-----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, RzNVZ9DHYhE+6oUfYlxw5kdbF1iyR7PqdqmaK4/sRlK0Sn5LP8gF/wP4vhc2ed0w +t3/fnowmbixMEFfp1U4KQ== 0000788784-98-000006.txt : 19980224 0000788784-98-000006.hdr.sgml : 19980224 ACCESSION NUMBER: 0000788784-98-000006 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 23 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980223 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-K405 SEC ACT: SEC FILE NUMBER: 001-09120 FILM NUMBER: 98547390 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-K405 SEC ACT: SEC FILE NUMBER: 001-00973 FILM NUMBER: 98547391 BUSINESS ADDRESS: STREET 1: 80 PARK PLZ STREET 2: PO BOX 570 CITY: NEWARK STATE: NJ ZIP: 07101 BUSINESS PHONE: 2014307000 10-K405 1 PSEG 1997 FORM 10-K =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year December 31, 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 Securities registered pursuant to Section 12 (b) of the Act: Name of Each Exchange Title of Each Class on Which Registered ------------------- --------------------------- Common Stock without New York Stock Exchange par value Philadelphia Stock Exchange Trust Originated Preferred Securities (Guaranteed Preferred Beneficial Interest in Enterprise's Debentures), $25 par value at 7.44%, issued by Enterprise Capital Trust I (Registrant) and registered on the New York Stock Exchange. 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 DOCUMENTS INCORPORATED BY REFERENCE Part of Form 10-K Documents Incorporated by Reference ----------------- ----------------------------------- III Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders of Public Service Enterprise Group Incorporated to be held April 21, 1998, which definitive Proxy Statement is expected to be filed with the Securities and Exchange Commission on or about March 6, 1998, as specified herein. ================================================================================ Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Which Title of Each Class Title of Each Class Registered -------------------------- ------------------------- ------------- Cumulative Preferred Stock First and Refunding $100 par value Series: Mortgage Bonds Series Due: 4.08% 8 3/4% Z 1999 4.18% 9 1/8% BB 2005 4.30% 9 1/4% CC 2021 5.05% 8 7/8% DD 2003 5.28% 7 7/8% FF 2001 5.97% 7 5/8% II 2000 6 7/8% MM 2003 6% NN 1998 7 1/2% OO 2023 New York Stock 6 1/2% PP 2004 Exchange $25 par value Series: 6% QQ 2000 6.75% 6 1/8% RR 2002 7% SS 2024 7 3/8% TT 2014 6 3/4% UU 2006 6 3/4% VV 2016 6 1/4% WW 2007 6 1/2% XX 2000 8% 2037 5% 2037 Monthly Income Preferred Securities (Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures), $25 par value at 9.375%, $25 par value at 8.00%, issued by Public Service Electric and Gas Capital, L.P. (Registrant) and registered on the New York Stock Exchange. Quarterly Income Preferred Securities (Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures), $25 par value at 8.625%, issued by PSE&G Capital Trust I (Registrant) and registered on the New York Stock Exchange. Quarterly Income Preferred Securities (Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures), $25 par value at 8.125%, issued by PSE&G Capital Trust II (Registrant) and registered on the New York Stock Exchange. Securities registered pursuant to Section 12(g) of the Act: Registrant Title of Class ---------- -------------- Public Service Enterprise Group Incorporated None Public Service Electric and Gas Company 6.92% Cumulative Preferred Stock $100 par value Medium-Term Notes, Series A Indicate by check mark whether the registrants (1) have 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 registrants were required to file such reports) and (2) have been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the Common Stock of Public Service Enterprise Group Incorporated held by non-affiliates as of January 31, 1998 was $7,184,603,338 based upon the New York Stock Exchange Composite Transaction closing price. 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 Outstanding at January 31, 1998 ----- ------------------------------- Common Stock, without par value 231,957,608 As of January 31, 1998, Public Service Electric and Gas Company had issued and outstanding 132,450,344 shares of Common Stock, without nominal or par value, all of which were privately held, beneficially and of record by Public Service Enterprise Group Incorporated. TABLE OF CONTENTS Page Table of Contents....................................................... i Glossary of Terms....................................................... iii PART I Item 1. Business....................................................... 1 General........................................................ 1 Enterprise..................................................... 1 PSE&G.......................................................... 1 Industry Issues................................................ 1 Segment Information............................................ 2 Competitive Environment........................................ 2 Construction and Capital Requirements.......................... 4 Financing Activities........................................... 4 Federal Income Taxes........................................... 5 Credit Ratings................................................. 5 PSE&G.......................................................... 5 Rate Matters................................................... 5 Customers...................................................... 5 Resource Plan.................................................. 6 Power Purchases................................................ 6 Demand Side Management......................................... 6 Electric Generating Capacity................................... 7 Nuclear Operations............................................. 7 Electric Fuel Supply and Disposal.............................. 10 Gas Operations and Supply...................................... 12 Employee Relations............................................. 13 Environmental Controls......................................... 13 EDHI........................................................... 21 Item 2. Properties..................................................... 23 Item 3. Legal Proceedings.............................................. 26 Item 4. Submission of Matters to a Vote of Security Holders............ 28 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...................................................... 29 Item 6. Selected Financial Data........................................ 30 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................ 31 Enterprise..................................................... 31 Corporate Structure............................................ 31 Overview of 1997............................................... 32 Results of Operations.......................................... 32 Liquidity and Capital Resources................................ 35 External Financings............................................ 39 Qualitative and Quantitative Disclosures about Market Risk..... 41 Nuclear Operations............................................. 43 Competitive Environment........................................ 43 Rate Matters................................................... 46 Accounting Issues.............................................. 46 Impact of New Accounting Pronouncements........................ 46 Site Restorations and Other Environmental Costs................ 46 Future Outlook................................................. 46 PSE&G.......................................................... 47 Forward Looking Statements..................................... 47 Item 7A. Qualitative and Quantitative Disclosures about Market Risk..... 48 TABLE OF CONTENTS - (Continued) Page Item 8. Financial Statements and Supplementary Data.................... 48 Consolidated Statements of Income (Enterprise)................. 49 Consolidated Balance Sheets (Enterprise)....................... 50 Consolidated Statements of Cash Flows (Enterprise)............. 52 Consolidated Statements of Common Stockholders' Equity (Enterprise)................................................. 53 Consolidated Statements of Income (PSE&G)...................... 55 Consolidated Balance Sheets (PSE&G)............................ 56 Consolidated Statements of Cash Flows (PSE&G)................... 58 Consolidated Statements of Common Stockholder's Equity (PSE&G).. 59 Notes to Consolidated Financial Statements (Enterprise)......... 60 Notes to Consolidated Financial Statements (PSE&G).............. 93 Financial Statement Responsibility (Enterprise)................. 96 Financial Statement Responsibility (PSE&G)...................... 97 Independent Auditors' Report (Enterprise)....................... 98 Independent Auditors' Report (PSE&G)............................ 99 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure...................................... 100 PART III Item 10. Directors and Executive Officers of the Registrants............. 100 Directors of the Registrants.................................... 100 Enterprise...................................................... 100 PSE&G........................................................... 100 Executive Officers of the Registrants........................... 101 Item 11. Executive Compensation.......................................... 103 Enterprise...................................................... 103 PSE&G........................................................... 103 Summary Compensation Table...................................... 103 Option Grants in Last Fiscal Year (1997)........................ 105 Aggregated Option Exercises in Last Fiscal Year (1997) and Fiscal Year End Option Values (12/31/97)...................... 106 Employment Contracts and Arrangements............................ 106 Compensation Committee Interlocks and Insider Participation...... 106 Compensation of Directors and Certain Business Relationships..... 106 Compensation Pursuant to Pension Plans........................... 107 Item 12. Security Ownership of Certain Beneficial Owners and Management... 107 Enterprise....................................................... 107 PSE&G............................................................ 107 Item 13. Certain Relationships and Related Transactions................... 108 Enterprise....................................................... 108 PSE&G............................................................ 108 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................................................ 109 Schedule II--Valuation and Qualifying Accounts (Enterprise)...... 111 Schedule II--Valuation and Qualifying Accounts (PSE&G)........... 111 Signatures--Public Service Enterprise Group Incorporated......... 112 Signatures--Public Service Electric and Gas Company.............. 113 Exhibit Index.................................................... 114 Enterprise....................................................... 115 PSE&G............................................................ 122 GLOSSARY TERMS The following is a glossary of frequently used abbreviations or acronyms that are found in this report: Term Meaning ACE............... Atlantic City Electric Company ACO............... Administrative Consent Order ADR............... Alternative Dispute Resolution AFDC.............. Allowance for Funds used During Construction AMT............... Alternative Minimum Tax APB 25............ Accounting Principles Board Opinion, No. 25 "Accounting for Stock Issued to Employees" Bonds............. First and Refunding Mortgage Bonds BPU............... New Jersey Board of Public Utilities BTU............... British Thermal Units BWR............... Boiling Water Nuclear Reactor CAA............... Federal Clean Air Act Capital........... PSEG Capital Corporation CEA............... Community Energy Alternatives Incorporated CERCLA............ Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 Combe Site........ Combe Fill South Sanitary Landfill in Washington and Chester Township, Morris County, New Jersey CORP.............. New Jersey Commission on Radiation Protection December 31st Order........... BPU's December 31, 1996 Order settling outstanding Salem and other outstanding regulatory issues Directive......... Spill Act Multi-Site Directive Directive One..... Directive and Notice to Insurers Number One Directive Two..... Directive and Notice to Insurers Number Two DOE............... U.S. Department of Energy DOJ............... U.S. Department of Justice DP&L.............. Delmarva Power & Light Company Draft Phase II Report.......... Draft Phase II Report of The New Jersey Energy Master Plan DRBC.............. Delaware River Basin Commission DSAF.............. Demand Side Adjustment Factor DSM............... Demand Side Management Eagle Point....... CEA Eagle Point, Inc. EBIT.............. Earnings before interest and taxes EDC............... Energy Development Corporation EDHI.............. Enterprise Diversified Holdings Incorporated EGDC.............. Enterprise Group Development Corporation EITF.............. FASB's Emerging Issues Task Force EITF 92-12........ Emerging Issues Task Force, Issue No. 92-12 "Accounting for OPEB Costs by Rate-Regulated Enterprises" EITF 97-4......... Emerging Issues Task Force, Issue No. 97-4 "Deregulation of the Pricing of Electricity; Issues Related to the Application of FASB Statements No. 71 and 101" EMF............... Electric and Magnetic Fields Energis........... Energis Resources Incorporated Enterprise........ Public Service Enterprise Group Incorporated EPA............... U.S. Environmental Protection Agency EPAct............. National Energy Policy Act of 1992 EPC............... Eagle Point Cogeneration Facility EWGs.............. Exempt Wholesale Generators FASB.............. Financial Accounting Standards Board Fault Act......... New Jersey Public Utility Accident Fault Determination Act FERC.............. Federal Energy Regulatory Commission GLOSSARY TERMS -- (Continued) Term Meaning FUCO.............. Foreign Utility Company Fuelco............ PSE&G Fuel Corporation Funding........... Enterprise Capital Funding Corporation FWPCA............. Federal Water Pollution Control Act GAAP.............. Generally Accepted Accounting Principles GE................ General Electric Company Global OU2........ Global Landfill Site Operable Unit Two Global Site....... Global Landfill Site in Old Bridge Township, Middlesex County, New Jersey GSG............... General Service Gas Hope Creek........ Hope Creek Nuclear Generating Station HWCS Project...... Hydrogen Water Chemistry System ICTC.............. Interim Competitive Transition Charge IPP............... Independent Power Producers IRP............... Integrated Resource Plan IRS............... Internal Revenue Service ISO............... Independent System Operator KWH............... Kilowatt-hour LEAC.............. Electric Levelized Energy Adjustment Clause LGAC.............. Levelized Gas Adjustment Clause LLRW.............. Low Level Radioactive Waste LMP............... Locational Marginal Pricing LNG............... Liquefied Natural Gas LPG............... Liquid Petroleum Air Gas LTIP.............. Long-Term Incentive Plan LVG............... Large Volume Gas MD&A.............. Management's Discussion and Analysis of Financial Condition and Results of Operations MICP.............. Management Incentive Compensation Plan MOA............... Memorandum of Agreement Mortgage.......... First and Refunding Mortgage of PSE&G MOU............... Memorandum of Understanding MTNs.............. Medium-Term Notes MW................ Megawatts MWH............... Megawatt-hours NAAQS............. National Ambient Air Quality Standards NEIL.............. Nuclear Electric Insurance Limited NJAPCC............ New Jersey Air Pollution Control Code NJDEP............. New Jersey Department of Environmental Protection NJGRT............. New Jersey Gross Receipts and Franchise Tax NJPDES............ New Jersey Pollution Discharge Elimination System NJWPCA............ New Jersey Water Pollution Control Act NML............... Nuclear Mutual Limited Notes............. Notes to Consolidated Financial Statements Notice............ Notice of Potential Liability NOV............... Notice of Violation November 25th Order........... November 25, 1997 PJM Restructuring Order NOx............... Nitrogen Oxides NPDES............. National Pollutant Discharge Elimination System NPS............... The BPU's nuclear performance standard established for nuclear generating stations owned by New Jersey electric utilities NRC............... Nuclear Regulatory Commission NUGs.............. Non-utility Generators NWPA.............. Nuclear Waste Policy Act of 1982, as amended GLOSSARY TERMS -- (Continued) Term Meaning OAL............... Office of the Administrative Law ODEC.............. Old Dominion Electric Cooperative OPEB.............. Other Postretirement Benefits Order No. 888..... FERC Order No. 888, effective July 9, 1996 OTAG.............. Ozone Transport Assessment Group OTR............... Ozone Transport Region OTRA.............. Off-Tariff Rate Agreement Peach Bottom...... Peach Bottom Atomic Power Station, Units 2 and 3 PECO Energy....... PECO Energy Company PJM............... Pennsylvania--New Jersey--Maryland Interconnection PJM Board......... An independent, 7-Member Board of Managers responsible for supervision of PJM operations PPG............... PPG Industries, Inc. PPUC.............. Pennsylvania Public Utility Commission PRAP.............. Proposed Remedial Action Plan Price Anderson.... Price-Anderson liability provisions of the Atomic Energy Act of 1954, as amended PRPs.............. Potentially Responsible Parties PSCRC............. Public Service Conservation Resources Corporation PSE&G............. Public Service Electric and Gas Company PSETC............. Public Service Energy Trading Company PSRC.............. Public Service Resources Corporation PUHCA............. Public Utility Holding Company Act of 1935 PWR............... Pressurized Water Nuclear Reactor QFs............... Qualifying Facilities RAC............... Remediation Adjustment Charge RCRA.............. Federal Resource Conservation and Recovery Act of 1976 Remediation Program......... PSE&G Manufactured Gas Plant Remediation Program RHR............... Residual Heat Removal RI................ Remedial Investigation RI/FS............. Remedial Investigation and Feasibility Study ROD............... Record of Decision Salem............. Salem Nuclear Generating Station, Units 1 and 2 SEC............... Securities and Exchange Commission Sewell Site....... Marvin Jonas Transfer Station SFAS 71........... Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" SFAS 88........... Statement of Financial Accounting Standards No. 88 "Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits" SFAS 90........... Statement of Financial Accounting Standards No. 90 "Regulated Enterprises Accounting for Abandonments and Disallowances of Plant Costs Statement No. 90" SFAS 101.......... Statement of Financial Accounting Standards No. 101 "Regulated Enterprises Accounting for Discontinuation of Application of FASB Statement No. 71" SFAS 106.......... Statement of Financial Accounting Standards No. 106 "Employers' Accounting for Postretirement Benefits Other than Pensions" SFAS 109.......... Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" SFAS 121.......... Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" SFAS 123.......... Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" SFAS 130.......... Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" GLOSSARY TERMS -- (Continued) Term Meaning SFAS 131.......... Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" SO2............... Sulfur Dioxide SOP 96-1.......... Statement of Position 96-1 "Environmental Remediation Liabilities" SPCC.............. Spill Prevention Control and Countermeasure Spill Act......... New Jersey Spill Compensation and Control Act Superfund......... Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 TEFA.............. Transitional Energy Facility Assessment Trust............. PSE&G Capital Trust I UGI............... UGI Utilities, Inc. Westinghouse...... Westinghouse Electric Corporation PART I Item 1. Business General Enterprise Public Service Enterprise Group Incorporated (Enterprise), incorporated under the laws of the State of New Jersey with its principal executive offices located at 80 Park Plaza, Newark, New Jersey 07101, is a public utility holding company that neither owns nor operates any physical properties. Enterprise has two direct, wholly-owned subsidiaries, Public Service Electric and Gas Company (PSE&G) and Enterprise Diversified Holdings Incorporated (EDHI). Enterprise's principal subsidiary, PSE&G, is an operating public utility providing electric and gas service in certain areas of the State of New Jersey. EDHI is the parent of Enterprise's non-utility businesses: Community Energy Alternatives Incorporated (CEA), Public Service Resources Corporation (PSRC), Energis Resources Incorporated (Energis), Enterprise Group Development Corporation (EGDC), PSEG Capital Corporation (Capital) and Enterprise Capital Funding Corporation (Funding). For additional information on EDHI and its subsidiaries, see EDHI. EDHI sold Energy Development Corporation (EDC) in 1996, see Note 16. Discontinued Operations of Notes to Consolidated Financial Statements (Notes). PSE&G PSE&G, a New Jersey corporation with its principal executive offices at 80 Park Plaza, Newark, New Jersey 07101, is an operating public utility company engaged principally in the generation, transmission, distribution and sale of electric energy service and in the transmission, distribution and sale of gas service in New Jersey. PSE&G supplies electric and gas service in areas of New Jersey in which approximately 5.5 million people, about 70% of the State's population, reside. PSE&G's electric and gas service area is a corridor of approximately 2,600 square miles running diagonally across New Jersey from Bergen County in the northeast to an area below the City of Camden in the southwest. The greater portion of this area is served with both electricity and gas, but some parts are served with electricity only and other parts with gas only. This heavily populated, commercialized and industrialized territory encompasses most of New Jersey's largest municipalities, including its six largest cities--Newark, Jersey City, Paterson, Elizabeth, Trenton and Camden--in addition to approximately 300 suburban and rural communities. This service territory contains a diversified mix of commerce and industry, including major facilities of many corporations of national prominence. PSE&G believes that it has all the franchises (including consents) necessary for its electric and gas operations in the territory it serves. Such franchise rights are not exclusive. Under the general laws of New Jersey, PSE&G has the right to use the public highways, streets and alleys in New Jersey for erecting, laying and maintaining poles, conduits and wires necessary for its electric operations. PSE&G must, however, first obtain the consent in writing of the owners of the soil for the purpose of erecting poles. PSE&G's rights are also subject to regulation by municipal authorities with respect to street openings and the use of streets for erecting poles in incorporated cities and towns. Concerning gas distribution, PSE&G has the right to use the roads, streets, highways and public grounds in New Jersey for pipes and conduits. Industry Issues The electric and gas industries in the State of New Jersey and across the country are undergoing a major transformation. Enterprise and PSE&G are affected by many issues that are generic to the electric and gas industries such as: deregulation and the unbundling of energy supplies and services and establishment of a competitive energy marketplace (see Competitive Environment); sales retention and growth potential in a mature service territory; the need to reduce costs; the ability to obtain adequate and timely rate relief, cost recovery and other necessary regulatory approvals (see Note 2. Rate Matters of Notes); the ability to economically operate nuclear facilities safely in accordance with regulatory requirements (see Nuclear Operations); increased capital investments attributable to environmental regulations (see Construction and Capital Requirements and Environmental Controls); nuclear decommissioning and the availability of reprocessing and storage facilities for spent nuclear fuel (see Electric Fuel Supply and Disposal); and credit market concerns associated with these issues. Segment Information Financial information with respect to business segments of PSE&G and Enterprise is set forth in Note 15. Financial Information by Business Segments of Notes. Competitive Environment Overview The regulatory structure which has historically governed the electric and gas industries in the United States is in transition. Legislative and regulatory initiatives, at both the Federal and State levels, are designed to promote competition and will continue to impose additional pressures on PSE&G's ability to retain customers. In addition, new technology and interest in self generation and cogeneration have provided customers with alternative sources and supplies of energy. Retention of existing customers and potential sales growth will depend upon the ability of PSE&G to reduce costs, meet customer expectations and respond to changing economic conditions and regulation. For further information on regulatory changes, see Competitive Environment of MD&A and Note 2. Rate Matters of Notes. Enterprise's non-utility businesses are subject to substantial competition as well. Energis competes with other providers of energy services, including utilities and their affiliates. Some of the power generation projects in which CEA invests compete with other independent power providers as well as utility generators both domestically and internationally. CEA's distribution businesses in Argentina and Brazil operate pursuant to franchise arrangements and are generally not subject to competition. For additional information see EDHI and MD&A. Federal Regulatory Bodies PSE&G is subject to regulation by the Federal Energy Regulatory Commission (FERC) with respect to certain matters, including interstate sales and exchanges of electric transmission, capacity and energy. Enterprise is not subject to regulation by FERC. Enterprise has claimed an exemption from regulation by the Securities and Exchange Commission (SEC) as a registered holding company under the Public Utility Holding Company Act of 1935 (PUHCA), except for Section 9(a)(2) thereof, which relates to the acquisition of 5% or more of the voting securities of an electric or gas utility company. Construction and operation of nuclear generating facilities are regulated by the Nuclear Regulatory Commission (NRC). For additional information relating to regulation by the NRC, see Nuclear Operations. In addition, the Federal Emergency Management Agency is responsible for the review, in conjunction with the NRC, of certain aspects of emergency planning relating to the operation of nuclear plants. For information on environmental regulation, see Environmental Controls. Federal Regulation Electric The electric industry is currently undergoing restructuring as a result of Federal legislation and regulatory initiatives. The National Energy Policy Act of 1992 (EPAct) eased restrictions on independent power producers (IPP) in an effort to increase competition in the wholesale electric generation market. As the barriers to entry in the power production business have been lowered, the construction of cogeneration facilities and independent power production facilities has grown, resulting in lower cost alternatives for large commercial and industrial customers. For further discussion of Federal regulation of the electric industry, including a discussion of the Pennsylvania--New Jersey--Maryland Interconnection (PJM) responses to FERC orders related to FERC Order No. 888 (Order No. 888), see Competitive Environment of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A). For a discussion of PSE&G's actions related to the potential environmental impact of Order No. 888, see Environmental Controls. Gas Over the last decade, the natural gas industry has experienced a dramatic transformation as several FERC initiatives have opened the industry to competitive market forces. On the interstate level, the pipeline suppliers that serve PSE&G have unbundled gas supply and transportation services and now offer transportation services that move gas purchased from numerous natural gas producers and marketers to PSE&G's service territory. State Regulatory Bodies As a New Jersey public utility, PSE&G is subject to comprehensive regulation by the New Jersey Board of Public Utilities (BPU) including, among other matters, regulation of intrastate rates and service and the issuance and sale of securities. As a participant in the ownership of certain generation and transmission facilities in Pennsylvania, PSE&G is subject to regulation by the Pennsylvania Public Utility Commission (PPUC) in limited respects in regard to such facilities. Enterprise is not subject to direct regulation by the BPU, except potentially with respect to certain transfers of control and reporting requirements. The BPU may also impose certain requirements with respect to affiliate transactions between and among PSE&G, Enterprise and Enterprise's non-utility subsidiaries (see EDHI). State Regulation Electric EPAct prevents FERC from ordering retail wheeling and preserves any existing state authority to mandate retail wheeling. In April 1997 in its Energy Master Plan proceedings, the BPU issued its final report on wholesale and retail electric competition in New Jersey. For further discussion of the Energy Master Plan proceedings regarding deregulation and unbundling of the electric utility industry in New Jersey, including PSE&G's proposal in response, see MD&A and Note 2. Rate Matters of Notes. In 1995, the BPU initiated a generic proceeding that would eventually lead to New Jersey electric utilities having the ability to offer "off-tariff" negotiated rates to customers. Although these Off-Tariff Rate Agreements (OTRAs) are offered at PSE&G's sole discretion, they are subject to BPU approval of minimum price, confidentiality of information, contract duration, regulatory filing requirements and other reporting requirements. These negotiated OTRAs form part of PSE&G's overall strategy to retain customers in its service territory and maintain long-term electric sales. To date, ten OTRAs have been filed with and approved by the BPU and PSE&G is currently in negotiations with several other customers. PSE&G does not expect the impact of OTRAs to have a material effect on its financial position, results of operations and net cash flows. The New Jersey Public Utility Accident Fault Determination Act (Fault Act) requires the BPU to make a determination of fault with regard to any accident at any electric generating or transmission facility prior to granting a request by any utility for a rate increase to cover accident-related costs in excess of $10 million. Fault, as defined in the Fault Act, means any negligent action or omission of any party which either contributed substantially to causing the accident or failed to mitigate its severity. If such an accident were to occur at a PSE&G facility, the Fault Act could have a material adverse effect on Enterprise's and PSE&G's financial position if it were ultimately determined that the accident was due to the fault of PSE&G and if the BPU were to deny recovery of all or a portion of the costs related thereto. The Fault Act allows the affected utility to file for non-accident related rate increases during such fault determination hearings and to recover contributions to Federally mandated or voluntary cost-sharing plans and allows the BPU to authorize the recovery of certain fault-related repair, clean-up, power replacement and damage costs if substantiated by the evidence presented and if authorized in writing by the BPU. The applicability of the Fault Act may be significantly affected as a result of the Energy Master Plan proceedings (see Note 2. Rate Matters of Notes). Gas PSE&G's unbundled gas transportation tariffs, which have been in place since 1994, allow any nonresidential customer, regardless of size, to purchase its own gas, transport it to PSE&G and require PSE&G to deliver such gas to the customer's facility. For further discussion of gas unbundling, see Note 2. Rate Matters of Notes. On October 10, 1997, PSE&G filed a Petition for Expedited Approvals with the BPU seeking approval, pursuant to a FERC authorized capacity release mechanism, to transfer to its subsidiary Public Service Energy Trading Company (PSETC), all of PSE&G's rights and obligations under its transportation and storage contracts with interstate pipelines. PSETC, in turn, would supply all of the natural gas requirements of PSE&G pursuant to a Requirement Contract between the two parties. The proposed transaction would transfer to PSETC all future contractual liabilities under these agreements and protect the regulatory status of certain off-system sales transactions currently being performed. On December 3, 1997, one of the interstate pipeline companies from which PSE&G obtains service filed a declaratory judgment action with FERC challenging PSE&G's interpretation of the capacity release rules. Under the interpretation proposed by the interstate pipeline company, PSE&G would be required to guarantee the performance of PSETC under the transferred agreements. PSE&G disagreed with these claims and filed a protest challenging the December 3, 1997 filing. On February 11, 1998, FERC ruled in favor of the interstate pipeline company finding that it was not unreasonable for the pipeline company to refuse to discharge PSE&G under the circumstances addressed in the order. PSE&G is currently evaluating its alternatives in response to that ruling, which could include seeking a rehearing of that order. PSE&G cannot predict the ultimate resolution of this matter at this time. General The issue of Enterprise sharing the benefits of consolidated tax savings with PSE&G or its ratepayers was addressed by the BPU in 1995 in a letter which informed PSE&G that the issue of consolidated tax savings can be discussed in the context of its next base rate case or plan for an alternative form of regulation. Enterprise believes that PSE&G's taxes should be treated on a stand alone basis for rate making purposes, based on the separate nature of the utility and non-utility businesses. However, neither Enterprise nor PSE&G is able to predict what action, if any, the BPU may take concerning consolidation of tax benefits in future proceedings. Under New Jersey law, the BPU is required to audit all or a portion of the operating procedures and other internal workings of every gas or electric utility subject to its jurisdiction, including PSE&G, at least once every six years. The BPU may, upon completion of the audit and after notice and hearing, order the utility to adopt such new practices and procedures that it shall find reasonable and necessary to promote efficient and adequate service to meet public convenience and necessity. In an Order dated June 25, 1997, the BPU commenced management audits of all New Jersey electric utilities, with the assistance of one or more consulting firms, under the direction of its own audit staff. The audit process included, but was not limited to, focused reviews of electric utility filings in response to the Energy Master Plan. The management audit process for PSE&G was concluded in December 1997 with a report filed by the management consulting firms which performed the audit on behalf of the BPU. The report was approved by the BPU on January 29, 1998. A second report on restructuring has yet to be filed. For additional information regarding the management audit report, see Note 2. Rate Matters of Notes. For a discussion of the BPU's previous focused audit of the non-utility businesses of Enterprise and its potential effects, see Liquidity and Capital Resources of MD&A. The BPU can adopt, reject or modify the audit report's results in its decision on PSE&G's proposal in the Energy Master Plan proceedings. PSE&G cannot predict to what extent the BPU will rely on the results of the audit report nor what the ultimate outcome of the Energy Master Plan proceedings will be; however, the decision of the BPU will fundamentally change the rules for the sale of electricity in New Jersey and therefore could have a material adverse effect on Enterprise's and PSE&G's financial condition, results of operations and net cash flows. Construction and Capital Requirements For information concerning investments, construction and capital requirements see Construction and Capital Requirements of MD&A, Note 7. Schedule of Consolidated Debt, Note 4. Long-Term Investments and Note 10. Commitments and Contingent Liabilities of Notes. Financing Activities For a discussion of issuance, repurchase, book value and market value of Enterprise's Common Stock and external financing activities of Enterprise, PSE&G and EDHI for the year 1997, see Item 5. Market for Registrant's Common Equity and Related Stockholder Matters and Liquidity and Capital Resources of MD&A. For a discussion of Capital and Funding, see EDHI--Capital and EDHI--Funding. For further discussion of long-term debt and short-term debt, see Note 7. Schedule of Consolidated Debt of Notes. Federal Income Taxes For information regarding Federal income taxes, see Note 1. Organization and Summary of Significant Accounting Policies, Note 2. Rate Matters and Note 12. Federal Income Taxes of Notes. Credit Ratings The current ratings of securities of Enterprise and its subsidiaries are shown below and reflect the respective views of the rating agencies, from whom an explanation of the significance of their ratings may be obtained. There is no assurance that these ratings will continue for any given period of time or that they will not be revised or withdrawn entirely by the rating agencies, if, in their respective judgments, circumstances so warrant. Any downward revision or withdrawal may adversely effect the market price of Enterprise's, EDHI's and PSE&G's securities and serve to increase their cost of capital. Standard Duff & Moody's & Poor's Phelps ------- -------- ------ Enterprise Preferred Securities............................ Baa2 BBB BBB PSE&G Mortgage Bonds.................................. A3 A- A Debenture Bonds................................. Baa1 BBB+ A- Preferred Securities............................ Baa1 BBB+ A- Commercial Paper (including PSE&G Fuel Corp.)... P2 A2 Duff 1 EDHI Senior Debt (Capital)........................... Baa2 BBB BBB+ As a component of PSE&G's ratings, each rating agency issues its opinion of the credit trend or outlook. Each of the three rating agencies currently evaluate that credit trend or outlook as negative. PSE&G Rate Matters For information concerning the Energy Master Plan, PSE&G's rate matters and environmental remediation and fuel adjustment clauses, see Competitive Environment--State Regulation (Electric), Note 1. Organization and Summary of Significant Accounting Policies and Note 2. Rate Matters of Notes. For information concerning PSE&G's under (over) recovered electric energy and gas fuel costs, see Note 3. Regulatory Assets and Liabilities of Notes. Customers As of December 31, 1997, PSE&G provided service to approximately 1.9 million electric customers and 1.5 million gas customers. PSE&G is not dependent on a single customer or a few customers for its electric or gas sales. For the year ended December 31, 1997, PSE&G's operating revenues aggregated $6.1 billion, of which 68% was from its electric operations and 32% from its gas operations. PSE&G's business is seasonal in that sales of electricity are higher during the summer months because of air conditioning requirements and sales of gas are greater in the winter months due to the use of gas for space-heating purposes. 1997 Revenues were derived as follows: Revenues --------------------------- Electric Gas -------- ---------- (Millions of Dollars) Residential................................. $1,260 $953 Commercial.................................. 1,845 362 Industrial.................................. 649 295 Transportation Service--Gas................. -- 168 Other....................................... 434 159 --------- ---------- Total................................... $4,188 $1,937 ========= ========== For information on the impact of competition on PSE&G's customer and revenue base, see Competitive Environment of MD&A. Resource Plan PSE&G periodically reevaluates its forecasted customer load and peak growth and the sources of electric generating capacity and Demand Side Management (DSM) to meet such projected growth (see DSM below and Note 2. Rate Matters of Notes). The Resource Plan takes into account assumptions concerning future customer demand, future cost trends, especially fuel and purchased power expenses, the impacts of conservation and load management activities, the long-term condition of and projected additions to PSE&G's plants and capacity available from other electric utilities and non-utility suppliers. The forecast for electric system peak demand over the period 1998-2002 has been developed based on an assumed compound annual rate of growth of 0.9%. Power Purchases A component of PSE&G's Resource Plan consists of expected capacity additions from PJM and non-utility generators (NUGs). NUG projects are expected to comprise approximately 6.5% of capacity resources by 2005. The availability of NUG generation reduces the need for PSE&G to build or acquire additional generation. For further information on PJM, NUGs and Stranded Costs, see Competitive Environment of MD&A and Note 2. Rate Matters of Notes. Demand Side Management (DSM) The BPU adopted rules in 1991 to encourage utilities to offer DSM related load management and conservation services. These rules were re-adopted in 1996 and are designed to place DSM on equal regulatory footing with supply side or energy production investments. In the Energy Master Plan proceedings, the BPU proposed that during the transition to a restructured industry, DSM programs continue to be implemented by utilities and funded through rates. Initially, the existing DSM rules would apply. For the longer term, the rules would be modified to reflect increasing reliance on market forces to drive DSM (see Competitive Environment--State Regulation and Note 2. Rate Matters of Notes). PSE&G's current DSM Resource Plan was approved by the BPU in 1995 and is designed to encourage investment in energy-saving DSM activities. These activities involve energy saving techniques and technologies, such as high-efficiency lighting and motors, which help reduce customer demand for energy. The DSM Resource Plan consists of two major program areas for both electric and gas: (1) a core program which includes many specialized programs such as energy audits, seal-ups and rebates for high efficiency heating and cooling equipment; and (2) a standard offer program which is performance based and provides payment for measurable energy savings resulting from the installation of qualified measures that improve the energy efficiency of end-uses. PSE&G's Resource Plan calls for PSE&G to utilize DSM to meet most of its incremental resource needs for the next decade. PSE&G projects 233 Megawatts (MW) of passive DSM and 455 MW of active DSM by 2002. Electric Generating Capacity The following table sets forth certain information as to PSE&G's installed generating capacity as of December 31, 1997: Installed Source Capacity (A)(MW) Percentage ------ ---------------- ---------- Conventional Steam Electric: Oil-fired (B).......................... 1,531 15% Coal-fired New Jersey (C).............. 1,248 12% Coal-fired Pennsylvania (mine mouth)(D) 770 7% Combustion Turbine (E)..................... 2,724 27% Combined Cycle............................. 922 9% Diesel (D)................................. 5 0% Nuclear (D): New Jersey............................. 1,921 19% Pennsylvania........................... 930 9% Pumped Storage (D) (E)..................... 200 2% ------ ---- Total............................. 10,251 100% ====== ==== (A) Excludes 687 MW of non-utility generation, 352 MW of capacity sales to Delmarva Power & Light Company (DP&L), Allegheny Power System and GPU, Inc. and 50 MW of capacity purchases from GPU, Inc. (B) Units with aggregate capacity of 836 MW can also burn gas. (C) Can also burn gas. (D) PSE&G share of jointly owned facilities. (E) Primarily used for peaking purposes. For additional information, see Item 2. Properties--PSE&G--Electric Properties. The capacity available at any time may be less than the installed capacity noted in the table above because of temporary outages for inspection, maintenance, repairs, legal and regulatory requirements or unforeseen circumstances. The maximum one-hour demand (peak load) which PSE&G experienced in 1997 was 9,548 MW, which occurred on July 15, 1997, when the day's output was 184,357 megawatt-hours (MWH) of electricity. This was an all time record, surpassing the old record of 9,467 MW, which occurred on August 2, 1995, when the day's output was 182,404 MWH of electricity. PSE&G expects to be able to continue to meet the demand for electricity on its system through operation of available equipment and by power purchases. However, if periods of unusual demand should coincide with outages of equipment, PSE&G could find it necessary at times to reduce voltage or curtail load in order to safeguard the continued operation of its system. Nuclear Operations PSE&G has an ownership interest in five nuclear generating units and operates three of these, the Salem Nuclear Generating Station, Units 1 and 2 (Salem 1 and 2), and the Hope Creek Nuclear Generating Station (Hope Creek). PECO Energy Company (PECO Energy) operates the Peach Bottom Atomic Power Station Units 2 and 3 (Peach Bottom 2 and 3). Operation of nuclear generating units involves continuous close regulation by the NRC. Such regulation involves testing, evaluation and modification of all aspects of plant operation in light of NRC safety and environmental requirements. Continuous demonstrations to the NRC that plant operations meet applicable requirements are also required. The NRC has the ultimate authority to determine whether any nuclear generating unit may operate. For information concerning the performance of the nuclear units, see Note 10. Commitments and Contingent Liabilities of Notes. The scheduled 1998, 1999 and 2000 refueling outages, ranging from five to ten weeks in duration, for PSE&G's five licensed nuclear units are expected to commence in the following months: Refueling Outages 1998 1999 2000 ----------------- ---- ---- ---- Salem 1............................... -- September -- Salem 2............................... -- January October Hope Creek............................ -- February May Peach Bottom 2........................ October -- October Peach Bottom 3........................ -- October -- Salem Salem consists of two 1,106 MW pressurized water nuclear reactors (PWR) located in southern New Jersey on the Delaware River. PSE&G owns 42.59% of the Salem units and operates them on behalf of itself and three other owners: PECO Energy--42.59%; Atlantic City Electric Company (ACE)--7.41%; and DP&L--7.41%. As of December 31, 1997, PSE&G's net book value was approximately $285 million for Salem 1, $287 million for Salem 2 and $162 million in common plant between the two units. Each Salem unit represents approximately 5% of PSE&G's installed electric generating capacity, approximately 2% of its total assets and approximately 4% of its net utility plant in service. For further discussion of Salem, see Nuclear Operations of MD&A. For certain litigation relating to Salem, see Item 3. Legal Proceedings and Note 10. Commitments and Contingent Liabilities of Notes. Hope Creek Hope Creek consists of one 1,031 MW boiling water nuclear reactor (BWR) located in southern New Jersey on the Delaware River adjacent to Salem. PSE&G owns 95% of Hope Creek and operates the unit on behalf of itself and ACE, which owns the remaining 5%. As of December 31, 1997, PSE&G's net book value for Hope Creek was approximately $2.8 billion. Hope Creek represents approximately 10% of PSE&G's installed electric generating capacity, approximately 19% of its total assets and approximately 27% of its net utility plant in service. Hope Creek completed its latest planned refueling and maintenance outage in December 1997. An outage at Hope Creek causes PSE&G to incur replacement energy costs of approximately $8 to $12 million per month. Such amounts vary, however, depending upon the availability of other generation, the cost of purchased energy and other factors including modifications to maintenance schedules of other units. Peach Bottom Peach Bottom consists of two 1,093 MW BWRs located on the Susquehanna River in southeastern Pennsylvania. PECO Energy owns 42.49% of the Peach Bottom units and operates them on behalf of itself and three other owners: PSE&G--42.49%; ACE--7.51%; and DP&L--7.51%. As of December 31, 1997, PSE&G's net book value was approximately $200 million for Peach Bottom 2 and $205 million for Peach Bottom 3. Each Peach Bottom unit represents approximately 4% of PSE&G's installed electric generating capacity, approximately 1% of its total assets and approximately 2% of its net utility plant in service. On July 17, 1997, the NRC issued its latest periodic Systematic Assessment of Licensee Performance Report for Peach Bottom for the period October 15, 1995 to June 7, 1997. Peach Bottom was rated Category 1 in the areas of Plant Operations, Maintenance and Plant Support and rated Category 2 in the area of Engineering. Overall, the NRC observed excellent performance at Peach Bottom during the assessment period. The NRC stated that station management provided excellent oversight and control of engineering activities throughout the period. The NRC noted that, while overall engineering performance was good, there were several instances where operating procedures, surveillances and tests were not consistent with the design and licensing bases. PECO Energy has advised PSE&G that it will continue to take actions to improve performance at Peach Bottom. PECO Energy has advised PSE&G that during planned inspections, conducted as part of the Peach Bottom 3 refueling outage in October 1997, cracks were identified in three of the ten recirculation system jet pump riser pipes within the reactor vessel. PECO Energy has further advised PSE&G that conservative analysis authorized resumption of power operation after refueling and that an operational strategy was developed allowing continued plant operation for several months at 94% of rated capacity, while a permanent repair was developed. PECO Energy plans to remove Peach Bottom 3 from service for approximately two weeks during March 1998 to perform repairs which it expects will allow return of the unit to full power operation. PECO Energy estimates that the cost of such repairs will be approximately $3 million, of which PSE&G's share would be approximately $1 million. Peach Bottom 3 successfully completed a scheduled refueling and maintenance outage in November 1997. The outage of a Peach Bottom unit causes PSE&G to incur additional replacement energy costs of approximately $4 to $5 million per month per unit. Such amounts vary, however, depending upon the availability of other generation, the cost of purchased energy and other factors including modifications to maintenance schedules of other units. Other Nuclear Matters In 1990, General Electric (GE) reported that crack indications were discovered near the seam welds of the core shroud assembly in a GE 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) and PECO Energy (Peach Bottom) 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. Although 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 latest refueling outage and the results were provided to the NRC in a letter dated November 10, 1997. The inspection disclosed no indications of cracking in the accessible areas of the four welds examined. PECO Energy has advised PSE&G that Peach Bottom 2 was reinspected during its 1996 refueling outage. While additional minor flaw indications were discovered, neither repair nor modification to the core shroud was necessary prior to restarting the reactor. PECO Energy has also advised that examination of the Peach Bottom 3 core shroud was not required during its 1997 refueling outage and that an examination will be performed during its next refueling outage in 1999. 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 1996 to operators of BWRs requesting that measures be taken to minimize the potential for clogging. The NRC has proposed three resolution options and required 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 installed a portion of the required large capacity passive strainers at Hope Creek during Hope Creek's latest refueling outage. On October 31, 1997, the NRC permitted PSE&G to defer installation of the remaining strainers until the next refueling outage, currently scheduled for February 1999. PECO Energy 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 scheduled for October 1998. PSE&G cannot predict what other actions, if any, the NRC may take in this matter. In 1996, PSE&G and PECO Energy, along with other nuclear plant operators, received a request for information from the NRC regarding the adequacy and availability of each plant's design bases data. The NRC required that information be submitted under oath and affirmation to provide it added confidence and assurance that all nuclear units are operated and maintained within the design bases of the facilities and that any deviations have been or will be reconciled in a timely manner. PSE&G responded to the NRC's request on February 11, 1997 with a detailed description of ongoing activities and new initiatives to ensure that Salem and Hope Creek are operated and maintained within their design bases. PECO Energy provided a similar response to the NRC on February 4, 1997 concerning Peach Bottom. Since the information which was submitted will be used by the NRC to determine follow-up inspection activity or potential enforcement actions, PSE&G cannot at this time predict what impact the NRC's request will have. 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, concerned 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 for any of these violations. 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 RHR 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 for this violation. Predecisional enforcement conferences were held on 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 these matters. Two predecisional enforcement conferences for Hope Creek were held on January 14, 1998 to discuss two apparent violations concerning implementation of the Maintenance Rule and one apparent violation concerning control rod operation. PSE&G cannot predict what other actions, if any, the NRC may take in these matters. For a discussion of the BPU's Nuclear Performance Standard, see Note 10. Commitments and Contingent Liabilities of Notes. For discussion of the lawsuit by PSE&G and the other co-owners of Salem seeking to recover damages for the costs of replacing the steam generators at Salem 1 and 2, see Item 3. Legal Proceedings. Nuclear Decommissioning In accordance with Federal regulations, utilities owning an interest in nuclear generating facilities are required to determine the costs and funding methods necessary to decommission such facilities upon termination of operation. As a general practice, each nuclear utility places funds in independent external trust accounts it maintains to provide for decommissioning. PSE&G currently recovers from its customers the amounts paid into the trust fund over a period of years. Although PSE&G's Energy Master Plan proposal continues this treatment, no assurances can be given as to the final outcome of the Energy Master Plan proceedings. For information concerning nuclear decommissioning costs, see Note 2. Rate Matters and Note 11. PSE&G Nuclear Decommissioning of Notes. Electric Fuel Supply and Disposal The following table indicates PSE&G's MWH output by source of energy: Actual Estimated (A) Source 1997 1998 - ------ ------------ --------------- Nuclear: New Jersey facilities..................... 17% 36% Pennsylvania facilities................... 17% 15% Fossil: Coal: New Jersey facilities................... 12% 8% Pennsylvania facilities................. 14% 13% Natural Gas................................. 5% 4% Net PJM Interchange and Purchases From Utilities and NUGs...................... 35% 24% ============ =============== Total (B) ......................... 100% 100% ============ =============== (A) No assurances can be given that actual output will match estimates. (B) Oil generation for 1997 was less than 1% and for 1998 is estimated to be less than 1%. Nuclear Fuel 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 uranium ore operators, converters, enrichers and fabricators to process uranium ore to uranium concentrate to meet the currently projected requirements for Salem and Hope Creek. PSE&G has been advised by PECO Energy that it has similar contracts to satisfy the fuel requirements of Peach Bottom 2 and 3. Currently, there is an adequate supply of nuclear fuel for Salem, Hope Creek and Peach Bottom. For a discussion of issues related to disposal of spent nuclear fuel and related litigation, see Nuclear Fuel Disposal and Note 10. Commitments and Contingent Liabilities of Notes. Coal Approximately 42% of PSE&G's coal supply for its New Jersey facilities is obtained under a contract which expires in 1999. The balance of the supply is contracted annually from various suppliers, many of whom PSE&G has dealt with on a continuing basis for a number of years, supplemented by spot market purchases. PSE&G does not presently anticipate any difficulties in obtaining adequate coal supplies. PSE&G owns approximately 23% of the Keystone and Conemaugh coal-fired generating stations located in western Pennsylvania and operated by Pennsylvania Electric Company. At least 80% of the fuel required by the Keystone station is supplied by five coal companies under contracts with varying expiration dates through December 31, 2003. At least 70% of the fuel required by the Conemaugh station is supplied by ten coal companies under contracts with varying expiration dates through 2002. The balance of the fuel required for each station is supplied through spot purchases obtained from local suppliers. The Keystone Conemaugh Projects Office, which performs project administration at these plants on a day to day basis, has advised PSE&G that it does not presently anticipate any difficulties in obtaining adequate coal supplies. (See Environmental Controls). Natural Gas PSE&G utilizes natural gas available from various spot and short-term gas contracts, to replace other fuels for electric generation. Presently, there are no legal restrictions on the use of natural gas for electric generation in existing plants. PSE&G does not presently anticipate any difficulties in obtaining natural gas supplies. Oil PSE&G uses residual oil in its conventional fossil-fired, steam-electric units. The supply of residual oil is furnished by spot market purchases. PSE&G uses distillate fuel in its combustion turbines which is also acquired by spot market purchases. PSE&G does not presently anticipate any difficulties in obtaining oil supplies. Nuclear Fuel Disposal After spent fuel is removed from a nuclear reactor, it is placed in temporary storage for cooling in a spent fuel pool at the nuclear station site. Under the Nuclear Waste Policy Act of 1982 (NWPA), as amended, the Federal government has entered into contracts for transportation and ultimate disposal of the spent fuel and the nuclear utilities agreed to contribute to a Nuclear Waste Fund at a rate of one mill per kilowatt-hour (KWH) of nuclear generation, subject to such escalation as may be required to assure full cost recovery by the Federal government. In addition, a one-time payment was made to the U.S. Department of Energy (DOE) for permanently discharged spent fuels irradiated prior to 1983. The Federal government's present policy is that spent nuclear fuel will be accepted for storage and disposal at government-owned and operated repositories. However, at present, no such repositories are in service or under construction. The DOE has announced that it will not be able to open a permanent, high-level nuclear waste storage repository until 2010, at the earliest. However, the DOE has also indicated that progress on the repository would be delayed beyond 2010 if sufficient funds, though available in the Nuclear Waste Fund, are not appropriated by the Congress for this program. Pursuant to NRC rules, spent nuclear fuel generated in any reactor can be stored in reactor facility storage pools or in independent spent fuel storage installations located at reactor or away-from-reactor sites for at least 30 years beyond the licensed life for reactor operation (which may include the term of a revised or renewed license). As a result of reracking the two spent fuel pools at Salem, the availability of adequate spent fuel storage capacity is estimated through 2012 for Salem 1 and 2016 for Salem 2, prior to losing an operational full core discharge reserve. The Hope Creek pool is also fully racked and it is expected to provide storage capacity until 2006, again prior to losing an operational full core discharge reserve. PECO Energy has advised PSE&G that spent fuel racks at Peach Bottom have storage capacity until 2000 for Peach Bottom 2 and 2001 for Peach Bottom 3, prior to losing full core discharge reserve capability. PECO Energy has also advised PSE&G that it is constructing an on-site dry storage facility which is expected to be operational in 2000 to provide additional storage capacity. For further discussion of Nuclear Fuel Disposal, see Note 11. PSE&G Nuclear Decommissioning of Notes. Low Level Radioactive Waste (LLRW) As a by-product of their operations, nuclear generating units, including those in which PSE&G owns an interest, produce LLRW. Such wastes include paper, plastics, protective clothing, water purification materials and other materials. LLRW materials are accumulated on site and disposed of at a Federally licensed permanent disposal facility in Barnwell, South Carolina. In 1991, New Jersey enacted legislation providing for funding of the estimated $70 million cost of establishing a LLRW disposal facility. New Jersey would recover the costs through fees paid by LLRW generators. PSE&G's overall share is expected to be about 40% of the total cost. PSE&G has provided about $5 million to date. New Jersey has established a volunteer siting process to establish a LLRW disposal facility by 2000. Public meetings have been held across the State in an effort to provide information to and obtain feedback from the public. To date, there have been no voluntary sites identified. Consequently, on February 10, 1998, the State agency responsible for this program recommended to the Governor that this effort be abandoned. Because of the uncertainties regarding disposal, PSE&G built an on-site facility which was completed in July 1994. The facility provides five years of storage for LLRW from Hope Creek and Salem. The facility was used from July 1994 through June 1995, while the Barnwell facility was temporarily unavailable, and emptied when Barnwell re-opened in 1995. The facility is being used for interim storage of radioactive materials and waste prior to transport to a permanent disposal facility. PECO Energy has advised PSE&G that it has an on-site LLRW storage facility for Peach Bottom, which will provide at least 5 years of temporary storage. PECO Energy has also advised PSE&G that Pennsylvania is pursuing its own LLRW site development via State-selected candidate sites, along with a volunteer plan option. Gas Operations and Supply PSE&G supplies its gas customers principally with natural gas. PSE&G supplements natural gas with purchased refinery/landfill gas and liquefied petroleum gas produced from propane. The adequacy of supply of all types of gas is affected by the nationwide availability of all sources for energy production. As of December 31, 1997, the daily gas capacity of PSE&G was as follows: Type of Gas Therms Per Day ----------- -------------- Natural gas.................................... 23,099,000 Liquefied petroleum gas........................ 2,200,000 Refinery/landfill gas.......................... 323,000 ---------- Total........................................ 25,622,000 ========== About 40% of the daily gas capacity is high load factor natural gas and is available every day of the year. The remainder comes from field storage, liquefied natural gas, seasonal sales, contract peaking supply, propane and refinery/landfill gas. PSE&G's total gas sold to and transported for its various customer classes in 1997 was 4.1 billion therms. Included in this amount is 1.0 billion therms of gas delivered to customers under PSE&G's transportation tariffs and individual cogeneration contracts. During 1997, PSE&G purchased approximately 3.7 billion therms of gas for its combined gas and electric operations directly from natural gas producers and marketers. These supplies were transported to New Jersey by PSE&G's four interstate pipeline suppliers. The majority of PSE&G's gas supply contracts expire at various times over the next 10 years. PSE&G does not presently anticipate any difficulty in negotiating replacement contracts. Since the quantities of gas available to PSE&G under its supply contracts are more than adequate in warm months, PSE&G nominates part of such quantities for storage, to be withdrawn during the winter season under storage contracts with its principal suppliers. Underground storage capacity currently is approximately 770 million therms. PSE&G does not presently anticipate any difficulty in obtaining adequate supplies of natural gas (see Federal Regulation). Substantially all of PSE&G's gas sales are made under rates which are currently designed to permit the recovery of projected increases in the cost of natural gas and gas from supplemental sources, when compared to levels included in base rates on a current annual basis (see Note 2. Rate Matters of Notes). The demand for gas by PSE&G's customers is affected by customer conservation, economic conditions, weather, the price relationship between gas and alternative fuels and other factors not within PSE&G's control. Gas sold in interstate commerce is now deregulated and is subject to market forces. PSE&G buys gas from producers, marketers, unregulated marketing affiliates of interstate pipeline companies and others. Interstate transportation is still being regulated by the FERC (see Competitive Environment--State Regulation). PSE&G was able to meet all of the demands of its firm customers during the 1996-97 winter season and expects to continue to meet such energy-related demands of its firm customers during the 1997-98 winter season. However, the sufficiency of supply could be affected by several factors not within PSE&G's control, including curtailments of natural gas by its suppliers, the severity of the winter, the extent of energy conservation by its customers and the availability of feedstocks for the production of supplements to its natural gas supply. Employee Relations Enterprise has no employees. As of December 31, 1997, PSE&G had 10,092 full time employees. Six-year collective bargaining agreements with all of its union groups, representing 6,111 PSE&G employees, expire on April 30, 2002. Also at December 31, 1997, EDHI and its subsidiaries had 530 employees, of whom 38 were represented by unions. PSE&G, EDHI and their subsidiaries believe that they maintain satisfactory relationships with their employees. For information concerning the employee pension plan and other postretirement benefits, see Note 1. Organization and Summary of Significant Accounting Policies, Note 13. Pension Plan and Note 14. Postretirement Benefits Other Than Pensions of Notes. Environmental Controls PSE&G, like most industrial enterprises, is subject to regulation with respect to the environmental impacts of its operations, including air and water quality control, limitations on land use, disposal of wastes, aesthetics and other matters by various Federal, regional, state and local authorities, including the U.S. Environmental Protection Agency (EPA), the U.S. Department of Transportation (USDOT), the New Jersey Department of Environmental Protection (NJDEP), the New Jersey Department of Health, the BPU, the Interstate Sanitation Commission, the Hackensack Meadowlands Development Commission, the Pinelands Commission, the Delaware River Basin Commission (DRBC), the U.S. Coast Guard and the U.S. Army Corps of Engineers. CEA and EGDC are also subject to similar regulation with respect to operation of their facilities. (See EDHI) Environmental laws generally require air emissions and water discharges to meet specified limits. They also impose potential joint and several liability, without regard to fault, on the generators of various hazardous substances to manage these materials properly and to clean up property affected by the production and discharge of such substances. Compliance with environmental requirements has caused PSE&G to modify the day-to-day operation of its facilities, to participate in the cleanup of various properties that have been contaminated and to modify, supplement and replace existing equipment and facilities. During 1997, PSE&G expended approximately $24 million for capital related expenditures to improve the environment and comply with changing regulations and estimates that it will expend approximately $31 million, $52 million and $38 million in the years 1998 through 2000, respectively, for such purposes. Such amounts are included in PSE&G's estimates of construction expenditures (see MD&A--Liquidity and Capital Resources). Preconstruction analyses and projections of the environmental impacts of contemplated activities, discharges and emissions are frequently required by the permitting agency. Before licensing approvals and permits are granted, the agency usually requests a modeling analysis of the effects of a specific action, its effect in combination with other existing and permitted activities and may request the applicant to address emerging environmental issues. Such environmental reviews have caused delays in the proceedings for licensing facilities and similar delays can be expected in the future. An industry issue with respect to the construction and operation of electric transmission and distribution lines has been the alleged adverse health effects of electric and magnetic fields (EMF) exposure. In 1990, the New Jersey Commission on Radiation Protection (CORP) decided against setting a limit on magnetic fields produced by high-voltage power lines citing the lack of convincing evidence required to determine dangerous levels. Proposed power regulations were studied by CORP. If revised, the rules would have authorized the NJDEP to screen all new power line projects of 100 kilovolts or more using a principle of "as low as reasonably achievable" to demonstrate that all steps within reason, including modest cost, were taken to reduce EMFs. In May 1997, CORP decided to take no further action regarding regulation of limits on magnetic field levels from new and modified transmission lines operating at 100 kilovolts and higher. The New Jersey Environmental Rights Act provides that any person may maintain a court action against any other person to enforce or to restrain the violation of any statute, regulation or ordinance which is designed to prevent or minimize pollution, impairment or destruction of the environment; or where no such violation exists, to protect the environment from pollution, impairment or destruction. Certain Federal legislation confers similar rights on individuals. The principal laws and regulations relating to the protection of the environment which affect PSE&G's operations are described below. Air Pollution Control The Federal Clean Air Act (CAA) imposes emission control requirements, including requirements related to the emissions of sulfur dioxide (SO2) and nitrogen oxides (NOx) and requires attainment of National Ambient Air Quality Standards (NAAQS). The New Jersey Air Pollution Control Code (NJAPCC) governs compliance with, and maintenance of, the NAAQS in New Jersey. PSE&G also has approximately a 23% interest in Conemaugh and Keystone, coal-fired generating stations located in western Pennsylvania. State regulations in Pennsylvania govern compliance with, and maintenance of the NAAQS in Pennsylvania. The CAA also requires that each major facility apply for and receive a facility-wide operating permit. The facility-wide operating permit terms and conditions are enforceable by both EPA and NJDEP. PSE&G filed permit applications for its major facilities in New Jersey in 1995. A draft permit for one facility was issued for comment in 1997, and the final permit for that facility is expected in 1998. Draft and final permits may be issued by NJDEP for all of PSE&G's remaining major facilities in 1998. Operating permits for certain PSE&G facilities may require changes to facility operations or technology, installation of additional air pollution controls and performance of supplemental emissions monitoring. To the extent estimates of the capital costs of complying with these and other CAA requirements through 2000 are quantifiable, they are included in PSE&G's construction expenditures (see Construction and Capital Requirements). PSE&G's generating stations in New Jersey are located in areas of the State classified as "non-attainment" for the ozone NAAQS. In non-attainment areas, construction or expansion of a facility may commence only upon a showing that any additional emissions from the source will be more than offset by reductions in similar emissions from existing sources. These requirements may affect PSE&G's ability to locate, construct or expand generating facilities in New Jersey in the future. Additionally, these requirements may impact the customers and potential customers of PSE&G and, in so doing, inhibit PSE&G's ability to grow its customer base in New Jersey. Air quality in the northeastern United States is affected by air pollution transported within and into the region by prevailing winds. In September 1994, 11 Northeastern states and the District of Columbia signed a memorandum of understanding (MOU) establishing a regional plan for reducing NOx emissions from utility and large industrial boilers. NOx contributes to the formation of ozone. The 12 jurisdictions signing this MOU fall within the Ozone Transport Region (OTR), created under section 184 of the CAA in recognition of the regional ozone problem facing the northeastern United States. In September 1997, the NJDEP proposed regulations implementing the MOU. Consistent with the MOU, 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 contained in Title IV of the CAA. 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 costs at this time but such costs could be material. To further improve northeastern air quality, PSE&G is working collaboratively with several environmental organizations, electric utilities, environmental regulators and large manufacturing companies located in the Northeast to achieve significant NOx emission reductions from power plants in the South and Midwest. It is expected that emission reductions from these power plants will improve the Northeast's air quality, thereby lessening the need for additional emission controls in New Jersey beyond those already in effect. These collaborative efforts, coupled with growing concerns for cost-effective compliance with CAA requirements, resulted in the creation of an environmental forum called the Ozone Transport Assessment Group (OTAG), consisting of the 37 states east of the Mississippi River. OTAG's charter was to study the nature and extent of the regional ozone transport problem and produce consensus recommendations concerning the need for additional emission controls necessary to address it. In June 1997, OTAG issued several recommendations for the reduction of ozone and ozone precursors throughout 22 states of the OTAG region. These recommendations include a call for reducing power plant NOx emissions by up to 85% from 1990 levels, or restricting power plants within the targeted 22 states to a 0.15 lb./mmbtu emission limit, whichever is less stringent. OTAG also recommended that air emissions trading be used to implement this recommendation. These recommendations apply to all Northeastern states, as well as many states in the South and Midwest. The recommendations are consistent with the NOx reduction program adopted by the OTR's MOU and, therefore, do not constitute a new or additional regulatory burden for PSE&G. If implemented, these recommendations will require power plants in the South and Midwest to meet NOx control requirements that are similar to the requirements faced by PSE&G facilities. On October 10, 1997, the EPA took steps to implement OTAG's recommendations by issuing an emissions reduction proposal under section 110 of the CAA for the 22 states targeted by OTAG's recommendations. PSE&G supports the EPA's position since scientific evidence indicates the change will improve air quality in New Jersey and the region. Because EPA's action is still a proposal, the impact to the operation of PSE&G facilities cannot be fully assessed at this time. In July 1997, EPA adopted new Federal air quality standards for ozone and particulate matter. The new ozone standard was lowered to be more protective of human health and the measure of the standard was revised to more accurately reflect the nature of the ozone problem confronting many areas of the United States. In announcing the new ozone standard, EPA stated that the regional NOx control program for power plants recommended by OTAG will bring nearly 80% of all new non-attainment areas back into attainment. EPA took action in October to implement the OTAG recommendations. PSE&G supports the new ozone standard and EPA's implementation policy because it addresses the ozone transport problem which burdens much of the northeastern United States. The new particulate matter standard addressed fine particulate matter. It is widely understood that attainment of the fine particulate matter standard may require reductions in NOx and SO2. However, under the time schedule announced by EPA when the new standard was adopted, it will be five years before non-attainment areas are designated and nearly eight years before control measures to meet this standard are identified. CEA Eagle Point, Inc. (Eagle Point), an indirect subsidiary of EDHI, is one partner in a partnership which owns the Eagle Point Cogeneration Facility (EPC), located in West Deptford, New Jersey. EPC is operated by an affiliate of Eagle Point's partner, provides electricity and steam for an adjacent petroleum refinery (owned and operated by another affiliate of Eagle Point's partner) and sells excess electricity to PSE&G. In 1995, Eagle Point received a Notice of Violation (NOV) from Region II of the EPA alleging violations of certain CAA requirements and limitations related to the air permit at EPC and the adjacent refinery and demanding that such violations be corrected. Eagle Point, its partner and the operator of the refinery are contesting the EPA conclusion that violations have occurred and they have met with the staffs of the EPA and NJDEP to discuss issues related to the NOV. As a result of discussions with NJDEP, Eagle Point received a modified air permit from NJDEP during January 1997. Discussions with the DOJ were initiated in the last half of 1997 to explore a negotiated resolution to the NOV issues. Those negotiations are continuing. Any adverse resolution of the NOV issues is not expected to have a material adverse effect on Enterprise's or PSE&G's financial position, results of operations and net cash flows. Water Pollution Control The Federal Water Pollution Control Act (FWPCA) authorizes the imposition of technology and water-quality based effluent limitations to regulate the discharge of pollutants into the surface waters of the United States through the issuance of National Pollutant Discharge Elimination System (NPDES) permits. EPA has been designated as the agency charged with responsibility for implementing the NPDES program. The FWPCA authorizes the EPA to delegate implementation of the NPDES program to states with approved programs. The New Jersey Water Pollution Control Act (NJWPCA) and implementing regulations were adopted to regulate discharges to surface waters and ground waters of the State through the New Jersey Pollutant Discharge Elimination System (NJPDES) permits. EPA has delegated to New Jersey authority to administer the NPDES program through the NJWPCA and to implement regulations with EPA oversight. The NJDEP administers the NPDES/NJPDES permit program. Certain PSE&G facilities are directly regulated by NJPDES permits issued by NJDEP pursuant to FWPCA and the NJWPCA. The FWPCA authorizes the imposition of less stringent thermal limits pursuant to a variance procedure set forth in its Section 316(a) and regulates cooling water intake structures pursuant to its Section 316(b). PSE&G has filed or will file data and information with the NJDEP in support of Section 316(a) variance requests and Section 316(b) best technology available determinations for several of its electric generating stations in connection with renewal of the facilities' NJPDES permits. With respect to Section 316(b) requirements, the EPA must propose draft regulations on or before July 1999 and promulgate final regulations by August 2001. These regulations will address, among other things, regulatory approaches for determining what constitutes adverse environmental impact and what constitutes the best technology available for minimizing adverse environmental impact. It is not possible to determine at this time how the EPA will resolve these issues. EPA's regulations in general and these determinations in particular may have a material effect on agency review of section 316(b) determinations. Permit proceedings involving the Hudson Station, the Mercer Station and Salem have the potential to impose new or more stringent terms or conditions which could require changes to operations or significant expenditures. The NJPDES permit for the Hudson Station, a 983 MW coal-fired fossil plant located in Jersey City, New Jersey, is in the process of being renewed by the NJDEP. As part of that renewal, the NJDEP has requested updated information in connection with PSE&G's 316(a) and 316(b) demonstrations, in part, to address issues identified by a consultant hired by NJDEP. The consultant recommended that Hudson Station be retrofitted to operate with closed cycle cooling to address alleged adverse impacts associated with the thermal discharge and intake structure. PSE&G is in the process of collecting additional data which will be used in the updated demonstrations. PSE&G anticipates submitting these documents to NJDEP in the second quarter of 1998. PSE&G does not believe that closed cycle cooling will be required. PSE&G presently estimates that the cost of retrofitting Hudson Station to operate with closed cycle cooling, if required, to be approximately $100 million in 1998 dollars. It is not possible to predict the NJDEP's determinations on these demonstrations. Such amount is not included in PSE&G's estimate of construction expenditures (see Liquidity and Capital Resources of MD&A). NJDEP has advised PSE&G that it is preparing a renewal permit for Mercer Station, a 648 MW coal fired fossil plant located in Hamilton Township, New Jersey, and in connection with that renewal, will be reexamining the effects of Mercer Station's cooling water system pursuant to Sections 316(a) and 316(b). PSE&G has submitted a proposed plan of study for updating its Sections 316(a) and 316(b) demonstrations for Mercer Station for submission to NJDEP in 2000. It is not possible to predict the outcome of such review at this time. PSE&G is implementing the 1994 NJPDES permit issued for Salem which requires, among other things, water intake screen modifications and wetlands restoration. The estimated capital cost of compliance with the final permit is approximately $100 million, of which approximately $10 million remains to be spent. PSE&G's share is 42.59% and is included in its 1998-2002 construction program. PSE&G must apply to renew the Salem permit in 1999 and must provide updated Section 316(a) and 316(b) demonstrations for the NJDEP's review (see the discussion above regarding EPA's Section 316(b) rulemaking). (See MD&A--Liquidity and Capital Resources--Construction and Capital Requirements Forecast.) Failure to obtain renewal of this permit on a timely basis, which cannot be assured, could have a material adverse effect on Enterprise's and PSE&G's financial position, results of operations and net cash flows. The DRBC issued a revised Docket for Salem in 1995 (Revised Docket) approving a modification to the 1970 Salem Docket that approved the construction and operation of the station's cooling water system. The Revised Docket authorized, among other things, the continued operation of the station's cooling water system for an additional five years. The Revised Docket provides that the authorization expires in September 2000 absent renewal by the DRBC on or by August 31, 1999. NJDEP issued a final renewal permit for Hope Creek effective April 1, 1997. Control of Hazardous Substances PSE&G Manufactured Gas Plant Remediation Program For information regarding PSE&G's Manufactured Gas Plant Remediation Program, see Note 2. Rate Matters and Note 10. Commitments and Contingent Liabilities of Notes. Other Sites A preliminary review of possible mercury contamination at the Kearny Station, a 280 MW oil fired fossil plant located in Kearny, New Jersey, concluded that an additional study and investigations are required. In 1996, PSE&G entered into a Memorandum of Agreement (MOA) with NJDEP for the Kearny Station which required PSE&G to conduct a Remedial Investigation (RI) of the site. A RI Work Plan has been approved by the NJDEP; field work activities associated with the RI were completed in February 1997. An RI Report was submitted to the NJDEP in September 1997 and is currently under technical review by the NJDEP. As currently issued, the RI Report found that the mercury at the site is stable and immobile and should be addressed at the time the Kearny Station is retired. PSE&G does not anticipate that remediation of this site will have a material effect on its financial position, results of operations and net cash flows. Hazardous Substances The Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), as amended by the Superfund Amendments and Reauthorization Act of 1986, and the Federal Resource Conservation and Recovery Act of 1976 (RCRA), authorizes EPA to issue orders and/or to bring enforcement actions to compel responsible parties to take investigative and/or cleanup actions at any site that is determined to present an actual or potential threat to human health or to the environment because of an actual or threatened release of one or more hazardous substances. The New Jersey Spill Compensation and Control Act (Spill Act) provides similar authority to NJDEP. 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 substances classified as hazardous under one or more of the above laws. PSE&G generally provides for the disposal or processing of such substances through licensed independent contractors. However, the foregoing statutory provisions impose joint and several liability without regard to fault on all allegedly responsible parties, including the generators of the hazardous substances, for certain investigative and cleanup costs at sites where these substances were disposed or processed. These statutes also authorize private rights of action for recovery of these costs. PSE&G has been notified with respect to a number of such sites. The cleanup of these potentially hazardous sites is receiving greater attention from the government agencies involved. Generally, actions directed at funding such site investigations and cleanups include suspected or known allegedly responsible parties. PSE&G's past operations suggest that some remedial action may be required. PSE&G does not expect its expenditures for any such site to have a material effect on its financial position, results of operations or net cash flows. The EPA has determined that a six mile stretch of the Passaic River in Newark, New Jersey is a "facility" within the meaning of that term under CERCLA and that at least thirteen corporations, to date, may be potentially liable for performing required remedial actions to address potential environmental pollution at the facility. The EPA anticipates identifying other potentially responsible parties (PRP). One PRP (Cooperating Party) entered into a consent decree with the EPA in 1994 obligating it to conduct a remedial investigation and feasibility study of available and applicable corrective actions for the site. The Cooperating Party has reported that it has incurred approximately $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 stretch of the Passaic River designated as the site. In April 1996, the EPA directed PSE&G to provide information concerning the nature and quantity of raw materials, by-products and wastes which may have been generated, treated, stored or disposed at certain of these facilities. The facilities are PSE&G's former Harrison Gas Plant and Essex Generating Station. PSE&G submitted responses to the EPA requests for these sites in August 1996. In July 1997, the EPA named PSE&G as a PRP for this site. PSE&G cannot predict what action, if any, the EPA or any third party may take against PSE&G with respect to this site, or in such event, what costs PSE&G may incur to address any such claims. However, such costs are expected to be material. Presently, other CERCLA/Spill Act actions involving PSE&G include the following: (1) Claim made in 1985 by U. S. Department of the Interior under CERCLA with respect to the Pennsylvania Avenue and Fountain Avenue municipal landfills in Brooklyn, New York, for damages to natural resources. The U.S. Government alleges damages of approximately $200 million. To PSE&G's knowledge there has been no action on this matter since 1988. (2) In July 1997, EPA Region III completed its deletion of a site operated by Sealand Ltd. in Mount Pleasant Township, New Castle County, Delaware from the National Priorities List. The State of Delaware has initiated a separate action against PSE&G and other PRP's under the Delaware Hazardous Substance Cleanup Act, alleging on-going threats to human health and the environment due to the presence of soil and groundwater contamination at the Sealand site. Delaware is presently contemplating requiring the PRPs to conduct additional monitoring at the Sealand site and to reimburse Delaware for past and future oversight costs. Based on the claims made and activities taken to date, PSE&G does not anticipate that its obligations with respect to this site will have a material adverse effect on its financial position, results of operations and net cash flows. (3) Duane Marine Salvage Corporation Superfund Site is in Perth Amboy, Middlesex County, New Jersey. Based upon the claims made and activities taken to date, PSE&G does not anticipate that its obligations with respect to this site will have a material adverse effect on its financial position, results of operations and net cash flows. (4) Various Spill Act directives were issued by NJDEP to PRPs, including PSE&G with respect to the PJP Landfill in Jersey City, Hudson County, New Jersey, ordering payment of costs associated with operating and maintenance expenses, interim remedial measures and a Remedial Investigation and Feasibility Study (RI/FS) in excess of $25 million. The directives also sought reimbursement of NJDEP's past and future oversight costs and the costs of any future remedial action. Based upon the claims made and activities taken to date, PSE&G does not anticipate that its obligations with respect to this site will have a material adverse effect on its financial position, results of operations and net cash flows. (5) Claim by EPA, Region III, under CERCLA with respect to a Superfund site in Philadelphia, Pennsylvania, owned and formerly operated as a non-ferrous scrap reclamation facility by Metal Bank of America, Inc. PSE&G, other utilities and other companies are alleged to be liable for contamination at the site. PSE&G and other utilities signed an Administrative Order by Consent (AOC) in 1991 to perform a remedial investigation and prepare a feasibility statement which was submitted to EPA in 1994. In 1995, EPA issued a Proposed Remedial Action Plan for the site in which EPA's proposed remedy was estimated to cost between $17 and $30 million. In December 1997, EPA issued a Record of Decision (ROD). EPA estimates that the selected remedy will cost approximately $17 million. PSE&G cannot predict with reasonable certainty the actual cost of the selected remedy or who will implement the remedy. If PSE&G participates in performing the selected remedy, the estimated cost of such participation could be between $4 million and $8 million. (6) The Klockner Road site is located in Hamilton Township, Mercer County, New Jersey, and occupies approximately two acres on PSE&G's Trenton Switching Station property. PSE&G has entered into a MOA with the NJDEP for the Klockner Road site pursuant to which PSE&G will conduct an RI/FS and remedial action, if warranted, of the site. Preliminary investigations indicated the potential presence of soil and groundwater contamination at the site. PSE&G's preliminary estimate is that the RI/FS will cost approximately $800,000. The cost of any remediation of potential site contamination is not presently estimable. (7) In U.S. v. CDMG Realty Co., et al., Civil Action No. 89-4246 (NHP) (RJH), pending in the U.S. District Court for the District of New Jersey, PSE&G and over 60 other entities were joined in 1995 as additional third-party defendants. Third-party plaintiffs, an association of 44 entities, are essentially seeking contribution and/or indemnification for the expenses they have incurred and will incur as a result of having settled the direct claims of the NJDEP and EPA related to the investigation and remediation of Sharkey's Landfill, located in Parsippany-Troy Hills, Morris County, New Jersey. The claims are all alleged to be brought pursuant to CERCLA and PSE&G is alleged to have arranged for the disposal of industrial wastes at Sharkey's Landfill. The claims with respect to this matter are presently the subject of an alternative dispute resolution proceeding. Based upon the claims made and activities taken to date, PSE&G does not anticipate that its obligations with respect to this site will have a material adverse effect on its financial position, results of operations and net cash flows. (8) In 1991, the NJDEP issued Directive and Notice to Insurers Number Two (Directive Two) to 24 Insurers and 52 Respondents, including PSE&G, in connection with an investigation and remediation of the Global Landfill Site in Old Bridge Township, Middlesex County, New Jersey (Global Site). Directive Two seeks recovery of past and anticipated future NJDEP response costs ($37 million). In 1991, PSE&G entered into an agreement with the NJDEP and 29 other Directive Two Respondents effecting a partial settlement of the foregoing costs. In 1993, the NJDEP and various other participating PRPs including PSE&G, executed a Consent Decree whereby the participating PRPs agreed to perform the remedial design and remedial action for the operable unit one as specified in a 1991 Superfund ROD (approximate total cost: $30 million). In 1996, 13 of the Directive Two Respondents, including PSE&G, filed a contribution action pursuant to CERCLA and the Spill Act against approximately 190 parties seeking contribution for an equitable share of all liability for response costs incurred and to be incurred in connection with the site. In September 1997, the NJDEP issued a Superfund ROD for the operable unit two remedy at the site. The estimated cost of the site operable unit two remedy is $3.7 million. Based on the claims made and activities taken to date, PSE&G does not anticipate that its obligations with respect to this site will have a material adverse effect on its financial position, results of operations and net cash flows. (9) In 1991, the NJDEP issued Directive and Notice To Insurers Number One (Directive No. One) to 50 insurers and 20 respondents, including PSE&G, seeking from the respondents payment of $5.5 million of NJDEP's anticipated costs of remedial action and of administrative oversight at the Combe Fill South Sanitary Landfill in Washington and Chester Townships, Morris County, New Jersey (Combe Site). The $5.5 million represents NJDEP's 10% share of total estimated site remediation costs and administrative oversight costs pursuant to a cooperative agreement with the United States concerning the selected remedial action for the site. In 1996, the NJDEP issued Directive Number Two (Directive No. Two) to 37 respondents, including PSE&G, directing the respondents to arrange for the operation, maintenance and monitoring of the implemented remedial action described therein or pay the NJDEP's future costs of these activities, estimated to be $39 million. In addition, Directive No. Two directs the respondents to prepare a workplan for the development and implementation of a Natural Resource Damage Restoration Plan. Based on the claims made in Directives No. One and No. Two and PSE&G's investigation and response to same, PSE&G does not anticipate that its obligation with respect to this site will have a material adverse effect on its financial position, results of operations and net cash flows. (10) Spill Act Multi-Site Directive (Directive) issued by the NJDEP to PRPs, including PSE&G, listing four separate sites, including the former solid waste bulking and transfer facility called the Marvin Jonas Transfer Station (Sewell Site) in Deptford Township, Gloucester County, New Jersey. With regard to the Sewell Site, this Directive ordered approximately 350 PRPs, including PSE&G, to enter into an Administrative Consent Order (ACO) with NJDEP, requiring them to remediate the Sewell Site. Certain PRPs, including PSE&G, have completed the interim actions directed at both site security and off-site disposal of containers, trailers and contaminated surface soils. PRPs, including PSE&G, are currently fulfilling the terms of a MOA entered into with NJDEP in 1993 to conduct an RI/FS and, if necessary, take remedial action. Based upon the claims made and activities taken to date, PSE&G does not anticipate that its obligations with respect to this site will have a material adverse effect on its financial position, results of operations and net cash flows. (11) In Transtech Industries, Inc. et al. v. A&Z Septic Clean et al., Docket No. 2-90-2578 (HAA), filed in 1990 in the U.S. District Court for the District of New Jersey, PSE&G has been named a defendant in a Complaint which has been filed pursuant to CERCLA against several hundred parties seeking recovery of past and future response costs incurred or to be incurred in the investigation and/or remediation of the Kin-Buc Landfill, located in Edison Township, Middlesex County, New Jersey. Plaintiffs allege that all named defendants, including PSE&G, are PRPs as generators and/or transporters of various hazardous substances ultimately deposited at the Kin-Buc Landfill. In December 1997, PSE&G entered into a settlement resolving the claims against it in this matter. In accordance with the settlement, PSE&G made a de minimis contribution to past costs incurred as of April 30, 1997. Further, the settlement obligates PSE&G to make future de minimis contributions to future response costs. Although future response costs at this site are not currently estimable, PSE&G does not anticipate that its obligations with respect to this site will have a material adverse effect on its financial position, results of operations and net cash flows. (12) In 1993, in a matter entitled The Fishbein Family Partnership v. PPG Industries, Inc. and Public Service Electric and Gas Company, Civil Action No. 93-653 (D.N.J.), the plaintiff filed an action pursuant to CERCLA, the Spill Act and various common law theories of liability, seeking declaratory relief regarding responsibility for and recovery of damages and response costs incurred and/or to be incurred as a result of the release or threatened release of hazardous substances at a property located in Jersey City, Hudson County, New Jersey. The plaintiff alleges that defendants are liable for the damages and relief sought based on their past conduct of industrial operations at the site. The industrial operations referenced in plaintiff's Complaint include chromium ore processing operations (PPG and its predecessors) and coal gasification operations (PSE&G and its predecessors). PSE&G filed its response to the plaintiff's Complaint including cross-claims for indemnity and contribution against PPG. PSE&G also filed a Third Party Complaint against UGI Utilities, Inc. (UGI) seeking indemnification and contribution as to any liability imposed upon PSE&G attributable to UGI's past conduct of industrial operations on a portion of the site. In 1995, PSE&G filed an Amended Third Party Complaint extending the time period of PSE&G's allegations concerning UGI's past conduct of industrial operations at the site. Also in 1995, an Administrative Stay of this matter was entered pending either an agreement between the NJDEP and PPG as to a cleanup plan for the site or a determination of certain cross-motions for summary judgment filed by plaintiff and PPG. In 1996, following the court's determination of plaintiff's and PPG's cross-motions for summary judgment, the Court entered an Order amending the Order of Administrative Stay whereby plaintiff's claims against PSE&G, all cross-claims of PPG and PSE&G, and all claims in the third party action were administratively stayed until further order of the court. Based upon the claims made and activities taken to date, PSE&G's potential liability in this matter, if any, is not currently estimable, but is not expected to have a material adverse effect on its financial position, results of operations and net cash flows. (13) Morton International, Inc. and the Velsicol Chemical Corporation have instituted separate suits (Morton International, Inc. v. A.E. Staley Manufacturing Co., et al. Civil Action No. 96-3609 (NHP) and Velsicol Chemical Corporation, et al. v. A.E. Staley Manufacturing Co., et al. Civil Action No. 96-3610 (NHP)) in the U.S. District Court in Newark, New Jersey against one hundred and seven (107) defendants, including PSE&G. The suits are contribution actions pursuant to CERCLA and the Spill Act seeking contribution for an equitable share of all liability for response costs and damages that plaintiffs anticipate they will incur in connection with the RI/FS and remedial action of a forty (40) acre parcel of land in Wood Ridge, Bergen County, New Jersey and an adjoining water body known as Berry's Creek. Plaintiffs have not initiated any remedial actions to date either at the site or the adjacent creek. While plaintiffs anticipate that the costs of the RI/FS and past and future NJDEP oversight costs with respect to the site will approximate $6 million, they have no current estimate of the costs for remediation of the site and/or the RI/FS and remediation of the creek. PSE&G's alleged nexus to the site is based on shipments of quantities of mercury from its Kearny Generating Station and other unnamed facilities. Based on the claims made and the information available to date, PSE&G's potential liability, if any, is not currently estimable, but is not expected to have a material adverse effect on its financial position, results of operations and net cash flows. (14) The EPA issued a Notice of Potential Liability (Notice) to approximately twenty entities including PSE&G in 1996 with respect to the Custom Distribution Services site in Perth Amboy, Middlesex County, New Jersey, formerly operated as a waste oil recovery facility. Available information suggests that PSE&G may have shipped waste oil to the facility for recycling. The EPA's notice advises that is has completed a removal action at the site at a cost of slightly in excess of $2 million and intends to seek to recover said costs from those entities including PSE&G that received a Notice. Prospective remedial actions, if any, have not been performed and/or identified. Based upon the claims made and activities taken to date, PSE&G does not anticipate that its obligations with respect to this site will have a material adverse effect on its financial position, results of operations and net cash flows. (15) The NJDEP assumed control of a former petroleum products blending and mixing operation and waste oil recycling facility in Elizabeth, Union County, New Jersey (Borne Chemical Co. site) and issued various directives to a number of entities including PSE&G requiring performance of various remedial actions including: establishment of security at the site; removal and off-site disposal of containerized wastes at the site; and conduct of a remedial investigation of the site. PSE&G's nexus to the site is based upon the shipment of certain waste oils to the site for recycling. PSE&G and certain of the other entities named in NJDEP directives are members of a PRP group that have been working together to satisfy NJDEP requirements including: funding of the site security program; containerized waste removal; and a site remedial investigation program. Based on the nature and extent of PSE&G's nexus to the site, PSE&G's liabilities to date have been de minimis. While the cost of prospective remedial actions are not currently estimable, PSE&G does not anticipate that its prospective liabilities, with respect to this site will have a material adverse effect on its financial position, results of operations and net cash flows. Other Potential Liability In addition to the sites individually listed above, PSE&G has received 15 claims and/or inquiries concerning prospective enforcement actions by the EPA and/or NJDEP. Such claims/inquiries relate to alleged properties/sites where it has been alleged that an actual or potential threat to human health or to the environment exists as a result of an actual or threatened release of one or more hazardous substances. PSE&G's investigation and initial response concerning each such claim and/or inquiry suggests that PSE&G's potential liability, if any, with respect to same will not have a material adverse effect on its financial position, results of operations and net cash flows. The EPA conducted an inspection of Spill Prevention Control and Countermeasure (SPCC) Plan compliance at three PSE&G electric distribution facilities in 1997. The EPA identified certain procedural and substantive deficiencies in the SPCC Plans for these sites. PSE&G has submitted revised SPCC Plans to the EPA for these sites and is currently working with the EPA to finalize these SPCC Plans. PSE&G has also developed and will initiate in 1998 a program to evaluate SPCC Plan compliance at all electric distribution facilities and resolve identified deficiencies. It is anticipated that this program will take up to several years to implement. While the costs of the program are not currently estimable, PSE&G does not anticipate that the costs will have a material adverse effect on its financial position, results of operations and net cash flows. EDHI EDHI, the wholly owned, direct non-utility subsidiary of Enterprise, is incorporated under the laws of New Jersey and is the parent company of CEA, PSRC, Energis, EGDC, Capital and Funding. EDHI's principal executive offices are located at 80 Park Plaza, Newark, New Jersey 07101. EDHI's focus is on investment opportunities in the domestic non-utility and international energy markets. For a discussion of Enterprise's agreement with the BPU regarding utility/non-utility activities and its impact on EDHI, see Liquidity and Capital Resources of MD&A. CEA CEA, a New Jersey corporation, has its principal executive offices at 1200 East Ridgewood Avenue, Ridgewood, New Jersey 07450. CEA invests and participates in the development and operation of projects in the generation, transmission and distribution of energy, which include cogeneration and IPP facilities and electric distribution companies. CEA's investments include domestic qualifying facilities (QFs), foreign exempt wholesale generators (EWGs) and foreign utility companies (FUCOs). CEA is expected to be a primary vehicle for EDHI's business growth for the foreseeable future, with emphasis on international investments due to expected growth opportunities. CEA and/or its subsidiaries and affiliates have investments in 26 cogeneration or independent power projects (including two under construction) and two electric distribution ventures. CEA continuously evaluates the status of project development and construction in light of the realities of timely completion and the costs incurred. CEA's projects are diversified geographically and technologically and are generally financed through non-recourse debt (see Liquidity and Capital Resources of MD&A). CEA's investments in QF projects have been undertaken with other participants because CEA, together with any other utility affiliate, may not own more than 50% of a QF under applicable law subsequent to the in-service date. Projects involving EWGs are not restricted to a 50% investment limitation. CEA is an investor in partnerships and corporate joint ventures which own these projects and the electric capacity of these facilities is not part of PSE&G's installed capacity. However, some of the electric power generated by these facilities is being purchased by PSE&G pursuant to long-term contracts with the applicable partnerships and corporate joint ventures. For more information on CEA's 1997 investment activity, see Liquidity and Capital Resources of MD&A. As of December 31, 1997 and 1996, CEA's consolidated assets aggregated $1.2 billion and $286 million, respectively. PSRC PSRC, a New Jersey corporation, has its principal executive offices at 80 Park Plaza, Newark, New Jersey 07101. PSRC makes primarily passive investments in assets that can provide funds for future growth as well as provide incremental earnings for EDHI. PSRC's investments are diverse as to asset type and maturity and include leveraged and direct financing leases, project financings, venture capital funds, leveraged buyout funds and securities (see Liquidity and Capital Resources of MD&A). Some of the transactions in which PSRC and its subsidiaries participate involve other equity investors. For additional discussion of PSRC's operations and investments, see Liquidity and Capital Resources of MD&A. As of December 31, 1997 and 1996, PSRC's consolidated assets aggregated $1.6 billion and $1.4 billion, respectively. Energis Energis, a New Jersey corporation established in 1996, has its principal executive offices at 499 Thornall Street, Edison, New Jersey 08837. Energis, an energy services business, provides a variety of energy related services to industrial and commercial customers both within and outside of PSE&G's traditional service territory. Energis includes PSRC's former wholly-owned subsidiaries, U.S. Energy Partners Incorporated and Enterprise Strategic Energy Solutions. In January 1998, Energis acquired a diversified mechanical service contractor which provides services for commercial and industrial clients in Pennsylvania, New Jersey and Delaware. Energis has also entered into a strategic alliance to market and service compact portable generators. As of December 31, 1997 and 1996, Energis' assets were $60 million and $48 million, respectively, including the assets of the former PSRC subsidiaries. For additional information, see Liquidity and Capital Resources of MD&A. EGDC EGDC, a New Jersey corporation having its principal executive offices at 80 Park Plaza, Newark, New Jersey 07101, is a nonresidential real estate development and investment business. EGDC has investments in nine commercial real estate properties (one of which is developed) in several states. EGDC's strategy is to preserve the value of its assets to allow for the controlled disposition of its properties as the real estate market improves. EGDC has been conducting a controlled exit from the real estate business since 1993. As of December 31, 1997 and 1996, EGDC's consolidated assets aggregated $83 million and $108 million, respectively. Capital Capital, a New Jersey corporation, has its principal executive offices at 80 Park Plaza, Newark, New Jersey 07101. Capital serves as a financing vehicle for EDHI's businesses (excluding Energis) borrowing on their behalf on the basis of a minimum net worth maintenance agreement with Enterprise. As of December 31, 1997 and 1996, Capital had debt outstanding of $611 million and $415 million, respectively. For additional information, see External Financings--EDHI and Liquidity and Capital Resources--EDHI of MD&A. Funding Funding, a New Jersey corporation, has its principal executive offices at 80 Park Plaza, Newark, New Jersey 07101. Funding serves as a financing vehicle for PSRC, CEA and their subsidiaries, borrowing on their behalf, as well as investing their short-term funds. As of December 31, 1997 and 1996, Funding had outstanding debt of $395 million and $183 million, respectively. For additional information, see External Financings--EDHI and Liquidity and Capital Resources--EDHI of MD&A. Item 2. Properties PSE&G The statements under this Item as to ownership of properties are made without regard to leases, tax and assessment liens, judgments, easements, rights of way, contracts, reservations, exceptions, conditions, immaterial liens and encumbrances and other outstanding rights affecting such properties, none of which is considered to be significant in the operations of PSE&G, except that PSE&G's First and Refunding Mortgage (Mortgage), securing the bonds issued thereunder, constitutes a direct first mortgage lien on substantially all of such property. PSE&G maintains insurance coverage against loss or damage to its principal plants and properties, subject to certain exceptions, to the extent such property is usually insured and insurance is available at a reasonable cost. For a discussion of nuclear insurance, see Note 10. Commitments and Contingent Liabilities of Notes. The electric lines and gas mains of PSE&G are located over or under public highways, streets, alleys or lands, except where they are located over or under property owned by PSE&G or occupied by it under easements or other rights. These easements and rights are deemed by PSE&G to be adequate for the purposes for which they are being used. Generally, where payments are minor in amount, no examinations of underlying titles as to the rights of way for transmission or distribution lines or mains have been made. Electric Properties As of December 31, 1997, PSE&G's share of installed generating capacity was 10,251 MW, as shown in the following table: Installed Principal Name and Location Capacity (MW) Fuel Used ----------------- ------------ --------- Steam: Hudson, Jersey City, NJ......................... 983 Coal Mercer, Hamilton, NJ............................ 648 Coal Sewaren, Woodbridge Twp., NJ.................... 453 Gas Linden, Linden, NJ.............................. 415 Oil Keystone, Shelocta, PA--22.84%(B)............... 388 Coal Conemaugh, New Florence, PA--22.50%(B).......... 382 Coal Kearny, Kearny, NJ.............................. 280 Oil ------ Total Steam................................ 3,549 ------ Nuclear: (Capacity factor calculated in accordance with industry maximum dependable capability standards) Hope Creek, Lower Alloways Creek, NJ 95%(B)..... 979 Nuclear Salem 1, Lower Alloways Creek, NJ 42.59%(B)..... 471 Nuclear Salem 2, Lower Alloways Creek, NJ 42.59%(B)..... 471 Nuclear Peach Bottom 2, Peach Bottom, PA 42.49%(B)...... 465 Nuclear Peach Bottom 3, Peach Bottom, PA 42.49%(B)...... 465 Nuclear ------ Total Nuclear.............................. 2,851 ------ Combined Cycle: Bergen, Ridgefield, NJ.......................... 682 Gas Burlington, Burlington, NJ...................... 240 Gas ------ Total Combined Cycle............................ 922 ------ Combustion Turbine: Essex, Newark, NJ............................... 617 Gas Edison, Edison Township, NJ..................... 504 Gas Kearny, Kearny, NJ.............................. 504 Gas Burlington, Burlington, NJ...................... 389 Oil Linden, Linden, NJ.............................. 223 Gas Hudson, Jersey City, NJ......................... 129 Oil Mercer, Hamilton, NJ............................ 129 Oil Sewaren, Woodbridge Township, NJ................ 129 Oil Bayonne, Bayonne, NJ............................ 42 Oil Bergen, Ridgefield, NJ.......................... 21 Gas National Park, National Park, NJ................ 21 Oil Salem, Lower Alloways Creek, NJ 42.59%(B)....... 16 Oil ------ Total Combustion Turbine........................ 2,724 ------ Internal Combustion: Conemaugh, New Florence, PA--22.50%(B).......... 3 Oil Keystone, Shelocta, PA--22.84%(B)............... 2 Oil ------ Total Internal Combustion.................. 5 ------ Pumped Storage: Yards Creek, Blairstown, NJ--50%(B)(C).......... 200 ------ Total PSE&G................................ 10,251 (A) ====== (A) Excludes 687 MW of non-utility generation and 302 MW of temporary capacity sales. (B) PSE&G's share of jointly owned facility. (C) Excludes energy for pumping and synchronous condensers. For information regarding construction see MD&A--Construction and Capital Expenditures. In addition to the generating facilities in New Jersey and Pennsylvania as indicated in the table above, as of December 31, 1997, PSE&G owned 41 switching and/or generating stations with an aggregate installed capacity of 30,255,000 kilovolt-amperes, and 222 substations with an aggregate installed capacity of 7,295,000 kilovolt-amperes. In addition, seven substations having an aggregate installed capacity of 115,250 kilovolt-amperes were operated on leased property. All of these facilities are located in New Jersey. As of December 31, 1997, PSE&G's transmission and distribution system included 153,238 circuit miles, of which 37,694 miles were underground, and 801,811 poles, of which 537,208 poles were jointly owned. Approximately 99% of this property is located in New Jersey. In addition, as of December 31, 1997, PSE&G owned four electric distribution headquarters and five subheadquarters in four operating divisions all located in New Jersey. Gas Properties As of December 31, 1997, the daily gas capacity of PSE&G's 100%-owned peaking facilities (the maximum daily gas delivery available during the three peak winter months) consisted of liquid petroleum air gas (LPG) and liquefied natural gas (LNG) and aggregated 2,973,000 therms (approximately 288,600,000 cubic feet on an equivalent basis of 1,030 Btu/cubic foot) as shown in the following table: Daily Capacity Plant Location (Therms) ----- -------- -------------- Burlington LNG.................... Burlington, NJ 773,000 Camden LPG........................ Camden, NJ 280,000 Central LPG....................... Edison Twp., NJ 960,000 Harrison LPG...................... Harrison, NJ 960,000 --------- Total........................... 2,973,000 ========= As of December 31, 1997, PSE&G owned and operated approximately 16,000 miles of gas mains, owned 11 gas distribution headquarters and two subheadquarters all in two operating regions located in New Jersey and owned one meter shop in New Jersey serving all such areas. In addition, PSE&G operated 61 natural gas metering or regulating stations, all located in New Jersey, of which 28 were located on land owned by customers or natural gas pipeline companies supplying PSE&G with natural gas and were operated under lease, easement or other similar arrangement. In some instances, portions of the metering and regulating facilities were owned by the pipeline companies. Office Buildings and Facilities PSE&G PSE&G leases substantially all of a 26-story office tower for its corporate headquarters at 80 Park Plaza, Newark, New Jersey, together with an adjoining three-story building. PSE&G also leases other office space at various locations throughout New Jersey for district offices and offices for various corporate groups and services. PSE&G also owns various other sites for training, testing, parking, records storage, research, repair and maintenance, warehouse facilities and for other purposes related to its business. EDHI EDHI owns no real property. EDHI leases its corporate headquarters at 80 Park Plaza, Newark, New Jersey. For a brief general description of the properties of the subsidiaries of EDHI, see Item 1. Business--EDHI. Item 3. Legal Proceedings In October 1995, Enterprise received a letter from a representative of a purported shareholder demanding that it commence legal action against certain of its officers and directors with regard to nuclear operations of Salem and Hope Creek. The Board of Directors promptly commenced an investigation and advised the purported shareholder thereof. While the investigation was pending, the purported shareholder nevertheless commenced, by complaint filed in December 1995, a shareholder derivative action on behalf of Enterprise shareholders against the then incumbent directors, except Dr. Remick. Similar derivative complaints were filed by two profit sharing plans and one individual in February and March 1996 against Messrs. Ferland, Codey, Eliason and others. On March 19, 1996, the Board's investigation was concluded, and the Board determined that this litigation should not have been instituted and should be terminated. On July 3, 1996, another individual purported shareholder filed a similar complaint naming the same defendants as the first derivative lawsuit. On August 21, 1996, all defendants filed motions to dismiss all four derivative actions, which motions were denied and attempts to appeal were unsuccessful. Pursuant to Court Order, the defendants have filed motions for summary judgment to dismiss two of the cases, which motions are pending. In the other two cases, one of the plaintiffs has sold her shares and is seeking to withdraw from the litigation. Another of the plaintiffs (a profit sharing plan) has been dissolved and one of the individual participants in the plan is seeking to maintain the litigation is his individual name. Discovery in these latter two cases is continuing. The four complaints generally seek recovery of damages for alleged losses purportedly arising out of PSE&G's operation of Salem and Hope Creek, together with certain other relief, including removal of certain executive officers of PSE&G and Enterprise and certain changes in the composition of Enterprise's Board of Directors. Enterprise cannot predict the outcome of these matters. 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 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. Westinghouse has filed a motion for summary judgment on the grounds that the claim of the plaintiffs is barred by the statute of limitations and oral arguments on this motion were held in February 1998. A decision is anticipated within approximately 30 days. PSE&G cannot predict the outcome of this proceeding. PECO Energy and DP&L as co-owners of Salem filed a lawsuit in 1996 against Enterprise and PSE&G in the U.S. District Court for the Eastern District of Pennsylvania alleging mismanagement by PSE&G in its operation of Salem and seeking unspecified compensatory and punitive damages. On May 12, 1997, the parties settled the lawsuit. This settlement, which required a payment in December 1997 to the plaintiffs totaling $82 million, 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 January 31, 1998, an aggregate of 59 reactor months had accumulated due to Salem outages. PSE&G does not expect to make any payments under this provision. Salem 2 returned to service on August 30, 1997. Salem 1 is expected to return to service around the end of the first quarter of 1998. PECO Energy, DP&L and PSE&G have also agreed to an operating performance standard through December 31, 2011 for Salem and through December 31, 2007 for Peach Bottom. 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. ACE also filed a similar suit alleging mismanagement in the operation of Salem by PSE&G in 1996 against Enterprise and PSE&G in the New Jersey Superior Court. PSE&G and ACE entered into an agreement (Agreement) to dismiss this lawsuit. Under the Agreement, ACE pays a portion of its share of the 1997 operation and maintenance expenses based on the amount of generation of the Salem units. PSE&G incurred approximately $13 million of ACE's share of 1997 operation and maintenance expenses since Salem 2 did not operate for the first eight months of 1997 and Salem 1 did not return to service during 1997. The Agreement applied only to calendar year 1997 and does not apply to any damages which may be alleged by ACE to continue beyond or be incurred after December 31, 1997; and did not apply to ACE's rights under the Salem Owners Agreement to review and approve capital projects; which, in each instance, continue to be governed by the terms and conditions of that agreement and the rights and obligations of ACE and PSE&G at law or in equity. In addition, see the following at the pages indicated: (1) Pages 2 and 43 through 44. Proceedings before FERC relating to competition and electric wholesale power markets. (Inquiry Concerning the Pricing Policy for Transmission Services Provided by Utilities Under the Federal Power Act, Docket No. RM93-19.) (2) Pages 2 and 44. Proceeding before FERC relating to the development by PSE&G and other regional transmission owners in PJM of a new transmission service tariff and an Independent System Operator, FERC Docket Nos. OA97-261-000, et al. (3) Page 3. Generic proceedings before the BPU relating to standards for "off tariff" negotiated rate agreement programs, Docket No. EX95070320. (4) Page 3. Proceedings before the BPU relating to PSE&G's first Off Tariff Rate Agreement (OTRA), Docket No. OTRA-96-1. (5) Pages 3, 43 and 64. Proceedings before the BPU in the matter of the Energy Master Plan Phase II Proceeding to investigate the future structure of the Electric Power Industry, Docket Nos. EX94120585Y, EO97070462 and EO97070463. (6) Page 3. Proceedings before the BPU relating to PSE&G's request to transfer its rights and obligations under its transportation and storage contracts with interstate pipelines to PSETC, Docket No. GM97100758. (7) Page 3. Proceedings before FERC relating to a declaratory judgment action challenging PSE&G's interpretation of the capacity release rules, Texas Eastern Transmission Corporation, FERC Docket No. RP98-83-000. (8) Pages 12 and 84. Proceedings before the United States Court of Appeals, District of Columbia Circuit, in the matter of the DOE's unconditional obligation to begin spent fuel acceptance by January 31, 1998, Northern States Power v. Department of Energy, Docket No. 97-1064. (9) Page 15. Notice of Violation issued by EPA against Eagle Point Cogeneration Partnership regarding alleged violations of air permit. (10) Page 15. Administrative proceedings before the NJDEP under Section 316 of the FWPCA for certain electric generating stations. (11) Pages 18 through 21 and 83 through 84. Various administrative actions, claims, litigation and requests for information by Federal and/or state agencies, and/or private parties, under CERCLA, RCRA and state environmental laws to compel PRPs, which may include PSE&G, to provide information with respect to transportation and disposal of hazardous substances and wastes and/or to undertake or contribute to the costs of investigative and/or cleanup actions at various locations because of actual or threatened releases of one or more potentially hazardous substances and/or wastes. (12) Page 26. Derivative actions related to nuclear operations and Salem Station shutdown, Public Service Enterprise Group Inc. by G. E. Stricklin, derivatively v. E. James Ferland, et. al., Docket No. L1068395, Superior Court of New Jersey, Law Division, Camden County. Dr. Steven Fink and Dr. David Friedman, P.C. Profit Sharing Plan, derivatively, et. al. v. Lawrence R. Codey, et. al., Superior Court of New Jersey, Chancery Division, Essex County, Docket No. C-65-96. A. Harold Datz Pension and Profit Sharing Plan derivatively, et. al., v. Lawrence R. Codey, et. al., Superior Court of New Jersey, Chancery Division, Essex County, Docket No. C-68-96. Tillie Greenberg, derivatively v. E. James Ferland, et. al., Superior Court of New Jersey, Chancery Division, Essex County, Docket No. C-188-96. (13) Page 26. Suit filed by co-owners of Salem against Westinghouse. Public Service Electric and Gas Company, et. al., v. Westinghouse Electric Corporation, United States District Court for the District of New Jersey, Civil Action No. CB-96-925. (14) Pages 26 and 81. Lawsuits by the co-owners of Salem against Public Service Electric and Gas Company. PECO Energy Company, Delmarva Power & Light Company v. Public Service Electric and Gas Company, United States District Court for the Eastern District of Pennsylvania Civil Action No. 96-CU7705. Atlantic City Electric Company v. Public Service Electric and Gas Company, New Jersey Superior Court, Law Division, Atlantic County, Docket No. L-773-96. (15) Page 44. Complaint before FERC regarding Old Dominion Electric Cooperative v. PSE&G challenging as unjust and unreasonable the rates in a negotiated contract under which ODEC purchases generation capacity and associated energy and generation reserves from PSE&G, FERC Docket No. EL98-6-000. (16) Pages 45 and 70. Implementation of P.L.1997,C.162, an Act Revising the Taxation of Electric and Gas Utilities, Docket Nos. ER97090661 and GR97090672. (17) Page 67. Proceedings before the BPU relating to recovery of replacement power costs in connection with the April 1994 Salem 1 shutdown, Docket No. ER94070293. (18) Page 67. Generic proceeding before the BPU relating to recovery of capacity costs associated with power purchases from cogenerators, Docket No. EX93060255. (19) Page 68. Proceedings before the BPU relating to PSE&G's Levelized Gas Adjustment Clause (LGAC) filed November 14, 1997, Docket No. GR97110839. (20) Page 68. Proceeding before the BPU related to the Electric Levelized Energy Adjustment Clause (LEAC) rate increase to recover DSM costs, Docket No. ER97020101. (21) Page 69. Proceedings before the BPU relating to PSE&G's RAC filed August 1, 1997, Docket No. GR97080573. (22) Page 69. Generic proceeding before the BPU relating to the matter of an inquiry into methods of implementation of SFAS-106, Docket No. AX96070530. (23) Page 70. Proceedings before the BPU relating to PSE&G's proposed CTC filed September 19, 1996, Docket No. ET96090669. Item 4. Submission of Matters to a Vote of Security Holders Enterprise and PSE&G, inapplicable. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Enterprise's Common Stock is listed on the New York Stock Exchange, Inc. and the Philadelphia Stock Exchange, Inc. All of PSE&G's common stock is owned by Enterprise, its parent company. As of December 31, 1997, there were 154,478 holders of record of Enterprise Common Stock. The following table indicates the high and low sale prices for Enterprise's Common Stock, as reported in The Wall Street Journal as Composite Transactions and dividends paid for the periods indicated: Dividend Common Stock High Low Per Share ------------ ---- --- --------- 1997: First Quarter......................... $29 1/4 $26 1/8 $.54 Second Quarter........................ 26 1/2 22 7/8 .54 Third Quarter......................... 26 3/16 24 1/16 .54 Fourth Quarter........................ 31 13/16 24 3/4 .54 1996: First Quarter......................... $32 1/8 $25 1/4 $.54 Second Quarter........................ 27 7/8 25 1/8 .54 Third Quarter......................... 27 7/8 25 5/8 .54 Fourth Quarter........................ 29 26 3/8 .54 For additional information concerning dividend history, policy and potential preferred voting rights and restrictions on payment, see Liquidity and Capital Resources and External Financings of MD&A and Note 6.Schedule of Consolidated Capital Stock and Other Securities of Notes. Item 6. Selected Financial Data Enterprise The information presented below should be read in conjunction with Enterprise's Consolidated Financial Statements and Notes thereto.
Years Ended December 31, ----------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------ ------------ ------------ ------------ ------------ (Millions of Dollars, where applicable) Total Operating Revenues............ $6,370 $6,041 $5,893 $5,695 $5,428 ============ ============ ============ ============ ============ Income from Continuing Operations... $560 $588 $627 $667 $549 Cumulative Effect of Change in Accounting for Income Taxes....... -- -- -- -- 6 Income from Discontinued Operations (A).................... -- 24 35 12 46 ------------ ------------ ------------ ------------ ------------ Net Income.......................... $560 $612 $662 $679 $601 ============ ============ ============ ============ ============ Earnings per Average Share (Basic and Diluted): From Continuing Operations........ $2.41 $2.42 $2.57 $2.73 $2.29 From Cumulative Effect of Change in Accounting for Income Taxes..... -- -- -- -- .02 From Discontinued Operations...... -- .10 .14 .05 .19 ------------ ------------ ------------ ------------ ------------ Total Earnings per Average Share $2.41 $2.52 $2.71 $2.78 $2.50 ============ ============ ============ ============ ============ Dividends Paid per Share............ $2.16 $2.16 $2.16 $2.16 $2.16 As of December 31: Total Assets...................... $17,943 $16,915 $16,816 $16,313 $15,995 Long-Term Liabilities: Long-Term Debt.................. $4,873 $4,580 $5,190 $5,110 $5,100 Other Long-Term Liabilities..... $168 $185 $200 $216 $220 Preferred Stock With Mandatory Redemption.......................... $75 $150 $150 $150 $150 Monthly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures........... $210 $210 $210 $150 -- Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures........... $303 $208 -- -- -- Ratio of Earnings to Fixed Charges plus Preferred Securities Dividend Requirements (B) 2.61 2.68 2.78 2.84 2.57 (A) See Note 16. Discontinued Operations of Notes. (B) Excludes income and expenses from discontinued operations.
PSE&G The information presented below should be read in conjunction with PSE&G's Consolidated Financial Statements and Notes thereto.
Years Ended December 31, ------------------------------------------------------------ 1997 1996 1995 1994 1993 ----------- ----------- ----------- ----------- ------------ (Millions of Dollars, where applicable) Total Operating Revenues................... $6,125 $5,825 $5,707 $5,518 $5,290 Net Income................................. $528 $535 $617 $659 $615 As of December 31: Total Assets............................. $14,920 $14,799 $14,587 $14,259 $13,984 Long-Term Liabilities: Long-Term Debt......................... $4,126 $4,107 $4,586 $4,487 $4,364 Other Long-Term Liabilities............ $168 $185 $200 $216 $220 Preferred Stock With Mandatory Redemption.. $75 $150 $150 $150 $150 Monthly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures............................... $210 $210 $210 $150 -- Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures............................... $303 $208 -- -- -- Ratio of Earnings to Fixed Charges......... 2.81 2.83 3.25 3.35 3.30 Ratio of Earnings to Fixed Charges plus Preferred Securities Dividend Requirements............................. 2.70 2.62 2.77 2.92 2.89
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Enterprise This discussion refers to the Consolidated Financial Statements and related Notes of Public Service Enterprise Group Incorporated (Enterprise) and should be read in conjunction with such statements and notes. Corporate Structure Enterprise has two direct wholly owned subsidiaries, Public Service Electric and Gas Company (PSE&G) and Enterprise Diversified Holdings Incorporated (EDHI). Enterprise's principal subsidiary, PSE&G, is an operating public utility providing electric and gas service in certain areas within the State of New Jersey. EDHI is the parent of Enterprise's non-utility businesses: Community Energy Alternatives Incorporated (CEA), an investor in and developer and operator of projects in the generation, transmission and distribution of energy, including cogeneration and independent power production (IPP) facilities, electric distribution companies, exempt wholesale generators (EWGs) and foreign utility companies (FUCOs); Public Service Resources Corporation (PSRC), which has made primarily passive investments; Energis Resources Incorporated (Energis) which provides a variety of energy related services to industrial and commercial customers both within and outside of PSE&G's traditional service territory (see Competitive Environment) and Enterprise Group Development Corporation (EGDC), a nonresidential real estate development and investment business. EDHI also has two finance subsidiaries: PSEG Capital Corporation (Capital), which provides privately-placed debt financing to EDHI's operating subsidiaries, except Energis, on the basis of a minimum net worth maintenance agreement with Enterprise and Enterprise Capital Funding Corporation (Funding), which provides privately-placed debt financing to PSRC, CEA and their subsidiaries, which debt is guaranteed by EDHI, but without direct support from Enterprise. EGDC has been conducting a controlled exit from its real estate business since 1993. In July 1996, EDHI sold Energy Development Corporation (EDC), an oil and gas subsidiary. As of December 31, 1997 and 1996, PSE&G comprised 83% and 88%, respectively, of Enterprise's assets. For each of the years 1997, 1996 and 1995, PSE&G revenues were approximately 96%, 96%, and 97%, respectively, of Enterprise's revenues and PSE&G's earnings available to Enterprise for such years were 92%, 87% and 88%, respectively, of Enterprise's net income. Overview of 1997 A major event which will impact Enterprise and PSE&G in the future occurred in April 1997 when the New Jersey Board of Public Utilities (BPU) unveiled its final report regarding Phase II of the New Jersey Energy Master Plan (Energy Master Plan) (final Phase II report) addressing wholesale and retail electric competition in New Jersey. The final Phase II report required PSE&G and other New Jersey electric utilities to develop rate and service plans to give customers a choice of suppliers. PSE&G filed its proposal in July 1997 and hearings before the BPU are in progress (see Note 2. Rate Matters of Notes to Consolidated Financial Statements (Notes)). PSE&G cannot predict the outcome of the Energy Master Plan proceedings. The outcome of these proceedings could have a material adverse impact on Enterprise's and PSE&G's financial condition, results of operations and net cash flows. Another significant event in 1997 was the progress made at the Salem Nuclear Generating Station (Salem). As previously reported, Salem Units 1 and 2 (Salem 1 and 2) were taken out of service in mid-1995. During these outages, PSE&G made significant changes and improvements related to the people, processes and equipment at Salem to improve the long-term reliability of the units. Salem 2 returned to service in August 1997. Salem 1 is scheduled to restart, subject to Nuclear Regulatory Commission (NRC) approval, during the first quarter of 1998 (see Nuclear Operations). To further Enterprise's strategy to develop its non-utility business through international expansion, CEA established strategic partnerships with other companies, expanding as a developer and operator of electric generation projects and an operator of distribution systems. CEA was successful in expanding operations in its various targeted regions in South America, particularly Brazil and Argentina. In 1997, CEA's assets quadrupled to about $1.2 billion, bringing the level of its portfolio at December 31, 1997 to 26 generation projects and two distribution ventures around the world (see Liquidity and Capital Resources). Results of Operations Earnings per share of Enterprise common stock (Common Stock) was $2.41 in 1997, representing a decrease of $0.11 per share or 4% from 1996. Earnings per share was $2.52 in 1996, a decrease of $0.19 per share or 7% from 1995. PSE&G's contribution to earnings per share in 1997 decreased $0.07 compared to 1996 due to higher administrative costs attributable to systems modifications for Year 2000 readiness, legal fees associated with the settlement of the Salem co-owner litigation and a gain recorded in the second quarter of 1996 from the repurchase of a portion of PSE&G's outstanding cumulative preferred stock at discounts to par. These decreases were partially offset by lower operation and maintenance expenses at Salem and the Hudson generating station. Salem's refueling outage expenses and restart activities declined while Hudson's expenses benefited from a decrease in the workforce as well as a reduction of outage work performed in 1997. Earnings per share in 1997 and 1996 were each negatively impacted by charges related to the shutdown of Salem 1 and 2 which began in 1995. The settlement of the lawsuits filed by the co-owners of Salem negatively impacted 1997 earnings by $0.27 per share and refunds required by the BPU's December 31, 1996 Order (December 31st Order) which resolved Salem and other outstanding regulatory issues negatively impacted 1996 earnings by $0.25 per share (see Note 2. Rate Matters of Notes). EDHI's contribution to earnings per share in 1997 decreased $0.14 compared to 1996 primarily due to the absence of 1996 earnings of $0.10 per share related to the discontinued operations of EDC and higher operating expenses of Energis as it continued to grow. As a result of Enterprise's stock repurchase program which began in July 1996, earnings per share of Common Stock for 1997 increased $0.10 from 1996. A total of 12.7 million shares were repurchased at a cost of $350 million under this program which concluded in January 1997. In 1996, PSE&G's contribution to earnings per share decreased $0.22 compared to 1995 due to the refunds required by the December 31st Order (see Note 2. Rate Matters of Notes). Other factors that decreased earnings per share in 1996 were increased operation and maintenance expenses related to the outages at Salem and Hope Creek Nuclear Generating Station (Hope Creek) and increased depreciation due to additional plant in service. The earnings per share decrease was partially offset by higher gas sales in early 1996 due to favorable weather conditions and the gain on the repurchase of certain of PSE&G's outstanding cumulative preferred stock at a discount to par. EDHI's contribution to earnings per share in 1996 increased $0.01 compared to 1995 principally due to increased investment income from PSRC. Earnings per share of Common Stock in 1996 increased $0.02 as a result of Enterprise's stock repurchase program, described above. PSE&G--Revenues Electric Revenues increased $244 million or 6% in 1997 and decreased $77 million or 2% in 1996. The increase in 1997 was primarily due to an increase in energy sales to wholesale customers and 1996 refunds required by the December 31st Order, partially offset by lower kilowatt sales from unfavorable weather. Gas Revenues increased $56 million or 3% and $195 million or 12% in 1997 and 1996, respectively. The 1996 increase was primarily due to a higher recovery of fuel costs and favorable weather conditions in early 1996. PSE&G--Expenses Fuel for Electric Generation and Interchanged Power Fuel for Electric Generation and Interchanged Power increased $260 million or 28% in 1997 and $27 million or 3% in 1996. The increases in both years were primarily due to increases in energy sales to wholesale customers. To the extent fuel revenue and expense flow through the Electric Levelized Energy Adjustment Clause (LEAC) mechanism, variances in fuel revenues and expenses offset and thus have no direct effect on earnings. For a discussion of fuel related revenue and expense included in the LEAC, see Note 1. Organization and Summary of Significant Accounting Policies of Notes. Gas Purchased Gas purchased decreased $17 million or 2% in 1997 and increased $156 million or 16% in 1996. The 1996 increase was due to an increase in energy sales to wholesale customers. Due to the operation of the Levelized Gas Adjustment Clause (LGAC) mechanism, variances in fuel revenues and expenses offset, and have no direct effect on earnings. Federal Income Taxes Federal income taxes increased $42 million or 16% in 1997 and decreased $56 million or 17% in 1996. The 1997 taxes were higher due to an increase in pre-tax operating income while 1996 taxes were lower due to a decrease in pre-tax operating income (see Note 12. Federal Income Taxes of PSE&G Notes). Net Loss (Gain) on Preferred Stock Redemptions Net Loss (Gain) on Preferred Stock Redemptions decreased $21 million in 1997 from the comparable 1996 period. The decrease was primarily due to an $18 million net gain on the repurchase of certain of PSE&G's outstanding cumulative preferred stock at discounts to par in the second quarter of 1996 (see External Financings--PSE&G). Year 2000 Expenses--Enterprise and PSE&G Many of Enterprise's and PSE&G's systems must be modified due to computer program limitations in recognizing dates beyond 1999. If not corrected, the systems could fail or cause erroneous results by, at or after January 1, 2000. Substantial changes to, and some replacements of, Enterprise's and PSE&G's present systems are being made in an effort to mitigate potential Year 2000 issues. Costs are being expensed as incurred in accordance with Emerging Issues Task Force (EITF) Issue No. 96-14, "Accounting for the Costs Associated with Modifying Computer Software for the Year 2000." During 1997, $8 million of costs related to Year 2000 readiness were incurred. Management estimates the total cost of this effort to be about $92 million to be incurred from 1997 through 2001, of which $41 million is expected to be incurred in 1998. Enterprise and PSE&G have assembled a cross-functional team to inventory, assess and identify and implement solutions for Enterprise's and PSE&G's systems. Plans provide for 80% of critical systems to be Year 2000 ready in 1998, with the remaining critical systems to be ready by July 1999. By the end of 1999, plans call for 80% of non-critical systems to be Year 2000 ready with the remainder of those systems to be Year 2000 ready in 2000. Additionally, the team has surveyed Enterprise's and PSE&G's top 3000 vendors to assess their plans for Year 2000 readiness. The team has also been working with critical suppliers and the Pennsylvania--New Jersey--Maryland Interconnection (PJM) on their plans for Year 2000 readiness. An inability of Enterprise, PSE&G, their subsidiaries, members of PJM or Enterprise's or PSE&G's critical suppliers to meet the Year 2000 deadline could have a material adverse impact on Enterprise's and PSE&G's operations, financial condition, results of operations and net cash flows. For a discussion of the NRC proposal regarding Year 2000 readiness, see Note 10. Commitments and Contingent Liabilities. EDHI--Net Income Increase or (Decrease) ---------------------------------------------- 1997 vs. 1996 1996 vs. 1995 ---------------------- ---------------------- Per Per Amount Share Amount Share ---------- ----------- ----------- --------- (Millions of Dollars, except Per Share Data) CEA.......................... $4 $.02 $(2) $(.01) PSRC......................... 3 .01 22 .09 EGDC......................... (5) (.02) (1) -- Energis...................... (12) (.05) (6) (.02) ---------- ----------- ----------- --------- Continuing Operations........ (10) (.04) 13 .06 Discontinued Operations--EDC Income from Operations...... (11) (.04) (24) (.11) Gain on Sale................ (13) (.06) 13 .06 ---------- ----------- ----------- --------- Total.................. $(34) $(.14) $2 $.01 ========== =========== =========== ========= Continuing Operations EDHI's income from continuing operations was $47 million for 1997, a $10 million decrease from 1996. The loss for Energis increased due to higher selling, general and administrative expenditures as Energis continued to grow. PSRC's income increased primarily due to income from new lease investments, partially offset by lower income from partnership investments. CEA's income increased due to improved financial performance of several projects. EDHI's income from continuing operations was $57 million in 1996, a $13 million increase over 1995. The 1996 increase was due to PSRC's increased income from partnership investments. Energis' income decreased due to increased administrative and general expenditures (startup costs) and lower margins related to retail gas marketing. Energis was formed on December 31, 1996 by consolidating the operations of two former PSRC subsidiaries, U.S. Energy Partners and Enterprise Strategic Energy Solutions. Discontinued Operations EDC was sold on July 31, 1996. Income related to EDC operations was $11 million in 1996, a $24 million decrease from 1995. The 1996 decrease was due to the inclusion of only seven months of earnings for 1996 and a $23 million after-tax gain realized in 1995 related to the settlement of a take-or-pay sales contract. Liquidity and Capital Resources Enterprise Enterprise is a public utility holding company and as such, has no operations of its own. The following discussion of Enterprise's liquidity and capital resources is on a consolidated basis, noting the uses and contributions of Enterprise's two direct subsidiaries, PSE&G and EDHI. Cash generated from PSE&G's operations is expected to provide the major source of funds for PSE&G's business. EDHI's growth will be funded through external financings, cash generated from its operations, and equity capital. Cash and cash equivalents totaled $83 million at the end of 1997 compared with $279 million at the end of 1996. During 1996, Enterprise repurchased 11.2 million shares of its Common Stock at an aggregate cost of $307 million. The Common Stock repurchase program concluded on January 17, 1997. A total of 12.7 million shares were repurchased under the program at a cost of $350 million. Dividend payments on Common Stock were $2.16 per share and totaled $501 million for the year ended December 31, 1997. Since 1986, PSE&G has made regular cash payments to Enterprise in the form of dividends on outstanding shares of PSE&G's common stock. PSE&G has paid quarterly dividends on its common stock in each year commencing in 1948, the year of the distribution of PSE&G's common stock by Public Service Corporation of New Jersey, the former parent of PSE&G. From 1992 through 1996, EDHI made regular cash payments to Enterprise in the form of dividends on outstanding shares of EDHI's common stock. Due to the growth in EDHI investment activities, no dividends on EDHI's common stock were paid in 1997 or are anticipated for 1998. Enterprise has paid quarterly dividends in each year commencing with the corporate restructuring of PSE&G when Enterprise became the owner of all the outstanding common stock of PSE&G. While a key objective of the Board of Directors of Enterprise is to keep the Common Stock dividend secure, amounts and dates of such dividends as may be declared will necessarily be dependent upon Enterprise's future earnings, financial requirements and other factors including the receipt of dividend payments from its subsidiaries. Enterprise and PSE&G have issued Deferrable Interest Subordinated Debentures in connection with the issuance of tax deferred preferred securities. If and for as long as payments on those Deferrable Interest Subordinated Debentures have been deferred, or Enterprise or PSE&G has defaulted on the indenture related thereto or its guarantee thereof, neither Enterprise nor PSE&G may pay any dividends on their common and preferred stock (see Note 6. Schedule of Consolidated Capital Stock and Other Securities of Notes). PSE&G paid dividends of $523 million and $524 million to Enterprise during the years ended December 31, 1997 and 1996, respectively. EDHI paid dividends of $369 million during the year ended December 31, 1996 primarily from proceeds of the sale of EDC. Cash provided by operating activities totaled $1.095 billion in 1997, down from $1.470 billion in 1996. The major contributor in 1997 was net income of $560 million, which included $630 million of non-cash deductions for depreciation and amortization (see Results of Operations). Cash provided by operating activities totaled $1.470 billion in 1996, down from $1.518 billion in 1995. The major contributor in 1996 was net income of $612 million, which included $607 million of non-cash deductions for depreciation and amortization (see Results of Operations). Cash used in investing activities totaled $1.614 billion in 1997, up from $9 million in 1996. The primary use of cash in 1997 was a net increase in long-term investments of $914 million, including CEA's investments in distribution and generation companies of $852 million, PSRC's net increase in investments of $97 million and utility plant additions, excluding Allowance for Funds Used During Construction (AFDC), of $542 million at PSE&G (see Capital Requirements--PSE&G). Cash used in investing activities totaled $9 million in 1996, down from $935 million in 1995. The proceeds from the sale of EDC were almost fully offset by PSE&G's additions to utility plant (see Capital Requirements -- PSE&G). Net proceeds from the EDC sale were $704 million. Cash provided by financing activities was $323 million in 1997 as compared to $1.244 billion of cash used in financing activities in 1996. Major contributors in 1997 were an increase in short-term debt by PSE&G of $468 million, EDHI of $267 million and Enterprise of $75 million, primarily used to fund certain scheduled long-term debt maturities, CEA's investments and a net increase in long-term debt of $85 million, partially offset by the payment of dividends on Common Stock of $501 million. PSE&G's long-term debt decreased $287 million in 1997 while EDHI's long-term debt increased $372 million. Cash used in financing activities was $1.244 billion in 1996, up from $586 million in 1995. The primary use of cash in 1996 was the payment of dividends on Common Stock of $523 million, the retirement of Common Stock of $307 million, and a net decrease in long-term debt $434 million. As of December 31, 1997, Enterprise's capital structure consisted of 48.4% common equity, 45.3% long-term debt and 6.3% preferred securities. The capital structure as of December 31, 1996 consisted of 49.8% common equity, 43.7% long-term debt and 6.5% preferred securities. As a result of the 1992 focused audit of Enterprise's non-utility businesses (Focused Audit), the BPU approved a plan which, among other things, provides that: (1) Enterprise will not permit EDHI's non-utility investments to exceed 20% of Enterprise's consolidated assets without prior notice to the BPU (such investments at December 31, 1997 were approximately 16% of assets); (2) the PSE&G Board of Directors include non-employee Enterprise directors, with an annual certification by such Board that the business and financing plans of EDHI will not adversely affect PSE&G; (3) Enterprise agree to (a) limit debt supported by the minimum net worth maintenance agreement between Enterprise and Capital to $750 million and (b) make a good-faith effort to eliminate such support over a six to ten year period from April 1993; and (4) EDHI pay PSE&G an affiliation fee of up to $2 million a year to be applied by PSE&G through its LGAC and its LEAC to reduce utility rates. Beginning in 1995, the debt supported by the minimum net worth maintenance agreement was limited to $650 million and the affiliation fee has been proportionately reduced as such supported debt is reduced. Enterprise and EDHI and its subsidiaries continue to reimburse PSE&G for the costs of all services provided to them by employees of PSE&G. As a result of Enterprise's intent that EDHI and its subsidiaries provide the primary growth vehicles for Enterprise, financing requirements connected with continued growth of EDHI, changes to the utility industry resulting from the final outcome of the Energy Master Plan proceedings and potential accounting impacts resulting from the deregulation of the generation of electricity, modifications will be required to certain of the restrictions agreed to by Enterprise with the BPU in response to the Focused Audit. Enterprise expects that these modifications will be addressed in conjunction with the Energy Master Plan proceedings. The resolution of these matters could impact the future relative size and financing of the non-utility businesses and may affect Enterprise's future financial position, results of operations and net cash flows (see Note 2. Rate Matters of Notes). EDHI CEA, PSRC and Energis are expected to be the growth vehicles for EDHI and Enterprise. During the next five years, EDHI's capital requirements are expected to be provided from additional debt financing, operational cash flows and equity capital. A significant portion of CEA's growth is expected to occur in the international arena due to the current and anticipated growth in electric capacity required in certain regions of the world. PSRC will continue its focus on investments related to the energy business. Energis is expected to expand upon the current energy related services being provided to industrial and commercial customers. EDHI's cash provided by (used in) operating, investing and financing activities was as follows:
1997 1996 1995 --------- ---------- ---------- (Millions of Dollars) Operating Activities: CEA......................................... $(9) $9 $9 PSRC........................................ 130 164 58 Other....................................... (23) (16) 12 --------- ---------- ---------- Continuing Operations....................... 98 157 79 EDC......................................... -- 78 138 --------- ---------- ---------- Total Operating Activities.............. $98 $235 $217 ========= ========== ========== Investing Activities: CEA......................................... $(852) $(8) $(27) PSRC........................................ (97) 2 (49) Other....................................... (2) 12 53 --------- ---------- ---------- Continuing Operations....................... (951) 6 (23) EDC......................................... -- 653 (113) --------- ---------- ---------- Total Investing Activities.............. $(951) $659 $(136) ========= ========== ========== Financing Activities: Debt........................................ $638 $(380) $2 Equity...................................... 78 (369) (87) --------- ---------- ---------- Total Financing Activities.............. $716 $(749) $(85) ========= ========== ==========
For a discussion of the source of EDHI's funds, see External Financings. Over the next several years, EDHI and its subsidiaries will be required to refinance their maturing debt and provide additional debt and equity financing for growth. Any inability to obtain required additional external capital or to extend or replace maturing debt and/or existing agreements at current levels and interest rates may affect future earnings. As of December 31, 1997 and 1996, EDHI's embedded cost of debt of its finance subsidiaries was approximately 8.2% and 8.9%, respectively. During 1997, EDHI's finance subsidiaries provided additional long-term debt financing of $265 million at an average interest rate of 6.8%. CEA During 1997, CEA's investment activities included: Acquisition of approximately 30% of a Brazilian electric distribution company serving customers in the State of Rio Grande Do Sul, located in Southern Brazil. The total purchase price was $1.49 billion of which CEA's share was $498 million. This investment is an exempt FUCO. Acquisition of a 50% interest in a 200 Megawatt (MW) natural gas-fired power plant located in Colombia, South America which is expected to become operational in the first quarter of 1998. This investment is a foreign EWG. Acquisition with a partner of a 90% interest in two Argentine electric distribution companies serving the Buenos Aires Province for $565 million. CEA's indirect ownership of the two companies is 30%. Each of these investments is an exempt FUCO. Acquisition of a 49% interest in an operating 180 MW oil-fired cogeneration plant located on the island of Oahu in Hawaii. This investment is a U.S. domestic QF. Acquisition of an 80% interest in a 30 MW coal-fired cogeneration plant in the Jiangsu Province of China which is currently under construction. This investment is a foreign EWG. Acquisition of 27% and 50% ownership interests in energy development companies located in the Philippines and Thailand, respectively. The project in the Philippines is a foreign EWG and the Thai investment is a power development company. The aggregate investment made in 1997 was approximately $852 million, of which $233 million was financed with non-recourse debt. PSRC During 1997, PSRC entered into leveraged leases of four power plants: one located in the United Kingdom and three in the Netherlands. The aggregate of these investments was approximately $145 million. During 1997, PSRC's investments in certain collateralized bond obligation securities and its equity investment in the underlying limited partnership were liquidated. Also in 1997, PSRC sold a DC10 aircraft, which was subject to a direct financing lease. The aggregate proceeds from these asset sales was approximately $62 million, which approximated the book cost of the assets sold. On January 2, 1998, the lessee of one of PSRC's leveraged leases exercised an early buyout option contained in the lease. As a result, in 1998, PSRC received approximately $59 million of proceeds resulting in an after-tax gain of approximately $6 million. Energis Energis continued to expand its customer base to more than 5,000 businesses and increased its capabilities in providing energy services to customers, including: Securing over 800 new business customers during a Pennsylvania Electric Pilot Program. Acquiring, in January 1998, a diversified mechanical service contractor which provides services to commercial and industrial clients in Pennsylvania, New Jersey and Delaware. Entering into a strategic alliance to market and service compact, portable generators. Capital Requirements--PSE&G PSE&G had utility plant additions of $557 million, $603 million and $686 million, for 1997, 1996 and 1995, respectively, including AFDC of $15 million, $17 million and $36 million, respectively. Construction expenditures were related to improvements in PSE&G's existing power plants (including acquisition of nuclear fuel), transmission and distribution system, gas system and common facilities. PSE&G also expended $28 million, $34 million and $30 million for the cost of plant removal (net of salvage) in 1997, 1996 and 1995, respectively. Construction expenditures from 1998 through 2002 are expected to aggregate $3.1 billion, including AFDC. Forecasted construction expenditures are related to improvements in PSE&G's transmission and distribution system, existing power plants (including acquisition of nuclear fuel), gas system and common facilities. (See Construction and Capital Requirements Forecast below.) The decision to make these improvements will depend, in part, upon the outcome of the Energy Master Plan proceeding. PSE&G expects that it will be able to internally generate all of its construction and capital requirements over the next five years, assuming adequate and timely recovery of costs, as to which no assurances can be given (see Note 2. Rate Matters and Note 10. Commitments and Contingent Liabilities of Notes). Construction and Capital Requirements Forecast
1998 1999 2000 2001 2002 Total ------ ------ ------ ------- ------ ------- (Millions of Dollars) Construction and Investment Requirements (Estimate): PSE&G................................. $606 $613 $619 $626 $652 $3,116 EDHI.................................. 284 182 293 195 313 1,267 ------ ------ ------ ------ ------ ------ Total Construction and Investment Requirements.......................... 890 795 912 821 965 4,383 ------ ------ ------ ------ ------ ------ Mandatory Retirement of Securities: PSE&G................................. 118 100 635 100 300 1,253 EDHI.................................. 222 314 105 162 157 960 ------ ------ ------ ------ ------- ------ Total Retirement of Securities........ 340 414 740 262 457 2,213 ------ ------ ------ ------ ------- ------ Total Capital Requirements.......... $1,230 $1,209 $1,652 $1,083 $1,422 $6,596 ====== ====== ====== ====== ======= ======
The projected effect of securitization, as included in PSE&G's Energy Master Plan proposal, is not included in the above forecast (see Note 2. Rate Matters of Notes). External Financings Enterprise At December 31, 1997 and 1996, Enterprise had a $75 million and a $25 million uncommitted line of credit, respectively, with a bank. At December 31, 1997, Enterprise had $75 million outstanding under this line of credit. At December 31, 1997, Enterprise had a committed $150 million revolving credit facility which expires in December 2002. At December 31, 1997, Enterprise had no debt outstanding under this revolving credit facility. In January 1998, Enterprise Capital Trust I, a special purpose statutory business trust controlled by Enterprise, issued $225 million of 7.44% Trust Originated Preferred Securities (Guaranteed Preferred Beneficial Interest in Enterprise's Debentures). Proceeds were lent to Enterprise and are evidenced by deferrable interest subordinated debenture. Enterprise used the proceeds to make a $218 million equity investment in EDHI. The debentures and their related indenture constitute a full and unconditional guarantee by Enterprise of the Preferred Securities issued by the trust. If and for as long as payments on Enterprise's debentures have been deferred, or Enterprise has defaulted on the indenture related thereto or its guarantee thereof, Enterprise may not pay any dividends on its Common Stock. Also in January 1998, Enterprise paid off the $75 million outstanding under its line of credit. PSE&G PSE&G has obtained BPU approval through December 31, 1998 to opportunistically refinance essentially all of its long-term debt and to refund up to $250 million of matured debt. Under its Mortgage, PSE&G may issue new First and Refunding Mortgage Bonds (Bonds) against previous additions and improvements and/or retired Bonds provided that its ratio of earnings to fixed charges is at least 2:1. As of December 31, 1997, the Mortgage would permit up to $3.3 billion aggregate principal amount of new Bonds to be issued against previous additions and improvements. At December 31, 1997, the coverage ratio under PSE&G's Mortgage was 3.45:1. In February 1997, PSE&G Capital Trust II, a special purpose statutory business trust controlled by PSE&G, issued $95 million of 8.125% Quarterly Income Preferred Securities (Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures). PSE&G used the proceeds to fund the redemption of all 188,684 shares of its 6.80% Cumulative Preferred Stock $100 par value at $102 per share on January 31, 1997 and redeemed all 750,000 shares of its 7.44% Cumulative Preferred Stock $100 par value at $103.72 per share in June 1997. In April 1997, PSE&G issued $25 million of Variable Rate Pollution Control Bonds, Series X, due 2031. PSE&G also issued $19 million of Variable Rate Pollution Control Notes due 2027 in June 1997. The proceeds of each of these issuances were used to redeem prior debt related to pollution control facilities of PSE&G. In June 1997, PSE&G issued $235 million of 6.50% Bonds, Series XX, due 2000. The proceeds were used primarily to refund $117 million of its 8.50% Bonds, Series LL, due 2022 and to reimburse its treasury for the purchase of other Bonds in the open market. Also in June 1997, PSE&G's 6.875% Bonds, Series KK, of $150 million matured. On November 1, 1997, $150 million of PSE&G's 7.125% Bonds, Series GG, matured. The redemption of these bonds was funded by the issuance of commercial paper. Also in November 1997, PSE&G issued $9 million of Secured MTNs, Series A at 7.04% and redeemed $9 million of its 9.25% Bonds, Series CC. In January 1998, $100 million of PSE&G's 6.00% Bonds, Series NN, matured. To provide liquidity for its commercial paper program, PSE&G has a $650 million revolving credit agreement expiring in June 1998 and a $650 million revolving credit agreement expiring in June 2002 with a group of commercial banks, which provide for borrowings of up to one year. On December 31, 1997, there were no borrowings outstanding under these credit agreements. The BPU has authorized PSE&G to issue and have outstanding at any one time through January 2, 1999, not more than $1.3 billion of short-term obligations, consisting of commercial paper and other unsecured borrowings from banks and other lenders. On December 31, 1997, PSE&G had $1.026 billion of short-term debt outstanding, including $74 million borrowed against its uncommitted bank lines of credit which lines of credit totaled $174 million as of December 31, 1997. PSE&G Fuel Corporation (Fuelco) has a $125 million commercial paper program to finance a 42.49% share of Peach Bottom nuclear fuel, supported by a $125 million revolving credit facility with a group of banks, which expires on June 28, 2001. PSE&G has guaranteed repayment of Fuelco's respective obligations under this program. As of December 31, 1997, Fuelco had commercial paper of $80 million outstanding under the program. EDHI The minimum net worth maintenance agreement between Capital and Enterprise provides, among other things, that Enterprise (1) maintain its ownership, directly or indirectly, of all outstanding common stock of Capital, (2) cause Capital to have at all times a positive tangible net worth of at least $100,000 and (3) make sufficient contributions of liquid assets to Capital in order to permit it to pay its debt obligations. In 1993, Enterprise agreed with the BPU to make a good-faith effort to eliminate such Enterprise support within six to ten years. Effective January 31, 1995, Capital notified the BPU of its intention not to have more than $650 million of debt outstanding at any time. Capital's assets consist principally of demand notes of CEA and PSRC. Intercompany borrowing rates are established based upon Capital's cost of funds. At December 31, 1997, Capital had total debt outstanding of $611 million, including $573 million of MTNs. In October 1997, Capital issued $165 million of MTNs with an average interest rate of 6.75%, which was used to fund CEA's investments. As of December 31, 1997, Funding had $300 million and $150 million revolving credit facilities with two groups of banks and had $128 million of Senior Notes outstanding. Funding makes short-term investments only if the funds cannot be employed in intercompany loans. Intercompany borrowing rates are established based upon Funding's cost of funds. Funding is providing both long and short-term capital for PSRC and CEA and their subsidiaries on the basis of an unconditional guaranty from EDHI, but without direct support from Enterprise. As of December 31, 1997, Funding had $395 million of total debt outstanding. EDHI, CEA and PSRC are subject to restrictive business and financial covenants contained in existing debt agreements. EDHI is required to maintain a debt to equity ratio of no more than 2.0:1 and a twelve-months earnings before interest and taxes to interest (EBIT) coverage ratio of at least 1.50:1. As of December 31, 1997 and 1996, EDHI had consolidated debt to equity ratios of 1.80:1 and 1.05:1 respectively, and for the years ended December 31, 1997, 1996 and 1995, EBIT coverage ratios, as defined to exclude the effects of EGDC and the gain on the sale of EDC, of 2.20:1, 2.45:1 and 2.47:1, respectively. Compliance with applicable financial covenants will depend upon future financial position and levels of earnings, as to which no assurance can be given. In addition, EDHI's ability to continue to grow its business will depend upon Enterprise's and EDHI's ability to obtain additional financing beyond current levels. Qualitative and Quantitative Disclosures about Market Risk The market risk inherent in Enterprise's market risk sensitive instruments and positions is the potential loss arising from adverse changes in commodity prices, equity security prices, interest rates and foreign currency exchange rates as discussed below. Enterprise's policy is to use physical forward and options contracts, and to a lesser extent, financial derivatives for the purpose of managing risk consistent with its business plans and prudent practices. Enterprise has a Risk Management Committee made up of executive officers and an independent risk oversight function to enhance its risk management practices. Enterprise is exposed to credit losses in the event of non-performance or non-payment by counterparties. Enterprise has a credit management process which is used to assess, monitor and mitigate counterparty exposure for PSE&G and EDHI. Management does not expect counterparty defaults to materially impact the financial condition, results of operations and net cash flows of Enterprise and PSE&G. Commodities--PSE&G The availability and price of energy commodities are subject to fluctuations from factors such as weather, environmental policies, changes in demand and state and Federal regulatory policies. To reduce price risk caused by market fluctuations, PSE&G enters into physical forward and options contracts and, to a lesser extent, financial derivatives including forwards, futures, swaps and options with approved counterparties to hedge its anticipated demand. These contracts, in conjunction with owned electric generating capacity, are designed to cover estimated electric and gas customer commitments. Gains and losses resulting from physical forward and options contracts and financial derivatives are recognized as a component of fuel revenue and expense upon maturity of these contracts. Additionally, PSE&G enters into physical forward and options contracts that are speculative in nature which are immaterial to PSE&G's market portfolio and do not have a material impact on PSE&G's financial condition, results of operations and net cash flows (see Note 1. Organization and Summary of Significant Accounting Policies of Notes). PSE&G uses a value-at-risk model to assess the market risk of its commodity business. This model includes fixed price sales commitments, owned generation, native load requirements, physical contracts and financial derivative instruments. Value-at-risk represents the potential gains or losses for instruments or portfolios due to changes in market factors, for a specified time period and confidence level. PSE&G estimates value-at-risk across its commodity business using a model with historical volatilities and correlations. The measured value-at-risk using a variance/co-variance model with a 97.5 percent confidence level and assuming a one week horizon at December 31, 1997 was approximately $7 million. PSE&G's calculated value-at-risk exposure represents an estimate of potential net losses that could be recognized on its portfolio of physical and financial derivative instruments assuming historical movements in future market rates. These estimates, however, are not necessarily indicative of actual results which may occur, since actual future gains and losses will differ from those historical estimates, based upon actual fluctuations in market rates, operating exposures, and the timing thereof, and changes in PSE&G's portfolio of hedging instruments during the year. Commodities--EDHI During 1997, Energis entered into futures contracts to buy natural gas related to fixed-price natural gas sales commitments. Such contracts hedged approximately 97% of its fixed price sales commitments at December 31, 1997. As of December 31, 1997, Energis had a net unrealized hedge loss of $2 million. During 1997, Energis entered into fixed price electricity sales commitments. Physical purchase contracts hedged approximately 10% of such fixed price sales commitments at December 31, 1997. Energis estimates value-at-risk across its electric and natural gas commodities using a model with historical volatilities and correlations. The measured value-at-risk using a variance/co-variance model with a 97.5 percent confidence level and assuming a one-week horizon at December 31, 1997 was approximately $0.2 million. Energis' calculated value-at-risk exposure represents an estimate of potential losses that could be recognized on its portfolio of physical and financial derivative instruments assuming historical movements in future market prices. These estimates, however, are not necessarily indicative of actual results which may occur, since actual future gains and losses will differ from those historical estimates, based upon actual fluctuations in market rates, operating exposures, and the timing thereof, and changes in Energis' portfolio of hedging instruments during the year. Nuclear Decommissioning Trust Funds--PSE&G Contributions made into the Nuclear Decommissioning Trust Funds are invested in debt and equity securities. These marketable debt and equity securities are recorded at a fair value of $458 million at December 31, 1997 and have exposure to price risk. The potential change in fair value resulting from a hypothetical 10% change in quoted market prices of these securities amounts to $46 million. All realized gains on Nuclear Decommissioning Trust Fund investments are recorded as a component of accumulated depreciation while unrealized gains are recorded as deferred credits and neither affects earnings. Equity Securities--EDHI PSRC has investments in equity securities and partnerships which invest in equity securities. The aggregate amount of such investments which have available market prices at December 31, 1997 are recorded at fair value of $185 million and have exposure to price risk. A sensitivity analysis has been prepared to estimate EDHI's exposure to market sensitivity of these investments. The potential change in fair value resulting from a hypothetical 10% change in quoted market prices of these investments amounts to $15 million. Interest Rates--PSE&G PSE&G is subject to the risk of fluctuating interest rates in the normal course of business. PSE&G's policy is to manage interest rates through the use of fixed and, to a lesser extent, floating rate debt. PSE&G's interest rate risk related to existing fixed, long-term debt is not significant as PSE&G has BPU approval to issue long-term debt for opportunistic refinancing purposes. As of December 31, 1997, a hypothetical 10% change in interest rates would result in a $8 million change in interest costs related to short-term and floating rate debt. Interest Rates--EDHI EDHI is subject to the risk of fluctuating interest rates in the normal course of business. EDHI's policy is to manage interest rates through the use of fixed rate debt, floating rate debt and interest rate swaps. As of December 31, 1997, a hypothetical 10% change in interest rates would result in a $2 million change in interest costs related to short-term and floating rate debt. In June 1997, an indirect subsidiary of CEA entered into an agreement to swap floating rate borrowings into fixed rate borrowings. The interest differential to be received or paid under the interest rate swap agreement is recorded over the life of the agreement as an adjustment to the interest expense of the related borrowing. The swap terminates on May 28, 1999. The notional amounts and interest rates are as follows: Pay-Fixed Swap -------------- Notional amount........................ $43.5 million Pay rate............................... 6.65% Average receive rate................... 5.73% Year-end receive rate.................. 5.91% Foreign Currencies--EDHI CEA has non-recourse debt of $135 million which is denominated in Brazilian Reals that is indexed to a basket of currencies including U.S. dollars. As a result, it is subject to foreign currency exchange rate risk due to the effect of exchange rate movements between the indexed foreign currencies and the Brazilian Real. Exchange rate changes ultimately impact the debt level outstanding in the denominated currency and result in foreign currency transactions in accordance with current accounting guidance. Any related transaction gains or losses resulting from such exchange rate changes are included in determining net income for the period. The potential change in non-recourse debt resulting from a hypothetical 10% change in exchange rates amounts to approximately $9 million. Nuclear Operations As previously reported, Salem 1 and 2 were taken out of service by PSE&G in the second quarter of 1995. In June 1995, the Nuclear Regulatory Commission (NRC) issued a Confirmatory Action Letter (CAL) which documented commitments of PSE&G to keep each unit off line until it is satisfied that the unit is ready to return to service and to operate reliably over the long term and until the NRC agrees that the unit is sufficiently prepared to restart. Salem 2 returned to service on August 30, 1997. The NRC amended the CAL to require a final assessment of Salem 2 after approximately two months of full power operation. A meeting was held with the NRC on December 4, 1997 which satisfied this final CAL requirement for Salem 2. Installation of Salem 1 steam generators has been completed and that unit is expected to return to service around the end of the first quarter of 1998. Restart of Salem 1 is subject to completion of the requirements of the restart plan to the satisfaction of PSE&G and the NRC. The cost of the steam generator replacement, including installation, was approximately $170 million (PSE&G's share was $72 million). In addition, the cost of disposal of the four old steam generators was $16 million (PSE&G's share was $7 million). Restart of Salem 1 is also subject to completion of the requirements of the restart plan to the satisfaction of PSE&G and the NRC. The NRC's Readiness Assessment Team Inspection (RATI) of Salem 1 (a requirement for restart) commenced on February 10, 1998. PSE&G expects that the NRC will complete its inspection in February 1998. The inability to successfully return Salem 1 to operation could have a material adverse impact on the financial condition, results of operations and net cash flows of Enterprise and PSE&G (see Forward Looking Statements). PSE&G's share of total operating and maintenance expenses for both Salem units for 1997 was $115 million and capital costs were $65 million, which includes $19 million for steam generator replacement and excludes $13 million related to the ACE settlement described below. The outage of a Salem unit causes PSE&G to incur replacement power costs of approximately $4 to $5 million per month. Such amounts vary, however, depending on the availability of other generation, the cost of purchased energy and other factors, including modifications to maintenance schedules of other units. PSE&G and ACE entered into an operating agreement which resulted in the dismissal of a lawsuit initiated by ACE related to Salem performance. Under the agreement, ACE paid a portion of its share of the 1997 operation and maintenance expenses based on the amount of generation of the Salem units. PSE&G incurred approximately $13 million of ACE's share of 1997 operation and maintenance expenses since Salem 2 did not operate for the first eight months of 1997 and Salem 1 did not return to service during 1997. At the January 1997 semi-annual NRC Senior Management Meeting, the NRC placed Salem 1 and 2 on the NRC Watch List and designated them as Category 2 facilities (i.e., a plant that is authorized to operate, but one that the NRC will monitor closely), noting that this action was not due to any performance problems or decline during its current evaluation period but rather that Salem should have been placed on the NRC Watch List earlier. The letter stated that the NRC staff was satisfied with the overall approach being taken by PSE&G to return the Salem units to service. Salem 1 and 2 remain on the NRC Watch List as a Category 2 plant. For information on Salem litigation, see Note 10. Commitments and Contingent Liabilities of Notes. Competitive Environment Many forces are reshaping how the utility industry meets the needs and expectations of its customers and shareholders. Profound changes in the way the industry is regulated will affect how Enterprise conducts business and its financial prospects in the future. Competitive changes in the utility industry continued to occur in 1997 and early 1998. See Note 2. Rate Matters of Notes for information on the final Phase II report and the Energy Master Plan proceedings. FERC Order No. 888 (Order No. 888) Order No. 888 became effective in July 1996 and requires all public utilities owning, controlling or operating transmission lines to file nondiscriminatory open access tariffs that offer others the same transmission service which they provide to themselves. Intra-pool transactions for power pools were also required to be under a nondiscriminatory, pool-wide open access tariff by March 1, 1997. Numerous parties, including PSE&G, filed requests seeking rehearing and clarification of various aspects of Order No. 888. As a result of those requests, FERC issued Orders No. 888-A and 888-B. Orders No.888-A and 888-B clarified and largely reaffirmed the legal and policy bases on which Order No. 888 was grounded. Orders No.888-A and 888-B also provided clarifications and modifications to the FERC's original pro forma open access transmission tariff and process for recovery of stranded costs from wholesale customers ordered as a result of Order No. 888. Numerous parties, including PSE&G, have filed petitions for judicial review of these orders and these petitions are currently pending before the United States Courts of Appeals for the District of Columbia and the Second Circuits (see PJM). As a result of open access mandated by Order No. 888, PSE&G and other New Jersey utilities are facing increased competition from older, dirtier coal-fired plants in the Midwest that are subject to less restrictive pollution control requirements than utilities in Northeastern states and consequently, are able to produce lower cost energy. These facilities, by increasing their power production in order to sell into the Northeast market, will, in turn, increase the release of pollutants that eventually make their way to New Jersey and other Northeastern states due to the prevailing westerly winds. PSE&G, which has to comply with strict New Jersey environmental laws, will be at a competitive disadvantage if Order No. 888 is not modified to recognize this issue. On October 27, 1997, Old Dominion Electric Cooperative (ODEC) filed a Complaint at FERC seeking to modify its 1992 Agreement with PSE&G for a ten-year sale of 150 MW of capacity and energy. ODEC's Complaint argues that given the restructuring of PJM, particularly PJM's new regional rate design which effectively eliminates rate "pancaking" for transmission that traverses more than one transmission system, it is unreasonable to leave intact existing bilateral agreements that have the same effect. It therefore urges FERC to reduce ODEC's contract capacity rate with PSE&G (reducing PSE&G's revenue by $3-$5 million per year) to eliminate the imputed transmission charge. In an answer filed December 1, 1997, PSE&G responded that the contract rates were negotiated at arm's length, are fully cost justified and cannot legally be modified absent an overriding public interest. Although it has not yet acted on these filings, FERC appears to have summarily decided the issue in ODEC's favor in its November 25, 1997 PJM Restructuring Order (November 25th Order) (see discussion below). PSE&G has requested rehearing and clarification of the November 25th Order. Pennsylvania--New Jersey--Maryland Interconnection (PJM) PSE&G is a member of PJM which integrates the bulk power generation and transmission supply operations of 11 utilities in Pennsylvania, New Jersey, Delaware, Maryland, Virginia and the District of Columbia, and, in turn, is interconnected with other major electric utility companies in the northeastern part of the United States. PJM is operated as one system and provides for the purchase and sale of power among members on the basis of reliability of service and operating economy. As a result, the most economical mix of generating capability available is used to meet PJM hourly load requirements. PSE&G's output, as shown under Electric Fuel Supply and Disposal, reflects significant amounts of purchased power because at times it is more economical for PSE&G to purchase power from PJM and others than to produce it. As of December 31, 1997, the aggregate installed generating capacity of the PJM companies was 57,216 MW. The all time record peak one-hour demand experienced by PJM was 49,406 MW which occurred on July 15, 1997. PSE&G's capacity obligations to the PJM system vary from year to year due to changes in system characteristics. PSE&G expects to have sufficient installed capacity to meet its obligations during the 1998-2002 period. PSE&G is also a party to the Mid-Atlantic Area Reliability Council which provides for review and evaluation of plans for generation and transmission facilities and other matters relevant to reliability of the bulk electric supply systems in the Mid-Atlantic area. In July 1996, the member companies of PJM, including PSE&G but excluding PECO Energy, filed a proposal to reorganize PJM into an Independent System Operator (ISO) to administer a pool-wide open-access transmission tariff and to operate a centrally dispatched bid-based energy market in response to Order No. 888. PECO Energy filed a separate proposal with FERC. On November 13, 1996, FERC announced that it was rejecting the restructuring proposals of both PECO Energy and the other PJM companies (the PJM Supporting Companies) due to concerns regarding the independence of the proposed ISO and directed PJM to submit a single consensus pool restructuring proposal by December 31, 1996. On December 31, 1996, PJM submitted a pool-wide open-access transmission tariff and a reformed pooling agreement. FERC issued an order on February 28, 1997, accepting most of the PJM Supporting Companies' proposal on an interim basis, effective April 1, 1997. On June 2, 1997, the PJM member companies, except for PECO Energy, filed a revised proposal with the FERC to reorganize PJM into an ISO. On June 9, 1997, PECO Energy filed a competing proposal that continued to advocate a different design of the energy market and transmission tariffs. In its November 25th Order, FERC conditionally approved, effective January 1, 1998, the PJM Supporting Companies' proposal to restructure the PJM power pool and establish an ISO consistent with the requirements of Order No. 888. The November 25th Order specifically approved a two-tier governance structure under which an independent 7-member Board of Managers (PJM Board) would be responsible for supervision and oversight of the day-to-day operations of PJM; while a Members Committee, consisting of five sectors representing generation owners, other suppliers, transmission owners, electric distribution and end-use customers would elect, and provide advice to, the PJM Board. The order also accepted the proposed zonal rate design, subject to its being replaced by a more uniform, regional rate design within five years. FERC also accepted the proposed locational marginal pricing (LMP) methodology for recovery of transmission congestion costs, but acknowledged that the lack of price certainty is a limitation of LMP and ordered the ISO to initiate a process to address this concern. FERC subsequently approved the ISO's request to defer implementation of LMP until April 1, 1998. The November 25th Order also introduced a new issue that could have an impact of approximately $3 to $5 million annually on PSE&G. FERC ordered that all existing power sales and wheeling agreements, such as between PSE&G and ODEC, be modified to eliminate multiple transmission charges to be consistent with the restructured PJM. PSE&G separately, and along with the other PJM Supporting Companies, has requested rehearing and clarification regarding this issue and is vigorously contesting this issue. PSE&G cannot predict the final outcome of these proceedings. A further potential impact of PJM restructuring relates to the operation of the Keystone-Conemaugh coal-fired electric power plants which are owned by a joint venture consisting of PSE&G and nine other utilities. In order to assure that the joint venture's proposed operation of these plants in the context of the new PJM energy exchange would be consistent with antitrust law requirements, the Antitrust Division of the DOJ was requested to indicate that it has no present intention of taking enforcement action with respect to the joint venture's proposed plan of operation. The DOJ responded on January 30, 1998 indicating no antitrust concerns. New Jersey Gross Receipts and Franchise Tax (NJGRT) Reform For a discussion of NJGRT Reform, see Note 2. Rate Matters of Notes. Gas Unbundling For a discussion of Gas Unbundling, see Note 2. Rate Matters of Notes. Energy Resources and Trading PSE&G has established an energy resources and trading organization to engage in wholesale transactions in electricity and gas. For additional information, see Qualitative and Quantitative Disclosures About Market Risk. Energis Energis has been formed to better position Enterprise to enter the rapidly deregulating energy market by marketing a variety of energy related products and services to industrial and commercial customers throughout the Northeast and Mid-Atlantic states. Energis offers a variety of services: sales of natural gas and electricity; energy consulting; engineering, equipment installation and repair; inspection and diagnostic services for motors, generators and other energy conversion and use equipment; and up-front financing. Energis' customers include small businesses, department stores, schools, hospitals and manufacturers from Maine to Maryland. For additional information, see Qualitative and Quantitative Disclosures About Market Risk. Bond Ratings The changes in the utility industry are attracting increased attention of bond rating agencies which regularly assess business and financial matters including how utility companies are meeting competition and competitive initiatives, especially as they affect potential stranded costs. Bond ratings affect the cost of capital and the ability to obtain external financing. PSE&G continually updates the rating agencies on all corporate matters in order to minimize surprises and give the rating agencies time to comprehend the information. Given the uncertainty of the industry, attention and scrutiny of PSE&G's competitive strategies by rating agencies will likely continue. This could result in changes to Enterprise's and PSE&G's bond ratings (see Item 1. General--Credit Ratings). Rate Matters For discussions of the Energy Master Plan, Stranded Costs, Securitization, Depreciation, NJGRT Reform, Settlement of Certain Regulatory Issues, the LGAC, the LEAC, the Demand Side Adjustment Factor, the Remediation Adjustment Charge, Consolidated Tax Benefits, OPEB, and other rate matters, see Note 2. Rate Matters of Notes. Accounting Issues For a discussion of significant accounting policies in regard to regulation of PSE&G, including discussion of Statement of Financial Accounting Standards (SFAS) 71, "Accounting for the Effects of Certain Types of Regulation," and Emerging Issues Task Force (EITF) Issue 97-4, "Deregulation for the Pricing of Electricity - Issues Related to the Application of FASB Statements No. 71 and 101," see Note 1. Organization and Summary of Significant Accounting Policies of Notes. Impact of New Accounting Pronouncements In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS 130, "Reporting Comprehensive Income" (SFAS 130), which is effective for fiscal years beginning after December 15, 1997. SFAS 130 requires that all items required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement displayed with the same prominence as other financial statements. It also requires that an enterprise classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. Also in June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131), which is effective for financial statements for periods beginning after December 15, 1997. This Statement need not be applied to interim financial statements in the initial year of its application. SFAS 131 supersedes SFAS 14, "Financial Reporting for Segments of a Business Enterprise" and requires that companies disclose segment data based on how management makes decisions about allocating resources to segments and measuring their performance. The adoption of SFAS 130 and SFAS 131 is not expected to have a material impact on the financial condition, results of operations and net cash flows of Enterprise or PSE&G. Site Restorations and Other Environmental Costs It is difficult to estimate the future financial impact of environmental laws, including potential liabilities. PSE&G accrues environmental provisions when it is probable that a liability has been incurred and the amount of the liability is reasonably estimable. Provisions for estimated losses from environmental remediation are, depending on the site, based primarily on internal and third-party environmental studies, estimates as to the number and participation level of any other Potentially Responsible Parties, the extent of the contamination and the nature of required remedial and restoration actions. The cost of environmental remediation could be material to Enterprise and PSE&G's financial position, results of operations and net cash flows (see Note 10. Commitments and Contingent Liabilities of Notes). Future Outlook Enterprise and PSE&G will face additional challenges with the continuing emergence of competition in 1998. Depending upon the BPU's actions in the Energy Master Plan proceedings, PSE&G's customers could begin choosing their energy suppliers as early as October 1998 with their choices becoming effective January 1999. In light of this, Enterprise and PSE&G are seeking to ensure that the new rules for electric industry restructuring provide customer choice and lower cost without endangering public safety or compromising New Jersey's stringent environmental standards or the reliability of electric service. Further expansion in the non-regulated businesses of Enterprise will be necessary to allow Enterprise to achieve its future growth objectives. To this end, Enterprise's strategy will be to rely to a large extent on CEA, PSRC and Energis. CEA will continue to focus on the international market. PSRC plans to continue to make investments in the energy sector. Energis plans to continue to market new and existing energy products and services to commercial and industrial business customers throughout the Northeast and Mid-Atlantic states. Deregulation will also place a greater emphasis on lowering electricity prices and costs. If PSE&G's Energy Master Plan proposal is adopted, rates will be frozen for seven years. PSE&G will continue to bear the risk of changes in fuel costs. Enterprise's wholesale energy trading and resource organization will continue to develop strategies to reduce costs, increase profits and manage both commodity and financial risks. Expansion of other non-traditional utility areas, such as the appliance service business within and outside of New Jersey, will also be key to the future of Enterprise and PSE&G. Enterprise is continuing to emphasize operational excellence as a key business objective. While Enterprise and PSE&G have improved productivity and efficiencies, efforts continue to improve response speed, reliability, employee safety, customer satisfaction, quality, cost management and cost-competitiveness. Enterprise has paid quarterly dividends in each year commencing with the corporate restructuring of PSE&G when Enterprise became the owner of all the outstanding common stock of PSE&G. While a key objective of the Board of Directors of Enterprise is to keep the Common Stock dividend secure, amounts and dates of such dividends as may be declared will necessarily be dependent upon Enterprise's future earnings, financial requirements and other factors including the receipt of dividend payments from its subsidiaries. Enterprise and PSE&G cannot predict the ultimate outcome of the ongoing changes in the utility industry. Decisions in the Energy Master Plan proceedings including those which will impact PSE&G's recovery of stranded costs and ability to use securitization could have a material adverse impact on Enterprise's and PSE&G's financial condition, results of operations and net cash flows. Enterprise and PSE&G believe that the end result will involve a fundamental change in the way their businesses are conducted. These changes may impact financial operating trends and could result in earnings volatility. PSE&G is actively seeking regulatory and operational changes that will allow it to provide energy services in a safe and reliable manner at competitive prices while achieving strong financial performance (see Note 1. Organization and Summary of Significant Accounting Policies and Note 2. Rate Matters of Notes). 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: Corporate Structure; Overview of 1997; Results of Operations; Liquidity and Capital Resources; External Financings; Qualitative and Quantitative Disclosures About Market Risk; Nuclear Operations; Competitive Environment; Rate Matters; Accounting Issues; Impact of New Accounting Pronouncements; Site Restorations and Other Environmental Costs and Future Outlook. Forward Looking Statements The Private Securities Litigation Reform Act of 1995 (the Act) provides a "safe harbor" for forward-looking statements to encourage such disclosures without the threat of litigation providing those statements are identified as forward-looking and are accompanied by meaningful, cautionary statements identifying important factors that could cause the actual results to differ materially from those projected in the statement. Forward-looking statements have been made in this report. Such statements are based on management's beliefs as well as assumptions made by and information currently available to management. When used herein, the words "will", "anticipate", "estimate", "expect", "objective", "hypothetical", "potential" and similar expressions are intended to identify forward-looking statements. In addition to any assumptions and other factors referred to specifically in connection with such forward-looking statements, factors that could cause actual results to differ materially from those contemplated in any forward-looking statements include, among others, the following: deregulation and the unbundling of energy supplies and services; an increasingly competitive energy marketplace; sales retention and growth potential in a mature service territory and a need to contain costs; ability to obtain adequate and timely rate relief, cost recovery, including the potential impact of stranded costs, and other necessary regulatory approvals; Federal and state regulatory actions; costs of construction; operating restrictions, increased cost and construction delays attributable to environmental regulations; nuclear decommissioning and the availability of reprocessing and storage facilities for spent nuclear fuel; licensing and regulatory approval necessary for nuclear and other operating stations; and credit market concerns. Enterprise and PSE&G undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The foregoing review of factors pursuant to the Act should not be construed as exhaustive or as any admission regarding the adequacy of disclosures made by Enterprise and PSE&G prior to the effective date of the Act. Item 7A. Qualitative and Quantitative Disclosures About Market Risk Information relating to quantitative and qualitative disclosure about market risk is set forth under the caption "Qualitative and Quantitative Disclosures about Market Risk" in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and "Financial Instruments" in Note 1. Organization and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements. Such information is incorporated herein by reference. For PSE&G, the information required by this item is incorporated herein by reference insofar as it relates to PSE&G and its subsidiaries. Item 8. Financial Statements and Supplementary Data PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED CONSOLIDATED STATEMENTS OF INCOME (Millions of Dollars, except Per Share Data)
For The Years Ended December 31, 1997 1996 1995 ----------- ---------- ---------- OPERATING REVENUES Electric $ 4,188 $ 3,944 $ 4,021 Gas 1,937 1,881 1,686 Nonutility Activities 245 216 186 ----------- ---------- ---------- TOTAL OPERATING REVENUES 6,370 6,041 5,893 ----------- ---------- ---------- OPERATING EXPENSES Operation Fuel for Electric Generation and Interchanged Power 1,179 919 892 Gas Purchased 1,101 1,118 962 Other 1,082 1,053 1,008 Maintenance 282 318 313 Depreciation and Amortization 630 607 597 Taxes Federal Income Taxes (Note 12) 329 290 338 New Jersey Gross Receipts Taxes 576 598 613 Other 76 81 77 ----------- ---------- ---------- TOTAL OPERATING EXPENSES 5,255 4,984 4,800 ----------- ---------- ---------- OPERATING INCOME 1,115 1,057 1,093 ----------- ---------- ---------- OTHER INCOME AND DEDUCTIONS Settlement of Salem Litigation - Net of Applicable Taxes of $29 (53) - - Other - net 7 (2) 13 ----------- ---------- ---------- Total Other Income and Deductions (46) (2) 13 ----------- ---------- ---------- INCOME BEFORE INTEREST CHARGES AND DIVIDENDS ON PREFERRED SECURITIES 1,069 1,055 1,106 ----------- ---------- ---------- INTEREST EXPENSE AND PREFERRED DIVIDENDS Interest Expense (Note 7) 470 453 464 Allowance for Funds Used During Construction - Debt and Capitalized Interest (20) (18) (33) Preferred Securities Dividend Requirements (Note 6) 56 50 48 Net Loss (Gain) on Preferred Stock Redemptions (Note 6) 3 (18) - ----------- ---------- ---------- Total Interest Expense and Preferred Dividends 509 467 479 ----------- ---------- ---------- INCOME FROM CONTINUING OPERATIONS 560 588 627 Discontinued Operations - Net of Taxes (Note 16): Discontinued Operations - 11 35 Gain on Sale of Discontinued Operations - 13 - ----------- ---------- ---------- NET INCOME $ 560 $ 612 $ 662 =========== ========== ========== AVERAGE SHARES OF COMMON STOCK OUTSTANDING (000's) 231,986 242,401 244,698 EARNINGS PER AVERAGE SHARE (Basic and Diluted) Income From Continuing Operations $ 2.41 $ 2.42 $ 2.57 Income From Discontinued Operations - 0.04 0.14 Gain on Sale of Discontinued Operations - 0.06 - ----------- ---------- ---------- TOTAL EARNINGS PER AVERAGE SHARE $ 2.41 $ 2.52 $ 2.71 =========== ========== ========== DIVIDENDS PAID PER SHARE OF COMMON STOCK $ 2.16 $ 2.16 $ 2.16 =========== ========== ========== See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED CONSOLIDATED BALANCE SHEETS ASSETS (Millions of Dollars)
December 31, -------------------------------- 1997 1996 -------------- ------------- UTILITY PLANT - Original cost (Note 15) Electric $13,692 $13,314 Gas 2,697 2,556 Common 558 530 -------------- ------------- Total 16,947 16,400 Less: Accumulated depreciation and amortization 6,463 5,889 -------------- ------------- Net 10,484 10,511 Nuclear Fuel in Service, net of accumulated amortization - 1997, $302; 1996, $259 216 199 -------------- ------------- Net Utility Plant in Service 10,700 10,710 Construction Work in Progress, including Nuclear Fuel in Process - 1997, $60; 1996, $70 326 445 Plant Held for Future Use 24 24 -------------- ------------- Net Utility Plant 11,050 11,179 -------------- ------------- INVESTMENTS AND OTHER NONCURRENT ASSETS (Notes 4, 5, 8 and 11) Long-Term Investments, net of amortization - 1997, $21; 1996, $13, and net of valuation allowances - 1997, $10; 1996, $10 2,873 1,854 Nuclear Decommissioning and Other Special Funds 492 382 Other Noncurrent Assets, net of amortization - 1997, $16; 1996, $12, 167 116 -------------- ------------- Total Investments and Other Noncurrent Assets 3,532 2,352 -------------- ------------- CURRENT ASSETS Cash and Cash Equivalents (Note 9) 83 279 Accounts Receivable: Customer Accounts Receivable 520 520 Other Accounts Receivable 293 225 Less: Allowance for Doubtful Accounts 41 46 Unbilled Revenues 270 248 Fuel, at average cost 310 313 Materials and Supplies, at average cost, net of inventory valuation reserves - 1997, $12; 1996, $16 142 148 Miscellaneous Current Assets 86 57 -------------- ------------- Total Current Assets 1,663 1,744 -------------- ------------- DEFERRED DEBITS (Notes 2 and 3) Unamortized Debt Expense 136 139 Deferred OPEB Costs 289 226 Unrecovered Environmental Costs 122 126 Underrecovered Electric Energy and Gas Costs 167 176 Unrecovered SFAS 109 Deferred Income Taxes (Note 12) 725 752 Deferred Demand Side Management Costs 116 40 Other 143 181 -------------- ------------- Total Deferred Debits 1,698 1,640 -------------- ------------- Total $17,943 $16,915 ============== ============= See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED CONSOLIDATED BALANCE SHEETS CAPITALIZATION AND LIABILITIES (Millions of Dollars)
December 31, -------------------------------- 1997 1996 ------------- -------------- CAPITALIZATION (Notes 6 and 7) Common Stockholders' Equity: Common Stock $ 3,603 $ 3,627 Retained Earnings 1,623 1,586 Foreign Currency Translation Adjustment (15) -- ------------- -------------- Total Common Stockholders' Equity 5,211 5,213 Subsidiaries' Preferred Securities: Preferred Stock Without Mandatory Redemption 95 114 Preferred Stock With Mandatory Redemption 75 150 Monthly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures 210 210 Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures 303 208 Long-Term Debt 4,873 4,580 ------------- -------------- Total Capitalization 10,767 10,475 ------------- -------------- OTHER LONG-TERM LIABILITIES Decontamination and Decommissioning Costs (Note 11) 43 47 Environmental Costs (Notes 2 and 10) 73 86 Capital Lease Obligations (Note 5) 52 52 ------------- -------------- Total Other Long-Term Liabilities 168 185 ------------- -------------- CURRENT LIABILITIES Long-Term Debt due within one year 340 548 Commercial Paper and Loans (Note 7) 1,448 638 Accounts Payable 686 697 Other 353 389 ------------- -------------- Total Current Liabilities 2,827 2,272 ------------- -------------- DEFERRED CREDITS Deferred Income Taxes (Note 12) 3,394 3,250 Deferred Investment Tax Credits 343 361 Deferred OPEB Costs (Notes 1, 2 and 14) 289 226 Other 155 146 ------------- -------------- Total Deferred Credits 4,181 3,983 ------------- -------------- COMMITMENTS AND CONTINGENT LIABILITIES (Note 10) - - ------------- -------------- Total $ 17,943 $ 16,915 ============= ============== See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (Millions of Dollars)
For the Years Ended December 31, ------------------------------------ 1997 1996 1995 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 560 $ 612 $ 662 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and Amortization 630 607 597 Amortization of Nuclear Fuel 60 60 75 Recovery (deferral) of Electric Energy and Gas Costs - net 9 (5) 2 Unrealized Earnings on Investments - net (56) (7) (47) Provision for Deferred Income Taxes - net 47 65 134 Investment Tax Credits - net (17) (29) (20) Allowance for Funds Used During Construction - Debt and Equity (AFDC), and Capitalized Interest (20) (18) (38) Proceeds from Leasing Activities 71 89 38 Changes in certain current assets and liabilities: Net increase in Accounts Receivable and Unbilled Revenues (95) (12) (169) Net decrease (increase) in Inventory - Fuel and Materials and Supplies 9 (64) 19 Net (decrease) increase in Accounts Payable (11) 60 99 Net (decrease) increase in Provision for Rate Refund (80) 75 (8) Net change in Prepaid / Other Accrued Taxes 22 1 (18) Net change in Other Current Assets and Liabilities (7) 11 20 Other (27) (29) 68 Net cash provided by operating activities - Discontinued Operations - 54 104 --------- --------- --------- Net cash provided by operating activities 1,095 1,470 1,518 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to Utility Plant, excluding AFDC (542) (586) (650) Net (increase) decrease in Long-Term Investments and Real Estate (914) 5 (66) Contribution to Decommissioning Funds and Other Special Funds (63) (29) (29) Cost of Plant Removal - net (28) (34) (30) Other (67) (18) (47) Net Proceeds from the Sale of Discontinued Operations - 704 - Change in Net Assets - Discontinued Operations - (51) (113) --------- --------- --------- Net cash used in investing activities (1,614) (9) (935) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in Short-Term Debt 810 71 358 Issuance of Long-Term Debt 785 374 156 Redemption of Long-Term Debt (700) (808) (556) Long-Term Debt Issuance and Redemption Costs (11) (40) (14) Redemption of Preferred Stock (94) (212) (60) Issuance of Preferred Securities of Subsidiaries 95 208 60 Retirement of Common Stock (43) (307) - Cash Dividends Paid on Common Stock (501) (523) (528) Other (18) (7) (2) --------- --------- --------- Net cash provided by (used in) financing activities 323 (1,244) (586) --------- --------- --------- Net (decrease) increase in Cash and Cash Equivalents (196) 217 (3) Cash and Cash Equivalents at Beginning of Period 279 62 65 --------- --------- --------- Cash and Cash Equivalents at End of Period $ 83 $ 279 $ 62 ========= ========= ========= Income Taxes Paid $ 170 $ 157 $ 185 Interest Paid $ 416 $ 463 $ 481 See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (Millions of Dollars)
Common Retained Foreign Currency Stock Earnings Translation Adjustment Total ---------- ------------------------------------------------------------- Balance as of January 1, 1995 $3,801 $ 1,505 $ - $5,306 Net Income - 662 - 662 Cash Dividends on Common Stock - (528) - (528) Preferred Securities Issuance Expenses - (2) - (2) ---------- ------------ ----------- ----------- Balance as of December 31, 1995 3,801 1,637 - 5,438 ---------- ------------ ----------- ----------- Net Income - 612 - 612 Cash Dividends on Common Stock - (523) - (523) Retirement of Common Stock (174) (133) - (307) Preferred Securities Issuance Expenses - (7) - (7) ---------- ------------ ----------- ----------- Balance as of December 31, 1996 3,627 1,586 - 5,213 ---------- ------------ ----------- ----------- Net Income - 560 - 560 Cash Dividends on Common Stock - (501) - (501) Retirement of Common Stock (24) (19) - (43) Currency Translation Adjustment - - (15) (15) Preferred Securities Issuance Expenses - (3) - (3) ---------- ------------ ----------- ----------- Balance as of December 31, 1997 $3,603 $ 1,623 $ (15) $5,211 ========== ============ =========== =========== Note: The ability of Enterprise to declare and pay dividends is contingent upon its receipt of dividends from its subsidiaries. PSE&G, Enterprise's principal subsidiary, has restrictions on the payment of dividends which are contained in its Restated Certificate of Incorporation, as amended, and certain of the debentures supplemental to its Mortgage and certain other indentures. However, none of these restrictions presently limits the payment of dividends out of current earnings. The amount of PSE&G's restricted retained earnings at December 31, 1997, 1996 and 1995 was $10 million. There are no restrictions on EDHI's retained earnings. See Notes to Consolidated Financial Statements.
[THIS PAGE INTENTIONALLY LEFT BLANK] PUBLIC SERVICE ELECTRIC AND GAS COMPANY CONSOLIDATED STATEMENTS OF INCOME (Millions of Dollars)
For The Years Ended December 31, ---------------------------------------- 1997 1996 1995 -------- -------- --------- OPERATING REVENUES Electric $ 4,188 $ 3,944 $ 4,021 Gas 1,937 1,881 1,686 -------- -------- --------- Total Operating Revenues 6,125 5,825 5,707 -------- -------- --------- OPERATING EXPENSES Operation Fuel for Electric Generation and Net Interchanged Power 1,179 919 892 Gas Purchased 1,101 1,118 962 Other 994 981 949 Maintenance 282 318 313 Depreciation and Amortization 616 604 591 Taxes Federal Income Taxes (Note 12) 307 265 321 New Jersey Gross Receipts Taxes 576 598 613 Other 72 75 71 -------- -------- --------- Total Operating Expenses 5,127 4,878 4,712 -------- -------- --------- OPERATING INCOME 998 947 995 OTHER INCOME AND DEDUCTIONS Settlement of Salem Litigation - Net of Applicable Taxes of $29 (53) - - Other - net 7 (2) 13 -------- -------- --------- Total Other Income and Deductions (46) (2) 13 -------- -------- --------- INCOME BEFORE INTEREST CHARGES AND DIVIDENDS ON PREFERRED SECURITIES 952 945 1,008 -------- -------- --------- INTEREST EXPENSES AND PREFERRED SECURITIES DIVIDENDS Interest Expense (Note 7) 395 399 407 Allowance for Funds Used During Construction - Debt (15) (17) (31) Preferred Securities Dividend Requirements of Subsidiaries (Note 6) 44 28 15 -------- -------- --------- Total Interest Expense and Preferred Securities Dividends 424 410 391 -------- -------- --------- Net Income 528 535 617 -------- -------- --------- Preferred Stock Dividend Requirements (Note 6) 12 23 34 Net Loss (Gain) on Preferred Stock Redemptions (Note 6) 3 (18) - -------- -------- --------- EARNINGS AVAILABLE TO PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED $ 513 $ 530 $ 583 ======== ======== ========= See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY CONSOLIDATED BALANCE SHEETS ASSETS (Millions of Dollars)
December 31, ----------------------------- 1997 1996 ------------- ------------- UTILITY PLANT - Original cost (Note 15) Electric $ 13,692 $ 13,314 Gas 2,697 2,556 Common 558 530 ------------ ------------- Total 16,947 16,400 Less: Accumulated depreciation and amortization 6,463 5,889 ------------ ------------- Net 10,484 10,511 Nuclear Fuel in Service, net of accumulated amortization - 1997, $302; 1996, $259 216 199 ------------ ------------- Net Utility Plant in Service 10,700 10,710 Construction Work in Progress, including Nuclear Fuel in Process - 1997, $60; 1996, $70 326 445 Plant Held for Future Use 24 24 ------------ ------------- Net Utility Plant 11,050 11,179 ------------ ------------- INVESTMENTS AND OTHER NONCURRENT ASSETS Long-Term Investments, net of amortization - 1997, $21; 1996, $13, and net of valuation allowances - 1997, $10; 1996, $10 (Note 4) 137 134 Nuclear Decommissioning and Other Special Funds (Note 11) 492 382 Other Noncurrent Assets, net of amortization - 1997, $21; 1996, $13 45 19 ------------ ------------- Total Investments and Other Noncurrent Assets 674 535 ------------ ------------- CURRENT ASSETS Cash and Cash Equivalents (Note 9) 17 48 Accounts Receivable: Customer Accounts Receivable 488 500 Other Accounts Receivable 232 183 Less: Allowance for Doubtful Accounts 41 46 Unbilled Revenues 270 248 Fuel, at average cost 310 313 Materials and Supplies, at average cost, net of inventory valuation reserves - 1997, $12; 1996, $16 142 148 Miscellaneous Current Assets 81 53 ------------ ------------- Total Current Assets 1,499 1,447 ------------ ------------- DEFERRED DEBITS (Notes 2 and 3) Unamortized Debt Expense 135 138 Deferred OPEB Costs 289 226 Unrecovered Environmental Costs 122 126 Underrecovered Electric Energy and Gas Costs 167 176 Unrecovered SFAS 109 Deferred Income Taxes (Note 12) 725 752 Deferred Demand Side Management Costs 116 40 Other 143 180 ------------ ------------- Total Deferred Debits 1,697 1,638 ------------ ------------- Total $ 14,920 $ 14,799 ============ ============= See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY CONSOLIDATED BALANCE SHEETS CAPITALIZATION AND LIABILITIES (Millions of Dollars)
December 31, ------------------------------- 1997 1996 ------------ ------------ CAPITALIZATION (Notes 6 and 7) Common Stockholder's Equity: Common Stock $ 2,563 $ 2,563 Contributed Capital 594 594 Retained Earnings 1,352 1,365 ------------ ------------ Total Common Stockholder's Equity 4,509 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 9,318 9,311 ------------ ------------ OTHER LONG-TERM LIABILITIES Decontamination and Decommissioning Costs (Note 11) 43 47 Environmental Costs (Notes 2 and 10) 73 86 Capital Lease Obligations (Note 5) 52 52 ------------ ------------ Total Other Long-Term Liabilities 168 185 ------------ ------------ CURRENT LIABILITIES Long-Term Debt due within one year 118 424 Commercial Paper and Loans (Note 7) 1,106 638 Accounts Payable 608 627 Other 268 341 ------------ ------------ Total Current Liabilities 2,100 2,030 ------------ ------------ DEFERRED CREDITS Deferred Income Taxes (Note 12) 2,569 2,557 Deferred Investment Tax Credits 333 352 Deferred OPEB Costs (Notes 1, 2 and 14) 289 226 Other 143 138 ------------ ------------ Total Deferred Credits 3,334 3,273 ------------ ------------ COMMITMENTS AND CONTINGENT LIABILITIES (Note 10) - - ------------ ------------ Total $ 14,920 $ 14,799 ============ ============ See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Millions of Dollars)
For the Years Ended December 31, ------------------------------------- 1997 1996 1995 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $528 $535 $617 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and Amortization 616 604 591 Amortization of Nuclear Fuel 60 60 75 Recovery (deferral) of Electric Energy and Gas Costs - net 9 (5) 2 Provision for Deferred Income Taxes - net 39 39 79 Investment Tax Credits - net (19) (19) (19) Allowance for Funds Used During Construction - Debt and Equity (AFDC) (15) (17) (36) Changes in certain current assets and liabilities: Net (increase) decrease in Accounts Receivable and Unbilled Revenues (64) 7 (143) Net decrease (increase) in Inventory - Fuel and Materials and Supplies 9 (64) 19 Net (decrease) increase in Accounts Payable (19) 67 86 Net (decrease) increase in Provision for Rate Refund (80) 75 (8) Net change in Prepaid / Other Accrued Taxes (15) 1 (11) Net change in Other Current Assets and Liabilities (6) (8) 6 Other (35) (36) 57 -------- -------- -------- Net cash provided by operating activities 1,008 1,239 1,315 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to Utility Plant, excluding AFDC (542) (586) (650) Net increase in Long-Term Investments (13) (21) (65) Contribution to Decommissioning Funds and Other Special Funds (62) (29) (30) Cost of Plant Removal - net (28) (34) (30) Other (26) 6 1 -------- -------- -------- Net cash used in investing activities (671) (664) (774) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in Short-Term Debt 468 71 166 Issuance of Long-Term Debt 288 374 156 Redemption of Long-Term Debt (575) (429) (367) Long-Term Debt Issuance and Redemption Costs (9) (36) (13) Redemption of Preferred Stock (94) (212) (60) Net (Loss) Gain on Preferred Stock Redemptions (3) 18 -- Issuance of Preferred Securities of Subsidiaries 95 208 60 Contributed Capital -- -- 60 Cash Dividends Paid (535) (547) (536) Other (3) (7) (2) -------- -------- -------- Net cash used in financing activities (368) (560) (536) -------- -------- -------- Net (decrease) increase in Cash and Cash Equivalents (31) 15 5 Cash and Cash Equivalents at Beginning of Period 48 33 28 -------- -------- -------- Cash and Cash Equivalents at End of Period $17 $48 $33 ======== ======== ======== Income Taxes Paid $259 $254 $280 Interest Paid $357 $392 $400 See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY (Millions of Dollars)
Contributed Common Capital from Retained Stock Enterprise Earnings Total ---------- ------------------------------------------ Balance as of January 1, 1995 $ 2,563 $ 534 $ 1,287 $ 4,384 Net Income - - 617 617 Cash Dividends on Common Stock - - (502) (502) Cash Dividends on Preferred Stock - - (34) (34) Preferred Securities Issuance Expenses - - (2) (2) Contributed Capital from Enterprise - 60 - 60 ---------- ---------- ---------- ---------- Balance as of December 31, 1995 2,563 594 1,366 4,523 ---------- ---------- ---------- ---------- Net Income - - 535 535 Cash Dividends on Common Stock - - (524) (524) Cash Dividends on Preferred Stock - - (23) (23) Preferred Securities Issuance Expenses - - (7) (7) Net Gain on Preferred Stock Redemptions - - 18 18 ---------- ---------- ---------- ---------- Balance as of December 31, 1996 2,563 594 1,365 4,522 ---------- ---------- ---------- ---------- Net Income - - 528 528 Cash Dividends on Common Stock - - (523) (523) Cash Dividends on Preferred Stock - - (12) (12) Preferred Securities Issuance Expenses - - (3) (3) Net Loss on Preferred Stock Redemptions - - (3) (3) ---------- ---------- ---------- ---------- Balance as of December 31, 1997 $ 2,563 $ 594 $ 1,352 $ 4,509 ========== ========== ========== ========== Note: PSE&G has restrictions on the payment of dividends which are contained in its Restated Certificate of Incorporation, as amended, and certain of the debentures supplemental to its Mortgage and certain other indentures. However, none of these restrictions presently limits the payment of dividends out of current earnings. The amount of PSE&G's restricted retained earnings at December 31, 1997, 1996 and 1995 was $10 million. See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Organization and Summary of Significant Accounting Policies Organization Public Service Enterprise Group Incorporated (Enterprise) has two direct wholly owned subsidiaries, Public Service Electric and Gas Company (PSE&G) and Enterprise Diversified Holdings Incorporated (EDHI). Enterprise's principal subsidiary, PSE&G, is an operating public utility providing electric and gas service within certain areas in the State of New Jersey. EDHI is the parent of Enterprise's non-utility businesses: Community Energy Alternatives Incorporated (CEA), an investor in and developer and operator of projects in the generation, transmission and distribution of energy, including cogeneration and independent power production (IPP) facilities, electric distribution companies, exempt wholesale generators (EWGs) and foreign utility companies (FUCOs); Public Service Resources Corporation (PSRC), which has made primarily passive investments; Energis Resources Incorporated (Energis), which provides a variety of energy related services to industrial and commercial customers both within and outside of PSE&G's traditional service territory and Enterprise Group Development Corporation (EGDC), a nonresidential real estate development and investment business. EDHI also has two finance subsidiaries: PSEG Capital Corporation (Capital), which provides privately-placed debt financing to EDHI's operating subsidiaries, except Energis, on the basis of a minimum net worth maintenance agreement with Enterprise and Enterprise Capital Funding Corporation (Funding), which provides privately-placed debt financing to PSRC, CEA and their subsidiaries, which debt is guaranteed by EDHI, but without direct support from Enterprise. EGDC has been conducting a controlled exit from the real estate business since 1993. In July 1996, EDHI sold Energy Development Corporation (EDC), an oil and gas subsidiary. Summary of Significant Accounting Policies Regulation--PSE&G The accounting and rates of PSE&G are subject, in certain respects, to the requirements of the New Jersey Board of Public Utilities (BPU) and the Federal Energy Regulatory Commission (FERC). As a result, PSE&G maintains its accounts in accordance with their prescribed Uniform Systems of Accounts, which are the same. The application of Generally Accepted Accounting Principles (GAAP) by PSE&G differs in certain respects from applications by non-regulated businesses. PSE&G prepares its financial statements in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 71 "Accounting for the Effects of Certain Types of Regulation" (SFAS 71). In general, SFAS 71 recognizes that accounting for rate-regulated enterprises should reflect the relationship of costs and revenues. As a result, a regulated utility may defer recognition of costs (a regulatory asset) or recognize obligations (a regulatory liability) if it is probable that, through the rate-making process, there will be a corresponding increase or decrease in revenues. Accordingly, PSE&G has deferred certain costs, which will be amortized over various periods. To the extent that collection of such costs or payment of liabilities is no longer probable as a result of changes in regulation and/or PSE&G's competitive position, the associated regulatory asset or liability will be charged or credited to income (see Note 3. Regulatory Assets and Liabilities). PSE&G continues to meet the requirements for application of SFAS 71. The regulatory changes proposed in the New Jersey Energy Master Plan (Energy Master Plan) will create a shift from regulated pricing to competitive market pricing for electric generation. Assuming enactment of the required enabling legislation, these proposed changes will limit Enterprise's and PSE&G's ability to continue to meet the applicable criteria of SFAS 71 for the generation portion of PSE&G's business. If PSE&G were to discontinue the application of SFAS 71, there could be an extraordinary, non-cash charge to operations that could be material to the financial position and results of operations of Enterprise and PSE&G. However, if PSE&G's proposal in response to the Energy Master Plan is approved by the BPU as filed, PSE&G does not expect such a charge to occur. In response to the continuing deregulation of the electric utility industry, the Financial Accounting Standards Board (FASB), through its Emerging Issues Task Force (EITF), undertook an initiative designated as EITF Issue 97-4, "Deregulation of the Pricing of Electricity - Issues Related to the Application of FASB Statements No. 71 and No. 101" (EITF 97-4). The purpose of this initiative was to develop guidance for the application of SFAS 101, "Regulated Enterprises Accounting for the Discontinuation of Application of FASB Statement No. 71" (SFAS 101). SFAS 101 addresses how an enterprise that ceases to meet the criteria for application of SFAS 71 to all or part of its operations should report that event in its general-purpose financial statements. The EITF's consensus on this issue is that an enterprise is required to discontinue the application of SFAS 71 for the deregulated portion of its business once legislation is passed or a rate order is issued which contains a sufficiently detailed plan to transition from regulated pricing to market pricing. In addition, the EITF concluded that an enterprise may continue to carry on its books the regulatory assets and liabilities of the portion of the business to which SFAS 101 is being applied, provided that regulators have approved a regulated cash flow stream. This also applies to costs or obligations not yet recorded as regulatory assets or liabilities regardless of when incurred. The discontinuance of SFAS 71 also requires an enterprise to reevaluate the impact of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121). SFAS 121 requires that regulatory assets be written off once they are no longer probable of recovery and that impairment losses be recorded for long-lived assets when related future cash flows or appraised value are less than the carrying value of the assets. The impact to Enterprise and PSE&G will be determined based on the outcome of the Energy Master Plan proceedings, including PSE&G's proposal filed in response to those proceedings. Under its proposal, PSE&G would have the opportunity, through various mechanisms, to recover its electric generation related potentially stranded costs. Management cannot predict the outcome of the Energy Master Plan proceeding, its related legislative process or the related impact of EITF 97-4 on Enterprise's and PSE&G's future financial condition, results of operations and net cash flows. However, depending on legislative and regulatory actions taken in New Jersey with respect to electric utility deregulation, there could be a material adverse effect on such results (see Note 2. Rate Matters). PSE&G has certain regulatory assets resulting from the use of a level of depreciation expense in the ratemaking process that differs from the amount that is recorded under generally accepted accounting principles for non-regulated companies. PSE&G cannot presently quantify what the financial statement impact would be if depreciation expense were required to be determined absent regulation, but the impact on the financial position, results of operations and net cash flows of Enterprise and PSE&G could be material (see Note 2. Rate Matters). Statement of Position 96-1 "Environmental Remediation Liabilities" (SOP 96-1) issued by the American Institute of Certified Public Accountants is effective for the fiscal years that begin after December 15, 1996. SOP 96-1 provides guidance where remediation is required because of the threat of litigation, a claim or an assessment. This Statement does not provide guidance on accounting for pollution control costs as it applies to current operations, costs of future site restoration or closure that are required upon the cessation of operations or sale of facilities or for remediation obligations undertaken at the sole discretion of management. The adoption of SOP 96-1 did not have a material impact on the financial condition, results of operations and net cash flows of Enterprise and PSE&G. For additional information concerning certain of PSE&G's Environmental Remediation Liabilities, see Note 2. Rate Matters and Note 10. Commitments and Contingent Liabilities. Consolidation Policy The consolidated financial statements include the accounts of Enterprise and its subsidiaries. Enterprise and its subsidiaries consolidate those entities in which they have a controlling interest. All significant intercompany accounts and transactions are eliminated in consolidation. Those entities in which Enterprise does not have a controlling interest are being accounted for under the equity method of accounting. For investments in which significant influence does not exist, the cost method of accounting is applied. Certain reclassifications of prior year data have been made to conform with the current presentation. Unamortized Debt Expense Gains, losses and the costs of issuing and redeeming long-term debt are deferred and amortized over the life of the applicable debt. Utility Plant--PSE&G Additions to utility plant and replacements of units of property are capitalized at original cost. The cost of maintenance, repair and replacement of minor items of property is charged to appropriate expense accounts. At the time units of depreciable property are retired or otherwise disposed, the original cost less net salvage value is charged to accumulated depreciation. Depreciation and Amortization Depreciation is computed under the straight-line method. Depreciation is based on estimated average remaining lives of the several classes of depreciable property. These estimates are reviewed on a periodic basis and necessary adjustments are made as approved by the BPU. Depreciation rates stated in percentages of original cost of depreciable property were 3.53% in 1997 and 1996 and 3.52% in 1995 (see Note 2. Rate Matters). Nuclear fuel burnup costs are charged to fuel expense on a units-of-production basis over the estimated life of the fuel. Rates for the recovery of fuel used at all nuclear units include a provision of one mill per kilowatt-hour (KWH) of nuclear generation for spent fuel disposal costs (see Note 11. PSE&G Nuclear Decommissioning). Use of Estimates The process of preparing financial statements in conformity with GAAP requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts. Decontamination and Decommissioning--PSE&G In 1993, FERC issued Order No. 557 regarding the accounting and rate-making treatment of special assessments levied under the National Energy Policy Act of 1992 (EPAct). Order No. 557 provides that special assessments are a necessary and reasonable current cost of fuel and shall be fully recoverable in rates in the same manner as other fuel costs (see Note 2. Rate Matters and Note 11. PSE&G Nuclear Decommissioning). Allowance for Funds Used During Construction (AFDC)--PSE&G AFDC represents the cost of debt and equity funds used to finance the construction of new utility facilities. The amount of AFDC capitalized is reported in the Consolidated Statements of Income as a reduction of interest charges for the borrowed funds component and as other income for the equity funds component. The rates used for calculating AFDC in 1997, 1996 and 1995 were 5.71%, 5.83% and 6.98%, respectively. Revenues and Fuel Costs--PSE&G Revenues are recorded based on services rendered to customers during each accounting period. PSE&G records unbilled revenues representing the estimated amount customers will be billed for services rendered from the time meters were last read to the end of the respective accounting period. Rates include projected fuel costs for electric generation, purchased and interchanged power and gas purchased. The fuel component of the LEAC rate was frozen for 1997 and 1998 as part of the December 31st Order and PSE&G bears all risks associated with fuel prices (see Note 2. Rate Matters). Any Electric Levelized Energy Adjustment Clause (LEAC) and Levelized Gas Adjustment Clause (LGAC) underrecoveries or overrecoveries, together with interest (in the case of net overrecoveries), are deferred and included in operations in the period in which they are reflected in rates. Effective January 1, 1998, the amount included for LEAC under/overrecovery represents the difference between fuel related revenues and fuel related expenses which are comprised of the cost of generation and interchanged power at the Pennsylvania--New Jersey--Maryland Interconnection (PJM) market clearing price (see Note 2. Rate Matters). Financial Instruments--PSE&G Under its commodity hedging program, PSE&G may enter into certain contracts with counterparties to manage exposure to electric and natural gas price volatility. These contracts, in conjunction with owned electric generating capacity, are designed to cover estimated electric and gas customer commitments. PSE&G's accounting policy for physical instruments is to recognize gains and losses in income upon settlement of the contracts. PSE&G's accounting policy for financial instruments is to mark-to-market and record unrealized gains and losses on hedged transactions as a component of stockholder's equity while unrealized gains and losses on speculative transactions are recorded in results of operations. These financial instruments and the effect of marking to market do not have a material impact on PSE&G's financial condition, results of operations and net cash flows. PSE&G does not hold any financial instruments of a leveraged nature. Financial Instruments--EDHI Gains and losses on hedges of existing assets or liabilities are included in the carrying amounts of those assets and liabilities and are ultimately recognized in income as part of those carrying amounts. Gains and losses related to qualifying hedges of firm commitments or anticipated transactions also are deferred and recognized in income or as adjustments of carrying amounts when the hedged transaction occurs (see Note 8. Financial Instruments). Foreign Currency Translation--EDHI The assets and liabilities of EDHI's foreign operations are translated into U.S. dollars at current exchange rates and revenues and expenses are translated at average exchange rates for the year. Resulting translation adjustments are reflected as a separate component of stockholders' equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency, except those transactions which operate as a hedge of an identifiable foreign currency commitment or as a hedge of a foreign currency investment position, are included in the results of operations as incurred. Income Taxes Enterprise and its subsidiaries file a consolidated Federal income tax return and income taxes are allocated to Enterprise's subsidiaries based on the taxable income or loss of each subsidiary. Investment tax credits were deferred in prior years and are being amortized over the useful lives of the related property, including nuclear fuel. Benefit Plans Non-represented employees of PSE&G commencing service before January 1, 1996, represented employees of PSE&G commencing employment before January 1, 1997 and certain employees of PSE&G's affiliated companies are covered by a noncontributory trusteed pension plan (Pension Plan) from the date of hire. Non-represented employees of PSE&G who commenced service after January 1, 1996, represented employees of PSE&G who commenced employment after January 1, 1997 and certain employees of PSE&G's affiliated companies are covered by a cash balance pension plan. The policy is to fund pension costs accrued. The funding policy for the plan year 1997 was modified to provide annual funding not to exceed the maximum tax deductible amount. Contributions will be made each year based on targeted funding levels for the plan (see Note 13. Pension Plan). In 1993, Enterprise and PSE&G adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (SFAS 106), which requires that the expected cost of employees' postretirement health care and life insurance benefits be charged to income during the years in which employees render service (see Note 2. Rate Matters and Note 14. Postretirement Benefits Other Than Pensions). Impairment of Long-Lived Assets On January 1, 1996, Enterprise and PSE&G adopted SFAS 121, which requires review for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The adoption of SFAS 121 did not have an impact on the results of operations, financial condition and net cash flows of Enterprise and PSE&G. However, future developments in the electric industry and utility regulation could jeopardize the full recovery of the carrying cost of certain investments. Stock-Based Compensation SFAS No. 123 "Accounting for Stock-Based Compensation" (SFAS 123) was effective for fiscal years commencing after December 15, 1995. SFAS 123 establishes financial accounting and reporting standards for stock based compensation plans and includes all arrangements by which employees receive shares of stock or other equity instruments of the employer or by which the employer incurs liabilities to employees in amounts based on the price of the employer's stock. SFAS 123 provides an entity the option to either adopt the new method or to continue to measure compensation cost as prescribed by Accounting Principles Board Opinion No. 25 (APB 25) "Accounting for Stock Issued to Employees" and provide pro forma disclosure of the effect of adopting SFAS 123. Enterprise has elected to continue its current accounting treatment for stock compensation under APB 25. If stock based compensation costs for Enterprise had been determined based on the methodology prescribed in SFAS 123, there would have been a charge to earnings of approximately $0.1 million with no impact on earnings per share. Earnings Per Share In February 1997, the FASB issued SFAS No. 128, "Earnings per Share", which is effective for financial statements issued after December 15, 1997. Under the new standard, basic earnings per share is computed as earnings available to common stockholders divided by weighted average shares outstanding excluding the dilutive effect of potential common shares. Diluted earnings per share includes the dilutive effect of potential common shares. Enterprise has an existing stock option plan which allows for options to be granted on a periodic basis. These potential common shares had no impact on diluted earnings per share for the years ended December 31, 1997, 1996 and 1995. Note 2. Rate Matters New Jersey Energy Master Plan (Energy Master Plan) On April 30, 1997, the BPU issued its final report regarding Phase II (final Phase II report) of the Energy Master Plan addressing wholesale and retail electric competition in New Jersey. The final Phase II report was approved by the Governor and Legislature in July 1997. In accordance with the final Phase II report, PSE&G filed a proposal regarding competition and rates with the BPU on July 15, 1997. The BPU is in the process of reviewing the filing and holding public hearings. The hearings on PSE&G's proposal commenced in early February 1998 and are expected to conclude during the second quarter of 1998, with a decision expected by July 1998. Legislation providing the BPU with requisite authority to implement such competition is necessary. The final Phase II report included the following key provisions: Beginning January 1, 1999, the rates for bundled electricity services, consisting of power generation, transmission, distribution and auxiliary customer services, such as metering and billing, would be unbundled. Each electric utility, including PSE&G, would continue to be responsible for providing distribution service to all customers, with price and service quality for distribution service continuing to be regulated by the BPU. Other customer services would also continue to be offered by each electric utility for a monthly fee, including metering, billing and account administration, which would also continue to be regulated by the BPU. The phase-in period for customers' choice of energy suppliers is to include 10% in October 1998, 20% by January 1999, 35% by April 1999, 50% by October 1999, 75% by April 2000, and 100% by July 2000. Transmission service would be provided by an Independent System Operator (ISO) which would be responsible for maintaining the reliability of the regional power grid and would be regulated by FERC. Utilities would continue to pass through the cost of transmission to customers in regulated rates. Metering and billing would also be reviewed in order to make recommendations for the introduction of competition into the customer services area. A distribution utility would be permitted to offer customer services, such as equipment repair and service contracts, in a competitive marketplace. A fully competitive marketplace must exist before the BPU will act to end economic regulation of power supply. This will require, at a minimum, utility generating assets and activities to be functionally separated and operated at arms length from the transmission, distribution and customer service activities of the electric utilities. The BPU would reserve final judgment on the issue of requiring divestiture of utility generating assets until detailed analyses of the potential for market power abuses by utilities have been performed. In addition, the BPU indicated its belief that it is necessary to have a fully independent and operating ISO prior to the implementation of customer choice. The BPU proposed that retail competition in New Jersey be introduced approximately 12 to 18 months after the implementation of full wholesale competition as provided by FERC Order No. 888. Customer protections will include: maintaining the electric utility as a universal service or "basic generation service" provider; continued funding of social programs now provided by electric utilities; registration of all third party power suppliers with the BPU; establishment of standards of conduct for third party power suppliers; and continued funding for energy efficiency programs. Utilities will have an opportunity for a limited number of years to recover through rates stranded costs associated with generating capacity investment and independent power contract costs made prior to the advent of competition. Utilities are obligated to take all reasonably available measures to mitigate stranded costs caused by the introduction of retail competition. A market transition charge is to be established for a limited time of 4-8 years to provide for the recovery of non-mitigated stranded costs and would be a separate component of a customer's electric bill. The issue of securitization of stranded costs is to be explored. There is a need for Federal action in a number of areas as an integral part of electric restructuring. Of particular concern is the transport of nitrogen oxides (NOx) and other pollutants to New Jersey from power plants located in the Midwest and Southeast. Near-term rate reductions in retail electric rates of 5-10% are required. A rate unbundling plan, stranded cost status report and restructuring plan to be filed by each utility by July 15, 1997. The final Phase II report endorsed environmental disclosure by power suppliers to provide consumers with information necessary to choose cleaner sources of power available in the marketplace. The information will enable verification of claimed emission rates, which will be explored by a Consumer Protection Task Force. PSE&G's proposal in response to the final Phase II report of the Energy Master Plan included the following key elements: A rate decrease of between 5% and 10%, effective January 1, 1999, dependent upon BPU approval of several key elements of the proposal. Allowing all customers in all classes to register for their choice of energy supplier beginning October 1, 1998. Those customers choosing a supplier other than PSE&G would be permitted to switch effective January 1, 1999. A transition period of seven years with basic tariff rates capped during that period. During the transition period, PSE&G would maintain responsibility for system reliability of energy and capacity supply. Recovery of transition costs through asset securitization, restructuring of certain non-utility generation contracts and depreciation accounting changes (see Stranded Costs, Securitization and Depreciation below). Recovery of mandated societal costs, such as nuclear decommissioning and Demand Side Management (DSM), would be adjusted based on changes in these costs. Discontinuation of PSE&G's LEAC effective December 31, 1998. PSE&G would be responsible for all risks associated with fuel prices, changes in operation and maintenance expenses and mitigation of the transition costs of non-securitized generation production assets within the price capped rates. Transfer of PSE&G's nuclear and fossil generation assets, at net book value, to a separate entity functionally independent of PSE&G at the conclusion of the transition period. PSE&G would file a rate case or a plan for a form of alternative regulation for its electric distribution delivery service functions one year prior to the end of the transition period. At the end of the transition period, responsibility for generation reliability would shift to the marketplace and PSE&G would retain its obligation to connect and deliver energy and would offer basic generation service. Pursuant to actions taken by the BPU under its Energy Master Plan proceeding, various BPU-sponsored working groups have been created to address and recommend solutions regarding certain issues regarding restructuring. PSE&G is participating in these working groups including the Consumer Protection Task Force, Phase-In Mechanisms Working Group, Customer Services Working Group and DSM and Renewables Working Group. In addition, PSE&G is participating in BPU proceedings dealing with certain generic issues, including exit fees, market power, affiliate relationships, mechanics of customer phase-in and fair competition. The working groups and the generic issues proceedings are running concurrently with the Energy Master Plan proceedings. In an Order dated June 25, 1997, the BPU commenced management audits of all New Jersey electric utilities, with the assistance of one or more consulting firms, under the direction of its own audit staff. The audit process included, but was not limited to, focused reviews of electric utility filings in response to the Energy Master Plan. The management audit process for PSE&G was concluded in December 1997 with a report filed by the management consulting firms which performed the audit on behalf of the BPU. A second report on restructuring is yet to be filed. The audit report, which was approved by the BPU on January 29, 1998, among other things: Supported a consumer rate reduction target of 8.4% to 11.7% and the use of an energy and capacity credit mechanism on customers' bills. Substantiated $2.9 billion of PSE&G's $3.9 billion stranded cost estimate, challenging certain assumptions as well as $230 million of capital additions incurred since 1992. Agreed with the use of securitization as a means of financing stranded costs in order to obtain rate reductions, recommending $2.2 billion (compared to the $2.5 billion requested by PSE&G) of securitization. Noted that an incentive or true-up mechanism may be appropriate to reduce the risk of significant overrecovery of stranded costs given the uncertainty surrounding load, market prices and the potential for mitigation. The BPU can adopt, reject or modify the audit report's results in its decision on PSE&G's proposal. PSE&G cannot predict to what extent the BPU will rely on the results of the audit report nor what the ultimate outcome of the Energy Master Plan proceedings will be. The decision of the BPU in the Energy Master Plan proceeding and the legislation to be adopted by the New Jersey Legislature required to implement certain aspects of electric restructuring in the State will establish the industry rules for the future. These actions are expected to fundamentally change the electric industry in the State by introducing retail competition to replace the utilities' former monopoly position and potentially requiring or resulting in the separation or sale of generation assets. Depending upon the outcome of these proceedings, these fundamental industry changes could have a material adverse effect on Enterprise's and PSE&G's financial condition, results of operations and net cash flows. Enterprise and PSE&G cannot predict the outcome of this matter. Stranded Costs Stranded costs represent the portion of the book value of generation related assets or the portion of payments under power purchase contracts which are in excess of their value in a competitive deregulated marketplace. PSE&G has identified its potentially stranded costs associated with fossil and nuclear generating stations at $3.9 billion, based on certain assumptions, including future market prices of electricity and performance of generating units. Changes in these assumptions could materially alter the estimated amount of potentially stranded costs. Recoverability of these costs is largely dependent on the transition rules to be established by regulators. PSE&G has proposed to securitize $2.5 billion of these costs, with the remainder to be mitigated through cost saving measures during a transition period of seven years. In addition, PSE&G is seeking to restructure certain of its BPU approved contracts with Non-utility Generators (NUGs), which are estimated to be $1.6 billion above assumed future market prices. As presently proposed, the Energy Master Plan would allow recovery of these restructuring costs in rates. Since the Energy Master Plan proceeding is still in progress, the issue of securitization and the extent of its application have not been determined; and recognizing the potential need for legislative action, management cannot predict the extent to which regulators will allow recovery of such costs. As noted above, the management audit report identified $2.9 billion of stranded costs as compared to the $3.9 billion estimated by PSE&G. The decision of the BPU in this matter could have a material adverse effect on Enterprise's and PSE&G's financial condition, results of operations and net cash flows. Securitization In its Energy Master Plan proposal, PSE&G has proposed to securitize $2.5 billion of its potentially stranded costs through the issuance of transition bonds with an estimated term of 15 years. Securitization is a method of refinancing potentially stranded costs with lower cost debt. The credit quality of the debt would be enhanced via enabling State legislation and approval by the BPU of an irrevocable, non-bypassable charge to service the interest and principal payments on the debt. The use of securitization as a means to reduce rates depends on enabling legislation, which the New Jersey Legislature is not expected to consider prior to the second quarter of 1998. If legislative approval is not granted, PSE&G will alter its Energy Master Plan proposal and projected rate reduction range. Since the Energy Master Plan proceeding is still in progress, the issue of securitization and the extent of its application have not been determined; and recognizing the potential need for legislative action, management cannot predict the extent to which regulators will allow the use of such securitization for recovery of stranded costs. As noted above, the management audit report recommended $2.2 billion of securitization. The decision of the BPU and/or the related legislative action required in this matter could have a material adverse effect on Enterprise's and PSE&G's financial condition, results of operations and net cash flows. Depreciation In its Energy Master Plan proposal, PSE&G has proposed to lengthen the depreciable lives of its electric distribution assets from 28 to 45 years. These assets are expected to remain regulated. The excess depreciation reserve, calculated based on this change in depreciable lives, would be amortized over a seven year transition period. If PSE&G's plan is adopted as proposed, it would result in a reduction of annual depreciation expense of $116 million during such transition period and $35 million thereafter over the remaining life of these assets. Settlement of Certain Regulatory Issues By Order dated December 31, 1996 (December 31st Order), the BPU approved a settlement among PSE&G, the staff of the BPU (Staff) and the New Jersey Division of Ratepayer Advocate (Ratepayer Advocate) addressing (1) the cost impact of the 1995 shutdown of Salem Nuclear Generating Station (Salem) Units 1 and 2 (Salem 1 and 2), including the "used and useful" issue related to the units through December 31, 1998; (2) the recovery of certain replacement power costs associated with the 1994 Salem 1 outage; and (3) the recovery of capacity costs associated with PSE&G's power purchases from cogeneration producers through December 31, 1998. Under the December 31st Order, PSE&G recorded a charge of $83.9 million for bill credits to electric customers who received credits in January and February 1997. PSE&G also agreed to forego recovery of $12 million associated with energy costs that previously had been deferred. The resulting after-tax earnings loss of $62 million or 26 cents per share of Enterprise Common Stock was previously recorded ($59 million or 25 cents per share in the third quarter of 1996 and $3 million or 1 cent per share in 1995). Under the terms of the December 31st Order, Salem 1 and 2 will continue in base rates without being subject to further refund and PSE&G will assume all nuclear and fossil generating fuel and performance risks, including replacement power costs associated with the Salem, Hope Creek Generating Station (Hope Creek) and Peach Bottom Atomic Power Station (Peach Bottom) nuclear stations from January 1, 1997 through December 31, 1998. The BPU's nuclear performance standard (NPS) will not apply to PSE&G from January 1, 1996 through December 31, 1998 (see Note 10. Commitments and Contingent Liabilities). In addition, the energy component of PSE&G's LEAC was fixed at its existing level with no increase to customers until at least January 1999 (see Electric Levelized Energy Adjustment Clause/Demand Side Adjustment Factor below) with PSE&G responsible for all risks associated with fuel prices. Any underrecovered or overrecovered LEAC balance existing on December 31, 1998 will not be considered in any LEAC review subsequent to that date. Any overrecovery at that date will be applied to reduce any potential stranded costs and any underrecovered balance will be charged to income in the period identified. The December 31st Order provides PSE&G the opportunity, but no guarantee, during the period January 1, 1997 through December 31, 1998, to fully recover the December 31, 1996 underrecovered LEAC energy balance of $151 million ($91 million as of December 31, 1997) without any change in the current energy component of the LEAC charge. Management believes that it will fully recover the underrecovered LEAC balance by December 31, 1998 and will continue to follow deferred accounting treatment for the LEAC (see discussion of the Energy Master Plan above). In addition to the resolution of the Salem "used and useful" issue, the December 31st Order addressed two other separate long standing issues that PSE&G had been litigating before the BPU. The first pertains to the recovery of certain replacement power costs associated with a 58 day outage at Salem 1 in 1994. The December 31st Order required PSE&G to reduce its underrecovered LEAC balance by $7 million related to that outage. The second pertains to the recovery of capacity costs associated with electric utility power purchases from cogeneration producers through December 31, 1998. The December 31st Order required PSE&G to provide bill credits to electric customers totaling $6.4 million during January and February 1997. In addition, PSE&G reduced its underrecovered LEAC balance by $5 million related to the recovery of capacity costs. Through separate letter agreements, PSE&G and the Ratepayer Advocate agreed on a commitment by PSE&G to provide financial assistance toward economic growth and development in New Jersey. This commitment, which runs through December 31, 1999, has four key elements. First, PSE&G created a $30 million revolving economic development fund with emphasis on stimulating jobs and developing high technology projects in urban areas. Second, PSE&G will continue to provide incentives to encourage local public housing authorities to replace up to 4,000 refrigerators a year. Third, PSE&G committed $1 million to develop a fund to provide innovative assistance to low income residents who are having difficulty paying energy bills. Finally, PSE&G will develop a computer system to assist low income residents in identifying government and community programs from which they would be eligible to receive benefits. On February 24, 1997, an Intervenor's group filed an appeal in New Jersey Superior Court seeking an invalidation of the December 31st Order. Notices of Dismissal of Appeal were filed by the Intervenor's group on August 1, 1997 with the Superior Court of New Jersey, Appellate Division. Levelized Gas Adjustment Clause (LGAC) In November 1996, the BPU approved an approximate $80 million increase based upon a modified Interim Stipulation in the LGAC proceeding. The monthly pricing methodology for Large Volume Gas (LVG) and General Service Gas (GSG) customers, with minor modifications, will continue. During the months of December 1996 and January 1997, approximately $14 million was refunded through bill credits to customers that purchased LVG or GSG service (excluding off-peak service) during the period January 1, 1996 through October 31, 1996. The refund was based on an over collection of gas costs from those customer classes and was apportioned based on those customers' billed usage during that period. On April 2, 1997, the BPU approved PSE&G's LGAC stipulation. The interim residential LGAC charge, approved in November 1996, continued through December 31, 1997. On July 30, 1997, the BPU authorized PSE&G to hedge or lock-in up to 50% of its residential natural gas portfolio, which may be accomplished using either physical or financial hedging mechanisms, beginning with the 1997-1998 heating season. Such hedges are intended to provide price stability for residential customers (see Note 8. Financial Instruments). On November 14, 1997, PSE&G filed its 1997/98 LGAC petition with the BPU requesting a $45 million increase on an annual basis in its LGAC for the period January 1, 1998 to December 31, 1998. This increase, as filed, amounts to approximately 4.8% on a typical residential bill. Public hearings were held on February 3, 1998. On February 18, 1998, the BPU approved a Stipulation agreed to by the parties in the proceeding. The Stipulation provides for an interim increase in LGAC revenues of approximately $31 million, excluding State sales and use tax. This represents an increase of 3.5% on a typical residential bill. The parties will continue to litigate and PSE&G cannot predict the final outcome of this proceeding. Electric Levelized Energy Adjustment Clause (LEAC)/Demand Side Adjustment Factor (DSAF) As discussed above, the December 31st Order has fixed the energy component of the LEAC as of December 31, 1996 (see Settlement of Certain Regulatory Issues). Additionally, under PSE&G's Energy Master Plan proposal, if approved, the LEAC would be discontinued. Certain components of the LEAC would become part of the societal benefits clause under PSE&G's proposal. No assurances can be given as to the outcome of the Energy Master Plan proceedings. On February 24, 1997, PSE&G filed with the BPU for an increase in the DSAF component of the LEAC, to become effective on or before May 1, 1997. The filing was to be effective for the period from May 1997 through December 1998 and requested an annualized increase of $151.8 million. The filing included recovery of demand side management (DSM)/conservation costs related to BPU approved programs and would raise rates to a level sufficient to recover such costs incurred through December 31, 1998. At December 31, 1997, PSE&G had an underrecovered balance, including interest, of approximately $122 million related to these programs. Such amount is included in Deferred Debits on PSE&G's balance sheet. A hearing was held before the Office of Administrative Law (OAL) in September 1997 and on December 5, 1997, the Administrative Law Judge recommended in his initial decision that the BPU approve $150.1 million of the $151.8 million requested. On January 19, 1998, the BPU extended its period of review to accept, reject or modify the Judge's decision. Approval of this filing by the BPU would result in recovery of this balance, as well as the costs of these programs through 2000. PSE&G cannot predict the outcome of this matter. Remediation Adjustment Charge (RAC) In 1992, the BPU approved a mechanism for recovery of PSE&G's costs associated with its Manufactured Gas Plant Remediation Program (Remediation Program) allowing the recovery of actual costs plus carrying charges, net of insurance recoveries, over a seven-year period through PSE&G's LGAC and LEAC, with 60% charged to gas customers and 40% charged to electric customers. In November 1996, the BPU approved an Interim LGAC Stipulation regarding costs incurred during the period August 1, 1995 through July 31, 1996. On July 30, 1997, the BPU approved the recovery of remediation program costs incurred during the period August 1, 1995 through July 31, 1996 on a final basis. On August 1, 1997, PSE&G requested that the BPU approve recovery of $6.8 million through PSE&G's RAC for manufactured gas plant remediation costs. This represents an increase in the amount of PSE&G's recovery of such costs by approximately $2 million over current rate levels. On October 9, 1997, this matter was transferred to the OAL. PSE&G cannot predict the outcome of this proceeding. Consolidated Tax Benefits In a case affecting another utility in which neither Enterprise nor PSE&G were parties, the BPU considered the extent to which tax savings generated by non-utility affiliates included in the consolidated tax return of that utility's holding company should be considered in setting that utility's rates. In 1992, the BPU approved an order in such case treating certain consolidated tax savings generated after June 30, 1990 by that utility's non-utility affiliates as a reduction of its rate base. Also in 1992, the BPU issued an order resolving PSE&G's 1992 base rate proceeding without separate quantification of the consolidated tax issue. Such order did not provide final resolution of the consolidated tax issue for any subsequent base rate filing. While Enterprise continues to account for its two wholly-owned subsidiaries on a stand-alone basis, resulting in a realization of tax benefits by the entity generating the benefit, an ultimate unfavorable resolution of the consolidated tax issue could reduce PSE&G's and Enterprise's revenues, net income or net cash flows. In addition, an unfavorable resolution may adversely impact Enterprise's non-utility investment strategy. Enterprise believes that PSE&G's taxes should be treated on a stand-alone basis for rate-making purposes, based on the separate nature of the utility and non-utility businesses. The issue of Enterprise sharing the benefits of consolidated tax savings with PSE&G or its ratepayers was addressed by the BPU in its July 28, 1996 letter which informed PSE&G that the issue of consolidated tax savings can be discussed in the context of PSE&G's next base rate case or plan for an alternative form of regulation. However, neither Enterprise nor PSE&G is able to predict what action, if any, the BPU may take concerning consolidation of tax benefits in future rate proceedings (see Note 12. Federal Income Taxes). Postretirement Benefits Other Than Pensions (OPEB) In August 1996, the BPU initiated a generic proceeding to resolve the regulatory and rate issues associated with SFAS 106. On January 8, 1997, the BPU issued its Order adopting a stipulation of the parties to the proceeding regarding SFAS 106 cost recovery mechanisms and initiating a second phase of the generic proceeding requiring each utility's individual filing to obtain SFAS 106 accrual rate recognition under one of the rate mechanisms established in the BPU Order (see Note 3. Regulatory Assets and Liabilities and Note 14. Postretirement Benefits Other Than Pensions). Other Rate Matters Interim Competitive Transition Charge (ICTC) In September 1996, PSE&G filed a petition with the BPU to establish an ICTC which is designed to recover stranded costs which will result from a customer leaving PSE&G's system as a full requirements customer. If approved by the BPU as filed, this charge would apply to customers who, after September 19, 1996, commit to an alternate source of electric power while remaining physically located in PSE&G's electric franchise area. On April 24, 1997, the BPU issued a generic order to investigate policy issues related to whether customers who cease to receive electric service from a utility and go to on-site generation should be charged an exit fee. PSE&G's petition and motions concerning its September 1996 ICTC filing have been placed in abeyance pending the conclusion of the separate generic proceeding on this issue. The generic ICTC matter continues to be reviewed by the BPU. PSE&G cannot predict the outcome of this proceeding. Gas Unbundling PSE&G's unbundled gas transportation tariffs, which have been in place since 1994, allow any nonresidential customer, regardless of size, to purchase its own gas, transport it to PSE&G pipelines and require PSE&G to deliver such gas to the customer's facility. To date, approximately 17,000 commercial and industrial customers, of approximately 180,000 such customers eligible, have elected to utilize this service. It is expected that this number will not significantly increase with the changes in the law affecting the gross receipts and franchise tax which became effective on January 1, 1998. Those changes now apply sales tax to sales by marketers, putting a similar tax burden on them as borne by PSE&G (see NJGRT Reform below). Current transportation rate schedules produce the same non-fuel revenue per therm as existing sales tariff rate schedules. Thus, to date, PSE&G's earnings have been unaffected by whether the customers remain on sales tariffs or convert to transportation service. Enterprise's indirect subsidiary, Energis, provides non-utility gas marketing services operating in New Jersey and several other states. In April 1997, the BPU approved PSE&G's proposal for a residential gas unbundling pilot program known as SelectGas. The pilot program allows 65,000 residential natural gas customers to participate in the competitive marketplace. To date, of the 65,000 eligible customers, none has subscribed to the program. PSE&G cannot predict the future impact of this program on its financial condition, results of operations and net cash flows. PSE&G also participates in a retail pilot program of the New Jersey Natural Gas Company (New Jersey Natural) to provide unbundled gas transportation to former residential customers of New Jersey Natural. PSE&G has enrolled over 1,300 former residential gas customers of New Jersey Natural. New Jersey Gross Receipts and Franchise Tax (NJGRT) Reform On July 14, 1997, Governor Whitman signed legislation eliminating the NJGRT, effective January 1, 1998. This legislation replaces the NJGRT with a combination of the corporate business tax, the State sales and use tax and a Transitional Energy Facility Assessment (TEFA). The TEFA will be phased out over five years. While PSE&G was subject to approximately 13% tax under the NJGRT, after the phase out of the TEFA, the tax rate will be substantially reduced. The new tax structure is expected to improve the competitive position of PSE&G vis-a-vis non-utility energy providers in New Jersey who were not subject to the NJGRT. On September 15, November 18 and December 24, 1997, PSE&G filed revised tariff schedules and other pertinent information, in compliance with the legislation. On December 31, 1997, the BPU accepted PSE&G's filings with revisions for the purpose of implementing interim rates with regard to the new tax structure effective with service rendered on and after January 1, 1998. The BPU continues its administrative review of the filings of all utilities and is expected to approve permanent rates no later than April 1, 1998. Note 3. Regulatory Assets and Liabilities Regulatory assets and liabilities are recorded in accordance with the provisions of SFAS 71 (see Note 1. Organization and Summary of Significant Accounting Policies and Note 2. Rate Matters). At December 31, 1997 and 1996, PSE&G had deferred the following regulatory assets on the Consolidated Balance Sheet: December 31, --------------------- 1997 1996 ------ ------- (Millions of Dollars) Unamortized Debt Expense............................ $135 $138 Deferred OPEB Costs................................. 289 226 Unrecovered Environmental Costs..................... 122 126 Underrecovered Electric Energy and Gas Costs........ 167 176 Unrecovered SFAS 109 Income Taxes................... 725 752 Deferred Demand Side Management Costs............... 116 40 Deferred Decontamination and Decommissioning Costs.. 43 47 Property Abandonments............................... 37 52 Unrecovered Plant and Regulatory Study Costs........ 34 34 Oil and Gas Property Write-Down..................... 26 31 ------ ------ Total Regulatory Assets......................... $1,694 $1,622 ====== ====== Unamortized Debt Expense: Represents bond issuance costs, premiums, discounts and losses on reacquired long-term debt. Bond issuance costs and associated premiums and discounts are generally amortized over the life of the debt issuance. In accordance with FERC regulations, costs to reacquire debt are amortized over the remaining original life of the retired debt. When refinancing debt, the unamortized portion of the original debt issuance costs of the debt being retired must be amortized over the life of the replacement debt. Deferred OPEB Costs: Includes costs associated with adoption of SFAS 106 which are deferred in accordance with EITF Issue 92-12. For a discussion of OPEB Costs, see Note 14. Postretirement Benefits Other Than Pensions and Note 2. Rate Matters. Unrecovered Environmental Costs: Represents environmental costs which are probable of recovery in future rates. For discussion of unrecovered environmental costs, see Note 2. Rate Matters. Underrecovered Electric Energy and Gas Costs: Recoveries of electric energy and gas costs are determined by the BPU under the LEAC and LGAC. PSE&G's deferred fuel balances as of December 31, 1997 and 1996 reflect underrecovered costs as follows: December 31, ------------------- 1997 1996 ---- ---- (Millions of Dollars) Underrecovered Electric Energy Costs............. $91 $151 Underrecovered Gas Fuel Costs.................... 76 25 ---- ---- Total.......................................... $167 $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. Management believes that it will recover this amount by December 31, 1998 and continues to follow deferred accounting treatment for the LEAC. For additional discussion, see Note 2. Rate Matters. Unrecovered SFAS 109 Income Taxes: Represents regulatory asset related to the implementation of SFAS 109, "Accounting for Income Taxes" in 1993 (see Note 12. Federal Income Taxes). Deferred Demand Side Management Costs: Recoveries of DSM/conservation costs (related to BPU-approved programs) are determined by the BPU. PSE&G's deferred DSM balance as of December 31, 1997 and 1996, respectively, reflects underrecovered/(overrecovered) costs as follows: December 31, ------------------- 1997 1996 ---- ---- (Millions of Dollars) Deferred DSM (Including Interest)--Electric.......... $122 $45 Deferred DSM (Including Interest)--Gas............... (6) (5) ---- ---- Total.............................................. $116 $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 existing deferred DSM balance as well as the estimated costs of these programs through December 1998 (see Note 2. Rate Matters). Deferred Decontamination and Decommissioning Costs: Represents amounts related to decontamination and decommissioning which are probable of recovery in future rates. For discussion of decontamination and decommissioning costs, see Note 11. PSE&G Nuclear Decommissioning. Property Abandonments: The BPU has authorized PSE&G to recover after-tax property abandonment costs from its customers. The table of Regulatory Assets above reflects property abandonments, and related tax effects, for which no return is earned. The net-of-tax discount rate used was between 4.868% and 5.292%. Unrecovered Plant and Regulatory Study Costs: Amounts shown in the consolidated balance sheets consist of costs associated with developing, consolidating and documenting the specific design basis of PSE&G's jointly owned nuclear generating stations, as well as PSE&G's share of costs associated with the cancellation of the Hydrogen Water Chemistry System Project (HWCS Project) at Peach Bottom. PSE&G has received both BPU and FERC approval to defer and amortize, over the remaining lives of the Salem, Hope Creek and Peach Bottom nuclear units, costs associated with configuration baseline documentation and the canceled HWCS Project. Oil and Gas Property Write-Down: On December 31, 1992, the BPU approved the recovery of PSE&G's deferral of an EDC write-down through PSE&G's LGAC over a ten-year period beginning January 1, 1993. Note 4. Long-Term Investments Long-Term Investments are primarily those of EDHI. December 31, ----------------------- 1997 1996 ----------- ----------- (Millions of Dollars) Lease Agreements (see Note 5. Leasing Activities): Leveraged Leases......................... $1,143 $932 Direct-Financing Leases.................. 2 33 Other Leases............................. 2 3 ----------- ----------- Total................................ 1,147 968 ----------- ----------- Partnerships: General Partnerships..................... 142 138 Limited Partnerships..................... 534 495 ----------- ----------- Total................................ 676 633 ----------- ----------- Corporate Joint Ventures..................... 885 75 Securities................................... 28 48 Other Investments............................ 137 130 ----------- ----------- Total Long-Term Investments.......... $2,873 $1,854 =========== =========== PSRC's leveraged leases are reported net of principal and interest on non-recourse loans, unearned income and deferred tax credits. Income and deferred tax credits are recognized at a level rate of return from each lease during the periods in which the net investment is positive. Partnership investments and corporate joint ventures are those of PSRC, EGDC and CEA. Other Investments, above, relate primarily to Public Service Conservation Resources Corporation (PSCRC), a wholly-owned subsidiary of PSE&G. PSCRC's investment in DSM projects had balances at December 31, 1997 and 1996 of approximately $84 million and $98 million, respectively. Note 5. Leasing Activities As Lessor PSRC's net investments in leveraged and direct financing leases are composed of the following elements:
December 31, 1997 December 31, 1996 ----------------------------- ----------------------------- (Millions of Dollars) (Millions of Dollars) Direct Direct Leveraged Financing Leveraged Financing Leases Lease Total Leases Leases Total ---------- ------------------ ----------- ----------------- Lease rents receivable...... $1,498 $3 $1,501 $1,094 $ 35 $1,129 Estimated residual value.... 635 -- 635 638 8 646 ---------- ------------------ ----------- ----------------- 2,133 3 2,136 1,732 43 1,775 Unearned and deferred income (990) (1) (991) (800) (10) (810) ---------- ------------------ ----------- ----------------- Total investments....... 1,143 2 1,145 932 33 965 Deferred taxes.............. (670) -- (670) (530) (10) (540) ---------- ------------------ ----------- ----------------- Net investments......... $473 $2 $475 $402 $23 $425 ========== ================== =========== =================
PSRC's other capital leases are with various regional, state and city authorities for transportation equipment and aggregated $2 million and $3 million as of December 31, 1997 and 1996, respectively. As Lessee The Consolidated Balance Sheets include assets and related obligations applicable to capital leases under which PSE&G is a lessee. The total amortization of the leased assets and interest on the lease obligations equals the net minimum lease payments included in rent expense for capital leases. Capital leases of PSE&G relate primarily to its corporate headquarters and other capital equipment. Certain of the leases contain renewal and purchase options as well as escalation clauses. Enterprise and its other subsidiaries are not lessees in any capitalized leases. Utility plant includes $52 million for capital leases net of accumulated amortization at December 31, 1997 and 1996. Rent expense included in Operating Expenses for 1997, 1996 and 1995 was $34 million, $32 million and $34 million, respectively. Note 6. Schedule of Consolidated Capital Stock and Other Securities
Current Redemption Outstanding Price December 31, December 31, Shares Per Share 1997 1996 ------------ ----------- ------------- ------------ (Millions of Dollars) Enterprise Common Stock (no par) (A) Authorized 500,000,000 shares; issued and $3,603 $3,627 outstanding at December 31, 1997, 231,957,608 shares, at December 31, 1996, 233,470,291 shares and at December 31, 1995, 244,697,930 shares Enterprise Preferred Securities (B) PSE&G Cumulative Preferred Stock (C) without Mandatory Redemption (D) (E) $100 par value series: 4.08%................................... 146,221 103.00 $15 $15 4.18%................................... 116,958 103.00 12 12 4.30%................................... 149,478 102.75 15 15 5.05%................................... 104,002 103.00 10 10 5.28%................................... 117,864 103.00 12 12 6.80%................................... -- -- -- 19 6.92%................................... 160,711 -- 16 16 $25 par value series 6.75%................................... 600,000 -- 15 15 ------------- ------------ Total Preferred Stock without Mandatory $95 $114 Redemption.............................. ============= ============ With Mandatory Redemption (D) (F) $100 par value series 7.44%................................... -- -- $-- $75 5.97%................................... 750,000 -- 75 75 ------------- ------------ Total Preferred Stock with Mandatory $75 $150 Redemption............................... ============= ============ Monthly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures (D) (F) (H) 9.375%.................................. 6,000,000 -- $150 $150 8.00%................................... 2,400,000 -- 60 60 ------------- ------------ Total Monthly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures............... $210 $210 ============= ============ Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures (D) (F) (G) (H) 8.625%.................................. 8,320,000 -- $208 $208 8.125%.................................. 3,800,000 -- 95 -- ------------- ------------ Total Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures............................ $303 $208 ============= ============ (A) In July 1996, Enterprise initiated a Common Stock repurchase program. As of December 31, 1996, 11,227,639 shares had been repurchased for $307 million. The program concluded on January 17, 1997. The total number of shares repurchased under the program was 12,740,322 at a cost of $350 million. Total authorized and unissued shares include 7,302,488 shares of Enterprise Common Stock reserved for issuance through Enterprise's Dividend Reinvestment and Stock Purchase Plan and various employee benefit plans. In 1997 and 1996, no shares of Enterprise Common Stock were issued or sold through these plans. (B) Enterprise has authorized a class of 50,000,000 shares of Preferred Stock without par value, none of which is outstanding. (C) At December 31, 1997, there were aggregates of 5,954,766 shares of $100 par value and 9,400,000 shares of $25 par value Cumulative Preferred Stock which were authorized and unissued, and which upon issuance may or may not provide for mandatory sinking fund redemption. If dividends upon any shares of Preferred Stock are in arrears in an amount equal to the annual dividend thereon, voting rights for the election of a majority of PSE&G's Board of Directors become operative and continue until all accumulated and unpaid dividends thereon have been paid, whereupon all such voting rights cease, subject to being revived from time to time. (D) At December 31, 1997, the annual dividend requirement and embedded dividend rate for Preferred Stock without mandatory redemption was $10,886,758 and 5.18%, respectively, and for Preferred Stock with mandatory redemption was $4,477,500 and 6.02%, respectively. At December 31, 1996, the annual dividend requirement and embedded dividend rate for Preferred Stock without mandatory redemption was $6,283,425 and 5.45%, respectively, and for Preferred Stock with mandatory redemption was $10,057,500 and 6.75%, respectively. At December 31, 1997 and 1996, the annual dividend requirement and embedded cost of the Monthly Income Preferred Securities (Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures) was $18,862,500 and 6.04%, respectively. At December 31, 1997 and 1996, the annual dividend requirement of the Quarterly Income Preferred Securities (Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures) and their embedded costs were $25,658,750 and 5.70% and $17,940,000 and 5.80%, respectively. (E) During 1996, PSE&G purchased an aggregate of 1,116,024 shares of its 4.08%, 4.18%, 4.30%, 5.05%, 5.28%, 6.80% and 6.92% Cumulative Preferred Stock ($100 par) through a tender offer. (F) For information concerning fair value of financial instruments, see Note 8. Financial Instruments. (G) In February 1997, PSE&G Capital Trust II issued $95 million of 8.125% Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures. (H) PSE&G Capital L.P., PSE&G Capital Trust I and PSE&G Capital Trust II were formed and are controlled by PSE&G for the purpose of issuing Monthly and Quarterly Income Preferred Securities (Monthly and Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures). The proceeds were lent to PSE&G and are evidenced by PSE&G's Deferrable Interest Subordinated Debentures. If and for as long as payments on PSE&G's Deferrable Interest Subordinated Debentures have been deferred, or PSE&G has defaulted on the indentures related thereto or its guarantees thereof, PSE&G may not pay any dividends on its common and preferred stock. The Subordinated Debentures and the indentures constitute a full and unconditional guarantee by PSE&G of the Preferred Securities issued by the partnership and the trusts.
Note 7. Schedule of Consolidated Debt
LONG-TERM December 31, ------------------------------- Interest Rates Maturity 1997 1996 - -------------- -------------- ------------- -------------- (Millions of Dollars) PSE&G First and Refunding Mortgage Bonds (A) 6.875%-7.125% 1997........ $-- $300 6.00% 1998........ 100 100 8.75% 1999........ 100 100 6.00%-7.625% 2000........ 635 400 7.875% 2001........ 100 100 6.125% 2002........ 300 300 6.25%-9.125% 2003-2007... 1,050 1,050 6.80%-6.90% 2008-2012... 3 26 Variable 2008-2012... 66 66 6.75%-7.375% 2013-2017... 375 400 6.45%-9.25% 2018-2022... 139 267 Variable 2018-2022... 14 14 5.55%-7.50% 2023-2027... 568 571 5.70%-6.55% 2028-2032... 499 499 Variable 2028-2032... 25 -- 5.00%-8.00% 2033-2037... 160 160 Medium-Term Notes 7.10%-7.13% 1997 -- 100 8.10%-8.16% 2008-2012... 60 60 7.04% 2018-2022... 9 -- 7.15%-7.18% 2023-2027... 41 41 ------------- -------------- Total First and Refunding Mortgage Bonds.......................... 4,244 4,554 ------------- -------------- Debenture Bonds Unsecured 6.00% 1998........ 18 18 Variable (B) 19 -- ------------- -------------- Total Debenture Bonds............................................. 37 18 ------------- -------------- Principal Amount Outstanding (C)..................................... 4,281 4,572 Amounts Due Within One Year (D)...................................... (118) (424) Net Unamortized Discount............................................. (37) (41) ------------- -------------- Total Long-Term Debt of PSE&G (E)................................. $4,126 $4,107 ============= ============== EDHI Capital Senior Notes (F) 9.875%--10.05% 1998........ $38 $80 Medium-Term Notes 5.79%-5.92% 1997........ -- 27 9.00% 1998........ 75 75 8.95%-9.93% 1999........ 155 155 6.54% 2000........ 78 78 6.74% 2001........ 135 -- 6.80%-7.00% 2002........ 130 -- ------------- -------------- Principal Amount Outstanding (C)..................................... 611 415 Amounts Due Within One Year (D)...................................... (113) (69) Net Unamortized Discount............................................. (2) (1) ------------- -------------- Total Long-Term Debt of Capital................................... 496 345 ------------- -------------- Funding (G) 6.85%-9.59% 1997........ -- 55 9.95% 1998........ 83 83 7.58% 1999........ 45 45 ------------- -------------- Principal Amount Outstanding (C)..................................... 128 183 Amounts Due Within One Year (D)...................................... (83) (55) ------------- -------------- Total Long-Term Debt of Funding................................... 45 128 ------------- -------------- CEA Non-recourse Debt 7.995% - Bank Loan 1999......... 87 -- 12.82% - Bank Loan 2002......... 135 -- 14.00% - Minority Interest Loan 2027......... 10 -- ------------- -------------- Principal Amount Outstanding (C)..................................... 232 -- Amounts Due Within One Year.......................................... (26) -- ------------- -------------- Total Long-Term Debt of CEA..................................... 206 -- ------------- -------------- Total Long-Term Debt of EDHI.................................... $747 $473 ============= ============== Consolidated Long-Term Debt (H).............................. $4,873 $4,580 ============= ==============
(A) PSE&G's Mortgage, securing the Bonds, constitutes a direct first mortgage lien on substantially all PSE&G's property and franchises. During the year, PSE&G reacquired on the open market $117 million of its 8.50% Series LL First and Refunding Mortgage Bonds (Bonds). In April 1997, PSE&G issued $25 million of Variable Rate Pollution Control Bonds, Series X, due 2031. In June 1997, PSE&G issued $235 million of its 6.50% Series XX Bonds due 2000 and in November 1997, PSE&G issued $9 million of 7.04% Medium Term Notes. Also in November 1997, PSE&G redeemed $9 million of its 9.25% Series CC Bonds. (B) PSE&G issued $19 million of Variable Rate Pollution Control Notes due 2027 in June 1997. (C) For information concerning fair value of financial instruments, see Note 8. Financial Instruments. (D) The aggregate principal amounts of mandatory requirements for sinking funds and maturities for each of the five years following December 31, 1997 are as follows:
Sinking Funds Maturities --------------------- --------------------------------------------------- Year Capital CEA PSE&G Capital Funding CEA Total -------------- ----------- --------- ------------ ----------- ----------- ---------- --------------- 1998........ $38 $26 $118 $75 $83 -- $340 1999........ -- 27 100 155 45 $87 414 2000........ -- 27 635 78 -- -- 740 2001........ -- 27 100 135 -- -- 262 2002........ -- 27 300 130 -- -- 457 ----------- --------- ------------ ----------- ----------- ---------- --------------- $38 $134 $1,253 $573 $128 $87 $2,213 =========== ========= ============ =========== =========== ========== ===============
(E) At December 31, 1997 and 1996, PSE&G's annual interest requirement on long-term debt was $291 million and $317 million, of which $283 million and $302 million, respectively, was the requirement for Bonds. The embedded interest cost on long-term debt on such dates was 7.44% and 7.45%, respectively. The embedded interest cost on long-term debt due within one year at December 31, 1997 was 7.14%. (F) Capital has provided up to $750 million debt financing for EDHI's businesses, except Energis, on the basis of a net worth maintenance agreement with Enterprise. Effective January 31, 1995, Capital has limited its borrowings to no more than $650 million. (G) Funding provides debt financing for PSRC, CEA and their subsidiaries on the basis of an unconditional guarantee from EDHI. (H) At December 31, 1997 and 1996, the annual interest requirement on long-term debt was $378 million and $370 million, of which $283 million and $302 million, respectively, was the requirement for Bonds. The embedded interest cost on long-term debt on such dates was 7.64% and 7.62%, respectively. SHORT-TERM (Commercial Paper and Bank Loans) Commercial paper represents unsecured bearer promissory notes sold through dealers at a discount with a term of nine months or less. Bank loans represent PSE&G's unsecured promissory notes issued under informal credit arrangements with various banks and have a term of eleven months or less. ENTERPRISE At December 31, 1997, Enterprise had a committed $150 million revolving credit facility which expires in December 2002. At December 31, 1997 and 1996, Enterprise had a $75 million and a $25 million uncommitted line of credit, respectively, with a bank. At December 31, 1997, Enterprise had $75 million outstanding under this line of credit with an interest rate of 6.2%. The consolidated weighted-average, short-term debt rate of Enterprise was 6.2%, 5.7% and 6.0% for the years ended December 31, 1997, 1996 and 1995, respectively. PSE&G
1997 1996 1995 ---- ---- ---- (Millions of Dollars) Principal amount outstanding at year end, primarily commercial paper....... $1,106 $638 $567 Weighted average interest rate for short-term debt at year end............. 6.07% 5.70% 5.93%
PSE&G has authorization from the BPU to issue and have outstanding not more than $1.3 billion of its short-term obligations at any one time, consisting of commercial paper and other unsecured borrowings from banks and other lenders. This authorization expires January 2, 1999. The $1.3 billion commercial paper program (Program) is supported by a $650 million revolving credit agreement expiring in June 1998 and a $650 million revolving credit agreement expiring in June 2002 with a group of commercial banks. As of December 31, 1997 and 1996, PSE&G had $952 million and $443 million, respectively, outstanding under the Program, which amounts are included in the table above. As of December 31, 1997, there was no debt outstanding under the revolving credit agreements. PSE&G has $174 million in uncommitted lines of credit facilities extended by a number of banks to primarily support short-term borrowings, of which $74 million was outstanding on December 31, 1997 and is included in the table above. PSE&G had various lines of credit facilities extended by banks to primarily support the issuance of letters of credit. As of December 31, 1997, letters of credit were issued in the amount of $21 million. PSE&G Fuel Corporation (Fuelco) has a $125 million commercial paper program to finance a 42.49% share of Peach Bottom nuclear fuel, supported by a $125 million revolving credit facility with a group of banks, which expires on June 28, 2001. PSE&G has guaranteed repayment of Fuelco's respective obligations. As of December 31, 1997 and 1996, Fuelco had commercial paper of $80 million and $83 million, respectively, outstanding under the commercial paper program, which amounts are included in the table above. As of December 31, 1997, there was no debt outstanding under the revolving credit facility. PSE&G has entered into standby financing arrangements with banks totaling $124 million. These facilities support long-term tax-exempt multi-mode mortgage bond financings done through the New Jersey Economic Development Authority, The Pollution Control Financing Authority of Salem County (New Jersey), the York County (Pennsylvania) Industrial Development Authority and the Indiana County (Pennsylvania) Industrial Development Authority. As of December 31, 1997, no amounts were outstanding under such arrangements. EDHI
1997 1996 1995 ---- ---- ---- (Millions of Dollars) Principal amount outstanding at year end................................... $267 -- $182(A) Weighted average interest rate for short-term debt at year end............. 6.92% -- 6.26% (A) Amounts included in Net Assets of Discontinued Operations.
On July 31, 1996, Funding amended and restated its commercial paper program and revolving credit facility in conjunction with the sale of EDC, reducing the total amount from $450 million to $300 million and extending the maturity from March 1998 to July 1999. In November 1997, Funding entered into an additional $150 million revolving credit agreement with a group of banks. Such agreement terminates in November 1998. Note 8. Financial Instruments Fair Value of Financial Instruments The estimated fair value was determined using the market quotations or values of instruments with similar terms, credit ratings, remaining maturities and redemptions at the end of 1997 and 1996, respectively.
December 31, ----------------------------------------------------- 1997 1996 -------------------------- -------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------ ------------- ------------ ------------- (Millions of Dollars) Long-Term Debt (A): EDHI........................................ $969 $978 $597 $606 PSE&G....................................... 4,244 4,389 4,531 4,592 Preferred Securities Subject to Mandatory Redemption: PSE&G Cumulative Preferred Securities....... 75 78 150 152 Monthly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures................................ 210 221 210 220 Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures................................ 303 316 208 211 (A) Includes current maturities and an interest rate swap of $44 million for EDHI.
Natural Gas Hedging--EDHI As of December 31, 1997 and 1996, Energis had outstanding futures contracts to buy natural gas related to fixed-price natural gas sales commitments. Such contracts hedged approximately 97% and 95% of its fixed price sales commitments at December 31, 1997 and 1996, respectively. As of December 31, 1997, Energis had a net unrealized hedge loss of $2 million and as of December 31, 1996, Energis had a net unrealized hedge gain of $4 million. Nuclear Decommissioning Trust Funds Contributions made into the Nuclear Decommissioning Trust Funds are invested in debt and equity securities. The carrying value of these funds approximates the fair market value of $458 million and $375 million as of December 31, 1997 and 1996, respectively. Equity Securities--EDHI PSRC has investments in equity securities and partnerships which invest in equity securities. The aggregate carrying value approximates the fair market value of $185 million and $131 million as of December 31, 1997 and 1996, respectively. Note 9. Cash and Cash Equivalents The December 31, 1997 and 1996 balances consist primarily of working funds and highly liquid marketable securities (commercial paper and money market funds) with a maturity of three months or less. Note 10. Commitments and Contingent Liabilities Nuclear Performance Standard (NPS) The BPU has established its NPS for nuclear generating stations owned by New Jersey electric utilities, including the five nuclear units in which PSE&G has an ownership interest. Under the NPS, an aggregate capacity factor is calculated annually using maximum dependable capability of each of the five nuclear units. This method takes into account actual operating conditions of the units. Failure to attain a satisfactory capacity factor percentage results in penalties. While the NPS does not specifically have a gross negligence provision, the BPU has indicated that it would consider allegations of gross negligence brought upon a sufficient factual basis. A finding of gross negligence could result in penalties other than those prescribed under the NPS. The December 31st Order provides that the NPS will not apply to PSE&G for the period January 1, 1996 through December 31, 1998 (see Note 2. Rate Matters). Nuclear Insurance Coverages and Assessments PSE&G's insurance coverages and maximum retrospective assessments for its nuclear operations are as follows: PSE&G Maximum Total Assessments Site for a Single Type and Source of Coverages Coverages Incident - ---------------------------- --------- ------------- (Millions of Dollars) Public Liability (Primary Layer): American Nuclear Insurers....................... $ 200.0 N/A Nuclear Liability (Excess Layer): Price-Anderson Act.............................. 8,720.3 (A) $210.2 -------- ------ Nuclear Liability Total..................... $8,920.3 (B) $210.2 ======== ====== Nuclear Worker Liability (Primary Layer): American Nuclear Insurers....................... $200.0 (C) $8.0 Property Damage (Primary Layer): American Nuclear Insurers (Peach Bottom)........ $500.0 N/A Nuclear Mutual Limited (Salem/Hope Creek)....... 500.0 $9.7 Property Damage (Excess Layer): Nuclear Electric Insurance Limited (NEIL II).... 2,250.0 13.7 -------- ----- Property Damage Total (Per Site)............ $2,750.0 $23.4 ======== ===== Replacement Power: Nuclear Mutual Limited (NML).................... $21.0 (D) N/A Nuclear Electric Insurance Limited (NEIL I)..... 473.2 (E) $11.3 ------ ----- Replacement Power Total (Salem/Hope Creek).. $494.2 (F) $11.3 ====== ===== (A) Retrospective premium program under the Price-Anderson liability provisions of the Atomic Energy Act of 1954, as amended. PSE&G is subject to retrospective assessment with respect to loss from an incident at any licensed nuclear reactor in the United States. This retrospective assessment can be adjusted for inflation every five years. The last adjustment was effective as of August 20, 1993. This retrospective program is excess over the Public and Nuclear Worker Liability primary layers. (B) Limit of liability under the Price-Anderson Act for each nuclear incident. (C) Industry aggregate limit representing the potential liability from workers claiming exposure to the hazard of nuclear radiation. This policy includes automatic reinstatements up to an aggregate of $200 million, thereby providing total coverage of $400 million. (D) After a waiting period, NML insured sites may receive a weekly indemnity of $3.5 million for six weeks. (E) Aggregate indemnity limit for a weekly indemnity of $3.5 million for 52 weeks followed by 80% of the weekly indemnity for 104 weeks. Also, represents limit of coverage for Peach Bottom which does not purchase insurance from NML. (F) Combined aggregate limit of NML and NEIL I coverages available to co-owners of Salem and Hope Creek for each plant. Of this limit, PSE&G is covered for its percent ownership in each plant. The Price-Anderson Act sets the "limit of liability" for claims that could arise from an incident involving any licensed nuclear facility in the nation. The "limit of liability" is based on the number of licensed nuclear reactors and is adjusted at least every five years based on the Consumer Price Index. The current "limit of liability" is $8.9 billion. All utilities owning a nuclear reactor, including PSE&G, have provided for this exposure through a combination of private insurance and mandatory participation in a financial protection pool as established by the Price-Anderson Act. Under the Price-Anderson Act, each party with an ownership interest in a nuclear reactor can be assessed its share of $79.3 million per reactor per incident, payable at $10 million per reactor per incident per year. If the damages exceed the "limit of liability", the President is to submit to Congress a plan for providing additional compensation to the injured parties. Congress could impose further revenue raising measures on the nuclear industry to pay claims. PSE&G's maximum aggregate assessment per incident is $210.2 million (based on PSE&G's ownership interests in Hope Creek, Peach Bottom and Salem) and its maximum aggregate annual assessment per incident is $26.5 million. This does not include the $8.0 million that could be assessed under the nuclear worker policies. Further, a recent decision by the U.S. Supreme Court, not involving PSE&G, held that the Price-Anderson Act did not preclude awards based on state law claims for punitive damage. PSE&G is a member of an industry mutual insurance company, NEIL, which, as of January 1, 1998, was consolidated with NML. NEIL provides all the coverages formerly provided by NML, including the primary property insurance at Salem and Hope Creek. Also, NEIL continues to provide excess property insurance through its NEIL II policy and replacement power coverage through its NEIL I policy. Both NEIL and NML policies may make retrospective premium assessments in case of adverse loss experience. PSE&G's maximum potential liabilities under these assessments are included in the table and notes above. Certain provisions in the NEIL policies provide that the insurer may suspend coverage with respect to all nuclear units on a site without notice if the NRC suspends or revokes the operating license for any unit on a site, issues a shutdown order with respect to such unit or issues a confirmatory order keeping such unit down. Settlement of Salem Litigation On May 12, 1997, PSE&G settled the lawsuit brought against it by PECO Energy Company (PECO Energy) and Delmarva Power & Light Company (DP&L), two co-owners of the Salem Units, related to alleged damages resulting from the outage of the facility. This settlement, which totaled $82 million, resulted in an after-tax charge to earnings, recorded in the first quarter of 1997, of $53 million or $0.23 per share of Enterprise Common Stock and was paid in December 1997. This settlement also obligates PSE&G to pay $1.4 million for each reactor month that the outage continues beyond an aggregate outage of 64 reactor months, up to a maximum payment under this provision of $17 million. As of January 31, 1998, an aggregate of 59 reactor months had accumulated due to Salem outages. PSE&G does not expect to make any payments under this provision. Salem 2 returned to service on August 30, 1997. Salem 1 is expected to return to service around the end of the first quarter of 1998. PECO Energy, DP&L and PSE&G have also agreed to an operating performance standard through December 31, 2011 for Salem and through December 31, 2007 for Peach Bottom which is operated by PECO Energy. Under this standard, the operator of each respective station would be required to make payments to the non-operating owners if the three-year capacity factor, determined annually, of such station falls below 40 percent, subject to a maximum of $25 million per year. The initial three-year period begins on January 1, 1998 for Peach Bottom and on the date the later of the two Salem units (Salem 1) returns to service for Salem. The parties have further agreed to forego litigation in the future, except for limited cases in which the operator would be responsible for damages of no more than $5 million per year. Year 2000 Many of Enterprise's and PSE&G's systems must be modified due to computer program limitations in recognizing dates beyond 1999. If not corrected, the systems could fail or cause erroneous results by, at or after January 1, 2000. Substantial changes to, and some replacements of, Enterprise's and PSE&G's present systems are being made in an effort to mitigate potential Year 2000 issues. Costs are being expensed as incurred in accordance with EITF 96-14, "Accounting for the Costs Associated with Modifying Computer Software for the Year 2000." During 1997, $8 million of costs related to Year 2000 readiness were incurred. Management estimates the total cost of this effort to be about $92 million to be incurred from 1997 through 2001, of which $41 million is expected to be incurred in 1998. Enterprise and PSE&G have assembled a cross-functional team to inventory, assess and identify and implement solutions for Enterprise's and PSE&G's systems. Plans provide for 80% of critical systems to be Year 2000 ready in 1998, with the remaining critical systems to be ready by July 1999. By the end of 1999, plans call for 80% of non-critical systems to be Year 2000 ready with the remainder of those systems to be Year 2000 ready in 2000. Additionally, the team has surveyed Enterprise's and PSE&G's top 3000 vendors to assess their plans for Year 2000 readiness. The team has also been working with critical suppliers and Pennsylvania--New Jersey--Maryland Interconnection (PJM) on their plans for Year 2000 readiness. On January 29, 1998, the NRC proposed to issue a generic letter which would require all nuclear plant operators to provide the agency with information concerning their programs, planned or implemented, to address Year 2000 computer and systems issues at their facilities. In particular, operators would be asked to provide confirmation of implementation of their programs and certification that their facilities are Year 2000 ready and in compliance with the terms and conditions of their licenses and NRC regulations. Licensees would be required to submit a written response indicating the status of their Year 2000 readiness program including scope, assessment process and plans for corrective action. Further, upon completion of their Year 2000 readiness program and no later than July 1, 1999, licensees would be required to confirm to the NRC that their facility is Year 2000 ready, together with a status report of work necessary to be Year 2000 compliant. Year 2000 ready means computer systems and applications are suitable for continued use into 2000. Year 2000 compliant means that such systems and applications accurately process date/time data beyond 2000. PSE&G cannot predict if this or any proposal will be adopted by the NRC. An inability of Enterprise, PSE&G, their subsidiaries, members of PJM or Enterprise's or PSE&G's critical suppliers to meet the Year 2000 deadline could have a material adverse impact on Enterprise's and PSE&G's operations, financial condition, results of operations and net cash flows. Construction and Fuel Supplies PSE&G has substantial commitments as part of its ongoing construction program, which include capital requirements for nuclear fuel. PSE&G's construction program is continuously reviewed and periodically revised as a result of changes in economic conditions, revised load forecasts, scheduled retirement dates of existing facilities, business strategies, site changes, cost escalations under construction contracts, requirements of regulatory authorities and laws, the timing of and amount of electric and gas rate changes and the ability of PSE&G to raise necessary capital. Pursuant to an electric resource plan (Resource Plan), PSE&G periodically reevaluates its forecasts of future customers, load and peak growth, sources of electric generating capacity and DSM to meet such projected growth, including the need to construct new electric generating capacity. The Resource Plan takes into account assumptions concerning future demands of customers, effectiveness of conservation and load management activities, the long-term condition of PSE&G's plants, capacity available from electric utilities and other suppliers and the amounts of co-generation and other non-utility capacity projected to be available. PSE&G's construction expenditures are expected to aggregate approximately $3.1 billion during the years 1998 through 2002, which includes $457 million for nuclear fuel and excludes AFDC. The estimate of construction requirements is based on expected project completion dates and includes anticipated escalation due to inflation of approximately 3% annually. Therefore, construction delays or higher inflation levels could cause significant increases in these amounts. PSE&G expects to internally generate the funds necessary to satisfy its construction expenditures over this period, assuming adequate and timely recovery of costs, as to which no assurances can be given. In addition, PSE&G does not presently anticipate any difficulties in obtaining sufficient sources of fuel for electric generation or adequate gas supplies during the years 1998 through 2002. Hazardous Waste Certain Federal and state laws authorize the U.S. Environmental Protection Agency (EPA) and the New Jersey Department of Environmental Protection (NJDEP), among other agencies, to issue orders and bring enforcement actions to compel responsible parties to investigate and take remedial actions at any site that is determined to present an actual or potential threat to human health or the environment because of an actual or threatened release of one or more hazardous substances. Because of the nature of PSE&G's business, including the production of electricity, the distribution of gas and, formerly, the manufacture of gas, various by-products and substances are or were produced or handled which contain constituents classified as hazardous. PSE&G generally provides for the disposal or processing of such substances through licensed independent contractors. However, these statutory provisions impose joint and several responsibility without regard to fault on all responsible parties, including the generators of the hazardous substances, for certain investigative and remediation costs at sites where these substances were disposed of or processed. PSE&G has been notified with respect to a number of such sites and the investigation and remediation of these potentially hazardous sites is receiving attention from the government agencies involved. Generally, actions directed at funding such site investigations and remediation include all suspected or known responsible parties. Except as discussed below with respect to its Remediation Program, Enterprise and PSE&G do not expect its expenditures for any such site to have a material effect on financial condition, results of operations and net cash flows. The NJDEP has recently revised regulations concerning site investigation and remediation. These regulations will require an ecological evaluation of potential injuries to natural resources in connection with a remedial investigation of contaminated sites. The NJDEP is presently working with the utility industry to develop procedures for implementing these regulations. These regulations may substantially increase the costs of remedial investigations and remediations, where necessary, particularly at sites situate on surface water bodies. PSE&G and predecessor companies owned and/or operated certain facilities situate on surface water bodies, certain of which are currently the subject of remedial activities. The financial impact of these regulations on these projects is not currently estimable. PSE&G does not anticipate that the compliance with these regulations will have material adverse effect on its financial position, results of operations or net cash flows. PSE&G Manufactured Gas Plant Remediation Program In 1988, NJDEP notified PSE&G that it had identified the need for PSE&G, pursuant to a formal arrangement, to systematically investigate and, if necessary, resolve environmental concerns extant at PSE&G's former manufactured gas plant sites. To date, NJDEP and PSE&G have identified 38 former manufactured gas plant sites. PSE&G is currently working with NJDEP under a program to assess, investigate and, if necessary, remediate environmental concerns at these sites. The Remediation Program is periodically reviewed and revised by PSE&G based on regulatory requirements, experience with the Remediation Program and available remediation technologies. The cost of the Remediation Program cannot be reasonably estimated, but experience to date indicates that costs of approximately $20 million per year could be incurred over a period of about 30 years and that the overall cost could be material to Enterprise's and PSE&G's financial condition, results of operations and net cash flows. Costs incurred through December 31, 1997 for the Remediation Program amounted to $122 million. In addition, at December 31, 1997, PSE&G's estimated liability for remediation costs through 2000 aggregated $73 million. Expenditures beyond 2000 cannot be reasonably estimated (see Note 1. Organization and Summary of Significant Accounting Policies and Note 2. Rate Matters). Note 11. PSE&G Nuclear Decommissioning The BPU decision in PSE&G's most recent base rate case utilized studies based on the prompt removal/dismantlement method of decommissioning for all of PSE&G's nuclear generating stations. This method consists of removing fuel, source material and all other radioactive materials with activity levels above accepted release limits from the nuclear sites. PSE&G has an ownership interest in five nuclear units: Salem 1 and Salem 2--42.59% each, Hope Creek--95% and Peach Bottom 2 and 3--42.49% each. In accordance with rate orders received from the BPU, PSE&G has established an external master nuclear decommissioning trust for all its nuclear units. This trust contains two separate funds: a qualified fund and a non-qualified fund, due to an Internal Revenue Service (IRS) ruling. Section 468A of the Internal Revenue Code limits the amount of money that can be contributed into a "qualified" fund. Contributions made into a qualified fund are tax deductible. PSE&G estimated the total cost of decommissioning its share of these five nuclear units at $986 million in year end 1995 dollars (the year that the most recent site specific estimates were prepared), excluding contingencies. On December 23, 1996, PSE&G filed its 1995 nuclear plant decommissioning cost update with the BPU. On December 17, 1997, the BPU accepted PSE&G's decommissioning cost updates and found that the current funding requirements as presented in PSE&G's 1996 Nuclear Decommissioning Trust Fund Report, dated May 15, 1997, appear adequate. The most recent base rate decision provided that $15.6 million of such costs are to be collected through base rates and an additional annual amount of $7 million in 1993 and $14 million each year thereafter are to be recovered through PSE&G's LEAC. Although PSE&G's Energy Master Plan proposal continues this treatment, no assurances can be given as to the outcome of the Energy Master Plan proceedings (see Note 2. Rate Matters). At December 31, 1997 and 1996, the accumulated provision for depreciation and amortization included reserves for nuclear decommissioning for PSE&G's nuclear units of $428 million and $338 million, respectively. As of December 31, 1997 and 1996, PSE&G had contributed $279 million and $249 million, respectively, into independent, external, qualified and non-qualified nuclear decommissioning trust funds. The fair market value of these funds as of December 31, 1997 and 1996 was $458 million and $375 million, respectively. The staff of the SEC has questioned certain of the current accounting practices of the electric utility industry, including PSE&G, regarding the recognition, measurement and classification of nuclear decommissioning costs in their financial statements. In response to these questions, the Financial Accounting Standards Board (FASB) has agreed to review the accounting for removal costs, including decommissioning. If current electric utility industry accounting practices for decommissioning are changed: (1) annual provisions for decommissioning could materially increase, (2) the estimated cost for decommissioning could be recorded as a liability rather than as accumulated depreciation and (3) trust fund income from the external decommissioning trusts could be reported as investment income rather than as a reduction to decommissioning expense all, or any of which, could have a material adverse effect on Enterprise's and PSE&G's financial condition, results of operations and net cash flows (see Note 2. Rate Matters). Uranium Enrichment Decontamination and Decommissioning Fund In accordance with EPAct, domestic utilities that own nuclear generating stations are required to pay a cumulative total of $150 million each year (adjusted for inflation) into a decontamination and decommissioning fund, based on their past purchases of U.S. government enrichment services. These amounts are being collected over a period of 15 years or until $2.25 billion (adjusted for inflation) has been collected. Under this legislation, PSE&G's obligation for the nuclear generating stations in which it has an interest is $70 million (adjusted for inflation). Since 1993, PSE&G has paid $27 million, resulting in a balance due of $43 million. PSE&G has deferred the expenditures incurred to date as part of underrecovered electric energy costs (see Note 2. Rate Matters). Spent Nuclear Fuel Disposal Costs In accordance with the Nuclear Waste Policy Act (NWPA), PSE&G has entered into contracts with the Department of Energy (DOE) for the disposal of spent nuclear fuel. Payments made to the DOE for disposal costs are based on nuclear generation and are included in Fuel for Electric Generation and Net Interchanged Power in the Statements of Income. These costs are being recovered through the LEAC (see Note 2. Rate Matters). DOE construction of a permanent disposal facility has not begun and DOE has announced that it does not expect a facility to be available until 2010 at the earliest. Accordingly, legislation which would have the DOE establish a centralized interim spent fuel storage facility has been introduced in Congress. In cases brought by PSE&G, 32 other utilities and many state and local governments, the United States Court of Appeals for the District of Columbia Circuit reaffirmed DOE's unconditional obligation to begin spent fuel acceptance by January 31, 1998. In November 1997, the court ruled that the utilities had fulfilled their obligations under their respective contracts with DOE by contributing to the Nuclear Waste Fund. The court further ruled that DOE's argument of unavoidable delay to meet its obligation was without merit. However, the court did not order DOE to commence spent fuel acceptance by January 31, 1998; instead, it decided that the standard contract provided a potentially adequate remedy in the form of payment of damages if DOE failed its obligations. Consequently, PSE&G is working with the utility industry to develop a methodology for determining damages incurred as a result of DOE's failure to meet its obligation and a strategy for its implementation. PSE&G is presently studying options to recover damages from DOE. The decision of the Court of Appeals has been appealed to the U.S. Supreme Court by the U.S. Department of Justice. No assurances can be given as to the ultimate availability of a facility. Note 12. Federal Income Taxes A reconciliation of reported Net Income with pretax income and of Federal income tax expense with the amount computed by multiplying pretax income by the statutory Federal income tax rate of 35% is as follows:
1997 1996 1995 -------------- -------------- --------------- (Millions of Dollars) Net Income....................................................... $560 $612 $662 Preferred securities (net)....................................... 15 5 34 Discontinued Operations.......................................... -- (24) (35) -------------- -------------- --------------- Subtotal............................................... $575 $593 $661 -------------- -------------- --------------- Federal income taxes: Operating income: Current provision........................................... 185 124 208 Provision for deferred income taxes--net(A)................. 164 187 152 Investment tax credits--net................................. (20) (21) (22) -------------- -------------- --------------- Total included in operating income..................... 329 290 338 Miscellaneous other income: Current provision........................................... (24) 1 (10) Provision for deferred income taxes (A)..................... -- -- 10 SFAS 90 deferred income taxes(A)............................ 1 2 2 -------------- -------------- --------------- Total Federal income tax provisions.................... 306 293 340 -------------- -------------- --------------- Pretax income.................................................... $881 $886 $1,001 ============== ============== ===============
Reconciliation between total Federal income tax provisions and tax computed at the statutory tax rate on pretax income:
1997 1996 1995 ----------- -------------- ------------ (Millions of Dollars) Tax computed at the statutory rate........................................... $308 $310 $351 Increase (decrease) attributable to flow through of certain tax adjustments: Depreciation............................................................. 27 11 16 Amortization of investment tax credits................................... (20) (22) (22) Other.................................................................... (9) (6) (5) ----------- -------------- ------------ Subtotal............................................................ (2) (17) (11) ----------- -------------- ------------ Total Federal income tax provisions................................. $306 $293 $340 =========== ============== ============ Effective Federal income tax rate............................................. 34.7% 33.1% 34.0%
(A) The provision for deferred income taxes represents the tax effects of the following items:
1997 1996 1995 ----------- -------------- ------------ (Millions of Dollars) Deferred Credits: Additional tax depreciation and amortization............................. $34 $39 $134 Leasing Activities....................................................... 114 136 64 Conservation Costs....................................................... 27 15 (1) Deferred Fuel Costs--net................................................. (4) 6 (4) Other.................................................................... (6) (7) (29) ----------- -------------- ------------ Total............................................................... $165 $189 $164 =========== ============== ============
Between the years 1987 and 1994, Enterprise's Federal Alternative Minimum Tax (AMT) liability exceeded its regular Federal income tax liability. This excess was carried forward to offset regular income tax liability in future years. Enterprise used these AMT credits as a reduction against regular tax liability for 1995, 1996 and 1997. There were no remaining credits as of December 31, 1997. Enterprise provides deferred taxes at the enacted statutory tax rate for all temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities irrespective of the treatment for rate-making purposes. Management believes that it is probable that the accumulated tax benefits that previously have been treated as a flow-through item to PSE&G customers will be recovered from utility customers in the future. Accordingly, an offsetting regulatory asset was established. As of December 31, 1997, PSE&G had a deferred tax liability and an offsetting regulatory asset of $725 million representing the future revenue expected to be recovered through rates based upon established regulatory practices which permit recovery of current taxes payable. This amount was determined using the enacted Federal income tax rate of 35% and State income tax rate of 9%. The following is an analysis of deferred income taxes: December 31, -------------------- 1997 1996 -------- ------- (Millions of Dollars) Deferred Income Taxes Assets: Current (net).................................... $25 $23 ------- ------- Non-current: Unrecovered Investment Tax Credits............. 117 123 Nuclear Decommissioning........................ 33 27 Construction Period Interest and Taxes......... 15 16 Vacation Pay................................... 7 7 AMT Credit..................................... -- 88 Real Estate Impairment......................... 6 3 Other.......................................... 33 24 ------- ------- Total Non-current......................... 211 288 ------- ------- Total Assets.............................. 236 311 ------- ------- Liabilities: Non-current: Plant Related Items............................ 2,349 2,361 Leasing Activities............................. 720 669 Conservation Costs............................. 39 12 Hope Creek O&M Costs........................... 21 22 Underrecovered Electric Energy and Gas Costs... 60 63 Unamortized Debt Expense....................... 44 40 Taxes Recoverable Through Future Rates (net)... 249 259 Other.......................................... 123 112 ------- ------- Total Non-current......................... 3,605 3,538 ------- ------- Total Liabilities......................... 3,605 3,538 ------- ------- Summary -- Accumulated Deferred Income Taxes Net Current Assets............................... 25 23 Net Non-current Liability........................ 3,394 3,250 ------- ------- Total....................................... $3,369 $3,227 ======= ======= Note 13. Pension Plan The discount rates, expected long-term rates of return on assets and average compensation growth rates used in determining the qualified Pension Plans' funded status and net pension cost as of December 31, 1997 and 1996 were as follows: 1997 1996 ------- -------- Funded Status: Discount Rate used to Determine Benefit Obligations....................................... 7.25% 7.50% Average Compensation Growth to Determine Benefit Obligations............................... 4.50% 4.50% Net Pension Cost: Discount Rate....................................... 7.50% 8.00% Expected Long-Term Return on Assets................. 9.00% 8.50% Average Compensation Growth......................... 4.50% 4.50% The following table shows the qualified Pension Plans' funded status:
December 31, ------------------------------ 1997 1996 -------------- ------------- (Millions of Dollars) Actuarial present value of benefit obligations: Accumulated benefit obligations, including vested benefits of $1,602 in 1997 and $1,474 in 1996................................ $(1,711) $(1,572) Effect of projected future compensation................................ (374) (459) -------------- ------------- Projected benefit obligations.......................................... (2,085) (2,031) Plan assets at fair value, primarily listed equity and debt securities. 1,959 1,687 -------------- ------------- Projected benefit obligations in excess of plan assets................. (126) (344) Unrecognized net (gain) loss from past experience and effects of changes in assumptions........................................... (5) 151 Prior service cost not yet recognized in net pension cost.............. 119 131 Unrecognized net obligations being recognized over 16.7 years.......... 45 53 -------------- ------------- Prepaid (Accrued) pension cost......................................... $33 $(9) ============== =============
The net pension cost for the qualified Pension Plans for the years ended December 31, 1997, 1996 and 1995, includes the following components:
1997 1996 1995 ---- ---- ---- (Millions of Dollars) Service cost--benefits earned during year............... $52 $51 $37 Interest cost on projected benefit obligations.......... 148 136 124 Return on assets........................................ (296) (206) (312) SFAS 88 early retirement (A)............................ 2 2 -- Net amortization and deferral........................... 164 93 223 ---- --- --- Total.............................................. $70 $76 $72 ==== === === See Note 1. Organization and Summary of Significant Accounting Policies. (A) Effective May 1, 1996, PSE&G's qualified Pension Plan was amended allowing employees the option to retire early upon attainment of age 55 and completion of 25 or more years of service. Also, between May 1, 1996 and April 30, 1997, early retirement without reduction was available to employees who had attained age 50 and had completed 30 or more years of service. SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits" requires that an employer that offers special termination benefits to employees shall recognize a liability when the employees accept the offer and the amount can be reasonably estimated. This resulted in an immediate expense applicable to the employees who, as of April 30, 1997, had accepted the offer.
The discount rates and average compensation growth rates used in determining the non-qualified Pension Plans' funded status and net pension cost as of December 31, 1997 and 1996 were as follows:
1997 1996 (A) ------------- -------------- Funded Status: Discount Rate used to Determine Benefit Obligations............ 7.25% 7.50% Average Compensation Growth to Determine Benefit Obligations... 4.50% 4.50% Net Pension Cost: Discount Rate.................................................. 7.50% -- Average Compensation Growth.................................... 4.50% --
The following table shows the non-qualified Pension Plans' funded status:
December 31, --------------------------- 1997 1996 (A) ------------ ------------ (Millions of Dollars) Actuarial present value of benefit obligations: Accumulated benefit obligations, including vested benefits of $25 in 1997 and $22 in 1996...................................... $(34) $(30) Effect of projected future compensation................................ (4) (4) ------------ ------------ Projected benefit obligations.......................................... (38) (34) Plan assets at fair value.............................................. -- -- ------------ ------------ Projected benefit obligations in excess of plan assets................. (38) (34) Unrecognized net (gain) loss from past experience and effects of changes in assumptions........................................... 2 -- Prior service cost not yet recognized in net pension cost.............. 31 34 Additional minimum liability........................................... (29) -- ------------ ------------ Prepaid (Accrued) pension cost......................................... $(34) $-- ============ ============
The net pension cost for the non-qualified Pension Plans for the years ended December 31, 1997, 1996 and 1995, includes the following components:
1997 (A) -------- (Millions of Dollars) Service cost--benefits earned during year................ $2 Interest cost on projected benefit obligations........... 2 Net amortization and deferral............................ 3 -------- Total............................................... $7 ========
(A) Beginning in 1997, SFAS 87 was applied to the non-qualified Pension Plans. Prior to that date, because the plans amounts were considered immaterial, SFAS 87 was not applied. Note 14. Postretirement Benefits Other Than Pensions Upon adoption of SFAS 106, PSE&G elected to amortize, over 20 years, its unfunded obligation of $609 million at January 1, 1993. The following table discloses the significant components of the net periodic postretirement benefit cost:
December 31, ----------------------------------------- 1997 1996 1995 ------------- ------------- ------------- (Millions of Dollars) Service cost............................................................. $12 $10 $ 9 Interest on accumulated postretirement obligation........................ 54 51 48 Amortization of transition obligation.................................... 30 31 31 Prior service cost....................................................... 2 -- -- Amortization of Net (Gain)/Loss (A)...................................... (2) (1) (4) Deferral of current expense.............................................. (63) (59) (51) ------------- ------------- ------------- Total............................................................ $33 $32 $33 ============= ============= ============= (A) Reflects change in Plan Assumptions.
The discount rate used in determining the PSE&G net periodic postretirement benefit cost was 7.5% and 8.0% for 1997 and 1996, respectively. A one percentage-point increase in the assumed health care cost trend rate for each year would increase the aggregate of the service and interest cost components of net periodic postretirement health care cost by approximately $6 million, or 10.5%, and increase the accumulated postretirement benefit obligation as of December 31, 1997 by $57 million, or 9.4%. The assumed health care cost trend rates used in measuring the accumulated postretirement benefit obligation in 1997 were: medical costs for pre-age sixty-five retirees--11.5%, medical costs for post-age sixty-five retirees--7.5% and dental costs--5.5%; such rates are assumed to decrease by 0.5% per year until they reach 5.0% and then remain constant. The medical costs above include a provision for prescription drugs. From January 1, 1993 through December 31, 1997, PSE&G accounted for the differences between its SFAS 106 accrual cost and the cash cost currently recovered through rates as a regulatory asset in accordance with SFAS 71 and EITF 92-12. OPEB costs expensed and capitalized during 1997 were $33 million and accrued OPEB costs deferred were $63 million. The amount of the unfunded liability, at December 31, 1997, as shown below, is $724 million. In 1993, the FASB's EITF concluded that deferral of such costs is acceptable, provided regulators allow SFAS 106 costs in rates within approximately five years of the adoption of SFAS 106, which was December 31, 1997, for financial reporting purposes, with any cost deferrals recovered in approximately twenty years. On December 17, 1997, the BPU ruled that PSE&G's current rates are sufficient to recover both the ongoing OPEB costs and the amortization of the deferred regulatory asset created by the accounting change from the cash basis of accounting to the accrual basis of accounting in accordance with SFAS 106 and EITF 92-12. As a result of the BPU's decision, PSE&G will amortize the regulatory asset over 15 years beginning January 1, 1998. Also effective January 1, 1998, PSE&G will record the annual SFAS 106 OPEB cost. In accordance with SFAS 106 disclosure requirements, a reconciliation of the funded status of the plan is as follows:
December 31, -------------------------- 1997 1996 ------------ ------------ (Millions of Dollars) Accumulated Postretirement Benefit Obligation: Retirees............................................................................ $(496) $(493) Fully eligible active plan participants............................................. (32) (36) Other active plan participants...................................................... (196) (206) ------------ ------------ Total........................................................................ (724) (735) Plan assets at fair value........................................................... -- -- ------------ ------------ Accumulated postretirement benefit obligation in excess of plan assets.............. (724) (735) Unrecognized net (gain)/loss from past experience different from that assumed and from changes in assumptions...................................................... (26) 15 Unrecognized prior service cost..................................................... 32 34 Unrecognized transition obligation.................................................. 429 460 ------------ ------------ Accrued postretirement obligation................................................... $(289) $(226) ============ ============
The discount rate used in determining the accumulated postretirement benefit obligation was 7.25% and 7.50% for 1997 and 1996, respectively. Note 15. Financial Information by Business Segments Information related to the segments of Enterprise's business is detailed below:
Non-utility Electric Gas Activities (A) Total -------------- ------------- -------------- -------------- (Millions of Dollars) For the Year Ended December 31, 1997: Total Operating Revenues.................... $4,188 $1,937 $245 $6,370 -------------- ------------- -------------- -------------- Depreciation and Amortization............... 531 85 14 630 Operating Income Before Income Taxes........ 978 328 144 1,450 Capital Expenditures........................ 426 131 953 1,510 As of December 31, 1997: Net Utility Plant........................... 9,352 1,698 -- 11,050 Other Corporate Assets...................... 3,096 774 3,023 6,893 -------------- ------------- -------------- -------------- Total Assets................................ $12,448 $2,472 $3,023 $17,943 ============== ============= ============== ============== For the Year Ended December 31, 1996: Total Operating Revenues.................... $3,944 $1,881 $216 $6,041 -------------- ------------- -------------- -------------- Depreciation and Amortization............... 517 87 3 607 Operating Income Before Income Taxes........ 978 234 140 1,352 Capital Expenditures........................ 463 140 47 650 As of December 31, 1996: Net Utility Plant........................... 9,566 1,613 -- 11,179 Other Corporate Assets...................... 2,840 780 2,116 5,736 -------------- ------------- -------------- -------------- Total Assets................................ $12,406 $2,393 $2,116 $16,915 ============== ============= ============== ============== For the Year Ended December 31, 1995: Total Operating Revenues.................... $4,021 $1,686 $186 $5,893 -------------- ------------- -------------- -------------- Depreciation and Amortization............... 503 88 6 597 Operating Income Before Income Taxes........ 1,140 179 121 1,440 Capital Expenditures........................ 546 140 140 826 As of December 31, 1995: Net Utility Plant........................... 9,652 1,536 -- 11,188 Other Corporate Assets...................... 2,730 669 2,230 5,629 -------------- ------------- -------------- -------------- Total Assets................................ $12,382 $2,205 $2,230 $16,817 ============== ============= ============== ============== (A) The Non-utility Activities include amounts applicable to Enterprise, the parent corporation, and EDHI.
Information related to Property, Plant and Equipment of PSE&G is detailed below:
December 31, ------------------------------------------------------ 1997 1996 1995 ---------------- ----------------- ---------------- (Millions of Dollars) Utility Plant--Original Cost Electric Plant in Service: Steam Production....................... $1,840 $1,843 $1,791 Nuclear Production..................... 6,162 6,001 5,992 Transmission........................... 1,163 1,146 1,127 Distribution........................... 3,315 3,171 3,045 Other.................................. 1,212 1,153 1,140 ---------------- ----------------- ---------------- Total Electric Plant in Service... 13,692 13,314 13,095 ---------------- ----------------- ---------------- Gas Plant in Service: Transmission........................... 67 67 65 Distribution........................... 2,472 2,358 2,251 Other.................................. 158 131 127 ---------------- ----------------- ---------------- Total Gas Plant in Service........ 2,697 2,556 2,443 ---------------- ----------------- ---------------- Common Plant in Service: Capital Leases......................... 59 59 59 General................................ 499 471 458 ---------------- ----------------- ---------------- Total Common Plant in Service..... 558 530 517 ---------------- ----------------- ---------------- Total........................ $16,947 $16,400 $16,055 ================ ================= ================
Note 16. Discontinued Operations On July 31, 1996, EDHI sold EDC to Samedan Oil Corporation, a subsidiary of Noble Affiliates, Inc., for an aggregate purchase price of $779 million subject to various purchase price adjustments resulting in an after-tax gain of $13 million. As a result, Consolidated Financial Statements previously issued have been restated to give effect to the classification of EDC as discontinued operations. Operating results of EDC for 1996 (7 months) and 1995 are summarized in the following table: (7 months) 1996 1995 ---- ---- (Millions of Dollars) Revenues........................................ $128 $270 Operating income................................ 24 81 Earnings before income taxes.................... 9 53 Income taxes.................................... (2) 18 Net income...................................... 11 35 Note 17. Jointly Owned Facilities--Utility Plant PSE&G has ownership interests in and is responsible for providing its share of the necessary financing for the following jointly owned facilities. All amounts reflect the share of PSE&G's jointly owned projects and the corresponding direct expenses are included in Consolidated Statements of Income as operating expenses (see Note 1. Organization and Summary of Significant Accounting Policies).
Plant--December 31, 1997 ---------------------------------------------------------------------- Ownership Plant in Accumulated Plant Under Interest Service Depreciation Construction -------------- -------------- ------------------ ----------------- (Millions of Dollars) Coal Generating Conemaugh.................... 22.50% $201 $49 $2 Keystone..................... 22.84% 124 40 3 Nuclear Generating Peach Bottom................. 42.49% 785 367 26 Salem........................ 42.59% 1,195 425 52 Hope Creek................... 95.00% 4,142 1,312 15 Nuclear Support Facilities... Various 191 46 3 Pumped Storage Facilities Yards Creek.................. 50.00% 28 11 4 Transmission Facilities........... Various 128 41 -- Merrill Creek Reservoir........... 13.91% 37 15 -- Linden SNG Plant.................. 90.00% 16 22 --
Note 18. Selected Quarterly Data (Unaudited) The information shown below, in the opinion of Enterprise, includes all adjustments, consisting only of normal recurring accruals, necessary to a fair presentation of such amounts. Due to the seasonal nature of the utility business, quarterly amounts vary significantly during the year.
Calendar Quarter Ended --------------------------------------------------------------------------------------------------- March 31, June 30, September 30, December 31, ------------------------ ------------------------- ----------------------- ----------------------- 1997 1996(A) 1997 1996(A) 1997 1996(A) 1997 1996(A) ------------ ----------- ------------- ----------- ----------- ----------- ---------- ------------ (Millions where Applicable) Operating Revenues......... $1,733 $1,798 $1,323 $1,337 $1,568 $1,335 $1,746 $1,571 Operating Income........... 309 309 219 237 301 265 286 246 Net Income................. 140 194 91 135 176 156 153 127 Earnings per Average Share of Common Stock (Basic and Diluted)............. 0.60 0.79 0.39 0.55 0.76 0.64 0.66 0.54 Average Shares of Common Stock Outstanding........ 232 245 232 245 232 243 232 237 (A) See Note 16. Discontinued Operations.
PSE&G Except as modified below, the Notes to Consolidated Financial Statements of Enterprise are incorporated herein by reference insofar as they relate to PSE&G and its subsidiaries: Note 1. Organization and Summary of Significant Accounting Policies Note 2. Rate Matters Note 3. Regulatory Assets and Liabilities Note 4. Long-Term Investments Note 5. Leasing Activities--As Lessee Note 6. Schedule of Consolidated Capital Stock and Other Securities Note 7. Schedule of Consolidated Debt Note 8. Financial Instruments Note 10. Commitments and Contingent Liabilities Note 11. PSE&G Nuclear Decommissioning Note 13. Pension Plan Note 14. Postretirement Benefits Other Than Pensions Note 15. Financial Information by Business Segments Note 17. Jointly Owned Facilities--Utility Plant Note 1. Organization and Summary of Significant Accounting Policies Enterprise owns all of PSE&G's common stock (without nominal or par value). Of the 150,000,000 authorized shares of common stock at December 31, 1997, 1996 and 1995, there were 132,450,344 shares outstanding, with an aggregate book value of $2.6 billion. Note 9. Cash and Cash Equivalents The December 31, 1997 and 1996 balances consist primarily of working funds. Note 12. Federal Income Taxes A reconciliation of reported Net Income with pretax income and of Federal income tax expense with the amount computed by multiplying pretax income by the statutory Federal income tax rate of 35% is as follows:
1997 1996 1995 ------------- ------------- ------------- (Millions of Dollars) Net Income....................................................... $528 $535 $617 ------------- ------------- ------------- Federal income taxes: Operating income: Current provision........................................... 292 241 275 Provision for deferred income taxes--net(A)................. 34 43 65 Investment tax credits--net................................. (19) (19) (19) ------------- ------------- ------------- Total included in operating income.......................... 307 265 321 Miscellaneous other income: Current provision........................................... (24) 1 (10) Provision for deferred income taxes(A)...................... -- -- 10 SFAS 90 deferred income taxes(A)............................ 1 2 2 ------------- ------------- ------------- Total Federal income tax provisions.................... 284 268 323 ------------- ------------- ------------- Pretax income.................................................... $812 $803 $940 ------------- ------------- -------------
Reconciliation between total Federal income tax provisions and tax computed at the statutory tax rate on pretax income:
1997 1996 1995 ------------- ------------- ------------- (Millions of Dollars) Tax computed at the statutory rate.............................. $284 $281 $329 ------------- ------------- ------------- Increase (decrease) attributable to flow through of certain tax adjustments: Depreciation............................................... 27 11 16 Amortization of investment tax credits..................... (19) (19) (19) Other...................................................... (8) (5) (3) ------------- ------------- ------------- Subtotal.............................................. -- (13) (6) ------------- ------------- ------------- Total Federal income tax provisions................... $284 $268 $323 ============= ============= ============= Effective Federal income tax rate............................... 35.0% 33.3% 34.4%
(A) The provision for deferred income taxes represents the tax effects of the following items:
1997 1996 1995 ------------- -------------- ------------- (Millions of Dollars) Deferred Credits: Additional tax depreciation and amortization............... $16 $31 $111 Conservation Costs......................................... 27 15 (1) Deferred Fuel Costs--net................................... (4) 6 (4) Other...................................................... (4) (7) (29) ------------- -------------- ------------- Total................................................. $35 $45 $77 ============= ============== =============
SFAS 109 The following is an analysis of deferred income taxes:
December 31, ------------------------------- 1997 1996 ------------- -------------- (Millions of Dollars) Deferred Income Taxes Assets: Current (net).......................................... $25 $23 Non-current: Unrecovered Investment Tax Credits................... 117 123 Nuclear Decommissioning.............................. 33 27 Construction Period Interest and Taxes............... 15 16 Vacation Pay......................................... 7 7 Other................................................ 17 17 ------------- -------------- Total Non-current................................. 189 190 ------------- -------------- Total Assets...................................... $214 $213 ------------- -------------- Liabilities: Non-current: Plant Related Items.................................. 2,246 2,255 Conservation Costs................................... 39 12 Hope Creek O&M Costs................................. 21 22 Deferred Electric Energy & Gas Costs................. 60 63 Unamortized Debt Expense............................. 44 40 Taxes Recoverable Through Future Rates (Net)......... 249 259 Other................................................ 99 96 ------------- -------------- Total Non-current................................. 2,758 2,747 ------------- -------------- Total Liabilities................................. 2,758 2,747 ------------- -------------- Summary--Deferred Income Taxes Net Current Assets..................................... 25 23 Net Non-current Liability.............................. 2,569 2,557 ------------- -------------- Total............................................. $2,544 $2,534 ============= ==============
The balance of Federal income tax payable by (receivable from) PSE&G to Enterprise was $5 million and $(5) million, as of December 31, 1997 and December 31, 1996, respectively. Note 18. Selected Quarterly Data (Unaudited) The information shown below, in the opinion of PSE&G, includes all adjustments, consisting only of normal recurring accruals, necessary to a fair presentation of such amounts. Due to the seasonal nature of the utility business, quarterly amounts vary significantly during the year.
Calendar Quarter Ended --------------------------------------------------------------------- March 31, June 30, September 30, December 31, --------------- --------------- --------------- --------------- 1997 1996 1997 1996 1997 1996 1997 1996 ------ ------ ------ ------ ------ ------ ------ ------ (Millions of Dollars) Operating Revenues .............................. $1,694 $1,756 $1,270 $1,286 $1,497 $1,270 $1,664 $1,513 Operating Income................................. 292 287 195 212 264 230 247 218 Net Income....................................... 140 184 87 109 159 122 142 120 Earnings Available to Enterprise................. 136 176 81 120 157 118 139 116
FINANCIAL STATEMENT RESPONSIBILITY--ENTERPRISE Management of Enterprise is responsible for the preparation, integrity and objectivity of the consolidated financial statements and related notes of Enterprise. The consolidated financial statements and related notes are prepared in accordance with generally accepted accounting principles. The financial statements reflect estimates based upon the judgment of management where appropriate. Management believes that the consolidated financial statements and related notes present fairly Enterprise's financial position and results of operations. Information in other parts of this Annual Report is also the responsibility of management and is consistent with these consolidated financial statements and related notes. The firm of Deloitte & Touche LLP, independent auditors, is engaged to audit Enterprise's consolidated financial statements and related notes and issue a report thereon. Deloitte & Touche's audit is conducted in accordance with generally accepted auditing standards. Management has made available to Deloitte & Touche all the corporation's financial records and related data, as well as the minutes of directors' meetings. Furthermore, management believes that all representations made to Deloitte & Touche during its audit were valid and appropriate. Management has established and maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded, and that transactions are executed in accordance with management's authorization and recorded properly for the prevention and detection of fraudulent financial reporting, so as to maintain the integrity and reliability of the financial statements. The system is designed to permit preparation of consolidated financial statements and related notes in accordance with generally accepted accounting principles. The concept of reasonable assurance recognizes that the costs of a system of internal accounting controls should not exceed the related benefits. Management believes the effectiveness of this system is enhanced by an ongoing program of continuous and selective training of employees. In addition, management has communicated to all employees its policies on business conduct, safeguarding assets and internal controls. The Internal Auditing Department of PSE&G conducts audits and appraisals of accounting and other operations of Enterprise and its subsidiaries and evaluates the effectiveness of cost and other controls and, where appropriate, recommends to management improvements thereto. Management has considered the internal auditors' and Deloitte & Touche's recommendations concerning the corporation's system of internal accounting controls and has taken actions that, in its opinion, are cost-effective in the circumstances to respond appropriately to these recommendations. Management believes that, as of December 31, 1997, the Corporation's system of internal accounting controls is adequate to accomplish the objectives discussed herein. The Board of Directors of Enterprise carries out its responsibility of financial overview through its Audit Committee, which presently consists of six directors who are not employees of Enterprise or any of its affiliates. The Audit Committee meets periodically with management as well as with representatives of the internal auditors and Deloitte & Touche. The Audit Committee reviews the work of each to ensure that its respective responsibilities are being carried out and discusses related matters. Both the internal auditors and Deloitte & Touche periodically meet alone with the Audit Committee and have free access to the Audit Committee, and its individual members, at all times. E. JAMES FERLAND ROBERT C. MURRAY Chairman of the Board, Vice President and President and Chief Executive Officer Chief Financial Officer PATRICIA A. RADO Vice President and Controller (Principal Accounting Officer) February 13, 1998 FINANCIAL STATEMENT RESPONSIBILITY--PSE&G Management of PSE&G is responsible for the preparation, integrity and objectivity of the consolidated financial statements and related notes of PSE&G. The consolidated financial statements and related notes are prepared in accordance with generally accepted accounting principles. The financial statements reflect estimates based upon the judgment of management where appropriate. Management believes that the consolidated financial statements and related notes present fairly PSE&G's financial position and results of operations. Information in other parts of this Annual Report is also the responsibility of management and is consistent with these consolidated financial statements and related notes. The firm of Deloitte & Touche LLP, independent auditors, is engaged to audit PSE&G's consolidated financial statements and related notes and issue a report thereon. Deloitte & Touche's audit is conducted in accordance with generally accepted auditing standards. Management has made available to Deloitte & Touche all the corporation's financial records and related data, as well as the minutes of directors' meetings. Furthermore, management believes that all representations made to Deloitte & Touche during its audit were valid and appropriate. Management has established and maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded, and that transactions are executed in accordance with management's authorization and recorded properly for the prevention and detection of fraudulent financial reporting, so as to maintain the integrity and reliability of the financial statements. The system is designed to permit preparation of consolidated financial statements and related notes in accordance with generally accepted accounting principles. The concept of reasonable assurance recognizes that the costs of a system of internal accounting controls should not exceed the related benefits. Management believes the effectiveness of this system is enhanced by an ongoing program of continuous and selective training of employees. In addition, management has communicated to all employees its policies on business conduct, safeguarding assets and internal controls. The Internal Auditing Department conducts audits and appraisals of accounting and other operations and evaluates the effectiveness of cost and other controls and, where appropriate, recommends to management improvements thereto. Management has considered the internal auditors' and Deloitte & Touche's recommendations concerning the corporation's system of internal accounting controls and has taken actions that are cost-effective in the circumstances to respond appropriately to these recommendations. Management believes that, as of December 31, 1997, the Corporation's system of internal accounting controls is adequate to accomplish the objectives discussed herein. The Board of Directors carries out its responsibility of financial overview through the Audit Committee of Enterprise, which presently consists of six directors who are not employees of PSE&G or any of its affiliates. The Enterprise Audit Committee meets periodically with management as well as with representatives of the internal auditors and Deloitte & Touche. The Audit Committee reviews the work of each to ensure that their respective responsibilities are being carried out and discusses related matters. Both the internal auditors and Deloitte & Touche, periodically meet alone with the Audit Committee and have free access to the Audit Committee, and its individual members, at all times. E. JAMES FERLAND ROBERT C. MURRAY Chairman of the Board and Executive Vice President--Finance Chief Executive Officer (Principal Financial Officer) PATRICIA A. RADO Vice President and Controller (Principal Accounting Officer) February 13, 1998 INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors of Public Service Enterprise Group Incorporated: We have audited the consolidated balance sheets of Public Service Enterprise Group Incorporated and its subsidiaries (the "Company") as of December 31, 1997 and 1996, and the related consolidated statements of income, common stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the consolidated financial statement schedule listed in the Index in Item 14(B)(1). These consolidated financial statements and the consolidated financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and consolidated financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Public Service Enterprise Group Incorporated and its subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We have also previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheets as of December 31, 1995, 1994, and 1993, and the related consolidated statements of income, retained earnings and cash flows for the years ended December 31, 1994 and 1993 (none of which are presented herein) and we expressed unqualified opinions on those consolidated financial statements. In our opinion, the information set forth in the Selected Financial Data for each of the five years in the period ended December 31, 1997 for the Company, presented in Item 6, is fairly stated in all material respects, in relation to the consolidated financial statements from which it has been derived. DELOITTE & TOUCHE LLP Parsippany, New Jersey February 13, 1998 INDEPENDENT AUDITORS' REPORT To the Board of Directors of Public Service Electric and Gas Company: We have audited the consolidated balance sheets of Public Service Electric and Gas Company and its subsidiaries (the "Company") as of December 31, 1997 and 1996, and the related consolidated statements of income, common stockholder's equity and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the consolidated financial statement schedule listed in the Index in Item 14(B)(2). These consolidated financial statements and the consolidated financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and consolidated financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Public Service Electric and Gas Company and its subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We have also previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheets as of December 31, 1995, 1994, and 1993, and the related consolidated statements of income, retained earnings and cash flows for the years ended December 31, 1994 and 1993 (none of which are presented herein) and we expressed unqualified opinions on those consolidated financial statements. In our opinion, the information set forth in the Selected Financial Data for each of the five years in the period ended December 31, 1997 for the Company, presented in Item 6, is fairly stated in all material respects, in relation to the consolidated financial statements from which it has been derived. DELOITTE & TOUCHE LLP Parsippany, New Jersey February 13, 1998 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Enterprise and PSE&G, none. PART III Item 10. Directors and Executive Officers of the Registrants Directors of the Registrants Enterprise The information required by Item 10 of Form 10-K with respect to present directors who are nominees for election as directors at Enterprise's Annual Meeting of Stockholders to be held on April 21, 1998, and directors whose terms will continue beyond the meeting, is set forth under the heading "Election of Directors" in Enterprise's definitive Proxy Statement for such Annual Meeting of Stockholders, which definitive Proxy Statement is expected to be filed with the Securities and Exchange Commission on or about March 6, 1998 and which information set forth under said heading is incorporated herein by this reference thereto. PSE&G There is shown as to each present director information as to the period of service as a director of PSE&G, age as of April 21, 1998, present committee memberships, business experience during the last five years and other present directorships. For discussion of certain litigation involving the directors of PSE&G, except Forrest J. Remick and Conrad K. Harper, see Part I--Business, Item 3--Legal Proceedings. LAWRENCE R. CODEY has been a director since 1988. Age 53. Member of Executive Committee. Has been President and Chief Operating Officer of PSE&G since 1991. Director of Enterprise. Director of Sealed Air Corporation, The Trust Company of New Jersey, United Water Resources Inc. and Blue Cross & Blue Shield of New Jersey. E. JAMES FERLAND has been a director since 1986. Age 56. Chairman of Executive Committee. Chairman of the Board, President and Chief Executive Officer of Enterprise since July 1986, Chairman of the Board and Chief Executive Officer of PSE&G since September 1991 and Chairman of the Board and Chief Executive Officer of EDHI since June 1989. Director of Enterprise and of EDHI. Director of Foster Wheeler Corporation and The HSB Group, Inc. RAYMOND V. GILMARTIN has been a director since 1993. Age 57. Director of Enterprise. Has been Chairman of the Board, President and Chief Executive Officer of Merck & Company, Inc., Whitehouse Station, New Jersey (discovers, develops, produces and markets human and animal health products) since November 1994. Was President and Chief Executive Officer from June 1994 to November 1994. Was Chairman of the Board, President and Chief Executive Officer of Becton Dickinson and Company from November 1992 to June 1994. Director of Merck & Co., Inc. and General Mills, Inc. CONRAD K. HARPER has been a director since May 1997. Age 57. Director of Enterprise. Has been a partner in the law firm of Simpson Thacher & Bartlett, New York, New York since October 1996 and from 1974 to May 1993. Was Legal Adviser, U.S. Department of State from May 1993 to June 1996. Director of New York Life Insurance Company. IRWIN LERNER has been a director since 1993. Age 67. Member of Executive Committee. Was previously a director from 1981 to February 1988. Director of Enterprise. Was Chairman, Board of Directors from January 1993 to September 1993 and President and Chief Executive Officer from 1980 to December 1992 of Hoffmann-La Roche Inc., Nutley, New Jersey (prescription pharmaceuticals, vitamins and fine chemicals, and diagnostic products and services). Director of Humana Inc., AXYS Pharmaceuticals, Inc., Medarex, Inc. and Covance Inc. FORREST J. REMICK has been a director since 1995. Age 67. Director of Enterprise. Has been an engineering consultant since 1994. Was Commissioner, U.S. Nuclear Regulatory Commission, from December 1989 to June 1994. Was Associate Vice President--Research and Professor of Nuclear Engineering at Pennsylvania State University, from 1985 to 1989. Executive Officers of the Registrants The following table sets forth certain information concerning the executive officers of Enterprise and PSE&G, respectively.
Age Effective Date Name December 31, 1997 Office First Elected to Present Position - ----------------------------- --------------------- ------------------------------------ ---------------------------------- E. James Ferland............ 55 Chairman of the Board, President July 1986 to present and Chief Executive Officer (Enterprise) Chairman of the Board and Chief July 1986 to present Executive Officer (PSE&G) Chairman of the Board and Chief June 1989 to present Executive Officer (EDHI) Lawrence R. Codey.......... 53 President and Chief Operating September 1991 to present Officer (PSE&G) Robert C. Murray........... 52 Vice President and Chief Financial January 1992 to present Officer (Enterprise) Executive Vice President--Finance June 1997 to present (PSE&G) Senior Vice President and Chief January 1992 to June 1997 Financial Officer (PSE&G) Patricia A. Rado........... 55 Vice President and Controller April 1993 to present (Enterprise) Vice President and Controller April 1993 to present (PSE&G) Controller of Yankee Energy July 1989 to April 1993 Systems Incorporated R. Edwin Selover........... 52 Vice President and General Counsel April 1988 to present (Enterprise) Senior Vice President and General January 1988 to present Counsel (PSE&G) Frank Cassidy.............. 50 President and Chief Executive November 1996 to present Officer (Energis Resources) Senior Vice President--Fossil February 1995 to November 1996 Generation (PSE&G) Vice President--Transmission November 1989 to February 1995 Systems (PSE&G) Robert J. Dougherty, Jr.... 46 President and Chief Operating January 1997 to present Officer (EDHI) President (Enterprise Ventures and February 1995 to December 1996 Services Corporation) Senior Vice President--Electric September 1991 to February 1995 (PSE&G)
Age Effective Date Name December 31, 1997 Office First Elected to Present Position - ----------------------------- --------------------- ------------------------------------ --------------------------------- Leon R. Eliason............. 58 Chief Nuclear Officer and October 1994 to present President--Nuclear Business Unit (PSE&G) President--Power Supply Business January 1993 to September 1994 Unit, Northern States Power Company Vice President--Nuclear Generation, July 1990 to January 1993 Northern States Power Alfred C. Koeppe............ 51 Senior Vice President--Corporate October 1996 to present Services and External Affairs (PSE&G) Senior Vice President--External October 1995 to October 1996 Affairs (PSE&G) President and Chief Executive February 1993 to October 1995 Officer, Bell Atlantic--New Jersey Vice President--Public Affairs, February 1991 to February 1993 Bell Atlantic--New Jersey Harold W. Keiser............ 54 Executive Vice President--Nuclear January 1998 to present (PSE&G) Private Consultant October 1997 to January 1998 Vice President and Chief Nuclear March 1996 to October 1997 Operating Officer, Commonwealth Edison Vice President, Pressurized Water December 1995 to March 1996 Reactor, Commonwealth Edison Executive Vice President and Chief April 1993 to December 1995 Operating Officer, Entergy Operations Incorporated Eileen A. Moran............. 43 President (PSRC) May 1990 to present President (EGDC) January 1997 to present Michael J. Thomson.......... 39 President and Chief Executive January 1997 to present Officer (CEA) Senior Vice President and Chief February 1994 to December 1996 Operating Officer (CEA) Senior Vice President (CEA) July 1993 to February 1994 Vice President--Business July 1992 to July 1993 Development and Planning (EDHI)
Item 11. Executive Compensation Enterprise The information required by Item 11 of Form 10-K is set forth under the heading "Executive Compensation" in Enterprise's definitive Proxy Statement for the Annual Meeting of Stockholders to be held April 21, 1998 which definitive Proxy Statement is expected to be filed with the Securities and Exchange Commission on or about March 6, 1998 and such information set forth under such heading is incorporated herein by this reference thereto. PSE&G Information regarding the compensation of the Chief Executive Officer and the four most highly compensated executive officers of PSE&G as of December 31, 1997 is set forth below. Amounts shown were paid or awarded for all services rendered to Enterprise and its subsidiaries and affiliates including PSE&G. SUMMARY COMPENSATION TABLE
Annual Compensation Awards Payouts ------------------------- ----------- ------------ Bonus/Annual LTIP All Other Salary Incentive Options Payouts Compensation Name and Principal Position Year $ Award($)(1) (#)(2) ($)(3) ($)(4) - ------------------------------------- ---------- ---------- ---------------- ----------- ------------ --------------- E. James Ferland.................... 1997 712,261 (5) 118,000 108,702 15,747 Chairman of the Board, President and 1996 712,261 279,811 6,500 168,084 10,994 CEO of Enterprise 1995 682,377 225,411 5,800 246,288 8,681 Lawrence R. Codey................... 1997 435,327 (5) 59,200 50,325 5,459 President and Chief Operating 1996 435,327 141,968 3,000 81,144 5,934 Officer of PSE&G 1995 418,392 141,931 2,800 118,746 5,756 Robert C. Murray.................... 1997 345,671 (5) 32,000 36,234 5,260 Vice President and Chief Financial 1996 332,721 83,887 2,000 57,960 5,248 Officer of Enterprise 1995 318,775 117,577(6) 2,000 70,368 5,169 Leon R. Eliason..................... 1997 336,706 65,000(5)(10) 15,500 36,234 7,505 President--Nuclear Business Unit and 1996 336,706 180,839(7) 2,500 34,776 6,239 Chief Nuclear Officer of PSE&G (9) 1995 323,755 229,168(8) 2,500 26,388 3,242 R. Edwin Selover.................... 1997 278,928 (5) 14,300 26,169 9,065 Vice President and General Counsel 1996 268,967 59,828 1,400 40,572 7,172 of Enterprise 1995 253,028 65,966 1,400 57,174 6,596
(1) Amount awarded in given year was earned under Management Incentive Compensation Plan (MICP) and determined in following year with respect to the given year based on individual performance and financial and operating performance of Enterprise and PSE&G, including comparison to other companies. For plan years prior to 1996, the award is accounted for as market-priced phantom stock with dividend reinvestment at 95% of market price, with payment made over three years beginning in second year following grant. Beginning in 1997 with respect to the 1996 and future plan years, awards are payable in one lump sum. (2) Includes grant of options to purchase 8,000 and 10,000; 4,200 and 5,000; 3,000 and 4,000; 3,000 and 2,500; 1,800 and 2,500 shares of Enterprise Common Stock in January and December, respectively, to Messrs. Ferland, Codey, Murray, Eliason and Selover, respectively, under Long-Term Incentive Plan (LTIP) in tandem with equal number of performance units and dividend equivalents which may provide cash payments, dependent upon future financial performance of Enterprise in comparison to other companies and dividend payments by Enterprise, to assist recipients in exercising options granted. The grant is made at the beginning of a three-year performance period and cash payment of the value of such performance units and dividend equivalents is made following such period in proportion to the options, if any, exercised at such time. Also includes options to purchase 100,000; 50,000; 25,000; 10,000 and 10,000 shares of Enterprise Common Stock granted to Messrs. Ferland, Codey, Murray, Eliason and Selover, respectively, under LTIP not in tandem with performance units and dividend equivalents. (3) Amount paid in proportion to options exercised, if any, based on value of previously granted performance units and dividend equivalents, each as measured during three-year period ending the year prior to the year in which payment is made. (4) Includes employer contribution to Thrift and Tax-Deferred Savings Plan and value of 5% discount on phantom stock dividend reinvestment under MICP:
Ferland Codey Murray Eliason Selover ---------------- -------------------- --------------- -------------- --------------- Thrift MICP Thrift MICP Thrift MICP Thrift MICP Thrift MICP ($) ($) ($) ($) ($) ($) ($) ($) ($) ($) ---------------- -------------------- --------------- -------------- -------------- 1997................. 4,801 1,122 4,802 657 4,802 458 519 0 4,802 325 1996................. 4,150 2,861 4,502 1,432 4,502 746 2,678 212 4,502 1,272 1995................. 3,752 2,383 4,502 1,254 4,502 667 1,795 0 4,501 1,144
In addition, 1997, 1996 and 1995 amounts include for Mr. Ferland $9,824, $3,983 and $2,546; for Mr. Eliason $6,986, $3,349 and $1,447 and for Mr. Selover $3,938, $1,398 and $951, respectively, representing interest on compensation deferred under PSE&G's Deferred Compensation Plan in excess of 120% of the applicable Federal long-term rate as prescribed under Section 1274(d) of the Internal Revenue Code. Under PSE&G's Deferred Compensation Plan, interest is paid at prime rate plus 1/2%, adjusted quarterly. (5) The 1997 MICP award amount has not yet been determined. The target award is 50% of salary for Mr. Ferland, 40% for Messrs. Codey and Eliason, 35% for Mr. Murray and 30% for Mr. Selover. The target award is adjusted to reflect Enterprise's return on capital, PSE&G's comparative electric and gas costs and individual performance. (6) Includes $25,000 paid pursuant to Mr. Murray's employment agreement. (7) Includes $100,000 paid pursuant to Mr. Eliason's employment agreement. (8) Includes $165,000 paid pursuant to Mr. Eliason's employment agreement. (9) Mr. Eliason is scheduled to retire effective April 30, 1998. (10) Amount paid pursuant to Mr. Eliason's employment agreement. OPTION GRANTS IN LAST FISCAL YEAR (1997)
Number of % of Total Securities Options Underlying Granted to Exercise or Options Employees in Base Price Expiration Grant Date Name Granted(1) Fiscal Year ($/Sh) Date Present Value ($)(4) - ------------------------------------- --------------- ---------------- ------------ ------------- ---------------------- E. James Ferland................... 8,000(1) 2.2 27.625 01/03/07 69,600 10,000(2) 2.7 29.563 12/16/07 100,800 100,000(3) 27.0 29.563 12/16/07 262,000 Lawrence R. Codey.................. 4,200(1) 1.1 27.625 01/03/07 36,540 5,000(2) 1.3 29.563 12/16/07 50,400 50,000(3) 13.5 29.563 12/16/07 131,000 Robert C. Murray................... 3,000(1) 0.8 27.625 01/03/07 26,100 4,000(2) 1.1 29.563 12/16/07 40,320 25,000(3) 6.7 29.563 12/16/07 65,500 Leon R. Eliason.................... 3,000(1) 0.8 27.625 01/03/07 26,100 2,500(2) 0.7 29.563 12/16/07 25,200 10,000(3) 2.7 29.563 12/16/07 26,200 R. Edwin Selover................... 1,800(1) 0.5 27.625 01/03/07 15,660 2,500(2) 0.7 29.563 12/16/07 25,200 10,000(3) 2.7 29.563 12/16/07 26,200
(1) Granted under LTIP in tandem with equal number of performance units and dividend equivalents which may provide cash payments, dependent on future financial performance of Enterprise in comparison to other companies and dividend payments by Enterprise, to assist recipients in exercising options, with exercisability commencing January 1, 2000. Cash payment is made, based on the value, if any, of performance units awarded and dividend equivalents accrued, if any, as measured during the three-year period ending the year prior to the year in which payment, if any, is made, only if the specified performance level is achieved, dividend equivalents have accrued and options are exercised. (2) Granted under LTIP in tandem with equal number of performance units and dividend equivalents, as described in Note (1) above, but with exercisability commencing January 1, 2001. (3) Granted under LTIP not in tandem with performance units and dividend equivalents, with exercisability commencing December 16, 1998, December 16, 1999 and December 16, 2000, respectively, with respect to one-third of the options at each such date. (4) Determined using the Black-Scholes model, incorporating the following material assumptions and adjustments for the grants expiring January 3, 2007 and December 16, 2007, respectively: (a) exercise prices of $27.625 and $29.563, equal to the fair market value of the underlying Enterprise Common Stock on the dates of grant; (b) an option term of ten years on all grants; (c) interest rates of 6.58% and 5.81% that represent the interest rates on U.S. Treasury securities on the dates of grant with a maturity date corresponding to that of the option terms; (d) volatilities of 17.847% and 18.948% calculated using daily Enterprise Common Stock prices for the one-year period prior to the grant dates; (e) a dividend yield of 0% with respect to the dividend equivalent feature of the tandem grants, since dividend payments accrue while the option is held; (f) a dividend yield of 7.31% on the non-tandem grants and (g) reductions of approximately 11.51% and 7.8% for the non-tandem and tandem grants, respectively, to reflect the probability of forfeiture due to termination prior to vesting, and approximately 26.3%, 17.36% and 1.75% for the grant expiring January 3, 2007 and each of the grants expiring December 16, 2007, respectively, to reflect the probability of a shortened option term due to termination of employment prior to the option expiration date. Actual values which may be realized, if any, upon any exercise of such options, will be based on the market price of Enterprise Common Stock at the time of any such exercise and thus are dependent upon future performance of Enterprise Common Stock. There is no assurance that any such value realized will be at or near the value estimated by the Black-Scholes model utilized. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR (1997) AND FISCAL YEAR END OPTION VALUES (12/31/97)
Value of Unexercised Number of Unexercised In-the-Money Options Options at FY-End(#)(1) At FY-End($)(3) ------------------------------- ----------------------------- Shares Acquired Value on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable Name (#)(1) ($)(2) (#) (#) ($) ($) - -------------------------------- ---------------------- ------------------------------- ----------------------------- E. James Ferland............... 5,400 0 0 130,300 0 300,839 Lawrence R. Codey............. 2,500 0 700 65,000 5,206 138,623 Robert C. Murray.............. 1,800 0 0 36,000 0 77,048 Leon R. Eliason............... 1,800 0 0 20,500 0 42,806 R. Edwin Selover.............. 1,300 0 2,200 17,100 10,862 36,144
(1) Does not reflect any options granted and/or exercised after year end (12/31/97). The net effect of any such grants and exercises is reflected in the table appearing under Security Ownership of Directors and Management. (2) Represents difference between exercise price and market price of Enterprise Common Stock on date of exercise. (3) Represents difference between market price of Enterprise Common Stock and the respective exercise prices of the options at fiscal year end (12/31/97). Such amounts may not necessarily be realized. Actual values which may be realized, if any, upon any exercise of such options will be based on the market price of Enterprise Common Stock at the time of any such exercise and thus are dependent upon future performance of Enterprise Common Stock. Employment Contracts and Arrangements Employment agreements were entered into with Messrs. Ferland, Murray and Eliason at the time of their employment. For Mr. Ferland, the remaining applicable provisions of the agreement provide for additional credited service for retirement benefits purposes in the amount of 22 years. The principal remaining applicable terms of the agreement with Mr. Murray, as modified in 1998, provide for additional years of credited service for retirement benefits purposes for allied work experience of five years after completion of five years of service, and up to seventeen years after completion of approximately nine years of service. The principal remaining applicable terms of the agreement with Mr. Eliason provide for a lump sum cash payment of $35,000 in 1998 to align Mr. Eliason with MICP payments for other executive officers, and additional years of credited service for retirement benefits purposes for allied work experience of 19 years at his scheduled retirement date of April 30, 1998. Compensation Committee Interlocks and Insider Participation PSE&G does not have a compensation committee. Decisions regarding compensation of PSE&G's executive officers are made by the Organization and Compensation Committee of Enterprise. Hence, during 1997 the PSE&G Board of Directors did not have, and no officer, employee or former officer of PSE&G participated in any deliberations of such Board, concerning executive officer compensation. Compensation of Directors and Certain Business Relationships A director who is not an officer of Enterprise or its subsidiaries and affiliates, including PSE&G, is paid an annual retainer of $22,000 and a fee of $1,200 for attendance at any Board or committee meeting, inspection trip, conference or other similar activity relating to Enterprise, PSE&G or EDHI. Each of the directors of PSE&G is also a director of Enterprise. No additional retainer is paid for service as a director of PSE&G. Fifty percent of the annual retainer is paid in Enterprise Common Stock. Enterprise also maintains a Stock Plan for Outside Directors pursuant to which directors who are not employees of Enterprise or its subsidiaries receive 300 shares of restricted stock for each year of service as a director. Such shares held by each non-employee director are included in the table above under the heading Security Ownership of Directors and Management. The restrictions on the stock granted under the Stock Plan for Outside Directors provide that the shares are subject to forfeiture if the director leaves service at any time prior to the Annual Meeting of Stockholders following his or her 70th birthday. This restriction would be deemed to have been satisfied if the director's service were terminated if Enterprise were to merge with another corporation and not be the surviving corporation or if the director were to die in office. Enterprise also has the ability to waive this restriction for good cause shown. Restricted stock may not be sold or otherwise transferred prior to the lapse of the restrictions. Dividends on shares held subject to restrictions are paid directly to the director, and the director has the right to vote the shares. Compensation Pursuant to Pension Plans The table below illustrates annual retirement benefits expressed in terms of single life annuities based on the average final compensation and service shown and retirement at age 65. A person's annual retirement benefit is based upon a percentage that is equal to years of credited service plus 30, but not more than 75%, times average final compensation at the earlier of retirement, attainment of age 65 or death. These amounts are reduced by Social Security benefits and certain retirement benefits from other employers. Pensions in the form of joint and survivor annuities are also available. PENSION PLAN TABLE Length of Service -------------------------------------------------------------- Average Final Compensation 30 Years 35 Years 40 Years 45 Years - ---------------- ------------- --------------- ---------------- --------------- $300,000 $180,000 $195,000 $210,000 $225,000 400,000 240,000 260,000 280,000 300,000 500,000 300,000 325,000 350,000 375,000 600,000 360,000 390,000 420,000 450,000 700,000 420,000 455,000 490,000 525,000 800,000 480,000 520,000 560,000 600,000 900,000 540,000 585,000 630,000 675,000 1,000,000 600,000 650,000 700,000 750,000 1,100,000 660,000 715,000 770,000 825,000 1,200,000 720,000 780,000 840,000 900,000 Average final compensation, for purposes of retirement benefits of executive officers, is generally equivalent to the average of the aggregate of the salary and bonus amounts reported in the Summary Compensation Table above under 'Annual Compensation' for the five years preceding retirement, not to exceed 130% of the average annual salary for such five year period. Messrs. Ferland, Codey, Murray and Selover will have accrued approximately 48, 41, 41 and 43 years of credited service, respectively, as of age 65. Mr. Eliason is scheduled to retire at age 59 with 23 years of credited service. Item 12. Security Ownership of Certain Beneficial Owners and Management Enterprise The information required by Item 12 of Form 10-K with respect to directors and executive officers is set forth under the heading 'Security Ownership of Directors and Management' in Enterprise's definitive Proxy Statement for the Annual Meeting of Stockholders to be held April 21, 1998 which definitive Proxy Statement is expected to be filed with the Securities and Exchange Commission on or about March 6, 1998 and such information set forth under such heading is incorporated herein by this reference thereto. PSE&G All of PSE&G's 132,450,344 outstanding shares of Common Stock are owned beneficially and of record by PSE&G's parent, Enterprise, 80 Park Plaza, P.O. Box 1171, Newark, New Jersey. The following table sets forth beneficial ownership of Enterprise Common Stock, including options, by the directors and executive officers named below as of January 31, 1998. None of these amounts exceed 1% of the Enterprise Common Stock outstanding at such date. No director or executive officer owns any PSE&G Preferred Stock of any class. Amount and Nature of Name Beneficial Ownership ---- -------------------- Lawrence R. Codey...................................... 80,811 (1) Leon R. Eliason........................................ 24,108 (2) E. James Ferland....................................... 183,057 (3) Raymond V. Gilmartin................................... 3,989 Conrad K. Harper....................................... 300 Irwin Lerner........................................... 10,367 Robert C. Murray....................................... 46,179 (4) Forrest J. Remick...................................... 2,213 R. Edwin Selover....................................... 26,891 (5) All directors and executive officers (12) as a group... 410,159 (6) (1) Includes options to purchase 65,700 shares, 3,500 of which are currently exercisable. (2) Includes the equivalent of 8 shares held under PSE&G Thrift and Tax-Deferred Savings Plan. Includes options to purchase 20,500 shares, 2,500 of which are currently exercisable. (3) Includes the equivalent of 10,989 shares held under PSE&G Thrift and Tax-Deferred Savings Plan. Includes options to purchase 130,300 shares, 5,800 of which are currently exercisable. (4) Includes the equivalent of 1,179 shares held under PSE&G Thrift and Tax-Deferred Savings Plan. Includes options to purchase 36,000 shares, 2,000 of which are currently exercisable. (5) Includes options to purchase 19,300 shares, of which 3,600 are currently exercisable. (6) Includes the equivalent of 12,453 shares held under PSE&G Thrift and Tax-Deferred Savings Plan. Includes options to purchase 302,400 shares, of which 18,400 are currently exercisable. Item 13. Certain Relationships and Related Transactions Enterprise The information required by Item 13 of Form 10-K is set forth under the heading "Executive Compensation" in Enterprise's definitive Proxy Statement for the Annual Meeting of Stockholders to be held April 21, 1998, which definitive Proxy Statement is expected to be filed with the Securities and Exchange Commission on or about March 6, 1998. Such information set forth under such heading is incorporated herein by this reference thereto. PSE&G None. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (A) Financial Statements: (1) Enterprise Consolidated Statements of Income for the years ended December 31, 1997, 1996, and 1995, on page 49. Enterprise Consolidated Balance Sheets for the years ended December 31, 1997 and 1996, on pages 50 and 51. Enterprise Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996, and 1995 on page 52. Enterprise Statements of Common Stockholders' Equity for the years ended December 31, 1997, 1996, and 1995 on page 53. Enterprise Notes to Consolidated Financial Statements on pages 60 through 92. (2) PSE&G Consolidated Statements of Income for the years ended December 31, 1997, 1996, and 1995, on page 55. PSE&G Consolidated Balance Sheets for the years ended December 31, 1997 and 1996, on pages 56 and 57. PSE&G Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996, and 1995 on page 58. PSE&G Statements of Common Stockholder's Equity for the years ended December 31, 1997, 1996, and 1995 on page 59. PSE&G Notes to Consolidated Financial Statements on pages 93 through 95. (B) The following documents are filed as a part of this report: (1) Enterprise Financial Statement Schedules: Schedule II--Valuation and Qualifying Accounts for each of the three years in the period ended December 31, 1997 (page 111). (2) PSE&G Financial Statement Schedules: Schedule II--Valuation and Qualifying Accounts for each of the three years in the period ended December 31, 1997 (page 111). Schedules other than those listed above are omitted for the reason that they are not required or are not applicable, or the required information is shown in the consolidated financial statements or notes thereto. (C) The following exhibits are filed herewith: (1) Enterprise: Exhibit 10a(1) Directors' Deferred Compensation Plan Exhibit 10a(2) Deferred Compensation Plan for Certain Employees Exhibit 10a(3) Limited Supplemental Benefits Plan for Certain Employees Exhibit 10a(4) Mid Career Hire Supplemental Retirement Plan Exhibit 10a(5) Retirement Income Reinstatement Plan Exhibit 10a(6) Long-Term Incentive Plan Exhibit 10a(9)(i) Amendment to Letter Agreement with Robert C. Murray Exhibit 10a(16) Letter Agreement with Harold W. Keiser Exhibit 10a(17) CEA Deferred Compensation Plan Exhibit 10a(18) CEA Executive Incentive Compensation Plan Exhibit 10a(19) EDHI Management Incentive Compensation Plan Exhibit 10a(20) EDHI Deferred Compensation Plan Exhibit 10a(21) Energis Executive Incentive Compensation Plan Exhibit 10a(22) EDHI Limited Supplemental Benefits Plan for Certain Employees Exhibit 12 Computation of Ratios of Earnings to Fixed Charges Exhibit 21 Subsidiaries of Registrant Exhibit 23 Independent Auditors' Consent Exhibit 27 Financial Data Schedule (See Exhibit Index on pages 115 through 122.) (2) PSE&G: Exhibit 10a(1) Directors' Deferred Compensation Plan Exhibit 10a(2) Deferred Compensation Plan for Certain Employees Exhibit 10a(3) Limited Supplemental Benefits Plan for Certain Employees Exhibit 10a(4) Mid Career Hire Supplemental Retirement Plan Exhibit 10a(5) Retirement Income Reinstatement Plan Exhibit 10a(6) Long-Term Incentive Plan Exhibit 10a(9)(i) Amendment to Letter Agreement with Robert C. Murray Exhibit 10a(16) Letter Agreement with Harold W. Keiser Exhibit 12(a) Computation of Ratios of Earnings to Fixed Charges Exhibit 12(b) Computation of Ratios of Earnings to Fixed Charges Plus Preferred Stock Dividend Requirements Exhibit 23 Independent Auditors' Consent Exhibit 27 Financial Data Schedule (See Exhibit Index on pages 122 through 128) (D) The following reports on Form 8-K were filed by the registrant(s) named below during the last quarter of 1997 and the 1998 period covered by this report under Item 5: Registrant Date of Report Item Reported None. SCHEDULE II PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED Schedule II -- Valuation and Qualifying Accounts Years Ended December 31, 1997 -- December 31, 1995
Column B Column C Column D Column E ------------- ----------------------------- ------------- ------------- Additions ----------------------------- Balance at Charged to Charged to Balance at beginning cost and other accounts Deductions- end of Description of period expenses describe describe period - ------------------------------------------- ------------- ----------------------------- ------------- ------------- (Millions of Dollars) 1997: Allowance for Doubtful Accounts.......... $46 $44 $-- $49 (A) $41 Discount on Property Abandonments........ 4 -- -- 2 (B) 2 Inventory Valuation Reserve.............. 16 -- -- 4 12 Other Valuation Allowances............... 10 -- -- -- 10 1996: Allowance for Doubtful Accounts.......... $38 $46 $-- $38 (A) $46 Discount on Property Abandonments........ 7 -- -- 3 (B) 4 Inventory Valuation Reserve.............. 20 -- -- 4 16 Other Valuation Allowances............... -- 10 -- -- 10 1995: Allowance for Doubtful Accounts.......... $41 $33 $-- $36 (A) $38 Discount on Property Abandonments........ 11 -- -- 4 (B) 7 Inventory Valuation Reserve.............. 18 2 -- -- 20 Other Valuation Allowances............... -- -- -- -- -- (A) Accounts Receivable/Investments written off. (B) Amortization of discount to income.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY Schedule II -- Valuation and Qualifying Accounts Years Ended December 31, 1997 -- December 31, 1995
Column B Column C Column D Column E ------------- ---------------------------- --------------- ------------- Additions ---------------------------- Balance at Charged to Charged to Balance at beginning cost and other accounts Deductions- end of Description of period expenses describe describe period - ------------------------------------------- ------------- ----------------------------- ------------- ------------- (Millions of Dollars) 1997: Allowance for Doubtful Accounts.......... $46 $44 $-- $49 (A) $41 Discount on Property Abandonments........ 4 -- -- 2 (B) 2 Inventory Valuation Reserve.............. 16 -- -- 4 12 Other Valuation Allowances............... 10 -- -- -- 10 1996: Allowance for Doubtful Accounts.......... $38 $46 $-- $38 (A) $46 Discount on Property Abandonments........ 7 -- -- 3 (B) 4 Inventory Valuation Reserve.............. 20 -- -- 4 16 Other Valuation Allowances............... -- 10 -- -- 10 1995: Allowance for Doubtful Accounts.......... $41 $33 $-- $36 (A) $38 Discount on Property Abandonments........ 11 -- -- 4 (B) 7 Inventory Valuation Reserve.............. 18 2 -- -- 20 Other Valuation Allowances............... -- -- -- -- -- (A) Accounts Receivable/Investments written off. (B) Amortization of discount to income.
SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Public Service Enterprise Group Incorporated By E. JAMES FERLAND -------------------------------- E. James Ferland Chairman of the Board, President and Chief Executive Officer Date: February 23, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- E. JAMES FERLAND Chairman of the Board, February 23, 1998 E. James Ferland President and Chief Executive Officer and Director (Principal Executive Officer) ROBERT C. MURRAY Vice President and Chief February 23, 1998 Robert C. Murray Financial Officer (Principal Financial Officer) PATRICIA A. RADO Vice President and Controller February 23, 1998 Patricia A. Rado (Principal Accounting Officer) LAWRENCE R. CODEY Director February 23, 1998 Lawrence R. Codey ERNEST H. DREW Director February 23, 1998 Ernest H. Drew T. J. DERMOT DUNPHY Director February 23, 1998 T. J. Dermot Dunphy RAYMOND V. GILMARTIN Director February 23, 1998 Raymond V. Gilmartin CONRAD K. HARPER Director February 23, 1998 Conrad K. Harper IRWIN LERNER Director February 23, 1998 Irwin Lerner MARILYN M. PFALTZ Director February 23, 1998 Marilyn M. Pfaltz FORREST J. REMICK Director February 23, 1998 Forrest J. Remick RICHARD J. SWIFT Director February 23, 1998 Richard J. Swift JOSH S. WESTON Director February 23, 1998 Josh S. Weston SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Public Service Electric and Gas Company By E. JAMES FERLAND ------------------- E. James Ferland Chairman of the Board and Chief Executive Officer Date: February 23, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- E. JAMES FERLAND Chairman of the Board and Chief February 23, 1998 E. James Ferland Chief Executive Officer and Director (Principal Executive Officer) ROBERT C. MURRAY Executive Vice President--Finance February 23, 1998 Robert C. Murray (Principal Financial Officer) PATRICIA A. RADO Vice President and Controller February 23, 1998 Patricia A. Rado (Principal Accounting Officer) LAWRENCE R. CODEY Director February 23, 1998 Lawrence R. Codey RAYMOND V. GILMARTIN Director February 23, 1998 Raymond V. Gilmartin CONRAD K. HARPER Director February 23, 1998 Conrad K. Harper IRWIN LERNER Director February 23, 1998 Irwin Lerner FORREST J. REMICK Director February 23, 1998 Forrest J. Remick EXHIBIT INDEX Certain Exhibits previously filed with the Commission and the appropriate securities exchanges are indicated as set forth below. Such Exhibits are not being refiled, but are included because inclusion is desirable for convenient reference. (a) Filed by PSE&G with Form 8-A under the Securities Exchange Act of 1934, on the respective dates indicated, File No. 1-973. (b) Filed by PSE&G with Form 8-K under the Securities Exchange Act of 1934, on the respective dates indicated, File No. 1-973. (c) Filed by PSE&G with Form 10-K under the Securities Exchange Act of 1934, on the respective dates indicated, File No. 1-973. (d) Filed by PSE&G with Form 10-Q under the Securities Exchange Act of 1934, on the respective dates indicated, File No. 1-973. (e) Filed by Enterprise with Form 10-K under the Securities Exchange Act of 1934, on the respective dates indicated, File No. 1-9120. (f) Filed with registration statement of PSE&G under the Securities Exchange Act of 1934, File No. 1-973, effective July 1, 1935, relating to the registration of various issues of securities. (g) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-4995, effective May 20, 1942, relating to the issuance of $15,000,000 First and Refunding Mortgage Bonds, 3% Series due 1972. (h) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-7568, effective July 1, 1948, relating to the proposed issuance of 200,000 shares of Cumulative Preferred Stock. (i) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-8381, effective April 18, 1950, relating to the issuance of $26,000,000 First and Refunding Mortgage Bonds, 2 3/4% Series due 1980. (j) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-12906, effective December 4, 1956, relating to the issuance of 1,000,000 shares of Common Stock. (k) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-59675, effective September 1, 1977, relating to the issuance of $60,000,000 First and Refunding Mortgage Bonds, 8 1/8% Series I due 2007. (l) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-60925, effective March 30, 1978, relating to the issuance of 750,000 shares of Common Stock through an Employee Stock Purchase Plan. (m) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-65521, effective October 10, 1979, relating to the issuance of 3,000,000 shares of Common Stock. (n) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-74018, filed on June 16, 1982, relating to the Thrift Plan of PSE&G. (o) Filed with registration statement of Public Service Enterprise Group Incorporated under the Securities Act of 1933, No. 33-2935 filed January 28, 1986, relating to PSE&G's plan to form a holding company as part of a corporate restructuring. (p) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 33-13209 filed April 9, 1987, relating to the registration of $575,000,000 First and Refunding Mortgage Bonds pursuant to Rule 415. ENTERPRISE - --------------------------------------------------- Exhibit Number - --------------------------------------------------- This Previous Filing ---------------------------------------- Filing Commission Exchanges - ------ ---------- --------- 3a (o) 3a (o) 3a Certificate of Incorporation Public Service Enterprise Group Incorporated 3b (e) 3b (e) 3b Copy of By-Laws of Public 4/11/88 Service Enterprise Group Incorporated, as in effect May 1,1987 3c (e) 3c (e) 3c Certificate of Amendment of 4/11/88 Certificate of Incorporation of Public Service Enterprise Group 4a(1) (f) B-1 (c) 4b(1) Incorporated, effective 2/18/81 April 23, 1987 Indenture between PSE&G and Fidelity Union Trust Company, (now First Union National Bank) as Trustee, dated August 1, 1924, securing First and Refunding Mortgage Bonds Indentures between PSE&G and First Union National Bank as Trustee, supplemental to Exhibit 4a(1), dated as follows: 4a(2) (i) 7(1a) (c) 4b(2) April 1, 1927 2/18/81 4a(3) (k) 2b(3) (c) 4b(3) June 1, 1937 2/18/81 4a(4) (k) 2b(4) (c) 4b(4) July 1, 1937 2/18/81 4a(5) (k) 2b(5) (c) 4b(5) December 19, 1939 2/18/81 4a(6) (g) B-10 (c) 4b(6) March 1, 1942 2/18/81 4a(7) (k) 2b(7) (c) 4b(7) June 1, 1949 2/18/81 4a(8) (k) 2b(8) (c) 4b(8) May 1, 1950 2/18/81 4a(9) (k) 2b(9) (c) 4b(9) October 1, 1953 2/18/81 4a(10) (k) 2b(10) (c) 4b(10) May 1, 1954 2/18/81 4a(11) (j) 4b(16) (c) 4b(11) November 1, 1956 2/18/81 4a(12) (k) 2b(12) (c) 4b(12) September 1, 1957 2/18/81 4a(13) (k) 2b(13) (c) 4b(13) August 1, 1958 2/18/81 4a(14) (k) 2b(14) (c) 4b(14) June 1, 1959 2/18/81 ENTERPRISE - --------------------------------------------------- Exhibit Number - --------------------------------------------------- This Previous Filing ---------------------------------------- Filing Commission Exchange - ------ ---------- --------- 4a(15) (k) 2b(15) (c) 4b(15) September 1, 1960 2/18/81 4a(16) (k) 2b(16) (c) 4b(16) August 1, 1962 2/18/81 4a(17) (k) 2b(17) (c) 4b(17) June 1, 1963 2/18/81 4a(18) (k) 2b(18) (c) 4b(18) September 1, 1964 2/18/81 4a(19) (k) 2b(19) (c) 4b(19) September 1, 1965 2/18/81 4a(20) (k) 2b(20) (c) 4b(20) June 1, 1967 2/18/81 4a(21) (k) 2b(21) (c) 4b(21) June 1, 1968 2/18/81 4a(22) (k) 2b(22) (c) 4b(22) April 1, 1969 2/18/81 4a(23) (k) 2b(23) (c) 4b(23) March 1, 1970 2/18/81 4a(24) (k) 2b(24) (c) 4b(24) May 15, 1971 2/18/81 4a(25) (k) 2b(25) (c) 4b(25) November 15, 1971 2/18/81 4a(26) (k) 2b(26) (c) 4b(26) April 1, 1972 2/18/81 4a(27) (a) 2 (c) 4b(27) March 1, 1974 3/29/74 2/18/81 4a(28) (a) 2 (c) 4b(28) October 1, 1974 10/11/74 2/18/81 4a(29) (a) 2 (c) 4b(29) April 1, 1976 4/6/76 2/18/81 4a(30) (a) 2 (c) 4b(30) September 1, 1976 9/16/76 2/18/81 4a(31) (k) 2b(31) (c) 4b(31) October 1, 1976 2/18/81 4a(32) (a) 2 (c) 4b(32) June 1, 1977 6/29/77 2/18/81 4a(33) (l) 2b(33) (c) 4b(33) September 1, 1977 2/18/81 ENTERPRISE - ---------------------------------------------------- Exhibit Number - ---------------------------------------------------- This Previous Filing ----------------------------------------- Filing Commission Exchanges - ------ ---------- --------- 4a(35) (a) 2 (c) 4b(35) July 1, 1979 7/25/79 2/18/81 4a(36) (m) 2d(36) (c) 4b(36) September 1, 1979 (No. 1) 2/18/81 4a(37) (m) 2d(37) (c) 4b(37) September 1, 1979 (No. 2) 2/18/81 4a(38) (a) 2 (c) 4b(38) November 1, 1979 12/3/79 2/18/81 4a(39) (a) 2 (c) 4b(39) June 1, 1980 6/10/80 2/18/81 4a(40) (a) 2 (a) 2 August 1, 1981 8/19/81 8/19/81 4a(41) (b) 4e (b) 4e April 1, 1982 4/29/82 5/5/82 4a(42) (a) 2 (a) 2 September 1, 1982 9/17/82 9/20/82 4a(43) (a) 2 (a) 2 December 1, 1982 12/21/82 12/21/82 4a(44) (d) 4(ii) (d) 4(ii) June 1, 1983 7/26/83 7/27/83 4a(45) (a) 4 (a) 4 August 1, 1983 8/19/83 8/19/83 4a(46) (d) 4(ii) (d) 4(ii) July 1, 1984 8/14/84 8/17/84 4a(47) (d) 4(ii) (d) 4(ii) September 1, 1984 11/2/84 11/9/84 4a(48) (b) 4(ii) (b) 4(ii) November 1, 1984 (No. 1) 1/4/85 1/9/85 4a(49) (b) 4(ii) (b) 4(ii) November 1, 1984 (No. 2) 1/4/85 1/9/85 4a(50) (a) 2 (a) 2 July 1, 1985 8/2/85 8/2/85 4a(51) (c) 4a(51) (c) 4a(51) January 1, 1986 2/11/86 2/11/86 4a(52) (a) 2 (a) 2 March 1, 1986 3/28/86 3/28/86 ENTERPRISE - ---------------------------------------------------- Exhibit Number - ---------------------------------------------------- This Previous Filing ----------------------------------------- Filing Commission Exchanges - ------ ---------- --------- 4a(53) (a) 2(a) (a) 2(a) April 1, 1986 (No. 1) 5/1/86 5/1/86 4a(54) (a) 2(b) (a) 2(b) April 1, 1986 (No. 2) 5/1/86 5/1/86 4a(55) (p) 4a(55) (p) 4a(55) March 1, 1987 4/9/87 4/9/87 4a(56) (a) 4 (a) 4 July 1, 1987 (No. 1) 8/17/87 8/17/87 4a(57) (d) 4 (d) 4 July 1, 1987 (No. 2) 11/13/87 11/20/87 4a(58) (a) 4 (a) 4 May 1, 1988 5/17/88 5/18/88 4a(59) (a) 4 (a) 4 September 1, 1988 9/27/88 9/28/88 4a(60) (a) 4 (a) 4 July 1, 1989 7/25/89 7/26/89 4a(61) (a) 4 (a) 4 July 1, 1990 (No. 1) 7/25/90 7/26/90 4a(62) (a) 4 (a) 4 July 1, 1990 (No. 2) 7/25/90 7/26/90 4a(63) (a) 4 (a) 4 June 1, 1991 (No. 1) 7/1/91 7/2/91 4a(64) (a) 4 (a) 4 June 1, 1991 (No. 2) 7/1/91 7/2/91 4a(65) (a) 4 (a) 4 November 1, 1991 (No. 1) 12/2/91 12/3/91 4a(66) (a) 4 (a) 4 November 1, 1991 (No. 2) 12/2/91 12/3/91 4a(67) (a) 4 (a) 4 November 1, 1991 (No. 3) 12/2/91 12/3/91 4a(68) (a) 4 (a) 4 February 1, 1992 (No. 1) 2/27/92 2/28/92 4a(69) (a) 4 (a) 4 February 1, 1992 (No. 2) 2/27/92 2/28/92 4a(70) (a) 4 (a) 4 June 1, 1992 (No. 1) 6/17/92 6/11/92 4a(71) (a) 4 (a) 4 June 1, 1992 (No. 2) 6/17/92 6/11/92 ENTERPRISE - ---------------------------------------------------- Exhibit Number - ---------------------------------------------------- This Previous Filing ----------------------------------------- Filing Commission Exchanges - ------ ---------- --------- 4a(72) (a) 4 (a) 4 June 1, 1992 (No. 3) 6/17/92 6/11/92 4a(73) (a) 4 (a) 4 January 1, 1993 (No.1) 2/2/93 2/2/93 4a(74) (a) 4 (a) 4 January 1, 1993 (No. 2) 2/2/93 2/2/93 4a(75) (a) 4 (a) 4 March 1, 1993 3/17/93 3/18/93 4a(76) (b) 4 (a) 4 May 1, 1993 5/27/93 5/28/93 4a(77) (a) 4 (a) 4 May 1, 1993 (No. 2) 5/25/93 5/25/93 4a(78) (a) 4 (a) 4 May 1, 1993 (No. 3) 5/25/93 5/25/93 4a(79) (b) 4 (b) 4 July 1, 1993 12/1/93 12/1/93 4a(80) (a) 4 (a) 4 August 1, 1993 8/3/93 8/3/93 4a(81) (b) 4 (b) 4 September 1, 1993 12/1/93 12/1/93 4a(82) (b) 4 (b) 4 September 1, 1993 (No. 2) 12/1/93 12/1/93 4a(83) (b) 4 (b) 4 November 1, 1993 12/1/93 12/1/93 4a(84) (a) 4 (a) 4 February 1, 1994 2/3/94 2/14/94 4a(85) (a) 4 (a) 4 March 1, 1994 (No. 1) 3/15/94 3/16/94 4a(86) (a) 4 (a) 4 March 1, 1994 (No. 2) 3/15/94 3/16/94 4a(87) (d) 4 (d) 4 May 1, 1994 11/8/94 12/2/94 4a(88) (d) 4 (d) 4 June 1, 1994 11/8/94 12/2/94 4a(89) (d) 4 (d) 4 August 1, 1994 11/8/94 12/2/94 4a(90) (d) 4 (d) 4 October 1, 1994 (No. 1) 11/8/94 12/2/94 4a(91) (d) 4 (d) 4 October 1, 1994 (No. 2) 11/8/94 12/2/94 ENTERPRISE - ---------------------------------------------------- Exhibit Number - ---------------------------------------------------- This Previous Filing ----------------------------------------- Filing Commission Exchanges - ------ ---------- --------- 4a(92) (a) 4 (a) 4 January 1, 1996 (No. 1) 1/26/96 1/26/96 4a(93) (a) 4 (a) 4 January 1, 1996 (No. 2) 1/26/96 1/26/96 4a(94) (e) 4 December 1, 1996 2/26/97 4a(95) (a) 4 (a) 4 June 1, 1997 6/17/97 6/17/97 4b (h) 7(12) (c) 4c(1) Indenture between PSE&G and 2/18/81 Federal Trust Company, as Trustee (Midlantic National Bank, Successor Trustee) dated July 1, 1948, providing for 6% Debenture Bonds due 1998 4c (b) 4 (b) 4 Indenture of Trust between PSE&G 12/1/93 12/1/93 and The Chase Manhattan Bank (National Association), as Trustee, providing for Secured Medium-Term Notes dated July 1, 1993 4d(1) (c) (c) Indenture between PSE&G and 2/23/95 2/23/95 First Union National Bank, National Association (now known as First Union National Bank), as Trustee, dated November 1, 1994, providing for Deferrable Interest Subordinated Debentures in Series 4d(2) (a) (a) Supplemental Indenture between 9/11/95 9/11/95 PSE&G and First Fidelity Bank, National Association (now known as First Union National Bank), as Trustee, dated September 1, 1995 providing for Deferrable Interest Subordinated Debentures, Series B 9 Inapplicable 10a(1) Directors' Deferred Compensation Plan 10a(2) Deferred Compensation Plan for Certain Employees 10a(3) Limited Supplemental Benefits Plan for Certain Employees 10a(4) Mid Career Hire Supplemental Retirement Plan 10a(5) Retirement Income Reinstatement Plan 10a(6) Long-Term Incentive Plan ENTERPRISE - ---------------------------------------------------- Exhibit Number - ---------------------------------------------------- This Previous Filing ----------------------------------------- Filing Commission Exchanges - ------ ---------- --------- 10a(7) (e) 10a(20) (e) 10a(20) Management Incentive 2/26/97 2/26/97 Compensation Plan 10a(8) (c) 10a(11) (c) 10a(11) Letter Agreement with E. James 2/10/93 2/11/93 Ferland dated April 16, 1986 10a(9) (c) 10a(15) (c) 10a(15) Letter Agreement with Robert C. 2/10/93 2/11/93 Murray dated December 17, 1991 10a(9)(i) Amendment to Letter Agreement with Robert C. Murray dated January 6, 1998 10a(10) (c) 10a(14) (c) 10a(14) Letter Agreement with 2/26/94 3/9/94 Patricia A. Rado dated March 24, 1993 10a(11) (c) 10a(15) (c) 10a(15) Letter Agreement, as amended, 2/23/95 2/23/95 with Leon R. Eliason dated September 14, 1994 10a(12) (d) 10a(15) (d) 10a(15) Letter Agreement with 8/14/95 8/14/95 Louis F. Storz dated July 7, 1995 10a(13) (d) 10a(16) (d) 10a(16) Letter Agreement with 8/14/95 8/14/95 Elbert C. Simpson dated May 31, 1995 10a(14) (d) 10a(17) (d) 10a(17) Letter Agreement with 11/14/95 11/14/95 Alfred C. Koeppe dated August 23, 1995 10a(15) (e) 10a(19) (e) 10a(19) Directors' Stock Plan 2/22/96 2/22/96 10a(16) Letter Agreement with Harold W. Keiser dated January 5, 1998 10a(17) CEA Deferred Compensation Plan 10a(18) CEA Executive Incentive Compensation Plan 10a(19) EDHI Management Incentive Compensation Plan 10a(20) EDHI Deferred Compensation Plan 10a(21) Energis Executive Incentive Compensation Plan 10a(22) EDHI Limited Supplemental Benefits Plan for Certain Employees 11 Inapplicable 12 Computation of Ratios of Earnings to Fixed Charges 13 Inapplicable 16 Inapplicable 18 Inapplicable ENTERPRISE - ---------------------------------------------------- Exhibit Number - ---------------------------------------------------- This Previous Filing ----------------------------------------- Filing Commission Exchanges - ------ ---------- --------- 21 Subsidiaries of the Registrant 22 Inapplicable 23 Independent Auditors' Consent 24 Inapplicable 27 Financial Data Schedule 28 Inapplicable 99 Inapplicable PSE&G - ---------------------------------------------------- Exhibit Number - ---------------------------------------------------- This Previous Filing ----------------------------------------- Filing Commission Exchanges - ------ ---------- --------- 3a(1) (b) 3a (b) 3a Restated Certificate of 8/28/86 8/29/86 Incorporation of PSE&G, effective May 1, 1986 3a(2) (c) 3a(2) (c) 3a(2) Certificate of Amendment of 4/10/87 Certificate of Restated Certificate of Incorporation of PSE&G filed February 18, 1987 with the State of New Jersey adopting limitations of liability provisions in accordance with an amendment to New Jersey Business Corporation Act 3a(3) (a) 3(a)3 (a) 3(a)3 Certificate of Amendment of 2/3/94 2/14/94 Restated Certificate of Incorporation of PSE&G filed June 17, 1992 with the State of New Jersey, establishing the 7.44% Cumulative Preferred Stock ($100 Par) as a series of the Preferred Stock 3a(4) (a) 3(a)4 (a) 3(a)4 Certificate of Amendment of 2/3/94 2/14/94 Restated Certificate of Incorporation of PSE&G filed March 11, 1993 with the State of New Jersey, establishing the 5.97% Cumulative Preferred Stock ($100 Par) as a series of Preferred Stock 3a(5) (a) 3(a)5 (a) 3(a)5 Certificate of Amendment of 2/3/94 2/14/94 Restated Certificate of Incorporation of PSE&G filed January 27, 1995 with the State of New Jersey, establishing the 6.92% Cumulative Preferred Stock ($100 Par) and the 6.75% Cumulative Preferred Stock -- $25 Par as series of Preferred Stock 3b Copy of By-Laws of PSE&G, as in effect September 1, 1995 4a(1) (f) B-1 (c) 4b(1) Indenture between PSE&G and 2/18/81 Fidelity Union Trust Company, (now First Union National Bank, National Association), as Trustee, dated August 1,1924, securing First and Refunding Mortgage Bond Indentures between PSE&G and First Fidelity Bank, National Association, as Trustee, supplemental to Exhibit 4a(1), dated as follows: 4a(2) (i) 7(1a) (c) 4b(2) April 1, 1927 2/18/81 4a(3) (k) 2b(3) (c) 4b(3) June 1, 1937 2/18/81 PSE&G Exhibit Number - ---------------------------------------------------- This Previous Filing ----------------------------------------- Filing Commission Exchanges - ------ ---------- --------- 4a(4) (k) 2b(4) (c) 4b(4) July 1, 1937 2/18/81 4a(5) (k) 2b(5) (c) 4b(5) December 19, 1939 2/18/81 4a(6) (g) B-10 (c) 4b(6) March 1, 1942 2/18/81 4a(7) (k) 2b(7) (c) 4b(7) June 1, 1949 2/18/81 4a(8) (k) 2b(8) (c) 4b(8) May 1, 1950 2/18/81 4a(9) (k) 2b(9) (c) 4b(9) October 1, 1953 2/18/81 4a(10) (k) 2b(10) (c) 4b(10) May 1, 1954 2/18/81 4a(11) (j) 4b(16) (c) 4b(11) November 1, 1956 2/18/81 4a(12) (k) 2b(12) (c) 4b(12) September 1, 1957 2/18/81 4a(13) (k) 2b(13) (c) 4b(13) August 1, 1958 2/18/81 4a(14) (k) 2b(14) (c) 4b(14) June 1, 1959 2/18/81 4a(15) (k) 2b(15) (c) 4b(15) September 1, 1960 2/18/81 4a(16) (k) 2b(16) (c) 4b(16) August 1, 1962 2/18/81 4a(17) (k) 2b(17) (c) 4b(17) June 1, 1963 2/18/81 4a(18) (k) 2b(18) (c) 4b(18) September 1, 1964 2/18/81 4a(19) (k) 2b(19) (c) 4b(19) September 1, 1965 2/18/81 4a(20) (k) 2b(20) (c) 4b(20) June 1, 1967 2/18/81 4a(21) (k) 2b(21) (c) 4b(21) June 1, 1968 2/18/81 4a(22) (k) 2b(22) (c) 4b(22) April 1, 1969 2/18/81 4a(23) (k) 2b(23) (c) 4b(23) March 1, 1970 2/18/81 PSE&G Exhibit Number - ---------------------------------------------------- This Previous Filing ----------------------------------------- Filing Commission Exchanges - ------ ---------- --------- 4a(24) (k) 2b(24) (c) 4b(24) May 15, 1971 2/18/81 4a(25) (k) 2b(25) (c) 4b(25) November 15, 1971 2/18/81 4a(26) (k) 2b(26) (c) 4b(26) April 1, 1972 2/18/81 4a(27) (a) 2 (c) 4b(27) March 1, 1974 3/29/74 2/18/81 4a(28) (a) 2 (c) 4b(28) October 1, 1974 10/11/74 2/18/81 4a(29) (a) 2 (c) 4b(29) April 1, 1976 4/6/76 2/18/81 4a(30) (a) 2 (c) 4b(30) September 1, 1976 9/16/76 2/18/81 4a(31) (k) 2b(31) (c) 4b(31) October 1, 1976 2/18/81 4a(32) (a) 2 (c) 4b(32) June 1, 1977 6/29/77 2/18/81 4a(33) (l) 2b(33) (c) 4b(33) September 1, 1977 2/18/81 4a(34) (a) 2 (c) 4b(34) November 1, 1978 11/21/78 2/18/81 4a(35) (a) 2 (c) 4b(35) July 1, 1979 7/25/79 2/18/81 4a(36) (m) 2d(36) (c) 4b(36) September 1, 1979 (No. 1) 2/18/81 4a(37) (m) 2d(37) (c) 4b(37) September 1, 1979 (No. 2) 2/18/81 4a(38) (a) 2 (c) 4b(38) November 1, 1979 12/3/79 2/18/81 4a(39) (a) 2 (c) 4b(39) June 1, 1980 6/10/80 2/18/81 4a(40) (a) 2 (a) 2 August 1, 1981 8/19/81 8/19/81 4a(41) (b) 4e (b) 4e April 1, 1982 4/29/82 5/5/82 4a(42) (a) 2 (a) 2 September 1, 1982 9/17/82 9/20/82 4a(43) (a) 2 (a) 2 December 1, 1982 12/21/82 12/21/82 4a(44) (d) 4(ii) (d) 4(ii) June 1, 1983 7/26/83 7/27/83 PSE&G - ---------------------------------------------------- Exhibit Number - ---------------------------------------------------- This Previous Filing ----------------------------------------- Filing Commission Exchanges - ------ ---------- --------- 4a(45) (a) 4 (a) 4 August 1, 1983 8/19/83 8/19/83 4a(46) (d) 4(ii) (d) 4(ii) July 1, 1984 8/14/84 8/17/84 4a(47) (d) 4(ii) (d) 4(ii) September 1, 1984 11/2/84 11/9/84 4a(48) (b) 4(ii) (b) 4(ii) November 1, 1984 (No. 1) 1/4/85 1/9/85 4a(49) (b) 4(ii) (b) 4(ii) November 1, 1984 (No. 2) 1/4/85 1/9/85 4a(50) (a) 2 (a) 2 July 1, 1985 8/2/85 8/2/85 4a(51) (c) 4a(51) (c) 4a(51) January 1, 1986 2/11/86 2/11/86 4a(52) (a) 2 (a) 2 March 1, 1986 3/28/86 3/28/86 4a(53) (a) 2(a) (a) 2(a) April 1, 1986 (No. 1) 5/1/86 5/1/86 4a(54) (a) 2(b) (a) 2(b) April 1, 1986 (No. 2) 5/1/86 5/1/86 4a(55) (p) 4a(55) (p) 4a(55) March 1, 1987 4/9/87 4/9/87 4a(56) (a) 4 (a) 4 July 1, 1987 (No. 1) 8/17/87 8/17/87 4a(57) (d) 4 (d) 4 July 1, 1987 (No. 2) 11/13/87 11/20/87 4a(58) (a) 4 (a) 4 May 1, 1988 5/17/88 5/18/88 4a(59) (a) 4 (a) 4 September 1, 1988 9/27/88 9/28/88 4a(60) (a) 4 (a) 4 July 1, 1989 7/25/89 7/26/89 4a(61) (a) 4 (a) 4 July 1, 1990 (No. 1) 7/25/90 7/26/90 4a(62) (a) 4 (a) 4 July 1, 1990 (No. 2) 7/25/90 7/26/90 4a(63) (a) 4 (a) 4 June 1, 1991 (No. 1) 7/1/91 7/2/91 4a(64) (a) 4 (a) 4 June 1, 1991 (No. 2) 7/1/91 7/2/91 4a(65) (a) 4 (a) 4 November 1, 1991 (No. 1) 12/2/91 12/3/91 4a(66) (a) 4 (a) 4 November 1, 1991 (No. 2) 12/2/91 12/3/91 PSE&G - ---------------------------------------------------- Exhibit Number - ---------------------------------------------------- This Previous Filing ----------------------------------------- Filing Commission Exchanges - ------ ---------- --------- 4a(67) (a) 4 (a) 4 November 1, 1991 (No. 3) 12/2/91 12/3/91 4a(68) (a) 4 (a) 4 February 1, 1992 (No. 1) 2/27/92 2/28/92 4a(69) (a) 4 (a) 4 February 1, 1992 (No. 2) 2/27/92 2/28/92 4a(70) (a) 4 (a) 4 June 1, 1992 (No. 1) 6/17/92 6/11/92 4a(71) (a) 4 (a) 4 June 1, 1992 (No. 2) 6/17/92 6/11/92 4a(72) (a) 4 (a) 4 June 1, 1992 (No. 3) 6/17/92 6/11/92 4a(73) (a) 4 (a) 4 January 1, 1993 (No. 1) 2/2/93 2/2/93 4a(74) (a) 4 (a) 4 January 1, 1993 (No. 2) 2/2/93 2/2/93 4a(75) (a) 4 (a) 4 March 1, 1993 3/17/93 3/18/93 4a(76) (b) 4 (a) 4 May 1, 1993 5/27/93 5/28/93 4a(77) (a) 4 (a) 4 May 1, 1993 (No. 2) 5/25/93 5/25/93 4a(78) (a) 4 (a) 4 May 1, 1993 (No. 3) 5/25/93 5/25/93 4a(79) (b) 4 (b) 4 July 1, 1993 12/1/93 12/1/93 4a(80) (a) 4 (a) 4 August 1, 1993 8/3/93 8/3/93 4a(81) (b) 4 (b) 4 September 1, 1993 12/1/93 12/1/93 4a(82) (a) 4 (a) 4 September 1, 1993 (No. 2) 12/1/93 12/1/93 4a(84) (a) 4 (a) 4 February 1, 1994 2/3/94 2/14/94 4a(85) (a) 4 (a) 4 March 1, 1994 (No. 1) 3/15/94 3/16/94 4a(86) (a) 4 (a) 4 March 1, 1994 (No. 2) 3/15/94 3/16/94 4a(87) (d) 4 (d) 4 May 1, 1994 11/8/94 12/2/94 4a(88) (d) 4 (d) 4 June 1, 1994 11/8/94 12/2/94 PSE&G - ---------------------------------------------------- Exhibit Number - ---------------------------------------------------- This Previous Filing ----------------------------------------- Filing Commission Exchanges - ------ ---------- --------- 4a(89) (d) 4 (d) 4 August 1, 1994 11/8/94 12/2/94 4a(90) (d) 4 (d) 4 October 1, 1994 (No. 1) 11/8/94 12/2/94 4a(91) (d) 4 (d) 4 October 1, 1994 (No. 2) 11/8/94 12/2/94 4a(92) (a) 4 (a) 4 January 1, 1996 (No.1) 1/26/96 1/26/96 4a(93) (a) 4 (a) 4 January 1, 1996 (No. 2) 1/26/96 1/26/96 4a(94) (c) 4 December 1, 1996 2/26/97 4a(95) (a) 4 (a) 4 June 1, 1997 6/17/97 6/17/97 4b (h) 7(12) (c) 4c(1) Indenture between PSE&G and 2/18/81 Federal Trust Company, as Trustee, (Midlantic National Bank, Successor Trustee) dated July 1, 1948, providing for 6% Debenture Bonds due 1998 4c (b) 4 (b) 4 Indenture of Trust between PSE&G 12/1/93 12/1/93 and Chase Manhattan Bank (National Association), as Trustee, providing for Secured Medium-Term Notes dated July 1, 1993 4d(1) (b) (c) Indenture between PSE&G and 2/23/95 2/23/95 First Fidelity Bank, National Association (now known as First Union National Bank), as Trustee, dated November 1, 1994, providing for Deferrable Interest Subordinated Debentures in Series 4d(2) (a) 4b(5) (a) 4b(5) Supplemental Indenture between PSE&G and First Fidelity Bank, National Association (now known as First Union National Bank), as Trustee, dated September 1, 1995 providing for Deferrable Interest Subordinated Debentures in Series B 9 Inapplicable 10a(1) Directors' Deferred Compensation Plan 10a(2) Deferred Compensation Plan for Certain Employees 10a(3) Limited Supplemental Benefits Plan for Certain Employees 10a(4) Mid Career Hire Supplemental Retirement Plan 10a(5) Retirement Income Reinstatement Plan 10a(6) Long-Term Incentive Plan 10a(7) (c) 10a(20) (c) 10a(20) Management Incentive 2/26/97 2/26/97 Compensation Plan PSE&G - ---------------------------------------------------- Exhibit Number - ---------------------------------------------------- This Previous Filing ----------------------------------------- Filing Commission Exchanges - ------ ---------- --------- 10a(8) (c) 10a(9) (c) 10a(9) Letter Agreement with 2/10/93 2/11/93 E. James Ferland dated April 16, 1986 10a(9) (c) 10a(12) (c) 10a(12) Letter Agreement with 2/10/93 2/11/93 Robert C. Murray dated December 17, 1991 10a(9)(i) Amendment to Letter Agreement with Robert C. Murray dated January 6, 1998 10a(10) (c) 10a(13) (c) 10a(13) Letter Agreement with 2/26/94 3/9/94 Patricia A. Rado dated March 24, 1993 10a(11) (c) 10a(14) (c) 10a(14) Letter Agreement, as amended, 2/23/95 2/23/95 with Leon R. Eliason dated September 14, 1994 10a(12) (d) 10a(15) (d) 10a(15) Letter Agreement with 8/14/95 8/14/95 Louis F. Storz dated July 7, 1995 10a(13) (d) 10a(16) (d) 10a(16) Letter Agreement with 8/14/95 8/14/95 Elbert C. Simpson dated May 31, 1995 10a(14) (d) 10a(17) (d) 10a(17) Letter Agreement with 11/14/95 11/14/95 Alfred C. Koeppe dated August 23, 1995 10a(15) (e) 10a(18) (e) 10a(18) Directors' Stock Plan 2/22/96 2/22/96 10a(16) Letter Agreement with Harold W. Keiser dated January 5, 1998 11 Inapplicable 12(a) Computation of Ratios of Earnings to Fixed Charges 12(b) Computation of Ratios of Earnings to Fixed Charges Plus Preferred Stock Dividend Requirements 13 Inapplicable 16 Inapplicable 19 Inapplicable 21 Inapplicable 23 Independent Auditors' Consent 27 Financial Data Schedule EX-10.A(1) 2 DEFERRED COMPENSATION PLAN FOR DIRECTORS (PSEG) PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED DEFERRED COMPENSATION PLAN FOR DIRECTORS January 1, 1988 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED DEFERRED COMPENSATION PLAN FOR DIRECTORS January 1, 1988 1. PURPOSE. The Plan is designed to provide a method of deferring payment to non-employee Directors of their fees and annual retainers, as fixed from time to time by the Board of Directors, until termination of their services on the Board. 2. PLAN PERIODS. The first Plan Period shall commence upon the election of Directors at the 1987 Annual Stockholders' Meeting and terminate upon the election of Directors at the 1988 Annual Stockholders' Meeting. Subsequent Plan Periods shall relate to successive similar periods between Annual Stockholders Meetings. 3. ADMINISTRATION. The Plan shall be administered by a Committee consisting of the Chief Executive Officer of the Company and two other officers appointed by him. The Committee shall have the power to interpret the Plan and, subject to its provisions, to make all determinations necessary or desirable for the Plan's administration. 4. PARTICIPATION. (a) An individual who serves as a Director and is not otherwise employed by the Company or any of its subsidiaries shall be eligible to participate in the Plan if he elects to have payment of his annual retainer, his fees or his annual retainer and fees in respect of a Plan Period deferred as provided herein. (b) The election shall be made by written notice on Schedule A to the Plan filed with the Company's Secretary prior to the first day of such Plan Period or, in the case of a Director who first becomes eligible during a Plan Period, not later than 30 days after he first becomes eligible. Each such election shall be irrevocable. 5. DEFERRED COMPENSATION ACCOUNTS. (a) An account shall be established for each eligible, electing Director (a "Participant") which shall be designated as his Deferred Compensation Account. If a Participant elects to have payment deferred of his annual retainer, the amount of the annual retainer payable to him with respect to a Plan Period shall be credited, in four equal installments on or about the last day of June, September, December and March in the Plan Period to which such retainer relates, to his Deferred Compensation Account, subject to the provisions of Section 5(c). If a Participant elects to have payment deferred of his fees, the amount of each fee payable to him for attendance at a meeting during a Plan Period shall be credited to his Deferred Compensation Account on or about the first business day following such meeting. The Company shall not be required to segregate any amounts credited to the Deferred Compensation Accounts, which shall be established merely as an accounting convenience. Amounts credited to the Deferred Compensation Accounts shall at all times remain solely the property of the Company subject to the claims of its general creditors and available for the Company's use for whatever purpose desired. (b) The amounts credited to a Deferred Compensation Account shall accrue interest each calendar quarter at an annual rate equal to the rate charged by The Chase Manhattan Bank, N.A., on the first business day of such calendar quarter for prime commercial loans of 90-day maturity (based on actual numbers of days, 360 days to the year), plus 1/2 of 1%. Such interest shall be computed on the average daily balance in a Deferred Compensation Account during each such calendar quarter and shall be credited to such Account and compounded on the last day of March, June, September and December. Interest shall continue to accrue and be compounded on the unpaid balance in a Deferred Compensation Account until such Account is fully distributed. (c) If, prior to the end of a Plan Period, a Participant becomes an employee of the Company or one of its subsidiaries or dies or ceases for any reason to be a Director, or if the effective date of participation by a Participant for any Plan Period shall be other than the first day thereof, he will be entitled to be credited with that proportion of the annual retainer for the full Plan Period which the number of days of his participation in the Plan during such Plan Period bears to the total number of days in such Plan Period. 6. PAYMENT. (a) Following termination of a Participant's service on the Board, the Company shall distribute his Deferred Compensation Account. (b) By written notice on Schedule A to the Plan filed with the Company's Secretary, a Participant may elect to have distribution of his Deferred Compensation Account commence either (l) within thirty (30) days after the date he ceases to be a Director of the Company, or, in the alternative, (2) in the month of January of any calendar year following termination of the Participant's service on the Board, but not later than the month of January following the Participant's 71st birthday, unless the Participant is still a Director at such time, in which case distribution shall commence within thirty (30) days after the date he ceases to be a Director. Any such election, or any change in such election (by such subsequent written notice to the Secretary of the Company), shall apply only to future deferrals. In the event no election is made as to the commencement of distribution, such distribution shall commence within 30 days after the date the Participant ceases to be a Director of the Company. The actual date that distribution shall commence shall be a date within the appropriate period determined by the Committee in its sole discretion. (c) By written notice on Schedule A to the Plan filed with the Company's Secretary, a Participant may elect to receive the distribution of his Deferred Compensation Account in the form of (l) one lump-sum payment, or (2) monthly distributions over a period selected by the Participant of up to ten years. Any such election, or any change in such election (by such subsequent written notice to the Secretary of the Company), shall apply only to future deferrals. In the event a lump-sum payment is made under the Plan, the amount then standing to the Participant's credit in his Deferred Compensation Account, including interest at the rate provided in Section 5(b) to the date of distribution, shall be paid to the Participant on the date determined under Section 6(b). In the case of a distribution over a period of years, the Company shall pay to the Participant, commencing on the date determined under Section 6(b), monthly installments from the amount then standing to his credit in his Deferred Compensation Account, including interest on the unpaid balance at the rate provided in Section 5(b) to the date of distribution. The amount of each installment shall be determined by dividing the then unpaid balance, plus accrued interest, in the Participant's Deferred Compensation Account by the number of installments remaining to be paid. If a Participant does not make an election as to the manner of distribution of his Deferred Compensation Account, such distribution shall be made in the form of monthly installments paid over a five-year period. Notwithstanding the above, a Participant may at any time elect, by written notice to the Secretary of the Company, to have the monthly payments scheduled to be made to him within a tax year paid to him in one installment within such year. (d) In the event of a Participant's death, the balance of the Participant's Deferred Compensation Account shall be distributed to the Participant's Beneficiary(ies) in annual installments over a period of not more than five years, in accordance with his election on Schedule B to the Plan filed with the Secretary of the Company. Any change in the period over which such payments are made shall only apply to future deferrals. Such distribution shall be made in a manner consistent with Section 6(c) of the Plan and shall commence within 30 days after the Participant's death, on a date within said month to be determined by the Committee in its sole discretion. Additional annual payments for distributions made over a period of more than one year shall be made on the yearly anniversaries of such date. In the event of a Participant's death after distribution of this Deferred Compensation Account has commenced, any election under this Section 6(d) shall not extend the time of payment of his Deferred Compensation Account beyond the time when distribution would have been completed if he had lived. A Participant may change Beneficiary designations by filing a subsequent Schedule B with the Secretary of the Company. If a Participant does not make an election as to the manner of distribution of his Deferred Compensation Account in the event of his death, any such distribution shall be made as a lump-sum payment to his estate within 30 days after the Participant's death. (e) Notwithstanding any other provision of the Plan, if the Committee shall determine in its sole discretion that the time of payment of a Participant's Deferred Compensation Account should be advanced because of protracted illness or other undue hardship, then the Committee may advance the time or times of payment (whether before or after the Retirement Date) only if the Committee determines that an emergency beyond the control of the Participant exists and which would cause such Participant severe financial hardship if the payment of such benefits were not approved. Any such distribution for hardship shall be limited to the amount needed to meet such emergency. A Participant who receives a hardship distribution may not reenter the Plan for twelve months after the date of such distribution. Any distribution for hardship under this Section 6(e) shall commence within thirty days after the Committee determines to make such hardship distribution. (f) Notwithstanding any other provision of the Plan if the Committee shall determine in its sole discretion that the time of payment of a Participant's Deferred Compensation Account should be advanced because it is important to terminate such Account in the interest of the Company, then the Committee may advance the time or times of payment (whether before or after the Retirement Date). 7. ASSIGNMENT. No benefit under the Plan shall in any manner or to any extent be assigned, alienated, or transferred by any Participant or Beneficiary or subject to attachment, garnishment or other legal process. 8. TERMINATION AND AMENDMENT. The Board may terminate the Plan at any time so that no further amounts shall be credited to Deferred Compensation Accounts or may, from time to time, amend the Plan, without the consent of Participants or Beneficiaries; provided, however, that no such amendment or termination shall impair any rights which have accrued under the Plan. SCHEDULE A DEFERRED COMPENSATION PLAN FOR DIRECTORS OF PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED (THE "PLAN") Elections in Connection with Deferral of Compensation Section 1 Election as to Compensation to be Deferred Note: THIS SECTION IS TO BE USED TO MAKE OR TO CHANGE AN ELECTION UNDER SECTION 4 OF THE PLAN. ANY CHANGE IN ELECTION WILL ONLY APPLY TO SUBSEQUENT PLAN PERIODS. I hereby elect to defer, in accordance with the provisions of the Plan: __________ (a) My retainer. __________ (b) My fees. __________ (c) My retainer and my fees. Section 2. Election as to Commencement of Distribution From Account Note: THIS SECTION IS TO BE USED (A) WHEN FIRST BECOMING A DIRECTOR COVERED BY THE PLAN AND (B) PRIOR TO EACH ANNUAL MEETING IF THERE IS TO BE ANY CHANGE IN THE ORIGINAL ELECTION. ANY SUCH CHANGE WILL ONLY APPLY TO FUTURE DEFERRALS. I hereby elect, in accordance with the provisions of the Plan, to have distribution from my Account commence: __________ (a) Within thirty (30) days after I cease to be a director of the Company. __________ (b) In the month of January after I cease to be a director of the Company. __________ (c) In the month of January, _________, (which is not later than the January following my 71st birthday), unless I am a director of the Company at such time, in which case within 30 days after I cease to be a director of the Company. Participant's Initials__________ Date__________ SCHEDULE A-2 Section 3. Election as to the Timing of the Distribution Note: THIS SECTION IS TO BE USED (A) WHEN FIRST BECOMING A DIRECTOR COVERED BY THE PLAN AND (B) PRIOR TO EACH ANNUAL MEETING IF THERE IS TO BE ANY CHANGE IN THE ORIGINAL ELECTION. ANY SUCH CHANGE WILL ONLY APPLY TO FUTURE DEFERRALS. I hereby elect, in accordance with the provisions of the Plan, to have the distribution of my Account paid: __________ (a) In one lump sum. __________ (b) In monthly installments over a period of __________ years. Date:__________ - ------------------------------------ ------------------------------------ Witness Participant's Signature SCHEDULE B DEFERRED COMPENSATION PLAN FOR DIRECTORS OF PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED (THE "PLAN") Section 1. Election as to Method of Distribution in Case of Death In case of my death, I hereby elect, in accordance with the provisions of the Plan, to have the distribution of my Deferred Compensation Account paid over a period of _________ year(s) to my Beneficiary(ies) designated in Section 2 hereof. Section 2. Designation of Beneficiary(ies) In the event of my death, I hereby designate the following individuals, fiduciaries or other entities, in their own right or in their representative capacity, in the proportions and in the priority of interest designated, to be the beneficiaries of any benefits owing to me, under the Plan. PRIMARY BENEFICIARIES - The following beneficiary(ies) shall receive all benefits payable under the Plan in the event of my death in the proportions designated hereunder. If any one or more of the primary beneficiaries designated hereunder shall predecease me, such beneficiary's share(s) shall be divided equally among the remaining primary beneficiaries. PROPORTIONATE NAME AND PRESENT INTEREST OF RELATIONSHIP ADDRESS OF PRIMARY PRIMARY TO BENEFICIARY(IES) BENEFICIARY(IES) PARTICIPANT - ----------------------- - ----------------------- ----------% -------------- - ----------------------- - ----------------------- -----------% -------------- - ----------------------- - ----------------------- ----------% -------------- - ----------------------- - ----------------------- ----------% -------------- Participant's Initials__________ Date__________ SCHEDULE B-2 SECONDARY BENEFICIARIES - The following beneficiary(ies) shall receive all benefits payable under the Plan in the event of my death in the proportions designated hereunder only if all of my Primary Beneficiaries have predeceased me. If all Primary Beneficiaries have predeceased me and if any one or more of the Secondary Beneficiaries designated hereunder shall predecease me, such Secondary Beneficiary's share(s) shall be divided equally among the Secondary Beneficiaries. PROPORTIONATE NAME AND PRESENT INTEREST OF RELATIONSHIP ADDRESS OF SECONDARY SECONDARY TO BENEFICIARY(IES) BENEFICIARY(IES) PARTICIPANT - ----------------------- - ----------------------- ----------% -------------- - ----------------------- - ----------------------- -----------% -------------- - ----------------------- - ----------------------- ----------% -------------- - ----------------------- - ----------------------- ----------% -------------- ESTATE - In the event I have declined to designate a Beneficiary hereunder or if all of the Beneficiaries that I have designated predecease me, then all benefits payable under the Plan shall be payable to my Estate. Date:__________ - ------------------------------------ ------------------------------------ Witness Participant's Signature EX-10.A(2) 3 DEFERRED COMPENSATION PLAN (PSE&G) DEFERRED COMPENSATION PLAN FOR CERTAIN EMPLOYEES OF PUBLIC SERVICE ELECTRIC AND GAS COMPANY AS AMENDED DECEMBER 17, 1996 DEFERRED COMPENSATION PLAN FOR CERTAIN EMPLOYEES OF PUBLIC SERVICE ELECTRIC AND GAS COMPANY, AS AMENDED DECEMBER 17, 1996 1. PURPOSE. The purpose of this Plan is to provide a method to certain select and key employees of the Company to defer compensation as provided herein. 2. DEFINITIONS OF TERMS USED IN THIS PLAN. As used in this Plan, the following words and phrases shall have the meanings indicated: (a) "Account" - The Deferred Compensation Account described in Paragraph 4 of this Plan. (b) "Assets" - All Compensation and interest that have been credited to an Employee's Account in accordance with Paragraph 4 of this Plan. (c) "Beneficiary" - The individual(s) and/or entity(ies) designated and defined by Schedule B of the Plan. (d) "Committee" - The Employee Benefits Committee of the Company. (e) "Company" - Public Service Electric and Gas Company. (f) "Compensation" - The total remuneration paid to an Employee for services rendered to the Company, excluding the Company's cost for any public or private employee benefit plan. Compensation deferrable under this Plan shall specifically include any and all amounts transferred from the deferred compensation accounts of the Management Incentive Compensation Plan of Public Service Electric and Gas Company. (g) "Deferred Compensation" - The amount of Compensation deferred pursuant to Paragraph 3 of this Plan. (h) "Disability" - Disability so as to be incapable of performing further work for the Company that results in termination of employment. (i) "Employee" - Each individual member of the Operating Committee of the Company and such other employees of the Company as may be designated by the Committee. (j) "Pension Plan" - The Pension Plan of Public Service Electric and Gas Company. (k) "Plan" - The Deferred Compensation Plan for Certain Employees of Public Service Electric and Gas Company. 3. ELECTION AS TO THE AMOUNT OF COMPENSATION THAT IS TO BE DEFERRED. An Employee may elect to defer any portion of his Compensation otherwise payable for services rendered for the Company after the date of adoption of this Plan. Any such election must be made by filing with the Committee an "Election in Connection with Deferral of Compensation", the form of which is attached to this Plan as Schedule A and is hereinafter referred to as "Schedule A". An Employee may change (using Schedule A for such purposes), not later than December 31 of any year, the amount of Compensation to be deferred by him with respect to the next succeeding calendar year or years. In the calendar year that an Employee first becomes eligible to participate in this Plan, such Employee may elect to defer Compensation for part of that calendar year but only if such election is made within thirty (30) days after the Employee first becomes eligible to participate in this Plan. Compensation may be deferred prospectively only, and the amount of Compensation to be deferred may be changed only with respect to future calendar years. 4. HOW THE ACCOUNT IS TO BE MAINTAINED. (a) Establishment of Account - The Company shall establish an Account for each Employee who elects to participate in the Plan. Each Employee's Account shall be credited at the end of each month with an amount equal to the Deferred Compensation which would have otherwise been payable to him that month. (b) Interest on Assets in the Account - The Assets credited to each Employee's Account shall accrue interest each calendar quarter at an annual rate equal to the rate charged by The Chase Manhattan Bank, N.A. on the first business day of such calendar quarter for prime commercial loans of 90 day maturity (based on actual number of days, 360 days to the year), plus 1/2 of 1%. Such interest shall be computed on the average daily balance in the Employee's Account during each calendar quarter, excluding any Assets which have been distributed from the Employee's Account during such quarter, and shall be credited to the Employee's Account and compounded on the last day of March, June, September and December, and interest on Assets distributed from an Employee's Account shall accrue in the same manner to the date of, be credited to the Employee's Account on the date of, and be paid with, such distribution. (c) Title to and Beneficial Ownership of Assets - The Plan shall be unfunded. The Company shall not be required to segregate any amounts credited to any Employee's Account, which shall be established merely as an accounting convenience. Title to and beneficial ownership of any Assets, whether Deferred Compensation or interest credited to an Employee's Account pursuant to Paragraphs 4(a) and (b) hereinabove, shall at all times remain in the Company, and no Employee nor Beneficiary shall have any interest whatsoever in any specific assets of the Company. All Assets shall at all times remain solely the property of the Company subject to the claims of its general creditors and available for the Company's use for whatever purpose desired. 5. DISTRIBUTION FROM THE ACCOUNT (a) Election as to the Commencement of the Distribution - By election on Schedule A filed with the Committee, an Employee may elect to have distribution from his Account commence either (l) within thirty (30) days after the date he ceases to be employed by the Company or, in the alternative, (2) in the month of January of any calendar year following termination of employment elected by the Employee, but in any event no later than the later of (a) the January of the year following the year of the Employee's 70th birthday or (b) the January following termination of employment. An Employee may change such election by filing a subsequent Schedule A, but any such change shall apply only to future deferrals. The actual date that distribution shall commence shall be a date within the elected period to be determined by the Committee in its sole discretion. (b) Election as to the Timing of the Distribution(s) - By election on Schedule A filed with the Committee, an Employee may elect to receive the distribution of his Account in the form of (l) one lump-sum payment, (2) annual distributions over a five-year period or (3) annual distributions over a 10-year period. An Employee may change such election by filing a subsequent Schedule A, but any such change shall apply only to future deferrals. In the event a lump-sum payment is made under this Plan, the Assets credited to an Employee's Account, including interest at the rate provided in Paragraph 4(b) of this Plan to the date of distribution, shall be paid to the Employee on the date determined under Paragraph 5(a) of this Plan. In the case of a distribution over a period of years, the Company shall pay to the Employee on the date determined under Paragraph S(a) of this Plan and on the yearly anniversaries of such date, annual installments of the unpaid balance of the Assets in the Employee's Account, including interest on the unpaid balance at the rate provided in Paragraph 4(b) of this Plan to the date of distribution. The amount of each installment shall be determined by multiplying the then unpaid balance, plus accrued interest, in the Employee's Account by a fraction, the numerator of which is one and the denominator of which is the number of annual installments remaining to be paid. (c) Distribution in Case of Certain Disability - In the event of an Employee's Disability prior to a calendar year elected by the Employee under Paragraph 5(a) (2) of this Plan for distribution to commence, distribution of the Employee's Account shall commence in the month following the month in which the Employee terminates employment for disability, in accordance with the Employee's election under Paragraph S(b) of this Plan as to the form of distribution. The actual date that distribution shall commence shall be a date within such month determined by the Committee in its sole discretion. (d) Distribution in Case of Death - In the event of an Employee's death, the balance of the Employee's Account shall be distributed to the__ Employee's Beneficiary(ies) over a period of not more than five (S) years, in accordance with his election on Schedules A and B (filed with the Committee) for distribution in case of death. Any change in the period over which such payments are made shall only apply to future deferrals. Such distribution shall be made in a manner consistent with Paragraph 5(b) of this Plan and shall commence in the month of January of the year after the year of the Employee's death, on a date within said month to be determined by the Committee in its sole discretion. Additional annual payments for distributions made over a period of more than one year shall be made on the yearly anniversaries of such date. In the event of an Employee's death after distribution of his Account has commenced, any election under this Paragraph S(d) shall not extend the time of payment of his Account beyond the time when distribution would have been completed if he had lived. An Employee may change Beneficiary designations by filing a subsequent Schedule B with the Committee. (e) Request for Change in Distribution - An Employee, Beneficiary or a legal representative may request a change in the timing, frequency or amount of payments made from an Employee's Account by filing a written request therefor with the Committee. The Committee may, in its sole discretion, grant such request only if the Committee determines that an emergency beyond the control of the Employee, Beneficiary or legal representative exists and which would cause such Employee, beneficiary or legal representative severe financial hardship if the payment of such benefits were not approved. Any such distribution for hardship shall be limited to the amount needed to meet such emergency. An Employee who makes a hardship withdrawal may not reenter this Plan for 12 months after the date of withdrawal. Any distribution under this Paragraph 5(e) shall commence within 30 days after the Committee grants such request for hardship withdrawal. (f) Employment not Terminated if Transferred to Company-Owned Corporation - For the purposes of this Paragraph 5, an Employee shall not be deemed to have terminated his employment if he is transferred to the employ of a corporation in which the Company owns a majority equity interest. (g) Company may Distribute in Lump-Sum if Distributable Amount Less Than $5,000 - The Company reserves the right to make a lump-sum distribution, notwithstanding any other provision of this Plan, if the total Assets in an Employee's Account are $5,000 or less at any time after the Employee ceases to be employed by the Company. 6. UNFUNDED ADJUSTMENTS To MAKE UP FOR REDUCED BENEFIT UNDER PENSION PLAN. If an Employee, on termination of employment or thereafter, or a Beneficiary of the Employee under the Pension Plan, is entitled to any benefit under the Pension Plan, the Company shall pay out of its general funds a supplementary benefit (at such time after the Employee's retirement and in such manner as the Committee in its sole discretion shall determine) equivalent to the excess of the amount computed in (a) below over the amount computed in (b) below: (a) The benefit to which the Employee or such Beneficiary would have been entitled if the Employee's Final Earnings, as defined in the Pension Plan, had included all Compensation earned which would have been included in his Final Earnings if this Plan were not in effect. (b) The actual benefit to which the Employee or such Beneficiary is entitled under the Pension Plan. 7. ASSIGNMENT. No benefit under the Plan shall in any manner or to any extent be assigned, alienated, or transferred by any Employee or Beneficiary under the Plan or subject to attachment, garnishment or other legal process. 8 PLAN DOES NOT CONSTITUTE AN EMPLOYMENT AGREEMENT. This Plan shall not constitute a contract for the continued employment of any Employee by the Company. The Company reserves the right to modify an Employee's compensation at any time and from time to time as it considers appropriate and to terminate his employment for any reason at any time notwithstanding this Plan. 9. AMENDMENT OR TERMINATION OF THE PLAN BY THE COMPANY. The Board of Directors of the Company may, in its sole discretion, amend, modify or terminate this Plan at any time, provided, however, that no such amendment, modification or termination shall materially adversely affect the right of an Employee in respect of Deferred Compensation previously earned by him which has not been paid, unless such Employee or his legal representative shall consent to such change. 10. WHAT CONSTITUTES NOTICE. Any notice to an Employee, Beneficiary or legal representative hereunder shall be given either by delivering it or by depositing it in the United States mail, postage prepaid, addressed to his last known address. Any notice to the Company or the Committee hereunder (including the filing of Schedules A and B) shall be given either by delivering it, or depositing it in the United States mail, postage prepaid, to the Secretary of the Employee Benefits Committee, Public Service Electric and Gas Company, 80 Park Plaza T2B, P. 0. Box 570, Newark, New Jersey 07101. 11. ADVANCE DISCLAIMER OF ANY WAIVER ON THE PART OF THE COMPANY. Failure by the Company to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of any such term, covenant or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a waiver or relinquishment of any such right or power at any other time or times. 12. EFFECT ON INVALIDITY OF ANY PART OF THE PLAN. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. 13. PLAN BINDING ON ANY SUCCESSOR OWNER. Except as otherwise provided herein, this Plan shall inure to the benefit of and be binding upon the Company, its successors and assigns, including but not limited to any corporation which may acquire all or substantially all of the Company's assets and business or with or into which the Company may be consolidated or merged. 14. LAWS GOVERNING THIS PLAN. Except to the extent federal law applies, this Plan shall be governed by the laws of the State of New Jersey. 15. MISCELLANEOUS. The masculine pronoun shall mean the feminine wherever appropriate. SCHEDULE A DEFERRED COMPENSATION PLAN FOR CERTAIN EMPLOYEES OF PUBLIC SERVICE ELECTRIC AND GAS COMPANY (THE "PLAN") Elections in Connection With Deferral of Compensation Section 1. Election as to Compensation to be Deferred. Note: THIS SECTION IS TO BE USED TO MAKE OR TO CHANGE AN ELECTION UNDER PARAGRAPH 3 OF THE PLAN. ANY CHANGE IN ELECTION MUST BE MADE NO LATER THAN DECEMBER 31 OF THE YEAR PRECEDING THE YEAR IN WHICH YOU WISH THE CHANGE TO APPLY. I hereby elect to defer, in accordance with the provisions of the Plan: __________ (a) a month of my Compensation; or __________ (b) All of my Compensation in excess of $_________ per year. Section 2. Election as to Commencement of Distribution From Account Note: THIS SECTION IS TO BE USED (A) WHEN FIRST BECOMING AN EMPLOYEE COVERED BY THE PLAN AND (B) PRIOR TO DECEMBER 31ST OF ANY GIVEN YEAR IF THERE IS TO BE ANY CHANGE IN THE ORIGINAL ELECTION. ANY SUCH CHANGE WILL ONLY APPLY TO FUTURE DEFERRALS. I hereby elect, in accordance with the provisions of the Plan, to have distribution from my Account commence: __________ (a) Within thirty (30) days after I cease to be employed by the Company. __________ (b) In the month of January, __________, unless I am employed by the Company at such time, in which case within 30 days after I cease to be employed by the Company. Employee's Initials __________ Date__________ SCHEDULE A-2 Section 3. Election as to the Timing of the Distribution Note: THIS SECTION IS TO BE USED (A) WHEN FIRST BECOMING AN EMPLOYEE COVERED BY THE PLAN AND (B) PRIOR TO DECEMBER 31ST OF ANY GIVEN YEAR IF THERE IS TO BE ANY CHANGE IN THE ORIGINAL ELECTION. ANY SUCH CHANGE WILL ONLY APPLY TO FUTURE DEFERRALS. I hereby elect, in accordance with the provisions of the Plan, to have the distribution of my Account paid: __________ (a) In one lump sum. __________ (b) In annual installments over a period of five (5) years. __________ (c) In annual installments over a period of ten (10) years. Section 4. Election As To Method Of Distribution In Case of Death Note: THIS SECTION TO BE USED TO SELECT THE METHOD OF DISTRIBUTION IN THE CASE OF DEATH. PERIOD SELECTED MAY NOT BE MORE THAN FIVE (5) YEARS. In case of my death, I hereby elect, in accordance with the provisions of the Plan, to have the distribution of my Account paid over a period of _____ year(s) to my Beneficiary(ies) designated on Schedule B. ______________________, 19___ - ------------------------------------ ------------------------------------ Witness Employee Signature SCHEDULE B DEFERRED COMPENSATION PLAN FOR CERTAIN EMPLOYEES OF PUBLIC SERVICE ELECTRIC AND GAS COMPANY (THE "PLAN") DESIGNATION OF BENEFICIARY(IES) In the event of my death, I hereby designate the following individuals, fiduciaries or other entities, either in their own right or in their representative capacity, in the proportions and in the priority of interest designated, to be the beneficiaries of any benefits owing to me, under the Plan. PRIMARY BENEFICIARIES - The following beneficiary(ies) shall receive all benefits payable under the Plan in the event of my death in the proportions designated hereunder. If any one or more of the primary beneficiaries designated hereunder shall predecease me, such beneficiary's share(s) shall be divided equally among the remaining primary beneficiaries. PROPORTIONATE NAME AND PRESENT ADDRESS INTEREST OF PRIMARY RELATIONSHIP OF PRIMARY BENEFICIARY(IES) BENEFICIARY(IES) TO EMPLOYEE - ------------------------------ - ------------------------------ ----------% -------------- - ------------------------------ - ------------------------------ ----------% -------------- - ------------------------------ - ------------------------------ ----------% -------------- - ------------------------------ - ------------------------------ ----------% -------------- SCHEDULE B SECONDARY BENEFICIARIES - The following beneficiary(ies) shall receive all benefits payable under the Plan in the event of my death in the proportions designated hereunder only if all of my Primary Beneficiaries have predeceased me. If all Primary Beneficiaries have predeceased me and if any one or more of the Secondary Beneficiaries designated hereunder shall predecease me, such Secondary Beneficiary's share(s) shall be divided equally among the Secondary Beneficiaries. PROPORTIONATE NAME AND PRESENT ADDRESS INTEREST OF PRIMARY RELATIONSHIP OF PRIMARY BENEFICIARY(IES) BENEFICIARY(IES) TO EMPLOYEE - ------------------------------ - ------------------------------ ----------% -------------- - ------------------------------ - ------------------------------ ----------% -------------- - ------------------------------ - ------------------------------ ----------% -------------- - ------------------------------ - ------------------------------ ----------% -------------- ESTATE - In the event I have declined to designate a Beneficiary hereunder or if all of the Beneficiaries that I have designated predecease me, then all benefits payable under the Plan shall be payable to my Estate. Date:__________ - ------------------------------------ ------------------------------------ Witness Employee's Signature EX-10.A(3) 4 LIMITED SUPPLEMENTAL BENEFITS (PSE&G) LIMITED SUPPLEMENTAL BENEFITS PLAN FOR CERTAIN EMPLOYEES OF PUBLIC SERVICE ELECTRIC AND GAS COMPANY As Amended January 1, 1997 LIMITED SUPPLEMENTAL BENEFITS PLAN FOR CERTAIN EMPLOYEES OF PUBLIC SERVICE ELECTRIC AND GAS COMPANY TABLE OF CONTENTS Page 1. PURPOSE.............................................................. 1 ------- 2. DEFINITIONS OF TERMS USED IN THE PLAN................................ 1 ------------------------------------- 3. DEATH BENEFIT......................................................... 5 ------------- 4. RETIREMENT BENEFIT.................................................... 6 ------------------ 5. ADMINISTRATION OF ACCOUNTS........................................... 12 -------------------------- 6. DESIGNATION OF BENEFICIARIES......................................... 13 ---------------------------- 7. LIMITATION OF BENEFITS............................................... 16 ---------------------- 8. PLAN DOES NOT CONSTITUTE AN EMPLOYMENT AGREEMENT..................... 16 ------------------------------------------------ 9. AMENDMENT OR TERMINATION OF THE PLAN................................. 16 ------------------------------------ 10. WHAT CONSTITUTES NOTICE.............................................. 17 ----------------------- 11. ADVANCE DISCLAIMER OF WAIVER......................................... 17 ---------------------------- 12. EFFECT OF INVALIDITY OF ANY PART OF THE PLAN......................... 17 -------------------------------------------- 13. PLAN BINDING ON ANY SUCCESSOR........................................ 17 ----------------------------- 14. FUNCTION OF THE COMMITTEE............................................ 18 ------------------------- 15. COMPANY SHALL PAY LEGAL FEES......................................... 18 ---------------------------- 16. LAW GOVERNING THE PLAN............................................... 18 ---------------------- 17. MISCELLANEOUS........................................................ 18 ------------- LIMITED SUPPLEMENTAL BENEFITS PLAN FOR CERTAIN EMPLOYEES OF PUBLIC SERVICE ELECTRIC AND GAS COMPANY 1. PURPOSE. The purpose of this Plan is to assist the Company in attracting and retaining a stable pool of key managerial talent and to encourage long-term key employee commitment to the Company by providing selected employees of the Company with certain limited supplemental death and retirement benefits as defined herein. The Plan is intended to provide such benefits to a select group of management or highly compensated employees within the meaning of ERISA. 2. DEFINITIONS OF TERMS USED IN THE PLAN. As used in the Plan, the following words and phrases shall have the meanings indicated: (a) "Account" -- Any account established pursuant to Paragraph 3(b) or 4(f) of the Plan. (b) "Annuity" -- A fully-funded contract with an independent insurance company purchased by the Company pursuant to Paragraph 4(f) of the Plan. (c) "Assets" -- All amounts that have been credited to an Employee's Account in accordance with Paragraph 3(b), 4(f), or 5(b) of the Plan. (d) "Beneficiary" -- The individual(s) and/or entity(ies) designated in writing by a Participant in the form attached to the Plan as Schedule A. (e) "Cash Balance Plan" -- The Cash Balance Pension Plan of Public Service Electric and Gas Company. (f) "Change in Control" -- For the purposes of the Plan, a Change in Control of the Company shall be deemed to have occurred upon the happening of any one of the following events: (i) A filing with the U.S. Securities and Exchange Commission disclosing that any individual, group or other entity (except for any employee benefit plan sponsored by the Company or Enterprise or any trust related to such a plan) is the beneficial owner, directly or indirectly, of 10% or more of the Voting Stock of Enterprise; (ii) The purchase by any individual, group or other entity (other than by Enterprise or an affiliate of Enterprise) pursuant to a tender or exchange offer that results in such individual, group or entity being the beneficial owner, directly or indirectly, of 10% or more of the Voting Stock of Enterprise; (iii) Approval by the stockholders of Enterprise or the Company, as the case may be, of any merger or consolidation of Enterprise or the Company in which the common stockholders of Enterprise or of the Company, as the case may be, do not continue substantially the same proportionate ownership of the common stock of the surviving entity; (iv) Approval by stockholders of the sale or transfer of the Company to an unrelated entity; (v) The sale or transfer, or taking by eminent domain or otherwise, of all or substantially all of the assets of the Company; or (vi) A change in the majority of the Board of Directors of the Company or of Enterprise within any twelve (12) month period. Except that a Change in Control shall not be deemed to have occurred with respect to the events noted in items (iii), (iv) or (v) hereof if the transaction, or in the case of the event noted in item (vi) hereof, if the election or nomination for election by the stockholders of each new director, shall have been approved by a vote of three- fourths of the directors of the Company with respect to Company directors and of the directors of Enterprise, with respect to Enterprise directors, then still in office who were in office prior to the event, or in the case of item (vi) hereof, at the beginning of the twelve (12) month period. (g) "Code" -- The Internal Revenue Code of 1986, as amended. (h) "Committee" -- The Employee Benefits Committee of the Company as selected by its Board of Directors. (i) "Company" -- Public Service Electric and Gas Company. (j) "Compensation" -- (i) For the purposes of calculating the Death Benefit pursuant to Paragraph 3 of the Plan, as to any Participant, Compensation shall be equal to the annual rate of salary of the Participant in effect at the date of death; and (ii) For the purposes of calculating the Retirement Benefit pursuant to Paragraph 4 of the Plan, as to any Participant, Compensation shall be equal to the average of the total remuneration paid to such Participant for services rendered to the Company, excluding the Company's cost for any public or private employee benefit plan (including, without limitation, the Long-Term Incentive Compensation Plan of Enterprise) but including all elective contributions that are made by the Company on behalf of a Participant which are not includable in income under Code Sections 125 or 401(k), for the five years ending at the earlier of such Participant's date of Retirement or attainment of normal retirement age under the Pension Plan; provided, however, that for the purposes of Paragraph 4 of the Plan, Compensation with respect to any Participant shall not exceed the amount which is 130% of the average annual base salary of the Participant for the applicable five-year period. (k) "Enterprise" -- Public Service Enterprise Group Incorporated. (l) "ERISA" -- The Employee Retirement Income Security Act of 1974, as amended. (m) "Participant" -- Each employee of the Company nominated by the Chief Executive Officer and designated by the Employee Benefits Policy Committee of Enterprise. The Chief Executive Officer of the Company shall nominate such select and key employees of the Company upon such terms as he shall deem appropriate due to the employee's responsibilities and opportunity to contribute substantially to the financial and operating objectives of the Company. (n) "Pension Plan" -- The Pension Plan of Public Service Electric and Gas Company. (o) "Plan" -- The Limited Supplemental Benefits Plan for Certain Employees of Public Service Electric and Gas Company. (p) "Retirement" -- For the purposes of the Plan, Retirement of a Participant shall be deemed to have occurred upon either (i) termination of the Participant's service with the Company with the right to an immediately payable periodic retirement benefit under the Pension Plan or the Cash Balance Plan or (ii) upon a Change in Control of the Company. Retirement shall not include termination of service with the right to a deferred pension under the Pension Plan or a deferred retirement benefit or early commencement of payment of a participant's Cash Balance Account under the Cash Balance Plan. (q) "Retirement Plan" -- Any pension plan within the meaning of ERISA, excluding (i) the Pension Plan, the Cash Balance Plan and all defined contribution plans maintained by the Company, except insofar as any such defined contribution plan may provide supplementary benefits to the Pension Plan or the Cash Balance Plan, (ii) this Plan and (iii) all deferred compensation plans, tax credit employee stock ownership plans and thrift plans, and all other profit-sharing plans which are not the principal retirement benefit of a plan sponsor, maintained by sponsors other than the Company. (r) "Voting Stock" -- Outstanding stock of a corporation entitled to vote in the election of the directors of that corporation. 3. DEATH BENEFIT. (a) Amount of Benefit -- If a Participant dies while in the active employment of the Company, the Company shall provide a death benefit to such Participant's Beneficiary in an amount equal to 150% of the Participant's Compensation, adjusted to the nearest $1,000, or to the next highest $1,000 if such Compensation is a multiple of $500 but not of $1,000. (b) Establishment of Account -- Upon the death of a Participant during employment with the Company, the Company shall establish an Account for the benefit of such Participant's Beneficiary. Such Account shall initially be credited with an amount equal to the benefit provided under Paragraph 3(a) and shall be held and administered as provided in Paragraph 5 of the Plan. 4. RETIREMENT BENEFIT (a) General -- At Retirement, the Company shall provide each Participant with a retirement benefit calculated as provided in this Paragraph 4. (b) Determination of Benefit -- (i) Pension Plan Participants: (A) The Participant's Compensation shall be multiplied by an amount equal to one one-hundredth of the sum of (x) the number of the Participant's years of credited service under the Pension Plan at Retirement, (y) the number of any additional years of service credit to which the Participant may be entitled from the Company under the Mid-Career Supplemental Retirement Income Plan of Public Service Electric and Gas Company and its Affiliates or any written arrangement with the Company, and (z) 30; but, in no event, shall the multiple be greater than 0.75. (B)The amount determined under subparagraph (A) of this Paragraph 4(b)(i) shall be reduced by the sum of (x) the amount the Participant would be entitled to at Retirement as an annual pension benefit under the Pension Plan and any supplemental retirement plan (other than this Plan) maintained by the Company calculated as a single life annuity without reduction for any pre-retirement survivor's option coverage or any reduction for early retirement, (y) 100% of the amount of the unreduced annual Social Security benefit to which the Participant would be entitled at age 65 (or such other age which may be established by the Social Security Administration from time to time as the earliest age at which a Participant may receive an unreduced benefit thereunder), assuming that the Participant has no earnings from the date of Retirement to age 65 (or such other applicable age), or, if greater, any disability benefit under Social Security to which the Participant may be entitled, and (z) the aggregate of the annual benefits to which the Participant is entitled under all Retirement Plans as of the date the Participant is employed by the Company, such Social Security Benefits and benefits under all Retirement Plans to be calculated as single life annuities without any reductions, under rules, procedures and equivalents determined by the Committee. To determine the amounts referred to under (y) and (z) above, the Participant shall file a declaration of all such amounts with the Employee Benefits Department of the Company in such form as the Committee may require from time to time. No benefit shall be paid under the Plan until such a declaration, in satisfactory form, shall be filed with the Employee Benefits Department. If a Participant is granted a disability Social Security benefit, he shall notify the Employee Benefits Department thereof within 30 days thereof, and the Participant's retirement benefit under this Plan shall be adjusted accordingly. The Company shall be entitled to rely on such statements in making payment, and if any such statement is incorrect or is not furnished, the Company shall be entitled to reimbursement from the Participant, the Beneficiary or their legal representatives for any overpayment and may reduce or suspend future payments to recover any such overpayment. In the event it is established to the satisfaction of the Committee, in its sole discretion, that any such statement was intentionally false or omitted, the Participant or Beneficiary shall be entitled to no further payments under the Plan, and the Company shall be entitled to recover any payments made hereunder. (ii) Cash Balance Plan Participants: (A) The Participant's Compensation shall be multiplied by an amount equal to one one-hundredth of the sum of (x) the number of the Participant's years of service under the Pension Plan with which such Participant would have been credited at Retirement had the Participant participated in the Pension Plan from his/her date of hire, (y) the number of any additional years of service credit to which the Participant may be entitled from the Company under the Mid-Career Supplemental Retirement Income Plan of Public Service Electric and Gas Company and its Affiliates or any written arrangement with the Company, and (z) 30; but, in no event, shall the multiple be greater than 0.75. (B) The amount determined under subparagraph (A) of this Paragraph 4(b)(ii) shall be reduced by the sum of (x) the amount the Participant would be entitled to at Retirement as an annual pension benefit under the Cash Balance Plan and any supplemental retirement plan (other than this Plan) maintained by the Company calculated as a single life annuity without reduction for any pre-retirement survivor's option coverage or any reduction for early retirement, (y) 100% of the amount of the unreduced annual Social Security benefit to which the Participant would be entitled at age 65 (or such other age which may be established by the Social Security Administration from time to time as the earliest age at which a Participant may receive an unreduced benefit thereunder), assuming that the Participant has no earnings from the date of Retirement to age 65 (or such other applicable age), or, if greater, any disability benefit under Social Security to which the Participant may be entitled, and (z) the aggregate of the annual benefits to which the Participant is entitled under all Retirement Plans as of the date the Participant is employed by the Company, such Social Security Benefits and benefits under all Retirement Plans to be calculated as single life annuities without any reductions, under rules, procedures and equivalents determined by the Committee. To determine the amounts referred to under (y) and (z) above, the Participant shall file a declaration of all such amounts with the Employee Benefits Department of the Company in such form as the Committee may require from time to time. No benefit shall be paid under the Plan until such a declaration, in satisfactory form, shall be filed with the Employee Benefits Department. If a Participant is granted a disability Social Security benefit, he shall notify the Employee Benefits Department thereof within 30 days thereof, and the Participant's retirement benefit under this Plan shall be adjusted accordingly. The Company shall be entitled to rely on such statements in making payment, and if any such statement is incorrect or is not furnished, the Company shall be entitled to reimbursement from the Participant, the Beneficiary or their legal representatives for any overpayment and may reduce or suspend future payments to recover any such overpayment. In the event it is established to the satisfaction of the Committee, in its sole discretion, that any such statement was intentionally false or omitted, the Participant or Beneficiary shall be entitled to no further payments under the Plan, and the Company shall be entitled to recover any payments made hereunder. (C) Forms of Benefit -- The annual amount determined under paragraph (b) of this Paragraph 4 shall be paid in one of the following forms: (i) a single life annuity in monthly installments equal to one twelfth of such annual amount; (ii) a joint and survivor annuity in monthly installments based upon such annual amount and calculated in accordance with any post-retirement survivorship option available under the Pension Plan or the Cash Balance Plan, as the case may be; (iii)a 10-year certain level payment annuity in monthly installments which is the actuarial equivalent to the single life annuity under (i), as determined by the actuary for the Pension Plan or the Cash Balance Plan, as the case may be, according to mortality assumptions used for the Pension Plan or the Cash Balance Plan, as the case may be, on the basis of a current interest rate assumption determined from time to time by the Committee; or (iv) a 10-year certain increasing payment annuity paid in accordance with Paragraph 5(c) of the Plan based upon the lump-sum amount which is the actuarial equivalent to the single life annuity under (i), as determined by the actuary for the Pension Plan or the Cash Balance Plan, as the case may be, according to mortality assumptions used for the Pension Plan or the Cash Balance Plan, as the case may be, on the basis of a current market rate interest assumption determined from time to time by the Committee; or (v) a lump sum payment of the present value of any of the foregoing based upon the same assumptions used for lump sum payments under the Pension Plan or the Cash Balance Plan, as the case may be. The Committee in its sole discretion shall determine the form of benefit payment for each Participant. (d) Change in Control -- (i) If there shall occur a Change in Control, then each Participant who has not already retired under the Pension Plan or the Cash Balance Plan, as the case may be, shall be entitled to a retirement benefit under this Plan calculated as if such Participant had retired under the Pension Plan or the Cash Balance Plan, as the case may be, as of the date of such Change in Control. (ii) The retirement benefit to be paid pursuant to Paragraph 4(d)(i) shall be paid to the Participant in a 10-year certain level payment annuity paid in accordance with Paragraph 5(c) of the Plan based upon the lump-sum amount which is the actuarial equivalent to the single-life annuity under Paragraph 4(c)(i) of the Plan as determined by the actuary for the Pension Plan or the Cash Balance Plan, as the case may be, according to mortality assumptions used for the Pension Plan or the Cash Balance Plan, as the case may be, on the basis of a current market rate interest assumption determined from time to time by the Committee. (iii)Notwithstanding anything contained in the Plan to the contrary, if a Change in Control shall occur, the Company shall purchase from an independent insurance company fully paid annuities which shall provide for the payment to all Participants and Beneficiaries of all accrued benefits under the Plan. (e) Establishment of Account -- If payment is made under either Paragraph 4(c)(iii) or 4(c)(iv) of the Plan, upon Retirement, the Company shall establish an Account for the benefit of the Participant and any Beneficiary. Such Account shall initially be credited with an amount equal to the amount of the lump-sum payment determined under Paragraph 4(c)(iii) or 4(c)(iv), as applicable, and shall be administered as provided in Paragraph 5 of the Plan. (f) Disability Retirement -- If a Participant retires for disability under the Pension Plan or the Cash Balance Plan, as the case may be, payment of the Participant's retirement benefit and any joint and survivor benefit under Paragraph 4(c)(ii) of the Plan shall be subject to the same conditions as the disability pension under the Pension Plan or the Cash Balance Plan, as the case may be. 5. ADMINISTRATION OF ACCOUNTS. (a) General -- Accounts shall be established under the Plan only pursuant to Paragraphs 3(b) and 4(e) hereof. All Accounts shall be administered in accordance with the provisions of this Paragraph 5. (b) Interest on Assets in the Account -- The Assets credited to a Participant's Account shall accrue interest at a market rate of interest as may be determined from time to time by the Committee. (c) Timing of the Distribution(s) -- A Participant or Beneficiary shall receive the distribution of the Participant's Account in the form of monthly distributions over a ten-year period commencing in the month following the month of the Participant's death in the case of a death benefit, or over a ten-year period commencing in the month of the Participant's Retirement in the case of a retirement benefit. The amount of each installment shall be determined by dividing the then unpaid balance in the Participant's Account, including accrued and unpaid interest, by the number of installments remaining to be paid. (d) Request for Change in Distribution -- A Participant, Beneficiary or legal representative may request a change in the timing, frequency or amount of payments made from a Participant's Account by filing a written request therefor with the Committee. The Committee may, in its sole discretion, grant such request only if the Committee determines that an emergency beyond the control of the Participant, Beneficiary or legal representative exists and which would cause such Participant, Beneficiary or legal representative severe financial hardship if the payment of such benefits were not approved. Any such distribution for hardship shall be limited to the amount needed to meet such emergency. The Committee shall inform the Participant, Beneficiary or legal representative of its decision within sixty (60) days of receipt of the written request. 6. DESIGNATION OF BENEFICIARIES (a) General -- To designate an individual(s) and/or entity(ies) to receive the benefits of the Plan with respect to a Participant, such Participant must file a written designation in the form of Schedule A to the Plan with the Committee. Subject to the restrictions of this Paragraph 6, a Participant may change such designation by filing a subsequent written designation. (b) Death Benefit -- By designation on Section 1 of a Schedule A filed with the Committee, a Participant may name an individual(s) and/or entity(ies) to receive a death benefit under Paragraph 3 of the Plan with respect to such Participant. A Participant may change such designation by filing a subsequent notification in the form of Schedule A. (c) Retirement Benefits -- (i) Single Life Annuity. If a Participant's retirement benefit under the Plan is paid as a single life annuity under Paragraph 4(c)(i) of the Plan, there shall be no Beneficiary with respect to such benefit and all retirement benefits shall cease upon the Participant's death. (ii) Joint and Survivor Annuity. If a Participant's retirement benefit under Paragraph 4(c) (ii) of the Plan and the Participant's pension under the Pension Plan or the Cash Balance Plan, as the case may be, are both paid as joint and survivor annuities, any survivor annuity under the Plan shall be paid to the same beneficiary entitled to any post-retirement survivorship benefit under the Pension Plan or the Cash Balance Plan, as the case may be. If the Participant's pension under the Pension Plan or the Cash Balance Plan, as the case may be, is paid as a single life annuity, any survivor annuity paid under Paragraph 4(c)(ii) of the Plan shall be paid to the Beneficiary designated in Section 2 of Schedule A to the Plan. If a Beneficiary designated by the Participant under Paragraph 4(c)(ii) of the Plan predeceases the Participant within five years from the date of Participant's Retirement, the Participant's retirement benefit hereunder will automatically revert and return to a single life annuity commencing the first day of the month following the month in which the designated Beneficiary died. If, however, the Beneficiary predeceases the Participant more than five years after Participant's Retirement, the Participant's reduced retirement benefit shall continue during his life and no survivor benefit shall be paid. The election of such Beneficiary must be made prior to Retirement and may not be changed thereafter. (iii)10-Year Certain Annuities. If a Participant's Retirement benefit is paid as a 10-year certain level payment annuity under Paragraph 4(c)(iii) or Paragraph 4(d)(ii) of the Plan, or a 10-year certain increasing payment annuity under Paragraph 4(c)(iv), the Beneficiary or Beneficiaries with respect to such benefit shall be as specified in Section 1 of the most recent Schedule A filed with the Committee. (d) Designation by Last Remaining Beneficiary -- After a Participant's death, if there is only one remaining Beneficiary with respect to a death benefit under Paragraph 3 of the Plan or a 10-year certain annuity under Paragraph 4(c)(iii), 4(c)(iv) or 4(d)(ii) of the Plan, such Beneficiary shall be entitled to designate in writing to the Committee an individual to be paid any remainder of such benefit under the Plan at such Beneficiary's death. If no such further designation is made, such remainder shall be paid to such Beneficiary's estate. In the event of such Beneficiary's death, and regardless of whether any such further designation has been made, the Committee in its sole discretion may require any such remainder to be paid as a lump sum. 7. LIMITATION OF BENEFITS. (a) The Plan shall be unfunded with respect to all benefits to be paid hereunder. In addition, except as provided in Paragraphs 4(d)(iii) and 16(b), the Company shall not be required to segregate any amounts credited to any Account, which shall be established merely as an accounting convenience; title to and beneficial ownership of any Assets credited to any Account shall at all times remain in the Company, and no Participant, Beneficiary or legal representative shall have any interest whatsoever in any specific assets of the Company. (b) The payment of any death or survivorship benefit under this Plan shall be contingent upon such evidence of death as may be required by the Committee. (c) If the Company should terminate the Plan pursuant to Paragraph 10 hereof, the Company's obligation to pay any benefits under the Plan shall likewise terminate; provided, however, that, except as otherwise provided in said Paragraph 10, the Company may not terminate the Plan with respect to any Participant subsequent to that Participant's Retirement or death. 8. PLAN DOES NOT CONSTITUTE AN EMPLOYMENT AGREEMENT. The Plan shall not constitute a contract for the continued employment of any Participant by the Company. The Company reserves the right to modify a Participant's Compensation at any time and from time to time as it considers appropriate and to terminate any Participant's employment for any reason at any time notwithstanding the Plan. 9. AMENDMENT OR TERMINATION OF THE PLAN. The Board of Directors of the Company may, in its sole discretion, amend, modify or terminate the Plan at any time, provided, however, that no such amendment, modification or termination shall deprive any Participant or Beneficiary of a previously acquired right unless such Participant or Beneficiary or his legal representative shall consent to such change. No right to a death benefit under the Plan shall accrue until a Participant's death and no right to a retirement benefit shall accrue until a Participant's Retirement. 10. WHAT CONSTITUTES NOTICE. Any notice to a Participant, a Beneficiary or any legal representative hereunder shall be given in writing, by personal delivery, overnight express service or by United States mail, postage prepaid, addressed to such person's last known address. Any notice to the Company or the Committee hereunder (including the filing of Schedule A) shall be given by delivering it in person or by overnight express service, or depositing it in the United States mail, postage prepaid, to the Secretary of the Employee Benefits Committee, Public Service Electric and Gas Company, 80 Park Plaza, T10B, P.O. Box 570, Newark, New Jersey, 07101. 11. ADVANCE DISCLAIMER OF WAIVER. Failure by the Company or the Committee to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of any such term, covenant or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a waiver or relinquishment of any such right or power at any other time or times. 12. EFFECT OF INVALIDITY OF ANY PART OF THE PLAN. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision of the Plan. 13. PLAN BINDING ON ANY SUCCESSOR. Except as otherwise provided herein, the Plan shall inure to the benefit of and be binding upon the Company, its successors and assigns, including but not limited to any corporation which may acquire all or substantially all of the Company's assets and business or with or into which the Company may be consolidated or merged. 14. FUNCTION OF THE COMMITTEE. The Plan shall be administered by the Committee and the Committee shall be the final arbiter of any question that may arise under the Plan. 15. COMPANY SHALL PAY LEGAL FEES. (a) In the event of a Change in Control, the Company shall pay the legal fees and expenses of any Participant, Beneficiary or legal representative thereof incurred in any action to enforce such person's right to receive a benefit under the Plan. (b) In the event of a Change in Control, the Company shall establish a trust for the benefit of Participants and persons claiming though them which shall be funded in an initial amount of $1,000,000 from which the Committee shall, according to reasonable rules that the Committee shall establish, pay the legal fees and expenses incurred by any Participant, Beneficiary or legal representative thereof in enforcing his rights under the Plan. The Company shall contribute such additional sums to such trust as shall be necessary to pay such legal fees and expenses. 16. LAW GOVERNING THE PLAN. Except to the extent federal law applies, the Plan shall be governed by the laws of the State of New Jersey without giving effect to principles of conflicts of law. 17. MISCELLANEOUS. (a) The masculine pronoun shall mean the feminine wherever appropriate. (b) The headings are for convenience only. In the event of a conflict between the headings of a paragraph and its contents, the contents shall control. EX-10.A(4) 5 MID-CAREER HIRE SUPPLEMENTAL BENEFITS INCOME PLAN MID-CAREER HIRE SUPPLEMENTAL RETIREMENT INCOME PLAN FOR SELECTED EMPLOYEES OF PUBLIC SERVICE ELECTRIC AND GAS COMPANY AND ITS AFFILIATES Effective January 1, 1996 As Amended January 5, 1998 TABLE OF CONTENTS Section 1. Definitions......................................................1 Section 2. Eligibility......................................................4 Section 3. Supplemental Retirement Benefit..................................5 Section 4. Supplemental Surviving Spouse Benefit............................7 Section 5. Administration of the Plan.......................................8 Section 6. Claims Procedure and Status Determination.......................10 Section 7. Amendment or Termination........................................10 Section 8. General Provisions..............................................11 Section 9. Miscellaneous...................................................14 MID-CAREER HIRE SUPPLEMENTAL RETIREMENT INCOME PLAN FOR SELECTED EMPLOYEES OF PUBLIC SERVICE ELECTRIC AND GAS COMPANY AND ITS AFFILIATES This Mid-Career Hire Supplemental Retirement Income Plan for Selected Employees of Public Service Electric and Gas Company and its Affiliates is adopted effective January 1, 1995. This Plan is established and maintained by Public Service Electric and Gas Company and its Participating Affiliates solely for the purpose of assisting in attracting and retaining a stable pool of key managerial and professional talent and long-term key employee commitment by providing certain supplemental retirement benefits based upon additional service credit for a selected number of their key employees who participate in the Pension Plan of Public Service Electric and Gas Company. This Plan is intended to constitute an unfunded plan of deferred compensation for a select group of management or highly compensated employees for purposes of Title 1 of ERISA. Accordingly, Public Service Electric and Gas Company hereby adopts this Plan pursuant to the terms and provisions set forth below: Section 1. Definitions When used herein, the words and phrases hereinafter defined shall have the following meanings unless a different meaning is clearly required by the context of the Plan: 1.1 "Affiliate" shall mean any organization which is a member of a controlled group of Companies (as defined in Code Section 414(b), as modified by Code Section 415(h)) which includes the Company; or any trades or businesses (whether or not incorporated) which are under common control (as defined in Code Section 414(c), as modified by Code Section 415(h)) with the Company; or a member of an affiliated service group (as defined in Code Section 414(m)) which includes the Company or any other entity required to be aggregated with the Company as required by regulations promulgated pursuant to Code Section 414(o). 1.2 "Beneficiary" shall mean any person or persons selected by a Participant on a form provided by the Company who may become eligible to receive the benefits provided under this Plan in the event of such Participant's death. 1.3 "Board of Directors" or "Board" shall mean the Board of Directors of the Company. 1.4 "Code" shall mean the Internal Revenue Code of 1986, as amended, and as same may be amended from time to time. 1.5 "Company" shall mean Public Service Electric and Gas Company. 1.6 "Compensation" shall mean compensation as defined in the Reinstatement Plan. 1.7 "Credited Service" shall mean the aggregate of all periods of employment with the Company or an Affiliate or former Affiliate and all periods of additional service credit granted by the Company for which a Participant will be given credit in computing his Supplemental Retirement Benefit. 1.8 "Employee Benefits Committee" or "Committee" shall mean the Employee Benefits Committee of Public Service Electric and Gas Company. 1.9 "Employee Benefits Policy Committee" or "Policy Committee" shall mean the Employee Benefits Policy Committee of Public Service Enterprise Group Incorporated, the Company's parent. 1.10 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, and as the same may be amended from time to time. 1.11 "Normal Retirement Date" shall mean the first day of the month coinciding with or next following a Participant's attainment of age 65. 1.12 "Participant" shall mean each employee or former employee of the Company or a Participating Affiliate who is selected by the Chief Executive Officer of the Company to participate in the Plan. The Chief Executive Officer of the Company shall select such key employees of the Company and Participating Affiliates upon such terms as he shall deem appropriate due to the employee's responsibilities and opportunity to contribute to the financial and operating objectives of the Company or Participating Affiliate. 1.13 "Participating Affiliate" shall mean any Affiliate of the Company which (a) is the sponsor or a Participating Affiliate of the Reinstatement Plan; (b) adopts this Plan with the approval of the Board of Directors; (c) authorizes the Board of Directors and the Employee Benefits Committee to act for it in all matters arising under or with respect to this Plan; and (d) complies with such other terms and conditions relating to this Plan as may be imposed by the Board of Directors. 1.14 "Pension Plan" shall mean the Pension Plan of Public Service Electric and Gas Company and each successor or replacement plan. 1.15 "Plan" shall mean this Mid-Career Hire Supplemental Retirement Income Plan for Selected Employees of Public Service Electric and Gas Company and Its Affiliates. 1.16 "Plan Year" shall mean the calendar year. 1.17 "Reinstatement Plan" shall mean the Retirement Income Reinstatement Plan for Non-Represented Employees of Public Service Electric and Gas Company and its Affiliates. 1.18 "Reinstatement Plan Retirement Benefit" shall mean the aggregate annual benefit payable to a Participant pursuant to the Reinstatement Plan by reason of his termination of employment with the Company and all Affiliates for any reason other than death. 1.19 "Reinstatement Plan Surviving Spouse Benefit" shall mean the aggregate annual benefit payable to the Surviving Spouse of a Participant pursuant to the Reinstatement Plan in the event of the death of the Participant at any time prior to commencement of payment of his Reinstatement Plan Retirement Benefit. 1.20 "Supplemental Retirement Benefit" shall mean the benefit payable to a Participant pursuant to this Plan by reason of his termination of employment with the Company and all Affiliates for any reason other than death. 1.21 "Surviving Spouse" shall mean a person who is married to a Participant at the date of his death. 1.22 "Year of Service" shall mean Year of Service as defined in the Pension Plan. 1.23 "Supplemental Surviving Spouse Benefit" shall mean the benefit payable to a Surviving Spouse pursuant to this Plan. Section 2. Eligibility 2.1 A Participant who is selected by the Chief Executive Officer of the Company to participate in this Plan shall be eligible to receive a Supplemental Retirement Benefit. The Surviving Spouse of a Participant described in the preceding sentence who dies prior to commencement of payment of his Reinstatement Plan Retirement Benefit shall be eligible to receive a Supplemental Surviving Spouse Benefit. 2.2 Upon selection for participation in the Plan, the Chief Executive Officer shall designate the number of years of additional Credited Service to which such Participant shall be entitled to be credited in calculating his Supplemental Retirement Benefit under this Plan. The Chief Executive Officer shall notify the Vice President - Human Resources in writing of such selection and designation. Section 3. Supplemental Retirement Benefit 3.1 The Supplemental Retirement Benefit payable to an eligible Participant shall be equal to the excess of (a) over (b) where: (a) is the amount of Pension Plan Retirement Benefit or Reinstatement Plan Retirement Benefit (which ever is greater) to which the Participant would have been entitled under the Pension Plan or Reinstatement Plan, as applicable, if such benefit were computed with the additional years of Credited Service provided for in this Plan; and (b) is the Pension Plan Retirement Benefit or Reinstatement Plan Retirement Benefit, as applicable, actually payable to the Participant or payable to a third party on the Participant's behalf.. The amounts described in (a) and (b) shall be computed as of the date of termination of employment of the Participant with the Company and all Affiliates in the form of a single life annuity payable over the lifetime of the Participant only commencing on his Normal Retirement Date. 3.2. The Supplemental Retirement Benefit payable to a Participant shall be paid in the same form under which the Pension Plan Retirement Benefit or Reinstatement Plan Retirement Benefit, as applicable, is payable to the Participant (including the election to receive a lump sum distribution of the present value of any benefit). The Participant's election under the Pension Plan of any optional form of payment of his Pension Plan Retirement Benefit (with the valid consent of his spouse where required under the Pension Plan) shall also be applicable to the payment of his Supplemental Retirement Benefit hereunder. 3.3 Payment hereunder of the Supplemental Retirement Benefit to a Participant shall commence on the same date as payment of the Pension Plan Retirement Benefit or Reinstatement Plan Retirement Benefit, as applicable, to the Participant commences. 3.4 Notwithstanding the provisions of Sections 3.2 and 3.3 above, an election made by the Participant with respect to the form of payment of his retirement benefits under the Pension Plan and Reinstatement Plan, or the date for commencement of payment thereof, shall not be effective with respect to the form of payment or date for commencement of payment of his Supplemental Retirement Benefits hereunder unless such election is expressly approved by the Committee with respect to his Supplemental Retirement Benefit. If the Committee shall not approve such election, then the form of payment or date for commencement of payment of the Participant's Supplemental Retirement Benefits shall be selected by the Committee in its sole discretion. 3.5 A Supplemental Retirement Benefit which is payable in any form other than a single life annuity over the lifetime of the Participant, or which commences at any time prior to the Participant's Normal Retirement Date, shall be the actuarial equivalent of the Supplemental Retirement Benefit set forth in Subsection 3.1 above as determined by the same actuarial adjustments as those specified in the Pension Plan with respect to determination of the amount of retirement benefits payable pursuant to the Pension Plan on the date for commencement of payment hereunder. Section 4. Supplemental Surviving Spouse Benefit 4.1 If a Participant dies prior to commencement of payment of his Pension Plan Retirement Benefit or Reinstatement Plan Retirement Benefit under circumstances in which a Pension Plan Surviving Spouse Benefit or Reinstatement Plan Surviving Spouse Benefit is payable to his Surviving Spouse, then a Supplemental Surviving Spouse Benefit shall be payable to his Surviving Spouse as hereinafter provided. The Supplemental Surviving Spouse Benefit payable to a Surviving Spouse shall be equal to the excess of (a) over (b) where: (a) is the amount of the greater of the Pension Plan Surviving Spouse Benefit or Reinstatement Plan Surviving Spouse Benefit to which the Surviving Spouse would have been entitled under the Pension Plan or Reinstatement Plan, as applicable, if such benefit were computed with the additional years of Credited Service provided for in this Plan; and (b) is the Pension Plan Surviving Spouse Benefit or Reinstatement Plan Surviving Spouse Benefit, as applicable, actually payable to the Surviving Spouse. 4.2 A Supplemental Surviving Spouse Benefit shall be payable over the lifetime of the Surviving Spouse only in monthly installments commencing on the date for commencement of payment of the Pension Plan Surviving Spouse Benefit or Reinstatement Plan Surviving Spouse Benefit, as applicable, to the Surviving Spouse and terminating on the date of the last payment of the Pension Plan Surviving Spouse Benefit or Reinstatement Plan Surviving Spouse Benefit, as applicable, made before the Surviving Spouse's death. Section 5. Administration of the Plan 5.1 The Committee shall be the named fiduciary of this Plan responsible for the general operation and administration of this Plan and for carrying out the provisions thereof. The Committee shall have discretionary authority to construe the terms of this Plan. 5.2 The Committee shall adopt such rules and procedures as it deems necessary and advisable to administer this Plan and to transact its business. Subject to the other requirements of this Section 5, the Committee may-- (a) employ agents to carry out non-fiduciary responsibility; (b) employ agents to carry out fiduciary responsibilities (other than trustee responsibilities as defined in Section 405(c)(3) of ERISA); (c) consult with counsel, who may be counsel to the Company or an Affiliate; and (d) provide for the allocation of fiduciary responsibilities (other than trustee responsibilities as defined in Section 405(c)(3) of ERISA) among its members. However, any action described in sub-paragraphs (b) or (d) of this Subsection 5.2, and any modification or rescission of any such action, may be effected by the Committee only by a resolution approved by a majority of the Committee. The Committee shall be entitled to rely conclusively upon all tables, valuations, certificates, opinions and reports furnished any actuary, accountant, controller, counsel or other person employed or engaged by the Committee with respect to this Plan. 5.3 The Committee shall keep written minutes of all its proceedings, which shall be open to inspection by the Board of Directors. In the case of any decision by the Committee with respect to a claim for benefits under this Plan, such Committee shall include in its minutes a brief explanation of the grounds upon which such decision was based. 5.4 In performing their duties, the members of the Committee shall act solely in the interest of the Participants in this Plan and their Beneficiaries and (a) for the exclusive purpose of providing benefits to Participants and their Beneficiaries; (b) with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; and (c) in accordance with the documents and instruments governing this Plan insofar as such documents and instruments are consistent with the provisions of Title I of ERISA. 5.5 In addition to any other duties the Committee may have, the Committee shall review the performance of all persons to whom the Committee shall have delegated or allocated fiduciary duties pursuant to the provisions of this Section 5. 5.6 The Company agrees to indemnify and reimburse, to the fullest extent permitted by law, members of the Committee, directors and employees of the Company and its Affiliates, and all such former members, directors and employees, for any and all expenses, liabilities or losses arising out of any act or omission relating to the rendition of services for or the management and administration of this Plan. 5.7 No member of the Committee nor any delegate thereof shall be personally liable by virtue of any contract, agreement or other instrument made or executed by him or on his behalf in such capacity. Section 6. Claims Procedure and Status Determination 6.1 Claims for benefits under this Plan and requests for a status determination shall be filed in writing with the Company. 6.2 In the case of a claim for benefits, written notice shall be given to the claiming Participant or Beneficiary of the disposition of such claim, setting forth specific reasons for any denial of such claim in whole or in part. If a claim is denied in whole or in part, the notice shall state that such Participant or Beneficiary may, within sixty days of the receipt of such denial, request in writing that the decision denying the claim be reviewed by the Committee and provide the Committee with information in support of his position by submitting such information in writing to the Secretary of the Committee. 6.3 The Committee shall review each claim for benefits which has been denied in whole or in part and for which such review has been requested and shall notify, in writing, the affected Participant or Beneficiary of its decision and the reasons therefor. 6.4 In the case of a request for status determination, written notice shall be given to the requesting person within a reasonable time setting forth specific reasons for the decision. Section 7. Amendment or Termination 7.1 The Company reserves the right to amend or terminate this Plan when, in the sole opinion of the Company, such amendment or termination is advisable. Any such amendment or termination shall be made pursuant to a resolution of the Board or of the Employee Benefits Policy Committee and shall be effective as provided for in such resolution. 7.2 No amendment or termination of this Plan shall directly or indirectly deprive any current or former Participant, Beneficiary or Surviving Spouse of all or any portion of any Supplemental Retirement Benefit or Supplemental Surviving Spouse Benefit payment which has commenced prior to the effective date of such amendment or termination or the right to which has accrued on such effective date. Section 8. General Provisions 8.1 This Plan at all times shall be entirely unfunded and no provision shall at any time be made with respect to segregating any assets of the Company or any Affiliate for payment of any benefits hereunder. No Participant, Beneficiary, Surviving Spouse or any other person shall have any interest in any particular assets of the Company or any Affiliate by reason of the right to receive a benefit under this Plan and any such Participant, Beneficiary, Surviving Spouse or other person shall have only the rights of a general unsecured creditor with respect to any rights under the Plan. 8.2 Except as otherwise expressly provided herein, all terms and conditions of the Pension Plan and the Reinstatement Plan applicable to a benefits paid to a Participant or a Surviving Spouse Benefit under such plans shall also be applicable to a Supplemental Retirement Benefit or a Supplemental Surviving Spouse Benefits payable hereunder. Any benefits payable under the Pension Plan or the Reinstatement Plan, shall be paid solely in accordance with the respective terms and conditions of the Pension Plan and the Reinstatement Plan and nothing in this Plan shall operate or be construed in any way to modify, amend or affect the terms and provisions of the Pension Plan or the Reinstatement Plan. 8.3 Nothing contained in this Plan shall constitute a guaranty by the Company or any other entity or person that the assets of the Company or any Affiliate will be sufficient to pay any benefit hereunder. 8.4 No Participant or Surviving Spouse shall have any right to a benefit under this Plan except in accordance with the terms of this Plan. Establishment of this Plan shall not be construed to give any Participant the right to be retained in the service of the Company or any Affiliate. 8.5 No interest of any person or entity in, or right to receive a benefit under, this Plan shall be subject in any manner to sale, transfer, assignment, pledge, attachment, garnishment or other alienation or encumbrance of any kind; nor any such interest or right to receive a benefits be taken, either voluntarily or involuntarily, for the satisfaction of the debts of, or other obligations or claims against, such person or entity, including claims for alimony, support, separate maintenance and claims in bankruptcy proceedings. 8.6 This Plan shall be construed and administered under the laws of the United States and the State of New Jersey to the extent not superseded by Federal law. 8.7 If the present value of any Supplemental Retirement Benefit or Supplemental Surviving Spouse benefit is less than $3,500, the Company may pay the present value of such Benefit to the Participant or Surviving Spouse in a single lump sum in lieu of any further benefit payments hereunder. 8.8 Actuarial assumptions to determine the present value of any benefit hereunder shall be the same as used to determine the present value of benefits under the Pension Plan. 8.9 If any person entitled to a benefit payment under this Plan is deemed by the Committee to be incapable of personally receiving and giving a valid receipt for such payment, then, unless and until claim therefor shall have been made by a duly appointed guardian or other legal representative of such person, the Committee may provide for such payment or any part thereof to be made to any other person or institution then contributing toward or providing for the care and maintenance of such person. Any such payment shall be a payment for the account of such person and a complete discharge of any liability of the Company and this Plan therefor. 8.10 This Plan shall not be automatically terminated by a transfer or sale of assets of the Company or by the merger or consolidation of the Company into or with any other company or other entity, but this Plan shall be continued after such sale, merger or consolidation only if and to the extent that the transferee, purchaser or successor entity agrees to continue this Plan. In the event that this Plan is not continued by the transferee, purchaser or successor entity, then this Plan shall terminate subject to the provisions of Section 7.2. 8.11 Each Participant shall keep the Company informed of his current address and the current address of his spouse. The Company shall not be obligated to search for the whereabouts of any person. If the location of a Participant is not made known to the Company within three (3) years after the date on which payment of the Participant's Supplemental Retirement Benefit may first be made, payment may be made as though the Participant had died at the end of the three-year period. If, within one additional year after such three-year period has elapsed, or, within three years after the actual death of a Participant, the Company is unable to locate any Surviving Spouse of the Participant, then the Company shall have no further obligation to pay any benefit hereunder to such Participant or Surviving Spouse or any other person and such benefit shall be irrevocably forfeited. 8.12 Notwithstanding any of the preceding provisions of this Plan, none of the Company, the Committee or any individual acting as an employee or agent of the Company or the Committee shall be liable to any Participant, former Participant, Surviving Spouse or any other person for any claim, loss, liability or expense incurred in connection with this Plan. Section 9. Miscellaneous 9.1 As used herein, words in the masculine gender shall include the feminine and the singular shall include the plural, and vice versa, unless otherwise required by the context. Any headings used herein are included for ease of reference only and are not to be construed so as to alter the terms hereof. EX-10.A(5) 6 RETIREMENT INCOME REINSTATEMENT PLAN (PSE&G) RETIREMENT INCOME REINSTATEMENT PLAN FOR NON-REPRESENTED EMPLOYEES OF PUBLIC SERVICE ELECTRIC AND GAS COMPANY AND ITS AFFILIATES As Amended March 26, 1996 TABLE OF CONTENTS Section 1. Definitions...................................................... 1 Section 2. Eligibility...................................................... 5 Section 3. Supplemental Retirement Benefit.................................. 5 Section 4. Supplemental Surviving Spouse Benefit............................ 7 Section 5. Administration of the Plan....................................... 8 Section 6. Claims Procedure and Status Determination....................... 10 Section 7. Amendment or Termination........................................ 11 Section 8. General Provisions.............................................. 11 Section 9. Miscellaneous................................................... 14 RETIREMENT INCOME REINSTATEMENT PLAN FOR NON-REPRESENTED EMPLOYEES OF PUBLIC SERVICE ELECTRIC AND GAS COMPANY AND ITS AFFILIATES This Retirement Income Reinstatement Plan for Non-Represented Employees of Public Service Electric and Gas Company and its Affiliates is adopted effective January 1, 1995. This Plan is established and maintained by Public Service Electric and Gas Company and its Participating Affiliates solely for the purpose of assisting in attracting and retaining a stable pool of key managerial and professional talent and long-term key employee commitment by providing certain supplemental retirement benefits for certain of their employees who participate in the Pension Plan of Public Service Electric and Gas Company or the Cash Balance Pension Plan of Public Service Electric and Gas Company. This Plan is intended to constitute an unfunded "excess benefit plan" as defined in Section 3(36) of the ERISA, to the extent it provides benefits that would be paid under the Pension Plan of Public Service Electric and Gas Company or the Cash Balance Pension Plan of Public Service Electric and Gas Company but for the limitations of Section 415 of the Code, and an unfunded plan of deferred compensation for a select group of management or highly compensated employees for purposes of Title 1 of ERISA, to the extent it provides other benefits. Accordingly, Public Service Electric and Gas Company hereby adopts this Plan pursuant to the terms and provisions set forth below: Section 1. Definitions When used herein, the words and phrases hereinafter defined shall have the following meanings unless a different meaning is clearly required by the context of the Plan: 1.1 "Affiliate" shall mean any organization which is a member of a controlled group of Companies (as defined in Code Section 414(b), as modified by Code Section 415(h)) which includes the Company; or any trades or businesses (whether or not incorporated) which are under common control (as defined in Code Section 414(c), as modified by Code Section 415(h)) with the Company; or a member of an affiliated service group (as defined in Code Section 414(m)) which includes the Company or any other entity required to be aggregated with the Company as required by regulations promulgated pursuant to Code Section 414(o). 1.2 "Beneficiary" shall mean any person or persons selected by a Participant on a form provided by the Company who may become eligible to receive to receive the benefits provided under this Plan in the event of such Participant's death. 1.3 "Benefit Limitation" shall mean the maximum annual benefit payable to a Participant under the Pension Plan or the Cash Balance Plan in accordance with Section 415 of the Code. 1.4 "Board of Directors" or "Board" shall mean the Board of Directors of the Company. 1.5 "Cash Balance Plan" shall mean the Cash Balance Pension Plan of Public Service Electric and Gas Company and each successor or replacement plan. 1.6 "Code" shall mean the Internal Revenue Code of 1986, as amended, and as same may be amended from time to time. 1.7 "Company" shall mean Public Service Electric and Gas Company. 1.8 "Compensation" shall mean compensation as defined in the Pension Plan or the Cash Balance Plan, as the case may be, except, for the purposes hereof, Compensation shall also include amounts which have been deferred under any Deferred Compensation Plan of the Company or any Participating Affiliate which would otherwise be excluded soley on account of Subsection 1.6(a) of the Pension Plan or, as the case may be, Subsection 1.1(k)(1) of the Cash Balance Plan. 1.9 "Compensation Limitation" shall mean the maximum amount of annual compensation under Section 401(a)(17) of the Code that may be taken into account in any Plan Year for benefit accrual purposes under the Pension Plan or the Cash Balance Plan. 1.10 "Employee" shall mean any individual in the employ of the Company or a Participating Affiliate who is not included within a unit of employees covered by a collective bargaining agreement. The term "Employee" shall not include a director of the Company or a Participating Affiliate who serves in no capacity other than as a director, a consultant or independent contractor doing work for the Company or a Participating Affiliate or a person employed by a consultant or independent contractor doing work for the Company or a Participating Affiliate. 1.11 "Employee Benefits Committee" or "Committee" shall mean the Employee Benefits Committee of Public Service Electric and Gas Company. 1.12 "Employee Benefits Policy Committee" shall mean the Employee Benefits Policy Committee of Public Service Enterprise Group Incorporated, the Company's parent. 1.13 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, and as the same may be amended from time to time. 1.14 "Normal Retirement Date" shall mean the first day of the month coinciding with or next following a Participant's attainment of age 65. 1.15 "Participant" shall mean any Employee or former Employee of the Company or a Participating Affiliate who meets the requirements of Subsection 2.1 of the Plan. 1.16 "Participating Affiliate" shall mean any Affiliate of the Company which (a) is the sponsor or a Participating Affiliate of the Pension Plan and/or the Cash Balance Plan; (b) adopts this Plan with the approval of the Board of Directors; (c) authorizes the Board of Directors and the Employee Benefits Committee to act for it in all matters arising under or with respect to this Plan; and (d) complies with such other terms and conditions relating to this Plan as may be imposed by the Board of Directors. 1.17 "Pension Plan" shall mean the Pension Plan of Public Service Electric and Gas Company and each successor or replacement plan. 1.18 "Pension Plan Retirement Benefit" shall mean the aggregate annual benefit payable to a Participant pursuant to the Pension Plan or the Cash Balance Plan, as the case may be, by reason of the Participant's termination of employment with the Company and all Affiliates for any reason other than death. 1.19 "Pension Plan Surviving Spouse Benefit" shall mean the aggregate annual benefit payable to the Surviving Spouse of a Participant pursuant to the Pension Plan or the Cash Balance Plan, as the case may be, in the event of the death of the Participant at any time prior to commencement of payment of the Participant's Pension Plan Retirement Benefit. 1.20 "Plan" shall mean this Retirement Income Reinstatement Plan for Non-Represented Employees of Public Service Electric and Gas Company and Its Affiliates. 1.21 "Plan Year" shall mean the calendar year. 1.22 "Supplemental Retirement Benefit" shall mean the benefit payable to a Participant pursuant to this Plan by reason of the Participant's termination of employment with the Company and all Affiliates for any reason other than death. 1.23 "Surviving Spouse" shall mean a person who is married to a Participant at the date of the Participant's death. 1.24 "Supplemental Surviving Spouse Benefit" shall mean the benefit payable to a Surviving Spouse pursuant to this Plan. Section 2. Eligibility 2.1 A Participant who is eligible to receive a Pension Plan Retirement Benefit, the amount of which is reduced by reason of (a) the application of the limitations on benefits imposed by application of any provisions of the Code, as in effect on the date for commencement of the Pension Plan Retirement Benefit or as in effect at any time thereafter, to the Pension Plan or the Cash Balance Plan, as the case may be, or (b) the restrictions of Subsection 1.6(a) of the Pension Plan or Subsection 1.1(k)(1) of the Cash Balance Plan, shall be eligible to receive a Supplemental Retirement Benefit. The Surviving Spouse of a Participant described in the preceding sentence who dies prior to commencement of payment of his Pension Plan Retirement Benefit shall be eligible to receive a Supplemental Surviving Spouse Benefit. Section 3. Supplemental Retirement Benefit 3.1 The Supplemental Retirement Benefit payable to an eligible Participant shall be equal to the excess of (a) over (b) where: (a) is the amount of Pension Plan Retirement Benefit to which the Participant would have been entitled under the Pension Plan or the Cash Balance Plan, as the case may be, if such benefit were computed without regard to (i) the exclusion of any amounts pursuant to Subsection 1.6(a) of the Pension Plan, (ii) the exclusion of any amounts pursuant to Subsection 1.1(k)(1) of the Cash Balance Plan, (iii) the Benefit Limitation or (iv) the Compensation Limitation; and (b) is the amount of the Pension Plan Retirement Benefit actually payable to the Participant or payable to a third party on the Participant's behalf under the Pension Plan or the Cash Balance Plan, as the case may be. The amounts described in (a) and (b) shall be computed as of the date of termination of employment of the Participant with the Company and all Affiliates in the form of a single life annuity payable over the lifetime of the Participant only commencing on his Normal Retirement Date. 3.2. The Supplemental Retirement Benefit payable to a Participant shall be paid in the same form under which the Pension Plan Retirement Benefit is payable to the Participant (including the election to receive a lump sum distribution of the present value of any benefit). The Participant's election under the Pension Plan or the Cash Balance Plan, as the case may be, of any optional form of payment of his Pension Plan Retirement Benefit (with the valid consent of his spouse where required under the Pension Plan or the Cash Balance Plan, as the case may be) shall also be applicable to the payment of his Supplemental Retirement Benefit. 3.3 Payment of the Supplemental Retirement Benefit to a Participant shall commence on the same date as payment of the Pension Plan Retirement Benefit to the Participant commences. Any election under the Pension Plan or the Cash Balance Plan, as the case may be, made by the Participant with respect to the commencement of payment of his Pension Plan Retirement Benefit shall also be applicable with respect to the commencement of payment of his Supplemental Retirement Benefit. 3.4 Notwithstanding the provisions of Sections 3.2 and 3.3 above, an election made by the Participant under the Pension Plan or the Cash Balance Plan, as the case may be, with respect to the form of payment of his Pension Plan Retirement Benefit (with the valid consent of his spouse where required under the Pension Plan), or the date for commencement of payment thereof, shall not be effective with respect to the form of payment or date for commencement of payment of his Supplemental Retirement Benefits hereunder unless such election is expressly approved by the Committee with respect to his Supplemental Retirement Benefit. If the Committee shall not approve such election, then the form of payment or date for commencement of payment of the Participant's Supplemental Retirement Benefits shall be selected by the Committee in its sole discretion. 3.5 A Supplemental Retirement Benefit which is payable in any form other than a single life annuity over the lifetime of the Participant, or which commences at any time prior to the Participant's Normal Retirement Date, shall be the actuarial equivalent of the Supplemental Retirement Benefit set forth in Subsection 3.1 above as determined by the same actuarial adjustments as those specified in the Pension Plan or the Cash Balance Plan, as the case may be, with respect to determination of the amount of the Pension Plan Retirement Benefit on the date for commencement of payment hereunder. Section 4. Supplemental Surviving Spouse Benefit 4.1 If a Participant dies prior to commencement of payment of his Pension Plan Retirement Benefit under circumstances in which a Pension Plan Surviving Spouse Benefit is payable to his Surviving Spouse, then a Supplemental Surviving Spouse Benefit shall be payable to his Surviving Spouse as hereinafter provided. The Supplemental Surviving Spouse Benefit payable to a Surviving Spouse shall be equal to the excess of (a) over (b) where: (a) is the amount of Pension Plan Surviving Spouse Benefit to which the Surviving Spouse would have been entitled under the Pension Plan or the Cash Balance Plan, as the case may be, if such benefit were computed without regard to (i) the exclusion of any amounts pursuant to Subsection 1.6(a) of the Pension Plan, (ii) the exclusion of any amounts pursuant to Subsection 1.1(k)(1) of the Cash Balance Plan, (iii) the Benefit Limitation or (iv) the Compensation Limitation; and (b) is the amount of the Pension Plan Surviving Spouse Benefit actually payable to the Surviving Spouse under the Pension Plan or the Cash Balance Plan, as the case may be. 4.2 A Supplemental Surviving Spouse Benefit shall be payable over the lifetime of the Surviving Spouse only in monthly installments commencing on the date for commencement of payment of the Pension Plan Surviving Spouse Benefit to the Surviving Spouse and terminating on the date of the last payment of the Pension Plan Surviving Spouse Benefit made before the Surviving Spouse's death. Section 5. Administration of the Plan 5.1 The Committee shall be the named fiduciary of this Plan responsible for the general operation and administration of this Plan and for carrying out the provisions thereof. The Committee shall have discretionary authority to construe the terms of this Plan. 5.2 The Committee shall adopt such rules and procedures as it deems necessary and advisable to administer this Plan and to transact its business. Subject to the other requirements of this Section 5, the Committee may-- (a) employ agents to carry out non-fiduciary responsibility; (b) employ agents to carry out fiduciary responsibilities (other than trustee responsibilities as defined in Section 405(c)(3) of ERISA); (c) consult with counsel, who may be counsel to the Company or an Affiliate; and (d) provide for the allocation of fiduciary responsibilities (other than trustee responsibilities as defined in Section 405(c)(3) of ERISA) among its members. However, any action described in sub-paragraphs (b) or (d) of this Subsection 5.2, and any modification or rescission of any such action, may be effected by the Committee only by a resolution approved by a majority of the Committee. The Committee shall be entitled to rely conclusively upon all tables, valuations, certificates, opinions and reports furnished any actuary, accountant, controller, counsel or other person employed or engaged by the Committee with respect to this Plan. 5.3 The Committee shall keep written minutes of all its proceedings, which shall be open to inspection by the Board of Directors. In the case of any decision by the Committee with respect to a claim for benefits under this Plan, such Committee shall include in its minutes a brief explanation of the grounds upon which such decision was based. 5.4 In performing their duties, the members of the Committee shall act solely in the interest of the Participants in this Plan and their Beneficiaries and (a) for the exclusive purpose of providing benefits to Participants and their Beneficiaries; (b) with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; and (c) in accordance with the documents and instruments governing this Plan insofar as such documents and instruments are consistent with the provisions of Title I of ERISA. 5.5 In addition to any other duties the Committee may have, the Committee shall review the performance of all persons to whom the Committee shall have delegated or allocated fiduciary duties pursuant to the provisions of this Section 5. 5.6 The Company agrees to indemnify and reimburse, to the fullest extent permitted by law, members of the Committee, directors and employees of the Company and its Affiliates, and all such former members, directors and employees, for any and all expenses, liabilities or losses arising out of any act or omission relating to the rendition of services for or the management and administration of this Plan. 5.7 No member of the Committee nor any delegate thereof shall be personally liable by virtue of any contract, agreement or other instrument made or executed by him or on his behalf in such capacity. Section 6. Claims Procedure and Status Determination 6.1 Claims for benefits under this Plan and requests for a status determination shall be filed in writing with the Company. 6.2 In the case of a claim for benefits, written notice shall be given to the claiming Participant or Beneficiary of the disposition of such claim, setting forth specific reasons for any denial of such claim in whole or in part. If a claim is denied in whole or in part, the notice shall state that such Participant or Beneficiary may, within sixty days of the receipt of such denial, request in writing that the decision denying the claim be reviewed by the Committee and provide the Committee with information in support of his position by submitting such information in writing to the Secretary of the Committee. 6.3 The Committee shall review each claim for benefits which has been denied in whole or in part and for which such review has been requested and shall notify, in writing, the affected Participant or Beneficiary of its decision and the reasons therefor. 6.4 In the case of a request for status determination, written notice shall be given to the requesting person within a reasonable time setting forth specific reasons for the decision. Section 7. Amendment or Termination 7.1 The Company reserves the right to amend or terminate this Plan when, in the sole opinion of the Company, such amendment or termination is advisable. Any such amendment or termination shall be made pursuant to a resolution of the Board or of the Employee Benefits Policy Committee and shall be effective as provided for in such resolution. 7.2 No amendment or termination of this Plan shall directly or indirectly deprive any current or former Participant, Beneficiary or Surviving Spouse of all or any portion of any Supplemental Retirement Benefit or Supplemental Surviving Spouse Benefit payment which has commenced prior to the effective date of such amendment or termination or the right to which has accrued on such effective date. Section 8. General Provisions 8.1 This Plan at all times shall be entirely unfunded and no provision shall at any time be made with respect to segregating any assets of the Company or any Affiliate for payment of any benefits hereunder. No Participant, Beneficiary, Surviving Spouse or any other person shall have any interest in any particular assets of the Company or any Affiliate by reason of the right to receive a benefit under this Plan and any such Participant, Beneficiary, Surviving Spouse or other person shall have only the rights of a general unsecured creditor with respect to any rights under the Plan. 8.2 Except as otherwise expressly provided herein, all terms and conditions of the Pension Plan or the Cash Balance Plan, as the case may be, applicable to a Pension Plan Retirement Benefit or a Pension Plan Surviving Spouse Benefit shall also be applicable to a Supplemental Retirement Benefit or a Supplemental Surviving Spouse Benefits payable hereunder. Any Pension Plan Retirement Benefit or Pension Plan Surviving Spouse Benefit, or any other benefit payable under the Pension Plan or the Cash Balance Plan, as the case may be, shall be paid solely in accordance with the terms and conditions of the Pension Plan or the Cash Balance Plan, as the case may be, and nothing in this Plan shall operate or be construed in any way to modify, amend or affect the terms and provisions of the Pension Plan or the Cash Balance Plan, as the case may be. 8.3 Nothing contained in this Plan shall constitute a guaranty by the Company or any other entity or person that the assets of the Company or any Affiliate will be sufficient to pay any benefit hereunder. 8.4 No Participant or Surviving Spouse shall have any right to a benefit under this Plan except in accordance with the terms of this Plan. Establishment of this Plan shall not be construed to give any Participant the right to be retained in the service of the Company or any Affiliate. 8.5 No interest of any person or entity in, or right to receive a benefit under, this Plan shall be subject in any manner to sale, transfer, assignment, pledge, attachment, garnishment or other alienation or encumbrance of any kind; nor any such interest or right to receive a benefits be taken, either voluntarily or involuntarily, for the satisfaction of the debts of, or other obligations or claims against, such person or entity, including claims for alimony, support, separate maintenance and claims in bankruptcy proceedings. 8.6 This Plan shall be construed and administered under the laws of the United States and the State of New Jersey to the extent not superseded by Federal law. 8.7 If the present value of any Supplemental Retirement Benefit or Supplemental Surviving Spouse benefit is less than $3,500, the Company may pay the present value of such Benefit to the Participant or Surviving Spouse in a single lump sum in lieu of any further benefit payments hereunder. 8.8 Actuarial assumptions to determine the present value of any benefit hereunder shall be the same as used to determine the present value of benefits under the Pension Plan or the Cash Balance Plan, as the case may be. 8.9 If any person entitled to a benefit payment under this Plan is deemed by the Committee to be incapable of personally receiving and giving a valid receipt for such payment, then, unless and until claim therefor shall have been made by a duly appointed guardian or other legal representative of such person, the Committee may provide for such payment or any part thereof to be made to any other person or institution then contributing toward or providing for the care and maintenance of such person. Any such payment shall be a payment for the account of such person and a complete discharge of any liability of the Company and this Plan therefor. 8.10 This Plan shall not be automatically terminated by a transfer or sale of assets of the Company or by the merger or consolidation of the Company into or with any other company or other entity, but this Plan shall be continued after such sale, merger or consolidation only if and to the extent that the transferee, purchaser or successor entity agrees to continue this Plan. In the event that this Plan is not continued by the transferee, purchaser or successor entity, then this Plan shall terminate subject to the provisions of Section 7.2. 8.11 Each Participant shall keep the Company informed of his current address and the current address of his spouse. The Company shall not be obligated to search for the whereabouts of any person. If the location of a Participant is not made known to the Company within three (3) years after the date on which payment of the Participant's Supplemental Retirement Benefit may first be made, payment may be made as though the Participant had died at the end of the three-year period. If, within one additional year after such three-year period has elapsed, or, within three years after the actual death of a Participant, the Company is unable to locate any Surviving Spouse of the Participant, then the Company shall have no further obligation to pay any benefit hereunder to such Participant or Surviving Spouse or any other person and such benefit shall be irrevocably forfeited. 8.12 Notwithstanding any of the preceding provisions of this Plan, none of the Company, the Committee or any individual acting as an employee or agent of the Company or the Committee shall be liable to any Participant, former Participant, Surviving Spouse or any other person for any claim, loss, liability or expense incurred in connection with this Plan. Section 9. Miscellaneous 9.1 As used herein, words in the masculine gender shall include the feminine and the singular shall include the plural, and vice versa, unless otherwise required by the context. Any headings used herein are included for ease of reference only and are not to be construed so as to alter the terms hereof. EX-10.A(6) 7 PSEG 1989 LONG-TERM INCENTIVE PLAN PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED 1989 LONG-TERM INCENTIVE PLAN Restated and Amended December 16, 1997 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED 1989 LONG-TERM INCENTIVE PLAN ARTICLE I PURPOSE Section 1.1 Purpose. This Public Service Enterprise Group Incorporated 1989 Long-Term Incentive Plan is intended to advance the interests of the Company and its Affiliates by affording an incentive to officers and other key employees to acquire a proprietary interest in the Company in order to induce them to exert their maximum efforts toward the Company's success, to remain in its employ and to more closely align the interests of such key employees with the long-term interests of the Company's Stockholders. The Plan is also intended to attract to the Company and its Affiliates individuals of experience and ability by providing a more competitive total compensation program. Section 1.2 Types of Awards. This Plan allows the Company to grant Non-Qualified Stock Options, which Options may, at the discretion of the Committee, be granted in tandem with Dividend Equivalents and/or Performance Units, to officers and key employees of the Company and its Affiliates. ARTICLE II DEFINITIONS When used herein, the words and phrases hereinafter defined shall have the following meanings unless a different meaning is clearly required by the context of the Plan: Section 2.1 "Affiliate" shall mean any organization which is a member of a controlled group of corporations (as defined in Code section 414(b) as modified by Code section 415(h)) which includes the Company, or any trades or businesses (whether or not incorporated) which are under common control (as defined in Code section 414(c) as modified by Code section 415(h)) with the Company, or a member of an affiliated service group (as defined in Code section 414(m)) which includes the Company, or any other entity required to be aggregated with the Company pursuant to regulations promulgated pursuant to Code section 414(o). Section 2.2 "Award Cycle" shall have the meaning specified in Section 6.1. Section 2.3 "Board of Directors" shall mean the Board of Directors of the Company. Section 2.4 "Code" shall mean the Internal Revenue Code of 1986, as amended, or as it may be amended from time to time. Section 2.5 "Committee" shall mean the Organization and Compensation Committee of the Board of Directors. Section 2.6 "Common Stock" shall mean the Common Stock, without nominal or par value of the Company. Section 2.7 "Company" shall mean Public Service Enterprise Group Incorporated, a New Jersey corporation. Section 2.8 "Director" shall mean a member of the Board of Directors. Section 2.9 "Disability" shall mean any physical or mental condition which renders a Participant incapable of performing further work for his or her employer, as certified in writing by a medical practitioner designated and/or approved by the Committee. Section 2.10 "Dividend Equivalent" shall have the meaning specified in Section 6.2. Section 2.11 "Exchange Act" shall mean the Securities and Exchange Act of 1934, as amended, or as it may be amended from time to time. Section 2.12 "Fair Market Value" shall mean, as of a given date, if the shares of Common Stock are listed as of such date on the NYSE, the closing price on such date. If the shares are not then listed on the NYSE, and if the shares of Common Stock are then listed on any other national securities exchange or traded on the over-the-counter market, the fair market value shall be the closing price on such exchange or on the NASDAQ National Market System or the mean of the closing bid and asked prices of the shares of Common Stock on the over-the-counter market, as reported by the NASDAQ, the National Association of Securities Dealers OTC Bulletin Board or the National Quotation Bureau, Inc., as the case may be, on such date or, if there is no closing price or bid or asked price on that day, the closing price or mean of the closing bid and asked prices on the most recent day preceding such date for which such prices are available. Section 2.13 "NASDAQ" shall mean the National Association of Securities Dealers Automated Quotation System. Section 2.14 "NYSE" shall mean the New York Stock Exchange, Inc. Section 2.15 "Option" shall mean a non-qualified stock option, that is, a stock option which is not intended to qualify as an "incentive stock option" as that term is defined in Section 422(b) of the Code. Section 2.16 "Option Price" shall mean the exercise price for any Options granted pursuant to the Plan computed in accordance with Section 6.1(b) or 6.1(d), as appropriate. Section 2.17 "Participant" shall mean any officer or key employee of the Company or an Affiliate who has been granted an Option pursuant to this Plan. Section 2.18 "Performance Unit" shall have the meaning specified in Section 6.3 of this Plan. Section 2.19 "Plan" shall mean this Public Service Enterprise Group Incorporated 1989 Long-Term Incentive Plan, as amended. Section 2.20 "Purchase Price" shall mean the Option Price times the number of shares with respect to which an Option is exercised. Section 2.21 "Retirement" shall mean the termination of employment by a Participant other than by reason of his death: (a) under circumstances entitling the Participant to an immediately payable periodic retirement benefit under any pension plan of his employer, or (b) at or after age 65. Section 2.22 "Securities Act" shall mean the Securities Act of 1933, as amended, or as it may be amended from time to time. Section 2.23 "Share" shall mean a share of Common Stock. Section 2.24 "Stockholders" shall mean the holders of Common Stock entitled to vote in an election of Directors. ARTICLE III SHARES SUBJECT TO THE PLAN Section 3.1 Total Shares Available. The total number of shares of Common Stock that may be subject to Options granted under the Plan shall be 5,000,000 shares in the aggregate, subject to adjustment as provided in Article VIII. This shall include shares both granted pursuant to Options and paid as Performance Units. Shares of Common Stock issued pursuant to this Plan may be either authorized but unissued shares or shares now or hereafter acquired in the open market by a agent independent of the Company, as selected by the Company. In the event any Option or Performance Unit granted under the Plan shall expire or terminate for any reason without having been exercised in full or shall cease for any reason to be exercisable in whole or in part, the unpurchased shares subject thereto shall again be available for the granting of Options or Performance Units under the Plan. ARTICLE IV ELIGIBILITY Section 4.1 Eligible Recipients. Options may be granted from time to time under the Plan to one or more officers or key employees of the Company or any Affiliate. ARTICLE V ADMINISTRATION OF THE PLAN. Section 5.1 Committee. The Plan shall be administered by the Committee. No member of the Committee shall be eligible to participate in the Plan. Within the limits of the express provisions of the Plan, the Committee shall have the authority, subject to such orders or resolutions, not inconsistent with the provisions of the Plan, as may from time to time be issued or adopted by the Board of Directors, in its discretion to determine the individuals to whom, and the time or times at which, Options shall be granted, the number of shares of Common Stock to be subject to each Option, whether any Option shall be granted in tandem with Dividend Equivalents and/or Performance Units, the limitations, restrictions and conditions applicable to each Option grant, the terms and provisions of option agreements that may be entered into in connection with Options (which need not be identical), to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan and to make all other determinations and take all other actions necessary or advisable for the administration of the Plan. In making its determinations relating to Option grants, the Committee may consult with the Chief Executive Officer of the Company and may take into account the recommendations of the Chief Executive Officer with respect to grants made to other employees. The Committee may also take into account the nature of the services rendered by such individuals, their present and potential contributions to the Company's success and such other factors as the Committee, in its discretion, shall deem relevant. The Committee's determinations on the matters regarding this Plan (including matters referred to in this Section 5.1) shall be conclusive and shall be binding on the Company, its Stockholders, its Affiliates, all Participants, all other employees and all other persons. Section 5.2 Section 16 of the Exchange Act. Notwithstanding anything contained herein to the contrary, the Committee shall have the exclusive right to grant Options to persons subject to Section 16 of the Exchange Act and set forth the terms and conditions thereof. With respect to persons subject to Section 16 of the Exchange Act, transactions under the Plan are intended to comply with all applicable conditions of Rule 16b-3, as amended from time to time (and its successor provisions, if any), under the Exchange Act. To the extent any provision of the Plan or action by the Board of Directors or the Committee fails to so comply, it shall be deemed null and void to the extent required by law and to the extent deemed advisable by the Board of Directors and/or the Committee. Section 5.3 Retention of Advisors. The Committee may retain such counsel, consultants or advisors as it shall deem necessary or appropriate in the performance of its duties and may rely upon any opinion or computation received from any such counsel, consultant or advisor. Expenses incurred by the Committee in the engagement of such counsel, consultant or advisor shall be paid by the Company or such Affiliate whose employees have benefited from the Plan, as determined by the Committee. The Company shall indemnify members of the Committee and any agent of the Committee who is an employee of the Company or an Affiliate against any and all liabilities or expenses to which they may be subjected by reason of any act or failure to act with respect to their duties on behalf of the Plan, except in circumstances involving such person's gross negligence or willful misconduct. ARTICLE VI TERMS OF OPTIONS Section 6.1 Option Provisions. The Committee may grant Options within the limits of the express provisions of the Plan. An Option shall enable the Participant to purchase from the Company, at any time during a specified exercise period, a specified number of shares of Common Stock at a specified Option Price. The character and terms of each Option granted under the Plan shall be determined by the Committee consistent with the provisions of the Plan, including the following: (a)The Option Price of the shares of Common Stock of Options granted in tandem with Dividend Equivalents and/or Performance Units shall not be less than the Fair Market Value of such shares of Common Stock as of the time such Option is granted. (b) Any Option granted in tandem with Dividend Equivalents and/or Performance Units shall be administered in Award Cycles relating to the performance of the Company and/or one or more of its Affiliates throughout a period determined by the Committee. The Committee shall define the length of any such Award Cycle, as well as one or more goals for each such Award Cycle to measure such performance. (c) The Option Price of the shares of Common Stock of Options not granted in tandem with Dividend Equivalents and Performance Units shall be determined by the Committee, in its sole discretion. (d) In no event shall any Option granted under the Plan have an expiration date later than ten (10) years from the date of its grant and all Options granted under the Plan shall be subject to earlier termination as expressly provided in this Article VI. (e) Unless otherwise provided in any option agreement under the Plan, an Option granted under the Plan shall become exercisable, in whole at any time or in part from time to time, but in no case may an Option (i) be exercised as to less than one hundred (100) shares of Common Stock at any one time, or the remaining shares of Common Stock covered by the Option if less than one hundred (100), and (ii) become fully exercisable more than ten (10) years from the date of its grant. Notwithstanding anything contained herein to the contrary and except as otherwise provided for herein, Options granted in tandem with Dividend Equivalents and/or Performance Units shall not be exercisable prior to the conclusion of their related Award Cycle. All other Options shall not be exercisable until one (1) year after the date of grant. (f) An Option granted under the Plan shall be exercised by the delivery by the holder thereof to the Company at its principal office (to the attention of the Compensation Manager of Public Service Electric and Gas Company, the Company's subsidiary) of written notice of the number of full shares of Common Stock with respect to which the Option is being exercised, accompanied by payment in full, in cash or by certified or bank check payable to the order of the Company, of the Option Price of such shares of Common Stock, or, at the discretion of the Committee, by the delivery of unexercised Options having an exercise value equal to the Option Price and/or shares of Common Stock having a Fair Market Value equal to the Option Price, or, at the option of the Committee, by a combination of cash and/or such unexercised Options and/or shares (subject to the restrictions above) held by a Participant that have an exercise value or a Fair Market Value together with such cash that shall equal the Option Price. The Option Price may also be paid in full by a broker-dealer to whom the Participant has submitted an exercise notice consisting of a fully endorsed Option, or through any other medium of payment as the Committee, in its discretion, shall authorize. (g) The holder of an Option shall have none of the rights of a Stockholder with respect to the shares of Common Stock covered by such holder's Option until such shares of Common Stock shall be issued to such holder upon the exercise of the Option. (h)No Options granted under the Plan shall be transferable otherwise than by will or the laws of descent and distribution, and any Option granted under the Plan may be exercised during the lifetime of the holder thereof only by the holder. No Option granted under the Plan shall be subject to execution, attachment or other process. (i) Except as otherwise provided herein, the right to exercise an Option shall expire when the Participant shall no longer be an employee of the Company or Affiliate. Section 6. 2 Dividend Equivalents. Dividend Equivalents granted in tandem with an Option under the Plan shall be in such form and shall contain such terms and conditions as the Committee shall from time to time determine, subject to the following: (a)Number. The number of Dividend Equivalents granted to a Participant under the Plan with respect to an Award Cycle shall be equal to the number of shares of Common Stock with respect to which Options are granted to the Participant for such Award Cycle. (b)Amount. The amount of each Dividend Equivalent granted under the Plan shall be equal to the cumulative cash dividends per share actually paid by the Company on its Common Stock during the applicable Award Cycle. (c)Term of Dividend Equivalents. A Dividend Equivalent shall be paid to a Participant if, and only if, and to the extent that, the Participant exercises the Option that was granted in tandem with the Dividend Equivalent within the first nine months that the Option is initially exercisable. If a Participant partially exercises the Option within the first nine months that the Option is initially exercisable, Dividend Equivalents with respect to the same number of shares shall be paid to the Participant. If the Option, or portion thereof, is not exercised within the first nine months after it is initially exercisable, the related Dividend Equivalent or portion thereof shall terminate and be forfeited, and the Participant shall have no right whatsoever to such Dividend Equivalent or portion thereof. (d) Manner of Payment. Dividend Equivalents shall be paid in cash Section 6. 3 Performance Units. Performance Units granted in tandem with an Option under the Plan shall be in such form and shall contain such terms and conditions as the Committee shall from time to time determine, subject to the following: (a)Number. The number of Performance Units granted to a Participant under the Plan with respect to an Award Cycle shall be equal to the number of shares of Common Stock which has been granted to the Participant for such Award Cycle pursuant to the related Option. (b)Amount. The Committee shall determine the target value of each Performance Unit as of the date it is granted. The actual value of the Performance Unit at the end of the Award Cycle shall be determined by the Committee by reference to performance by the Company and/or one or more Affiliate relative to the goal or goals established by the Committee for the Award Cycle at the time of grant; provided, however, that the Committee may, subsequent to the date of grant, adjust such goal or goals to account for extraordinary extenuating circumstances so as to equitably reflect what would be a consistent application of the goal or goals over the Award Cycle. (c)Term and Manner of Payment for Performance Units. A Performance Unit shall be paid to a Participant if, and only if, and to the extent that, the Participant exercises the Option that was granted in tandem with the Performance Unit within the first nine months that the Option is initially exercisable. The actual value of the Performance Units granted in tandem with such Option, determined as of the end of the Award Cycle, shall be paid to the Participant in cash. If a Participant does not exercise the Option within such initial nine month period, the related Performance Units shall terminate and be forfeited. If the Participant partially exercises the Option within the first nine months that the Option initially becomes exercisable, the Participant shall be so paid in cash with respect to the number of Performance Units equal to the number of Shares for which the Option is exercised, and shall forfeit the balance of such Performance Units. Section 6.4 Retirement or Disability. Except as otherwise provided herein, upon termination of employment with the Company or an Affiliate on account of Retirement or Disability, all Options not in tandem with Dividend Equivalents and Performance Units shall become exercisable in full, and any Participant holding any such Options may exercise such Options at any time within three (3) years after the date of such termination, subject to the provisions of Section 6.7. In addition, and anything contained hereto to the contrary notwithstanding, the term during which a Participant may exercise Options subsequent to the date of termination may, in the Committee's discretion, be modified, subject to applicable law and regulation, from the term specified above, as of the date of grant and as specified in an option agreement evidencing the grant of Options under the Plan. With respect to a Participant holding one or more Options granted in tandem with Dividend Equivalents and/or Performance Units, who terminates employment prior to the end of the related Award Cycle(s) on account of Disability or Retirement, and who survives to the end of the Award Cycle(s), then, if the Participant had been actively employed for at least one year during such Award Cycle(s), the Committee may, in its sole discretion, at the end of the applicable Award Cycle(s), permit the Participant to participate in the Plan with respect to such Award Cycle(s). If the Committee permits the Participant to so participate with respect to such Award Cycle(s), such participation shall be upon the same terms and conditions as if the Participant continued to be employed by the Company or an Affiliate, except to the extent that the Committee in its sole discretion shall modify such terms and conditions and except that (1) the Participant's award (Options, Dividend Equivalents and Performance Units) shall be prorated to reflect his or her employment during the applicable Award Cycle(s), (2) any Dividend Equivalents and Performance Units shall expire no later than nine months following the end of the applicable Award Cycle(s) and (3) any related Options shall expire no later than three (3) years following termination of employment. In the event that a Participant holding one or more Options granted in tandem with Dividend Equivalents and/or Performance Units terminates employment following the conclusion of the related Award Cycle on account of Disability or Retirement, then to the extent the Participant has any unexercised Options with respect to such Award Cycle at the time of termination of employment, the Participant shall have the same rights as an active employee with respect to such Options, except that any Dividend Equivalents and Performance Units shall expire no later than nine months following the end of the applicable Award Cycle(s) and all such Options shall expire on the sooner of three (3) years following termination of employment or on the date specified in the related Option agreement. Section 6.5 Death. If a Participant dies holding an Option granted not in tandem with Dividend Equivalents or Performance Units (i) while employed by the Company or a Affiliate or (ii) within three (3) months after the termination of such Participant's employment on account of Retirement or Disability, such Options shall become exercisable in full and, subject to the provisions of Section 6.7, may be exercised by such Participant's personal representative at any time within three (3) years after the Participant's death. With respect to a Participant holding one or more Options granted in tandem with Dividend Equivalents and/or Performance Units, who terminates employment prior to the end of the related Award Cycle(s) on account of death, or dies prior to the end of the Award Cycle(s) following Disability or Retirement, then, if the Participant had been employed by the Company or an Affiliate for at least one year during such Award Cycle(s), the Committee, in its sole discretion, may determine that the Participant shall be entitled to an award with respect to the applicable Award Cycle(s), in which case the Participant's personal representative shall have rights similar to the rights the Participant would have had at the end of the applicable Award Cycle(s), except that: (1) the right of the personal representative to exercise any Options shall commence as of the date of the Participant's death and shall expire no later than three (3) years after the date of the Participant's death; (2) the amount of the prorated Dividend Equivalents shall be paid to the Participant's personal representative in cash as soon as practicable; and (3) if appropriate in the sole discretion of the Committee, a prorated amount appropriately reflecting the value of the Performance Units shall be paid to the Participant's personal representative in cash as soon as practicable; If a Participant holding Options granted in tandem with Dividend Equivalents and/or Performance Units terminates employment on account of death after the end of the related Award Cycle, the Participant's personal representative shall have the same rights as the Participant had at the time of his or her death, except that: (1) the right of the Participant's personal representative to exercise any unexercised Option shall expire no later than three (3) years after the date of the Participant's death; (2) the amount of any remaining Dividend Equivalents shall be paid to the Participant's personal representative in cash as soon as practicable; and (3) the final value of any remaining Performance Units shall be paid to the Participant's personal representative in cash as soon as practicable. Section 6.6 Other Termination of Employment. In the event that Participant holding Options granted in tandem with Dividend Equivalents and/or Performance Units terminates employment following the conclusion of an Award Cycle otherwise than on account of death, Disability or Retirement, then such Participant shall have the same rights as an actively employed Participant, except that all Options, Dividend Equivalents and Performance Units shall expire on the earliest of nine months following termination of employment, the date specified in the related Option agreement, or the date otherwise applicable to the Dividend Equivalent and/or Performance Unit. Section 6.7 No Extension. An Option may not be exercised pursuant to this Article VI except to the extent that the Participant holding such Option was entitled to exercise the Option at the time of termination of employment or death and, in any event, may not be exercised after the original expiration date of the Option. Section 6.8 Change In Control. Notwithstanding anything in this Plan to the contrary, any Options granted hereunder and then outstanding shall become immediately exercisable in full in the event the Participant's employment with the Company is terminated by the Company subsequent to the consummation of a tender offer or exchange offer made by any "person" within the meaning of Section 14(d) of the Securities Act or subsequent to a Change in Control, as defined below, provided however, that if in the opinion of counsel to the Company the immediate exercisability of such Options when taken into consideration with all other "parachute payments" as defined in Section 280G of the Code would result in an "excess parachute payment" as defined in such Section, as well as an excise tax imposed by Section 4999 of the Code, such Options shall not become immediately exercisable, except as and to the extent the Committee, in its sole discretion shall otherwise determine, and which determination by the Committee shall be based solely upon maximizing the after-tax benefits to be received by any such Participant, and provided further, that this Section 6.8 shall not operate to make any Option exercisable within one (1) year after the grant thereof. In the event a Participant elects to so exercise any Option granted in tandem with a Dividend Equivalent and/or Performance Unit, such related Dividend Equivalent and/or Performance Unit shall also become payable to the Participant whether or not the related Award Cycle(s) has been completed, adjusted, in the discretion of the Committee, to proportionately reflect the partially completed Award Cycle(s). In the event a Participant does not elect to so exercise any such Option, any related Dividend Equivalent, adjusted, in the discretion of the Committee, to proportionately reflect the partially completed Award Cycle(s), shall terminate and be automatically paid to the Participant in cash, and any related Performance Units, adjusted, in the discretion of the Committee, to proportionately reflect the partially completed Award Cycle(s), shall be automatically paid to the Participant in Common Stock and/or cash as determined by the Committee, on such date within 30 days prior to the effective date of such Change in Control as the Committee shall determine and, in the absence of such determination, on the last business day immediately prior to such effective date. For purposes of this Section, a "Change in Control" shall have occurred if: (a) any Person is or becomes the Beneficial Owner (as that term is defined in Rule 13-3 under the Exchange Act, directly or indirectly, or securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company) representing twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding securities; or (b) individuals who, on December 16, 1997, constitute the Board and any new director (other than a director designated by a Person who has entered into an agreement with the Company to effect a transaction described in clause (a), (c) or (d) of this definition or any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents) whose election by the Board or nomination for election by the Company's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on such date or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of the Board; or (c) the Stockholders approve a reorganization, merger or consolidation, other than a reorganization, merger or consolidation with respect to which all or substantially all of the individuals and entities who were Beneficial Owners, immediately prior to such reorganization, merger or consolidation, of the combined voting power of the Company's then outstanding securities beneficially own, directly or indirectly, immediately after such reorganization, merger or consolidation, more then seventy-five percent (75%) of the combined voting power of the securities of the corporation resulting from such reorganization, merger or consolidation in substantially the same proportions as their respective ownership, immediately prior to such reorganization, merger or consolidation, of the combined voting power of the Company's securities; or (d) the Stockholders approve (a) the sale or disposition by the Company (other than to a subsidiary of the Company) of all or substantially all of the assets of the Company (or any such sale or disposition is effected through condemnation proceedings), or (b) a complete liquidation or dissolution of the Company or Public Service Electric and Gas Company Section 6.9 Vesting on Account of Death. In addition, and notwithstanding anything contained herein to the contrary, in the event an Participant dies during such time as the Participant is employed by the Company or an Affiliate, then any outstanding Options which have not vested and are not exercisable by the Participant as of the date of death shall be automatically deemed vested and exercisable by the Participant's personal representative and/or his legatees in accordance with Section 6.5. ARTICLE VII LEAVE OF ABSENCE Section 7.1 Leaves. For the purposes of the Plan, a Participant who is on military or sick leave or other bona fide leave of absence shall be considered as remaining in the employ of the Company or of a Affiliate or for ninety (90) days or such longer period as such Participant's right to reemployment is guaranteed either by statute or by contract. ARTICLE VIII ADJUSTMENT UPON CHANGES IN CAPITALIZATION Section 8.1 Recapitalization. In the event that the outstanding shares of Common Stock are hereafter changed by reason of recapitalization, reclassification, stock split, combination or exchange of shares of Common Stock or the like, or by the issuance of dividends payable in shares of Common Stock, an appropriate adjustment shall be made by the Committee in the aggregate number of shares of Common Stock available under the Plan, in the number of shares of Common Stock issuable upon exercise of outstanding Options or Performance Units and the Option Price per share. In the event of any consolidation or merger of the Company with or into another company or the conveyance of all or substantially all of the assets of the Company to another company, each then outstanding Option shall, upon exercise, thereafter entitle the holder thereof to such number of shares of Common Stock or other securities or property to which a holder of shares of Common Stock would have been entitled to upon such consolidation, merger or conveyance; and, in any such case, appropriate adjustment, as determined by the Committee, shall be made as set forth above with respect to any future changes in the capitalization of the Company or its successor entity. In the event of the proposed dissolution or liquidation of the Company, all outstanding Options under the Plan will automatically terminate, unless otherwise provided by the Board or any authorized committee thereof; provided, however, that the Committee shall give at least 30 days prior written notice of such event to each Participant during which time he or she shall have a right to exercise his or her unexercised Options, and, subject to prior expiration as otherwise provided in this Plan, each such Stock Option shall be exercisable after receipt of such written notice and prior to the effective date of such transaction. In the event a Participant elects to so exercise any such Option, any related Dividend Equivalents and Performance Units shall also become payable to the Participant adjusted, in the discretion of the Committee, to proportionately reflect the partially completed Award Cycle(s). In the event a Participant does not elect to so exercise any such Option, any related Dividend Equivalent, adjusted, in the discretion of the Committee, to proportionately reflect the partially completed Award Cycle(s), shall terminate and be automatically paid to the Participant in cash, and any related Performance Units, adjusted, in the discretion of the Committee, to proportionately reflect the partially completed Award Cycle(s), shall be automatically paid to the Participant in Common Stock and/or cash as determined by the Committee, on such date within 30 days prior to the effective date of such transaction or dissolution as the Committee shall determine and, in the absence of such determination, on the last business day immediately prior to such effective date. Section 8.2 Unexercised Options. Any adjustment in the number of shares of Common Stock shall apply proportionately to only the unexercised portion of the Options granted hereunder. If fractions of shares of Common Stock would result from any such adjustment, the adjustment shall be revised to the next higher whole number of shares of Common Stock. ARTICLE IX FURTHER CONDITIONS Section 9.1 Representation by the Participant. Unless the shares of Common Stock issuable upon the exercise of an Option to be awarded under the Plan have been registered with the Securities and Exchange Commission under the Securities Act prior to the exercise of the Option, the Participant receiving such Option must represent in writing to the Company that such shares of Common Stock are being acquired for investment purposes only and not with a view towards the further resale or distribution thereof and must supply to the Company such other documentation as may be required by the Company, unless in the opinion of counsel to the Company such representation, agreement or documentation is not necessary to comply with such law. Section 9.2 Exchange Listing. The Company shall not be obligated to deliver any shares of Common Stock until they have been listed on each securities exchange on which the shares of Common Sock may then be listed or until there has been qualification under or compliance with such state or federal laws, rules or regulations as the Company may deem applicable. The Company shall use reasonable efforts to obtain such listing, qualification and compliance. Section 9.3 Tax Withholding. The Committee may make such provisions and take such steps as it may deem necessary or appropriate for the withholding of any taxes that the Company is required by any law or regulation of any governmental authority, whether federal, state or local, domestic or foreign, to withhold in connection with the exercise of any Option, including, but not limited to, (i) the withholding of delivery of shares of Common Stock until the Participant reimburses the Company for the amount the Company is required to withhold with respect to such taxes, (ii) the canceling of any number of shares of Common Stock issuable in an amount sufficient to reimburse the Company for the amount it is required to so withhold or (iii) withholding the amount due from any such Participant's wages or other compensation. A Participant may request that the Company withhold from the shares of Common Stock to be issued upon exercise of an Option that number of shares having a Fair Market Value equal to the tax withholding amount due in order to provide for such withholding tax. ARTICLE X TERMINATION, MODIFICATION AND AMENDMENT Section 10.1 Termination of Plan.. The Committee or the Board of Directors may, at any time, terminate the Plan or from time to time make such modifications or amendments of the Plan it may deem advisable. Section 10.2 Modification of Outstanding Awards. The Committee may from time to time, at its discretion, alter, amend or suspend any previously granted Option, including any previously granted Option granted in tandem with a Dividend Equivalent and/or Performance Unit prior to the completion of the related Award Cycle. Section 10.3 Effect on Outstanding Awards. No action taken pursuant to Sections 10.1 or 10.2 may materially and adversely affect the rights of a Participant under any outstanding Option without the consent of such Participant. ARTICLE XI EFFECTIVE DATE OF THE PLAN Section 11.1 Effective Date. This Plan was initially adopted by the Board of Directors on December 20, 1988. ARTICLE XII NOT A CONTRACT OF EMPLOYMENT Section 12.1 No Employment Rights Conferred. Nothing contained in the Plan or in any option agreement executed pursuant hereto shall be deemed to confer upon any Participant to whom an Option is or may be granted hereunder any right to remain in the employ of the Company or of an Affiliate or in any way limit the right of the Company, or of any Affiliate, to terminate the employment of any Participant or to terminate any other relationship with a Participant. ARTICLE XIII OTHER COMPENSATION PLANS Section 13.1 No Effect on Other Plans. The adoption of this Plan shall not affect any other stock option plan, incentive plan or any other compensation plan in effect for the Company or any Affiliate, nor shall the Plan preclude the Company or any Affiliate from establishing any other form of stock option plan, incentive plan or any other compensation plan. ARTICLE XIV MISCELLANEOUS Section 14.1 Non-Assignability. No grant of any "derivative security" (as defined by Rule 16a-1(c) under the Exchange Act) made under the Plan or any rights or interests therein shall be assignable or transferable by a Participant except by will or the laws of descent and distribution and except to the extent it is otherwise permissible under the Exchange Act, nor shall any "derivative security" be subject to execution, attachment or similar process, it being understood that no grant of any "derivative security" shall be assignable or transferable pursuant to a domestic relations order. During the lifetime of a Participant, awards granted hereunder shall be exercisable only by the Participant or the Participant's guardian or legal representative. Any attempted assignment, transfer, pledge, hypothecation, other disposition, levy of attachment or similar process not specifically permitted herein shall be null and void and without effect. Section 14.2 Costs and Expenses. The costs and expenses of administering the Plan shall be borne by the Company and its Affiliates and shall not be charged against any award nor to any Participant receiving an award. Section 14.3 Written Option Agreement. Notwithstanding anything to the contrary contained herein, the Company shall be under no obligation to sell or deliver Common Stock or to make any other payment under this Plan to any Participant unless and until such Participant shall execute a written option agreement in form and substance satisfactory to the Committee. Section 14.4 Non-Competition. Any option agreement may contain, among other things, provisions prohibiting Participants from competing with the Company or any Affiliate in a form or forms acceptable to the Committee, in its sole discretion. Section 14.5 Transfer of Employment. For the purposes hereof, a Participant shall not be considered as having terminated his/her employment if he/she transfers employment between the Company and an Affiliate or between Affiliates. Section 14.6 Governing Law. To the extent not preempted by Federal law, this Plan and actions taken in connection herewith shall be governed and construed in accordance with the laws of the State of New Jersey. Section 14.7 Rules of Construction. The captions and section numbers appearing in this Plan are inserted only as a matter of convenience. They do not define, limit or describe the scope or intent of the provisions of this Plan. In this Plan, words in the singular number include the plural and in the plural include the singular; and words of the masculine gender include the feminine and the neuter, and when the sense so indicates, words of the neuter gender may refer to any gender. Section 14.8 Time for Performance. Whenever the time for payment or performance hereunder shall fall on a weekend or public holiday, such payment or performance shall be deemed to be timely if made on the next succeeding business day; provided, however, that this Section 14.6 shall not be construed to extend the ten (10) year period referred to in Section 6.1(d). Section 14.9 Notices. Every direction, revocation or notice authorized or required by the Plan shall be deemed delivered to the Company (a) on the date it is personally delivered its principal executive offices to the attention of the Compensation Manager of Public Service Electric and Gas Company or (b) three business days after it is sent by registered or certified mail, postage prepaid, addressed to the Company ( attn: Compensation Manager of Public Service Electric and Gas Company) at such offices; and shall be deemed delivered to a Participant (a) on the date it is personally delivered to him or her, or (b) three business days after it is sent by registered or certified mail, postage prepaid, addressed to him or her at the last address shown for him or her on the records of the Company. EX-10.A(9)(I) 8 AGREEMENT LETTER January 6, 1998 Mr. Robert C. Murray Riverview Road Irvington, NY 10533 Dear Mr. Murray: In recognition of your present responsibilities as Executive Vice President - Finance of Public Service Electric and Gas Company and Vice President and Chief Financial Officer of Public Service Enterprise Group Incorporated, Paragraph 7 of your employment agreement dated December 17, 1991 is amended to read as follows: 7. You shall be granted credited service, in addition to that earned as a result of your employment by PSE&G, for the purpose of determining the amount (but not the vesting) of any pension benefits from PSE&G in accordance with the following schedule: Additional Years of Date of Termination of Employment Credited Service --------------------------------- ---------------- On or after DOE plus 5 years and 5 prior to DOE plus 6 years On or after DOE plus 6 years and 7 prior to DOE plus 7 years On or after DOE plus 7 years and 9 prior to DOE plus 8 years On or after DOE plus 8 years and 11 prior to November 10, 2000 On or after November 10, 2000 17 The additional credited service shown in the table above is not cumulative but is applied from the table depending upon when you retire. The above service credit of 17 years, coupled with your actual service at your 55th birthday (8.85 years), would permit you to retire at that time without having your pension reduced for early retirement. The above credited service is additional to the current policy of the Board of Directors to credit 5 years of additional credited service to officers who retire between age 60 and age 65 1/2. Please sign and return to me the enclosed copy of this letter to signify your agreement with this change. Sincerely, E. JAMES FERLAND ---------------- E. James Ferland Chairman of the Board, President and Chief Executive Officer Agreed to this 6th day of January, 1998. ROBERT C. MURRAY - ---------------- Robert C. Murray x:res\murray.doc EX-10.A(16) 9 AGREEMENT LETTER January 5, 1998 Mr. Harold W. Keiser 3605 Royal Fox Drive St. Charles, Illinois 60174 Dear Mr. Keiser: In conjunction with your employment as Chief Nuclear Officer of Public Service Electric and Gas Company (PSE&G) and President of PSE&G's Nuclear Business Unit, reporting to the Chief Executive Officer of PSE&G, the agreed terms of employment are as follows: 1. The effective date of your employment with PSE&G shall be January 12, 1998 or such earlier date as may be agreed to in writing (the Date of Employment (DOE)). Effective upon your employment, you shall assume the position of Executive Vice President-Nuclear, and shall assume the position of Chief Nuclear Officer and President of PSE&G's Nuclear Business Unit upon the retirement of Leon Eliason, which is expected to occur no later than April 30, 1998. 2. You shall be paid a base salary at the annual rate of $335,000, which salary may be increased, but shall not be reduced, thereafter during the five-year period commencing on the DOE. This initial annual rate of salary shall remain in effect until December 31, 1998. 3. You shall be entitled to those benefits from time to time available to officers and employees of PSE&G generally, except as otherwise provided in this letter. You shall be initially eligible for a minimum of four weeks of vacation per year. In addition, financial counseling will be available to you on the same terms and conditions that it is provided to officers of PSE&G. 4. PSE&G will compensate you for reasonably incurred moving and relocation expenses in accordance with PSE&G's Relocation Program. Such compensation shall specifically include reimbursement of any sales commissions on your existing principal residence and will also include, if you so elect, the purchase of your principal residence at appraised value which shall be no less than your investment therein. In addition, PSE&G will provide you and your spouse temporary living expenses in New Jersey for a period of up to six months and will provide for the taxes associated with providing you housing in New Jersey during such 6-month period. PSE&G will pay for the cost of installation of a security system in your permanent home in New Jersey, or vicinity, and will maintain such a system in your permanent home as long as you are Chief Nuclear Officer of PSE&G. 5. You may be discharged with or without cause at any time. If you should be discharged without cause during the five-year period commencing on DOE, PSE&G will pay to you the salary in effect pursuant to Paragraph 1 above at the time of your discharge for a period of twelve months following such discharge, or for the remainder of such five-year period, whichever is less. "Cause" shall mean (i) the willful or negligent dereliction of, and continued failure by you to perform your duties with PSE&G (other than any such failure resulting from your incapacity due to physical or mental illness), after a written demand for performance is delivered to you by the Chief Executive Officer of PSE&G which identifies the manner in which the CEO believes that you have not so performed your duties, or (ii) any conduct constituting a felony or moral turpitude. 6. Your participation in PSE&G's Management Incentive Compensation Plan (MICP) for 1998 will reflect a full year's award. Your target incentive award as Chief Nuclear Officer and as Executive Vice President-Nuclear, will initially be 40% of salary. This may be adjusted from time to time in accordance with established plan procedures. Copies of the MICP and the calculation determining the 1997 corporate factor are being forwarded to you under separate cover. 7. As Chief Nuclear Officer and as Executive Vice President-Nuclear, you will participate in the Long-Term Incentive Plan (LTIP) of Public Service Enterprise Group Incorporated (Enterprise), the parent of PSE&G. The LTIP provides senior officers selected by the Organization and Compensation Committee with two forms of options to purchase shares of Enterprise Common Stock: (i) options that are granted in tandem with performance-based cash payments that are designed to assist executives in exercising the options (Tandem Options); and (ii) options that are granted without any such cash equivalents (Non-Qualified Options). The Tandem Options generally are granted in annually and become exercisable approximately three years after the date of grant, and the LTIP provides for payments to be made, dependent upon dividends paid by Enterprise and future financial performance by Enterprise in comparison to other corporations, to assist the officers in exercising the options granted. It will be recommended to the Organization and Compensation Committee that you be granted 2,500 Tandem Options in January 1998 (which would be exercisable in January 2001). In addition, it will be recommended to the Organization and Compensation Committee that you be granted 10,000 Non-Qualified Options at a current market price under the LTIP. A third of these options would become exercisable in one year and an additional 1/3 in each of the two succeeding years. They would expire in ten years. All such options (both Tandem and Non-Qualified) would be subject to all of the provisions of the LTIP and would permit the purchase by you of numbers of shares granted by the Organization and Compensation Committee that appropriately reflect your responsibilities and ability to contribute to the long term success of Enterprise. 8. In light of your allied work experience, after you have been employed by PSE&G for five years after your DOE, you shall be granted additional credited service of twenty (20) years (in addition to that earned as a result of your employment by PSE&G), for the purpose of determining any pension benefits from PSE&G. Assuming you are currently age 54, this additional credited service would provide you with 25 years of service after five years of employment (5 years actual plus 20 years additional service), and under the terms of the Pension Plan, you would be entitled to retire without a reduction in your pension for early retirement. In addition, the Board of Directors' current policy of granting 5 years of additional credited service to officers who retire between age 60 and 65-1/2 would be available to you if you retire in that age bracket. You will be a participant in PSE&G's Pension Plan and in its Limited Supplemental Death Benefits and Retirement Plan. The Limited Plan provides a retirement benefit of a percentage of final average compensation as defined in the Plan that is equal to credited service plus 30 years. This would result in a target retirement benefit of 55% (25 years plus 30) at age 59, and 66% at age 65, times final average compensation, adjusted for any survivorship benefit you may choose, and reduced by Social Security benefits and pensions from other employers as provided in the Plan. The amount of your pension or survivorship benefits paid by any previous employer shall be deducted from the pension benefits payable to you or your beneficiary by PSE&G on account of such service with any previous employer. 9. In recognition of your need for an automobile for business purposes, PSE&G will provide you with a full size American made automobile (Oldsmobile, Buick or other comparable model) and shall provide the related maintenance, repairs, insurance and costs of operation thereof. 10. As part of PSE&G's requirement for a work force that is free from the influence of foreign chemical substances, you will be required to complete a medical examination which will include definitive analysis of a freshly voided urine specimen for the presence of commonly abused drugs, including marijuana. 11. During the course of your employment, you will have access to and shall become familiar with "Confidential Information" as defined below. You agree that you shall not, directly or indirectly, disclose or use any Confidential Information, except as required in the course of your employment with PSE&G or its affiliates and subsidiaries and consistent with their interests. All files, records, documents, or recordings, electronic or otherwise, containing or relating to Confidential Information, whether prepared by you or otherwise coming into your possession, shall remain the exclusive property of PSE&G or its affiliates and subsidiaries. As used herein, the term "Confidential Information" means all trade secrets, proprietary and confidential business information belonging to, used by, or in the possession of PSE&G or its affiliates and subsidiaries, with respect to their respective business strategies, plans and financial information, purchase or sale of property, leasing, pricing, sales programs or tactics, actual or past sellers, purchasers, lessees, lessors or customers, those with whom PSE&G or its affiliates and subsidiaries has begun negotiations for new business, costs, employee compensation, marketing and development plans, inventions and technology, whether such Confidential Information is oral, written or electronically recorded or stored, except information in the public domain, information known to you prior to your employment with PSE&G, and information received by you from sources other than PSE&G or its affiliates and subsidiaries, without obligation of confidentiality. 12. You agree that the knowledge and information, including, but not limited to, "Confidential Information" as defined in the previous paragraph, gained in the performance of your duties hereunder may be valuable to those who are now, or might become, competitors of PSE&G or its affiliates and subsidiaries. Accordingly, you agree that, if your employment is terminated prior to the completion of five years from DOE, you will not, for the period of one year, or for the remainder of the period to the end of five years after DOE, whichever is less, you will not, directly or indirectly, own, manage, operate, join, control, become employed (whether as an employee or a consultant) by or participate in the ownership, management, or control of, or become connected with, any business which is in direct competition with PSE&G and/or its affiliates and subsidiaries in New Jersey, New York, Pennsylvania, Maryland or Delaware. Further, you shall not be entitled to post-employment payments, including non-qualified pension payments, as provided herein from and after the date of commencement of any such prohibited subsequent activity in violation of this Agreement. 13. You further acknowledge and agree that in the event of a breach by you of any of the agreements set forth in Paragraphs 10 and/or 11, PSE&G shall suffer irreparable harm for which money damages are not an adequate remedy, and that, in the event of such breach, PSE&G shall be entitled to obtain an order of a court of competent jurisdiction for equitable relief from such breach, including, but not limited to, temporary restraining orders and preliminary and/or permanent injunctions against the breach of such agreements by you. 14. Any and all disputes arising out of or relating to this Agreement or your employment, other than an unemployment or workers' compensation claim, shall, at the demand of either you or PSE&G, whether made before or after the institution of any legal proceeding, be resolved through binding arbitration administered by the American Arbitration Association (AAA) in accordance with the Employment Dispute Resolution Rules of the AAA and with the United States Arbitration Act. The arbitration shall be conducted in Newark, New Jersey before one arbitrator. If the parties cannot agree on the arbitrator within 30 days after the demand for an arbitration, then either party may request the AAA to select an arbitrator, which selection shall be deemed acceptable to both parties. To the maximum extent practicable, the arbitration proceeding shall be concluded within 180 days of filing the demand for arbitration with the AAA. All costs and fees of the arbitration shall be shared equally by the parties, unless otherwise awarded by the arbitrator. Each party agrees to keep all such disputes and arbitration proceedings strictly confidential except for disclosure of information required by law. Each party further agrees to abide by and perform any award rendered by the arbitrator, and that a judgment of a court of competent jurisdiction may be entered on the award. 15. This Agreement shall be governed by the laws of New Jersey. 16. The foregoing terms of this Agreement constitute the entire agreement between the parties and supersede all previous communications, representations, and agreements, oral or written, between the parties with respect to the Agreement's subject matter. No agreement or understanding modifying this Agreement shall be binding unless signed by both parties. If the foregoing is in accordance with your understanding, please sign the enclosed copy of this letter and return it to me. Sincerely, M. PETER MELLETT ---------------- M. Peter Mellett Vice President - Human Resources Agreed to this 6th day of January, 1998. HAROLD W. KEISER - ----------------- Harold W. Keiser x:\Keiser.doc EX-10.A(17) 10 DEFERRED COMPENSATION PLAN (CEA) DEFERRED COMPENSATION PLAN FOR CERTAIN EMPLOYEES OF COMMUNITY ENERGY ALTERNATIVES, INCORPORATED February 1, 1995 TABLE OF CONTENTS 1. PURPOSE................................................................1 2. DEFINITIONS OF THE TERMS USED IN THIS PLAN.............................1 (a) "Account"........................................................1 (b) "Affiliate"......................................................1 (c) "Assets".........................................................1 (d) "Beneficiary"....................................................1 (e) "Committee"......................................................1 (f) "Company"........................................................1 (g) "Compensation"...................................................2 (h) "Deferrable SAR".................................................2 (i) "Deferred Compensation"..........................................2 (j) "Disability".....................................................2 (k) "Employee".......................................................2 (l) "Plan"...........................................................2 (m) "SAR Income".....................................................2 (n) "SAR Plan".......................................................2 3. ELECTION AS TO THE AMOUNT OF COMPENSATION AND/OR SAR INCOME THAT IS TO BE DEFERRED......................................2 4. HOW THE ACCOUNT IS TO BE MAINTAINED....................................3 (a) Establishment of Account.........................................3 (b) Interest on Assets in the Account................................3 (c) Title and Beneficial Ownership of Assets.........................4 5. DISTRIBUTION FROM THE ACCOUNT..........................................4 (a) Election as to the Commencement of the Distribution..............4 (b) Election as to the Timing of the Distribution(s).................4 (c) Distribution in Case of Certain Disability.......................5 (d) Distribution in Case of Death....................................5 (e) Request for Change in Distribution...............................6 (f) Not Terminated if Transferred to an Affiliate....................6 (g) Company may Distribution in Lump Sum if Distributable Amount Less than $5,000.................................................6 (h) Delay of Certain Distributions...................................6 6. ASSIGNMENT.............................................................7 7. PLAN DOES NOT CONSTITUTE AN EMPLOYMENT AGREEMENT.......................7 8. AMENDMENT OR TERMINATION OF THE PLAN BY THE COMPANY....................7 9. WHAT CONSTITUTES NOTICE................................................8 10. ADVANCE DISCLAIMER OF ANY WAIVER ON THE PART OF THE COMPANY................................................................8 11. EFFECT ON INVALIDITY OF ANY PART OF THE PLAN...........................8 12. PLAN BINDING ON ANY SUCCESSOR OWNER....................................8 13. LAWS GOVERNING THIS PLAN...............................................9 14. WITHHOLDING FOR TAXES..................................................9 15. MISCELLANEOUS..........................................................9 SCHEDULE A..................................................................10 SCHEDULE B..................................................................12 DEFERRED COMPENSATION PLAN FOR CERTAIN EMPLOYEES OF COMMUNITY ENERGY ALTERNATIVES, INCORPORATED February 1, 1995 1.....PURPOSE.....The purpose of this Plan is to provide a method to certain select and key employees of the Company to defer compensation as provided herein. 2.....DEFINITIONS OF THE TERMS USED IN THIS PLAN. As used in this Plan, the following words and phrases shall have the meanings indicated: (a)..."Account" - The Deferred Compensation Account described in Paragraph 4 of this Plan. (b)..."Affiliate" - Any organization which is a member of a controlled group of corporations (as defined in the Internal Revenue Code (Code) section 414(b) as modified by Code section 415(h)) which includes the Company, or any trades or businesses (whether or not incorporated) which are under common control (as defined in Code section 414(c) as modified by Code section 415(h)) with the Company, or a member of an affiliated service group (as defined in Code section 414(m)) which includes the Company, or any other entity required to be aggregated with the Company pursuant to regulations promulgated pursuant to Code section 414(o). (c)..."Assets" - All Compensation, SAR Income and interest that have been credited to an Employee's Account in accordance with Paragraph 4 of this Plan. (d)..."Beneficiary" - The individual(s) and/or entity(ies) designated and defined by Schedule B of the Plan. (e)..."Committee"- The Compensation Committee of the Company. (f)..."Company" -- Community Energy Alternatives, Incorporated and Affiliates. (g)..."Compensation" - The total remuneration paid to an Employee for services rendered to the Company or an Affiliate excluding the Company's or Affiliate's cost for any public or private employee benefit plan. (h)..."Deferrable SAR" - A stock appreciation right under the SAR Plan granted no more than five years before the date of any deferral under Section 3 of this Plan. (i)..."Deferred Compensation" - The amount of compensation deferred pursuant to Paragraph 3 of this Plan. (j)..."Disability" - Disability so as to be incapable of performing further work for the Company. (k) .."Employee" - Each employee of the Company as may be designated by the Committee. (l)..."Plan" - This Deferred Compensation Plan for Certain Employees of Community Energy Alternatives, Incorporated. (m)..."SAR Income" - That amount to which an Employee may be entitled to receive pursuant to the SAR Plan with respect to Deferrable SARs. (n)..."SAR Plan" - The Community Energy Alternatives, Incorporated 1987 Stock Appreciation Rights Plan. 3.....ELECTION AS TO THE AMOUNT OF COMPENSATION AND/OR SAR INCOME THAT IS TO BE DEFERRED. An Employee may elect to defer any portion of his Compensation otherwise payable for services rendered for the Company after the date of adoption of this Plan. An Employee may also elect to defer any portion of SAR Income otherwise payable to him after the adoption of this Plan. Any such election must be made by filing with the Committee an "Election in Connection With Deferral of Compensation", the form of which is attached to this Plan as Schedule A and is hereinafter referred to as "Schedule A". An Employee may change (using Schedule A for such purpose), not Later than December 31 of any year, the amount of Compensation and/or SAR Income to be deferred by him with respect to the next succeeding calendar year or years. In the calendar year this Plan is adopted, or in the calendar year that an Employee first becomes eligible to participate in this Plan, an election may be made to defer Compensation and/or SAR Income for a part of that calendar year. Compensation and/or SAR Income may be deferred prospectively only, and the amount of Compensation and/or SAR Income to be deferred may be changed only with respect to future calendar years. 4.....HOW THE ACCOUNT IS TO BE MAINTAINED. (a)...Establishment of Account - The Company shall establish an Account for each Employee who elects to participate in the Plan. Each Employee's Account shall be credited at the end of each month with an amount equal to the Deferred Compensation and/or SAR Income which would have otherwise been payable to him that month. (b)...Interest on Assets in the Account - The Assets credited to each Employee's Account shall accrue interest each calendar quarter at an annual rate equal to the rate charged by The Chase Manhattan Bank, N.A. on the first business day of such calendar quarter for prime commercial loans of 90-day maturity (based on actual number of days, 360 days to the year), plus 1/2 of 1%. Such interest shall be computed on the average daily balance in the Employee's Account during each calendar quarter, excluding any Assets which have been distributed from the Employee's Account during such quarter, and shall be credited to the Employee's Account and compounded on the last day of March, June, September and December, and interest in Assets distributed from an Employee's Account shall accrue in the same manner to the date of, be credited to the Employee's Account on the date of, and be paid with, such distribution. (c)...Title and Beneficial Ownership of Assets - The Plan shall be unfunded. The Company shall be not be required to segregate any amounts credited to any Employee's Account, which shall be established merely as an accounting convenience. Title and beneficial ownership of any Assets, whether Deferred Compensation, Deferred SAR Income or interest credited to an Employee's Account pursuant to Paragraphs 4(a) and (b) hereinabove, shall at all times remain in the Company, and an Employee shall not have any interest whatsoever in any specific assets of the Company. 5.....DISTRIBUTION FROM THE ACCOUNT. (a)...Election as to the Commencement of the Distribution - By election on Schedule A filed with the Committee, an Employee may elect to have distribution from his Account commence either (1) within sixty (60) days after the date he ceases to be employed by the Company or, in the alternative, (2) in the month of January of the calendar year elected by the Employee. An Employee may change such election by filing a subsequent Schedule A, but any such change shall apply only to future deferrals. The actual date that distribution shall commence shall be a date within the elected period to be determined by the Committee in its sole discretion. (b)...Election as to the Timing of the Distribution(s) - By election on Schedule A filed with the Committee, an Employee may elect to receive the distribution of his Account in the form of (1) one lump-sum payment, (2) annual distributions over a five-year period or (3) annual distributions over a 10-year period. An Employee may change such election by filing a subsequent Schedule A, but any such change shall apply only to future deferrals. In the event a lump-sum payment is made under this Plan, the Assets credited to an Employee's Account, including interest at the rate provided in Paragraph 4(b) of this Plan to the date of distribution, shall be paid to the Employee on the date determined under Paragraph 5(a) of this Plan. In the case of a distribution over a period of years, the Company shall pay to the Employee on the date determined under Paragraph 5(a) of this Plan and on the yearly anniversaries of such date, annual installments of the unpaid balance of the Assets in the Employee's Account, including interest on the unpaid balance at the rate provided in Paragraph 4(b) of this Plan to the date of distribution. The amount of each installment shall be determined by multiplying the then unpaid balance, plus accrued interest, in the Employee's Account by a fraction, the numerator of which is one and the denominator of which is the number of annual installments remaining to be paid. (c)...Distribution in Case of Certain Disability - In the event of an Employee's Disability prior to a calendar year elected by the Employee under Paragraph 5(a)(2) of this Plan for distribution to commence, distribution of the Employee's Account shall commence within six (6) months after such Disability, in accordance with the Employee's election under Paragraph 5(b) of this Plan as to the form of distribution. The actual date that distribution shall commence shall be a date within such six (6) month period to be determined by the Committee in its sole discretion. (d)...Distribution in Case of Death - In the event of an Employee's death, the balance of the Employee's Account shall be distributed to the Employee's Beneficiary(ies) over a period of not more than five (5) years, in accordance with his election on Schedules A and B filed with the Committee for distribution in case of death. Such distribution shall be made in a manner consistent with Paragraph 5(b) of this Plan and shall commence in the month of January of the year after the year of the Employee's death, on a date within said month to be determined by the Committee in its sole discretion. Additional annual payments for distributions made over a period of more than one year shall be made on the yearly anniversaries of such date. In the event of an Employee's death after distribution of his Account has commenced, any election under this paragraph 5(d) shall not extend the time of payment of his Account beyond the time when distribution would have been completed if he had lived. An Employee may change Beneficiary designations by filing a subsequent Schedule B with the Committee. (e)...Request for Change in Distribution - An Employee, Beneficiary or a legal representative may request a change in the timing, frequency or amount of payments made from an Employee's Account by filing a written request therefor with the Committee. The Committee may, in its sole discretion, grant such request only if such request specifies appropriate circumstances to justify such a change to prevent undue hardship. The Committee shall inform the Employee, Beneficiary or representative of its decision within sixty (60) days of its receipt of the written request. (f)...Not Terminated if Transferred to an Affiliate - For the purposes of this Paragraph 5, an Employee shall not be deemed to have terminated his employment if he is transferred to and remains in the employ of an Affiliate. (g)...Company may Distribution in Lump Sum if Distributable Amount Less than $5,000 - The Company reserves the right to make a lump-sum distribution, notwithstanding any other provision of this Plan, if the total Assets in an Employee's Account are $5,000 or less at any time after the Employee ceases to be employed by the Company. (h)...Delay of Certain Distributions - Notwithstanding anything contained in this Plan to the contrary, distribution of an amount equal to 50% of what the Company's withholding obligation for Federal and applicable state income tax purposes had the Company been obligated to withhold in the year that the Employee elected to redeem such Deferrable SARs, would have been in respect of SARs which were vested under the terms of the SAR Plan at the time of the election to defer income related thereto, shall be deferred as described in this paragraph. Such deferred amount, and all interest accrued with respect thereto under this Plan, shall be paid in one lump sum upon the earlier of the end of (a) eleven (11) years from the date of the exercise of the vested SAR or (b) the date upon which the audit period for the Company's Federal or applicable state income tax return for the year in which the vested Deferrable SARs were exercised closes. Except, however, if at the time noted in (a), above the issue of the Company's withholding obligation in respect of such SAR Income is being contested, distribution of all amounts otherwise distributable, not exceeding the amount in controversy, will be delayed until resolution of such contest. 6.....ASSIGNMENT. No benefit under the Plan shall in any manner or to any extent be assigned, alienated or transferred by any Employee or Beneficiary under the Plan or be subject to attachment, garnishment or other legal process. 7.....PLAN DOES NOT CONSTITUTE AN EMPLOYMENT AGREEMENT. This Plan shall not constitute a contract for the continued employment of any Employee by the Company. The Company reserves the right to modify an Employee's Compensation at any time and from time to time as it considers appropriate and to terminate his employment for any reason at any time notwithstanding this Plan. 8.....AMENDMENT OR TERMINATION OF THE PLAN BY THE COMPANY. The Board of Directors of the Company may, in its sole discretion, amend, modify or terminate this Plan at any time, provided, however, that no such amendment, modification or termination shall materially adversely affect the right of an Employee in respect of Deferred Compensation previously earned by him which has not been paid, unless such Employee or his legal representative shall consent to such change. 9.....WHAT CONSTITUTES NOTICE. Any notice to an Employee, Beneficiary or legal representative hereunder shall be given either by delivering it or by depositing it in the United States mail, postage prepaid, addressed to his last-known address. Any notice to the Company or the Committee hereunder (including the filing of Schedules A and B) shall be given either by delivering it, or depositing it in the United States mail, postage prepaid, to the Secretary of the Employee Benefits Policy Committee, Public Service Enterprise Group Incorporated, 80 Park Plaza, T4B, Newark, New Jersey 07101. 10....ADVANCE DISCLAIMER OF ANY WAIVER ON THE PART OF THE COMPANY. Failure by the Company to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of any such term, covenant or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a waiver or relinquishment of any such right or power at any other time or times. 11....EFFECT ON INVALIDITY OF ANY PART OF THE PLAN. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. 12....PLAN BINDING ON ANY SUCCESSOR OWNER. Except as otherwise provided herein, this Plan shall inure to the benefit of and be binding upon the Company, its successors and assigns, including but not limited to any corporation which may acquire all or substantially all of the Company's assets and business or with or into which the Company may be consolidated or merged. 13....LAWS GOVERNING THIS PLAN. Except to the extent federal law applies, this Plan shall be governed by the laws of the State of New Jersey. 14....WITHHOLDING FOR TAXES. The Company shall have the right to deduct from any payment any sums required to be withheld by federal, state, or local tax law. There is no obligation hereunder that any Participant or other person be advised in advance of the existence of the tax or the amount so required to be withheld. 15....MISCELLANEOUS. The masculine pronoun shall mean the feminine wherever appropriate. SCHEDULE A DEFERRED COMPENSATION PLAN FOR CERTAIN EMPLOYEES OF COMMUNITY ENERGY ALTERNATIVES, INCORPORATED (THE "PLAN") Elections In Connection With Deferral Of Compensation Section 1...Election As To Compensation To Be Deferred. Note: THIS SECTION IS TO BE USED TO MAKE OR TO CHANGE ANY ELECTION UNDER PARAGRAPH 3 OF THE PLAN. ANY CHANGE IN ELECTION MUST BE MADE NO LATER THAN DECEMBER 31 OF THE YEAR PRECEDING THE YEAR IN WHICH YOU WISH THE CHANGE TO APPLY. I hereby elect to defer, in accordance with the provisions of the Plan: (a) _________________ a month of my Compensation; (b) All of my Compensation in excess of $_______________ per year; (c) __________% of any payments made pursuant to the grant of _________________________________ under the Community Energy Alternatives Incorporated 1987 Stock Appreciation Rights Plan; (d) __________% or $_______________ of any award paid to me pursuant to the Community Energy Alternatives Incorporated Incentive Compensation Plan; (e) __________% or $_______________ of any project completion bonus paid to me. Section 2...Election As To Commencement Of Distribution From Account Note: THIS SECTION IS TO BE USED (A) WHEN FIRST BECOMING AN EMPLOYEE COVERED BY THE PLAN AND (B) PRIOR TO DECEMBER 31ST OF ANY GIVEN YEAR IF THERE IS TO BE ANY CHANGE IN THE ORIGINAL ELECTION. ANY SUCH CHANGE WILL ONLY APPLY TO FUTURE DEFERRALS. I hereby elect, in accordance with the provisions of the Plan, to have distribution from my Account commence: __________ (a) Within sixty (60) days after I cease to be employed by the Company. __________ (b) In the month of January of the calendar year following the year I cease to be employed by the Company. __________ (c) In the month of January, _______________________. Employee's Initials __________ Date _____________________ SCHEDULE A Section 3...Election As To The Timing Of The Distribution Note: THIS SECTION IS TO BE USED (A) WHEN FIRST BECOMING AN EMPLOYEE COVERED BY THE PLAN AND (B) PRIOR TO DECEMBER 31ST OF ANY GIVEN YEAR IF THERE IS TO BE ANY CHANGE IN THE ORIGINAL ELECTION. ANY SUCH CHANGE WILL ONLY APPLY TO FUTURE DEFERRALS. I hereby elect, in accordance with the provisions of the Plan, to have the distribution of my Account paid: __________..(a)...In one lump sum __________ (b) In annual installments over a period of five (5) years. __________ (c) In annual installments over a period of ten (10) years. Section 4...Election As To Method Of Distribution In Case Of Death Note: THIS SECTION TO BE USED TO SELECT THE METHOD OF DISTRIBUTION IN THE CASE OF DEATH. PERIOD SELECTED MAY NOT BE MORE THAN FIVE (5) YEARS. In case of my death, I hereby elect, in accordance with the provisions of the Plan, to have the distribution of my Account paid over a period of _____ year(s) to my Beneficiary(ies) designated on Schedule B. ___________________, 19__ - ------------------------------ ------------------------------------ WITNESS EMPLOYEE SIGNATURE SCHEDULE B DEFERRED COMPENSATION PLAN FOR CERTAIN EMPLOYEES OF COMMUNITY ENERGY ALTERNATIVES, INCORPORATED (THE "PLAN") DESIGNATION OF BENEFICIARY(IES) In the event of my death, I hereby designate the following individuals, fiduciaries or other entities, either in their own right or in their representative capacity, in the proportions and in the priority of interest designated, to be the beneficiaries of any benefits owing to me under the Plan. PRIMARY BENEFICIARIES - The following beneficiary(ies) shall receive all benefits payable under the Plan in the event of my death in the proportions designated hereunder. If any one or more of the primary beneficiaries designated hereunder shall predecease me, such beneficiary's share(s) shall be divided equally among the remaining primary beneficiaries. NAME AND PRESENT PROPORTIONATE INTEREST ADDRESS OF PRIMARY BENEFICIARIES OF PRIMARY RELATIONSHIP BENEFICIARY(IES) TO EMPLOYEE - ------------------------- ----------% --------------- - ------------------------- - ------------------------- ----------% --------------- - ------------------------- - ------------------------- ----------% --------------- - ------------------------- - ------------------------- ----------% --------------- - ------------------------- ------------------------ Employee's Initials SCHEDULE B SECONDARY BENEFICIARIES - The following beneficiary(ies) shall receive all benefits payable under the Plan in the event of my death in the proportions designated hereunder only if all of my primary beneficiaries have predeceased me. If all primary beneficiaries have predeceased me and if any one or more of the secondary beneficiaries designated hereunder shall predecease me, such secondary beneficiary's share(s) shall be divided equally among the remaining secondary beneficiaries. NAME AND PRESENT PROPORTIONATE INTEREST ADDRESS OF SECONDARY OF SECONDARY RELATIONSHIP BENEFICIARY(IES) BENEFICIARY(IES) TO EMPLOYEE - ------------------------- ----------% --------------- - ------------------------- - ------------------------- ----------% --------------- - ------------------------- - ------------------------- ----------% --------------- - ------------------------- - ------------------------- ----------% --------------- - ------------------------- ESTATE - In the event I have declined to designate a beneficiary hereunder or if all of the beneficiaries that I have designated predecease me, then all benefits payable under the Plan shall be payable to my estate. Date:____________________ - ------------------------------------ ------------------------------------ WITNESS EMPLOYEE'S SIGNATURE EX-10.A(18) 11 EXECUTIVE LONG-TERM INCENTIVE COMP. PLAN (CEA) EXECUTIVE LONG-TERM INCENTIVE COMPENSATION PLAN COMMUNITY ENERGY ALTERNATIVES INCORPORATED January 1, 1994 TABLE OF CONTENTS Page No. 1. Purposes.................................................... 1 2. Definitions................................................. 1 3. Eligibility................................................. 3 4. Administration.............................................. 4 5. Determination of Award Year................................. 4 6. Determination of Target Incentive Award..................... 5 7. Determination of Performance Objectives..................... 5 8. Determination of Achievement of Performance Objectives...... 6 9. Determination of Final Incentive Awards..................... 6 10. Deferral of Final Incentive Award........................... 7 11. Election to Defer Award..................................... 7 12. Hardship Distribution....................................... 9 13. Participant Deferral Accounts............................... 9 14. Termination................................................. 11 15. Assignment.................................................. 12 16. Plan Does Not Constitute an Employment Agreement............ 12 17. Amendment or Termination of the Plan by the Company......... 12 18. What Constitutes Notice..................................... 13 19. Advance Disclaimer of Any Waiver............................ 13 20. Effect on Invalidity of Any Part of the Plan................ 14 21. Plan Binding on Any Successor Owner......................... 14 22. Laws Governing This Plan.................................... 14 23. Miscellaneous............................................... 14 24. Withholding................................................. 14 25. Effective Date.............................................. 15 COMMUNITY ENERGY ALTERNATIVES INCORPORATED EXECUTIVE LONG-TERM INCENTIVE COMPENSATION PLAN January 1, 1994 1. Purposes The purposes of this Plan are to foster attainment of the long-term financial and operating objectives of the Company by providing incentive to members of the senior management of this Company tied strictly to the achievement of those long-term objectives; to supplement the Company's salary and benefit programs so as to provide overall compensation for such executives which is competitive with corporations with which the Company must compete for executive talent; and to assist the Company in attracting and retaining executives who can materially influence its long-term financial and operating results. 2. Definitions As used in this Plan, the following words and phrases shall have the following meanings unless the context clearly requires otherwise: (a) "Account" - an Account established pursuant to Paragraph 13 of this Plan. (b) "Award Cycle" - a period of three consecutive Plan Years as designated by the Committee. (c) "Award Year" - a Plan Year with respect to which Final Incentive Awards to Participants in the Plan are approved by the Committee. (d) "Base Salary" - a sum equal to the annual rate of a Participant's base compensation as of the first day of any Award Cycle. (e) "Committee" - the Compensation Committee of the Board of Directors of the Company. (f) "Company" - Community Energy Alternatives Incorporated. (g) "Disability" - any physical or mental condition which renders a Participant incapable of performing further work for the Company and that results in termination of such Participant's employment. (h) "Distribution Date" - a date for distribution established by the Committee pursuant to Paragraph 10(b) of this Plan. (i) "Enterprise" - Public Service Enterprise Group Incorporated, the ultimate parent corporation of the controlled group of corporations of which the Company is a member. (j) "Enterprise Common Stock" - the Common Stock, without par value, of Enterprise. (k) "Final Incentive Award" - the amount awarded to a Participant in accordance with Paragraph 9 of this Plan. (l) "Participant" - such employees of the Company as may be designated by the Committee to participate in this Plan. (m) "Plan" - this Community Energy Alternatives Incorporated Executive Long-Term Incentive Compensation Plan. (n) "Plan Year" - the calendar year. (o) "Retirement" - termination of employment with the Company (i) at or after the age of 62 or (ii) under circumstances entitling the Participant to an immediately payable retirement benefit under the Public Service Electric and Gas Company Pension Plan. (p) "Subsidiary" - a corporation at least 80% of the voting shares of which are owned by this Company. (q) "Target Incentive Award" - the amount determined under Paragraph 6 of this Plan. 3. Eligibility (a) The Committee may select such employees of the Company and its subsidiaries (individually or by position) for participation in the Plan upon such terms as it deems appropriate, due to the employee's responsibilities and opportunity to contribute substantially to the attainment of the long-term financial and operating objectives of the Company. A determination with respect to participation for any particular Award Cycle shall be made no later than the beginning of the Award Cycle, except that designation of Participants with respect to the first Award Cycle following adoption of the Plan shall be made within 30 days of the initial adoption of this Plan and selection of new hires for participation shall be made within 30 days of hire. Further, the Committee may adjust a Final Incentive Award of any Participant if the Committee deems it appropriate to so do reflect a change which may have occurred during an Award Cycle in such Participant's position or responsibilities. (b) Participation in the Plan in one Plan Year or Award Cycle shall not guarantee participation in any other Plan Year or Award Cycle. The Committee shall have sole discretion with respect to the selection of Participants or whether to suspend operation of the Plan for any period of time. 4. Administration (a) The Plan shall be administered by the Committee. Subject to the provisions of the Plan, the Committee shall have full and final authority to select Participants, to designate the Target Incentive Award for each Participant, to determine Performance Objectives for an Award Cycle, to determine the amount of all Final Incentive Awards and to determine whether any such awards shall be paid in cash or in shares of Enterprise Common Stock. The Committee shall also have, subject to the provisions of the Plan, full and final authority to interpret the Plan, to establish and revise rules, regulations and guides relating to the Plan, to entertain appeals of Participants or beneficiaries regarding alleged adverse determinations under the Plan and to make any other determinations that it believes necessary or advisable for the administration of the Plan. (b) All decisions and determinations by the Committee shall be final and binding upon all parties, including shareholders, Participants, beneficiaries and other employees. 5. Determination of Award Year Not later than 120 days after the close of each Award Cycle, the Committee shall, in its sole discretion, determine whether any Participant shall be granted a Final Incentive Award Performance Unit with respect to such Award Cycle. 6. Determination of Target Incentive Award Prior to each Award Cycle, or in the case of the first Award Cycle, within 30 days after the initial adoption of the Plan and, in the case of new hires selected for participation, within 30 days from the date of hire, the Committee shall approve a Target Incentive Award for each Participant based upon the Participant's position and potential to contribute to the attainment of the Company's long-term financial and operating objectives. The Target Incentive Award shall be expressed as a whole dollar amount equal to a percentage of the Participant's Base Salary. 7. Determination of Performance Objectives (a) Concurrent with the approval of Target Incentive Awards for Participants, the Committee shall establish Performance Objectives for the Company for the related Award Cycle. The Company's actual performance during an Award Cycle will be compared to these Performance Objectives in determining the amount, if any, of each Participant's Final Incentive Award. Performance Objectives shall be measurable criteria regarding the Company's quality of earnings, earnings growth, capacity growth and/or such other indicators selected by the Committee to reflect the Company's business plan for the related Award Cycle. (b) At the time that it approves Performance Objectives for an Award Cycle, the Committee shall assign to each a relative weight to be afforded the accomplishment of such Performance Objective in calculating the Final Incentive Award of each Participant. 8. Determination of Achievement of Performance Objectives Within 90 days of the end of each Award Cycle, the Committee shall certify the extent to which the Company has achieved the several Performance Objectives which have been established for such Award Cycle. Certification shall be by resolution of the Committee, which resolution shall state the percentage of achievement of each respective Performance Objective. The determination of such achievement shall be by reference to the Company's audited financial statements. 9. Determination of Final Incentive Awards To determine each Participant's Final Incentive Awards, the Participant's Target Incentive Award shall be multiplied by an applicable percentage based upon the Committee's certification of the Company's achievement of its Performance Objectives for the Award Cycle and the following chart: ================================================================================ Weighted Average Final Incentive Award* as Achievement of a Percent of Target Performance Objectives Incentive Award - -------------------------------------------------------------------------------- > 150% 200% - - -------------------------------------------------------------------------------- 125% 150% - -------------------------------------------------------------------------------- 100% 100% - -------------------------------------------------------------------------------- 75% 50% - -------------------------------------------------------------------------------- < 50% 0% - - -------------------------------------------------------------------------------- *Awards for weighted average achievement of Performance Objectives at levels above 50% and below 150%, but not shown above, are to be interpolated. ================================================================================ 10. Payment of Final Incentive Award Unless the Participant has elected, pursuant to Paragraph 11, to defer receipt of his/her Final Incentive Award, payment of such award shall be made within 30 days of the date that the Committee approves the amount of such award. The Committee shall determine, in its sole discretion, whether any such payment shall be paid in cash by check or in shares of Enterprise Common Stock. If the payment shall be made in shares of Enterprise Common Stock, the number of shares to be distributed shall be determined by dividing the amount of the Final Incentive Award (less any withholding required by law) by the average of the high and low sale prices of Enterprise Common Stock on the New York Stock Exchange on the date of distribution. 11. Election to Defer Award (a) A Participant may elect to defer receipt of all or any portion of a Final Incentive Award for an Award Cycle by so electing to make such deferral prior to the beginning of such Award Cycle. For the Award Cycle which includes the calendar year that the Plan is adopted, each Participant may elect to defer any portion of his or her Final Incentive Award for that Award Cycle, but only if such election is made within 30 days after the initial adoption of the Plan. Further, an employee who becomes a Participant after the commencement of an Award Cycle must make any election to defer any portion of his or her Final Incentive Award for such Award Cycle within 30 days of first becoming a Participant in the Plan. An election to defer the distribution of any part of a Participant's Final Incentive Award with respect to an Award Cycle shall be irrevocable after the commencement of such Award Cycle, except in the case of a hardship distribution under Paragraph 12. (b) If a Participant elects a deferral under this Paragraph 11, the Participant shall also elect to have the related distribution from his or her Account commence either (1) within 30 days after the date of the Participant's termination of employment with the Company or, in the alternative, (2) in the month of January of any calendar year following the Plan Year in which the amount so deferred is determined as elected by the Participant, but in no event later than the later of (a) the January of the year following the year of the Participant's 70th birthday, or (b) the January of the year following termination of employment. Any such election to defer receipt of a Final Incentive Award with respect to an Award Cycle shall be irrevocable after the commencement of such Award Cycle, except in the case of a hardship distribution under Paragraph 12. (c) If a Participant elects a deferral under this Paragraph 11, the Participant shall also elect to receive the related distribution from his Account in the form of (1) one lump-sum payment, or (2) annual distributions over a period of years up to 10 years. Any such election regarding distribution with respect to an Award Cycle shall be irrevocable after the commencement of such Award Cycle, except in the case of a hardship distribution under Paragraph 12. (d) Except as provided in Paragraph 11(c) hereof, at the end of the deferral period, the appropriate amount in the Participant's Account shall be distributed as a lump sum. (e) All deferral elections shall comply with such further rules and procedures as may be established by the Committee. 12. Hardship Distribution A Participant or legal representative may request a change in the timing of a distribution which has been deferred under Paragraph 11 by filing a written request therefor with the Committee. The Committee may, in its sole discretion, grant such request only if the Committee determines that an emergency beyond the control of the Participant exists and which would cause the Participant severe financial hardship if the payment of such amounts were not approved. Any such distribution for hardship shall be limited to the amount needed to meet such emergency. Any distribution under this Paragraph 12 shall be in a lump sum and shall be made within 30 days after the Committee grants such request for hardship distribution. 13. Participant Deferral Accounts Where the Participant has elected to defer all or a portion of his/her Final Incentive Award, in lieu of distribution thereof: (a) There shall be established an Account for each Participant for each Award Year which shall be credited with the amount of the Participant's Final Incentive Award. The Plan shall be unfunded. It is the intention of the Company that the Plan be unfunded for the purposes of the Internal Revenue Code of 1986, as amended, and the Employee Retirement Income Security Act of 1974, as amended. The Company shall not be required to segregate any amounts credited to any Participant's Account, which shall be established merely as an accounting convenience. Title to and beneficial ownership of any amounts credited to a Participant's Account shall at all times remain in the Company, and no Participant or beneficiary shall have any interest whatsoever in any specific assets of the Company. All amounts credited to Participant's Account shall at all times remain solely the property of the Company subject to the claims of its general creditors and available for the Company's use for whatever purpose desired. (b) The amount credited to a Participant's Account shall be treated for valuation purposes as if it had been used to purchase shares of Enterprise Common Stock on the date it is credited to the Participant's Account at a price equal to the average of the high and low sale prices of Enterprise Common Stock on the New York Stock Exchange on such date. For the purpose of valuing a Participant's Account, the equivalent shares so credited to a Participant's Account shall be treated as if they were to accrue dividends at the same rate as actual shares of such Enterprise Common Stock, and such equivalent dividends were used to purchase additional shares of such Common Stock at a price equal to the average of the high and low sale prices of such Enterprise Common Stock on the New York Stock Exchange on the dividend payment date. (c) When a distribution or partial distribution from a Participant's Account is to be made, such distribution shall be in money, by check. The amount distributed shall be equal to the equivalent number of shares otherwise distributable times the average of the high and low sale prices of Enterprise Common Stock on the New York Stock Exchange on the date of distribution. 14. Termination (a) If the employment of a Participant by the Company is terminated on account of the Participant's death, Disability or Retirement after such Participant shall have completed at least one year of an Award Cycle, the Committee shall, if it determines that a Final Incentive Award may be earned for any such Award Cycle(s) which include the Plan Year of termination, prorate the Final Incentive Award(s) for that part of such Award Cycles in which the Participant was participating prior to such termination and the Company shall pay the prorated Final Incentive Award as soon as practicable after determination, unless otherwise determined by the Committee. (b) If the employment of a Participant is terminated for any reason other than death, Disability or Retirement, the Participant shall not receive any Final Incentive Award for that part of any uncompleted Award Cycle(s) in which the Participant was participating at the time of termination. (c) If a Participant becomes a Participant during an Award Cycle, any Final Incentive Award to the Participant shall be appropriately prorated from the time the Participant entered the Plan to the end of the Award Cycle. (d) In the case of a Participant's death, payment of the entire value of the Participant's Account under the Plan shall be made to the Participant's Estate. Such payment shall be made as a lump sum as soon as practicable after the Participant's death. 15. Assignment No benefit under the Plan shall in any manner or to any extent be assigned, alienated or transferred by any Participant under the Plan or subject to attachment, garnishment or other legal process. 16. Plan Does Not Constitute an Employment Agreement This Plan shall not constitute a contract for the continued employment of any Participant by the Company. The Company reserves the right to modify a Participant's compensation at any time and from time to time as it considers appropriate and to terminate any Participant's employment for any reason at any time notwithstanding this Plan. 17. Amendment or Termination of the Plan by the Company The Board of Directors of the Company may, in its sole discretion, amend, modify or terminate this Plan at any time, provided, however, that no such amendment, modification or termination shall materially adversely affect the right of a Participant in respect of a previously earned Final Incentive Award which has not been paid, unless such Participant or his or her legal representative shall consent to such change. If this Plan is terminated during any Award Cycle in which Participants have been selected to participate, the Board of Directors may authorize the Committee to prorate and make provision for payment of Final Incentive Awards for such a period. 18. What Constitutes Notice Any notice to a Participant or legal representative hereunder shall be given either by delivering it, or by depositing it in the United States mail, postage prepaid, addressed to such person's last-known address. Any notice to the Company or the Committee hereunder shall be given either by delivering it, or depositing it in the United States Mail, postage prepaid, to the Secretary, Community Energy Alternatives Incorporated, 80 Park Plaza, T4B, P. O. Box 1171, Newark, New Jersey 07101. 19. Advance Disclaimer of Any Waiver Failure by the Company or the Committee to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of any such term, covenant or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a waiver or relinquishment of any such right or power at any other time or times. 20. Effect on Invalidity of Any Part of the Plan The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. 21. Plan Binding on Any Successor Owner Except as otherwise provided herein, this Plan shall inure to the benefit of and be binding upon the Company, its successors and assigns, including but not limited to any corporation which may acquire all or substantially all of the Company's assets and business or with or into which the Company may be consolidated or merged. 22. Laws Governing This Plan Except to the extent federal law applies, this Plan shall be governed by the laws of the State of New Jersey. 23. Miscellaneous The masculine pronoun shall also mean the feminine and vice versa wherever appropriate. 24. Withholding The Company shall have the right to deduct from any payment any sums required to be withheld by federal, state, or local tax law. There is no obligation hereunder that any Participant or other person be advised in advance of the existence of the tax or the amount so required to be withheld. 25. Effective Date This Plan shall be effective as of January 1, 1994. Notwithstanding anything to the contrary contained herein, no distributions shall be made under the Plan prior to April 1, 1997. EX-10.A(19) 12 MANAGEMENT INCENTIVE COMPENSATION PLAN (EDHI) MANAGEMENT INCENTIVE COMPENSATION PLAN ENTERPRISE DIVERSIFIED HOLDINGS INCORPORATED Amended December 16, 1997 ENTERPRISE DIVERSIFIED HOLDINGS INCORPORATED MANAGEMENT INCENTIVE COMPENSATION PLAN 1. Purposes The purposes of this Plan are to foster attainment of the financial and operating objectives of this Corporation which are important to customers and stockholders by providing incentive to members of management who contribute to attainment of these objectives; to supplement this Corporation's salary and benefit programs so as to provide overall compensation for such executives which is competitive with corporations with which this Corporation must compete for executive talent; and to assist this Corporation in attracting and retaining executives who are important to its continued success. 2. Definitions As used in this Plan, the following words and phrases shall have the meanings indicated: (a) "Account" - an Account established pursuant to Paragraph 8(a) of this Plan. (b) "Award" - the amount of final Incentive Award for a Participant approved by the Committee pursuant to Paragraphs 5 and 7 of the Plan. (c) "Award Year" - a Plan Year in which Incentive Awards are earned by Participants in the Plan. (d) "Committee" - the Compensation Committee appointed by the Board of Directors of this Corporation. (e) "Corporation" - Enterprise Diversified Holdings Incorporated. (f) "Disability" - any physical or mental condition which renders a Participant incapable of performing further work for this Corporation and that results in termination of employment. (g) "Distribution Date" - for each Award Year, the first business day of January. (h) "Enterprise" - Public Service Enterprise Group Incorporated. (i) "Incentive Award" - the amount earned by a Participant in accordance with Paragraph 7. (j) "Participant" - each officer or other employee of this Corporation and its subsidiaries as may be designated by the Committee pursuant to Paragraph 3 of the Plan. (k) "Plan" - the Enterprise Diversified Holdings Incorporated Management Incentive Compensation Plan. (l) "Plan Year" - the calendar year. (m) "Primary Award" - the amount determined under Paragraph 7(a)(1). (n) "PSE&G" - Public Service Electric and Gas Company. (o) "Retirement" - termination of service with this Corporation with the right to an immediately payable periodic normal or early retirement benefit under the Pension Plan of Public Service Electric and Gas Company or the Cash Balance Pension Plan of Public Service Electric and Gas Company. Retirement shall not include termination of service with the right to a deferred retirement benefits under either said plan. (p) "Target Incentive Award" - the amount determined under paragraph 6. 3. Eligibility (a) The Committee may select such employees of this Corporation and its subsidiaries (individually or by position) for participation in the Plan upon such terms as it deems appropriate, due to the employee's responsibilities and his opportunity to contribute substantially to the attainment of financial and operating objectives of this Corporation. A determination of participation for a Plan Year shall be made no later than the beginning of that Plan Year. Provided, however, that employees whose duties and responsibilities change significantly during a Plan Year may be added or deleted as a Participant by the Committee. Provided further, the Committee may prorate the Incentive Award of any Participant if appropriate to reflect any such change in employee responsibilities during a Plan Year. (b) Participation in the Plan in one Plan Year shall not guarantee participation in another Plan Year. (c) The Committee shall have sole discretion as to whether to suspend operation of the Plan for any period of time. 4. Administration (a) The Plan shall be administered by the Committee. Subject to the provisions of the Plan, the Committee shall have full and final authority to select Participants, to designate the Target Incentive Award for each Participant, and to determine the performance objectives and the amount of all Incentive Awards. The Committee shall also have, subject to the provisions of the Plan, full and final authority to interpret the Plan, to establish and revise rules, regulations and guides relating to the Plan, and to make any other determinations that it believes necessary or advisable for the administration of the Plan. The Committee may delegate such responsibilities, other than final approval of Awards or appeals of alleged adverse determinations under the Plan, to the Chief Executive Officer of this Corporation or to any other officer of this Corporation. (b) All decisions and determinations by the Committee shall be final and binding upon all parties, including stockholders, Participants, legal representatives and other employees. 5. Determination of Award Year Not later than 120 days after the close of each Plan Year, the Committee shall, in its sole discretion, determine whether any Participants shall be eligible to earn Incentive Awards with respect to such Plan Year. The discretion of the Committee with respect to this final approval of Awards shall be total. 6. Determination of Target Incentive Awards For each Award Year, the Committee shall establish a Target Incentive Award for each Participant based upon the Participant's position and potential for contribution to the attainment of this Corporation's financial and operating objectives. The Target Incentive Award shall be expressed as a percentage of the Participant's rate of base salary in effect as of the last day of the Plan Year to which such Target Incentive Award relates. 7. Determination of Incentive Award (a) To determine each Participant's Incentive Award, the Participant's Target Incentive Award shall be adjusted based upon the following factors, provided that the Incentive Award for any Participant shall in no event exceed 1.5 times the Target Incentive Award and provided further that the Committee may determine, based upon the financial and operating results of this Corporation or any other business factors that it determines appropriate, that no Incentive Award shall be awarded for any Plan Year: (1) The Target Incentive Award shall be multiplied by a factor of between 0 and 1.5 to proportionately reflect Enterprise's return on capital for the Plan Year as reported to the Board of Directors in accordance with such rules and procedures as are approved by the Committee; provided, however, that if such return is below a minimum threshold established by the Committee prior to the beginning of the Plan Year, no Incentive Award shall be earned for such Plan Year. This adjusted amount is the Participant's Primary Award. (2) The Participant's Primary Award shall be adjusted by a factor of between -0.5 and +0.5 to proportionately reflect the relative annual increase or decrease in this PSE&G's weighted average of cost per unit of electricity and gas sold in the Plan Year as compared with similar increases or decreases of other designated comparison utilities, in accordance with such rules and procedures as are approved by the Committee. (3) The sum of items (1) and (2) above shall be multiplied by a factor of between 0 and 1.5 to reflect the Participant's level of individual performance, in accordance with such rules and procedures as are approved by the Committee. (b) The Chief Executive Officer shall recommend to the Committee an Award for each Participant, except that the Committee shall have full responsibility for assessing the performance of the Chief Executive Officer and that the Committee shall make the final determination of all Awards. 8. Award Payment (a) For Incentive Awards Relating to Plan Years Ending Prior to 1/1/96: (i) There shall be established an account for each Participant for each Plan Year which shall, to the extent not paid to the Participant, be initially credited with the amount of the Participant's Incentive Award. The Plan shall be unfunded. This Corporation shall not be required to segregate any amounts credited to any Participant's Account, which shall be established merely as an accounting convenience. Title to and beneficial ownership of any amounts credited to a Participant's Account shall at all times remain in this Corporation, and no Participant or shall have any interest whatsoever in any specific assets of this Corporation. All amounts credited to Participants' Accounts shall at all times remain solely the property of this Corporation subject to the claims of its general creditors and available for this Corporation's use for whatever purpose desired. (ii) The amount credited to a Participant's Account shall be treated for valuation purposes as if it had been used to purchase shares of the Common Stock of this Corporation or Enterprise, whichever is then listed on the New York Stock Exchange, on the date it is credited to the Participant's Account at a price equal to the average of the high and low sale prices of such Common Stock on such date on the New York Stock Exchange. For the purpose of valuing a Participant's Account, the equivalent shares so credited to a Participant's Account shall be treated as if they were to accrue dividends the same as actual shares of Common Stock, and such equivalent dividends were used to purchase additional shares of such Common Stock at a price equal to 95% of the average of the high and low sale prices of such Common Stock on the New York Stock Exchange on the dividend payment date. (iii) When a distribution or partial distribution is to be made, cash in the amount of the equivalent number of shares of Common Stock to be distributed times the average of the high and low sale prices of such Common Stock on the New York Stock Exchange as of the Distribution Date shall be distributed. (iv) Distribution of a Participant's Account attributable to a Plan Year shall be made in yearly payments over a period of three years, commencing with the second year following the Plan Year to which the Incentive Award relates, each yearly payment to be determined by dividing the value of such Account by the number of payments remaining. (b) For Incentive Awards Related to Plan Years Beginning After 12/31/95: Participants' Incentive Awards shall be made in one lump sum cash payment as soon as practicable after the Determination Date. 9. Deferral of Awards (a) Effective January 1, 1997, receipt of payment of Incentive Awards earned pursuant to this Plan may no longer be voluntarily deferred pursuant to this Plan. (b) Also effective on that date, all amounts previously deferred under the voluntary deferral provisions of this Plan shall be transferred (using the last sale price for the Common Stock on December 31, 1996 as a reference for the amount to be transferred) to the Deferred Compensation Plan for Certain Employees of Public Service Electric and Gas Company, as amended, and be treated in accordance with the terms of that plan. 10. Termination (a) If the employment of a Participant by this Corporation is terminated by the Participant's death, Disability or Retirement, the entire value of the Participant's Account shall be distributed as soon as practicable. In addition, the Committee shall, if it determines that Incentive Awards may be earned for such year of termination, prorate an Award for that part of the year in which the Participant was participating prior to such termination and this Corporation shall pay the prorated Award as soon as practicable after determination, unless otherwise determined by the Committee. (b) If the employment of a Participant is terminated for any reason other than death, Disability or Retirement, any amounts held for the Account of Participant upon any such termination which have not been paid because of the mandatory deferral provisions of Paragraph 8(a) shall be forfeited, unless otherwise determined by the Committee, and the balance of the Participant's Account shall be distributed as soon as practicable. In addition, the Participant shall not receive an Award for that part of the Plan Year in which the Participant was participating at the time of termination, unless otherwise determined by the Committee. (c) If a Participant becomes or ceases to be a Participant during a Plan Year, any Award to the Participant shall be appropriately prorated from the time the Participant entered or left the Plan to the end of the Plan Year. (d) In the case of a Participant's death, payment of the entire value of the Participant's Account under the Plan and/or any Award related to the Participant's final year of participation shall be made to the Participant's estate as a lump sum as soon as practicable after the Participant's death. 11. Assignment No benefit under the Plan shall in any manner or to any extent be assigned, alienated, or transferred by any Participant or be subject to attachment, garnishment or other legal process. 12. Plan Does Not Constitute an Employment Agreement This Plan shall not constitute a contract for the continued employment of any Participant by this Corporation. This Corporation reserves the right to modify a Participant's compensation at any time and from time to time as it considers appropriate and to terminate his employment for any reason at any time notwithstanding this Plan. 13. Amendment or Termination of the Plan by this Corporation The Board of Directors of this Corporation may, in its sole discretion, amend, modify or terminate this Plan at any time, provided, however, that no such amendment, modification or termination shall materially adversely affect the right of a Participant in respect of an Incentive Award previously earned by him which has not been paid, unless such Participant or his legal representative shall consent to such change. If this Plan is terminated during any Plan Year in which Participants have been selected to participate, the Board of Directors may authorize the Committee to prorate and make provision for payment of Awards for such period. 14. What Constitutes Notice Any notice hereunder to a Participant or his legal representative shall be given either by delivering it, or by depositing it in the United States mail, postage prepaid, addressed to his last-known address. Any notice to this Corporation or the Committee hereunder shall be given either by delivering it, or depositing it in the United States Mail, postage prepaid, to the Secretary, Enterprise Diversified Holdings Incorporated c/o/Public Service Enterprise Group Incorporated, 80 Park Plaza, T4B, P.O. Box 1171, Newark, New Jersey 07101. 15. Advance Disclaimer of Any Waiver Failure by this Corporation or the Committee to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of any such term, covenant or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a waiver or relinquishment of any such right or power at any other time or times. 16. Effect of Invalidity of Any Part of the Plan The invalidity or unenforceability of any provision hereof shall in no way affect the validity of enforceability of any other provision. 17. Plan Binding on Any Successor Owner Except as otherwise provided herein, this Plan shall inure to the benefit of and be binding upon this Corporation, its successors and assigns, including but not limited to any corporation which may acquire all or substantially all of this Corporation's assets and business or with or into which this Corporation may be consolidated or merged. 18. Laws Governing This Plan Except to the extent federal laws applies, this Plan shall be governed by the laws of the State of New Jersey. 19. Miscellaneous The masculine pronoun shall also mean the feminine wherever appropriate. 20. Withholding This Corporation shall have the right to deduct from any payment any sums to be withheld by federal, state, or local tax law. There is no obligation hereunder that any Participant or other person be advised in advance of the existence of the tax or the amount so required to be withheld. 21. Effective Date This Plan shall be effective as of January 1, 1993. EX-10.A(20) 13 DEFERRED COMPENSATION PLAN (EDHI) DEFERRED COMPENSATION PLAN FOR CERTAIN EMPLOYEES OF ENTERPRISE DIVERSIFIED HOLDINGS INCORPORATED December 21, 1992 As Amended December 17, 1996 TABLE OF CONTENTS Page Number 1. Purpose 1 2. Definitions Of Terms Used In This Plan 1 (a) Account (b) Assets (c) Beneficiary (d) Company (e) Compensation (f) Deferred Compensation (g) Disability (h) Employee (i) Pension Plan (j) Plan 3. Election as to Amount of Compensation That Is To Be Deferred 2 4. How The Account Is To Be Maintained 2 (a) Establishment of Account (b) Interest on Assets in the Account (c) Title to be Beneficial Ownership of Assets 5. Distribution From The Account 3 (a) Election as to the Commencement of the Distribution (b) Election as to the Timing of the Distribution(s) (c) Distribution in Case of Certain Disability (d) Distribution in Case of Death (e) Request for Change in Distribution (f) Not Terminated if Transferred to Company-Owned Corporation (g) Company may Distribute in Lump-Sum if Distributable Amount Less Than $5,000 6. Unfunded Adjustments to Make Up For Reduced Benefit Under Pension Plan 6 7. Assignment 6 8. Plan Does Not Constitute An Employment Agreement 7 9. Amendment Or Termination Of The Plan By The Company 7 10. What Constitutes Notice 7 11. Advance Disclaimer Of Any Waiver On The Part Of The Company 7 12. Effect Of Invalidity Of Any Part Of The Plan 8 13. Plan Binding On Any Successor Owner 8 14. Laws Governing This Plan 8 15. Miscellaneous 8 Schedule A - Elections In Connection With Deferral Of Compensation 9 Schedule B - Designation Of Beneficiary(ies) 11 DEFERRED COMPENSATION PLAN FOR CERTAIN EMPLOYEES OF ENTERPRISE DIVERSIFIED HOLDINGS INCORPORATED December 21, 1992 1. Purpose. The purpose of this Plan is to provide a method to certain select and key employees of the Company to defer compensation as provided herein. 2. Definitions Of Terms Used In This Plan. As used in this Plan, the following words and phrases shall have the meanings indicated: (a) "Account" - The Deferred Compensation Account described in Paragraph 4 of this Plan. (b) "Assets" - All Compensation and interest that have been credited to an Employee's Account in accordance with Paragraph 4 of this Plan. (c) "Beneficiary" - The individual(s) and/or entity(ies) designated and defined by Schedule B of the Plan. (d) "Company" - Enterprise Diversified Holdings Incorporated. (e) "Compensation" - The total remuneration paid to an Employee for services rendered to the Company, excluding the Company's cost for any public or private employee benefit plan. Compensation deferrable under this Plan shall specifically include any and all amounts transferred from the deferred compensation accounts of the Management Incentive Compensation Plan of Enterprise Diversified Holdings Incorporated; (f) "Deferred Compensation" - The amount of Compensation deferred pursuant to Paragraph 3 of this Plan. (g) "Disability" - Disability so as to be incapable of performing further work for the Company that results in termination of employment. (h) "Employee" - Each employee of the Company as may be designated by the Company. (i) "Pension Plan" - The Pension Plan of Public Service Electric and Gas Company. (j) "Plan" - The Deferred Compensation Plan for Certain Employees of Enterprise Diversified Holdings Incorporated. 3. Election As To The Amount Of Compensation That Is To Be Deferred. An employee may elect to defer any portion of his compensation otherwise payable for services rendered for the Company after the date of adoption of this Plan. Any such election must be made by filing with the Company an "Election in Connection with Deferral of Compensation", the form of which is attached to this Plan as Schedule A and is hereinafter referred to as "Schedule A". An Employee may change (using Schedule A for such purposes), not later than December 31 of any year, the amount of Compensation to be deferred by him with respect to the next succeeding calendar year or years. In the calendar year that an Employee first becomes eligible to participate in this Plan, such Employee may elect to defer Compensation for part of that calendar year but only if such election is made within thirty (30) days after the Employee first becomes eligible to participate in this Plan. Compensation may be deferred prospectively only, and the amount of Compensation to be deferred may be changed only with respect to future calendar years. 4. How The Account Is To Be Maintained. (a) Establishment of Account - The Company shall establish an Account for each Employee who elects to participate in the Plan. Each Employee's Account shall be credited at the end of each month with an amount equal to the Deferred Compensation which would have otherwise been payable to him that month. (b) Interest on Assets in the Account - The Assets credited to each Employee's Account shall accrue interest each calendar quarter at an annual rate equal to the rate charged by The Chase Manhattan Bank, N.A. on the first business day of such calendar quarter for prime commercial loans of 90-day maturity (based on actual numbers of days, 360 days to the year), plus 1/2 of 1%. Such interest shall be computed on the average daily balance in the Employee's Account during each calendar quarter, excluding any Assets which have been distributed from the Employee's Account during such quarter, and shall be credited to the Employee's Account and compounded on the last day of March, June, September and December, and interest on Assets distributed from an Employee's Account shall accrue in the same manner to the date of, be credited to the Employee's Account on the date of, and be paid with, such distribution. (c) Title to and Beneficial Ownership of Assets - The Plan shall be unfunded. The Company shall not be required to segregate any amounts credited to any Employee's Account, which shall be established merely as an accounting convenience. Title to and beneficial ownership of any Assets, whether Deferred Compensation or interest credited to an Employee's Account pursuant to Paragraphs 4(a) and (b) herein above, shall at all times remain in the Company, and no Employee nor Beneficiary shall have any interest whatsoever in any specific assets of the Company. All Assets shall at all times remain solely the property of the Company subject to the claims of its general creditors and available for the Company's use for whatever purpose desired. 5. Distribution From The Account (a) Election as to the Commencement of the Distribution - By election on Schedule A filed with the Company, an Employee may elect to have distribution from his Account commence either (l) within thirty (30) days after the date he ceases to be employed by the Company or, in the alterative, (2) in the month of January of any calendar year following termination of employment elected by the Employee, but in any event, no later than the later of (a) the January of the year following the year of the Employee's 70th birthday or (b) the January following termination of employment. An Employee may change such election by filing a subsequent Schedule A, but any such change shall apply only to future deferrals. The actual date that distribution shall commence shall be a date within the elected period to be determined by the Company in its sole discretion. (b) Election as to the Timing of the Distribution(s) - By election on Schedule A filed with the Company an Employee may elect to receive the distribution of his Account in the form of (l) one lump-sum payment, (2) annual distributions over a five-year period or (3) annual distributions over a 10-year period. An Employee may change such election by filing a subsequent Schedule A, but any such change shall apply only to future deferrals. In the event a lump-sum payment is made under this Plan, the Assets credited to an Employee's Account, including interest at the rate provided in Paragraph 4(b) of this Plan to the date of distribution, shall be paid to the Employee on the date determined under Paragraph S(a) of this Plan. In the case of a distribution over a period of years, the Company shall pay to the Employee on the date determined under Paragraph S(a) of this Plan and on the yearly anniversaries of such date, annual installments of the unpaid balance of the Assets in the Employee's Account, including interest on the unpaid balance at the rate provided in Paragraph 4(b) of this Plan to the date of distribution. The amount of each installment shall be determined by multiplying the then unpaid balance, plus accrued interest, in the Employee's Account by a fraction, the numerator of which is one and the denominator of which is the number of annual installments remaining to be paid. (c) Distribution in Case of Certain Disability - In the event of an Employee's Disability prior to a calendar year elected by the Employee under Paragraph S(a)(2) of this Plan for distribution to commence, distribution of the Employee's Account shall commence in the month following the month in which the Employee terminates employment for disability, in accordance with the Employee's election under Paragraph 5(b) of this Plan as to the form of distribution. The actual date that distribution shall commence shall be a date within such month determined by the Company in its sole discretion. (d) Distribution in Case of Death - In the event of an Employee's death, the balance of the Employee's Account shall be distributed to the Employee's Beneficiary(ies) over a period of not more than five (S) years, in accordance with his election on Schedules A and B (filed with the Company) for distribution in case of death. Any change in the period over which such payments are made shall only apply to future deferrals. Such distribution shall be made in a manner consistent with Paragraph S(b) of this Plan and shall commence in the month of January of the year after the year of the Employee's death, on a date within said month to be determined by the Company in its sole discretion. Additional annual payment for distributions made over a period of more than one year shall be made on the yearly anniversaries of such date. In the event of an Employee's death after distribution of his Account has commenced, any election under this Paragraph S(d) shall not extend the time of payment of his Account beyond the time when distribution would have been completed if he had lived. An Employee may change Beneficiary designations by filing a subsequent Schedule B with the Company. (e) Request for Change in Distribution - An Employee, Beneficiary or a legal representative may request a change in the timing, frequency or amount of payments made from an Employee's Account by filing a written request therefor with the Company. The Company may, in it sole discretion, grant such request only if the Company determines that an emergency beyond the control of the Employee, Beneficiary or legal representative exists and which would cause such Employee, Beneficiary or legal representative severe financial hardship if the payment of such benefits were not approved. Any such distribution for hardship shall be limited to the amount needed to meet such emergency. An Employee who makes a hardship withdrawal may not reenter this Plan for 12 months after the date of withdrawal. Any distribution under this Paragraph S(e) shall commence within 30 days after the Company grants such request for hardship withdrawal. (f) Employment not Terminated if Transferred to Company-owned or Commonly Controlled Corporation. - For the purposes of this Paragraph 5, an Employee shall not be deemed to have terminated his employment if he is transferred to the employ of a corporation in which the Company owned a majority equity interest or in which a majority equity interest is owned, directly or indirectly, by a company under common control with the Company. (g) Company may Distribute in Lump-Sum if Distributable Amount Less Than $5,000 The Company reserves the right to make a lump-sum distribution, notwithstanding any other provision of this Plan, if the total Assets in an Employee's Account are $5,000 or less at any time after the Employee ceases to be employed by the Company. 6. Unfunded Adjustments To Make Up For Reduced Benefit Under Pension Plan. If an Employee, on termination of employment or thereafter, or a Beneficiary of the Employee under the Pension Plan, is entitled to any benefit under the Pension Plan, the Company shall pay out of its general funds a supplementary benefit (as such time after the Employee's retirement and in such manner as the Company in its sole discretion shall determine) equivalent to the excess of the amount computed in (a) below over the amount computed in (b) below: (a) The benefit to which the Employee or such Beneficiary would have been entitled if the Employee's Final Earnings, as defined in the Pension Plan, had included all Compensation earned which would have been included in his Final Earnings if this Plan were not in effect. (b) The actual benefit to which the Employee or such Beneficiary is entitled under the Pension Plan. 7. Assignment. No benefit under the Plan shall in any manner or to any extent be assigned, alienated, or transferred by any Employee or Beneficiary under the Plan or subject to attachment, garnishment or other legal process. 8. Plan Does Not Constitute An Employment Agreement. This Plan shall not constitute a contract for the continued employment of any Employee by the Company. The Company reserves the right to modify an Employee's compensation at any time and from time to time as it considers appropriate and to terminate its employment for any reason at any time notwithstanding this Plan. 9. Amendment Or Termination Of The Plan By The Company. The Board of Directors of the Company may, in its sole discretion, amend, modify or terminate this Plan at any time, provided, however, that no such amendment, modification or termination shall materially adversely affect the right of an Employee in respect of Deferred Compensation previously earned by him which has not been paid, unless such Employee or his legal representative shall consent to such change. 10. What Constitutes Notice. Any notice to an Employee, Beneficiary or legal representative hereunder shall be give either by delivering it or by depositing it in the United States mail, postage prepaid, addressed to his last-known address. Any notice to the Company hereunder (including the filing of Schedules A and B) shall be given either by delivering it, or depositing it in the United States mail, postage prepaid, to the Secretary of the Company, c/o Public Service Enterprise Group Incorporated, 80 Park Plaza, T-4B, P.O. Box 570, Newark, New Jersey 07101. 11. Advance Disclaimer Of Any Waiver On The Part Of The Company. Failure by the Company to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of any such term, covenant or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a waiver or relinquishment of any such right or power at any other time or times. 12. Effect On Invalidity Of Any Part Of The Plan. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. 13. Plan Binding On Any Successor Owner. Except as otherwise provided herein, this Plan shall inure to the benefit of and be binding upon the Company, its successors and assigns, including but not limited to any corporation which may acquire all or substantially all of the Company's assets and business or with or into which the Company may be consolidated or merged. 14. Laws Governing This Plan. Except to the extent federal law applies, this Plan shall be governed by the laws of the State of New Jersey. 15. Miscellaneous. The masculine pronoun shall mean the feminine wherever appropriate. Schedule A DEFERRED COMPENSATION PLAN FOR CERTAIN EMPLOYEES OF ENTERPRISE DIVERSIFIED HOLDINGS INCORPORATED (THE PLAN) Elections in Connection with Deferral of Compensation Section 1. Election as to Compensation to be Deferred. Note: THIS SECTION IS TO BE USED TO MAKE OR CHANGE AN ELECTION UNDER PARAGRAPH 3 OF THE PLAN, ANY CHANGE IN ELECTION MUST BE MADE NO LATER THAN DECEMBER 31 OF THE YEAR PRECEDING THE YEAR IN WHICH YOU WISH THE CHANGE TO APPLY. I hereby elect to defer, in accordance with the provisions of the Plan: (a) a month of my Compensation; or (b) All of my Compensation in excess of S per year. $ per year. Section 2. Election as to Commencement of Distribution From Account Note: THIS SECTION IS TO BE USED (A) WHEN FIRST BECOMING AN EMPLOYEE COVERED BY THE PLAN AND (B) PRIOR TO DECEMBER 31 OF ANY GIVEN YEAR IF THERE IS TO BE ANY CHANGE IN THE ORIGINAL ELECTION. ANY SUCH CHANGE WILL ONLY APPLY TO FUTURE DEFERRALS. I hereby elect, in accordance with the provisions of the Plan, to have distribution from my Account commence: (a) Within thirty (30) days after I cease to be employed by the Company. (b) In the month of January, unless I am employed by the Company at such time, in which case within 30 days after I cease to be employed by the Company. Employee's Initials Date Schedule A Section 3. Election as to the Timing of the Distribution. Note: THIS SECTION IS TO BE USED (A) WHEN FIRST BECOMING AN EMPLOYEE COVERED BY THE PLAN AND (B) PRIOR TO DECEMBER 31 OF ANY GIVEN YEAR IF THERE IS TO BE ANY CHANGE IN THE ORIGINAL ELECTION. ANY SUCH CHANGE WILL ONLY APPLY TO FUTURE DEFERRALS. I hereby elect, in accordance with the provisions of the Plan, to have the distribution of my Account paid: (a) In one lump-sum. (b) In annual installments over a period of five (S) years. (c) In annual installments over a period of ten (10) years. Section 4. Election As To Method Of Distribution In Case of Death. Note: THIS SECTION TO BE USED TO SELECT THE METHOD OF DISTRIBUTION IN THE CASE OF DEATH. PERIOD SELECTED MAY NOT BE MORE THAN FIVE (5) YEARS. In case of my death, I hereby elect, in accordance with the provisions of the Plan, to have the distribution of my Account paid over a period of year(s) to my Beneficiary(ies) designated on Schedule B. ___________________, 19___ - ------------------------------ ------------------------------------ WITNESS EMPLOYEE SIGNATURE Schedule B SECONDARY BENEFICIARIES - The following beneficiary(ies) shall receive all benefits payable under the Plan in the event of my death in the proportions designated hereunder only if all of my Primary Beneficiaries have predeceased me. If all Primary Beneficiaries have predeceased me and if any one or more of the Secondary Beneficiaries designated hereunder shall predecease me, such Secondary Beneficiary's share(s) shall be divided equally among the Secondary Beneficiaries. NAME AND PRESENT PROPORTIONATE INTEREST ADDRESS OF PRIMARY OF PRIMARY RELATIONSHIP BENEFICIARY(IES) BENEFICIARY(IES) TO EMPLOYEE - ------------------------- ----------% --------------- - ------------------------- - ------------------------- ----------% --------------- - ------------------------- - ------------------------- ----------% --------------- - ------------------------- - ------------------------- ----------% --------------- - ------------------------- ESTATE - In the event I have declined to designate a Beneficiary hereunder or if all of the Beneficiaries that I have designated predecease me, then all benefits payable under the Plan shall be payable to my Estate. Date: - ------------------------------ ------------------------------------ WITNESS EMPLOYEE SIGNATURE EX-10.A(21) 14 EXECUTIVE LONG-TERM INCENTIVE PLAN (ERI) EXECUTIVE LONG-TERM INCENTIVE COMPENSATION PLAN Energis Resources Incorporated January 1, 1997 TABLE OF CONTENTS Page No. 1. Purposes.................................................... 1 2. Definitions................................................. 1 3. Eligibility................................................. 2 4. Administration.............................................. 3 5. Determination of Target Incentive Award..................... 3 6. Determination of Performance Objectives..................... 3 7. Determination of Achievement of Performance Objectives...... 3 8. Determination of Award Cycle................................ 4 9. Determination of Final Incentive Performance Awards......... 4 10. Payment of Final Incentive Performance Awards............... 4 11. Termination................................................. 4 12. Assignment.................................................. 5 13. Plan Does Not Constitute an Employment Agreement............ 5 14. Amendment or Termination of the Plan by the Company......... 5 15. What Constitutes Notice..................................... 5 16. Advance Disclaimer of Any Waiver............................ 6 17. Effect on Invalidity of Any Part of the Plan................ 6 18. Plan Binding on Any Successor Owner......................... 6 19. Laws Governing This Plan.................................... 6 20. Miscellaneous............................................... 6 21. Withholding................................................. 6 22. Effective Date.............................................. 7 ENERGIS RESOURCES INCORPORATED EXECUTIVE LONG-TERM INCENTIVE COMPENSATION PLAN January 1, 1997 1. Purposes The purposes of this Plan are to foster attainment of the long-term financial and operating objectives of the Company by providing incentive to members of the senior management of the Company tied to the achievement of those long-term objectives; to supplement the Company's salary and benefit programs so as to provide overall compensation for such executives which is competitive with corporations with which the Company must compete for executive talent; and to assist the Company in attracting and retaining executives who can have a material, positive influence on its long-term financial and operating results. 2. Definitions As used in this Plan, the following words and phrases shall have the following meanings unless the context clearly requires otherwise: (a) "Award Cycle" - a Performance Cycle with respect to which Final Incentive Performance Awards to Participants in the Plan are approved by the Committee in accordance with Section 9. (b) "Base Salary" - a sum equal to the annual rate of a Participant's base compensation as of the first day of any Performance Cycle. (c) "Committee" - the Compensation Committee of the Board of Directors of the Company. (d) "Company" - Energis Resources Incorporated (e) "Disability" - any physical or mental condition which renders a Participant incapable of performing further work for the Company and that results in termination of such Participant's employment. (f) "Distribution Date" - a date for distribution established by the Committee pursuant to Paragraph 10(b) of this Plan. (g) "Final Incentive Performance Award" - the amount awarded to a Participant in accordance with Paragraph 9 of this Plan. (h) "Participant" - such senior employees of the Company as may be designated by the Committee to participate in this Plan. (i) "Performance Cycle" - a period of three consecutive Plan Years as designated by the Committee. (j) "Plan" - this Energis Resources Incorporated Executive Long-Term Incentive Compensation Plan. (k) "Plan Year" - the calendar year. (l) "Retirement" - termination of employment with the Company (i) at or after the age of 62 or (ii) under circumstances entitling the Participant to an immediately payable periodic retirement benefit under the Public Service Electric and Gas Company Pension Plan or the Cash Balance Pension Plan of Public Service Electric and Gas Company. (m) "Subsidiary" - a corporation at least 80% of the voting shares of which are owned by this Company. (n) "Target Incentive Award" - the amount determined under Paragraph 5 of this Plan. 3. Eligibility (a) The Committee may select such employees of the Company and its Subsidiaries (individually or by position) for participation in the Plan upon such terms as it deems appropriate, due to the employee's responsibilities and opportunity to contribute substantially to the attainment of the long-term financial and operating objectives of the Company. A determination with respect to participation for any particular Performance Cycle shall be made no later than the beginning of the Performance Cycle, except that designation of Participants with respect to the first Performance Cycle following adoption of the Plan shall be made within 30 days of the initial adoption of this Plan and selection for participation in the Plan of new hires or of employees newly promoted to executive positions shall be made within 30 days of hire or promotion. Further, the Committee may adjust a Final Incentive Performance Award of any Participant if the Committee deems it appropriate to so do reflect a change which may have occurred during a Performance Cycle in such Participant's position or responsibilities. (b) Participation in the Plan in one Plan Year or Performance Cycle shall not guarantee participation in any other Plan Year or Performance Cycle. The Committee shall have sole discretion with respect to the selection of Participants or whether to suspend operation of the Plan for any period of time. 4. Administration (a) The Plan shall be administered by the Committee. Subject to the provisions of the Plan, the Committee shall have full and final authority to select Participants, to designate the Target Incentive Award for each Participant, to determine Performance Objectives for a Performance Cycle and to determine the amount of all Final Incentive Performance Awards. Also, notwithstanding anything contained in this Plan to the contrary, the Committee may adjust a Participant's Final Incentive Award based upon any reasonable criteria it may determine. The Committee shall also have, subject to the provisions of the Plan, full and final authority to interpret the Plan, to establish and revise rules, regulations and guides relating to the Plan, to entertain appeals of Participants or beneficiaries regarding alleged adverse determinations under the Plan and to make any other determinations that it believes necessary or advisable for the administration of the Plan. (b) All decisions and determinations by the Committee shall be final and binding upon all parties, including the Company, Participants, beneficiaries and other employees. 5. Determination of Target Incentive Award Prior to each Performance Cycle, or in the case of the first Performance Cycle, within 30 days after the initial adoption of the Plan and, in the case of new hires or newly promoted executives selected for participation, within 30 days from the date of hire or promotion, the Committee shall approve a Target Incentive Award for each Participant based upon the Participant's position and potential to contribute to the attainment of the Company's long-term financial and operating objectives. The Target Incentive Award shall be expressed as a whole dollar amount equal to a percentage of the Participant's Base Salary. 6. Determination of Performance Objectives (a) Concurrent with the approval of Target Incentive Awards for Participants, the Committee shall establish Performance Objectives for the Company for the related Performance Cycle. The Company's actual performance during a Performance Cycle will be compared to these Performance Objectives in determining the amount, if any, of each Participant's Final Incentive Performance Award. Performance Objectives shall be measurable criteria regarding the Company's quality of earnings, earnings growth, asset growth, market share and/or such other indicators selected by the Committee to reflect the Company's business plan for the related Performance Cycle. (b) At the time that it approves Performance Objectives for a Performance Cycle, the Committee shall assign to each a relative weight to be afforded the accomplishment of each such Performance Objective in calculating the Final Incentive Performance Award of each Participant. 7. Determination of Achievement of Performance Objectives Within 90 days of the end of each Performance Cycle, the Committee shall certify the extent to which the Company has achieved the several Performance Objectives which have been established for such Performance Cycle. Certification shall be by resolution of the Committee, which resolution shall state the percentage of achievement of each respective Performance Objective. The determination of such achievement shall be by reference to the Company's audited financial statements. 8. Determination of Award Cycle Not later than 120 days after the close of each Performance Cycle, the Committee shall, in its sole discretion, determine whether any Participant shall be granted a Final Incentive Performance Award with respect to such Performance Cycle. A Performance Cycle for which the Committee has determined that a Final Incentive Performance Award shall be paid shall be deemed an Award Cycle. 9. Determination of Final Incentive Performance Awards To determine each Participant's Final Incentive Performance Awards, the Participant's Target Incentive Award shall be multiplied by an applicable percentage based upon the Committee's certification of the Company's achievement of its Performance Objectives for the Performance Cycle and the following chart: ================================================================================ Weighted Average Final Incentive Performance Award* as Achievement of a Percent of Target Performance Objectives Incentive Award - -------------------------------------------------------------------------------- > 150% 200% - - -------------------------------------------------------------------------------- 125% 150% - -------------------------------------------------------------------------------- 100% 100% - -------------------------------------------------------------------------------- 75% 50% - -------------------------------------------------------------------------------- < 50% 0% - - -------------------------------------------------------------------------------- *Awards for weighted average achievement of Performance Objectives at levels above 50% and below 150%, but not shown above, are to be interpolated. ================================================================================ 10. Payment of Final Incentive Performance Awards Payment of a Participant's Final Incentive Performance Award shall be made within 30 days of the date that the Committee approves the amount of such award unless the Committee determines, in its sole discretion, that payment shall be made at some other time. Payment shall be paid in cash by check. 11. Termination (a) If the employment of a Participant by the Company is terminated on account of the Participant's death, Disability or Retirement after such Participant shall have completed at least one year of a Performance Cycle, the Committee shall, if it determines that a Final Incentive Performance Award may be earned for any such Performance Cycle(s) which include the Plan Year of termination, prorate the Final Incentive Performance Award(s) for that part of such Performance Cycle(s) in which the Participant was participating prior to such termination and the Company shall pay the prorated Final Incentive Performance Award as soon as practicable after determination, unless otherwise determined by the Committee. (b) If the employment of a Participant is terminated for any reason other than death, Disability or Retirement, the Participant shall not receive any Final Incentive Performance Award for that part of any uncompleted Performance Cycle(s) in which the Participant was participating at the time of termination. (c) If a Participant becomes a Participant during a Performance Cycle, any Final Incentive Performance Award to the Participant shall be appropriately prorated from the time the Participant entered the Plan to the end of the Performance Cycle. (d) In the case of a Participant's death, payment of the entire value of the Participant's award under the Plan shall be made to the Participant's Estate. Such payment shall be made as a lump sum as soon as practicable after the Participant's death. 12. Assignment No benefit under the Plan shall in any manner or to any extent be assigned, alienated or transferred by any Participant under the Plan or subject to attachment, garnishment or other legal process. 13. Plan Does Not Constitute an Employment Agreement This Plan shall not constitute a contract for the continued employment of any Participant by the Company. The Company reserves the right to modify a Participant's compensation at any time and from time to time as it considers appropriate and to terminate any Participant's employment for any reason at any time notwithstanding this Plan. 14. Amendment or Termination of the Plan by the Company The Board of Directors of the Company may, in its sole discretion, amend, modify or terminate this Plan at any time, provided, however, that no such amendment, modification or termination shall materially adversely affect the right of a Participant in respect of a previously earned Final Incentive Performance Award which has not been paid, unless such Participant or his or her legal representative shall consent to such change. If this Plan is terminated during any Performance Cycle in which Participants have been selected to participate, the Board of Directors may authorize the Committee to prorate and make provision for payment of Final Incentive Performance Awards for such a period. 15. What Constitutes Notice Any notice to a Participant or legal representative hereunder shall be given either by delivering it, or by depositing it in the United States mail, postage prepaid, addressed to such person's last-known address. Any notice to the Company or the Committee hereunder shall be given either by delivering it, or depositing it in the United States Mail, postage prepaid, to the Secretary, Energis Resources Incorporated, 80 Park Plaza, T4B, P. O. Box 1171, Newark, New Jersey 07101. 16. Advance Disclaimer of Any Waiver Failure by the Company or the Committee to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of any such term, covenant or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a waiver or relinquishment of any such right or power at any other time or times. 17. Effect on Invalidity of Any Part of the Plan The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. 18. Plan Binding on Any Successor Owner Except as otherwise provided herein, this Plan shall inure to the benefit of and be binding upon the Company, its successors and assigns, including but not limited to any corporation which may acquire all or substantially all of the Company's assets and business or with or into which the Company may be consolidated or merged. 19. Laws Governing This Plan Except to the extent federal law applies, this Plan shall be governed by the laws of the State of New Jersey. 20. Miscellaneous The masculine pronoun shall also mean the feminine and vice versa wherever appropriate. 21. Withholding The Company shall have the right to deduct from any payment any sums required to be withheld by federal, state, or local tax law. There is no obligation hereunder that any Participant or other person be advised in advance of the existence of the tax or the amount so required to be withheld. 22. Effective Date This Plan shall be effective as of January 1, 1997 although, at the Committee's discretion, the first year of the first Performance Cycle may be less than a full calender year and may commence prior to such date, but no earlier than June 1, 1996. EX-10.A(22) 15 LIMITED SUPPLEMENTAL BENEFITS PLAN (EDHI) LIMITED SUPPLEMENTAL BENEFITS PLAN FOR CERTAIN EMPLOYEES OF ENTERPRISE DIVERSIFIED HOLDINGS INCORPORATED Amended as of January 1, 1997 TABLE OF CONTENTS PAGE 1. Purpose.......................................................... 1 2. Definitions of Terms Used in the Plan ........................... 1 3. Death Benefit.................................................... 3 4. Retirement Benefit............................................... 3 5. Administration of Accounts ...................................... 7 6. Designations of Beneficiaries ................................... 8 7. Limitation of Benefit .......................................... 10 8. Company May Make Certain Lump-sum Distributions................. 10 9. Plan Does Not Constitute an Employment Agreement................ 11 10. Amendment or Termination of the Plan ........................... 11 11. What Constitutes Notice......................................... 11 12. Advance Disclaimer of Waiver ................................... 12 13. Effect of Invalidity of Any Part of the Plan ................... 12 14. Plan Binding on Any Successor .................................. 12 15. Law Governing the Plan ......................................... 12 16. Miscellaneous .................................................. 12 LIMITED SUPPLEMENTAL BENEFITS PLAN FOR CERTAIN EMPLOYEES OF ENTERPRISE DIVERSIFIED HOLDINGS INCORPORATED 1. Purpose. The purpose of this Plan is to assist the Company in attracting and retaining a stable pool of key managerial talent and to encourage long-term key employee commitment to the Company by providing selected employees of the Company with certain limited supplemental death and retirement benefits as defined herein. The Plan is intended to provide such benefits to a select group of management or highly compensated employees within the meaning of ERlSA. 2. Definitions Of Terms Used In The Plan. As used in the Plan, the following words and phrases shall have the meanings indicated: (a) "Account" - Any account established pursuant to Paragraph 3(b) or 4(d) of the Plan. (b) "Assets" - All amounts that have been credited to an Employee's Account in accordance with Paragraph 3(b), 4(d), or S(b) of the Plan. (c) "Beneficiary" - The individual(s) and/or entity(ies) designated in writing by a Participant in the form attached to the Plan as Schedule A. (d) "Code" - The Internal Revenue Code of 1986, as amended. (e) "Company" - Enterprise Diversified Holdings Incorporated and its Subsidiaries. (f) "Compensation" - (i) for the purposes of calculating the Death Benefit pursuant to Paragraph 3 of the Plan, as to any Participant, Compensation shall be equal to the annual rate of salary in effect at the date of death; and (ii) for the purposes of calculating the Retirement Benefit pursuant to Paragraph 4 of the Plan, as to any Participant, Compensation shall be equal to the average of the total remuneration paid to such Participant for services rendered to the Company or any of its subsidiaries or affiliates, excluding the Company's, or any such subsidiary's or affiliate's, cost for any public or private employee benefit plan (including, without limitation, the Long Term Incentive Compensation Plan of Enterprise), but including all elective contributions that are made by the Company or any subsidiary or affiliate on behalf of Participant which are not includable in income under Code Sections 125 or 401(k), for the five years ending at the earlier of such Participant's date of Retirement or the date he attains normal retirement age under the Pension Plan. Provided, however, that for the purposes of Paragraph 4 of the Plan, Compensation with respect to any Participant shall not exceed the amount which is 130% of the average of annual base salary of the Participant for the applicable five-year period. (g) "ERISA" - The Employee Retirement Income Security Act of 1974, as amended. (h) "Participant" -- Each employee of the Company or any one of its subsidiaries nominated by the Chief Executive Officer and designated by the Board of Directors of the Company. The Chief Executive Officer of the Company shall nominate such select and key employees of the Company or any one of its subsidiaries upon such terms as he shall deem appropriate due to the employee's responsibilities and opportunity to contribute substantially to the financial and operating objectives of the Company or the subsidiary. (i) "Pension Plan" - The Pension Plan of Public Service Electric and Gas Company. (j) "Plan" - The Limited Supplemental Benefits Plan for Certain Employees of Enterprise Diversified Holdings Incorporated. (k) "Retirement" - For the purposes of the Plan, Retirement of a Participant shall be deemed to have occurred upon the termination of the Participant's service with the Company or its subsidiary with the right to an immediate benefit under the Pension Plan. Retirement shall not include termination of service with the right to a deferred pension. (l) "Retirement Plan" - Any pension plan within the meaning of ERISA, excluding: (i) the Pension Plan and all defined contribution plans maintained by the Company or any subsidiary, except insofar as any such defined contribution plan may provide supplementary benefits to the Pension Plan (ii) this Plan (iii) all deferred compensation plans, tax credit employee stock ownership plans and thrift plans, and all other profit-sharing plans which are not the principal retirement benefit of a plan sponsor, maintained by sponsors other than the Company or one of its subsidiaries. 3. Death Benefit. (a) Amount of Benefit - If a Participant dies while in the active employment of the Company or one of its subsidiaries, the Company shall provide a death benefit to such Participant's Beneficiary in an amount equal to 150% of the Participant's Compensation, adjusted to the nearest $1,000, or to the next highest $1,000 if such Compensation is a multiple of $500 but not of $1,000. (b) Establishment of Account - Upon the death of a Participant during employment with the Company or one of its subsidiaries, the Company shall establish an Account for the benefit of such Participant's Beneficiary. Such Account shall initially be credited with an amount equal to the benefit provided under Paragraph 3(a) and shall be held and administered as provided in Paragraph 5 of the Plan. 4. Retirement Benefit. (a) General - At Retirement, the Company shall provide each Participant with a retirement benefit calculated as provided in this Paragraph 4. (b) Determination of Benefit -- (i) The Participant's Compensation shall be multiplied by an amount equal to one one-hundredth of the sum of (A) the number of the Participant's years of credited service under the Pension Plan at Retirement, (B) the number of any additional years of service credit to which the Participant may be entitled from the Company, the Company's subsidiary, or any other company, more than fifty percent (50%) of which is owned by Public Service Enterprise Group Incorporated, if applicable, under any written arrangement with the Company, such subsidiary or other company, and (C) 30; but, in no event, shall the multiple be greater than 0.75. (ii) The amount determined under subparagraph (i) of this Paragraph 4(b) shall be reduced by the sum of (A) the amount the Participant would be entitled to at Retirement as an annual pension benefit under the Pension Plan calculated as a single life annuity without reduction for any pre-retirement survivor's option coverage or any reduction for early retirement, (B) 100% of the amount of the unreduced annual Social Security benefit to which the Participant would be entitled at age 65 (or such other age which may be established by the Social Security Administration from time to time as the earliest age at which a Participant may receive an unreduced benefit thereunder), assuming that the Participant has no earnings from the date of Retirement to age 65 (or such other applicable age), or, if greater, any disability benefit under Social Security to which the Participant may be entitled, and (C) the aggregate of the annual benefits to which the Participant is entitled under all Retirement Plans as of the date the Participant is employed by the Company or the Company's subsidiary, such Social Security Benefits and benefits under all Retirement Plans to be calculated as single life annuities without any reductions, under rules, procedures and equivalents determined by the Company. To determine the amounts referred to under (B) and (C) above, the Participant shall file a declaration of all such amounts with the Company in such form as the Company may require from time to time. No benefit shall be paid under the Plan until such a declaration, in satisfactory form, shall be filed with the Company. If a Participant is granted a disability Social Security benefit, he shall notify the Company thereof within 30 days thereof, and the Participant's retirement benefit under this Plan shall be adjusted accordingly. The Company shall be entitled to rely on such statements in making payment, and if any such statement is incorrect or is not furnished, the Company shall be entitled to reimbursement from the Participant, the Beneficiary or their legal representatives for any overpayment and may reduce or suspend future payments to recover any such overpayment. In the event it is established to the satisfaction of the Company, in its sole discretion, that any such statement was intentionally false or omitted, the Participant or Beneficiary shall be entitled to no further payments under the Plan, and the Company shall be entitled to recover any payments made hereunder. (c) Forms of Benefit -- The annual amount determined under paragraph (b) o this Paragraph 4 shall be paid in one of the following forms: (i) a single life annuity in monthly installments equal to one twelfth of such annual amount; (ii) a joint and survivor annuity in monthly installments based upon such annual amount and calculated in accordance with any post-retirement survivorship option available under the Pension Plan; (iii) a 10-year certain level payment annuity in monthly installments which is the actuarial equivalent to the single life annuity under (i), as determined by the actuary for the Pension Plan according to mortality assumptions used for the Pension Plan on the basis of a current interest rate assumption determined from time to time by the Company; or (iv) a 10-year certain increasing payment annuity paid in accordance with Paragraph S(c) of the Plan based upon the lump-sum amount which is the actuarial equivalent to the single life annuity under (i), as determined by the actuary for the Pension Plan according to mortality assumptions used for the Pension Plan on the basis of a current market rate interest assumption determined from time to time by the Company. The Company in its sole discretion shall determine the form of benefit payment for each Participant. (d) Establishment of Account - If payment is made under either Paragraph 4(c)(iii) or 4(c)(iv) of the Plan, upon Retirement, the Company shall establish an Account for the benefit of the Participant and any Beneficiary. Such Account shall initially be credited with an amount equal to the amount of the lump-sum payment determined under Paragraph 4(c)(iii) or 4(c)(iv), as applicable, and shall be administered as provided in Paragraph 5 of the Plan. (e) Disability Retirement - If a Participant retires for disability under the Pension Plan, payment of the Participant's retirement benefit and any joint and survivor benefit under Paragraph 4(c)(ii) of the Plan shall be subject to the same conditions as the disability pension under the Pension Plan. 5.Administration Of Accounts. (a) General - Accounts shall be established under the Plan only pursuant to Paragraphs 3(b) and 4(d) hereof. All Accounts shall be administered in accordance with the provisions of this Paragraph 5. (b) Interest on Assets in the Account - The Assets credited to a Participant's Account shall accrue interest at a market rate of interest as may be determined from time to time by the Company. (c) Timing of the Distribution(s) - A Participant or Beneficiary shall receive the distribution of the Participant's Account in the form of monthly distributions over a ten-year period commencing in the month following the month of the Participant's death in the case of a death benefit, or over a ten-year period commencing in the month of the Participant's Retirement in the case of a retirement benefit. The amount of each installment shall be determined by dividing the then unpaid balance in the Participant's Account, including accrued and unpaid interest, by the number of installments remaining to be paid. (d) Request for Change in Distribution - A Participant, Beneficiary or legal representative may request a change in the timing, frequency or amount of payments made from a Participant's Account by filing a written request therefor with the Company. The Company may, in its sole discretion, grant such request only if the Company determines that an emergency beyond the control of the Participant, Beneficiary or legal representative exists and which would cause such Participant, Beneficiary or legal representative severe financial hardship if the payment of such benefits were not approved. Any such distribution for hardship shall be limited to the amount needed to meet such emergency. The Company shall inform the Participant, Beneficiary or legal representative of its decision within sixty (60) days of receipt of the written request. 6. Designation Of Beneficiaries. (a) General - To designate an individual(s) and/or entity(ies) to receive the benefits of the Plan with respect to a Participant, such Participant must file a written designation in the form of Schedule A to the Plan with the Company. Subject to the restrictions of this Paragraph 6, a Participant may change such designation by filing a subsequent written designation. (b) Death Benefit - By designation on Section 1 of a Schedule A filed with the Company, a Participant may name an individual(s) and/or entity(ies) to receive a death benefit under Paragraph 3 of the Plan with respect to such Participant. A Participant may change such designation by filing a subsequent notification in the form of Schedule A. (c) Retirement Benefits - (i) Single Life Annuity. If a Participant's retirement benefit under the Plan is paid as a single life annuity under Paragraph 4(c)(i) of the Plan, there shall be no Beneficiary with respect to such benefit and all retirement benefits shall cease upon the Participant's death. (ii) Joint and Survivor Annuity. If a Participant's retirement benefit under Paragraph 4(c)(ii) of the Plan and the Participant's pension under the Pension Plan are both paid as joint and survivor annuities, any survivor annuity under the Plan shall be paid to the same beneficiary entitled to any post-retirement survivorship benefit under the Pension Plan. If the Participant's pension under the Pension Plan is paid as a single life annuity, any survivor annuity paid under Paragraph 4(c)(ii) of the Plan shall be paid to the Beneficiary designated in Section 2 of Schedule A to the Plan. If a Beneficiary designated by the Participant under Paragraph 4(c)(ii) of the Plan predeceases the Participant within five years from the date of Participant's Retirement, the Participant's retirement benefit hereunder will automatically revert and return to a single life annuity commencing the first day of the month following the month in which the designated Beneficiary died. If, however, the Beneficiary predeceases the Participant more than five years after Participant's Retirement, the Participant's reduced retirement benefit shall continue during his life and no survivor benefit shall be paid. The election of such Beneficiary must be made prior to Retirement and may not be changed thereafter. (iii) 10-Year Certain Annuities. If a Participant's Retirement benefit is paid as a 10-year certain level payment annuity under Paragraph 4(c)(iii) of the Plan, or a 10 year certain increasing payment annuity under Paragraph 4(c)(iv) of the Plan, the Beneficiary or Beneficiaries with respect to such benefit shall be as specified in Section 1 of the most resent Schedule A filed with the Company. (d) Designation by Last Remaining Beneficiary - After a Participant's death, if there is only one remaining Beneficiary with respect to a death benefit under Paragraph 3 of the Plan or a l year certain annuity under Paragraph 4(c)(iii) or 4(c)(iv) of the Plan, such Beneficiary shall be entitled to designate in writing to the Company an individual to be paid any remainder of such benefit under the Plan at such Beneficiary's death. If no such further designation is made, such remainder shall be paid to such Beneficiary's estate. In the event of such Beneficiary's death, and regardless of whether any such further designation has been made, the Company in its sole discretion may require any such remainder to be paid as a lump sum. 7. Limitation Of Benefits. (a) The Plan shall be unfunded with respect to all benefits to be paid hereunder In addition, and without limitation, the Company shall not be required to segregate any amounts credited to any Account, which shall be established merely as an accounting convenience; title to and beneficial ownership of any Assets credited to any Account shall at all times remain in the Company, and no Participant, Beneficiary or legal representative shall have any interest whatsoever in any specific assets of the Company. (b) The payment of any death or survivorship benefit under this Plan shall be contingent upon such evidence of death as may be required by the Company. (c) If the Company should terminate the Plan pursuant to Paragraph 10 hereof, the Company's obligation to pay any benefits under the Plan shall likewise terminate; provided, however, that, except as otherwise provided in said Paragraph 10, the Company may not terminate the Plan with respect to any Participant subsequent to that Participant's Retirement or death. 8. Company May Make Certain Lump-Sum Distributions. The Company reserves the right to make a lump-sum distribution, notwithstanding any other provision of the Plan, if the total benefit payable to a Participant, Beneficiary or legal representative is $20,000 or less at any time. 9. Plan Does Not Constitute An Employment Agreement. The Plan shall not constitute a contract for the continued employment of any Participant by the Company. The Company reserves the right to modify a Participant's Compensation at any time and from time to time as it considers appropriate and to terminate any Participant's employment for any reason at any time notwithstanding the Plan. 10. Amendment Or Termination Of The Plan. The Board of Directors of the Company may, in its sole discretion, amend, modify or terminate the Plan at any time, provided, however, that no such amendment, modification or termination shall deprive any Participant or Beneficiary of a previously acquired right unless such Participant or Beneficiary or his legal representative shall consent to such change. No right to a death benefit under the Plan shall accrue until a Participant's death and no right to a retirement benefit shall accrue until a Participant's Retirement. 11. What Constitutes Notice. Any notice to a Participant, a Beneficiary or any legal representative hereunder shall be given in writing, by personal delivery, overnight express service or by United States mail, postage prepaid, addressed to such person's last known address. Any notice to the Company hereunder (including the filing of Schedule A) shall be given by delivering it in person or by overnight express service, or depositing it in the United States mail, postage prepaid, to the Secretary, Enterprise Diversified Holdings Incorporated, 80 Park Plaza, T4B, P.O. Box 1171, Newark, New Jersey, 07101. 12. Advance Disclaimer Of Waiver. Failure by the Company or the Committee to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of any such term, covenant or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a waiver or relinquishment of any such right or power at any other time or times. 13. Effect Of Invalidity Of Any Part Of The Plan. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision of the Plan. 14. Plan Binding On An Successor. Except as otherwise provided herein, the Plan shall inure to the benefit of and be binding upon the Company, its successors and assigns, including but not limited to any corporation which may acquire all or substantially all of the Company's assets and business or with or into which the Company may be consolidated or merged. 15. Law Governing The Plan. Except to the extent federal law applies, the Plan shall be governed by the laws of the State of New Jersey without giving effect to principles of conflicts of law. 16. Miscellaneous. (a) The masculine pronoun shall mean the feminine wherever appropriate. (b) The headings are for convenience only. In the event of a conflict between the headings of a paragraph and its contents, the contents shall control. EX-12 16 PSEG COMPUTATION OF RATIOS EXHIBIT 12 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Years Ended December 31, --------- --------- --------- ---------- --------- 1993(A) 1994 1995 1996 1997 --------- --------- --------- ---------- --------- (Millions of Dollars, where applicable) Earnings as Defined in Regulation S-K: Income from Continuing Operations (B) $549 $667 $627 $588 $560 Federal Income Taxes (C) 296 320 348 297 313 Fixed Charges 539 535 549 528 543 --------- --------- --------- ---------- --------- Earnings $1,384 $1,522 $1,524 $1,413 $1,416 ========= ========= ========= ========== ========= Fixed Charges as Defined in Regulation S-K (D) Total Interest Expense (E) $471 $462 $464 $453 $470 Interest Factor in Rentals 11 12 12 12 11 Subsidiaries' Preferred Securities Dividend Requirements -- 2 16 28 44 Preferred Stock Dividends 38 41 34 23 12 Adjustment to Preferred Stock Dividends to state on a pre-income tax basis 19 18 23 12 6 --------- --------- --------- ---------- --------- $539 $535 $549 $528 $543 ========= ========= ========= ========== ========= Ratio of Earnings to Fixed Charges 2.57 2.84 2.78 2.68 2.61 ========= ========= ========= ========== ========= Notes: (A) Excludes cumulative effect of $5.4 million credit to income reflecting a change in income taxes. (B) Excludes income from discontinued operations. (C) Includes State income taxes and Federal income taxes for other incomes. (D) Fixed Charges represent (a) interest, whether expensed or capitalized, (b) amortization of debt discount, premium and expense, (c) an estimate of interest implicit in rentals, and (d) preferred securities dividend requirements of subsidiaries and preferred stock dividends, increased to reflect the pre-tax earnings requirement for Public Service Enterprise Group Incorporated. (E) Excludes interest expense from discontinued operations.
EX-12.A 17 PSE&G COMPUTATION OF RATIOS EXHIBIT 12 (A) PUBLIC SERVICE ELECTRIC AND GAS COMPANY COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Years Ended December 31, --------- --------- --------- ---------- -------- 1993 1994 1995 1996 1997 --------- --------- --------- ---------- -------- (Millions of Dollars, where applicable) Earnings as Defined in Regulation S-K: Net Income $615 $659 $617 $535 $528 Federal Income Taxes (A) 307 302 326 268 286 Fixed Charges 401 408 419 438 450 --------- --------- --------- ---------- -------- Earnings $1,323 $1,369 $1,362 $1,241 $1,264 ========= ========= ========= ========== ======== Fixed Charges as Defined in Regulation S-K (B): Total Interest Expense $390 $396 $407 $399 $395 Interest Factor in Rentals 11 12 12 11 11 Subsidiaries' Preferred Securities Dividend Requirements -- -- -- 28 44 --------- --------- --------- ---------- -------- Total Fixed Charges $401 $408 $419 $438 $450 ========= ========= ========= ========== ======== Ratio of Earnings to Fixed Charges 3.30 3.35 3.25 2.83 2.81 ========= ========= ========= ========== ======== Notes: (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.
EX-12.B 18 PSE&G COMPUTATION OF RATIOS EXHIBIT 12 (B) PUBLIC SERVICE ELECTRIC AND GAS COMPANY COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS
Years Ended December 31, --------- --------- --------- ---------- --------- 1993 1994 1995 1996 1997 --------- --------- --------- ---------- --------- (Millions of Dollars, where applicable) Earnings as Defined in Regulation S-K (A): Net Income $615 $659 $617 $535 $528 Federal Income Taxes (B) 307 302 326 268 286 Fixed Charges 401 408 419 438 450 --------- --------- --------- ---------- --------- Earnings $1,323 $1,369 $1,362 $1,241 $1,264 ========= ========= ========= ========== ========= Fixed Charges as Defined in Regulation S-K (C): Total Interest Expense $390 $396 $407 $399 $395 Interest Factor in Rentals 11 12 12 11 11 Subsidiaries' Preferred Securities Dividend Requirements -- -- -- 28 44 Preferred Stock Dividends 38 42 49 23 12 Adjustment to Preferred Stock Dividends to state on a pre-income tax basis 19 19 24 12 6 --------- --------- --------- ---------- --------- Total Fixed Charges $458 $469 $492 $473 $468 ========= ========= ========= ========== ========= Ratio of Earnings to Fixed Charges 2.89 2.92 2.77 2.62 2.70 ========= ========= ========= ========== ========= Notes: (A) The term "earnings" shall be defined as pretax income from continuing operations. Add to pretax income the amount of fixed charges adjusted to exclude (a) the amount of any interest capitalized during the period and (b) the actual amount of any preferred stock dividend requirements of majority-owned subsidiaries which were included in such fixed charges amount but not deducted in the determination of pretax income. (B) Includes State income taxes and Federal income taxes for other income. (C) Fixed Charges represent (a) interest, whether expensed or capitalized, (b) amortization of debt discount, premium and expense, (c) an estimate of interest implicit in rentals, and (d) preferred securities dividend requirements of subsidiaries and preferred stock dividends, increased to reflect the pre-tax earnings requirement for Public Service Electric and Gas Company.
EX-21 19 PSEG SIGNFICANT SUBSIDIARIES EXHIBIT 21 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED SIGNIFICANT SUBSIDIARIES State of Name Ownership % Incorporation - ---- ----------- ------------- Public Service Electric and Gas Company 100 New Jersey Enterprise Diversified Holdings Incorporated 100 New Jersey The remaining subsidiaries of Public Service Enterprise Group Incorporated are not significant subsidiaries as defined in Regulation S-X. EX-23 20 PSEG INDEPENDENT AUDITOR'S CONSENT EXHIBIT 23 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements Nos. 33-44581, 33-44582 and 33-45491 of Public Service Enterprise Group Incorporated on Form S-8 and Registration Statement No. 33-49123 of Public Service Enterprise Group Incorporated on Form S-3 of our report dated February 13, 1998, appearing in this Annual Report on Form 10-K of Public Service Enterprise Group Incorporated for the year ended December 31, 1997. DELOITTE & TOUCHE LLP Parsippany, New Jersey February 23, 1998 EX-23.A 21 PSE&G INDEPENDENT AUDITOR'S CONSENT EXHIBIT 23(A) PUBLIC SERVICE ELECTRIC AND GAS COMPANY INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements Nos. 33-49367, 33-50199, 33-51309, 333-02763, 333-27547 and 333-44991 of Public Service Electric and Gas Company on Form S-3 of our report dated February 13, 1998 appearing in this Annual Report on Form 10-K of Public Service Electric and Gas Company for the year ended December 31, 1997. DELOITTE & TOUCHE LLP Parsippany, New Jersey February 23, 1998 EX-27.A 22 FDS ENTERPRISE
UT This schedule contains summary information extracted from SEC Form 10-K and is qualified in its entirety by reference to such financial statements. 0000788784 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED 1000000 YEAR DEC-31-1997 DEC-31-1997 PER-BOOK 11,050 3,532 1,663 1,698 0 17,943 3,603 0 1,623 5,211 588 95 4,873 0 0 1,448 340 0 52 0 5,336 17,943 6,370 313 4,919 5,255 1,115 (46) 1,069 509 560 56 560 501 388 1,095 2.41 2.41 State Income Taxes of $7 and Federal Income Taxes for Other Income of $(23) were incorporated into this line 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 Dividends Requirements.
EX-27.B 23 FDS PSE&G
UT This schedule contains summary financial information extracted from Form 10-K and is qualified in its entirety by reference to such financial statements. 0000081033 PUBLIC SERVICE ELECTRIC AND GAS COMPANY 1000000 YEAR DEC-31-1997 DEC-31-1997 PER-BOOK 11,050 674 1,499 1,697 0 14,920 2,563 594 1,352 4,509 588 95 4,126 0 0 1,106 118 0 52 0 4,326 14,920 6,125 286 4,818 5,127 998 (46) 952 424 528 15 513 523 326 1,008 0 0 State Income Taxes of $2 and Federal Income Taxes for Other Income of $(23) 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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