ITEM 1. BUSINESS
GENERAL
PSEG
Public Service Enterprise Group Incorporated (PSEG), incorporated under the laws of the State of New Jersey with its principal executive offices located at 80 Park Plaza, Newark, New Jersey 07102, is an exempt public utility holding company. PSEG has two principal direct wholly-owned subsidiaries: Public Service Electric and Gas Company (PSE&G) and PSEG Energy Holdings Inc. (Energy Holdings), formerly Enterprise Diversified Holdings Incorporated. Energy Holdings is the parent of PSEG's non-utility businesses: PSEG Global Inc. (Global), formerly Community Energy Alternatives Incorporated; PSEG Resources Inc. (Resources), formerly Public Service Resources Corporation; PSEG Energy Technologies Inc. (Energy Technologies) formerly Energis Resources Incorporated; Enterprise Group Development Corporation (EGDC); PSEG Capital Corporation (PSEG Capital) and Enterprise Capital Funding Corporation (Funding).
PSE&G
PSE&G, a New Jersey corporation with its principal executive offices at 80 Park Plaza, Newark, New Jersey 07102, 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 distribution operations in the territory it serves. Such franchise rights are not exclusive.
INDUSTRY ISSUES AND RISK FACTORS
The electric and gas utility industries in the State of New Jersey and across the country are undergoing major transformations. Legislation has been passed in New Jersey mandating retail competition in the electric and gas industries and rate decreases in the electric industry in New Jersey. The New Jersey Board of Public Utilities (BPU) is expected to issue rulings that will decide company specific issues by March 31, 1999 and generic issues for the State sometime thereafter. For discussion of this activity including related potential financial impacts, volatility of earnings and accounting changes, see Overview of 1998 and Future Outlook of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and Note 2. Regulatory Issues of Notes to Consolidated Financial Statements (Notes).
PSEG and PSE&G are affected by many issues that are generic to the electric and gas industries such as: deregulation, the unbundling of energy supplies and services and the establishment of a competitive energy marketplace for products and services (see Competitive Environment and Note 2. Regulatory Issues of Notes); energy sales retention and growth potential in a mature, competitive service territory; the need to reduce operating and capital costs in a competitive environment and in light of mandated rate reductions; revenue stability and growth, including the ability to obtain adequate and timely rate relief, cost recovery, including stranded costs, and other necessary regulatory approvals (see Note 2. Regulatory Issues of Notes); the ability to economically and safely operate nuclear facilities 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 storage facilities for spent nuclear fuel and related costs of disposal (see Electric Fuel Supply and Disposal); managing wholesale energy trading operations in conjunction with electricity and gas production, transmission and distribution systems, including commodity price fluctuations, volatility and credit risk from counterparties; managing foreign investments and electric generation and distribution operations in locations outside of the traditional utility service territory (see Foreign Operations of MD&A and Note 20. Subsequent Events of Notes); political and foreign currency risks; exposure to market price fluctuations and volatility (see Qualitative and Quantitative Disclosures About Market Risk and Foreign Operations of MD&A); Year 2000 issues (see Year 2000 Readiness Disclosure of MD&A and Note 10. Commitments and Contingent Liabilities of Notes); accounting changes resulting from deregulation (see Note 19. Accounting Matters of Notes); and debt and equity market concerns associated with these issues.
SEGMENT INFORMATION
Financial information with respect to business segments of PSEG and PSE&G 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 and in New Jersey is in transition. Deregulation is underway in New Jersey and in other states in the Northeast, including Pennsylvania and New York, and across the United States. The deregulation and restructuring of the nation's energy markets, unbundling of services, the diverse industry strategies related to generation capacity and the anticipated resulting industry consolidation will have a profound effect on PSEG and PSE&G, providing new opportunities and exposing PSEG and PSE&G to new risks (see Overview of 1998 and Future Outlook of MD&A).
Legislative and regulatory initiatives, at both the State and Federal levels, are designed to promote competition and will continue to impose additional pressures on PSE&G's ability to retain customers. Statutorily mandated unbundling of the services traditionally provided by vertically integrated companies, such as PSE&G, and the rapid growth of independent generation, energy trading and marketing together with 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. Recently, a number of utility-affiliated entities and other companies have purchased generating units from utilities in the Northeast which are divesting such assets. In addition, a variety of energy marketers have expressed interest in operating in New Jersey. These and others selling generation and other products and services will be competitors of PSEG and PSE&G. For further information on regulatory changes, see Overview of 1998 and Future Outlook of MD&A and Note 2. Regulatory Issues of Notes.
PSEG's non-utility businesses are subject to substantial competition in the United States as well as in the international markets. Restructuring of world energy markets including the privatization of government owned utilities and the opening of opportunities to foreign investors will impact PSEG. Some of the power generation projects in which Global invests compete with other independent power providers as well as utility generators both domestically and internationally. Global's distribution businesses in Argentina and Brazil operate pursuant to franchise arrangements and are generally not subject to competition. Energy Technologies also competes with other providers of energy services, including utilities and their affiliates. For additional information, see Energy Holdings.
STATE REGULATORY BODIES
As a New Jersey public utility, PSE&G is subject to comprehensive regulation by the 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. PSEG 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, PSEG and PSEG's non-
utility subsidiaries (see Energy Holdings). Additionally, PSEG and PSE&G are subject to the rules and regulations of the New Jersey Department of Environmental Protection (NJDEP) and the State Department of Transportation.
STATE REGULATION
ELECTRIC
The BPU, as well as the New Jersey State Legislature, have each undertaken the task of restructuring the electric and gas industries in New Jersey. Throughout 1998, the BPU held hearings and reviewed an Administrative Law Judge's recommendations and the results of management audits in the proceedings relating to its Energy Master Plan issued in 1997. In January 1999, the State Legislature enacted legislation to guide the restructuring of New Jersey's electric and gas industries. That legislation, the New Jersey Electric Discount and Energy Competition Act (Energy Competition Act), was signed into law by the Governor on February 9, 1999. The Energy Competition Act provides, among other things, for rate reductions and customer choice by August 1, 1999.
Over the next few months, the BPU is expected to issue a series of orders to continue to provide the specific rules to govern the new deregulated electric marketplace in New Jersey in accordance with the Energy Competition Act. The BPU has set a target date for finalizing electric restructuring rules for March 31, 1999, but has yet to establish a target date for a gas restructuring order. For further discussion of the aforementioned BPU activities, the Energy Competition Act and the forthcoming BPU proceedings (collectively, the Energy Master Plan Proceedings) regarding deregulation and unbundling of the electric utility industry in New Jersey, see Overview of 1998 and Future Outlook of MD&A and Note 2. Regulatory Issues of Notes.
The BPU's response to the New Jersey legislation will significantly impact PSEG's and PSE&G's future prospects. The BPU will continue in its regulatory role over many aspects of the New Jersey electric industry, both in determining the rules for the competitive marketplace and continuing to regulate the portions of PSE&G's business that remain regulated, including transmission and distribution of electricity.
In other matters, in 1995 the BPU initiated a generic proceeding that led 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 have formed part of PSE&G's overall strategy to retain customers in its service territory and maintain long-term electric sales. PSE&G files an annual report with the BPU which discusses OTRA activities in the prior year. This report allows the BPU to evaluate the impact of the OTRAs on the financial integrity of PSE&G. PSE&G is currently in negotiation with several customers for OTRAs. These agreements have been or will shortly be submitted to the BPU for review and approval. The Energy Competition Act provides that OTRAs implemented on or after the effective date of retail competition may establish a price only for the transmission or distribution of electricity to a retail customer that is different from, but in no case higher than, that specified in the electric public utility's current cost-of-service-based tariff rate for transmission or distribution service otherwise applicable to that customer. The electric rates under these OTRAs shall include the appropriate societal benefits charge, market transition charge and securitization transition bond charge. For further discussion of the Energy Competition Act and the Energy Master Plan Proceedings, see Note 2. Regulatory Issues of Notes. 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 Energy Competition Act repealed the New Jersey Public Utility Accident Fault Determination Act (Fault Act) which had required 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. The Energy Competition Act also repealed the requirement that electric utilities obtain a certificate of need prior to construction of a new electric generating facility. For more information on the Energy Competition Act and the Energy Master Plan Proceedings, see Note 2. Regulatory Issues.
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.
Under the Energy Competition Act, utilities are required to offer all of their customers the choice to buy the gas commodity from alternate suppliers by December 31, 1999. For further discussion of gas unbundling and the Energy Master Plan Proceedings, see Note 2. Regulatory Issues of Notes.
GENERAL
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.
The issue of PSEG 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. PSEG believes that PSE&G's taxes should be treated on a stand alone basis for rate making purposes, based on the separate nature of the utility and non-utility businesses. However, neither PSEG nor PSE&G is able to predict what action, if any, the BPU may take concerning consolidation of tax benefits in future 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 June 1997, the BPU commenced management audits of all New Jersey electric utilities, with the assistance of certain 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 BPU's Energy Master Plan. The management audit process for PSE&G was concluded in December 1997 with a report of the BPU's management consultants relating to issues of stranded costs, securitization and consumer rate reductions. A second report on restructuring was filed in February 1998. These management audit reports were approved for release by the BPU in January 1998 and March 1998, respectively, and are being considered by the BPU as part of the Energy Master Plan Proceedings. For additional information regarding the management audit report, see Note 2. Regulatory Issues of Notes. For a discussion of the BPU's previous focused audit of the non-utility businesses of PSEG and its impact on PSEG, see Liquidity and Capital Resources of MD&A.
The BPU can adopt, reject or modify the audit report's results in its decision 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 generation and sale of electricity in New Jersey and therefore could have a material adverse effect on PSEG's and PSE&G's financial condition, results of operations and net cash flows.
On August 31, 1998, the BPU mandated the commencement of an audit of PSE&G's competitive services, including PSE&G's Appliance Service Business, to determine whether PSE&G's competitive services have impaired or could impair PSE&G's ability to provide safe, adequate and proper service; if cross-subsidization exists between the regulated utility and the entity providing competitive services; if rates for competitive services are unjust, unreasonable, discriminatory or unduly preferential and if the utility is in compliance with the BPU's compliance monitoring and reporting requirements. The BPU completed its audit by December 31, 1998 and is expected to issue a draft report of its findings in concert with the Energy Master Plan Proceedings. PSE&G cannot predict the outcome of this matter.
The Energy Competition Act requires an independent audit of the relationship between PSE&G's regulated businesses and its and its affiliates' competitive businesses every two years.
On December 16, 1998, the BPU issued an Order in connection with its investigation of the damage caused by a September 1998 storm that passed through PSE&G's territory. This Order recommended improvement in communications between PSE&G and its customers and emergency officials after storm-related power outages. PSE&G responded to the BPU on January 4, 1999 stating that it will comply and will work with the BPU on any open recommendations.
FEDERAL REGULATORY BODIES
PSE&G and certain of Energy Holdings' subsidiaries are 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. PSEG 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. Additionally, PSE&G is subject to the rules and regulation of the Federal Environmental Protection Agency (EPA), Department of Transportation (USDOT) and Department of Energy (DOE). 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.
FERC Order No. 888 (Order No. 888) became effective in July 1996 and required all public utilities owning, controlling or operating electric transmission lines to offer nondiscriminatory open access to their transmission systems. Intra-pool transactions for power pools were also required to be conducted 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, which clarified and largely reaffirmed the legal and policy bases on which Order No. 888 was grounded, and also provided a process for recovery of stranded costs from wholesale customers. 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 Interconnection, L.L.C. (PJM)). In March 1998, all of these appeals were consolidated in the Court of Appeals for the District of Columbia Circuit (D.C. Circuit). On April 30, 1998, the D.C. Circuit entered an order permitting certain additional parties to intervene and establishing certain procedural guidelines for the hearing of these appeals. Briefs were filed on October 1, 1998. Additional briefs are to be filed later in 1999. Oral argument has been scheduled for November 1999.
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.
CONSTRUCTION AND CAPITAL REQUIREMENTS
For information concerning investments, construction and capital requirements see MD&A--Liquidity and Capital Resources--Construction and Capital Requirements Forecast, Note 4. Long-Term Investments, Note 7. Schedule of Consolidated Debt and Note 10. Commitments and Contingent Liabilities of Notes.
FINANCING ACTIVITIES
For a discussion of issuance, repurchase, book value and market value of PSEG's Common Stock and external financing activities of PSEG, PSE&G and Energy Holdings for the year 1998, 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 PSEG Capital and Funding, see Energy Holdings--PSEG Capital and Energy Holdings--Funding. For further discussion of long-term debt and short-term debt, see Note 7. Schedule of Consolidated Debt of Notes.
INCOME TAXES
For information regarding Federal and State income taxes, see Note 1. Organization and Summary of Significant Accounting Policies, Note 2. Regulatory Issues and Note 12. Income Taxes of Notes.
CREDIT RATINGS
The current ratings of securities of PSEG 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 PSEG's, Energy Holdings' and PSE&G's securities and serve to increase those companies' cost of capital.
STANDARD DUFF & MOODY'S & POOR'S PHELPS ------- -------- ------ PSEG Preferred Securities............................ Baa2 BB+ BBB Extendible Notes................................ Baa2 BBB BBB+
PSE&G Mortgage Bonds.................................. A3 A- A Preferred Securities............................ Baa1 BBB A- Commercial Paper (including PSE&G Fuel Corp.)... P2 A2 Duff 1
ENERGY HOLDINGS Senior Debt (PSEG Capital)...................... Baa2 BBB BBB+
As a component of PSE&G's ratings, each rating agency issues its opinion of the credit trend or outlook. Duff and Phelps currently evaluates that credit trend or outlook as negative. Standard and Poor's and Moody's evaluate the outlook as stable.
In February 1999, Standard & Poor's introduced a single credit rating scale for both debt and preferred securities to replace the separate rating scales that were applied to these two classes of securities. By rating all debt and preferred securities according to the same scale, Standard & Poor's has stated that it believes investors will gain a clearer picture of the credit risk that these securities present. Broadly, the criteria of the new scale calls in part for Standard & Poor's to rate preferred securities at least two notches below the corporate credit rating of an investment-grade issuer. This has resulted in the re-rating of the preferred securities of PSEG and PSE&G to BB+ and BBB, respectively.
PSE&G
RATE MATTERS
For information concerning the Energy Master Plan Proceedings, PSE&G's rate matters and environmental remediation and fuel adjustment clauses, see General--Competitive Environment--State Regulation (Electric), Note 1. Organization and Summary of Significant Accounting Policies and Note 2. Regulatory Issues 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, 1998, PSE&G provided service to approximately 1.9 million electric customers and 1.6 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, 1998, PSE&G's operating revenues aggregated $5.6 billion, of which 72% was from its electric operations and 28% from its gas operations. PSE&G's business is weather sensitive and 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.
Revenues were derived as follows for 1998:
REVENUES ---------------------------- ELECTRIC GAS ------------ ---------- (MILLIONS OF DOLLARS) Residential....................... $1,272 $833 Commercial........................ 1,849 194 Industrial........................ 631 237 Transportation Service--Gas....... -- 245 Other............................. 279 50 ------------ ---------- Total......................... $4,031 $1,559 ============ ==========
For information on the impact of competition and the Energy Master Plan Proceedings on PSE&G's customer and revenue base, see Overview of 1998 and Future Outlook of MD&A and Note 2. Regulatory Issues of Notes.
ELECTRIC SUPPLY AND CAPACITY
The supply of electricity for PSE&G's business is provided by various sources. Generation, power purchases within PJM, from other power pools and from non-utility generators (NUGs), and demand side management programs provide sources for electricity as a commodity. Capacity is provided by the installed generation production facilities which PSE&G owns as well as through bilateral purchases and purchases in the new capacity market administered by PJM. The nature of the supply and capacity markets are changing due to deregulation in various states and FERC initiatives. The resulting development of new markets has increased volatility and risks and also has created opportunities for PSE&G. For further discussion, see Qualitative and Quantitative Disclosures About Market Risk of MD&A.
RESOURCE PLAN AND POWER PURCHASES
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. Regulatory Issues 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 1999-2003 has been developed based on an assumed compound annual rate of growth of 1.47%.
A component of PSE&G's Resource Plan consists of expected capacity additions from PJM and NUGs. PSE&G is engaged in wholesale purchases and sales of electricity and gas. These transactions help satisfy the Resource Plan requirements and may include both purchasing power from PJM and other electric systems. Analysis of the lowest cost sources of electricity is made and based on the expectation that, at certain times, purchases at the wholesale level will replace production of electricity by PSE&G's facilities. For further discussion of wholesale activities, see Quantitative and Qualitative Disclosures About Market Risk of MD&A and Note 8. Financial Instruments and Risk Management of Notes.
NUG projects are expected to comprise approximately 6% 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 PJM Interconnection, L.L.C. and Note 2. Regulatory Issues 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 treat DSM on equal regulatory footing with supply side or energy production investments. The Energy Competition Act permits the continuation of DSM programs. The recovery of costs for DSM programs is to be through a societal benefits charge, on all electric customers' bills, initially set at the level in rates for DSM cost recovery in place on February 9, 1999. Within the subsequent twelve months, the BPU is required to complete a statewide comprehensive resource analysis of energy efficiency and renewable energy programs and determine the appropriate level of funding for each utility based on this analysis.
PSE&G's most recent DSM Resource Plan (1995 Plan) was approved by the BPU in 1995 and was designed to encourage investment in energy-saving DSM activities. These activities involve energy saving techniques and technologies, such as high-efficiency lighting and motors, which help reduce customer demand for energy. The 1995 Plan consisted of two major program areas for both electric and gas; (1) Core Programs which include many specialized programs such as energy audits, building envelope efficiency improvements and rebates for high efficiency heating and cooling equipment; and (2) the 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.
BPU approval of the 1995 Plan included a requirement to file the next DSM Plan by July 1, 1997. In April of 1997 PSE&G filed a request with the BPU to extend the 1995 Plan for one year and to defer filing the next DSM Plan until July 1, 1998, which requests were granted with the condition that the Core Programs would continue until the next DSM Plan was approved. The BPU further directed that PSE&G also extend existing project acceptance and in-service deadline dates by one year. On June 29, 1998, PSE&G filed with the BPU the 1999 Interim Demand Side Management Plan which included Core Programs and the Standard Offer, and hearings on the filing were conducted. No action has been taken by the BPU leaving no mechanism open at this time for the accepting of new Standard Offer project proposals. It is anticipated that there will be BPU action on the 1999 Interim Plan in the near future, but PSE&G cannot predict the outcome of such action.
ELECTRIC GENERATING CAPACITY
The following table sets forth certain information as to PSE&G's installed generating capacity as of December 31, 1998:
INSTALLED SOURCE CAPACITY (A) (MW) PERCENTAGE - ------------------------------------------------- ----------------- ---------- Conventional Steam Electric: Oil-fired (B)............................... 1,531 15% Coal-fired New Jersey (C)................... 1,271 12% Coal-fired Pennsylvania (mine mouth) (D).... 770 7% Combustion Turbine (E)........................... 2,724 27% Combined Cycle................................... 920 9% Diesel (D)....................................... 5 0% Nuclear (D): New Jersey.................................. 1,921 19%
Pennsylvania................................ 930 9% Pumped Storage (D) (E)........................... 200 2% ----------- --------- Total................................... 10,272 100% =========== =========
(A) Excludes 695 MW of non-utility generation and 505 MW of capacity sales to other utilities.
(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.
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, 1998, PSE&G's share of installed generating capacity was 10,272 MW, as shown in the following table:
INSTALLED PRINCIPAL NAME AND LOCATION CAPACITY (MW) FUELS USED - ------------------------------------------------- -------------- ---------- Steam: Hudson, Jersey City, NJ...................... 1,006 Coal/Gas Mercer, Hamilton, NJ......................... 648 Coal/Gas Sewaren, Woodbridge Twp., NJ................. 453 Gas/Oil 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............................. 3,572 ----------- Nuclear: 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....................... 675 Gas Burlington, Burlington, NJ................... 245 Gas ----------- Total Combined Cycle.................... 920 ----------- Combustion Turbine: Essex, Newark, NJ............................ 617 Gas/Oil Edison, Edison Township, NJ.................. 504 Gas/Oil Kearny, Kearny, NJ........................... 504 Gas/Oil Burlington, Burlington, NJ................... 389 Oil Linden, Linden, NJ........................... 223 Gas/Oil 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............................. 10,272(A) ===========
(A) Excludes 695 MW of non-utility capacity and 505 MW of 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 Requirements Forecast.
In addition to the generating facilities in New Jersey and Pennsylvania as indicated in the table above, as of December 31, 1998, PSE&G owned 41 switching and/or generating stations with an aggregate installed capacity of 30,417,670 kilovolt-amperes and 222 substations with an aggregate installed capacity of 7,497,000 kilovolt-amperes. In addition, seven substations having an aggregate installed capacity of 103,250 kilovolt-amperes were operated on leased property. All of these facilities are located in New Jersey.
As of December 31, 1998, PSE&G's transmission and distribution system included approximately 154,634 circuit miles, of which approximately 38,538 miles were underground, and approximately 808,164 poles, of which approximately 538,759 poles were jointly owned. Approximately 99% of this property is located in New Jersey.
In addition, as of December 31, 1998, 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, 1998, 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 2,886,000 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, 1998, PSE&G owned and operated approximately 16,240 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.
ENERGY HOLDINGS
Energy Holdings maintains insurance coverage against loss or damage to its properties, subject to certain exceptions, to the extent such property is usually insured and insurance is available at a reasonable cost.
For a brief general description of the properties of the subsidiaries of Energy Holdings and their locations, see Item 1. Business--Energy Holdings.
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.
ENERGY HOLDINGS
Energy Holdings owns no real property. Energy Holdings leases office space for its corporate headquarters at 80 Park Plaza, Newark, New Jersey from PSE&G.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
As previously disclosed, in October 1995, PSEG received a letter from a representative of a purported shareholder demanding that it commence legal action against certain of its officers and directors with regard to nuclear operations of 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 PSEG shareholders against the then incumbent directors, except Dr. Remick. Similar derivative complaints were filed by two profit sharing plans and one individual in February and March 1996 against Messrs. Ferland, Codey and others. On March 19, 1996, the Board's investigation was concluded, and the Board determined that this litigation should not have been instituted and should be terminated. On July 3, 1996, another individual purported shareholder filed a similar complaint naming the same defendants as the first derivative lawsuit. On August 21, 1996, all defendants filed motions to dismiss all four derivative actions, which motions were denied and attempts to appeal were unsuccessful. The defendants filed motions for summary judgment to dismiss all four of the cases, which motions are pending. One of the plaintiffs has sold her shares and has withdrawn from the litigation. Another of the plaintiffs (a profit sharing plan) has been dissolved, and one of the individual participants in the plan is maintaining the litigation in his individual name. The four complaints generally seek recovery of damages for alleged losses purportedly arising out of PSE&G's operation of the Salem and Hope Creek generating stations, together with certain other relief, including removal of certain executive officers of PSE&G and PSEG and certain changes in the composition of PSEG's Board of Directors. Discovery in all four cases is proceeding to permit plaintiffs to respond to the defendants' motions for summary judgement. PSEG cannot predict the outcome of this matter. 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.
As previously disclosed, on June 25, 1998, a complaint was filed against the directors of PSEG, and PSEG as a nominal defendant, by the same purported shareholder of PSEG who instituted the December 1995 shareholder derivative suit, alleging that the 1996, 1997 and 1998 proxy statements provided to shareholders of PSEG were false and misleading by reason, among other things, of failure to disclose certain material facts relating to (i) the controls over and oversight of PSEG's nuclear operations, (ii) the condition of problems at and reserves with respect to PSEG's nuclear operations, (iii) the demand letter and derivative litigation disclosed above, (iv) PSEG's liabilities to the Salem co-owners as a result of the shutdown of the Salem plants and (v) a shareholder proposal relating to operations of Salem 1 and 2 which was voted upon at the 1998 annual meeting of shareholders. The complaint sought to have the 1996, 1997 and 1998 proxy statements declared to be in violation of law, and to set aside the elections of directors of PSEG, the ratification of the selection of Deloitte & Touche LLP as PSEG's auditors at those annual meetings and the other matters voted upon at the 1996, 1997 and 1998 annual meetings, and to require PSEG to conduct a special meeting of shareholders providing for election of directors following timely dissemination of a proxy statement approved by the Court hearing this matter, which should include as nominees for election as directors persons having no previous relationship with PSEG or the current directors, and other relief. A motion to dismiss the complaint was granted by the Court on November 10, 1998 except with respect to allegations concerning the 1998 shareholder proposal and with respect to the disclosure in the 1998 proxy statement of the settlement of litigation between PSE&G and the Salem co-owners. Following the filing of an amended complaint and a second amended complaint, the Court, on January 19, 1999, again granted defendants' motion to dismiss the second amended complaint, again except to the extent set forth in the Court's November 10, 1998 decision. Discovery on the two remaining claims has commenced. PSEG cannot predict the outcome of this matter. G.E. Stricklin v. E. James Ferland, et al., United States District Court for the Eastern District of Pennsylvania, Civil Action No. 98-3279.
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 (Civil Action No. CB96-925) 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, including a claim under the Federal Racketeering Influenced and Corrupt Organizations Act (RICO). 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. On November 6, 1998, the Court granted Westinghouse summary judgment on the RICO claim but did not address the plaintiffs' remaining claims, dismissing them without prejudice since the Court only had original jurisdiction over the RICO claim. The plaintiffs have appealed this decision to the Third Circuit Court of Appeals and have re-filed their remaining claims in the Superior Court of New Jersey.
In October 1997, Old Dominion Electric Cooperative (ODEC) filed a Complaint at FERC (Docket No. EL 98-6-000) seeking to modify its 1992 Agreement with PSE&G for a ten-year sale of 150 MW of capacity and energy. ODEC's Complaint argued that, given the restructuring of PJM, particularly PJM's new open access regional transmission service rate design which effectively eliminates rate "pancaking" for energy transactions that traverse more than one transmission system, it is unreasonable to leave intact existing bilateral agreements that result in multiple transmission charges. ODEC therefore urged FERC to reduce ODEC's contract capacity rate with PSE&G to eliminate an imputed transmission charge. In an answer filed in December 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 at the time, FERC had not acted on these filings, it appears FERC summarily decided the issue in ODEC's favor in its November 25, 1997 PJM Restructuring Order (November 25th Order). PSE&G has requested rehearing and clarification of the November 25th Order. In May 1998, while the ODEC complaint was pending, in a separate proceeding relating to the restructuring of PJM, FERC ordered PSE&G to reduce its charges to ODEC by $5.5 million annually for each of the remaining six years of the agreement. FERC determined that a transmission charge, which it imputed to the agreement, violated FERC policy, specifically, that users of the PJM transmission system must pay one rate for transmission based on the transmission zone in which they are delivering power rather than multiple rates based on their actual use of multiple transmission systems through which their energy transactions are moving. PSE&G has applied to FERC for a rehearing of its order which is pending at this time. On August 4, 1998, FERC dismissed ODEC's October 1997 complaint, determining that issues relating to rate "pancaking" of transmission were more appropriately addressed in the separate FERC proceeding on PJM restructuring and that ODEC had failed to show it was entitled to relief on the remaining issues. ODEC did not seek further review of this order.
On October 10, 1997, PSE&G filed a Petition for Expedited Approvals with the BPU (Docket No. GM97100758) 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 (Texas Eastern Transmission Corporation, Docket No. RP98.83-000) finding that it was not unreasonable for the pipeline company to refuse to discharge PSE&G under the circumstances addressed in the order. On April 29, 1998, FERC issued an order on rehearing in which it denied PSE&G's request for a rehearing. On June 26, 1998, PSE&G filed a petition for review of FERC's order with the U.S. Court of Appeals, District of Columbia Circuit. In January 1999, PSE&G filed a brief. The matter is currently pending.
In addition, see the following below or at the pages indicated:
(1) Pages 2, 9 and 72. 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.
(2) Page 3. Generic proceedings before the BPU relating to standards for "off-tariff" negotiated rate agreement programs, Docket No. EX95070320.
(3) Page 4. Proceeding before the BPU in the Matter of the Board's Determination a Management Audit be Performed on PSE&G, Docket No. EA97060397.
(4) Pages 4 and 73. Proceedings before the BPU relating to an audit of PSE&G's competitive services, Docket No. EC98080627.
(5) Page 5. Proceedings before the United States Court of Appeals, District of Columbia Circuit, in the matter of appeal of FERC Orders No. 888, 888A and 888B. (Transmission Access Policy Study Group v. Federal Energy.
(6) Pages 5 and 9 through 10. 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.)
(7) Pages 5 and 10. 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.
(8) Pages 14 and 97. 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 19. Notice of Violation issued by EPA against Eagle Point Cogeneration Partnership regarding alleged violations of air permit.
(10) Page 20. Administrative proceedings before the NJDEP under Section 316 of the FWPCA for certain electric generating stations.
(11) Pages 40 and 98. Implementation of P.L.1997,C.162, an Act Revising the Taxation of Electric and Gas Utilities, Docket Nos. ER97090661 and GR97090672.
(12) Page 71. Generic proceeding before the BPU relating to the matter of an inquiry into methods of implementation of SFAS-106, Docket No. AX96070530.
(13) Page 77. Generic proceeding before the BPU relating to recovery of capacity costs associated with power purchases from cogenerators, Docket No. EX93060255.
(14) Page 78. Proceedings before the BPU relating to PSE&G's Levelized Gas Adjustment Clause (LGAC) filed November 14, 1997, Docket No. GR97110839.
(15) Page 78. Proceeding before the Superior Court of New Jersey, Appellate Division in the matter of the motion of PSE&G to increase the level of the Electric Demand Side Adjustment Factor, Appellate Docket No. A-005257-97T2.
(16) Page 78. Proceeding before the BPU related to the Electric Levelized Energy Adjustment Clause (LEAC) rate increase to recover DSM costs, Docket No. ER97020101.
(17) Page 79. Proceedings before the BPU relating to PSE&G's RAC filed August 1, 1997, Docket No. GR97080573.
(18) Page 80. Proceedings before the BPU in the Matter of the Electric Restructuring Plans Filed by Atlantic City Electric Company, Jersey Central Power & Light Company, D/B/A GPU Energy, Public Service Electric and Gas Company, and Rockland Electric Company -- General Auction Standards and Review Criteria, Order Adopting Auction Standards, Docket Nos. EX94120585Y, EO97070457, EO97070460, EO97070463 and EO97070466.
(19) Page 80. Proceedings before the BPU relating to PSE&G's proposed CTC filed September 19, 1996, Docket No. ET96090669.
(20) Page 96. Investigation by the U.S. Environmental Protection Agency (EPA) regarding the Passaic River site.
(21) Page 96. Additional investigation by the U.S. Environmental Protection Agency (EPA) regarding the Passaic River site.
(22) Page 98. Proceedings before the United States Court of Claims and United States District Court for the Southern District of New York relating to recovery of certain uranium enrichment decontamination and decommissioning payments. Docket Nos. 96-490C and 98CIV.4155(WK).
In addition, see the following environmental related matters. Based on current information, PSEG and PSE&G do not expect expenditures for any such site, individually or all such current sites in the aggregate, to have a material effect on financial condition, results of operations and net cash flows.
(23) 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.
(24) 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. PSE&G has agreed to enter into a Consent Decree with the State of Delaware under the Delaware Hazardous Substance Cleanup Act, requiring the PRPs to conduct additional limited monitoring at the Sealand site for five years and to reimburse Delaware for past and future oversight costs.
(25) Duane Marine Salvage Corporation Superfund Site is in Perth Amboy, Middlesex County, New Jersey.
(26) 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.
(27) 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 has been named as a potentially responsible party and alleged to be liable for contamination at the Metal Bank Cottman Avenue Superfund Site, a former non-ferrous scrap reclamation facility located in Philadelphia, Pennsylvania. 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. PSE&G estimates that its share of the cost of performing the remedy selected by the U.S. Environmental Protection Agency (EPA) could be $4 to $8 million. On June 26, 1998, EPA Region III issued an Administrative Order For Remedial Design And Remedial Action, Docket No. III-98-082-DC, to thirteen Respondents including PSE&G, other utilities, and other persons and entities, ordering the Respondents to implement the remedy selected ROD issued by EPA Region III in December, 1997. Additionally, with respect to this site, the
United States of America application in the matter entitled United States of America, et. al., v. Union Corporation, et. al., Civil Action No. 80-1589, United States District Court for the Eastern District of Pennsylvania, seeking leave of court to file an amended complaint adding claims under the CERCLA was granted. PSE&G and one other utility were named as third party defendants in the foregoing captioned matter. Defendants have filed an amended third party complaint naming PSE&G as a third party defendant. On July 28, 1998, PSE&G and seven other utilities named as Respondents in the above-referenced Administrative Order filed with EPA Region III a Notice of Intent to Comply With Administrative Order for Remedial Design and Remedial Action, Metal Bank Cottman Avenue Site, Docket No. III-98-082-DC.
(28) 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.
(29) 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. On July 31, 1998, PSE&G and 23 other third-party defendants entered into a Settlement Agreement with third-party plaintiffs. The Settlement Agreement provides the settling defendants, including PSE&G, a release from all claims for contribution, diminution of property value, and certain defined response costs. PSE&G's financial contribution to the settlement was not material. By Order dated September 2, 1998, the matter was dismissed with prejudice.
(30) 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). PSE&G and other participating PRPs have agreed with NJDEP to a partial settlement of such costs and to perform the remedial design and remedial action. 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 with estimated cost of $3.7 million.
(31) 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. In October 1998, the NJDEP and The United States of America filed separate cost recovery actions pursuant to CERCLA and/or the Spill Act against approximately 30 parties seeking recovery of their respective shares of past and future site investigation and remediation response and administrative oversight costs incurred and to be incurred at the site. Third party contribution actions were also filed in each of the foregoing cost recovery actions seeking contribution for an equitable share of all liability for these same costs from approximately 170 third party defendants. PSE&G is a named defendant in the
NJDEP cost recovery action and a named third party defendant in the contribution action filed in the United States' lawsuit.
(32) 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.
(33) 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.
(34) 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.
(35) 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.
(36) 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.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PSEG and PSE&G, inapplicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PSEG'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 PSEG, its parent company. As of December 31, 1998, there were 144,218 holders of record of PSEG Common Stock.
The following table indicates the high and low sale prices for PSEG's Common Stock and dividends paid for the periods indicated:
DIVIDEND COMMON STOCK HIGH LOW PER SHARE - ------------ ---- --- --------- 1998: First Quarter........................ $37 15/16 $30 5/16 $.54 Second Quarter....................... 37 7/8 31 3/4 .54 Third Quarter........................ 39 11/16 32 5/16 .54 Fourth Quarter....................... 42 3/4 36 15/16 .54 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
For additional information concerning dividend history, policy, and potential preferred voting rights, restrictions on payment and common stock repurchase programs, 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.
ITEM 6. SELECTED FINANCIAL DATA
PSEG
The information presented below should be read in conjunction with PSEG's Consolidated Financial Statements and Notes thereto.
(A) For discussion of discontinued operations, 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.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PSEG
This discussion refers to the Consolidated Financial Statements and related Notes of Public Service Enterprise Group Incorporated (PSEG) and should be read in conjunction with such statements and notes.
CORPORATE STRUCTURE
PSEG has two principal direct wholly-owned subsidiaries: Public Service Electric and Gas Company (PSE&G) and PSEG Energy Holdings Inc. (Energy Holdings), formerly Enterprise Diversified Holdings Incorporated. PSEG's largest subsidiary, PSE&G, is an operating public utility providing electric and gas service in certain areas within the State of New Jersey.
Energy Holdings is the parent of PSEG's non-utility businesses: PSEG Global Inc. (Global), formerly Community Energy Alternatives Incorporated, an investor in and developer and operator of projects in the generation and distribution of energy, including cogeneration and independent power production (IPP) facilities, electric distribution companies, exempt wholesale generators (EWGs) and foreign utility companies (FUCOs); PSEG Resources Inc. (Resources), formerly Public Service Resources Corporation, which has made primarily passive investments; PSEG Energy Technologies Inc. (Energy Technologies), formerly Energis Resources Incorporated, which provides a variety of energy related services to industrial and commercial customers both within and outside of PSE&G's traditional service territory; and Enterprise Group Development Corporation (EGDC), a nonresidential real estate development and investment business. Energy Holdings also has two finance subsidiaries: PSEG Capital Corporation (PSEG Capital), which provides privately-placed debt financing to Energy Holdings' operating subsidiaries, except Energy Technologies, on the basis of a minimum net worth maintenance agreement with PSEG and Enterprise Capital Funding Corporation (Funding), which provides privately-placed debt financing to Resources, Global and their subsidiaries, which debt is guaranteed by Energy Holdings,
but without direct support from PSEG. EGDC has been conducting a controlled exit from its real estate business since 1993. In July 1996, Energy Holdings sold Energy Development Corporation (EDC), an oil and gas subsidiary.
As of December 31, 1998 and 1997, PSE&G comprised 82% and 83%, respectively, of PSEG's assets. For each of the years 1998, 1997 and 1996, PSE&G revenues were approximately 94%, 96%, and 96%, respectively, of PSEG's revenues and PSE&G's earnings available to PSEG for such years were 92%, 92% and 87%, respectively, of PSEG's net income.
OVERVIEW OF 1998 AND FUTURE OUTLOOK
In 1998, energy industry restructuring continued to advance in New Jersey as PSE&G completed the evidentiary hearings related to the Energy Master Plan and the Office of Administrative Law filed its decision providing its recommendations to the New Jersey Board of Public Utilities (BPU). On February 9, 1999, the New Jersey Electric Discount and Energy Competition Act (Energy Competition Act) was enacted. It provides that all New Jersey retail electric customers may select their electric supplier commencing August 1, 1999 and all New Jersey retail gas customers may select their gas suppliers commencing January 1, 2000, thus fully opening the New Jersey energy markets to competition. The Energy Competition Act also:
o Requires electric rate decreases of at least 10%, to be phased in over a period of up to 36 months.
o Allows utilities to have an opportunity to recover up to 100% of electric-related stranded (above market) costs.
o Allows securitization of up to 75% of electric-related stranded costs.
o Permits the BPU to require the functional separation or divestiture of generating assets if required for competition to develop.
o Provides for customer account services (e.g., metering, billing and related administrative services) to become competitive in one year.
o Authorizes private and municipal aggregation of customers to collectively choose their electric supplier.
o Authorizes "shopping credits" or discounts for customers that switch from their current electric utility supplier.
o Requires disclosure of the environmental impact of generation used for supplying electric customers.
o Authorizes the collection of costs of certain social programs, nuclear plant decommissioning, demand side management, manufactured gas plant clean up costs and consumer education through a non-bypassable Societal Benefits Charge.
The BPU has been conducting related proceedings pursuant to the New Jersey Energy Master Plan (Energy Master Plan), under which the BPU is expected to issue a series of orders that will decide both generic issues for the energy industry (e.g., affiliate standards) and company specific matters (e.g. the levels of rate decrease, shopping credit, stranded asset recovery and securitization) for each utility. The BPU has set a target date of March 31, 1999 for issuing an electric restructuring order, but has yet to establish a target date for the gas restructuring order. For further discussion of the aforementioned BPU activities, the Energy Competition Act and the forthcoming BPU proceedings (collectively, the Energy Master Plan Proceedings), see Note 2. Regulatory Issues of Notes to Consolidated Financial Statements (Notes). These decisions will fundamentally change the energy industry in New Jersey and will result in competitive markets for electric and gas supply and for customer services. The transmission and distribution businesses will remain regulated. The outcome of these proceedings could have a material adverse impact on PSEG's and PSE&G's financial condition, results of operations and net cash flows including a potentially material impact resulting from the discontinuation of the regulated accounting model currently used by PSE&G. For discussion of potential accounting changes resulting from deregulation, see Note 19. Accounting Matters of Notes.
PSEG has been engaged in the competitive energy business for a number of years through certain of its non-utility subsidiaries. Due to the regulatory changes outlined above, in the future, PSEG will include a larger component of
competitive businesses. As the unregulated component of the business continues to grow, potential financial risks and rewards will be greater, financial requirements will change, and the volatility of earnings will increase. The pending regulatory decisions and the business experience PSEG has acquired in operating non-regulated energy business will be significant components in determining future success.
As part of its Energy Master Plan proposal, PSE&G has proposed to recover $2.5 billion of its potentially stranded costs through the issuance of its transition bonds, referred to as securitization. The Energy Competition Act provides that the net proceeds from securitization must be used to reduce utility debt and equity. Dependent upon the level of securitization authorized by the BPU in the Energy Master Plan Proceedings, PSE&G may use a number of alternatives to reduce utility debt and equity, including purchasing outstanding PSEG common stock and the redemption, tender or purchase of outstanding PSE&G mortgage bonds and PSE&G preferred stock. For further discussion of securitization, see Note 2. Regulatory Issues of Notes.
To the extent that recovery of stranded costs occasioned by deregulation are not probable of recovery and not eligible for deferred accounting treatment under Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71) and EITF Issue 97-4, "Deregulation of the Pricing of Electricity - Issues Related to the Application of FASB Statements No. 71 and No. 101" (EITF 97-4), PSE&G would incur an extraordinary, non-cash charge to operations, which could be material to the financial position and results of operations of PSEG and PSE&G. For discussion of potential accounting changes due to deregulation, see Note 19. Accounting Matters of Notes.
PSEG and PSE&G believe that the end result of the Energy Master Plan Proceedings will involve a fundamental change in the way their businesses are conducted. These changes may impact financial operating trends and could result in earnings volatility, write down of asset values, reduction in dividend payments and adverse impacts on revenues due to the mandated electric rate cut, electric and gas retail choice and fuel and energy price risks. PSE&G is actively seeking regulatory and operational changes that will allow it to provide energy services in a safe and reliable manner at competitive prices while achieving strong financial performance.
Many forces are reshaping how the utility industry meets the needs and expectations of its customers and shareholders. Profound changes in the way the industry is regulated are affecting how PSEG conducts business and its financial prospects in the future. Competitive changes in the utility industry continued to occur in 1998 and will continue to occur in 1999. For discussions of the New Jersey Energy Master Plan Proceedings and other rate matters, see Note 2. Regulatory Issues and Note 3. Regulatory Assets and Liabilities of Notes.
The New Jersey Gross Receipts and Franchise Tax (NJGRT) was eliminated effective January 1, 1998 and replaced with a combination of the New Jersey Corporate Business Tax which is a State income tax, the State sales and use tax and a Transitional Energy Facility Assessment (TEFA), with no material impact on the financial condition, results of operations and net cash flows of PSEG and PSE&G. As a result of such tax reform, after the phase out of the TEFA, the effective state tax rate applicable to PSE&G will be substantially reduced, putting PSE&G on a more level playing field with competitors. For additional discussion of energy tax reform, see Note 12. Income Taxes of Notes.
To the extent that the discussion that follows reports on business conducted under full monopoly regulation of the utility business, it must be understood that such business will change in 1999 and that past results are not necessarily an indication of future business prospects or financial results.
In 1998, PSE&G's operations were highlighted by the return to service of Salem 1 and the overall successful operation of the nuclear generation program. Complimenting PSE&G's generation capability was the activity of its wholesale energy operations which positively contributed to PSE&G's results and, through its risk management policies, mitigated PSE&G's exposure to the dramatic price volatility and credit concerns seen throughout the energy commodity markets during the summer of 1998 (see Qualitative and Quantitative Disclosures About Market Risk).
In 1998, Energy Holdings continued to implement its strategy to develop its business through international expansion as Global made its first investment in India and continued its growth in Latin America through the acquisition of its third
Argentine electric distribution company. Resources also continued its investment strategy through its investments in several leveraged leases on energy-related assets in Europe. For discussion of related risks, see Qualitative and Quantitative Disclosures About Market Risk and Foreign Operations.
Going forward, PSEG will continue to pursue its strategies to grow its family of businesses. As previously reported, more emphasis will be placed on finding opportunities for expansion outside of its traditional utility services and markets. PSE&G's strategy is to size its electric generation fleet in New Jersey to meet its anticipated needs, while seeking to increase its value and manage commodity price risk through its wholesale trading activity. PSE&G will also seek to capitalize on synergies which may exist with its natural gas purchasing and trading activities. PSE&G's transmission and distribution strategy, both gas and electric, is to provide cost-effective, high quality service. PSEG will also consider opportunities for expansion through business combinations. Global's strategy is to invest in both generation and distribution facilities worldwide with the goal of creating long-term value. Resources' strategy is to continue focusing on passive investments in the energy sector worldwide seeking to provide earnings and economic value. Energy Technologies' strategy is to expand upon the current energy related services it provides to industrial and commercial customers to create long-term value and to participate in the retail energy marketplace.
Successful implementation of these strategies, coupled with the restructuring of the electric and gas industries will shift more of the assets and earnings of the PSEG companies from regulated to competitive businesses. As a result of the deregulation of the electric utility industry, PSE&G could be required to separate its electric generation services, and potentially other competitive services, from its regulated utility operations and to possibly transfer those operations to an entity functionally independent from PSE&G.
RESULTS OF OPERATIONS
Basic and diluted earnings per share of PSEG common stock (Common Stock) were $2.79 in 1998, representing an increase of $0.38 per share or 16% from 1997. Basic and diluted earnings per share were $2.41 in 1997, a decrease of $0.11 per share or 4% from 1996.
PSE&G's contribution to earnings per share of Common Stock in 1998 increased $0.37 or 17% compared to 1997 primarily due to the settlement of the lawsuits filed by the co-owners of Salem which negatively impacted 1997 earnings by $0.27 per share, an increase in electric revenues resulting from considerably warmer weather in the third quarter of 1998 and wholesale power activities of PSE&G (see Item 7A.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Information relating to quantitative and qualitative disclosures about market risk is set forth under the caption "Qualitative and Quantitative Disclosures About Market Risk" in 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED CONSOLIDATED STATEMENTS OF INCOME (MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED CONSOLIDATED BALANCE SHEETS ASSETS (MILLIONS OF DOLLARS)
See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED CONSOLIDATED BALANCE SHEETS CAPITALIZATION AND LIABILITIES (MILLIONS OF DOLLARS)
See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (MILLIONS OF DOLLARS)
See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (MILLIONS)
Note: The ability of PSEG to declare and pay dividends is contingent upon its receipt of dividends from its subsidiaries. PSE&G, PSEG's principal subsidiary, has restrictions on the payment of dividends which are contained in its Restated Certificate of Incorporation, as amended, and certain of the indentures supplemental to its Mortgage and certain other indentures. However, none of these restrictions presently limits the payment of dividends out of current earnings. The amount of PSE&G's restricted retained earnings at December 31, 1998, 1997 and 1996 was $10 million. There are no restrictions on Energy Holding's retained earnings.
See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY CONSOLIDATED STATEMENTS OF INCOME (MILLIONS OF DOLLARS)
See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY CONSOLIDATED BALANCE SHEETS ASSETS (MILLIONS OF DOLLARS)
See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY CONSOLIDATED BALANCE SHEETS CAPITALIZATION AND LIABILITIES (MILLIONS OF DOLLARS)
See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (MILLIONS OF DOLLARS)
See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY (MILLIONS OF DOLLARS)
Note: The ability of PSEG to declare and pay dividends is contingent upon its receipt of dividends from its subsidiaries. PSE&G, PSEG's principal subsidiary, has restrictions on the payment of dividends which are contained in its Restated Certificate of Incorporation, as amended, and certain of the indentures supplemental to its Mortgage and certain other indentures. However, none of these restrictions presently limits the payment of dividends out of current earnings. The amount of PSE&G's restricted retained earnings at December 31, 1998, 1997 and 1996 was $10 million. There are no restrictions on Energy Holding's retained earnings.
See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
PSEG has two principal direct wholly-owned subsidiaries: Public Service Electric and Gas Company (PSE&G) and PSEG Energy Holdings Inc. (Energy Holdings), formerly Enterprise Diversified Holdings Incorporated. PSEG's largest subsidiary, PSE&G, is an operating public utility providing electric and gas service within certain areas in the State of New Jersey.
Energy Holdings is the parent of PSEG's non-utility businesses: PSEG Global Inc. (Global), formerly Community Energy Alternatives Incorporated, an investor in and developer and operator of projects in the generation and distribution of energy, including cogeneration and independent power production (IPP) facilities, electric distribution companies, exempt wholesale generators (EWGs) and foreign utility companies (FUCOs); PSEG Resources Inc. (Resources), formerly Public Service Resources Corporation, which has made primarily passive investments; PSEG Energy Technologies Inc. (Energy Technologies), formerly Energis Resources, which provides a variety of energy related services to industrial and commercial customers both within and outside of PSE&G's traditional service territory; and Enterprise Group Development Corporation (EGDC), a nonresidential real estate development and investment business. Energy Holdings also has two finance subsidiaries: PSEG Capital Corporation (PSEG Capital), which provides privately-placed debt financing to Energy Holdings' operating subsidiaries, except Energy Technologies, on the basis of a minimum net worth maintenance agreement with PSEG and Enterprise Capital Funding Corporation (Funding), which provides privately-placed debt financing to Resources, Global and their subsidiaries, which debt is guaranteed by Energy Holdings, but without direct support from PSEG. EGDC has been conducting a controlled exit from the real estate business since 1993. In July 1996, Energy Holdings sold Energy Development Corporation (EDC), an oil and gas subsidiary. For more information on EDC, see Note 16. Discontinued Operations.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REGULATION--PSE&G
The accounting and rates of PSE&G are subject, in certain respects, to the requirements of the New Jersey Board of Public Utilities (BPU) and the Federal Energy Regulatory Commission (FERC). As a result, PSE&G maintains its accounts in accordance with their prescribed Uniform Systems of Accounts, which are the same. The application of Generally Accepted Accounting Principles (GAAP) by PSE&G differs in certain respects from applications by non-regulated businesses. PSE&G prepares its financial statements in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 71 "Accounting for the Effects of Certain Types of Regulation" (SFAS 71). In general, SFAS 71 recognizes that accounting for rate-regulated enterprises should reflect the relationship of costs and revenues. As a result, a regulated utility may defer recognition of costs (a regulatory asset) or recognize obligations (a regulatory liability) if it is probable that, through the rate-making process, there will be a corresponding increase or decrease in revenues. Accordingly, PSE&G has deferred certain costs and recoveries, which will be amortized over various future periods. To the extent that collection of such costs or payment of liabilities is no longer probable as a result of changes in regulation and/or PSE&G's competitive position, the associated regulatory asset or liability will be charged or credited to income unless recovery mechanisms are approved by the BPU. PSE&G continues to meet the requirements for application of SFAS 71.
However, once the BPU issues an order with respect to PSE&G in the New Jersey Energy Master Plan (Energy Master Plan) Proceedings, currently scheduled for March 31, 1999, it is expected that PSE&G will no longer meet the requirements for application of SFAS 71 for its then deregulated operations. See Note 2. Regulatory Issues and Note 19. Accounting Matters for further discussion of deregulation and the potential accounting impacts caused by deregulation.
CONSOLIDATION POLICY
The consolidated financial statements include the accounts of PSEG and its subsidiaries. PSEG and its subsidiaries consolidate those entities in which they have a controlling interest. All significant intercompany accounts and transactions are eliminated in consolidation. Those entities in which PSEG does not have a controlling interest are being accounted for under the equity method of accounting. For investments in which significant influence does not exist, the cost method of accounting is applied.
RECLASSIFICATIONS
Certain reclassifications of prior period data have been made to conform with the current presentation.
UNAMORTIZED LOSS ON REACQUIRED DEBT AND DEBT EXPENSE
Bond issuance costs and associated premiums and discounts are generally amortized over the life of the debt issuance. In accordance with Federal Energy Regulatory Commission (FERC) regulations, costs to reacquire debt are amortized over the remaining original life of the retired debt. When refinancing debt, the unamortized portion of the original debt issuance costs of the debt being retired must be amortized over the life of the replacement debt.
Upon deregulation, gains and losses on reacquired debt associated with the deregulated portion of PSE&G's operations will be reflected in the statement of operations as incurred. Gains and losses on reacquired debt associated with PSE&G's regulated operations will continue to be deferred and amortized to interest expense over the period approved for ratemaking purposes.
UTILITY PLANT--PSE&G
Additions to utility plant and replacements of units of property are capitalized at original cost. The cost of maintenance, repair and replacement of minor items of property is charged to appropriate expense accounts. At the time units of depreciable property are retired or otherwise disposed, the original cost less net salvage value is charged to accumulated depreciation. Upon deregulation, PSE&G will record a gain or loss on the retirement, sale or disposal of assets in the deregulated portion of its business.
DEPRECIATION AND AMORTIZATION
Depreciation is computed under the straight-line method. Depreciation is based on estimated average remaining lives of the several classes of depreciable property. These estimates are reviewed on a periodic basis and necessary adjustments are made as approved by the BPU. Depreciation rates stated in percentages of original cost of depreciable property were 3.53% in 1998, 1997 and 1996.
PSE&G has certain regulatory assets resulting from the use of a level of depreciation expense in the ratemaking process that differs from the amount that is recorded under generally accepted accounting principles (GAAP) for non-regulated companies. Upon issuance of a BPU order, PSE&G will no longer calculate depreciation in accordance with BPU guidance for the deregulated portion of PSE&G's business. Depreciation for those assets will be calculated based on estimated plant lives rather than regulatory guidance. PSE&G cannot presently quantify what the financial statement impact might be if depreciation expense were required to be determined absent regulation, but the impact on the financial position, results of operations and net cash flows of PSEG and PSE&G could be material.
Nuclear fuel burnup costs are charged to fuel expense on a units-of-production basis over the estimated life of the fuel. Rates for the recovery of fuel used at all nuclear units include a provision of one mill per kilowatt-hour (KWH) of nuclear generation for spent fuel disposal costs.
USE OF ESTIMATES
The process of preparing financial statements in conformity with GAAP requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts.
DECONTAMINATION AND DECOMMISSIONING--PSE&G
In 1993, FERC issued Order No. 557 regarding the accounting and rate-making treatment of special assessments levied under the National Energy Policy Act of 1992 (EPAct). Order No. 557 provides that special assessments are a necessary and reasonable current cost of fuel and shall be fully recoverable in rates in the same manner as other fuel costs.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFDC)--PSE&G
AFDC represents the cost of debt and equity funds used to finance the construction of new utility facilities. The amount of AFDC capitalized is reported in the Consolidated Statements of Income as a reduction of interest charges for the borrowed funds component and as other income for the equity funds component. The rates used for calculating AFDC in 1998, 1997 and 1996 were 6.06 %, 5.71% and 5.83%, respectively. Upon deregulation, PSE&G will no longer calculate AFDC for the deregulated portion of PSE&G's business. Interest (cost of debt only) related to capital projects for generation projects will be capitalized in accordance with SFAS No. 34, "Capitalization of Interest Cost."
REVENUES AND FUEL COSTS--PSE&G
Revenues are recorded based on services rendered to customers during each accounting period. PSE&G records unbilled revenues representing the estimated amount customers will be billed for services rendered from the time meters were last read to the end of the respective accounting period. Rates include projected fuel costs for electric generation, purchased and interchanged power and gas purchased. The fuel component of the LEAC rate was frozen for 1997 and 1998 as part of the BPU's Order dated December 31, 1996 (December 31st Order) and PSE&G bore all risks associated with fuel prices.
Any Electric Levelized Energy Adjustment Clause (LEAC) and Levelized Gas Adjustment Clause (LGAC) underrecoveries or overrecoveries, together with interest (in the case of net overrecoveries), are deferred and included in operations in the period in which they are reflected in rates. Effective January 1, 1998, the amount included for LEAC under/overrecovery represents the difference between fuel related revenues and fuel related expenses which are comprised of the cost of generation and interchanged power at the PJM Interconnection, L.L.C. (PJM) market clearing price. Effective April 1, 1998, PJM, as independent system operator (ISO), replaced the PJM uniform market clearing price with locational marginal pricing (LMP) for determining the market clearing pricing to energy providers. For discussion of the current and proposed status of the LEAC and the LGAC, see Note 2. Regulatory Issues and Note 3. Regulatory Assets and Liabilities.
INVENTORY--MATERIALS AND SUPPLIES AND NUCLEAR FUEL
Inventory is carried on the books at cost in accordance with rate based regulation. When portions of PSE&G's business become deregulated, the carrying value of its inventory for its unregulated operations will be valued at a lower of cost or market basis which could have a material adverse impact on PSEG's and PSE&G's financial position, results of operations and net cash flows to the extent that any write downs are not recovered through regulatory mechanisms approved by the BPU.
COMMODITY CONTRACTS--PSE&G
PSE&G engages in electricity and natural gas commodity forwards, futures, swaps and options purchases and sales with counterparties to manage exposure to electricity and natural gas price risk. Certain contracts, in conjunction with owned electric generating capacity, are designed to provide for estimated electric customer commitments. Similarly,
PSE&G uses natural gas futures and swaps to manage the price risk associated with gas supply to customers. PSE&G's accounting policy for these contracts is to recognize the gains and losses in income upon settlement of the contracts.
PSE&G also enters into forwards, futures, swaps and options that are not used to manage price risk exposure for commitments to customers. As these are considered to be trading contracts, PSE&G's accounting policy has been to mark the contracts to market and record unrealized gains and losses in income. These contracts do not have a material impact on PSE&G's financial condition, results of operations and net cash flows. PSE&G does not hold any financial instruments of a leveraged nature.
For discussion of SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), and Emerging Issues Task Force Issue No. 98-10, "Accounting for Energy Trading and Risk Management Activities" (EITF 98-10), see Note 19. Accounting Matters.
FINANCIAL INSTRUMENTS--ENERGY HOLDINGS
Gains and losses on hedges of existing assets or liabilities are included in the carrying amounts of those assets and liabilities and are ultimately recognized in income as part of those carrying amounts. Gains and losses related to qualifying hedges of firm commitments or anticipated transactions also are deferred and recognized in income or as adjustments of carrying amounts when the hedged transaction occurs.
EQUITY INVESTMENTS--ENERGY HOLDINGS
Resources carries its investments in equity securities at their approximate fair market values as of the reporting date.
FOREIGN CURRENCY TRANSLATION/TRANSACTIONS--ENERGY HOLDINGS
The assets and liabilities of Energy Holdings' foreign operations are translated into U.S. dollars at current exchange rates and revenues and expenses are translated at average exchange rates for the year. Resulting translation adjustments are reflected as a separate component of stockholders' equity.
Transaction gains and losses that arise from exchange rate fluctuations on normal operating transactions denominated in a currency other than the functional currency, except those transactions which operate as a hedge of an identifiable foreign currency commitment or as a hedge of a foreign currency investment position, are included in the results of operations as incurred.
INCOME TAXES
PSEG and its subsidiaries file a consolidated Federal income tax return and income taxes are allocated to PSEG's subsidiaries based on the taxable income or loss of each subsidiary. Investment tax credits were deferred in prior years and are being amortized over the useful lives of the related property, including nuclear fuel. For discussion of energy tax reform and its impact on NJGRT, see Note 12. Income Taxes.
BENEFIT PLANS
Non-represented employees of PSE&G commencing service before January 1, 1996, represented employees of PSE&G commencing employment before January 1, 1997 and certain employees of PSE&G's affiliated companies are covered by a noncontributory trusteed pension plan (Pension Plan) from the date of hire. Non-represented employees of PSE&G who commenced service after January 1, 1996, represented employees of PSE&G who commenced employment after January 1, 1997 and certain employees of PSE&G's affiliated companies are covered by a cash balance pension plan. Beginning with the plan year 1997, the funding policy was modified to provide annual funding not to exceed the maximum tax deductible amount. Contributions will be made each year based on targeted funding levels for the plan.
In 1993, PSEG adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (SFAS 106), which requires that the expected cost of employees' postretirement health care and life insurance benefits, also referred to as other postretirement benefits (OPEB), be charged to income during the years in which employees render
service. PSE&G deferred a portion of these costs as a regulatory asset from 1993 until 1997 when a BPU order was received stipulating that current rates were sufficient to recover such costs. Therefore, on January 1, 1998, PSE&G began amortizing its regulatory asset for OPEB over 15 years and recording the annual SFAS 106 OPEB cost. In 1998, PSE&G began funding its annual OPEB obligation in an external trust to the maximum extent allowable under Section 401(h) of the Internal Revenue Code.
CAPITAL LEASES AS LESSEE
The Consolidated Balance Sheets include assets and related obligations applicable to capital leases under which PSE&G is a lessee. The total amortization of the leased assets and interest on the lease obligations equals the net minimum lease payments included in rent expense for capital leases. Capital leases of PSE&G relate primarily to its corporate headquarters.
IMPAIRMENT OF LONG-LIVED ASSETS
On January 1, 1996, PSEG adopted SFAS 121, which requires review for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The adoption of SFAS 121 did not have an impact on the results of operations, financial condition and net cash flows of PSEG or PSE&G. However, future developments in the electric and gas industries could have a material impact on the carrying value of certain investments. Upon deregulation, PSE&G will reevaluate the potential impairment of its assets which may result in recording an extraordinary, non-cash charge to earnings that could have a material adverse impact on PSEG's and PSE&G's financial condition and results of operations to the extent that any impairments are not recovered through regulatory mechanisms approved by the BPU.
EARNINGS PER SHARE
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share", which was effective for financial statements issued after December 15, 1997. Under the new standard, basic earnings per share is computed as earnings available to common stockholders divided by weighted average shares outstanding excluding the dilutive effect of potential common shares. Diluted earnings per share includes the dilutive effect of potential common shares. PSEG has an existing stock option plan which allows for options to be granted on a periodic basis. These potential common shares had no impact on diluted earnings per share for the years ended December 31, 1998, 1997 and 1996.
NOTE 2. REGULATORY ISSUES
NEW JERSEY ENERGY MASTER PLAN PROCEEDINGS
In 1998 and continuing into 1999, energy industry restructuring continued to advance in New Jersey. In 1998, evidentiary hearings related to PSE&G's proposal in connection with the BPU's New Jersey Energy Master Plan were completed and the Office of Administrative Law filed its decision providing its recommendations on such proposal with the BPU. In January 1999, the State Legislature passed the New Jersey Electric Discount and Competition Act (Energy Competition Act) which was signed into law by the Governor on February 9, 1999. The Energy Competition Act and the related BPU proceedings are hereinafter defined as the Energy Master Plan Proceedings. Among other things, the Energy Competition Act provides that all New Jersey retail electric customers may select their electric supplier commencing August 1, 1999 and all New Jersey retail gas customers may select their gas suppliers commencing January 1, 2000, thus fully opening the New Jersey energy markets to customer choice and competition.
The Energy Competition Act provides the BPU requisite authority to implement certain aspects of retail electric and gas competition in New Jersey. The BPU is currently engaged in proceedings to implement the Energy Competition Act, the result of which will fundamentally change the electric and gas industries in New Jersey by, among other things, introducing retail competition to replace the monopoly position of regulated public utilities, potentially requiring or resulting in the separation or sale of utilities' electric generation assets and establishing a number of generic rules related to deregulation, including governing regulated utilities' relationships with their affiliates.
Under the Energy Competition Act, the distribution business will remain regulated by the BPU. Transmission will remain regulated by the FERC. With deregulation, electric generation will be a competitive business. Succeeding as a competitive generator will depend on many factors such as fuel cost, production costs including labor cost, environmental constraints and related expenses, transmission availability and rates, marketing ability and quality of service, among others. The outcome of these proceedings will have a profound effect on PSEG and PSE&G.
On February 11, 1999, the BPU adopted a schedule for the resolution of each New Jersey electric utility's filings for rate unbundling, stranded cost and restructuring proceedings. With respect to PSE&G, the BPU indicated that it is encouraging the parties to the case to undertake discussions in an attempt to reach consensus on the litigated issues in the rate unbundling, stranded cost and, on limited issues, the restructuring proceedings. The BPU further indicated that, in lieu of a negotiated settlement of the case among the parties, it has scheduled a final vote on the PSE&G filing at its March 31, 1999 agenda meeting. To that end, the BPU has set a deadline of March 3, 1999 for the submission of any negotiated settlement.
Shortly thereafter, the BPU is expected to issue a series of orders that will decide generic issues related to deregulation of the industry in the State (e.g., affiliate standards). The BPU has yet to set a timetable related to a gas restructuring order. Once the March 31, 1999 BPU Order is issued, PSE&G will no longer meet the requirements of SFAS 71 for the electric generation portion of its business. While PSE&G cannot predict the outcome of the Energy Master Plan Proceedings, when PSE&G discontinues the application of SFAS 71 and if full recovery were not probable through recovery mechanisms approved by the BPU, there could be an extraordinary, non-cash charge to operations that could be material to the financial position and results of operations of PSEG and PSE&G. See Note 19. Accounting Matters for further discussion of the potential accounting impacts caused by deregulation.
THE ENERGY COMPETITION ACT
Key features of the Energy Competition Act, as passed, include:
o Competitive choice for electric service will begin on August 1, 1999. Competitive choice for gas service must be fully implemented by December 31, 1999. For further discussion of gas competition, see Gas Unbundling.
o Mandates that an electric rate reduction of at least 10%, phased in over a period of up to thirty-six months, will be provided to consumers. The rate reduction will be based on the level of rates in effect as of April 30, 1997. Rates must be reduced by no less than 5% effective August 1, 1999. When coupled with reductions from the 1998 change in New Jersey energy taxes, the total rate reductions for consumers could total 16%, not including an additional 3.5% reduction due to an interim DSM rate increase.
o Authorizes "shopping credits" or discounts for customers that switch from their current electric utility supplier to encourage competition.
o Utilities have an opportunity to recover stranded costs associated with generation assets through a market transition charge (MTC) that could last up to eight years. Costs associated with above-market power purchase contracts with other utilities and with non-utility generators (NUGs) will be recovered over the remaining life of those contracts. Mitigation by the utility of its stranded costs, to the extent possible, is required.
o Securitization is limited to 75% of utility generation-related stranded costs. Transition bonds with a maximum scheduled amortization of 15 years can be issued if the proceeds are used to recover eligible stranded costs. Power purchase contracts can also be securitized in an effort to buy out or buy down contracts.
o On or after the starting date of implementation of retail choice, the BPU may require functional separation of a utility's non-competitive business functions from its competitive electric generation service and require that those competitive services be provided by a related competitive business segment of a public utility holding company. The related competitive business segment of the public utility holding company will not be subject to regulation under New Jersey utility law but may be subject to FERC regulation.
o While the Energy Competition Act does not mandate divestiture of electric generation assets, it gives the BPU the right to examine market conditions and requires divestiture if the BPU finds market power would impede development of competition.
o Competitive services may be offered by a public utility or a competitive business segment of a public utility only with the written approval of the BPU. Tariffs for competitive services will be required and subject to review and approval by the BPU. The competitive business segment must not adversely impact the ability of the utility to offer non-competitive services to customers in a safe, adequate and proper manner. The price for services must not be less than the fully allocated cost of providing such services. Cross-subsidization is prohibited and standards for affiliate relationships will be established. The BPU will be required to apply 50% of the net revenues earned from competitive services offered by an electric public utility as an offset to stranded costs or a reduction of rates for the period of time that the utility collects transition bond charges.
o Utility holding companies are permitted to offer competitive electric generation service to existing utility retail customers subject to affiliate relations standards to be established by the BPU. A utility holding company's competitive business entity utilizing utility assets, including personnel and equipment other than the delivery network or certain shared corporate overhead or administrative services, to provide competitive services is subject to a 50% sharing of net revenues from such services. Unless the utility ratepayers receive full market value for the use of such utility assets pursuant to a contract between the parties filed with the BPU, those revenues will be used to offset transition charges and/or distribution rates for a period of time.
o The BPU is required to initiate a proceeding and adopt interim technical standards to ensure the safety, reliability and accuracy of metering equipment provided to electric and gas customers. The BPU is required to issue an order providing customers the opportunity to choose a supplier for some or all customer services (such as metering and billing) not later than one year from the start of retail competition. Until that time, customers are given the option with affirmative consent to receive two bills, one from the utility and one from the supplier.
o The BPU is required to adopt interim consumer protection standards for electric and gas suppliers to prevent slamming, protect customer privacy and provide customers necessary information to make informed decisions.
o Simultaneously with the implementation of retail choice, the BPU may permit recovery of certain costs through a Societal Benefits Charge which would be a component of rates for all retail customers. These costs will include social programs for which rate recovery was approved prior to April 30, 1997; nuclear decommissioning costs; demand side management program costs, manufactured gas plant clean up costs and potentially the cost of a statewide consumer education program. The BPU is authorized to use the existing funds for social programs to create a universal service fund for low income energy assistance.
o Utilities will serve customers for at least three years as the energy provider of last resort, providing basic electric generation and gas services. The BPU is required to decide, no later than three years after the start of retail choice, whether to allow other, non-utility, suppliers to offer basic generation service on a competitive basis.
o Businesses, cities, towns and counties are able to aggregate their own power demands and other energy needs for which marketers may bid to serve. Customers will control their inclusion in any such group. Aggregation by municipalities to serve residents and businesses within those municipalities can also begin at the start of retail choice.
o Electric suppliers must disclose information about fuels used to generate the electricity that they sell and emissions from their portfolio of electricity suppliers on customers' bills or in marketing materials. The BPU and New Jersey Department of Environmental Protection (NJDEP) may adopt an emission control portfolio standard for all retail suppliers if the BPU finds that a standard is necessary to meet Clean Air Act rules and that regional and Federal actions would not achieve compliance with those rules, or if two other states using the PJM power pool comprising 40% of the retail electric usage in PJM adopt such standards.
STRANDED COSTS
Stranded costs represent the portion of the book value of generation related assets or the portion of payments under power purchase contracts which are in excess of their value in a competitive deregulated marketplace. In its initial proposal, PSE&G had identified its potentially stranded costs associated with fossil and nuclear generating stations at $3.9 billion, based on certain assumptions, including future market prices of electricity and performance of generating units. Changes in these assumptions could materially alter the estimated amount of potentially stranded costs.
To the extent that any portion of its stranded costs are not probable of recovery upon the conclusion of the Energy Master Plan Proceedings, and thus ineligible for deferral as a regulatory asset under Statement of Financial Accounting Standards (SFAS) 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71), PSE&G would incur an extraordinary, non-cash charge to income that could be material to the financial position and results of operations of PSEG and PSE&G. For additional discussion related to the Energy Master Plan Proceedings, see Note 3. Regulatory Assets and Liabilities.
Recoverability of these costs is largely dependent on the order to be issued by the BPU at the conclusion of the Energy Master Plan Proceedings. PSE&G has proposed to securitize $2.5 billion of these costs, with the remainder to be recovered through a market transition charge during a proposed transition period of seven years. In addition, PSE&G is seeking to negotiate the restructuring of certain of its BPU approved contracts with Non-utility Generators (NUGs), which, in PSE&G's initial proposal, were estimated to be $1.6 billion above assumed future market prices. These costs are being recovered through the LEAC and are expected to continue to be recovered through successor mechanisms to be determined by the outcome of the Energy Master Plan Proceedings as to which no assurances can be given. PSEG and PSE&G cannot predict the outcome of these proceedings. However, such proceedings could have a material adverse effect on PSEG's and PSE&G's financial condition, results of operations and net cash flows and could adversely affect the carrying values of PSEG's and PSE&G's assets and the ability to declare dividends on PSEG's common stock.
SECURITIZATION
In accordance with the provisions of the Energy Competition Act, it is expected that the BPU will issue an order authorizing securitization of up to 75% of PSE&G's generation-related stranded costs. Securitization is a refinancing technique, whereby the interest and principal payments on the securitized debt which is issued will be serviced by an irrevocable, non-bypassable charge to utility customers. The Energy Competition Act provides that net proceeds from any authorized securitization of a utility's stranded costs must be used to reduce that utility's debt and equity.
Dependent upon market conditions and the level of securitization authorized by the BPU in the Energy Master Plan Proceedings, PSE&G may use a number of alternatives to reduce its debt and equity, including the redemption, tender or purchase of its outstanding Mortgage Bonds and preferred stock. In anticipation of an application of the use of proceeds of securitization, PSEG has been engaged in a program to repurchase its Common Stock, as discussed below.
Since the Energy Master Plan Proceedings are still in progress, PSE&G cannot predict the extent to which regulators will allow the use of such securitization for recovery of stranded costs. PSE&G's decision as to the manner in which the proceeds of securitization will be utilized to reduce debt and equity is dependent upon the BPU's decision in the Energy Master Plan Proceedings. The decision of the BPU required in this matter could have a material adverse effect on PSEG's and PSE&G's financial condition, results of operations and net cash flows. The use of securitization proceeds to reduce debt and equity is likely to affect the market prices of the related securities. Additionally, the use of securitization could impact PSEG's and PSE&G's bond ratings and the cost of other debt for PSEG and PSE&G.
On September 15, 1998, in anticipation of securitization of PSE&G's stranded costs afforded by the then proposed Energy Competition Act, the Board of Directors of PSEG authorized the repurchase of up to 10 million shares of its Common Stock. Under the authorization, repurchases were made in the open market at the discretion of
PSEG. The repurchased shares have been held as treasury stock. At December 31, 1998, PSEG had repurchased approximately 5.3 million shares of Common Stock at a cost of approximately $207 million, under this authorization. As of February 8, 1999, PSEG had repurchased a total of 10 million shares at a cost of approximately $391 million under this program.
DEPRECIATION
In its Energy Master Plan proposal, PSE&G has proposed to lengthen the depreciable lives of its electric distribution assets from 28 to 45 years. These assets are expected to remain regulated. The excess depreciation reserve, calculated based on this change in depreciable lives, would be amortized over a proposed seven year transition period. If PSE&G's plan is adopted as proposed, it would result in a reduction of annual depreciation expense of $116 million during such transition period and $35 million thereafter over the remaining life of these assets.
ADMINISTRATIVE LAW JUDGE'S RECOMMENDATIONS
Previously, in connection with its Energy Master Plan Proceedings, the BPU requested the Office of Administrative Law to hold evidentiary hearings regarding stranded costs and unbundling issues. Hearings were held before an Administrative Law Judge (ALJ) and on August 17, 1998, the ALJ filed his decision providing its recommendations to the BPU. The BPU can adopt, reject or modify the ALJ's recommendations in its decision on PSE&G's proposal which was filed as part of these proceedings. PSE&G cannot predict the extent to which the BPU will rely on the ALJ's decision in evaluating PSE&G's proposal. The ALJ's decision on PSE&G's competition and rate proposal:
o Recommended the adoption of PSE&G's request to securitize up to $2.5 billion of its after-tax stranded costs through the issuance of revenue bonds, which would mature over a 15 year period.
o Recommended the recovery of $1.6 billion of PSE&G's above-market price contracts to purchase power from non-utility generators (NUGs).
o Recommended a rate cut of between 10% and 12%, exclusive of the impact of energy tax reform.
o Supported PSE&G's request for a seven year transition period. PSE&G had proposed a transition period of seven years, starting on the effective date of the BPU's final decision in these proceedings, with basic tariff rates capped during that seven year period. During the transition period, PSE&G would maintain responsibility for system reliability of energy and capacity supply.
o Accepted PSE&G's approach/methodology of quantifying stranded costs without quantifying the amount of such costs.
o Recommended a review of PSE&G's actual electric fuel costs, which would apply any potential savings from the elimination of the Electric Levelized Energy Adjustment Clause (LEAC) to mitigate stranded costs.
o Supported PSE&G's Societal Benefits Clause proposal, but proposed to exclude non-utility generators (NUG) costs from the Societal Benefits Clause. A separate NUG charge would be created.
o Recommended adding an amount, known as a "retail adder," to the proposed market-based energy credit on customers' bills to give customers who choose another energy supplier credits for more than the market price for power.
On October 2, 1998, PSE&G filed exceptions to the ALJ's decision. These exceptions addressed issues identified in the ALJ's decision including the validity of capital additions made by PSE&G after the conclusion of its 1992 base rate case, the relevance of PSE&G's methodology regarding stranded costs, mitigation strategies, the adoption of securitization and the unbundling of costs and rates. Other parties to the proceeding have also filed exceptions to the ALJ's decision. PSE&G filed its reply exceptions to the other parties' exceptions to the ALJ's decision on October 30, 1998.
Hearings at the BPU addressing other restructuring issues such as market power, functional separation and consumer protection concluded on May 28, 1998. Briefs have been filed by the parties in these hearings. As previously discussed, these generic issues are expected to be decided shortly after the March 31, 1999 BPU Order.
SETTLEMENT OF CERTAIN REGULATORY ISSUES
By Order dated December 31, 1996 (December 31st Order), the BPU approved a settlement among PSE&G, the staff of the BPU (Staff) and the New Jersey Division of Ratepayer Advocate (Ratepayer Advocate) addressing (1) the cost impact of the 1995 shutdown of Salem Nuclear Generating Station (Salem) Units 1 and 2 (Salem 1 and 2), including the "used and useful" issue related to the units through December 31, 1998; (2) the recovery of certain replacement power costs associated with the 1994 Salem 1 outage; and (3) the recovery of capacity costs associated with PSE&G's power purchases from cogeneration producers through December 31, 1998. Under the December 31st Order, PSE&G recorded a charge of $83.9 million for bill credits to electric customers who received credits in January and February 1997. PSE&G also agreed to forego recovery of $12 million associated with energy costs that previously had been deferred. The resulting after-tax earnings loss of $62 million or 26 cents per share of PSEG Common Stock was previously recorded ($59 million or 25 cents per share in the third quarter of 1996 and $3 million or 1 cent per share in 1995).
Under the terms of the December 31st Order, Salem 1 and 2 continued in base rates without being subject to further refund and PSE&G assumed all nuclear and fossil generating fuel and performance risks, including replacement power costs associated with the Salem, Hope Creek Generating Station (Hope Creek) and Peach Bottom Atomic Power Station (Peach Bottom) nuclear stations from January 1, 1997 through December 31, 1998. The BPU's nuclear performance standard (NPS) did not apply to PSE&G from January 1, 1996 through December 31, 1998. In addition, the energy component of PSE&G's LEAC was fixed at its then existing level with no increase to customers until at least January 1999 with PSE&G responsible for all risks associated with fuel prices. Any underrecovered or overrecovered LEAC balance existing on December 31, 1998 would not be considered in any LEAC review subsequent to that date. Any overrecovery at that date would be applied to reduce any potential stranded costs and any underrecovered balance will be charged to income in the period identified. For an update on the current status of the LEAC, see Note 3. Regulatory Assets and Liabilities.
The December 31st Order provided PSE&G the opportunity, but no guarantee, during the period January 1, 1997 through December 31, 1998, to fully recover the December 31, 1996 underrecovered LEAC energy balance of $151 million without any change in the current energy component of the LEAC charge. This balance was fully recovered and the overrecovery of $39 million at December 31, 1998 is being carried as a regulatory liability to offset stranded costs.
In addition to the resolution of the Salem "used and useful" issue, the December 31st Order addressed two other separate long standing issues that PSE&G had been litigating before the BPU. The first pertains to the recovery of certain replacement power costs associated with a 58 day outage at Salem 1 in 1994. The December 31st Order required PSE&G to reduce its underrecovered LEAC balance by $7 million related to that outage. The second pertains to the recovery of capacity costs associated with electric utility power purchases from cogeneration producers through December 31, 1998. The December 31st Order required PSE&G to provide bill credits to electric customers totaling $6.4 million during January and February 1997. In addition, PSE&G reduced its underrecovered LEAC balance by $5 million related to the recovery of capacity costs.
Through separate letter agreements, PSE&G and the Ratepayer Advocate agreed on a commitment by PSE&G to provide financial assistance toward economic growth and development in New Jersey. This commitment, which runs through December 31, 1999, has four key elements. First, PSE&G created a $30 million revolving economic development fund with emphasis on stimulating jobs and developing high technology projects in urban areas. Second, PSE&G will continue to provide incentives to encourage local public housing authorities to replace up to 4,000 refrigerators a year. Third, PSE&G committed $1 million to develop a fund to provide innovative assistance to low income residents who are having difficulty paying energy bills. Finally, PSE&G committed to developing a computer system which has been developed to assist low income residents in identifying government and community programs from which they would be eligible to receive benefits.
On November 10, 1998, the BPU requested PSE&G to identify its intention with regard to a new LEAC filing before the BPU, in accordance with the December 31st Order. On November 20, 1998, PSE&G responded and addressed the issue
of a new LEAC by stating that it intends to follow its Energy Master Plan filing, wherein it proposed to discontinue the LEAC effective with the commencement of retail electric competition. PSE&G intends to continue the utilization of deferred accounting for the LEAC until commencement of customer choice. Assuming that retail access will commence on or about August 1, 1999, as mandated in the Energy Competition Act, any overrecovery that exists as of that date would be utilized as an offset to the proposed $3.9 billion of stranded costs. As of December 31, 1998, PSE&G established a deferred regulatory liability in the amount of $39 million which represents an overrecovery of LEAC fuel costs, to be applied as an offset to stranded costs.
ELECTRIC LEVELIZED ENERGY ADJUSTMENT CLAUSE (LEAC)/DEMAND SIDE ADJUSTMENT FACTOR (DSAF)
As discussed above, the December 31st Order fixed the energy component of the LEAC as of December 31, 1996. Additionally, under PSE&G's Energy Master Plan proposal, if approved, the LEAC would be discontinued. Certain components of the LEAC would become part of the societal benefits clause under PSE&G's proposal. No assurances can be given as to the outcome of the Energy Master Plan Proceedings. For further discussion, see Note 3. Regulatory Assets and Liabilities and Note 11. PSE&G Nuclear Decommissioning.
On February 24, 1997, PSE&G requested an annualized increase of $151.8 million in the DSAF component of the LEAC effective for the period from May 1997 through December 1998, representing an increase on a typical residential bill of approximately 3.5%. The request included recovery of electric demand side management (DSM)/conservation costs related to BPU approved programs and would raise rates to a level sufficient to recover such costs incurred through December 31, 1998. On April 1, 1998, the BPU approved $150.8 million of PSE&G's requested increase. This increase was effective for service rendered on or after April 3, 1998. The Division of the Ratepayer Advocate has appealed the BPU's order, seeking to overturn the BPU's decision. Initial Briefs on Appeal were filed on October 14, 1998. PSE&G cannot predict the outcome of that appeal. If such an appeal is successful, there could be a material adverse impact on PSEG's and PSE&G's financial condition, results of operations and net cash flows.
At December 31, 1998, PSE&G had an underrecovered balance, including interest, of approximately $150 million related to these programs. Such amount is included in Deferred Debits on PSE&G's balance sheet.
PSE&G's most recent DSM Resource Plan (1995 Plan) was approved by the BPU in 1995 and was designed to encourage investment in energy-saving DSM activities. BPU approval of the 1995 Plan included a requirement to file the next DSM Plan by July 1, 1997. In April of 1997 PSE&G filed a request with the BPU to extend the 1995 Plan for one year and to defer filing the next DSM Plan until July 1, 1998, which requests were granted with the condition that the Core Programs would continue until the next DSM Plan was approved. The BPU further directed that PSE&G also extend existing project acceptance and in-service deadline dates by one year. On June 29, 1998, PSE&G filed with the BPU the 1999 Interim Demand Side Management Plan which included Core programs and the Standard Offer, and hearings on the filing were conducted. No action has been taken by the BPU leaving no mechanism open at this time for the accepting of new Standard Offer project proposals. It is anticipated that there will be BPU action on the 1999 Interim Plan in the near future, but PSE&G cannot predict the outcome of such action.
The Energy Competition Act provides for the continued ability to recover costs related to the DSM programs through a societal benefits charge initially set at the level in rates for DSM cost recovery in place on February 9, 1999. Within the subsequent twelve months, the BPU is required to complete a statewide comprehensive resource analysis of energy efficiency and renewable energy programs and determine the appropriate level of funding for each utility based on this analysis. PSEG and PSE&G cannot predict the final outcome of DSM and other mandated societal costs recovery under the Energy Master Plan Proceedings. Inability to recover such amounts could have a material adverse impact on PSEG's and PSE&G's financial condition, results of operations and net cash flows. For further discussion of the potential impact on PSEG and PSE&G of the Energy Master Plan Proceedings, see New Jersey Energy Master Plan Proceedings.
LEVELIZED GAS ADJUSTMENT CLAUSE (LGAC)
On July 10, 1998, PSE&G filed a motion with the BPU requesting a $27 million annual increase in its LGAC for the period October 1, 1998 to September 30, 1999, representing an increase on a typical residential bill of approximately 2.8%. Also included in the revised LGAC rate is an increase in the Remediation Adjustment Clause (RAC) component, a decrease in the Demand Side Adjustment Factor (DSAF) and a request to change, on a monthly basis, the over/under collection
component of the LGAC rate for residential customers. On October 15, 1998, PSE&G, BPU Staff and the Ratepayer Advocate executed an Interim Stipulation which allows the filed LGAC rates to become effective, subject to refund. On November 4, 1998, the BPU approved an Order adopting the Interim Stipulation.
On December 22, 1998, the Board approved a Final Stipulation in the LGAC which provided for the following:
1) All previously approved interim rates became final.
2) All margins (prospectively) from PSE&G's participation in the New Jersey Natural Gas Company (New Jersey Natural) residential unbundling pilot program were to be returned 100% to PSE&G's firm gas customers.
3) PSE&G was allowed to hedge up to 115bcf (approximately 80%) of its residential gas supply through physical or financial transactions, with a limit on the financial transactions of 75% of the total to be hedged.
4) The LGAC rate can now be changed (increased or decreased) monthly, within certain limits, during November through April to reflect changes in the projected over/under collection.
On November 14, 1997, PSE&G filed its 1997/98 LGAC petition with the BPU requesting a $45 million increase on an annual basis in its LGAC for the period January 1, 1998 to December 31, 1998. This increase, as filed, amounts to approximately 4.8% on a typical residential bill. Public hearings were held on February 3, 1998. On February 18, 1998, the BPU approved a Stipulation agreed to by the parties in the proceeding. The Stipulation provided for an interim increase in LGAC revenues of approximately $31 million, excluding State sales and use tax. This represents an increase of 3.5% on a typical residential bill. On June 26, 1998, an Order was executed by the BPU making the terms of the interim Stipulation final, without modification.
REMEDIATION ADJUSTMENT CHARGE (RAC)
In 1992, the BPU approved a mechanism for recovery of PSE&G's costs associated with its Manufactured Gas Plant Remediation Program (Remediation Program) allowing the recovery of actual costs plus carrying charges, net of insurance recoveries, over a seven-year period through PSE&G's LGAC and LEAC, with 60% charged to gas customers and 40% charged to electric customers.
On July 10, 1998, PSE&G filed a motion before the BPU requesting a $1.5 million annual increase in its RAC for the period August 1, 1997 to July 31, 1998, representing an increase on a typical residential bill of approximately 0.03%. On November 4, 1998, the BPU issued an Order approving the rate increase on an interim basis, subject to refund. On December 22, 1998, the BPU approved the rate increase on a final basis.
The Energy Competition Act provides for the continued ability to recover costs related to the Remediation Program through a societal benefits charge. No assurances can be given as to the outcome of the Energy Master Plan Proceedings.
CONSOLIDATED TAX BENEFITS
In a case affecting another utility in which neither PSEG nor PSE&G were parties, the BPU considered the extent to which tax savings generated by non-utility affiliates included in the consolidated tax return of that utility's holding company should be considered in setting that utility's rates. In 1992, the BPU approved an order in such case treating certain consolidated tax savings generated after June 30, 1990 by that utility's non-utility affiliates as a reduction of its rate base. Also in 1992, the BPU issued an order resolving PSE&G's 1992 base rate proceeding without separate quantification of the consolidated tax issue. Such order did not provide final resolution of the consolidated tax issue for any subsequent base rate filing. While PSEG continues to account for its two wholly-owned subsidiaries on a stand-alone basis, resulting in a realization of tax benefits by the entity generating the benefit, an ultimate unfavorable resolution of the consolidated tax issue could reduce PSE&G's and PSEG's revenues, net income or net cash flows. In addition, an unfavorable resolution may adversely impact PSEG's non-utility investment strategy. PSEG believes that PSE&G's taxes should be treated on a stand-alone basis for rate-making purposes, based on the separate nature of the utility and non-utility businesses. The issue of PSEG sharing the benefits of consolidated tax savings with PSE&G or its ratepayers was addressed by the BPU in its July 28, 1996 letter which informed PSE&G that the issue of consolidated tax savings can be discussed in the context of PSE&G's next base rate case or plan for an alternative form of regulation. However, neither PSEG nor PSE&G is able to predict what action, if any, the BPU may take concerning consolidation of tax benefits in future rate proceedings.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (OPEB)
On October 21, 1998, the BPU ordered PSE&G to fund in an external trust its annual OPEB obligation to the maximum extent allowable under Section 401(h) of the Internal Revenue Code. For 1998, the amount funded was $12 million. Remaining OPEB costs will not be funded in an external trust.
OTHER REGULATORY ISSUES
NON-UTILITY GENERATION BUYDOWN
PSE&G is seeking to restructure certain of its BPU approved contracts with NUGs, which are estimated to be $1.6 billion above assumed future market prices. Under Federal and State regulations, utilities have been required to enter into long-term power purchase agreements with NUGs at prices which have subsequently proven to be above market. In June 1998, PSE&G and the Union County Utilities Authority (UCUA) announced an agreement to amend their Power Purchase and Interconnection Agreement and in July 1998, the BPU approved this amendment. Under this amendment, PSE&G has paid UCUA a lump sum amount of $7.75 million in exchange for a $15.6 million savings to ratepayers on a net present value basis. The payment of $7.75 million by PSE&G is being recovered through the LEAC and is expected to continue to be recovered through successor mechanisms to be determined by the outcome of the Energy Master Plan Proceedings as to which no assurances can be given.
ORDER ADOPTING AUCTION STANDARDS
On June 16, 1998, the BPU adopted standards applicable to the auction processes being used by two other New Jersey utilities to divest themselves of certain of their generating plants by sale to unrelated entities. At this time, PSEG's strategy is to retain its generation assets. The BPU order adopting these auction standards indicated that the standards would be reviewed and possibly modified if deemed appropriate. Should PSE&G decide or be required to sell its generation assets, PSE&G would determine at such time whether to seek such review or modification.
INTERIM COMPETITIVE TRANSITION CHARGE (ICTC)
In September 1996, PSE&G filed a petition with the BPU to establish an ICTC which is designed to recover stranded costs which will result from a customer leaving PSE&G's system as a full requirements customer. The Energy Competition Act does not require that on-site generators pay any fees equivalent to the societal benefits charge or recovery of utility stranded costs (market transition charge or transition bond charges) provided that the energy load served by the on-site generators does not reduce the utility's distributed kilowatt hours below 92.5% of the kilowatt hours distributed by the utility in 1999. If that trigger is exceeded, then on-site generators will pay such charges. PSE&G cannot predict the impact this may have on its financial condition, results of operations and net cash flows.
GAS UNBUNDLING
PSE&G's unbundled gas transportation tariffs, which have been in place since 1994, allow any nonresidential customer, regardless of size, to purchase its own gas, transport it to PSE&G and require PSE&G to deliver such gas to the customer's facility. Under the Energy Competition Act, utilities are required to offer all of their customers the choice to buy the gas commodity from alternate suppliers by December 31, 1999. The Energy Competition Act also applies similar rules to the gas industry as to the electric industry addressing affiliate relations, consumer protections, among others.
To date, approximately 17,700 commercial and industrial customers, of approximately 180,000 such customers eligible, have elected to utilize unbundled gas service. PSE&G cannot predict, in light of restructuring and with the changes in the law affecting the gross receipts and franchise tax which became effective on January 1, 1998, whether additional customers will use this service. Those changes now apply sales tax to sales by marketers, putting a similar tax burden on them as borne by PSE&G (see NJGRT Reform below).
In April 1997, the BPU approved PSE&G's proposal for a residential gas unbundling pilot program (SelectGas), which allowed approximately 65,000 residential natural gas customers, out of a total of 1.4 million residential gas customers, to participate in the competitive marketplace effective May 1, 1997. On April 30, 1998, PSE&G filed a report with the BPU
on SelectGas and proposed refinements for a permanent residential gas unbundling program (SelectGas Plus). Under SelectGas Plus, as proposed, a total of 300,000 residential customers would be permitted to choose their gas supplier on a first-come, first-served basis. This expanded program would commence sixty days after a BPU order authorizing this program. PSE&G's proposal would permit its remaining residential customers to choose their gas supplier by July 1, 1999 or such alternate date as may be established by the BPU. On December 22, 1998, PSE&G, the BPU and the Ratepayer Advocate executed an Interim Stipulation for Phase I of PSE&G's Residential Gas Transportation Program (Program). In accordance with the Interim Stipulation, residential customers would not be eligible to register (sign-up) for the Program until 60 days after the BPU's Energy Master Plan Proceedings written order. The Interim Stipulation mandates that residential customers who return to PSE&G's bundled sales service after a designated period would be served gas which is market- priced under PSE&G's Market Price Gas Service (MPGS) tariff.
PSE&G also participates in a retail pilot program of the New Jersey Natural Gas Company (New Jersey Natural) to provide unbundled gas transportation to former residential customers of New Jersey Natural. PSE&G has enrolled over 1,700 former residential gas customers of New Jersey Natural.
Current transportation rate schedules produce the same non-fuel revenue per therm as existing sales tariff rate schedules. Thus, to date, PSE&G's earnings have been unaffected by whether the customers remain on sales tariffs or convert to transportation service. PSEG's indirect subsidiary, Energy Technologies, provides non-utility gas marketing services operating in New Jersey and several other states.
NEW JERSEY GROSS RECEIPTS AND FRANCHISE TAX (NJGRT) REFORM
For a discussion of New Jersey energy tax reform and its impact on the NJGRT, see Note 12. Income Taxes.
NOTE 3. REGULATORY ASSETS AND LIABILITIES
Regulatory assets and liabilities are recorded in accordance with the provisions of SFAS 71. In general, SFAS 71 recognizes that accounting for rate-regulated enterprises should reflect the relationship of costs and revenues. As a result, a regulated utility may defer recognition of costs (a regulatory asset) or recognize obligations (a regulatory liability) if it is probable that, through the rate-making process, there will be a corresponding increase or decrease in revenues. Accordingly, PSE&G has deferred certain costs, which are being amortized over various periods. To the extent that collection of such costs or payment of liabilities is no longer probable as a result of changes in regulation and/or PSE&G's competitive position, the associated regulatory asset or liability will be charged or credited to income. Through 1998 and into 1999, PSE&G continues to meet the requirements for application of SFAS 71. Once the BPU issues its March 31, 1999 order in the Energy Master Plan Proceedings, PSE&G will no longer meet the requirements for application of SFAS 71 for its then deregulated operations. It is expected that the existing regulatory assets, listed below, will continue in the regulated portion of PSE&G's business and will continue to be subject to SFAS 71.
At December 31, 1998 and 1997, PSE&G had deferred the following regulatory assets and liabilities on the Consolidated Balance Sheets:
DECEMBER 31, ----------------------- 1998 1997 ---------- ---------- REGULATORY ASSETS (MILLIONS OF DOLLARS)
SFAS 109 Income Taxes $ 704 $ 725 OPEB Costs 270 289 Demand Side Management Costs 150 116 Environmental Costs 139 122 Unamortized Loss on Reacquired Debt and Debt Expense 135 135 Decontamination and Decommissioning Costs 39 43 Underrecovered Gas Costs 35 76 Plant and Regulatory Study Costs 32 34 Repair Allowance Tax Deficiencies and Interest 26 -- Property Abandonments 21 37 Oil and Gas Property Write-Down 21 26
Underrecovered Electric Energy Costs -- 91 Other 7 -- ---------- ---------- Total Regulatory Assets $ 1,579 $ 1,694 ========== ========== REGULATORY LIABILITIES Overrecovered Electric Energy Costs $ 39 $ -- Other Stranded Cost Recovery Offsets 4 -- ---------- ---------- Total Regulatory Liabilities $ 43 $ -- ========== ==========
UNAMORTIZED LOSS ON REACQUIRED DEBT AND DEBT EXPENSE: Represents bond issuance costs, premiums, discounts and losses on reacquired long-term debt.
OPEB COSTS: Includes costs associated with adoption of SFAS 106 which were deferred in accordance with EITF Issue 92-12. Beginning January 1, 1998, PSE&G commenced the amortization of the regulatory asset over 15 years.
ENVIRONMENTAL COSTS: Represents environmental costs which are probable of recovery in future rates.
UNDERRECOVERED ELECTRIC ENERGY COSTS/OVERRECOVERED ELECTRIC ENERGY COSTS: PSE&G had the opportunity, but no guarantee, during the period January 1, 1997 through December 31, 1998, to fully recover its December 31, 1996 underrecovered LEAC balance of $151 million without any change in the current energy component of the LEAC charge. At December 31, 1998, PSE&G has fully recovered its December 31, 1996 underrecovered LEAC balance. The LEAC is in an overrecovered position of $39 million at December 31, 1998. This overrecovered amount will be used to offset stranded costs per the BPU's December 31st Order in the Salem settlement. PSE&G continues to follow deferred accounting treatment for the LEAC until the BPU rules on PSE&G's Energy Master Plan proposal. The potential discontinuance of the LEAC which may result from the Energy Master Plan Proceedings may cause increased earnings volatility since PSE&G will bear the full risks and rewards of changes in nuclear and fossil generating fuel costs and replacement power costs. No assurances can be given as to the outcome of the New Jersey Energy Master Plan Proceedings.
SFAS 109 INCOME TAXES: Represents regulatory asset related to the implementation of SFAS 109, "Accounting for Income Taxes" in 1993. For further discussion including flow-through impacts, see Note 12. Income Taxes.
DEMAND SIDE MANAGEMENT COSTS: Recoveries of DSM/conservation costs (related to BPU-approved programs) are determined by the BPU. PSE&G's deferred DSM balance as of December 31, 1998 and 1997, respectively, reflects underrecovered/(overrecovered) costs as follows:
DECEMBER 31, -------------------- 1998 1997 -------- -------- (MILLIONS OF DOLLARS) Deferred DSM (Including Interest)--Electric $ 151 $ 122 Deferred DSM (Including Interest)--Gas (1) (6) -------- -------- Total $ 150 $ 116 ======== ========
DECONTAMINATION AND DECOMMISSIONING COSTS: Represents amounts related to decontamination and decommissioning at Federal government sites which are probable of recovery in future rates.
PLANT AND REGULATORY STUDY COSTS: Amounts shown in the consolidated balance sheets consist of costs associated with developing, consolidating and documenting the specific design basis of PSE&G's jointly owned nuclear generating stations, as well as PSE&G's share of costs associated with the cancellation of the Hydrogen Water Chemistry System Project (HWCS Project) at Peach Bottom. PSE&G has received both BPU and FERC approval to defer and amortize, over the remaining lives of the Salem, Hope Creek and Peach Bottom nuclear units, costs associated with configuration baseline documentation and the canceled HWCS Project.
REPAIR ALLOWANCE TAX DEFICIENCIES AND INTEREST: Represents Federal income tax deficiencies and interest thereon applicable to deductions under the repair allowance provisions of the Internal Revenue Code, disallowed upon IRS audit. The BPU has allowed recovery of these costs in rates.
PROPERTY ABANDONMENTS: The BPU has authorized PSE&G to recover after-tax property abandonment costs from its customers. The table of Regulatory Assets above reflects property abandonments, and related tax effects, for which no return is earned. The net-of-tax discount rate used was between 4.868% and 5.292%.
OIL AND GAS PROPERTY WRITE-DOWN: On December 31, 1992, the BPU approved the recovery of PSE&G's deferral of an EDC write-down through PSE&G's LGAC over a ten-year period beginning January 1, 1993.
NOTE 4. LONG-TERM INVESTMENTS
Long-Term Investments are primarily those of Energy Holdings.
DECEMBER 31, ----------------------- 1998 1997 ---------- ---------- (MILLIONS OF DOLLARS) Lease Agreements (see Note 5 Leasing Activities): Leveraged Leases ..................... $ 1,393 $ 1,143 Direct and Other Financing Leases .... -- 4 ---------- ---------- Total ............................. 1,393 1,147 ---------- ---------- Partnerships: General Partnerships ................. 72 142 Limited Partnerships ................. 522 534 ---------- ---------- Total ............................. 594 676 ---------- ----------
Corporate Joint Ventures ................ 879 885 Securities .............................. 21 28 Other Investments ....................... 147 137 ---------- ---------- Total Long-Term Investments ....... $ 3,034 $ 2,873 ========== ==========
Resources' leveraged leases are reported net of principal and interest on non-recourse loans, unearned income and deferred tax credits. Income and deferred tax credits are recognized at a level rate of return from each lease during the periods in which the net investment is positive.
Partnership investments and corporate joint ventures are those of Resources, Global and EGDC.
Other Investments, above, relate primarily to Public Service Conservation Resources Corporation (PSCRC), which at December 31, 1998 was a wholly-owned subsidiary of PSE&G. On January 1, 1999, PSCRC was transferred to Energy Technologies, a wholly-owned subsidiary of Energy Holdings. PSCRC's investment in DSM projects had balances at December 31, 1998 and 1997 of approximately $72 million and $84 million, respectively.
NOTE 5. LEASING ACTIVITIES
AS LESSOR
Resources' net investments in leveraged leases are composed of the following elements:
DECEMBER 31, 1998 DECEMBER 31, 1997 --------------------- --------------------- (MILLIONS OF DOLLARS) (MILLIONS OF DOLLARS)
LEVERAGED LEVERAGED LEASES LEASES ---------- ---------- Lease rents receivable ............ $ 1,921 $ 1,498 Estimated residual value .......... 665 635 ---------- ---------- 2,586 2,133 Unearned and deferred income ...... (1,193) (990) ---------- ---------- Total investments . ........... 1,393 1,143 Deferred taxes .................... (731) (670) ---------- ---------- Net investments ............... $ 662 $ 473 ========== ==========
Resources' other capital leases are with various regional, state and city authorities for transportation equipment and aggregated $0 million and $4 million as of December 31, 1998 and 1997, respectively.
NOTE 6. SCHEDULE OF CONSOLIDATED CAPITAL STOCK AND OTHER SECURITIES
(A) On September 15, 1998, in anticipation of securitization of PSE&G's stranded costs afforded by the Energy Competition Act and the ALJ's decision, the Board of Directors of PSEG authorized the repurchase of up to 10 million shares of its common stock (Common Stock). Under the authorization, repurchases were made in the open market at the discretion of PSEG. The repurchased shares have been held as treasury stock. At December 31, 1998, PSEG had repurchased 5,314,100 shares of Common Stock at a cost of approximately $207 million, under this authorization. As of February 8, 1999, PSEG had repurchased a total of 10 million shares at a cost of approximately $391 million under this program.
In July 1996, PSEG initiated a Common Stock repurchase program. As of December 31, 1996, 11,227,639 shares had been repurchased for $307 million. The program concluded on January 17, 1997. The total number of shares repurchased under the program was 12,740,322 at a cost of $350 million.
Total authorized and unissued shares include 7,302,488 shares of PSEG Common Stock reserved for issuance through PSEG's Dividend Reinvestment and Stock Purchase Plan and various employee benefit plans. In 1998 and 1997, no shares of PSEG Common Stock were issued or sold through these plans.
(B) PSEG has authorized a class of 50,000,000 shares of Preferred Stock without par value, none of which is outstanding.
(C) At December 31, 1998, there were aggregates of 5,954,766 shares of $100 par value and 9,400,000 shares of $25 par value Cumulative Preferred Stock which were authorized and unissued, and which upon issuance may or may not provide for mandatory sinking fund redemption. If dividends upon any shares of Preferred Stock are in arrears in an amount equal to the annual dividend thereon, voting rights for the election of a majority of PSE&G's Board of Directors become operative and continue until all accumulated and unpaid dividends thereon have been paid, whereupon all such voting rights cease, subject to being revived from time to time.
(D) At December 31, 1998 and 1997, the annual dividend requirement and embedded dividend rate for Preferred Stock without mandatory redemption was $10,886,758 and 5.18%, respectively, and for Preferred Stock with mandatory redemption was $4,477,500 and 6.02%, respectively.
At December 31, 1998 and 1997, the annual dividend requirement and embedded cost of the Monthly Income Preferred Securities (Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures) was $18,862,500 and 5.50% and $18,862,500 and 6.04%, respectively.
At December 31, 1998 and 1997, the annual dividend requirement of the Quarterly Income Preferred Securities (Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures) and their embedded costs were $25,658,750 and 5.18% and $25,658,750 and 5.70%, respectively.
At December 31, 1998, the annual dividend requirement of PSEG's Trust Preferred Securities (Guaranteed Preferred Beneficial Interest in PSEG's Subordinated Debentures) and their embedded costs were $38,433,000 and 4.91%, respectively. There were no Trust Preferred Securities at PSEG at December 31, 1997.
(E) For information concerning fair value of financial instruments, see Note 8. Financial Instruments and Risk Management.
(F) In February 1997, PSE&G Capital Trust II issued $95 million of 8.125% Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures.
(G) In January 1998, Enterprise Capital Trust I issued $225 million of 7.44% Quarterly Guaranteed Preferred Beneficial Interest in PSEG's Subordinated Debentures. In June 1998, Enterprise Capital Trust II issued $150 million of Floating Rate Capital Securities with a Quarterly Guaranteed Preferred Beneficial Interest in PSEG's Subordinated Debentures. The Floating Rate Capital Securities were offered to Institutional Investors at an annual rate equal to 3-month LIBOR plus 1.22%, determined quarterly. PSEG entered into an interest rate swap agreement which effectively fixes the rate on this issue for 10 years at 7.2%. In July 1998, Enterprise Capital Trust III issued $150 million of 7.25% Quarterly Guaranteed Preferred Beneficial Interest in PSEG's Subordinated Debentures.
(H) PSE&G Capital L.P., PSE&G Capital Trust I and PSE&G Capital Trust II were formed and are controlled by PSE&G for the purpose of issuing Monthly and Quarterly Income Preferred Securities (Monthly and Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated Debentures). The proceeds were loaned to PSE&G and are evidenced by PSE&G's Deferrable Interest Subordinated Debentures. If and for as long as payments on PSE&G's Deferrable Interest Subordinated Debentures have been deferred, or PSE&G has defaulted on the indentures related thereto or its guarantees thereof, PSE&G may not pay any dividends on its common and preferred stock. The Subordinated Debentures and the indentures constitute a full and unconditional guarantee by PSE&G of the Preferred Securities issued by the partnership and the trusts.
(I) Enterprise Capital Trust I, Enterprise Capital Trust II and Enterprise Capital Trust III were formed and are controlled by PSEG for the purpose of issuing Quarterly Trust Preferred Securities (Quarterly Guaranteed Preferred
Beneficial Interest in PSEG's Subordinated Debentures). The proceeds were loaned to PSEG and are evidenced by PSEG's Deferrable Interest Subordinated Debentures. If and for as long as payments on PSEG's Deferrable Interest Subordinated Debentures have been deferred, or PSEG has defaulted on the indentures related thereto or its guarantees thereof, PSEG may not pay any dividends on its common and preferred stock. The Subordinated Debentures and the indentures constitute a full and unconditional guarantee by PSEG of the Preferred Securities issued by the trusts.
NOTE 7. SCHEDULE OF CONSOLIDATED DEBT
(A) In November 1998, PSEG issued Series A and B of Extendible Notes due November 2000 totaling $275 million. Series A in the amount of $100 million pays interest at LIBOR plus 0.75%, reset quarterly, and will be automatically tendered to the remarketing agent for remarketing on May 24, 1999. Series B in the amount of $175 million pays interest at LIBOR plus 0.78%, reset quarterly, and will be automatically tendered to the remarketing agent for remarketing on November 22, 1999. At December 31, 1998, the interest rates on Series A and B were 6.00% and 6.03%, respectively.
(B) PSE&G's Mortgage, securing the Bonds, constitutes a direct first mortgage lien on substantially all PSE&G's property and franchises.
During 1998, PSE&G reacquired on the open market $242 million of its 7.50% Series OO First and Refunding Mortgage Bonds (Bonds). In May 1998, PSE&G issued $250 million of its 6.375% Remarketable Series YY Bonds due 2023, Mandatorily Tendered 2008. PSE&G also entered into a Remarketing Agreement with a third party that granted the third party the option to call and remarket the Series YY Bonds on May 1, 2008 for the remaining term of the Series YY Bonds. In January 1998, $100 million of PSE&G's 6.00% Bonds, Series NN, matured.
(C) On July 1, 1998, $18 million of PSE&G's 6% Unsecured Bonds matured.
(D) For information concerning fair value of financial instruments, see Note 8. Financial Instruments and Risk Management.
(E) The aggregate principal amounts of mandatory requirements for sinking funds and maturities for each of the five years following December 31, 1998 are as follows:
(F) At December 31, 1998 and 1997, PSE&G's annual interest requirement on long-term debt was $282 million and $291 million, of which $274 million and $283 million, respectively, was the requirement for Bonds. The embedded interest cost on long-term debt on such dates was 7.35% and 7.44%, respectively. The embedded interest cost on long-term debt due within one year at December 31, 1998 was 8.83%.
(G) PSEG Capital has provided up to $750 million debt financing for Energy Holdings' businesses, except Energy Technologies, on the basis of a net worth maintenance agreement with PSEG. Effective January 31, 1995, PSEG Capital has limited its borrowings to no more than $650 million.
(H) Funding provides debt financing for Resources, Global and their subsidiaries on the basis of an unconditional guarantee from Energy Holdings.
(I) Global's projects are generally financed with non-recourse debt at the project level, with the balance in the form of equity investments by the partners in the project. The non-recourse debt shown in the above table is that of two consolidated subsidiaries which have equity investments in distribution facilities in Argentina and Brazil. Global's capital at risk on the projects is limited to its original equity investment. The non-recourse debt, through the process of consolidation, appears as long-term debt and long-term investments in PSEG's consolidated balance sheets.
(J) At December 31, 1998 and 1997, the annual interest requirement on long-term debt was $365 million and $378 million, of which $274 million and $283 million, respectively, was the requirement for Bonds. The embedded interest cost on long-term debt on such dates was 7.32% and 7.64%, respectively.
PSEG
At December 31, 1998, PSEG had a committed $150 million revolving credit facility which expires in December 2002. At December 31, 1998 and 1997, PSEG had a $25 million and $75 million uncommitted line of credit, respectively, with a bank. At December 31, 1998, PSEG had no debt outstanding under these facilities. The weighted-average, short-term debt rate of PSEG was 5.6%, 6.2% and 5.7% for the years ended December 31, 1998, 1997 and 1996, respectively.
PSE&G
PSE&G has authorization from the BPU to issue and have outstanding not more than $1.5 billion of its short-term obligations at any one time, consisting of commercial paper and other unsecured borrowings from banks and other lenders. This authorization expires January 4, 2000.
PSE&G has a $1.3 billion commercial paper program (Program) supported by a $650 million revolving credit agreement expiring in June 1999 and a $650 million revolving credit agreement expiring in June 2002 with a group of commercial banks. As of December 31, 1998 and 1997, PSE&G had $655 million and $952 million, respectively, outstanding under the Program, which amounts are included in the table above. As of December 31, 1998, there was no debt outstanding under the revolving credit agreements.
PSE&G has $150 million in uncommitted lines of credit facilities extended by a number of banks to primarily support short-term borrowings, of which $115 million was outstanding on December 31, 1998 and is included in the table above.
PSE&G had various lines of credit facilities extended by banks to primarily support the issuance of letters of credit. As of December 31, 1998, letters of credit were issued in the amount of $21 million.
PSE&G Fuel Corporation (Fuelco) has a $125 million commercial paper program to finance a 42.49% share of Peach Bottom nuclear fuel, supported by a $125 million revolving credit facility with a group of banks, which expires on June 28, 2001. PSE&G has guaranteed repayment of Fuelco's respective obligations. As of December 31, 1998 and 1997, Fuelco had commercial paper of $80 million outstanding under the commercial paper program, which amounts are included in the table above. As of December 31, 1998, there was no debt outstanding under the revolving credit facility.
Pursuant to the BPU's authorization of long-term debt, PSE&G has entered into standby financing arrangements with banks totaling $124 million. These facilities support long-term tax-exempt multi-mode mortgage bond financings done through the New Jersey Economic Development Authority, The Pollution Control Financing Authority of Salem County (New Jersey), the York County (Pennsylvania) Industrial Development Authority and the Indiana County (Pennsylvania) Industrial Development Authority. As of December 31, 1998, no amounts were outstanding under such arrangements.
ENERGY HOLDINGS
Funding has a $300 million credit facility expiring in July 1999 and a $150 million revolving credit agreement expiring in November 1999. As of December 31, 1998, there was $206 million outstanding under these facilities, which is included in the table above.
NOTE 8. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
PSEG's operations give rise to exposure to market risks from changes in commodity prices, interest rates, foreign currency exchange rates and securities prices. PSEG's policy is to use derivative financial instruments for the purpose of managing market risk consistent with its business plans and prudent business practices.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value was determined using the market quotations or values of instruments with similar terms, credit ratings, remaining maturities and redemptions at the end of 1998 and 1997, respectively. Note that certain events, in connection with the Energy Master Plan Proceedings could trigger certain redemption features of certain PSE&G mortgage bonds which is not reflected in the fair value estimations below, see Note 2. Regulatory Issues.
(A) Includes current maturities and interest rate swaps of $44 million and $150 million for Energy Holdings and PSEG, respectively, for the period ended December 31, 1998. Includes current maturities and an interest rate swap of $44 million for Energy Holdings for the period ended December 31, 1997.
Global had consolidated non-recourse debt of $123 million as of December 31, 1998 which is denominated in the Brazilian Real that is indexed to a basket of currencies including U.S. dollars. As a result, it is subject to foreign currency exchange rate risk due to the effect of exchange rate movements between the indexed foreign currencies and the Brazilian Real and between the Brazilian Real and the U.S. Dollar. Exchange rate changes ultimately impact the debt level outstanding in the denominated currency and result in foreign currency transactions in accordance with current accounting guidance. Any related transaction (losses)/gains resulting from such exchange rate changes are included in determining net income for the period and amounted to $(3) million and $1 million for the years ended December 31, 1998 and 1997, respectively. For more information on foreign operations and the devaluation of foreign currencies, see Note 20. Subsequent Events.
COMMODITY INSTRUMENTS--PSE&G
At December 31, 1998 and 1997, PSE&G held or issued instruments that reduce exposure to market fluctuations from factors such as weather, environmental policies, changes in demand, changes in supply, state and Federal regulatory policies and other events. These instruments, in conjunction with owned electric generating capacity and physical gas supply contracts, are designed to cover estimated electric and gas customer commitments. PSE&G currently has levelized energy adjustment clauses, LEAC and LGAC, in place for both electricity and natural gas pursuant to BPU orders. These clauses were established to minimize the impact of major commodity price swings on energy cost to customers. Effective January 1, 1998, the amount included for LEAC under/overrecovery represents the difference between fuel-related revenues and fuel-related expenses which are comprised of the cost of generation and net purchased power at the locational marginal price. PSE&G uses futures, forwards, swaps and options to manage and hedge price risk related to these market exposures.
Energy commodity futures involve the buying or selling of electricity and natural gas at a fixed price under the provisions of exchange regulations. Energy commodity forwards involve the buying or selling of electricity and natural gas at non-standardized terms that result from direct negotiation between the buyer and the seller. Swap agreements require PSE&G to receive or make payment based on the difference between a specified price and the actual price of the underlying commodity. Energy commodity options provide the right, but not the requirement, to buy or sell energy-related commodities at a fixed price. PSE&G uses these instruments to manage commodity price risk.
At December 31, 1998, PSE&G had outstanding commodity financial instruments with a notional contract quantity of 1.6 million MWH of electricity and 65.2 million MMBTU of natural gas. At December 31, 1997, PSE&G had outstanding commodity financial instruments with a notional contract quantity of 0.9 million MWH of electricity and 3.7 million MMBTU of natural gas. Notional amounts are indicative only of the volume of activity and are not a measure of market risk. At December 31, 1998 and 1997, PSE&G had current unrecognized net gains of $5 million and $3 million, respectively, related to commodity instruments.
NATURAL GAS HEDGING--ENERGY HOLDINGS
As of December 31, 1998 and 1997, Energy Technologies had outstanding futures contracts to buy natural gas related to fixed-price natural gas sales commitments. Such contracts hedged approximately 90% and 97% of its fixed price sales commitments at December 31, 1998 and 1997, respectively. As of December 31, 1998 and 1997, Energy Technologies had a net unrealized hedge loss of $5 million and $2 million, respectively.
NUCLEAR DECOMMISSIONING TRUST FUNDS
Contributions made into the Nuclear Decommissioning Trust Funds are invested in debt and equity securities. The carrying value of these funds of $524 million and $459 million approximates the fair market value as of December 31, 1998 and 1997, respectively.
EQUITY SECURITIES--ENERGY HOLDINGS
Resources, a wholly-owned subsidiary of Energy Holdings, has investments in equity securities and partnerships, in which Resources is a limited partner, which invest in equity securities. Resources carries its investments in equity securities at their approximate fair value as of the reporting date. Consequently, the carrying value of these investments is affected by changes in the fair value of the underlying securities. Fair value is determined by adjusting the market value of the securities for liquidation and market volatility factors, where appropriate. The aggregate amount of such investments which have available market prices at December 31, 1998 and 1997 are recorded at fair value of $204 million and $185 million, respectively, and have exposure to market price risk. A sensitivity analysis has been prepared to estimate Energy Holdings' exposure to market sensitivity of these investments. The potential change in fair value resulting from a hypothetical 10% change in quoted market prices of these investments amounts to $17 million.
INTEREST RATE SWAPS--PSEG AND ENERGY HOLDINGS
PSEG entered into an interest rate swap on June 26, 1998 to hedge Enterprise Capital Trust II's $150 million of Floating Rate Capital Securities, Series B, due 2028. Enterprise Capital Trust II is a special purpose statutory business trust controlled by PSEG. The basis for both the interest rate swap and the Floating Rate Capital Securities is the quarterly London Interbank Offered Rate (LIBOR). This interest rate swap effectively hedges the underlying debt for 10 years at an effective rate of 7.2%.
In June 1997, an indirect subsidiary of Global entered into an interest rate swap on 50% of its floating rate borrowings of $87 million. The basis for the interest rate swap is six month LIBOR. The interest rate swap effectively hedges the underlying debt through its scheduled maturity in May 1999 at the current effective rate of 7.76%. The interest differential to be received or paid under the interest rate swap agreement is recorded over the life of the agreement as an adjustment to the interest expense of the related borrowing. The swap terminates on May 28, 1999.
CREDIT RISK--PSE&G AND ENERGY HOLDINGS
Credit risk relates to the risk of loss that PSEG would incur as a result of nonperformance by counterparties, pursuant to the terms of their contractual obligations. PSEG has established credit policies that it believes significantly minimizes PSEG's exposure to credit risk. These policies include an evaluation of potential counterparties' financial condition (including credit rating), collateral requirements under certain circumstances and the use of standardized agreements, which may allow for the netting of positive and negative exposures associated with a single counterparty.
NOTE 9. CASH AND CASH EQUIVALENTS
The December 31, 1998 and 1997 balances consist primarily of working funds and highly liquid marketable securities (commercial paper and money market funds) with a maturity of three months or less.
NOTE 10. COMMITMENTS AND CONTINGENT LIABILITIES
NUCLEAR INSURANCE COVERAGES AND ASSESSMENTS
PSE&G's insurance coverages and maximum retrospective assessments for its nuclear operations are as follows:
(A) The primary limit for Public Liability is a per site aggregate limit with no potential for assessment. The Nuclear Worker Liability represents the potential liability from workers claiming exposure to the hazard of nuclear radiation. This coverage is subject to an industry aggregate limit, includes annual automatic reinstatement if the ICRP Reserve Fund exceeds $400 million, and has an assessment potential under former canceled policies.
(B) Retrospective premium program under the Price-Anderson liability provisions of the Atomic Energy Act of 1954, as amended. PSE&G is subject to retrospective assessment with respect to loss from an incident at any licensed nuclear reactor in the United States. This retrospective assessment can be adjusted for inflation every five years. The last adjustment was effective as of August 20, 1998. This retrospective program is excess over the Public and Nuclear Worker Liability primary layers.
(C) Limit of liability under the Price-Anderson Act for each nuclear incident.
(D) After a waiting period, NEIL Primary insured sites may receive a weekly indemnity of $3.5 million for six weeks.
(E) Salem and Peach Bottom have an aggregate indemnity limit based on a weekly indemnity of $1.5 million for 52 weeks followed by 80% of the weekly indemnity for 104 weeks. Hope Creek has an aggregate indemnity limit based on a weekly indemnity of $3.3 million for 52 weeks followed by 80% of the weekly indemnity for 104 weeks.
(F) Combined aggregate limit of NEIL Primary and NEIL I coverages available for Hope Creek is $470.5 million. For Salem and Peach Bottom the combined aggregate limits are $223.8 million.
The Price-Anderson Act sets the "limit of liability" for claims that could arise from an incident involving any licensed nuclear facility in the nation. The "limit of liability" is based on the number of licensed nuclear reactors and is adjusted at least every five years based on the Consumer Price Index. The current "limit of liability" is $9.7 billion. All utilities owning a nuclear reactor, including PSE&G, have provided for this exposure through a combination of private insurance
and mandatory participation in a financial protection pool as established by the Price-Anderson Act. Under the Price-Anderson Act, each party with an ownership interest in a nuclear reactor can be assessed their share of $88.1 million per reactor per incident, payable at $10 million per reactor per incident per year. If the damages exceed the "limit of liability," the President is to submit to Congress a plan for providing additional compensation to the injured parties. Congress could impose further revenue raising measures on the nuclear industry to pay claims. PSE&G's maximum aggregate assessment per incident is $233.6 million (based on PSE&G's ownership interests in Hope Creek, Peach Bottom and Salem) and its maximum aggregate annual assessment per incident is $26.5 million. This does not include the $8.0 million that could be assessed under the nuclear worker policies.
Further, a decision by the U.S. Supreme Court, not involving PSE&G, has held that the Price-Anderson Act did not preclude awards based on state law claims for punitive damages.
PSE&G is a member of an industry mutual insurance company, NEIL. NEIL provides the primary property and decontamination liability insurance at Salem/Hope Creek and Peach Bottom. NEIL also provides excess property insurance through its decontamination liability, decommissioning liability, and excess property policy and replacement power coverage through its business interruption and/or extra expense policy. NEIL policies may make retrospective premium assessments in case of adverse loss experience. PSE&G's maximum potential liabilities under these assessments are included in the table and notes above. Certain provisions in the NEIL policies provide that the insurer may suspend coverage with respect to all nuclear units on a site without notice if the NRC suspends or revokes the operating license for any unit on a site, issues a shutdown order with respect to such unit or issues a confirmatory order keeping such unit down.
NUCLEAR OPERATING PERFORMANCE STANDARD (OPS)
PECO Energy Company (PECO Energy), Delmarva Power & Light Company (DP&L) and PSE&G, three of the co-owners of the Salem Nuclear Generating Station Units 1 and 2 (Salem) and the Peach Bottom Atomic Power Station Units 2 and 3 (Peach Bottom), have agreed to an OPS through December 31, 2011 for Salem and through December 31, 2007 for Peach Bottom. Under the OPS, the station operator is required to make payments to the non-operating owners (excluding Atlantic City Electric Company) commencing in January 2001 if the three-year historical average net maximum dependable capacity factor for that station, calculated as of December 31 of each year commencing with December 31, 2000, falls below 40%. Any such payment is limited to a maximum of $25 million per year. The parties have further agreed to forego litigation in the future, except for limited cases in which the operator would be responsible for damages of no more than $5 million per year.
YEAR 2000
Many of PSEG's and PSE&G's systems, which include information technology applications, plant control and telecommunications infrastructure systems, must be modified due to computer program limitations in recognizing dates beyond 1999. Management estimates the total cost related to Year 2000 readiness will approximate $83 million, to be incurred from 1997 through 2001, of which $8 million was incurred in 1997, $27 million was incurred in 1998 and approximately $36 million is expected to be incurred in 1999. A portion of these costs is not likely to be incremental to PSEG or PSE&G, but rather, represents a redeployment of existing personnel/resources.
The schedule to replace certain systems was accelerated for Year 2000 purposes. Analysis is continuing and costs identified to date are approximately $5 million, which are not included in the estimates above. Additionally, PSE&G is installing programs (SAP) from SAP America, Inc. to replace certain major business systems. SAP America, Inc. has represented that SAP is Year 2000 compliant, and thus, installation of SAP will eliminate the need to modify those business systems for Year 2000 compliance. The phased implementation of SAP is scheduled to be completed by January 1, 2000. The cost of implementing SAP is not included in the above cost estimates since SAP implementation has not been accelerated for Year 2000 purposes.
If PSEG, PSE&G, their domestic and international subsidiaries, other members of the PJM Interconnection, L.L.C. (PJM), PJM trading partners supplying power through PJM or PSEG's or PSE&G's critical vendors and/or customers are unable to meet the Year 2000 deadline, such inability could have a material adverse impact on PSEG's and PSE&G's operations, financial condition, results of operations and net cash flows.
CONSTRUCTION AND FUEL SUPPLIES
PSE&G has substantial commitments as part of its ongoing construction program, which include capital requirements for nuclear fuel. PSE&G's construction program is continuously reviewed and periodically revised as a result of changes in economic conditions, revised load forecasts, scheduled retirement dates of existing facilities, business strategies, site changes, cost escalations under construction contracts, requirements of regulatory authorities and laws, the timing of and amount of electric and gas rate changes and the ability of PSE&G to raise necessary capital. The outcome of the Energy Master Plan Proceedings and the use of alternative sources of generation may impact PSE&G's construction program. For discussion of the Energy Master Plan Proceedings, see Note 2. Regulatory Issues.
PSE&G's construction expenditures are expected to aggregate approximately $2.8 billion during the years 1999 through 2003, which includes $414 million for nuclear fuel and excludes AFDC. The estimate of construction requirements is based on expected project completion dates and includes anticipated escalation due to inflation of approximately 3% annually. Therefore, construction delays or higher inflation levels could cause significant increases in these amounts. PSE&G expects to generate the majority of funds necessary to satisfy its construction expenditures over this period, assuming adequate and timely recovery of costs which may be impacted by the outcome of the Energy Master Plan Proceedings, as to which no assurances can be given. In addition, PSE&G does not presently anticipate any difficulties in obtaining sufficient sources of fuel for electric generation or adequate gas supplies during the years 1999 through 2003.
SITE RESTORATIONS AND OTHER ENVIRONMENTAL COSTS
It is difficult to estimate the future financial impact of environmental laws, including potential liabilities. PSEG and PSE&G accrue environmental liabilities when it is probable that a liability has been incurred and the amount of the liability is reasonably estimable. Provisions for estimated losses from environmental remediation are, depending on the site, based primarily on internal and third-party environmental studies, estimates as to the number and participation level of any other Potentially Responsible Parties, the extent of the contamination and the nature of required remedial and restoration actions.
HAZARDOUS WASTE
Certain Federal and state laws authorize the U.S. Environmental Protection Agency (EPA) and the New Jersey Department of Environmental Protection (NJDEP), among other agencies, to issue orders and bring enforcement actions to compel responsible parties to investigate and take remedial actions at any site that is determined to present an actual or potential threat to human health or the environment because of an actual or threatened release of one or more hazardous substances. Because of the nature of PSE&G's business, including the production of electricity, the distribution of gas and, formerly, the manufacture of gas, various by-products and substances are or were produced or handled which contain constituents classified as hazardous. PSE&G generally provides for the disposal or processing of such substances through licensed independent contractors. However, these statutory provisions impose joint and several responsibility without regard to fault on all responsible parties, including the generators of the hazardous substances, for certain investigative and remediation costs at sites where these substances were disposed of or processed. PSE&G has been notified with respect to a number of such sites and the investigation and remediation of these potentially hazardous sites is receiving attention from the government agencies involved. Generally, actions directed at funding such site investigations and remediation include all suspected or known responsible parties. Based on current information, except as discussed below with respect to its manufactured gas plant Remediation Program, PSEG and PSE&G do not expect its expenditures for any such site, individually or all such current sites in the aggregate, to have a material effect on financial condition, results of operations and net cash flows.
The NJDEP has recently revised regulations concerning site investigation and remediation. These regulations will require an ecological evaluation of potential injuries to natural resources in connection with a remedial investigation of contaminated sites. The NJDEP is presently working with the utility industry to develop procedures for implementing these regulations. These regulations may substantially increase the costs of remedial investigations and remediations, where necessary, particularly at sites situate on surface water bodies. PSE&G and predecessor companies owned and/or operated certain facilities situate on surface water bodies, certain of which are currently the subject of remedial activities.
The financial impact of these regulations on these projects is not currently estimable. PSE&G does not anticipate that the compliance with these regulations will have a material adverse effect on its financial position, results of operations or net cash flows.
PSE&G MANUFACTURED GAS PLANT REMEDIATION PROGRAM
In 1988, NJDEP notified PSE&G that it had identified the need for PSE&G, pursuant to a formal arrangement, to systematically investigate and, if necessary, resolve environmental concerns extant at PSE&G's former manufactured gas plant sites. To date, NJDEP and PSE&G have identified 38 former manufactured gas plant sites. PSE&G is currently working with NJDEP under a program to assess, investigate and, if necessary, remediate environmental concerns at these sites. The Remediation Program is periodically reviewed and revised by PSE&G based on regulatory requirements, experience with the Remediation Program and available remediation technologies. The cost of the Remediation Program cannot be reasonably estimated, but experience to date indicates that costs of approximately $20 million per year could be incurred over a period of about 30 years and that the overall cost could be material to PSEG's and PSE&G's financial condition, results of operations and net cash flows.
Costs incurred through December 31, 1998 for the Remediation Program amounted to $139 million. In addition, at December 31, 1998, PSE&G's estimated liability for remediation costs through 2001 aggregated $84 million. Expenditures beyond 2001 cannot be reasonably estimated.
The Energy Competition Act provides for the continuation of RAC programs. The recovery of costs for RAC is to be through a societal benefits charge. No assurances can be given as to the outcome of the Energy Master Plan Proceedings (see Note 2. Regulatory Issues).
AIR POLLUTION CONTROL
In June 1998, NJDEP adopted regulations implementing a memorandum of understanding among 11 Northeastern states and the District of Columbia, establishing a regional plan for reducing nitrogen oxide (NOx) emissions from utility and large industrial boilers. The extent of investment in control technologies, operational changes and purchases of allowances required to comply with these regulations will be directly related to the number of allowances PSE&G receives. PSE&G expects to receive a preliminary allocation of allowances in March 1999 and the final allocation is expected to be determined in accordance with the NJDEP regulations in November 1999 which is subsequent to the May 1, 1999 through September 30, 1999 period governed by the regulations. PSE&G has attempted to minimize the uncertainty associated with the timing of the allocation by purchasing allowances, upgrading control technologies and estimating the expected allocation with as much precision as is practicable using available data. However PSE&G's present analysis leads it to believe that the potential costs for purchasing additional NOx budget allowances should not exceed a total of $10 million through December 31, 2002. Expenditures associated with installing control technology could result in an additional $72 million. However, PSE&G is currently analyzing alternatives which could substantially reduce the necessity of capital improvements.
PASSAIC RIVER SITE
The EPA has determined that a six mile stretch of the Passaic River in Newark, New Jersey is a "facility" within the meaning of that term under CERCLA and that, to date, at least thirteen corporations may be potentially liable for performing required remedial actions to address potential environmental pollution at the facility. The EPA anticipates identifying other potentially responsible parties (PRP). One PRP (Cooperating Party) entered into a consent decree with the EPA in 1994 obligating it to conduct a remedial investigation and feasibility study of available and applicable corrective actions for the site. The Cooperating Party has reported that it has incurred approximately $35 million to date in connection with the implementation of required remedial actions for the site. Future costs for prospective remedial actions may be material to PSE&G.
In a separate matter, PSE&G and certain of its predecessors operated industrial facilities at properties along the stretch of the Passaic River designated as the site. In April 1996, the EPA directed PSE&G to provide information concerning the nature and quantity of raw materials, by-products and wastes which may have been generated, treated, stored or disposed at certain of these facilities. The facilities are PSE&G's former Harrison Gas Plant and Essex Generating Station. PSE&G
submitted responses to the EPA requests for these sites in August 1996. In July 1997, the EPA named PSE&G as a PRP for this site. PSE&G cannot predict what action, if any, the EPA or any third party may take against PSE&G with respect to this site, or in such event, what costs PSE&G may incur to address any such claims. However, such costs may be material.
NOTE 11. PSE&G NUCLEAR DECOMMISSIONING
The BPU decision in PSE&G's most recent base rate case utilized studies based on the prompt removal/dismantlement method of decommissioning for all of PSE&G's nuclear generating stations. This method consists of removing fuel, source material and all other radioactive materials with activity levels above accepted release limits from the nuclear sites. PSE&G has an ownership interest in five nuclear units: Salem 1 and Salem 2--42.59% each, Hope Creek--95% and Peach Bottom 2 and 3--42.49% each. In accordance with rate orders received from the BPU, PSE&G has established an external master nuclear decommissioning trust for all its nuclear units. This trust contains two separate funds: a qualified fund and a non-qualified fund, due to an Internal Revenue Service (IRS) ruling. Section 468A of the Internal Revenue Code limits the amount of money that can be contributed into a "qualified" fund. Contributions made into a qualified fund are tax deductible. PSE&G estimated the total cost of decommissioning its share of these five nuclear units at $986 million in year end 1995 dollars (the year that the most recent site specific estimates were prepared), excluding contingencies. On December 23, 1996, PSE&G filed its 1995 nuclear plant decommissioning cost update with the BPU. On December 17, 1997, the BPU accepted PSE&G's decommissioning cost updates and found that the current funding requirements as presented in PSE&G's 1996 Nuclear Decommissioning Trust Fund Report, dated May 15, 1997, appear adequate.
The most recent base rate decision provided that $15.6 million of such costs are to be collected through base rates and an additional annual amount of $7 million in 1993 and $14 million each year thereafter are to be recovered through PSE&G's LEAC. Although the Energy Competition Act provides that the societal benefits charge will be utilized to collect the necessary funding for nuclear decommissioning, no assurances can be given as to the outcome of the Energy Master Plan Proceedings. At December 31, 1998 and 1997, the accumulated provision for depreciation and amortization included reserves for nuclear decommissioning for PSE&G's nuclear units of $465 million and $428 million, respectively. As of December 31, 1998 and 1997, PSE&G had contributed $303 million and $279 million, respectively, into independent, external, qualified and non-qualified nuclear decommissioning trust funds. The fair market value of these funds as of December 31, 1998 and 1997 was $542 million and $458 million, respectively.
The staff of the SEC has questioned certain of the current accounting practices of the electric utility industry, including PSE&G, regarding the recognition, measurement and classification of nuclear decommissioning costs in their financial statements. In response to these questions, the Financial Accounting Standards Board (FASB) has agreed to review the accounting for removal costs, including decommissioning. If current electric utility industry accounting practices for decommissioning are changed: (1) annual provisions for decommissioning could materially increase, (2) the estimated cost for decommissioning could be recorded as a liability rather than as accumulated depreciation and (3) trust fund income from the external decommissioning trusts could be reported as investment income rather than as a reduction to decommissioning expense all, or any of which, could have a material adverse effect on PSEG's and PSE&G's financial condition, results of operations and net cash flows.
URANIUM ENRICHMENT DECONTAMINATION AND DECOMMISSIONING FUND
In accordance with EPAct, domestic utilities that own nuclear generating stations are required to pay a cumulative total of $150 million each year (adjusted for inflation) into a decontamination and decommissioning fund, based on their past purchases of U.S. government enrichment services. These amounts are being collected over a period of 15 years or until $2.25 billion (adjusted for inflation) has been collected. Under this legislation, PSE&G's obligation for the nuclear generating stations in which it has an interest is $70 million (adjusted for inflation). Since 1993, PSE&G has paid $32 million, resulting in a balance due of $38 million. PSE&G has collected the expenditures incurred to date as part of underrecovered electric energy costs and anticipates recovery of such costs through a future regulatory mechanism. PSE&G believes that it should not be subject to collection of any such fund payments under EPAct. It has filed suit in the U.S. Court of Claims and petitioned the U.S. District Court, Southern District of NY to recover these costs.
SPENT NUCLEAR FUEL DISPOSAL COSTS
In accordance with the Nuclear Waste Policy Act (NWPA), PSE&G has entered into contracts with the Department of Energy (DOE) for the disposal of spent nuclear fuel. Payments made to the DOE for disposal costs are based on nuclear generation and are included in Net Interchanged Power and Fuel for Electric Generation in the Statements of Income. Until the start of retail competition pursuant to the Energy Competition Act, these costs are being recovered through the LEAC. Thereafter, PSE&G will bear the risks of nuclear fuel disposal costs. See Note 2. Regulatory Issues for the Energy Master Plan Proceedings and the potential impact on the LEAC.
DOE construction of a permanent disposal facility has not begun and DOE has announced that it does not expect a facility to be available until 2010 at the earliest. In 1998, legislation which would have the DOE establish a centralized interim spent fuel storage facility was introduced in Congress. However, Congress ultimately elected not to consider this legislation, and whether or not similar legislation will be considered in the future is unknown. In litigation brought by PSE&G, 40 other utilities and many state and local governments, the United States Court of Appeals for the District of Columbia Circuit reaffirmed DOE's unconditional obligation to begin spent fuel acceptance by January 31, 1998. In November 1997, the court ruled that the utilities had fulfilled their obligations under their respective contracts with DOE by contributing to the Nuclear Waste Fund. The court further ruled that DOE's argument of unavoidable delay to meet its obligation was without merit. However, the court did not order DOE to commence spent fuel acceptance by January 31, 1998; instead, it decided that the standard contract provided a potentially adequate remedy in the form of payment of damages if DOE failed its obligations. In May 1998 the court denied a petition to order DOE to begin spent fuel acceptance immediately and declare that the utilities are allowed to escrow their Nuclear Waste Fund fees until DOE begins spent fuel acceptance. Following this decision, DOE offered a proposal to settle issues related to its failure to meet its obligation, which the utilities unanimously rejected. PSE&G is continuing to work with the utility industry to develop a methodology for determining damages incurred as a result of DOE's failure to meet its obligation and a strategy for its implementation. Some utilities have initiated litigation against DOE to recover damages and this option, among others, is currently being considered by PSE&G. No assurances can be given as to the ultimate availability of a facility.
NOTE 12. INCOME TAXES
The New Jersey Gross Receipts and Franchise Tax (NJGRT) was eliminated effective January 1, 1998 and replaced with a combination of the New Jersey Corporate Business Tax which is a State income tax, the State sales and use tax and a Transitional Energy Facility Assessment (TEFA), with no material impact on the financial condition, results of operations and net cash flows of PSEG and PSE&G. The TEFA, which is collected from customers, will be phased out over five years. The corresponding phase out and reduction in rates will cause no material impact on PSEG and PSE&G. While under NJGRT, PSE&G was subject to an effective state tax on unit sales equal to approximately 13% of receipts. As a result of such tax reform, after the phase out of the TEFA, the effective state tax rate applicable to PSE&G will have been substantially reduced, putting PSE&G on a more level playing field with competitors. Interim rates were implemented with regard to the new tax structure effective with service rendered on and after January 1, 1998. The BPU completed its administrative review of the filings of all New Jersey utilities and approved permanent rates for 1998 on July 13, 1998 in a final Order. Effective January 1, 1999, revised rates became effective which reflect one year's phase out of the TEFA.
On September 18, 1998 and October 15, 1998, PSE&G filed with the BPU additional information necessary to 1) reconcile its NJGRT collections to its liability through April 1998, 2) reflect the impact of cash working capital and net
negative deferred State income taxes on a separate electric and gas basis and 3) provide actual and estimated tax collected and tax liability through December 31, 1998. On December 16, 1998, the BPU issued an "Order Implementing 1999 'TEFA' Reductions and Other Rate Adjustments." This order mandates PSE&G to recognize the cash working capital impact on a separate electric and gas basis and defer such impact as deferred balance sheet credits with interest. In accordance with the order, PSE&G deferred $1.3 million at December 31, 1998. The Order also requires the BPU Staff to perform audits of New Jersey energy utilities for NJGRT tax payments and collections. The results of such audits are to be reported to the BPU for further action. PSE&G does not expect these adjustments, if any, to have a material impact on its financial condition, results of operations and net cash flows.
A reconciliation of reported Net Income with pretax income and of income tax expense with the amount computed by multiplying pretax income by the statutory Federal income tax rate of 35% is as follows:
Reconciliation between total income tax provisions and tax computed at the statutory tax rate on pretax income:
(A) The provision for deferred income taxes represents the tax effects of the following items:
Between the years 1987 and 1994, PSEG's Federal Alternative Minimum Tax (AMT) liability exceeded its regular Federal income tax liability. This excess was carried forward to offset regular income tax liability in future years. PSEG used these AMT credits as a reduction against regular tax liability for 1995, 1996 and 1997. There were no remaining credits as of December 31, 1997.
PSEG provides deferred taxes at the enacted statutory tax rate for all temporary differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities irrespective of the treatment for rate-making purposes. Management believes that it is probable that the accumulated tax benefits that previously have been treated as a flow-through item to PSE&G customers will be recovered from utility customers in the future. Accordingly, an offsetting regulatory asset was established. As of December 31, 1998, PSE&G had a deferred tax liability and an offsetting regulatory asset of $704 million representing the future revenue expected to be recovered through rates based upon established regulatory practices which permit recovery of current taxes payable. This amount was determined using the enacted Federal income tax rate of 35% and State income tax rate of 9%.
The following is an analysis of deferred income taxes:
DECEMBER 31, ---------------------- 1998 1997 -------- -------- DEFERRED INCOME TAXES (MILLIONS OF DOLLARS) Assets: Current (net) ................................ $30 $25 -------- -------- Non-current: Unrecovered Investment Tax Credits ......... 110 117 Nuclear Decommissioning .................... 27 33 Construction Period Interest and Taxes ..... 13 15 New Jersey Corporate Business Tax .......... 15 -- Vacation Pay ............................... 6 7 Development Fees ........................... 15 14 Other ...................................... 32 27 -------- -------- Total Non-current ..................... 218 213 -------- -------- Total Assets .......................... 248 238 -------- -------- Liabilities: Non-current: Plant Related Items ........................ 2,180 2,246 Leasing Activities ......................... 702 667 Partnership Activities ..................... 155 159 Conservation Costs ......................... 75 39 Hope Creek O&M Costs ....................... 19 21 Deferred Electric Energy and Gas Costs ..... -- 60 Unamortized Debt Expense ................... 45 44 Taxes Recoverable Through Future Rates (net) 242 249 Other ...................................... 184 122 -------- -------- Total Non-current ..................... 3,602 3,607 -------- -------- Total Liabilities ..................... 3,602 3,607 -------- -------- Summary -- Accumulated Deferred Income Taxes
Net Current Assets ........................... 30 25 Net Non-current Liability .................... 3,384 3,394 -------- -------- Total ................................... $3,354 $3,369 ======== ========
NOTE 13. PENSION, OTHER POSTRETIREMENT BENEFIT AND SAVINGS PLANS
In February 1998, the FASB issued SFAS 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" (SFAS 132), which is effective for financial statements for periods beginning after December 15, 1997. This statement revises and standardizes disclosure requirements for pension and other postretirement benefit plans but does not change the measurement or recognition of those plans. Since SFAS 132 solely revises disclosure requirements, the adoption of SFAS 132 did not have a material impact on the financial condition, results of operations and net cash flows of PSEG and PSE&G. The disclosures required by SFAS 132 are below.
PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
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.
(B) Beginning in 1997, SFAS 87 was applied to the non-qualified Pension Plans. Prior to that date, because the plans amounts were considered immaterial, SFAS 87 was not applied.
(C) From January 1, 1993 through December 31, 1997, PSE&G accounted for the differences between its SFAS 106 accrual cost and the cash cost currently recovered through rates as a regulatory asset in accordance with SFAS 71 and EITF 92-12. In 1993, the FASB's EITF concluded that deferral of such costs is acceptable, provided regulators allow SFAS 106 costs in rates within approximately five years of the adoption of SFAS 106, which was December 31, 1997, for financial reporting purposes, with any cost deferrals recovered in approximately twenty years. On December 17, 1997, the BPU ruled that PSE&G's current rates are sufficient to recover both the ongoing OPEB costs and the amortization of the deferred regulatory asset created by the accounting change from the cash basis of accounting to the accrual basis of accounting in accordance with SFAS 106 and EITF 92-12. As a result of the BPU's decision, PSE&G began amortizing the regulatory asset over 15 years beginning January 1, 1998. Also effective January 1, 1998, PSE&G began recording the annual SFAS 106 OPEB cost. OPEB costs during 1998 were $121 million, including $19 million of amortization. At December 31, 1998, the amount of the unfunded liability was $769 million.
Also, on October 21, 1998, the BPU ordered PSE&G to fund in an external trust its annual OPEB obligation to the maximum extent allowable under Section 401(h) of the Internal Revenue Code. In 1998, $12 million was funded, as allowed. Remaining OPEB costs will not be funded in an external trust, as mandated by the BPU.
SAVINGS PLANS
PSE&G sponsors two defined contribution plans. Represented employees of PSE&G and Energy Holdings are eligible for participation in the PSE&G Employee Savings Plan while all other employees of PSE&G and Energy Holdings are eligible for participation in the PSE&G Thrift and Tax-Deferred Savings Plan. The two principal defined contribution plans are PSE&G sponsored 401(k) plans to which eligible employees may contribute up to 25% of their compensation. Employee contributions up to 7% for represented employees and up to 8% for all other employees are matched with employer contributions of cash or PSEG common stock equal to 50% of such employee contributions. Employer contributions in excess of 5% and up to 7% are made in shares of PSEG common stock for represented employees. Employer contributions in excess of 6% and up to 8% are made in shares of PSEG common stock for all other employees. PSE&G billed Energy Holdings for its portion of employer contributions. The amount expensed for the matching provision of the plans was approximately $14 million, $15 million and $14 million in 1998, 1997 and 1996, respectively.
NOTE 14. STOCK OPTIONS, STOCK PURCHASE PLAN AND STOCK REPURCHASE PROGRAM
STOCK OPTIONS
PSEG and PSE&G apply APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for its stock-based compensation plans, which are described below. Accordingly, compensation expense has been recognized for performance units and dividend equivalent rights issued in tandem with an equal number of options under its fixed stock option grants. Performance units and dividend equivalents provide cash payments, dependent upon future financial performance of PSEG in comparison to other companies and dividend payments by PSEG, to assist recipients in exercising options granted. Prior to 1997, all options were granted in tandem with performance units and dividend equivalent rights. In 1998 and 1997, there were 4,600 and 93,500 options, respectively, granted in tandem with performance units and dividend equivalent rights. No compensation cost has been recognized for its fixed stock option grants other than those previously described since the exercise price of the stock options equals the market price of the underlying stock on the date of grant. Had compensation costs for its stock option grants been determined based on the fair value at the grant dates for awards under these plans in accordance with SFAS No. 123
"Accounting for Stock-Based Compensation," there would have been a charge to PSEG's net income of approximately $0.4 million and $0.1 million in 1998 and 1997 respectively, with no impact on earnings per share.
In 1989, PSEG adopted a plan (Long Term Incentive Plan) under which non-qualified options to acquire shares of common stock may be granted to officers and other key employees selected by the Organization and Compensation Committee of PSEG's Board of Directors, the plan's administrative committee (the "Committee"). Payment by option holders upon exercise of an option may be made in cash or, with the consent of the Committee, by delivering previously acquired shares of PSEG common stock or surrendering other vested options. In instances where an optionee tenders shares acquired from a grant previously exercised that were held for a period of less than six months, an expense will be recorded for the difference between the fair market value at exercise date and the option price. (To date, no such transaction has occurred.) Options are exercisable over a period of time designated by the Committee (but not prior to one year from the date of grant) and are subject to such other terms and conditions as the Committee determines. Vesting schedules may be accelerated upon the occurrence of certain events, such as a change in control. Options may not be transferred during the lifetime of a holder.
The Long Term Incentive Plan originally provided for the issuance of up to 500,000 shares of common stock and was subsequently amended to increase the amount to 5,000,000. At December 31, 1998, there were 3,637,700 shares available for future grants under the Long Term Incentive Plan.
Since the Long Term Incentive Plan's inception, PSEG has delivered treasury shares upon the exercise of stock options. The difference between the cost of the treasury shares (purchased on the date of exercise) and the exercise price of the options has been reflected in Stockholder's Equity except where otherwise discussed.
Changes in common shares under option for the three fiscal years in the period ended December 31, 1998 are summarized as follows:
For this purpose, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1998, 1997 and 1996, respectively: expected volatility of 21.41%, 17.15% and 12.92%, risk free interest rates of 4.48%, 5.14% and 5.28%, expected lives of 4 years, 3.75 years and 3.75 years. Additional weighted averages assumptions include for grants in 1998, 1997 and 1996 a dividend yield of 0% with respect to the dividend equivalent feature of the tandem grants. There was a dividend yield of 5.51% in 1998 and 7.31% in 1997 on the non-tandem grants. There were no non-tandem grants issued in 1996.
The following table provides information about options outstanding at December 31, 1998:
In June 1998, the Committee granted 150,000 shares of common stock to a key executive. As of December 31, 1998 all of the shares remained outstanding. These shares are subject to restrictions on transfer and subject to risk of forfeiture until earned by continued employment. The shares vest on a staggered schedule beginning on March 31, 2002 and become fully vested on March 31, 2005. The unearned compensation related to this restricted stock grant as of December 31, 1998 is approximately $5 million and is included in retained earnings on the consolidated balance sheets.
PSEG's Stock Plan for Outside Directors provides non-employee directors, as part of their annual retainer, 300 shares of common stock, which will be increased to 600 shares beginning in 1999. With certain exceptions, the restrictions on the stock provide that the shares are subject to forfeiture if the individual ceases to be a director at any time prior to the Annual Meeting of Stockholders following his or her 70th birthday. These shares are recorded as compensation expense in the consolidated statements of income.
STOCK PURCHASE PLAN
PSEG and PSE&G have an employee stock purchase plan for all eligible employees. Under the plan, shares of the common stock may be purchased at 95% of the fair market value. Employees may purchase shares having a value not exceeding 10% of their base pay. During 1998, 1997 and 1996, employees purchased 102,387, 144,377 and 153,810 shares at an average price of $36.36, $26.39 and $27.24 per share, respectively. At December 31, 1998, 1,289,780 shares were available for future issuance under this plan.
STOCK REPURCHASE PROGRAM
In September 1998, PSEG announced a stock repurchase program whereby the Board of Directors authorized the repurchase of up to 10 million shares of its common stock from time to time, subject to market conditions and other relevant factors affecting PSEG and PSE&G. Share repurchases are planned when market and business conditions are deemed favorable. The repurchased shares have been held as treasury stock. As of December 31, 1998, PSEG had repurchased 5,314,100 shares at a cost of approximately $207 million. As of February 8, 1999, PSEG had repurchased a total of 10 million shares at a cost of approximately $391 million under this program.
NOTE 15. FINANCIAL INFORMATION BY BUSINESS SEGMENTS
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131), which is effective for financial statements for periods beginning after December 15, 1997. SFAS 131 supersedes SFAS 14, "Financial Reporting for Segments of a Business Enterprise" and requires that companies disclose segment data based on how management makes decisions about allocating resources to segments and measuring their performance. Since SFAS 131 solely revises disclosure requirements, the adoption of SFAS 131 did not have a material impact on the financial condition, results of operations and net cash flows of PSEG or PSE&G. The disclosure under SFAS 131 is below.
BASIS OF ORGANIZATION
The reportable segments disclosed herein were determined based on a variety of factors including the regulatory environment and the types of products and services offered. With the transition into a deregulated environment, it is likely that this basis of organization will change.
ELECTRIC
The electric segment of PSE&G's business generates revenue from its bundled tariff rates under which it provides generation, transmission and distribution energy services for its residential, commercial and industrial customers in New Jersey. Revenues are also generated from a variety of wholesale energy sales and other ancillary and miscellaneous services.
GAS
The gas segment of PSE&G's business generates revenue from its bundled tariff rates under which it provides for the sale and distribution of gas to its residential, commercial and industrial customers. Revenues are also generated from a variety of other activities such as capacity sales, off-system sales, sundry sales and other miscellaneous services.
RESOURCES
Resources receives revenues from its passive investments including leveraged leases, limited partnerships, leveraged buyout funds and marketable securities.
OTHER NON-UTILITY
PSEG's non-utility activities, other than Resources, generate revenues from Global, Energy Technologies and EGDC. Global receives revenues from its investment, development and operation of projects in the generation and distribution of energy both domestically and internationally. Energy Technologies receives revenues from a variety of energy related services to industrial and commercial customers. EGDC receives revenues from its nonresidential real estate development and investment business.
Information related to the segments of PSEG's business is detailed below:
(A) Other Non-utility Activities include amounts applicable to PSEG, the parent corporation, and Energy Holdings, excluding Resources.
Information related to Property, Plant and Equipment of PSE&G is detailed below:
Geographic Information for PSEG is disclosed below. PSE&G does not have foreign investments or operations.
IDENTIFIABLE REVENUES (1) ASSETS ---------- ---------- United States $ 5,831 $ 16,387 Foreign Countries 100 1,610 ---------- ---------- Total $ 5,931 $ 17,997 ========== ==========
Identifiable Assets from Foreign Countries include amounts from: Argentina $307 Brazil (2) 482 Netherlands 400
(1) Revenues are attributed to countries based on the locations of the investments.
(2) Amount is net of foreign currency translation adjustment of $39 million.
NOTE 16. DISCONTINUED OPERATIONS
On July 31, 1996, Energy Holdings sold EDC to Samedan Oil Corporation, a subsidiary of Noble Affiliates, Inc., for an aggregate purchase price of $779 million subject to various purchase price adjustments resulting in an after-tax gain of $13 million. As a result, Consolidated Financial Statements previously issued have been restated to give effect to the classification of EDC as discontinued operations.
Operating results of EDC for 1996 (7 months) are summarized in the following table:
(7 MONTHS) ---------- ---- (MILLIONS OF DOLLARS)
Revenues ............................... $ 128 Operating income ....................... 24 Earnings before income taxes ........... 9 Income taxes ........................... (2) Net income ............................. 11
NOTE 17. JOINTLY OWNED FACILITIES--UTILITY PLANT
PSE&G has ownership interests in and is responsible for providing its share of the necessary financing for the following jointly owned facilities. All amounts reflect the share of PSE&G's jointly owned projects and the corresponding direct expenses are included in Consolidated Statements of Income as operating expenses.
NOTE 18. SELECTED QUARTERLY DATA (UNAUDITED)
The information shown below, in the opinion of PSEG, includes all adjustments, consisting only of normal recurring accruals, necessary to a fair presentation of such amounts. Due to the seasonal nature of the utility business, quarterly amounts vary significantly during the year.
NOTE 19. ACCOUNTING MATTERS
In response to the continuing deregulation of the electric utility industry, the Financial Accounting Standards Board (FASB), through its Emerging Issues Task Force (EITF), undertook an initiative designated as EITF Issue 97-4, "Deregulation of the Pricing of Electricity - Issues Related to the Application of FASB Statements No. 71 and No. 101" (EITF 97-4). The purpose of this initiative was to develop guidance for the application of SFAS 101, "Regulated Enterprises Accounting for the Discontinuation of Application of FASB Statement No. 71" (SFAS 101). SFAS 101 addresses how an enterprise that ceases to meet the criteria for application of SFAS 71 to all or part of its operations should report that event in its general-purpose financial statements. This authoritative pronouncement will dictate the timing for the accounting for the outcome of the Energy Master Plan Proceedings.
The EITF's consensus on this issue is that an enterprise is required to discontinue the application of SFAS 71 for the deregulated portion of its business once legislation is passed or a rate order is issued which contains a sufficiently detailed plan to transition from regulated pricing to market pricing. In addition, the EITF concluded that an enterprise may continue to carry on its books the regulatory assets and liabilities of the portion of the business to which SFAS 101 is being applied, provided that regulators have approved a regulated cash flow stream. This also applies to costs or obligations not yet recorded as regulatory assets or liabilities regardless of when incurred. The discontinuance of SFAS 71 also requires an enterprise to reevaluate the impact of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121). SFAS 121 requires that regulatory assets be written off once they are no longer probable of recovery and that impairment losses be recorded for long-lived assets when related future cash flows or appraised value are less than the carrying value of the assets.
The impact of these accounting standards to PSEG and PSE&G will be determined based on the outcome of the Energy Master Plan Proceedings. Under PSE&G's proposal and the Energy Competition Act, PSE&G would have the opportunity, through various mechanisms, to recover its electric generation related potentially stranded costs. Management cannot predict the outcome of the Energy Master Plan Proceedings on PSEG's and PSE&G's future financial condition, results of operations and net cash flows. However, depending on regulatory actions taken in New Jersey with respect to electric utility deregulation, there could be a material adverse effect on such results.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), which is effective for financial statements for all fiscal quarters of fiscal years beginning after June 15, 1999. SFAS 133 establishes accounting and reporting standards for derivative instruments and hedging activities. It requires an entity to recognize all derivatives, within the scope of this statement, as assets or liabilities on the balance sheet at fair value. Also, derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability or firm commitment through earnings or be recognized in other comprehensive income until the hedged item is recognized in earnings, depending on the nature of the hedge. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. PSEG and PSE&G are currently evaluating the impact of SFAS 133.
In November 1998, the EITF issued EITF 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities." EITF 98-10 is effective for financial statements issued for fiscal years beginning after December 15, 1998. EITF 98-10 requires that energy trading contracts be marked to market with gains and losses included in earnings and separately disclosed in the financial statements and footnotes. The EITF described indicators that should be considered in determining whether an identifiable operation enters into contracts that would fall under the scope of this issue. PSE&G has determined that EITF 98-10 does apply to its operations and will be adopted in January 1999. The impact of applying EITF 98-10 is not expected to have a material adverse impact on the financial condition, results of operations and net cash flows of PSEG and PSE&G.
In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1), which is effective for financial statements for fiscal years beginning after December 15, 1998. SOP 98-1 provides criteria for capitalizing certain internal-use software costs. The adoption of SOP 98-1 is not expected to have a material impact on the financial condition, results of operations and net cash flows of PSEG and PSE&G.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5), which is effective for financial statements for fiscal years beginning after December 15, 1998. SOP 98-5 requires the expensing of the costs of start-up activities as incurred. Additionally, previously capitalized start-up costs must be written off as a Cumulative Effect of a Change in Accounting Principle. The adoption of SOP 98-5 is not expected to have a material impact on the financial condition, results of operations and net cash flows of PSEG and PSE&G.
NOTE 20. SUBSEQUENT EVENTS
On January 1, 1999, the outstanding stock of PSCRC was dividended by PSE&G to PSEG, which contributed such stock indirectly to Energy Technologies as an additional equity investment. PSCRC had earnings/(losses) of $2 million, $0.2 million and $(9) million for the years ended December 31, 1998, 1997 and 1996, respectively. At December 31, 1998 and 1997, PSCRC had assets of $89 million and $117 million, respectively. Future earnings and assets will be reflected in the consolidated financial statements of Energy Technologies, Energy Holdings and PSEG.
In January 1999, Brazil abandoned its managed devaluation strategy and allowed its currency, the Real, to float against other currencies. As of January 31, 1999, the Real has devalued approximately 40% against the U.S. dollar since December 31, 1998. Based on the December 31, 1998 Brazilian investment balance of $482 million, there was a 40% devaluation as of January 31, 1999 which resulted in a charge of $172 million to cumulative foreign currency translation adjustment (a separate component of stockholders' equity). PSEG cannot predict to what extent, if any, further devaluation may occur, and, therefore, cannot predict the impact of potential devaluation of currencies on PSEG's results of operations, financial condition and net cash flows. However, assuming no further significant devaluation, PSEG does not expect this to have a material adverse effect on its 1999 results of operations, financial condition or net cash flows. For additional information, see Note 15. Financial Information by Business Segment. As PSEG increases its international investments, the financial statements of PSEG will be increasingly affected by changes in the global economy.
PSE&G
Except as modified below, the Notes to Consolidated Financial Statements of PSEG 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. Regulatory Issues 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 and Risk Management Note 10. Commitments and Contingent Liabilities Note 11. PSE&G Nuclear Decommissioning Note 12. Income Taxes Note 13. Pension, Other Postretirement Benefit and Savings Plans Note 14. Stock Options, Stock Purchase Plan and Stock Repurchase Program Note 15. Financial Information by Business Segments Note 17. Jointly Owned Facilities--Utility Plant Note 19. Accounting Matters Note 20. Subsequent Events
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PSEG 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, 1998, 1997 and 1996, 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, 1998 and 1997 balances consist primarily of working funds.
NOTE 12. INCOME TAXES
A reconciliation of reported Net Income with pretax income and of income tax expense with the amount computed by multiplying pretax income by the statutory Federal income tax rate of 35% is as follows:
Reconciliation between total income tax provisions and tax computed at the statutory tax rate on pretax income:
(A) The provision for deferred income taxes represents the tax effects of the following items:
SFAS 109
The following is an analysis of deferred income taxes:
The balance of Federal income tax payable by (receivable from) PSE&G to PSEG was $9 million and $5 million as of December 31, 1998 and December 31, 1997, 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.
FINANCIAL STATEMENT RESPONSIBILITY--PSEG
Management of PSEG is responsible for the preparation, integrity and objectivity of the consolidated financial statements and related notes of PSEG. The consolidated financial statements and related notes are prepared in accordance with generally accepted accounting principles. The financial statements reflect estimates based upon the judgment of management where appropriate. Management believes that the consolidated financial statements and related notes present fairly PSEG's financial position and results of operations. Information in other parts of this Annual Report is also the responsibility of management and is consistent with these consolidated financial statements and related notes.
The firm of Deloitte & Touche LLP, independent auditors, is engaged to audit PSEG's consolidated financial statements and related notes and issue a report thereon. Deloitte & Touche's audit is conducted in accordance with generally accepted auditing standards. Management has made available to Deloitte & Touche all the corporation's financial records and related data, as well as the minutes of directors' meetings. Furthermore, management believes that all representations made to Deloitte & Touche during its audit were valid and appropriate.
Management has established and maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded, and that transactions are executed in accordance with management's authorization and recorded properly for the prevention and detection of fraudulent financial reporting, so as to maintain the integrity and reliability of the financial statements. The system is designed to permit preparation of consolidated financial statements and related notes in accordance with generally accepted accounting principles. The concept of reasonable assurance recognizes that the costs of a system of internal accounting controls should not exceed the related benefits. Management believes the effectiveness of this system is enhanced by an ongoing program of continuous and selective training of employees. In addition, management has communicated to all employees its policies on business conduct, safeguarding assets and internal controls.
The Internal Auditing Department of PSE&G conducts audits and appraisals of accounting and other operations of PSEG and its subsidiaries and evaluates the effectiveness of cost and other controls and, where appropriate, recommends to management improvements thereto. Management has considered the internal auditors' and Deloitte & Touche's recommendations concerning the corporation's system of internal accounting controls and has taken actions that, in its opinion, are cost-effective in the circumstances to respond appropriately to these recommendations. Management believes that, as of December 31, 1998, the Corporation's system of internal accounting controls is adequate to accomplish the objectives discussed herein.
The Board of Directors of PSEG carries out its responsibility of financial overview through its Audit Committee, which presently consists of five directors who are not employees of PSEG or any of its affiliates. The Audit Committee meets periodically with management as well as with representatives of the internal auditors and Deloitte & Touche. The Audit Committee reviews the work of each to ensure that its respective responsibilities are being carried out and discusses related matters. Both the internal auditors and Deloitte & Touche periodically meet alone with the Audit Committee and have free access to the Audit Committee, and its individual members, at all times.
E. JAMES FERLAND ROBERT C. MURRAY Chairman of the Board, Vice President and President and Chief Executive Officer Chief Financial Officer
PATRICIA A. RADO Vice President and Controller (Principal Accounting Officer)
February 12, 1999
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, 1998, 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 PSEG, which presently consists of five directors who are not employees of PSE&G or any of its affiliates. The PSEG 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 12, 1999
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of Public Service Enterprise Group Incorporated:
We have audited the consolidated balance sheets of Public Service Enterprise Group Incorporated and its subsidiaries (the "Company") as of December 31, 1998 and 1997, and the related consolidated statements of income, common stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. 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, 1996, 1995, and 1994, and the related consolidated statements of income, common stockholders' equity and cash flows for the years ended December 31, 1995 and 1994 (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, 1998 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 12, 1999
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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. 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, 1996, 1995, and 1994, and the related consolidated statements of income, common stockholder's equity and cash flows for the years ended December 31, 1995 and 1994 (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, 1998 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 12, 1999
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
PSEG and PSE&G, none.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
DIRECTORS OF THE REGISTRANTS
PSEG
The information required by Item 10 of Form 10-K with respect to present directors who are nominees for election as directors at PSEG's Annual Meeting of Stockholders to be held on April 20, 1999, and directors whose terms will continue beyond the meeting, is set forth under the heading "Election of Directors" in PSEG'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 2, 1999 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 20, 1999, 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 54. Member of Executive Committee. Has been President and Chief Operating Officer of PSE&G since 1991. Director of PSEG. Director of Sealed Air Corporation, The Trust Company of New Jersey, United Water Resources Inc. and Horizon Blue Cross Blue Shield of New Jersey.
E. JAMES FERLAND has been a director since 1986. Age 57. Chairman of Executive Committee. Chairman of the Board, President and Chief Executive Officer of PSEG 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 Energy Holdings since June 1989. Director of PSEG and of Energy Holdings. Director of Foster Wheeler Corporation and The HSB Group, Inc.
CONRAD K. HARPER has been a director since May 1997. Age 58. Director of PSEG. 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 68. Member of Executive Committee. Was previously a director from 1981 to February 1988. Director of PSEG. Retired. Until retirement was Chairman, Board of Directors of Hoffmann-La Roche Inc., Nutley, New Jersey (prescription pharmaceuticals, vitamins and fine chemicals, and diagnostic products and services) from January 1993 to September 1993 and President and Chief Executive Officer from 1980 to December 1992. Director of Humana Inc., AXYS Pharmaceuticals, Inc., Medarex, Inc., Covance Inc. and V.I. Technologies, Inc.
MARILYN M. PFALTZ has been a director since 1998 and was a Director of Energy Holdings from 1989 to 1998. Age 66. Director of PSEG. Has been a partner of P and R Associates, Summit, New Jersey (communication specialists), since 1968. Director of AAA National Association and Beacon Trust Company.
FORREST J. REMICK has been a director since 1995. Age 68. Director of PSEG. 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 PSEG and PSE&G, respectively.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
PSEG
The information required by Item 11 of Form 10-K is set forth under the heading "Executive Compensation" in PSEG's definitive Proxy Statement for the Annual Meeting of Stockholders to be held April 20 1999 which definitive Proxy Statement is expected to be filed with the Securities and Exchange Commission on or about March 2, 1999 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, 1998 is set forth below. Amounts shown were paid or awarded for all services rendered to PSEG and its subsidiaries and affiliates including PSE&G.
(1) Amount awarded in given year was earned under Management Incentive Compensation Plan (MICP) and determined in following year based on individual performance and financial and operating performance of PSEG and PSE&G, including comparison to other companies.
(2) All grants of options to purchase shares of PSEG Common Stock were made under the Long-Term Incentive Plan (LTIP). For 1998, all options granted were non-tandem (as described below) except for 2,500 options granted to Mr. Keiser. For 1997, 100,000; 50,000; 25,000 and 10,000 were non-tandem and 18,000; 9,200; 7,000 and 4,300 of the options granted to Messrs. Ferland, Codey, Murray, and Selover, respectively, were tandem. For 1996, all options granted were in tandem with performance units and dividend equivalents. Tandem grants are made with an equal number of performance units and dividend equivalents which may provide cash payments, dependent upon future financial performance of PSEG in comparison to other companies and dividend payments by PSEG, to assist recipients in exercising options granted. The tandem grant is made at the beginning of a three-year performance period and cash payment of the value of such performance units and dividend equivalents is made following such period in proportion to the options, if any, exercised at such time. Non-tandem grants are made without performance units and dividend equivalents.
(3) Amount paid in proportion to options exercised, if any, based on value of previously granted performance units and dividend equivalents, each as measured during three-year period ending the year prior to the year in which payment is made.
(4) Includes employer contribution to Thrift and Tax-Deferred Savings Plan and value of 5% discount on phantom stock dividend reinvestment under MICP:
In addition, 1998, 1997 and 1996 amounts include for Mr. Ferland $23,463, $9,824 and $3,983 and for Mr. Selover $14,292, $3,938 and $1,398, respectively, representing interest on compensation deferred under PSE&G's Deferred Compensation Plan in excess of 120% of the applicable Federal long-term rate as prescribed under Section 1274(d)
of the Internal Revenue Code. Under PSE&G's Deferred Compensation Plan, interest is paid at prime rate plus 1/2%, adjusted quarterly.
(5) Value as of original grant date, based on the closing price on the New York Stock Exchange on June 16, 1998, with respect to an award to Mr. Ferland of 150,000 shares of restricted stock, of which 60,000 shares vest in 2002; 20,000 shares vest in 2003; 30,000 shares vest in 2004 and 40,000 shares vest in 2005. Dividends on the entire grant are paid in cash from the date of grant.
(6) Mr. Keiser was first employed in January 1998.
OPTION GRANTS IN LAST FISCAL YEAR (1998)
(1) Granted under LTIP not in tandem with performance units and dividend equivalents, with exercisability commencing December 3, 1999, December 3, 2000 and December 3, 2001, respectively, with respect to one-third of the options at each such date.
(2) Granted under LTIP in tandem with equal number of performance units and dividend equivalents with exercisability commencing December 16, 1998, December 16, 1999 and December 16, 2000, respectively, with respect to one-third of the options at each such date.
(3) Granted under LTIP in tandem with equal number of performance units and dividend equivalents which may provide cash payments, dependent on future financial performance of PSEG in comparison to other companies and dividend payments by PSEG, to assist recipients in exercising options, with exercisability commencing January 1, 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.
(4) Determined using the Black-Scholes model, incorporating the following material assumptions and adjustments for the grants expiring January 20, 2008, January 21, 2008 and December 3, 2008, respectively: (a) exercise prices of $29.5625, $31.5625 and $39.3125, equal to the fair market value of the underlying PSEG Common Stock on the date of grant (or as of December 16, 1997 for the grant expiring January 20, 2008), to replicate grants previously given to other executive officers for similar performance periods; (b) an option term of ten years on all grants; (c) interest rates of 5.54%, 5.81% and 4.65% that represent the interest rates on U.S. Treasury securities on the dates of grant (or December 16, 1997 for the grant (expiring January 20, 2008) with a maturity date corresponding to that of the option terms; (d) volatilities of 19.12%, 19.12% and 20.17% calculated using daily PSEG Common Stock prices for the one-year period prior to the grant dates; (e) a dividend yield of 0% with respect to the dividend equivalent feature of the tandem grants (expiring January 21, 2008) since dividend payments accrue while the option is held; (f) dividend yields of 6.84% and 5.49% on the non-tandem (expiring January 20, 2008 and December 3, 2008); and (g) reductions of approximately 7.8% and 7.82% for the non-tandem and 11.53% for the tandem grants, respectively, to reflect the probability of forfeiture due to termination prior to vesting, and approximately 2.4%, 20% and 6.23% for the grants
expiring January 20, 2008, January 21, 2008 and December 3, 2008, respectively, to reflect the probability of a shortened option term due to termination of employment prior to the option expiration date. Actual values which may be realized, if any, upon any exercise of such options, will be based on the market price of PSEG Common Stock at the time of any such exercise and thus are dependent upon future performance of PSEG Common Stock. There is no assurance that any such value realized will be at or near the value estimated by the Black-Scholes model utilized.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR (1998) AND FISCAL YEAR END OPTION VALUES (12/31/98)
(1) Does not reflect any options granted and/or exercised after year end (12/31/98). The net effect of any such grants and exercises is reflected in the table appearing under Security Ownership of Directors and Management.
(2) Represents difference between exercise price and market price of PSEG Common Stock on date of exercise.
(3) Represents difference between market price of PSEG Common Stock and the respective exercise prices of the options at fiscal year end (12/31/98). Such amounts may not necessarily be realized. Actual values which may be realized, if any, upon any exercise of such options will be based on the market price of PSEG Common Stock at the time of any such exercise and thus are dependent upon future performance of PSEG Common Stock.
EMPLOYMENT CONTRACTS AND ARRANGEMENTS
PSEG has entered into an employment agreement dated as of June 16, 1998 with Mr. Ferland covering his employment as Chief Executive Officer through March 31, 2005. Under the Agreement, Mr. Ferland has agreed not to retire prior to March 31, 2002, but may retire thereafter. The Agreement provides that Mr. Ferland will be re-nominated for election as a Director during his employment under the Agreement. The Agreement provides that Mr. Ferland's base salary, target annual incentive bonus and long term incentive bonus will be determined based on compensation practices for CEO's of similar companies and that his annual salary will not be reduced during the term of the Agreement and awards him 150,000 shares of restricted PSEG Stock, of which 60,000 shares vest 2002; 20,000 shares vest in 2003; 30,000 shares vest in 2004 and 40,000 shares vest in 2005. Any non-vested shares are forfeited upon his retirement unless the Board of Directors, in its discretion, determines to make payment. The Agreement provides for the granting of 22 years of pension credit for Mr. Ferland's prior service, which was awarded at the time of his employment. The Agreement further provides that if Mr. Ferland is terminated without "Cause" or resigns for "Good Reason" (as those terms are defined in the Agreement) during the term of the Agreement, the entire stock award becomes vested, he will be paid a benefit of two times base salary and target bonus and welfare benefits will be continued for two years unless sooner employed. In the event such a termination occurs after a "Change in Control" (as defined), the payment to Mr. Ferland becomes three times the sum of salary and target bonus, continuation of welfare benefits for three years unless sooner reemployed, payment of the net present value providing three years additional service under PSEG's retirement plans, and a gross-up for excise taxes on any termination payments due under the Internal Revenue Code. The Agreement provides that Mr. Ferland is prohibited from competing with or recruiting employees from PSEG or its subsidiaries of affiliates for two years after termination of employment. Violation of these provisions requires a forfeiture of a portion of the restricted stock grant and certain other benefits.
The principal remaining applicable terms of an employment agreement entered into with Mr. Murray at the time of his employment, as modified in 1998, provide for the grant of additional years of credited service for retirement purposes in light of allied work experience of five years after completion of five years of employment, and up to seventeen years after completion of approximately nine years of employment.
The principal remaining applicable terms of an employment agreement entered into with Mr. Keiser at the time of his employment provide that his salary may not be decreased during the first five years of employment, if discharged without cause during such period, he will be paid his salary for a twelve-month period or the remainder of the five year period, whichever is less, and the grant of twenty years of additional credited service for retirement purposes after completion of five years of employment, in light of allied work experience.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
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 PSEG. Hence, during 1998 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 PSEG 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 PSEG, PSE&G or Energy Holdings. Beginning in 1999, each committee Chair will receive an additional annual retainer of $3,000. Each of the directors of PSE&G is also a director of PSEG. No additional retainer is paid for service as a director of PSE&G. Fifty percent of the annual retainer is paid in PSEG Common Stock.
PSEG also maintains a Stock Plan for Outside Directors pursuant to which directors who are not employees of PSEG or its subsidiaries receive 300 shares of restricted stock for each year of service as a director. Beginning in 1999, this amount will be increased to 600 shares annually. Such shares held by each non-employee director are included in the table in Item 12
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PSEG
The information required by Item 12 of Form 10-K with respect to directors, executive officers and certain beneficial owners is set forth under the heading 'Security Ownership of Directors, Management and Certain Beneficial Owners' in PSEG's definitive Proxy Statement for the Annual Meeting of Stockholders to be held April 20, 1999 which definitive Proxy Statement is expected to be filed with the Securities and Exchange Commission on or about March 2, 1999 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, PSEG, 80 Park Plaza, P.O. Box 1171, Newark, New Jersey.
The following table sets forth beneficial ownership of PSEG Common Stock, including options, by the directors and executive officers named below as of January 31, 1999. None of these amounts exceed 1% of the PSEG 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....................................... 155,816 (1) E. James Ferland........................................ 483,578 (2) Conrad K. Harper........................................ 940 Harold W. Keiser........................................ 37,512 (3) Irwin Lerner............................................ 11,359 Robert C. Murray........................................ 96,322 (4) Marilyn M. Pfaltz....................................... 8,473 Forrest J. Remick....................................... 2,838 R. Edwin Selover........................................ 50,691 (5) All directors and executive officers (11) as a group.... 905,686 (6)
(1) Includes the equivalent of 5 shares held under PSE&G Thrift and Tax-Deferred Savings Plan. Includes options to purchase 137,200 shares, 16,670 of which are currently exercisable.
(2) Includes the equivalent of 11,531 shares held under PSE&G Thrift and Tax-Deferred Savings Plan. Includes options to purchase 274,500 shares, 33,340 of which are currently exercisable. Includes 150,000 shares of restricted stock, which vest as described in the Summary Compensation Table Note 5.
(3) Includes the equivalent of 12 shares held under PSE&G Thrift and Tax-Deferred Savings Plan. Includes options to purchase 37,500 shares, 3,334 of which are currently exercisable.
(4) Includes the equivalent of 1,322 shares held under PSE&G Thrift and Tax-Deferred Savings Plan. Includes options to purchase 84,000 shares, 8,335 of which are currently exercisable.
(5) Includes options to purchase 41,700 shares, of which 4,334 are currently exercisable.
(6) Includes the equivalent of 18,163 shares held under PSE&G Thrift and Tax-Deferred Savings Plan. Includes options to purchase 625,700 shares, of which 69,407 are currently exercisable.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PSEG
The information required by Item 13 of Form 10-K is set forth under the heading "Executive Compensation" in PSEG's definitive Proxy Statement for the Annual Meeting of Stockholders to be held April 20, 1999, which definitive Proxy Statement is expected to be filed with the Securities and Exchange Commission on or about March 2, 1999. Such information set forth under such heading is incorporated herein by this reference thereto.
PSE&G
None.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) Financial Statements:
(1) PSEG Consolidated Statements of Income for the years ended December 31, 1998, 1997, and 1996, on page 57.
PSEG Consolidated Balance Sheets for the years ended December 31, 1998 and 1997, on pages 58 and 59.
PSEG Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997, and 1996 on page 60.
PSEG Statements of Common Stockholders' Equity for the years ended December 31, 1998, 1997, and 1996 on page 61.
PSEG Notes to Consolidated Financial Statements on pages 68 through 111.
(2) PSE&G Consolidated Statements of Income for the years ended December 31, 1998, 1997, and 1996, on page 63.
PSE&G Consolidated Balance Sheets for the years ended December 31, 1998 and 1997, on pages 64 and 65.
PSE&G Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997, and 1996 on page 66.
PSE&G Statements of Common Stockholder's Equity for the years ended December 31, 1998, 1997, and 1996 on page 67.
PSE&G Notes to Consolidated Financial Statements on pages 111 through 114.
(B) The following documents are filed as a part of this report:
(1) PSEG Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts for each of the three years in the period ended December 31, 1998 (page 130).
(2) PSE&G Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts for each of the three years in the period ended December 31, 1998 (page 130).
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) PSEG:
Exhibit 4f Indenture dated as of November 1, 1998 between Public Service Enterprise Group Incorporated and First Union National Bank providing for the issuance of Senior Debt Securities 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(14) Directors' Stock Plan Exhibit 10a(16) Global Deferred Compensation Plan Exhibit 10a(17) Global Executive Incentive Compensation Plan Exhibit 10a(18) Energy Holdings Management Incentive Compensation Plan Exhibit 10a(19) Energy Holdings Deferred Compensation Plan Exhibit 10a(20) Energy Technologies Executive Incentive Compensation Plan Exhibit 10a(21) Energy Holdings Limited Supplemental Benefits Plan for Certain Employees Exhibit 10a(22) Resources Annual Incentive Compensation Plan 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 135 through 143.)
(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(14) Directors' Stock Plan 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 143 through 149.)
(D) The following reports on Form 8-K were filed by the registrant(s) named below during the last quarter of 1998 and the 1999 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, 1998 -- DECEMBER 31, 1996
(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, 1998 -- DECEMBER 31, 1996
(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 22, 1999
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 22, 1999 - --------------------- President and Chief Executive E. JAMES FERLAND Officer and Director (Principal Executive Officer)
ROBERT C. MURRAY Vice President and Chief Financial February 22, 1999 - --------------------- Officer (Principal Financial Officer) ROBERT C. MURRAY
PATRICIA A. RADO Vice President and Controller February 22, 1999 - --------------------- (Principal Accounting Officer) PATRICIA A. RADO
LAWRENCE R. CODEY Director February 22, 1999 - --------------------- LAWRENCE R. CODEY
ERNEST H. DREW Director February 22, 1999 - --------------------- ERNEST H. DREW
T. J. DERMOT DUNPHY Director February 22, 1999 - --------------------- T. J. DERMOT DUNPHY
RAYMOND V. GILMARTIN Director February 22, 1999 - --------------------- RAYMOND V. GILMARTIN
CONRAD K. HARPER Director February 22, 1999 - --------------------- CONRAD K. HARPER
IRWIN LERNER Director February 22, 1999 - --------------------- IRWIN LERNER
MARILYN M. PFALTZ Director February 22, 1999 - --------------------- MARILYN M. PFALTZ
FORREST J. REMICK Director February 22, 1999 - --------------------- FORREST J. REMICK
RICHARD J. SWIFT Director February 22, 1999 - --------------------- RICHARD J. SWIFT
JOSH S. WESTON Director February 22, 1999 - --------------------- 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 ENTERPRISE GROUP INCORPORATED
By E. JAMES FERLAND ----------------------------------------- E. JAMES FERLAND CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: February 22, 1999
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 22, 1999 - --------------------- Executive Officer and Director E. JAMES FERLAND (Principal Executive Officer)
ROBERT C. MURRAY Executive Vice President--Finance February 22, 1999 - --------------------- (Principal Financial Officer) ROBERT C. MURRAY
PATRICIA A. RADO Vice President and Controller February 22, 1999 - --------------------- (Principal Accounting Officer) PATRICIA A. RADO
LAWRENCE R. CODEY Director February 22, 1999 - --------------------- LAWRENCE R. CODEY
CONRAD K. HARPER Director February 22, 1999 - --------------------- CONRAD K. HARPER
IRWIN LERNER Director February 22, 1999 - --------------------- IRWIN LERNER
MARILYN M. PFALTZ Director February 22, 1999 - --------------------- MARILYN M. PFALTZ
FORREST J. REMICK Director February 22, 1999 - --------------------- 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 PSEG 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.
PSEG - -------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------- PREVIOUS FILING THIS ----------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 3a (o) 3a (o) 3a Certificate of Incorporation Public Service Enterprise Group Incorporated
3b (e) 3b (e) 3b By-Laws of Public Service 4/11/88 Enterprise Group Incorporated
3c (e) 3c (e) 3c Certificate of Amendment of 4/11/88 Certificate of Incorporation of Public Service Enterprise Group
3d (f) (f) Trust Agreements for 12/24/97 Enterprise Capital Trust I and III
3e (d) 3 (d) 3 Amended and Restated Trust 8/14/98 8/14/98 Agreement for Enterprise Capital Trust II
4a(1) (f) B-1 (c) 4b(1) Incorporated, effective April 2/18/81 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
PSEG - -------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------- PREVIOUS FILING THIS ----------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 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
PSEG - -------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------- PREVIOUS FILING THIS ----------------------------------- 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
PSEG - -------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------- PREVIOUS FILING THIS ----------------------------------- 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
PSEG - -------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------- PREVIOUS FILING THIS ----------------------------------- 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
PSEG - -------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------- PREVIOUS FILING THIS ----------------------------------- 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
4a(96) (a) 4 (a) 4 May 1, 1998 5/15/98 5/15/98
4b (b) 4 (b) 4 Indenture of Trust between 12/1/93 12/1/93 PSE&G and The Chase Manhattan Bank (National Association), as Trustee, providing for Secured Medium-Term Notes dated July 1, 1993
4c(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
4c(2) (a) (a) Supplemental Indenture between 9/11/95 9/11/95 PSE&G and First Fidelity Bank, (d) 4d (2) (d) 4d (2) National Association (now 5/13/98 5/13/98 known as First Union National Bank), as Trustee, dated September 1, 1995 providing for Deferrable Interest Subordinated Debentures, Series B (relating to Monthly Preferred Securities)
4d(1) (d) 4e (1) (d) 4e (2) Indenture between PSE&G and 5/13/98 5/13/98 First Union National Bank, as Trustee, dated June 1, 1996 providing for Deferrable Interest Subordinated Debentures in Series (relating to Quarterly Preferred Securities)
4d(2) (d) 4e(2) (d) 4e(2) Supplemental Indenture between 5/13/98 5/13/98 PSE&G and First Union National Bank, as Trustee, dated February 1, 1997 providing for Deferrable Interest Subordinated Debentures, Series B (relating to Quarterly Preferred Securities)
4e(1) (d) 4f (d) 4f Indenture between Public 5/13/98 5/13/98 Service Enterprise Group Incorporated and First Union National Bank, as Trustee, dated January 1, 1998 providing for Deferrable Interest Subordinated Debentures in Series (relating to Quarterly Preferred Securities)
4e(2) (d) 4a (d) 4a First Supplemental Indenture 8/14/98 8/14/98 to Indenture dated as of January 1, 1998 between Public Service Enterprise Group Incorporated and First Union National Bank, as Trustee, dated June 1, 1998 providing for the issuance of Floating Rate Deferrable Interest Subordinated Debentures, Series B (relating to Trust Preferred Securities)
4e(3) (d) 4b (d) 4b Second Supplemental Indenture 8/14/98 8/14/98 to Indenture dated as of January 1, 1998 between Public Service Enterprise Group Incorporated and First Union National Bank, as Trustee, dated July 1, 1998 providing for the issuance of Deferrable Interest Subordinated Debentures, Series C (relating to Trust Preferred Securities)
4f Indenture dated as of November 1, 1998 between Public Service Enterprise Group Incorporated and First Union National Bank providing for the issuance of Senior Debt Securities
9 Inapplicable
PSEG - -------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------- PREVIOUS FILING THIS ----------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 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) (e) 10a(20) (e) 10a(20) Management Incentive 2/26/97 2/26/97 Compensation Plan
10a(8) (d) 10 (d) 10 Employment Agreement with E. 8/14/98 8/14/98 James Ferland, dated June 16,
10a(9) (c) 10a(15) (c) 10a(15) Letter Agreement with Robert 2/10/93 2/11/93 C. Murray dated December 17,
10a(9)(i) (c) 10a(9)(i) (c) 10a(9)(i) Amendment to Letter Agreement 2/23/98 2/23/98 with Robert C. Murray dated January 6, 1998
10a(10) (c) 10a(14) (c) 10a(14) Letter Agreement with Patricia 2/26/94 3/9/94 A. Rado dated March 24, 1993
10a(11) (d) 10a(15) (d) 10a(15) Letter Agreement with Louis 8/14/95 8/14/95 F. Storz dated July 7, 1995
10a(12) (d) 10a(16) (d) 10a(16) Letter Agreement with Elbert 8/14/95 8/14/95 C. Simpson dated May 31, 1995
10a(13) (d) 10a(17) (d) 10a(17) Letter Agreement with Alfred 11/14/95 11/14/95 C. Koeppe dated August 23,
PSEG - -------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------- PREVIOUS FILING THIS ----------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 10a(14) Directors' Stock Plan
10a(15) (c) 10a(16) (c) 10a(16) Letter Agreement with Harold 2/23/98 2/23/98 W. Keiser dated January 5,
10a(16) Global Deferred Compensation Plan
10a(17) Global Executive Incentive Compensation Plan
10a(18) Energy Holdings Management Incentive Compensation Plan
10a(19) Energy Holdings Deferred Compensation Plan
10a(20) Energy Technologies Executive Incentive Compensation Plan
10a(21) Energy Holdings Limited Supplemental Benefits Plan for Certain Employees
10a(22) Resources Annual Incentive Compensation Plan
11 Inapplicable
12 Computation of Ratios of Earnings to Fixed Charges
13 Inapplicable
16 Inapplicable
18 Inapplicable 21 Subsidiaries of the Registrant
22 Inapplicable
23 Independent Auditors' Consent
PSEG - -------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------- PREVIOUS FILING THIS ----------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 24 Inapplicable
27 Financial Data Schedule
28 Inapplicable
99 Inapplicable
PSE&G - -------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------- PREVIOUS FILING THIS ----------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 3a(1) (b) 3a (b) 3a Restated Certificate of 8/28/86 8/29/86 Incorporation of PSE&G
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 (a) (a) Copy of By-Laws of PSE&G 2/23/95 2/23/95
4a(1) (f) B-1 (c) 4b(1) Indenture between PSE&G and 2/18/81 Fidelity Union Trust Company, 2/18/81 (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 - -------------------------------------------------- PREVIOUS FILING THIS ----------------------------------- 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 - -------------------------------------------------- PREVIOUS FILING THIS ----------------------------------- 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 - -------------------------------------------------- PREVIOUS FILING THIS ----------------------------------- 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
PSE&G - -------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------- PREVIOUS FILING THIS ----------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 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
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 - -------------------------------------------------- PREVIOUS FILING THIS ----------------------------------- 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
4a(96) (a) 4 (a) 4 May 1, 1998 5/15/98 5/15/98
4b (b) 4 (b) 4 Indenture of Trust between 12/1/93 12/1/93 PSE&G and Chase Manhattan Bank (National Association), as Trustee, providing for Secured Medium-Term Notes dated July 1, 1993
4c(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
4c(2) (a) 4b(5) (a) 4b(5) Supplemental Indenture between PSE&G and First Fidelity Bank, (d) 4d(2) (d) 4d(2) National Association (now 5/13/98 5/13/98 known as First Union National Bank), as Trustee, dated September 1, 1995 providing for Deferrable Interest Subordinated Debentures, Series B (relating to Monthly Preferred Securities)
4d(1) (d) 4e(1) (d) 4e(1) Indenture between PSE&G and 5/13/98 5/13/98 First Union National Bank, as Trustee, dated June 1, 1996 providing for Deferrable Interest Subordinated Debentures in Series (relating to Quarterly Preferred Securities)
4d(2) (d) 4e(2) (d) 4e(2) Supplemental Indenture between 5/13/98 5/13/98 PSE&G and First Union National Bank, as Trustee, dated February 1, 1997 providing for Deferrable Interest Subordinated Debentures, Series B (relating to Quarterly Preferred Securities)
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
PSE&G - -------------------------------------------------- EXHIBIT NUMBER - -------------------------------------------------- PREVIOUS FILING THIS ----------------------------------- FILING COMMISSION EXCHANGES ------ ---------- --------- 10a(6) Long-Term Incentive Plan
10a(7) (c) 10a(20) (c) 10a(20) Management Incentive 2/26/97 2/26/97 Compensation Plan
10a(8) (d) 10 (d) 10 Employment Agreement with E. 8/14/98 8/14/98 James Ferland, dated June 16,
10a(9) (c) 10a(12) (c) 10a(12) Letter Agreement with Robert 2/10/93 2/11/93 C. Murray dated December 17,
10a(9)(i) (c) 10a(9)(i) (c) 10a(9)(i) Amendment to Letter Agreement 2/23/98 2/23/98 with Robert C. Murray dated January 6, 1998
10a(10) (c) 10a(13) (c) 10a(13) Letter Agreement with Patricia 2/26/94 3/9/94 A. Rado dated March 24, 1993
10a(11) (d) 10a(15) (d) 10a(15) Letter Agreement with Louis F. 8/14/95 8/14/95 Storz dated July 7, 1995
10a(12) (d) 10a(16) (d) 10a(16) Letter Agreement with Elbert 8/14/95 8/14/95 C. Simpson dated May 31, 1995
10a(13) (d) 10a(17) (d) 10a(17) Letter Agreement with Alfred 11/14/95 11/14/95 C. Koeppe dated August 23,
10a(14) Directors' Stock Plan
10a(15) (c) 10a(16) (c) 10a(16) Letter Agreement with Harold 2/23/98 2/23/98 W. Keiser dated January 5,
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
GLOSSARY OF 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 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 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 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 DRBC................... Delaware River Basin Commission DSAF................... Demand Side Adjustment Factor DSM.................... Demand Side Management Eagle Point............ PSEG Eagle Point, Inc. EBIT................... Earnings before interest and taxes EDC.................... Energy Development Corporation 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" EITF 98-10............. Emerging Issues Task Force, Issue No. 98-10 "Accounting for Energy Trading and Risk Management Activities" Energy Holdings........ PSEG Energy Holdings Inc. Energy Technologies.... PSEG Energy Technologies Inc. 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 FUCO................... Foreign Utility Company
GLOSSARY OF TERMS -- (CONTINUED)
TERM MEANING - ---- -------
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................. PSEG Global Inc. Global Site............ Global Landfill Site in Old Bridge Township, Middlesex County, New Jersey Hope Creek............. Hope Creek Nuclear Generating Station HWCS Project........... Hydrogen Water Chemistry System ICTC................... Interim Competitive Transition Charge IPP.................... Independent Power Producers 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 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 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 OF 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.................... PJM Interconnection, L.L.C. PJM Board.............. An independent, 7-Member Board of Managers responsible for supervision of PJM operations PPG.................... PPG Industries, Inc. PPUC................... Pennsylvania Public Utility Commission PRPs................... Potentially Responsible Parties PSCRC.................. Public Service Conservation Resources Corporation PSE&G.................. Public Service Electric and Gas Company PSEG................... Public Service Enterprise Group Incorporated PSEG Capital........... PSEG Capital Corporation PSETC.................. Public Service Energy Trading Company 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 Resources.............. PSEG Resources Inc. 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 OF TERMS -- (CONTINUED)
TERM MEANING - ---- -------
SFAS 131............... Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" SFAS 132............... Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits--an amendment of FASB Statements No. 87, 88, and 106" SFAS 133............... Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" 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