport Assessment Group (OTAG). The EPA anticipates that the identified reductions will support attainment of the ambient air quality standards for ozone in the Northeast. While impact to the operation of PSE&G facilities cannot be fully assessed at this time, PSE&G supports the EPA's position since scientific evidence indicates the change will improve air quality in New Jersey and the region. Additionally, the proposal recognizes the role of Midwestern pollution on the air quality in New Jersey. In September 1997, the New Jersey Department of Environmental Protection proposed regulations implementing the Ozone Transport Commission Memorandum of Understanding (MOU) on reducing regional NOx emissions from large stationary sources. This MOU affects electric utilities in the 12 state Ozone Transport Region (OTR). New Jersey's proposed rule calls for a 65% reduction in NOx from 1990 levels starting in 1999 and a 90% reduction starting in 2003. These reductions will be achieved through a regional emission trading program, similar to the Federal Acid Rain Program. PSE&G is currently assessing the compliance options under this proposal. The extent of investment in control technologies or operational changes will be directly related to the number of allowances PSE&G receives. PSE&G will not know the final allocation until the rule is adopted and thus cannot assess the potential cost at this time. Item 6. Exhibits and Reports on Form 8-K (a) A listing of exhibits being filed with this document is as follows: Exhibit Number Document 12 Computation of Ratios of Earnings to Fixed Charges (Enterprise). 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(A) Financial Data Schedule (Enterprise). 27(B) Financial Data Schedule (PSE&G). (b) Reports on Form 8-K: 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: November 14, 1997
EXHIBIT 12 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES 12 Months Ended YEARS ENDED DECEMBER 31, September 30, ------- ------- ------ ------- --------- 1992 1993 1994 1995 1996 1997 ------- ------- ------ ------- --------- ------------- (Millions of Dollars) Earnings as Defined in Regulation S-K: Net Income (A) 475 549 667 627 588 535 Federal Income Taxes (B) 238 296 320 348 297 294 Fixed Charges 538 539 535 549 528 532 ------- ------- ------ ------- ------- ------------- Earnings 1,251 1,384 1,522 1,524 1,413 1,361 ======= ======= ====== ======= ======= ============= Fixed Charges as Defined in Regulation S-K (C): Total Interest Expense (D) 481 471 462 464 453 459 Interest Factor in Rentals 9 11 12 12 12 11 Subsidiaries' Preferred Securities Dividend Requirements -- -- 2 16 28 42 Preferred Stock Dividends 32 38 41 34 23 13 Adjustment to Preferred and Preference Stock Dividends to state on a pre-income tax basis 15 19 18 23 12 7 ------- ------- ------ ------- ------- ------------- Total Fixed Charges 537 539 535 549 528 532 ======= ======= ====== ======= ======= ============= Ratio of Earnings to Fixed Charges 2.33 2.57 2.84 2.78 2.68 2.56 ======= ======= ====== ======= ======= =============
(A) Excludes 1993 cumulative effect of $5.4 million credit to income reflecting a change in income taxes. (B) Includes state income taxes and federal income taxes for other incomes. (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, (d) Preferred Securities Dividend Requirements of subsidiaries, and (e) Preferred Stock Dividend Requirements, increased to reflect the pre-tax earnings requirement for Public Service Enterprise Group Incorporated. (D) Excludes 1992 interest expense on decommissioning costs of $5,208. Effective January 1, 1992, accounting was changed to follow Federal Energy Regulatory Commission guidelines.
EXHIBIT 12 (A) PUBLIC SERVICE ELECTRIC AND GAS COMPANY COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES 12 Months Ended YEARS ENDED DECEMBER 31, September 30, ------- ------ ------- ------- ------- 1992 1993 1994 1995 1996 1997 ------- ------ ------- ------- ------- ------------ (Millions of Dollars) Earnings as Defined in Regulation S-K: Net Income 476 615 659 617 535 508 Federal Income Taxes (A) 224 307 302 326 268 269 Fixed Charges 411 401 408 419 438 446 ------- ------ ------- ------- ------- ------------ Earnings 1,111 1,323 1,369 1,362 1,241 1,223 ======= ====== ======= ======= ======= ============ Fixed Charges as Defined in Regulation S-K (B) Total Interest Expense (C) 402 390 396 407 399 393 Interest Factor in Rentals 9 11 12 12 11 11 Subsidiaries' Preferred Securities Dividend Requirements -- -- -- -- 28 42 ------- ------ ------- ------- ------- ------------ Total Fixed Charges 411 401 408 419 438 446 ======= ====== ======= ======= ======= ============ Ratio of Earnings to Fixed Charges 2.70 3.30 3.35 3.25 2.83 2.74 ======= ====== ======= ======= ======= ============
(A) Includes state income taxes and federal income taxes for other income. (B) 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. (C) Excludes 1992 interest expense on decommissioning costs of $5,208. Effective January 1, 1992, accounting was changed to follow Federal Energy Regulatory Commission guidelines.
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, September 30, -------- -------- ------- ------- ------- 1992 1993 1994 1995 1996 1997 -------- -------- ------- ------- ------- ------------- (Millions of Dollars) Earnings as Defined in Regulation S-K: Net Income 476 615 659 617 535 508 Federal Income Taxes (A) 224 307 302 326 268 269 Fixed Charges 411 401 408 419 438 446 -------- -------- -------- ------- ------- ------------- Earnings 1,111 1,323 1,369 1,362 1,241 1,223 ======== ======== ======== ======= ======= ============= Fixed Charges as Defined in Regulation S-K (B): Total Interest Expense (C) 402 390 396 407 399 393 Interest Factor in Rentals 9 11 12 12 11 11 Subsidiaries' Preferred Securities Dividend Requirements -- -- -- -- 28 42 Preferred Stock Dividends 32 38 42 49 23 13 Adjustment to Preferred and Preference Stock Dividends to state on a pre-income tax basis 15 19 19 24 12 7 -------- -------- -------- ------- ------- ------------- Total Fixed Charges 458 458 469 492 473 466 ======== ======== ======== ======= ======= ============= Ratio of Earnings to Fixed Charges 2.43 2.89 2.92 2.77 2.62 2.62 ======== ======== ======== ======= ======= =============
(A) Includes state income taxes and federal income taxes for other income. (B) 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, (d) Preferred Securities Dividend Requirements of subsidiaries, and (e) Preferred Stock Dividend Requirements, increased to reflect the pre-tax earnings requirement for Public Service Electric and Gas Company. (C) Excludes 1992 interest expense on decommissioning costs of $5,208. Effective January 1, 1992, accounting was changed to follow Federal Energy Regulatory Commission guidelines. EX-27.A 2 FDS ENTERPRISE
UT This schedule contains summary financial information extracted from SEC Form 10-Q and is qualified in its entirety by reference to such financial statements. 0000788784 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED 1,000,000 9-MOS DEC-31-1996 JAN-01-1997 SEP-30-1997 PER-BOOK 11,046 2,979 1,591 1,690 0 17,306 3,603 0 1,596 5,199 588 95 4,623 0 0 1,060 471 0 52 0 5,218 17,306 4,623 226 3,543 3,794 829 (47) 782 375 407 42 407 376 290 778 1.75 1.75 State Income Taxes of $6 and Federal Income Taxes for Other Income of $(25) were incorporated into this line item for FDS purposes. In the referenced financial statements, State Income Taxes are included in Taxes - Other and Total Other Income and Deductions are net of the above applicable federal income taxes.
EX-27.B 3 FDS PSE&G
UT This schedule contains summary financial information extracted from SEC form 10-Q and is qualified in its entirety by reference to such financial statements. 0000081033 PUBLIC SERVICE ELECTRIC AND GAS COMPANY 1,000,000 9-MOS DEC-31-1996 JAN-01-1997 SEP-30-1997 PER-BOOK 11,046 618 1,469 1,689 0 14,822 2,563 594 1,345 4,502 588 95 4,126 0 0 928 268 0 52 0 4,263 14,822 4,461 207 3,477 3,710 751 (47) 704 317 387 10 374 391 247 696 0 0 State Income Taxes of $1 and Federal Income Taxes for Other Income of $(25) were incorporated into this line item for FDS purposes. In the referenced financial statements, State Income Taxes are included in Taxes - Other and Total Other Income and Deductions are net of the above applicable federal income taxes. Total interest expense includes Preferred Securities Dividend Requirements.
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