ITEM 1. BUSINESS
General
Enterprise
Public Service Enterprise Group Incorporated (Enterprise), incorporated under the laws of the State of New Jersey with its principal executive offices located at 80 Park Plaza, Newark, New Jersey 07101, is a public utility holding company that neither owns nor operates any physical properties. Enterprise has two direct wholly-owned subsidiaries, Public Service Electric and Gas Company (PSE&G) and Enterprise Diversified Holdings Incorporated (EDHI). Enterprise's principal subsidiary, PSE&G, is an operating public utility providing electric and gas service in certain areas in the State of New Jersey. Enterprise has claimed an exemption from regulation by the Securities and Exchange Commission (SEC) as a registered holding company under the Public Utility Holding Company Act of 1935 (PUHCA), except for Section 9(a)(2) thereof which relates to the acquisition of voting securities of an electric or gas utility company. PSE&G is subject to direct regulation by the New Jersey Board of Public Utilities (BPU) and the Federal Energy Regulatory Commission (FERC). EDHI is the parent of Enterprise's nonutility businesses: Energy Development Corporation (EDC), an oil and gas exploration and production and marketing company; Community Energy Alternatives Incorporated (CEA), an investor in and developer and operator of cogeneration and independent power production facilities; Public Service Resources Corporation (PSRC), which makes primarily passive investments; Enterprise Group Development Corporation (EGDC), a diversified nonresidential real estate development and investment business; PSEG Capital Corporation (Capital), which provides debt financing on the basis of a minimum net worth maintenance agreement from Enterprise; and Enterprise Capital Funding Corporation (Funding), which provides privately placed debt financing on the basis of the consolidated financial position of EDHI without direct support from Enterprise. As of December 31, 1995 and 1994, PSE&G comprised 85% of Enterprise's assets. PSE&G's 1995, 1994 and 1993 revenues were 93% of Enterprise's revenues and PSE&G's earnings available to Enterprise for such years were 88%, 91% and 96%, respectively, of Enterprise's net income. Production of electricity and electric and gas distribution will continue as the principal business of Enterprise for the foreseeable future. Enterprise has announced that it intends to divest EDC in 1996. See EDHI - EDC and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A).
Financial information with respect to business segments of PSE&G and Enterprise is set forth in Note 15 -- Financial Information by Business Segments of Notes to Consolidated Financial Statements (Notes).
PSE&G
PSE&G, a New Jersey corporation with its principal executive offices at 80 Park Plaza, Newark, New Jersey 07101, is an operating public utility company engaged principally in the generation, transmission, distribution and sale of electric energy service and in the transmission, distribution and sale of gas service in New Jersey. PSE&G supplies electric and gas service in areas of New Jersey in which approximately 5,500,000 persons, about 70% of the State's population, reside. (See General -- Enterprise.)
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. It contains a diversified mix of commerce and industry, including major facilities of many corporations of national prominence.
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. In incorporated cities and towns, PSE&G must obtain from the municipality a designation of the streets in which the poles are to be placed and the manner of placing them. 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.
PSE&G, by virtue of a special charter granted by the State of New Jersey to one of its predecessors, has the right to use the roads, streets, highways and public grounds in New Jersey for pipes and conduits for distributing gas.
PSE&G believes that it has all the franchises (including consents) necessary for its electric and gas operations in the territory it serves. Such franchises are non-exclusive.
For discussion of the significant changes which PSE&G's electric and gas utility businesses have been and are undergoing, see Competition and Regulation.
Industry Issues
Enterprise and PSE&G are affected by many issues that are common to the electric and gas industries, such as: deregulation and the unbundling of energy supplies and services; an increasingly competitive energy marketplace, sales retention and growth potential in a mature service territory and a need to contain costs (see Competition, Regulation and MD&A - Competition); ability to operate nuclear plants in a cost effective way (see PSE&G - Nuclear Operations); ability to obtain adequate and timely rate relief, cost recovery, including the potential impact of stranded assets, and other necessary regulatory approvals (see PSE&G -- Rate Matters; Regulation and Item 7. MD&A - Competition); costs of construction (see Construction and Capital Requirements); operating restrictions, increased costs and construction delays attributable to environmental regulations (see Environmental Controls); controversies regarding electric and magnetic fields (EMF) (see Environmental Controls); nuclear decommissioning and the availability of reprocessing and storage facilities for spent nuclear fuel (see Electric Fuel Supply and Disposal); and credit market concerns with these issues.
Competition
Overview
The energy utility industry is in transition. Changes in Federal and state law and regulation are encouraging new entrants to the traditional markets of electric and gas utilities. New technologies are creating opportunities for new energy services. Customers, more aware and sophisticated about their choices and dissatisfied with prices and the often limited range of options available from the local utility, are increasingly turning elsewhere for energy supplies and services. As a consequence of competition, the traditional utility structure -- consisting of a vertically integrated system and functioning as a natural monopoly -- is being dramatically altered. Further, PSE&G's ability to meet competition and change prices to meet customer's needs is impacted by state regulation, including the historic utility mandate to serve all customers. (See MD&A -- Competition.) For a discussion of PSE&G's alternative plan of rate regulation, "New Jersey Partners in Power" (Alternative Rate Plan) as a response to these demands, see MD&A and Note 2 -- Rate Matters of Notes.
Non health and safety related Federal energy laws and regulations are designed to make more efficient use of all energy, introduce price competition, encourage the use of nonconventional energy sources and
limit oil imports by increasing production of domestic energy resources. Among other things, these actions (1) encourage development of alternative energy generation, (2) require wheeling of power for wholesale transactions, (3) require state regulatory authorities to consider certain standards on rate design and certain other utility practices, (4) encourage conservation of energy through certain financial incentives, including incentives by individual utilities to customers to help them to conserve energy and (5) deregulate prices on natural gas.
Also, Federal and State laws designed to reduce air and water pollution and control hazardous substances have had the effect of increasing the costs of operation and replacement of existing utility plants and other facilities. (See Environmental Controls.)
Competition from nonutility generators (NUGs), such as cogenerators, independent power producers (IPP) and exempt wholesale generators (EWGs), as permitted by the Public Utility Regulatory Policies Act of 1978 (PURPA) and the National Energy Policy Act of 1992 (EPAct), continues to impact PSE&G. As a result of changes brought about by EPAct, along with proposals in some states to authorize retail wheeling, discussed below, electric customers and suppliers, including PSE&G and its customers, have increased opportunities for purchase and sale of electricity from and to sellers and buyers outside of traditional franchised territories. Retention of existing customers and potential sales growth will depend upon the ability of PSE&G to contain costs, meet customer expectations and respond to changing economic conditions and energy regulation. As a result of such competitive forces, Enterprise Ventures & Services Corporation (Ventures) has been established as a subsidiary of PSE&G to develop and market new energy-related products and services beyond traditional geographic and/or industry boundaries. Competition may also adversely impact upon the economics of certain regulatory-created incentives, such as Demand Side Management (DSM) and conservation. For additional information, including a discussion of the potential effects of competition upon rates, cost recovery and assets, see MD&A -- Competition. For information relating to the Alternative Rate Plan see MD&A and Note 1--Organization and Summary of Significant Accounting Policies, Note 2--Rate Matters and Note 5--Deferred Items of Notes.
Electric
In the electric utility industry, competitive pressures began with the enactment of PURPA. This law, together with subsequent changes in Federal regulation, has increasingly opened the electric utility industry to competition. PURPA created a class of generating facilities exempt from Federal and State public utility regulation -- cogeneration and small power producers known as "qualifying facilities" (QFs) -- and created an instant market for them by requiring regulated utilities to purchase their excess power production. EPAct, by facilitating the development of the wholesale power market, has led to even stronger competition. The increasing competitiveness of the electric wholesale markets, along with consideration of retail wheeling or "direct retail access" within utility franchise areas in several states, has brought to the forefront the issue of potential stranded costs within the electric utility industry (see MD&A - Competition).
EPAct provides FERC with increased authority to order "wheeling" of wholesale, but not retail, electric power on the transmission systems of electric utilities, provided that certain requirements are met. In order to facilitate the transition to increased competition in wholesale power markets made possible by EPAct, in March 1995, FERC issued a Notice of Proposed Rulemaking (NOPR) which, if adopted, would require electric utilities, including PSE&G, to provide open access to the interstate transmission network pursuant to non-discriminatory tariffs available to all wholesale sellers and buyers of electric energy. Utilities would be required to offer transmission to eligible customers comparable to the service they provide themselves and to take service under the tariffs for their own wholesale sales and purchases. Further, transmission and ancillary service components would be unbundled and, when buying or selling power, utilities would have to rely on the same network for transmission system information as their customers.
The NOPR states FERC's general principle that utilities should be entitled to full recovery of legitimate and verifiable stranded costs at the Federal and State levels and reiterates its prior proposal that such costs be directly assigned to departing customers. The NOPR further provides that stranded costs due to retail wheeling are a state matter, while stranded costs due to wholesale wheeling, municipalization or a change from retail to wholesale customer class are within FERC's jurisdiction. PSE&G cannot predict the impact of any regulations that may be adopted. See MD&A -- Competition. For discussion of the Pennsylvania, New Jersey and Maryland Interconnection (PJM) proposal in response to the FERC NOPR, see Pennsylvania--New Jersey--Maryland Interconnection. For a discussion of PSE&G's actions and comments related to the potential environmental impact of the NOPR, see Environmental Controls - Air Pollution Control.
EPAct also amended PUHCA to create a new category of generation owners known as EWGs, which are not subject to PUHCA regulation. EPAct permits both independent companies and utility affiliates to participate in the development of EWG projects regardless of the location and ownership of other generating resources. The transmission access provisions apply to wholesale, but not retail, "wheeling" of power, subject to FERC review. See PSE&G -- Integrated Resource Plan, Construction and Capital Requirements, Financing Activities and PSE&G - -- Customers. For information concerning the activities of CEA, which is an owner-developer of QFs and EWGs, see EDHI -- CEA.
Another key factor in determining how competition will affect PSE&G's electric business is the extent to which New Jersey public utility regulation may be modified to be reflective of these new competitive realities. The BPU presented the first phase of the New Jersey Energy Master Plan to Governor Whitman on March 8, 1995. This Phase I Plan acknowledged the need for regulatory flexibility as competition unfolds and called for legislation that would allow New Jersey utilities to propose, subject to BPU approval, alternatives to existing rate base/rate of return pricing, allow for pricing flexibility under certain standards for customers with competitive options and equalize the impact of tax policies, such as New Jersey Gross Receipts and Franchise Tax (NJGRT) which is currently assessed only on utility retail energy sales. On July 20, 1995, Governor Whitman signed into law legislation which provides utilities the flexibility to propose alternative regulatory pricing and to offer negotiated off-tariff agreements (See PSE&G - Customers). On January 16, 1996, PSE&G filed a petition with the BPU for its Alternative Rate Plan designed to fulfill the objectives of this new regulatory reform legislation. This Alternative Rate Plan represents a regulatory transition designed to provide PSE&G with the mechanisms and incentives to compete more effectively on several fronts, including the ability to develop revenue from non-regulated products and services, accelerate or modify depreciation schedules to help mitigate any potential stranded asset issue and more aggressively manage costs. For more information regarding the Alternative Rate Plan see MD&A and Note 1 -- Organization and Summary of Significant Accounting Policies, Note 2 -- Rate Matters and Note 5 -- Deferred Items of Notes.
On June 1, 1995, the BPU issued its Order initiating a formal Phase II proceeding to the New Jersey Energy Master Plan. This proceeding is intended to investigate and consider the future long term structure of the electric power industry in New Jersey. The proceeding will address wholesale and retail competition, ownership of generation, transmission and distribution facilities, operation of the transmission system and stranded investments. A Phase II report proposing policy restructuring is expected by March 1996. PSE&G cannot predict what impact, if any, the Phase II report will have.
Gas
Over the last decade the natural gas industry has experienced a dramatic transformation as several FERC initiatives have subjected the industry to competitive market forces. On the interstate level, the pipeline suppliers that serve PSE&G have unbundled gas supply and service and now offer transportation services that move gas purchased from numerous natural gas producers and marketers to PSE&G's service territory.
This unbundling effort has moved to the local level and, in late 1994, the BPU approved unbundled transport tariffs for PSE&G. These tariffs allow any non-residential 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. To date, over 5,000 commercial and industrial customers out of a potential of 180,000 customers have decided to utilize this service. It is expected that this number will continue to grow as marketers become more active in New Jersey and encourage customers to convert from sales service. The transportation rate schedules produce the same non-fuel revenue per therm as existing sales service rate schedules. Thus, PSE&G's earnings are unaffected whether the customers remain on sales service or convert to transportation service. See Gas Operations and Supply. In meeting the challenges and opportunities presented by this unbundling of gas supply and service, Enterprise initiated a gas marketing company, U.S. Energy Partners (USEP). For more information see EDHI - PSRC.
Construction and Capital Requirements
For information concerning investments, construction and capital requirements see MD&A, Note 6 -- Schedule of Consolidated Debt, Note 7 -- Long-Term Investments and Note 12 -- Commitments and Contingent Liabilities -- Construction and Fuel Supplies of Notes.
Financing Activities
For a discussion of issuance, book value and market value of Enterprise's Common Stock and external financing activities of Enterprise, PSE&G and EDHI for the year 1995, see MD&A -- Liquidity and Capital Resources and Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
For a discussion of Capital and Funding, see EDHI -- Capital and EDHI - Funding. For further discussion of long-term debt and short-term debt, see Note 6 -- Schedule of Consolidated Debt of Notes.
Federal Income Taxes
For information regarding Federal income taxes, see Note 1 -- Organization and Summary of Significant Accounting Policies, Note 2 -- Rate Matters and Note 10 -- Federal Income Taxes of Notes.
Credit Ratings
The current ratings of securities of Enterprise's subsidiaries set forth below reflect the respective views of the rating agency furnishing the same, from whom an explanation of the significance of such ratings may be obtained. There is no assurance that such ratings will continue for any given period of time or that they will not be revised downward or withdrawn entirely by such rating agencies, if, in their respective judgments, circumstances so warrant. Any such downward revision or withdrawal of any of such ratings may have an adverse effect on the market price of Enterprise's Common Stock and PSE&G's securities and serve to increase the cost of capital of PSE&G and EDHI.
(A) Supported by commercial bank letter of credit (see MD&A -- Liquidity and Capital Resources and Note 6-- Schedule of Consolidated Debt -- Short-Term of Notes.)
PSE&G
Rate Matters
For information concerning PSE&G's Alternative Rate Plan, rate matters, and environmental remediation and fuel adjustment clauses see Note 1 -- Organization and Summary of Significant Accounting Policies and Note 2 -- Rate Matters of Notes. For information concerning PSE&G's Under (Over) recovered Electric Energy and Gas Fuel Costs, see Note 5 -- Deferred Items of Notes.
Nuclear Performance Standard
The BPU has established a nuclear performance standard (NPS) for nuclear generating stations owned by New Jersey electric utilities, including the five nuclear units in which PSE&G has an ownership interest: Salem Nuclear Generating Station, Units 1 and 2 (Salem 1 and 2) -- 42.59%; Hope Creek Nuclear Generating Station (Hope Creek) -- 95%; and Peach Bottom Atomic Power Station, Units 2 and 3 (Peach Bottom 2 and 3) -- 42.49%. PSE&G operates Salem and Hope Creek, while Peach Bottom is operated by PECO Energy, Inc. (PECO). The following table sets forth the capacity factor in accordance with the NPS of each of PSE&G's nuclear units for the years indicated:
For information concerning the NPS, see Nuclear Operations and Note 12 -- Commitments and Contingent Liabilities of Notes.
Customers
As of December 31, 1995, PSE&G provided service to approximately 1,900,000 electric customers and 1,500,000 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, 1995, PSE&G's operating revenues aggregated $5.7 billion, of which 70% was from its electric operations and 30% from its gas operations. PSE&G's business is seasonal in that sales of electricity are higher during the summer months because of air conditioning requirements and sales of gas are greater in the winter months due to the use of gas for space-heating purposes.
These revenues were derived as follows:
Customers of PSE&G, as well as those of other New Jersey electric and gas utilities, pay the NJGRT which, in effect, adds approximately 13% to their bills. The NJGRT is a unit tax based on electric kilowatthour and gas therm sales. This tax differential provides an incentive to large-volume electric and gas customers to seek to obtain their energy supplies from nonutility sources not subject to NJGRT. To the extent PSE&G experiences a loss of customers seeking to avoid this cost, it could result in a significant decrease in PSE&G's revenues and earnings.
On November 17, 1995, the BPU issued an order approving a Stipulation regarding PSE&G's proposed Experimental Hourly Energy Pricing Tariff and the first service agreement thereunder with its second largest customer. Under the agreement, the tariff will result in a bill reduction for the customer of approximately $7 million or about 27%. This reduction in revenues will be partially offset by a decrease of $1.25 million in PSE&G's NJGRT liability. Under the agreement between the customer and PSE&G, the customer will forego an opportunity to relocate to another state and remain a PSE&G customer for ten years. On January 2, 1996, an appeal seeking to overturn the BPU's November 17, 1995 Decision and Order was filed by a third party in the Appellate Division of the Superior Court of New Jersey. PSE&G cannot predict the outcome of this matter.
PSE&G has signed each of its three existing wholesale electric customers, aggregating 40 mw of load, to 5-year full service agreements with mid-term extension options. In addition, under the terms of a previously negotiated 10-year wholesale power transaction, PSE&G receives $12.5 million in annual revenues from an out of state electric cooperative. For further information on the impact of competition on PSE&G's customer and revenue base - See Competition and MD&A - Competition.
Integrated Resource Plan
PSE&G's construction program focuses on upgrading electric and gas transmission and distribution systems and constructing new transmission and distribution facilities to serve new load.
Pursuant to its Integrated Resource Plan (IRP), PSE&G periodically reevaluates its forecasted customer load and peak growth and the sources of electric generating capacity and DSM to meet such projected growth (see Demand Side Management below). The IRP takes into account assumptions concerning future customer demand, future cost trends, especially fuel and purchased power expenses, the effectiveness 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 nonutility suppliers. PSE&G's IRP consists principally of plant additions, power purchases through PJM and from NUGs and DSM.
Pennsylvania -- New Jersey -- Maryland Interconnection
PSE&G is a member of the PJM which integrates the bulk power generation and transmission supply operations of 11 utilities in Pennsylvania, New Jersey, Delaware, Maryland, Virginia and the District of Columbia, and, in turn, is interconnected with other major electric utility companies in the northeastern part of the United States. The PJM is operated as one system and provides for the purchase and sale of power among members on the basis of reliability of service and operating economy. As a result, the most economical mix of generating capability available is used to meet PJM daily load requirements. PSE&G's output, as shown under Electric Fuel Supply and Disposal, reflects significant amounts of purchased power because at times it is more economical for PSE&G to purchase power from PJM and others than to produce it. As of December 31, 1995, the aggregate installed generating capacity of the PJM companies was 56,098 megawatts (MW). The all time record peak one-hour demand experienced by the PJM power pool was 48,524 MW which occurred on August 2, 1995. The 1995 peak was 2,532 MW higher than the record-setting 1994 summer peak of 45,992 MW which occurred on July 8, 1994. PSE&G's capacity obligations to the PJM system vary from year to year due to changes in system characteristics. PSE&G expects to have sufficient installed capacity to meet its obligations during the 1996-2000 period.
PJM has developed a comprehensive proposal intended to meet or exceed the goals expressed by FERC in its open access NOPR, including a number of innovations that were designed to harmonize the requirements of the NOPR with the benefits of power pooling. In this proposal, PJM intends to satisfy the NOPR's goals by building upon the foundation of PJM's power pooling operations. The member companies of PJM intend to file this proposal with FERC by May 1996 and implement a restructured pool by year-end 1996.
Under this proposal, the current members of PJM and other load- serving entities in the PJM control area will purchase regional "network" transmission rights that are intended to enable them to reliably and economically integrate generation and load. For deliveries to retail customers, this service will remain part of the bundled rates for retail electric service, subject to state jurisdiction, but with terms and conditions comparable to the service provided for wholesale users. Because this service will cover all deliveries to loads located in the pool, generators selling power to serve pool load will not have to purchase transmission service independently. This is intended to create a regional wholesale power market in which all sellers and buyers operate on a level playing field.
Under the proposal, transmission service will be provided under a regional point-to-point transmission service tariff. This tariff will apply a uniform ratemaking methodology to all wholesale transactions involving deliveries outside the pool, including off- system sales by the current members of PJM and other load-serving entities in the pool. Accordingly, all transmission service associated with sales outside the pool will be provided on a comparable basis.
In order to meet the requirements to functionally unbundle transmission, PJM has proposed to reorganize into an independent System Operator (ISO) with responsibility for operating the bulk power system, administering the regional transmission service tariffs and managing
the pool's competitive energy market. The ISO will be governed by a Board of Directors that is not controlled by the transmission-owning members of PJM or their affiliates, and its responsibilities will be set forth in contracts filed with the FERC. The ISO will contract with the various pool participants to supply control area services, administer the transmission service tariffs and be responsible for maintaining the reliable operation of the system throughout each day.
One of the key elements of PJM's restructuring proposal is the creation of an expanded regional market for energy transactions. PJM will replace the existing system of cost-based centralized dispatch with an expanded, hourly bid/price pool in which all sellers will be able to bid their energy into the pool and all load-serving entities will be able to buy energy from the pool. The energy market will "clear" in each hour at the highest bid price for energy that must be dispatched to serve load.
Further, under the proposal, PJM will retain most of the existing pool procedures for ensuring reliable electric service, but will create new contractual mechanisms to ensure participation by all entities responsible for serving load in decisions affecting reliability. Each load-serving entity that chooses to operate in the PJM control area will be required to execute an agreement to maintain adequate generation reserves and to share those reserves on a reciprocal basis. PJM will establish an enhanced regional planning process, under the supervision of the ISO, to meet Mid-Atlantic Area Reliability Council (MAAC) reliability requirements applicable to both generation and transmission. In short, all load-serving entities in the pool will be subject to the same reliability standards and will participate in decisions relating to the establishment of regional reliability requirements.
Power Purchases
A component of PSE&G's IRP consists of expected capacity additions from NUGs. These additions are projected to aggregate 46 MW and are scheduled for service by 1998. NUG projects are expected to comprise approximately 6.5% of energy resources by 2004. This availability of NUG generation will reduce the need for PSE&G to build or acquire additional generation.
PSE&G is also a party to the MAAC which provides for review and evaluation of plans for generation and transmission facilities and other matters relevant to reliability of the bulk electric supply systems in the Mid-Atlantic area.
PSE&G expects to be able to continue to meet the demand for electricity on its system through operation of available equipment and by power purchases. However, if periods of unusual demand should coincide with outages of equipment, PSE&G could find it necessary at times to reduce voltage or curtail load in order to safeguard the continued operation of its system.
Demand Side Management
Integrated resource planning brings together demand-side and supply-side strategies. In order to encourage DSM, the BPU adopted rules in 1991 providing special incentives to encourage utilities to offer these load management conservation services. The rules are designed to place DSM on an equal regulatory footing with supply side or energy production investments. Both EPAct and Phase I of the Energy Master Plan call for conservation to play a significant role in meeting New Jersey's energy needs over the coming decade. PSE&G's DSM Plan has been approved by the BPU. The IRP calls for PSE&G to utilize conservation and DSM to meet most of the incremental resource needs for the next decade (see Competition).
PSE&G's DSM Plan is designed to encourage investment in energy-saving DSM activities in New Jersey. These activities involve new techniques and technologies, such as high-efficiency lighting and motors, that help reduce customer demand for energy. The DSM Plan consists of two major program areas for both electric and gas: (1) a core program which includes many specialized programs such as energy audits, seal-ups and rebates for high efficiency heating and cooling equipment; and (2) a standard offer program which is performance based and provides payment for measurable energy savings resulting from the installation of qualified measures that improve the energy efficiency of end-uses. PSE&G's most recent IRP includes a demand forecast average compound annual rate of growth through the year 2004 of electric system peak demand of 1.3%. PSE&G's IRP projects 597 MW of passive DSM and 815 MW of active DSM by the year 2004.
PSE&G has established a wholly owned subsidiary, Public Service Conservation Resources Corporation (PSCRC), to offer DSM services. PSCRC has its principal office at 9 Campus Drive, Parsippany, N.J. 07054. PSCRC finances, markets and develops energy conservation projects, mostly within the PSE&G service territory. At December 31, 1995, its assets totaled $110 million, of which $88.2 million were project assets and work in progress.
Electric Generating Capacity
The following table sets forth certain information as to PSE&G's installed generating capacity as of December 31, 1995:
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 12 - -- Commitments and Contingent Liabilities of Notes to Consolidated Financial Statements.
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, 1995, PSE&G's share of installed generating capacity was 10,400 MW, as shown in the following table:
As of December 31, 1995, PSE&G owned and operated approximately 15,467 miles of gas mains, owned 12 gas distribution headquarters and one subheadquarters and leased one other subheadquarters all in two operating regions located in New Jersey and owned one meter shop in New Jersey serving all such areas. In addition, PSE&G operated 61 natural gas metering or regulating stations, all located in New Jersey, of which 28 were located on land owned by customers or natural gas pipeline companies supplying PSE&G with natural gas and were operated under lease, easement or other similar arrangement. In some instances, portions of the metering and regulating facilities were owned by the pipeline companies.
Office Buildings and Facilities
PSE&G leases substantially all of a 26-story office tower for its corporate headquarters at 80 Park Plaza, Newark, New Jersey, together with an adjoining three-story building. PSE&G also leases other office space at various locations throughout New Jersey for district offices and offices for various corporate groups and services. PSE&G also owns various other sites for training, testing, parking, records storage, research, repair and maintenance, warehouse facilities and for other purposes related to its business.
EDHI owns no real property. EDHI leases its corporate headquarters at One Riverfront Plaza, Newark, New Jersey 07102. For a brief general description of the properties of the subsidiaries of EDHI, see Item 1. Business -- EDHI.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
In October 1995, Enterprise received a letter from a representative of a purported shareholder demanding that it commence legal action against certain of its officers and directors with regard to nuclear operations and the current shutdown of the Salem generating station. In January, 1996, Enterprise and each of its directors except Forrest J. Remick were served with a civil complaint in a shareholder derivative action by such purported shareholder on behalf of Enterprise shareholders (Public Service Enterprise Group Incorporated by G.E. Stricklin, derivatively vs. E. James Ferland, et al., Docket No. L1068395, Superior Court of New Jersey, Law Division, Camden County filed December 27, 1995). The complaint seeks removal of certain executive officers of PSE&G and Enterprise, certain changes in the composition of Enterprise's Board of Directors, recovery of damages and certain other relief for alleged losses purportedly arising out of PSE&G's operation of the Salem and Hope Creek generating stations. The Board of Directors has commenced an investigation of the matters raised in the October demand letter, and that investigation has not yet been completed. Following conclusion of the investigation, the Board will meet to determine what action, if any, should be taken with respect to the complaint filed in the shareholder derivative action.
In addition, see the following, at the pages indicated:
(1) Page 5. Proceedings before FERC relating to competition and electric wholesale power markets. (Inquiry Concerning the Pricing Policy for Transmission Services Provided by Utilities Under the Federal Power Act, Docket No. RM93-19.)
(2) Page 11. Proceedings before the BPU relating to PSE&G's Second Largest Customer, filed January 6, 1995, in Docket No. ER95010005.
(3) Page 44. Requests filed in 1974 and later supplemented, to EPA and NJDEP to establish thermal discharges and intake structures for PSE&G's electric generating stations (Sewaren Generating Station, NJ 0000680; Hudson Generating Station, NJ 0000647; Kearny Generating Station, NJ 0000655; Salem Generating Station, NJ 0005622; Linden Generating Station, NJ 0000663).
(4) Page 46. Notice of Violation issued by EPA against Eagle Point Cogeneration Partnership regarding alleged violations of air permit.
(5) Pages 48 through 53. Various administrative actions, claims, litigation and requests for information by federal and/or state agencies, and/or private parties, under CERCLA, RCRA, and state environmental laws to compel PRPs, which may include PSE&G, to provide information with respect to transportation and disposal of hazardous substances and wastes, and/or to undertake or contribute to the costs of investigative and/or cleanup actions at various locations because of actual or threatened releases of one or more potentially hazardous substances and/or wastes.
(6) Page 74. Proceedings before The BPU relating to New Jersey Partners in Power Plan filed January 16, 1996, in Docket No. E096010028.
(7) Page 115. Proceedings before the BPU relating to PSE&G's LGAC, filed October 2, 1995, in Docket No. GR9510456.
(8) Page 116. Proceedings before the BPU relating to recovery of replacement power costs in connection with the Salem 1 shutdown, May 5, 1995, Docket No. ER94070293.
(9) Page 116. Proceedings before the BPU relating to PSE&G's LEAC Remediation Program Costs (RAC), filed July 21, 1995, in Docket No. GR95070344.
(10) Page 117. Generic proceeding before the BPU relating to recovery of capacity costs associated with power purchases from cogenerators, September 16, 1994, in Docket No. EX93060255.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Enterprise and PSE&G, inapplicable.
ITEM 10. EXECUTIVE OFFICERS OF THE REGISTRANTS
Enterprise and PSE&G. Information regarding executive officers required by this Item is set forth in Part III, Item 10 hereof.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Enterprise's Common Stock is listed on the New York Stock Exchange, Inc. and the Philadelphia Stock Exchange, Inc. All of PSE&G's common stock is owned by Enterprise, its corporate parent. As of December 31, 1995, there were 175,831 holders of record of Enterprise Common Stock.
The following table indicates the high and low sale prices for Enterprise's Common Stock, as reported in The Wall Street Journal as Composite Transactions and dividends paid for the periods indicated:
Since 1986, PSE&G has made regular cash payments to Enterprise in the form of dividends on outstanding shares of PSE&G's Common Stock. PSE&G has paid quarterly dividends on its common stock in each year commencing in 1948, the year of the distribution of PSE&G's common stock by Public Service Corporation of New Jersey, the former parent of PSE&G. Since 1992, EDHI has made regular cash payments to Enterprise in the form of dividends on outstanding shares of EDHI's common stock. Enterprise has paid quarterly dividends in each year commencing with the corporate restructuring of PSE&G when Enterprise became the owner of all the outstanding common stock of PSE&G. While the Board of Directors of Enterprise intends to continue the practice of paying dividends quarterly, amounts and dates of such dividends as may be declared will necessarily be dependent upon Enterprise's future earnings, financial requirements and other factors. See MD&A -- Dividends.
The ability of Enterprise to declare and to pay dividends is contingent upon its receipt of dividend payments from its subsidiaries. PSE&G has restrictions on the payments of dividends which are contained in its Restated Certificate of Incorporation, as amended, certain of the indentures supplemental to its Mortgage and certain debenture bond indentures. Under these restrictions, dividends on PSE&G's common stock may be paid only out of PSE&G's earned surplus and may not reduce PSE&G's earned surplus to less than $10 million. PSE&G dividends on common stock would be limited to 75% of Earnings Available for Public Service Enterprise Group Incorporated if payment thereof would reduce PSE&G's Stock Equity to less than 33 1/3% of PSE&G's Total Capitalization and would be limited to 50% of Earnings Available for Public Service Enterprise Group Incorporated if payment thereof would reduce Stock Equity to less than 25% of PSE&G's Total Capitalization, as each of said terms is defined in said PSE&G's debenture bond indentures. Further, under an indenture relating to the loan to PSE&G of the proceeds of the Monthly Income Preferred Securities of Public Service Electric and Gas Capital, L.P. (see Note 4. -- Schedule of Consolidated Capital Stock and Other Securities of Notes), dividends may not be paid on PSE&G's capital stock as long as any payments on PSE&G's deferrable interest subordinated debentures issued under said indenture have been deferred or there is a default under said indenture or PSE&G's guarantee relating to the Monthly Income Preferred Securities. None of these restrictions presently limits the payment of dividends out of current earnings. The amount of Enterprise's and PSE&G's consolidated retained earnings not subject to these restrictions at December 31, 1995 was $1.6 billion and $1.4 billion, respectively.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
Enterprise
PSE&G
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ENTERPRISE
Significant factors affecting the consolidated financial condition and the results of operations of Public Service Enterprise Group Incorporated (Enterprise) and its subsidiaries are described below. This discussion refers to the Consolidated Financial Statements and related Notes of Enterprise and should be read in conjunction with such statements and notes.
Overview
Enterprise has two direct wholly owned subsidiaries, Public Service Electric and Gas Company (PSE&G) and Enterprise Diversified Holdings Incorporated (EDHI). Enterprise's principal subsidiary, PSE&G, is an operating public utility providing electric and gas service in certain areas in the State of New Jersey.
EDHI is the parent of Enterprise's nonutility businesses: Energy Development Corporation (EDC), an oil and gas exploration and production and marketing company; Community Energy Alternatives Incorporated (CEA), an investor in and developer and operator of cogeneration and independent power production (IPP) facilities and exempt wholesale generators (EWGs); Public Service Resources Corporation (PSRC), which has made primarily passive investments; and Enterprise Group Development Corporation (EGDC), a diversified nonresidential real estate development and investment business. EDHI also has two finance subsidiaries: PSEG Capital Corporation (Capital), which provides privately placed debt financing on the basis of a minimum net worth maintenance agreement from Enterprise and Enterprise Capital Funding Corporation (Funding), which provides privately placed debt financing guaranteed by EDHI but without direct support from Enterprise. Enterprise has been conducting a controlled exit from the real estate business since 1993 and, in December 1995, announced that it intends to divest EDC.
As of December 31, 1995 and December 31, 1994, PSE&G comprised 85% of Enterprise assets. For each of the years 1995, 1994 and 1993, PSE&G revenues were 93% of Enterprise's revenues and PSE&G's earnings available to Enterprise for such years were 88%, 91% and 96%, respectively, of Enterprise's net income.
The major factors which will affect Enterprise's future results include general and regional economic conditions, PSE&G's customer retention and growth, the ability of PSE&G and EDHI to meet competitive pressures and to contain costs, the ability to respond to and take advantage of opportunities arising from increasing competition in the
utility business, the adequacy and timeliness of rate relief, cost recovery and necessary regulatory approvals, the ability to continue to operate and maintain nuclear programs in accordance with Nuclear Regulatory Commission (NRC) and New Jersey Board of Public Utilities (BPU) requirements, the impact of environmental regulations, continued access to the capital markets and continued favorable regulatory treatment of consolidated tax benefits. (See Note 2 -- Rate Matters, Note 10 -- Federal Income Taxes and Note 12 -- Commitments and Contingent Liabilities of Notes to Consolidated Financial Statements ("Notes").)
Competition
The regulatory structure which has historically embraced the electric and gas industry is in the process of transition. Legislative and regulatory initiatives, at both the federal and state levels, are designed to promote competition and will continue to impose additional pressures on PSE&G's ability to retain customers. In addition, new technology and interest in self generation and cogeneration have provided customers with alternative sources of energy.
Over the last several years, the gas industry has been transformed. Today, commercial and industrial customers can negotiate their own gas purchases directly with producers or brokers, while PSE&G is required to provide intrastate transportation of such purchased gas to the customers' facilities. Although PSE&G is not providing gas sales service to certain commercial and industrial customers, to date there has been no negative impact on earnings since sales service and transportation service tariffs result in the same non-fuel revenue per therm. Additionally, as a result of this restructuring, PSE&G has been able to negotiate lower cost gas supplies for those customers who continue to be part of its bundled rate schedules. A potential significant competitive challenge could emerge if interstate pipeline companies are permitted to expand their facilities into PSE&G territory and provide intrastate transportation to customers. However, this type of expansion would require federal and state regulatory approvals not currently in existence.
The restructuring of the electric industry is more complex and evolving at a slower pace than that of the gas industry. Federal legislation, such as the National Energy Policy Act (EPAct) has eased restrictions on independent power producers (IPP) in an effort to increase competition in the wholesale electric generation market. As the barriers to entry in the power production business have been lowered, the construction of cogeneration facilities and independent
power production facilities has been growing, with the result of creating lower cost alternatives for large commercial and industrial customers. Presently, PSE&G is in the process of assessing the potential for individual arrangements with commercial and industrial customers which have such competitive alternatives, but PSE&G believes that it does not currently have a material exposure with respect to such customers.
Further, EPAct authorized the Federal Energy Regulatory Commission (FERC) to mandate utilities to transport and deliver or "wheel" energy for the supply of bulk power to wholesale customers. In March 1995, FERC issued a Notice of Proposed Rulemaking (NOPR) that would require utilities to (1) establish open access to all wholesale sellers and buyers, (2) offer transmission service comparable to service they provide themselves and (3) take transmission service under the same tariffs offered to other buyers and sellers. FERC's stated position is that it will ensure that utilities have a fair opportunity to recover prudently incurred investments that could become stranded costs as a result of the NOPR.
In the wholesale electric market, other competitive pressures, such as municipalization, may also have an impact on utilities in the evolving electric power industry. Municipalization involves the acquisition and operation of existing investor-owned facilities by a municipal utility (MUNI) through condemnation, purchase or lease or the construction and operation of duplicate, parallel facilities within a municipal boundary. As a result, utilities, such as PSE&G, could lose customers (residential, commercial and industrial) in the municipality that is served by the MUNI, as well as lose the municipal entity itself as a customer.
EPAct granted the states sole authority to mandate retail wheeling. New Jersey regulators have been reviewing existing regulations in an effort to develop a revised regulatory structure that would afford public utilities, such as PSE&G, increased flexibility to meet the competitive challenges of the future. Phase I of the New Jersey Energy Master Plan (Phase I), a two-phase plan to better manage the future energy needs of the State, has been completed. Phase I called for legislation that would allow New Jersey utilities to propose, subject to BPU approval, alternatives to rate base/rate of return pricing, allow for pricing flexibility under certain standards for customers with competitive options and equalize the impact of tax policies, such as the New Jersey Gross Receipts and Franchise Tax (NJGRT) currently assessed on retail energy utility sales, upon all energy producers. On July 20, 1995, Governor Whitman signed into law legislation which provides utilities the flexibility
to propose, subject to BPU approval, alternatives to existing rate base/rate of return pricing and offer negotiated off-tariff agreements to customers with competitive options. On June 1, 1995, the BPU issued its order initiating a formal Phase II proceeding of the Master Plan. The proceeding will address wholesale and retail competition in New Jersey.
Recoverability of stranded costs is largely dependent on the transition rules established by regulators, including FERC and the BPU. Stranded costs that could result as the industry moves to a more competitive environment include investments in generating facilities, transmission assets, purchase power agreements where the price being paid under such an agreement exceeds the market price for electricity and regulatory assets for which recovery is based solely on continued cost based regulation. At this time, management cannot predict the level of stranded costs, if any, or the extent to which regulators will allow recovery of such costs.
Increased competition and the shift of risks and opportunities between rate payers and PSE&G resulting from PSE&G's filing of its proposed Alternative Rate Plan (discussed below) will increase the emphasis upon electric operational reliability, efficiency and cost. While the incremental cost of nuclear production is less expensive than PSE&G's other sources of generation, comparatively high embedded costs for nuclear plants increase the need for PSE&G to optimize the utilization of its nuclear generating capacity in order to make its actual generation output cost competitive.
In order to succeed in this increasingly competitive environment, Enterprise and its subsidiaries have taken the following steps designed to retain customers, reduce costs, improve operations and strategically position itself for future operation:
1) On January 16, 1996, PSE&G filed its proposed alternative rate plan, the "New Jersey Partners in Power" Plan (Alternative Rate Plan). This seven-year proposed Alternative Rate Plan allows for a transition to a competitive energy marketplace while substantially shifting the business and financial risks and opportunities involved in such transition away from customers to PSE&G. Some of the key features of the proposal are: (a) an indexed or price-capped approach to replace the rate base/rate of return form of regulation including the discontinuance of the electric Levelized Energy Adjustment Clause (LEAC) and the BPU's Nuclear Performance Standard (NPS), (b) a productivity gains sharing mechanism with electric and gas customers, (c) continued recovery of costs associated with activities mandated by state or federal agencies and (d) a program of rewards and penalties based on the performance of certain key overall service indicators, such as the
duration of customer power outages compared to a five year average. For a full discussion of the Alternative Rate Plan, see Note 2 -- Rate Matters of Notes.
2) PSE&G reorganized its senior nuclear leadership team to address operation and performance issues at PSE&G operated nuclear facilities and completed a thorough work scope assessment of Salem 1 and Salem 2 in order to return these units to safe, reliable operation over the long-term.
3) PSE&G reorganized to reflect the evolution toward stand-alone energy and energy services businesses designed to compete successfully in the future. The reorganization "unbundled" the services previously provided by the electric and gas businesses. The focus is now on areas of business: Generation, Transmission and Distribution and Customer Services.
4) Also as part of the corporate reorganization, a new business was created, Enterprise Ventures & Services Corporation, to pursue products and services which can be marketed beyond traditional geographic and industry boundaries. Among these are: natural gas marketing in the wake of deregulation of that industry, conservation and energy management services and a product development venture with AT&T Corp. to pilot and eventually market two-way customer communications systems and services.
5) PSE&G developed initiatives, including the announced closure of five older, less efficient generating units, to reduce annual fossil generation operating and maintenance expenses, as well as to reduce annual fossil capital expenditures.
6) PSE&G has established a deleveraging plan to retire more than $1 billion of outstanding debt over the next five years and to fund its current five-year construction program entirely through internally generated cash.
7) PSE&G became the first utility in the Northeast to implement a service guarantee program. It covers nine key service areas and provides direct bill credits to customers should PSE&G fail to live up to its promises.
8) The Strategic Account Marketing Organization was created within PSE&G to provide more individualized service to its 200 largest customers.
9) PSE&G received BPU approval for its proposed Experimental Hourly Energy Pricing Tariff and the first service agreement thereunder with its second largest customer. This type of agreement serves as an incentive to retain customers with other energy alternatives in PSE&G's customer base, as well as in New Jersey.
10) Also in 1995, PSE&G completed the Bergen Repowering Project which improved the efficiency and environmental effectiveness of the facility. Fuel costs for the facility will be reduced by approximately $30 million annually.
11) CEA pursued business opportunities in certain international markets. During 1995, CEA closed on three projects and a strategic alliance in China and South America.
12) Enterprise announced that EDHI will pursue the divestiture of EDC. The decision to divest EDC stems from Enterprise's conclusion that ownership of large oil and natural gas reserves is no longer necessary to provide efficient energy solutions to customers and that the true market value of EDC is not reflected in the price of Enterprise Common Stock.
Enterprise and its subsidiaries remain committed to the pursuit of initiatives to contain costs and retain customers.
Accounting for the Effects of Regulation
Currently, PSE&G accounts for the effects of regulation in accordance with Statement of Financial Accounting Standards No. 71 "Accounting for the Effects of Certain Types of Regulation" (SFAS 71). In accordance with the provisions of SFAS 71, PSE&G defers certain expenses (regulatory assets) on the basis that they will be recovered from customers as part of the ratemaking process. PSE&G believes that if its proposed Alternative Rate Plan is approved essentially as proposed, it would continue to meet the criteria to account for certain utility revenues and expenses in accordance with SFAS 71. However, if future events or regulatory changes limit PSE&G's ability to establish prices to recover its costs, PSE&G might conclude that it no longer meets the application criteria to defer certain expenses in accordance with SFAS 71. If PSE&G were to discontinue the application of SFAS 71, the accounting impact would be an extraordinary, non-cash charge to operations that could be material to the financial position and results of operations of Enterprise and PSE&G.
PSE&G has certain regulatory assets resulting from the use of a level of depreciation expense in the rate making process that is less than the amount that would be recorded under Generally Accepted Accounting Principles (GAAP) for non-regulated companies. PSE&G cannot presently quantify what the financial statement impact may be if depreciation expense were required to be determined absent regulation, but the impact on the financial position and results of operations of PSE&G and Enterprise could be material.
Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets" (SFAS 121) effective for 1996, establishes accounting standards for the impairment of long-lived assets. SFAS 121 also requires that regulatory assets which are no longer probable of recovery through future revenues be charged to earnings. The adoption of SFAS 121 is not expected to have a material impact on the financial position or results of operations of PSE&G and Enterprise.
PSE&G Energy and Fuel Adjustment Clauses
Under the existing regulatory framework, PSE&G has fuel and energy tariff rate adjustment clauses, the Levelized Gas Adjustment Charge (LGAC) and the LEAC, which are designed to permit adjustments for changes in electric energy and gas supply costs and certain other costs as approved by the BPU, when compared to cost recovery included in base rates. Presently, charges under the clauses are primarily based on energy and gas supply costs which are normally projected over twelve-month periods except for large gas commercial and industrial customers for which commencing January 1, 1996, gas supply costs are projected monthly. The changes in the clauses do not directly affect earnings because such costs are adjusted monthly to match amounts recovered through revenues except for the financing costs of carrying underrecovered balances and required interest payments on net overrecovered balances. Under the clauses, if actual costs differ from the costs recovered, the amount of the underrecovery or overrecovery is deferred. Actual costs otherwise includable in the LEAC are subject to adjustment by the BPU in accordance with the NPS. (See Note 2 -- Rate Matters and Note 12 -- Commitments and Contingent Liabilities of Notes.) The Alternative Rate Plan proposes discontinuing LEAC and NPS and would substantially shift the risks and opportunities involved in managing changes in fuel and replacement power costs from customers to PSE&G.
Accounting for Stock Compensation
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS 123) is effective for fiscal years that begin after December 15, 1995. SFAS 123 establishes financial accounting and reporting standards for stock based compensation plans and includes all arrangements by which employees receive shares of stock or other equity instruments of the employer or by which the employer incurs liabilities to employees in amounts based on the price of the employer's stock. The adoption of SFAS 123 is not expected to have a material impact on the financial position or results of operations of PSE&G and Enterprise.
Corporate Policy for the Use of Derivatives
Enterprise and its subsidiaries have established a policy to use derivatives only for the purpose of managing financial risk and not for speculative purposes. EDHI currently uses derivatives to manage financial risk for EDC and PSRC, including its subsidiary United States Energy Partners (USEP). The derivatives are used to mitigate the impact on earnings of volatile gas prices for EDC and USEP and volatile security prices for PSRC's investing activities. For details, see Note 8 -- Financial Instruments and Risk Management of Notes. Although PSE&G does not currently use derivatives, if the Alternative Rate Plan is approved as proposed, PSE&G could find derivatives to be a useful and appropriate tool in managing the volatility of fuel prices, among other things.
Nuclear Operations
Operation of the Salem units has continued to present challenges to PSE&G. The units have experienced equipment failures which, combined with personnel errors, have precipitated or contributed to plant events or trips which have led to a number of outages over the lifetime of the units.
Both of the Salem units are currently out of service and their return dates are subject to completion of testing, analysis, repair activity and NRC concurrence that they are prepared to restart. Restart of Salem 1, which had originally been scheduled for the second quarter of 1996, will be delayed for a substantial period as a result of the ongoing steam generator inspection and analysis. Salem 2, which is also undergoing steam generator inspection and analysis is still scheduled to return to service in the third quarter of 1996. The inability to successfully return these units to continuous, safe operation could have a material effect on the financial position, results of operation and net cash flows of Enterprise and PSE&G.
Results of Operations
Earnings per share of Enterprise Common Stock were $2.71 in 1995, $2.78 in 1994 and $2.50 in 1993.
In 1995, Enterprise earnings decreased principally due to increased operating expenses and lower gas sales from PSE&G. These decreases in earnings were partially offset by improved electric sales, EDC revenues resulting from the settlement of litigation related to a take or pay sales contract and from gains realized on sales of properties by EDC.
In 1994, the increase in Enterprise earnings was driven primarily by increased weather related electric and gas sales. Enterprise earnings also benefited from higher investment income from PSRC.
PSE&G - Earnings Available to Enterprise
During 1995, electric revenues were impacted by higher residential and commercial sales resulting from a recovering economy, warm summer weather and a modest increase in customer base. In addition, other electric revenues increased principally due to higher miscellaneous revenues from increased capacity sales to unaffiliated utilities and to wholesale customers, service reconnections, temporary services and revenues from Public Service Conservation Resources Corporation (PSCRC), PSE&G's energy services subsidiary. Capacity sales are sales for the reservation of a specified quantity of PSE&G system generating capacity and must be paid even when the energy is not taken.
In 1995, gas revenues decreased due to the mild winter weather, partially offset by revenues resulting from the rapidly growing off system sales and higher gas service contract revenues. Off system sales are sales of excess gas to brokers and other utilities which are not part of PSE&G's firm customer base. Earnings on these sales are shared between the firm customer and PSE&G on an 80/20 split, respectively.
In 1994, electric and gas revenues benefited from weather related sales which primarily impacted electric commercial sales and all firm gas rate schedules. Other electric revenues increased principally due to increased capacity sales to unaffiliated utilities and increased miscellaneous revenues, partially offset by lower energy sales to the unaffiliated utilities. Other gas revenues were significantly impacted by a one time $10 million legal settlement of a gas contract.
PSE&G - Expenses
Fuel Expenses
As discussed in the PSE&G Energy and Fuel Adjustment Clauses section, variances in fuel expenses do not directly affect earnings because of the adjustment clause mechanism. However, if the proposed Alternative Rate Plan is adopted as filed, future changes in electric fuel and replacement power costs could impact earnings.
Other Operation Expenses
During 1995, other operation expenses decreased $10 million from 1994 levels. PSE&G had lower nuclear and miscellaneous production expenses. Nuclear production expenses decreased during 1995 due in part to the extended outage of Salem Units 1 and 2. PSE&G also secured savings in miscellaneous expenditures, such as clerical and office supplies in its steam production area. These savings were partially offset by increased marketing expenditures for customer related programs initiated in 1995.
During 1994, other operation expenses increased $77 million when compared to 1993 principally due to increased nuclear production expenses which were higher than 1993 levels when Salem had a refueling outage, increased transmission and distribution expenses incurred during the bitter 1994 winter and increased administrative and general expenses primarily due to a rise in personal and property damage claim expenses. The increase in personal and property damage claims was directly related to storm damage and other weather related occurrences.
Maintenance Expenses
Maintenance expense increased $4 million in 1995 in comparison to 1994 due to the extended outage at Salem Units 1 and 2, partially offset by decreased expenses for electric and gas distribution facilities. Maintenance expense for 1994 was $4 million higher than in 1993 primarily due to the 1994 Hope Creek refueling outage and increased expenses for gas distribution facilities which resulted from the extremely cold weather during January and February 1994.
Depreciation and Amortization Expenses
Depreciation and Amortization expenses increased $39 million in 1995 when compared to 1994 and $41 million in 1994 when compared to 1993. The increases in 1995 and 1994 are attributable to increased depreciation expenses directly related to increases in plant in service.
Federal Income Taxes
In 1995, Federal Income Taxes increased $27 million from 1994 and 1994 Federal Income Taxes decreased $14 million from 1993. The 1995 taxes were higher than 1994 principally due to the receipt of a non- taxable insurance benefit in 1994 and to higher pre-tax operating income. Federal Income Taxes decreased in 1994 due to the receipt of a non-taxable insurance benefit, partially offset by higher pre-tax operating income.
Interest Charges
In 1995, interest charges were $11 million higher than in 1994 and, in 1994, interest charges were $6 million higher than in 1993. The primary reason for the 1995 increase was higher interest charges on miscellaneous liabilities, while the driving force behind the 1994 increase was a higher average daily balance of short-term debt outstanding at higher interest rates.
Allowance for Funds Used During Construction
In 1995, there was a $2 million decrease in AFDC income principally due to a decrease in construction expenditures. In 1994, AFDC income was $11 million higher than the 1993 level due to increased construction resulting from the repowering of the Bergen Generating Station.
Preferred Securities
Dividend requirements on preferred securities increased $8 million in 1995 compared to 1994 and $4 million in 1994 compared to 1993. The increases are the result of the issuance of higher rate Monthly Income Preferred Securities used to redeem certain issues of PSE&G Preferred Stock.
EDHI - Net Income
The net income of EDHI was $80 million in 1995, a $20 million increase over 1994. EDC's income increased $23 million primarily due to the realization of a settlement related to a take-or-pay sales contract. EDC's gains from property sales, higher oil prices and volumes and reduced depreciation, depletion and amortization (DD&A) expenses also contributed to higher earnings but were substantially offset by lower gas prices and volumes. CEA's earnings decreased $4 million compared to 1994 due to higher interest and development expenses.
The net income of EDHI was $60 million in 1994. Excluding the impact of an impairment of assets of $51 million, after tax, by EGDC in 1993, EDHI's earnings in 1994 decreased $15 million in comparison to 1993. Increased income from PSRC (higher investment income, lower income taxes compared to 1993 which included the effects of a Federal income tax increase and lower interest charges) and CEA (higher income from operating plants) was offset by lower EDC earnings (lower gas volumes and prices and higher exploration and development expenditures due to increased drilling activities).
Dividends
The ability of Enterprise to declare and pay dividends is contingent upon its receipt of dividend payments from its subsidiaries. PSE&G has made regular payments to Enterprise in the form of dividends on outstanding shares of its common stock since Enterprise was formed in 1986. In addition, commencing in 1992, EDHI has also made payments to Enterprise in the form of dividends on its outstanding common stock. Since 1992, Enterprise has maintained a constant rate of common stock dividends. Management believes that gradually reducing the common stock dividend payout ratio is a prudent policy.
Dividends paid to holders of Enterprise Common Stock increased $.5 million during 1995 compared to 1994 and increased $6 million during 1994 compared to 1993. Such increases were due to the issuance of additional shares of Enterprise Common Stock.
Dividends paid to holders of PSE&G's Preferred Stock decreased $6.7 million during 1995 compared to 1994 and increased $2 million during 1994 compared to 1993. The 1995 decrease in such dividends was due to the redemption of certain series of Preferred Stock. The increase in 1994 was due to the issuance of additional shares of Preferred Stock. (See Liquidity and Capital Resources.)
Dividends paid to holders of Monthly Income Preferred Securities of Public Service Electric and Gas Capital, L.P. (Partnership), a limited partnership of which PSE&G is the general partner, increased $14 million during 1995 compared to 1994. The Partnership's Monthly Income Preferred Securities were first issued in 1994 and were not outstanding for the entire year. The increase in 1995 was due to the issuance of additional securities coupled with the fact that Monthly Income Preferred Securities were outstanding for the entire year. (See Note 4 -- Schedule of Consolidated Capital Stock and Other Securities of Notes.)
Liquidity and Capital Resources
Enterprise's liquidity is affected by maturing debt, investment and acquisition activities, the capital requirements of PSE&G's and EDHI's construction and investment programs, permitted regulatory recovery of expenses and collection of revenues. Capital resources available to meet such requirements depend upon general and regional economic conditions, PSE&G's customer retention and growth, the ability of PSE&G and EDHI to meet competitive pressures and to contain costs, the adequacy and timeliness of rate relief, cost recovery and necessary regulatory approvals, the ability to continue to operate and maintain nuclear programs in accordance with NRC and BPU requirements, the impact of environmental regulations, continued access to the capital markets and continued favorable regulatory treatment of consolidated tax benefits. (For additional information see the discussion of Competition above and Note 12, Commitments and Contingencies of the Notes.)
PSE&G
PSE&G had utility plant additions of $686 million, $887 million and $890 million, for 1995, 1994 and 1993, respectively, including AFDC of $36 million, $38 million and $27 million, respectively. Construction expenditures were related to improvements in PSE&G's existing power plants, transmission and distribution system, gas system and common facilities. PSE&G also expended $30 million, $34 million and $48 million for the cost of plant removal (net of salvage) in 1995, 1994 and 1993, respectively. Construction expenditures from 1996 through 2000 are expected to aggregate $2.8 billion, including AFDC. Forecasted construction expenditures are related to improvements in PSE&G's existing power plants (including nuclear fuel), transmission and distribution system, gas system and common facilities. (See Construction, Investments and Other Capital Requirements Forecast below.)
PSE&G expects that it will be able to internally generate all of its capital requirements, including construction expenditures, over the next five years and reduce its debt outstanding by approximately $1 billion, assuming adequate and timely recovery of costs, as to which no assurances can be given. (See Note 2 -- Rate Matters and Note 12 -- Commitments and Contingent Liabilities of Notes.)
EDHI
During the next five years, a majority of EDHI's capital requirements are expected to be provided from operational cash flows. (See Construction, Investments and Other Capital Requirements Forecast below.) CEA is expected to be the primary vehicle for EDHI's business growth. A significant portion of CEA's growth is expected to occur in the international arena due to the current and anticipated growth in electric capacity required in certain regions of the world. EDC will continue to pursue a program to grow its reserve base through a combination of strategic acquisitions, high potential exploration activities and exploitation of its acquired properties and new discoveries. EDC's worldwide 1995 production totaled 99 BCFE and, at year end, EDC had proved reserves of 920 BCFE. EDC expended approximately $153 million, $188 million and $109 million in 1995, 1994 and 1993, respectively, to acquire, discover or develop domestic and international reserves. Of these expenditures, $132 million, $160 million and $92 million in 1995, 1994 and 1993, respectively, were capitalized. These amounts included capitalized interest of $4 million, $4 million and $3 million, respectively. For discussion regarding the potential divestiture of EDC, see Competition.
PSRC will continue to limit new investments to those related to the energy businesses, while EGDC will exit the real estate business in a prudent manner. Over the next several years, EDHI and its subsidiaries will also be required to refinance a portion of their maturing debt in order to meet their capital requirements. In addition, any divestiture of EDC will require the renegotiation of existing loan agreements of Funding. Any inability to extend or replace maturing debt and or existing agreements at current levels and interest rates may affect future earnings and result in an increase in EDHI's cost of capital.
PSRC is a limited partner in various limited partnerships and is committed to make investments from time to time, upon the request of the respective general partners. At December 31, 1995, $58 million remained as PSRC's unfunded commitment subject to call.
EDHI and each of its subsidiaries are subject to restrictive business and financial covenants contained in existing debt agreements and are required to not exceed various debt to equity ratios which vary from 3:1 to 1.75:1. EDHI is also required to maintain a twelve-months earnings before interest and taxes to interest (EBIT) coverage ratio of at least 1.35:1. As of December 31, 1995 and 1994, EDHI had a consolidated debt to equity ratio of 1.15:1 and, for the years ended December 31, 1995, 1994 and 1993, EBIT coverage ratios, as defined to exclude the effects of EGDC, of 2.47:1, 1.94:1 and 2.13:1, respectively. Compliance with applicable financial covenants will depend upon future financial position and levels of earnings, as to which no assurance can be given. (See Note 6 -- Schedule of Consolidated Debt and Note 16 -- Property Impairment of Enterprise Group Development Corporation of Notes.)
Long-Term Investments and Real Estate
Long-term investments and real estate increased $82 million in 1995 and decreased $58 million and $67 million in 1994 and 1993, respectively. The increase in 1995 was primarily due to an increase in PSCRC's long-term investments of $49 million, PSRC's increase in investments in partnerships and leases of $52 million and CEA's increase in partnership investments of $27 million, partially offset by EGDC's property sales of $53 million. The decrease in 1994 was primarily due to a $73 million net decrease in PSE&G's investment in an insurance contract, partially offset by an increase in long-term investments of $23 million. The decrease in 1993 was due primarily to EDHI's decrease in long-term investments of $63 million. (For more details, see Note 7 -- long-term investments and Note 11 -- Leasing Activities - As Lessor of Notes.)
Construction, Investments and Other Capital Requirements Forecast
While the above forecast includes capital costs to comply with revised Federal Clean Air Act (CAA) requirements through 2000, it does not include additional requirements being developed under the CAA by Federal and State agencies. Such additional costs cannot be reasonably estimated at this time. PSE&G believes that such CAA costs would be recoverable from electric customers. In accordance with the proposed Alternative Rate Plan, separate mechanisms would be established to ensure continued recovery of costs associated with activities mandated or approved by state or federal agencies or otherwise out of PSE&G's control.
Internal Generation of Cash from Operations
Enterprise's cash from operations is generated primarily from the operating activities of PSE&G.
Enterprise's cash provided by operations for 1995 increased $261 million to $1.493 billion from 1994. This increase was primarily due to the increase in PSE&G s revenues (partially offset by an increase in accounts receivable and unbilled revenues), an increase in the recovery of electric energy and gas costs through PSE&G's LEAC and LGAC and a decrease in PSE&G s gross receipts taxes. For additional information see Results of Operations.
Enterprise's cash provided by operations for 1994 increased $200 million to $1.232 billion from 1993. This increase was primarily due to the increase in PSE&G's revenues (plus a decrease in accounts receivable and unbilled revenues) and an increase in the recovery of electric energy and gas costs through PSE&G's LEAC and LGAC. For additional information see Results of Operations.
External Financings - PSE&G
In 1995, PSE&G issued $156 million of its First and Refunding Mortgage Bonds (Bonds)/Medium-Term Notes (MTNs) for the purpose of redeeming $56 million of its higher cost Bonds and to pay a portion of its maturing bonds.
In 1995, Partnership issued $60 million of Monthly Income Preferred Securities, the proceeds of which were used to redeem $60 million of PSE&G's Preferred Stock.
The BPU has authorized PSE&G to issue approximately $4.375 billion aggregate amount of additional Bonds/MTNs/Preferred Stock/Monthly Income Preferred Securities through 1997 for refunding purposes. Under its Mortgage, PSE&G may issue new Bonds against retired Bonds and as of December 31, 1995, up to $2.840 billion aggregate amount of new Bonds against previous additions and improvements to utility plant, provided that the ratio of earnings to fixed charges is at least 2:1. At December 31, 1995 the ratio was 2.77:1.
In January 1996, PSE&G issued $350 million of Bonds. In February 1996, the net proceeds from the sale were deposited in an escrow account for the purpose of refunding certain higher cost bonds at their respective first optional redemption dates in November 1996 and February 1997.
The BPU has authorized PSE&G to issue and have outstanding at any one time not more than $1 billion of its short-term obligations, consisting of commercial paper and other unsecured borrowings from banks and other lenders through January 1, 1997. On December 31, 1995, PSE&G had $449 million of short-term debt outstanding.
To provide liquidity for its commercial paper program, PSE&G has a $500 million one year revolving credit agreement expiring in August 1996 and a $500 million five year revolving credit agreement expiring in August 2000 with a group of commercial banks, which provides for borrowing up to one year. On December 31, 1995, there were no borrowings outstanding under these credit agreements. PSE&G expects to be able to renew the credit agreement expiring in 1996.
PSCRC has a $30 million revolving credit facility supported by a PSE&G subscription agreement in an aggregate amount of $30 million which terminates on March 7, 1996. PSCRC is presently in the process of negotiating a one year extension for this facility. As of December 31, 1995, PSCRC had $30 million outstanding under this facility.
PSE&G Fuel Corporation (Fuelco) has a $150 million commercial paper program to finance a 42.49% share of Peach Bottom nuclear fuel, supported by a $150 million revolving credit facility with a group of banks, which expires on June 28, 1996. PSE&G has guaranteed repayment of Fuelco's respective obligations. As of December 31, 1995, Fuelco had commercial paper of $88 million outstanding under such program.
External Financings - EDHI
Funding has a commercial paper program, supported by a commercial bank letter of credit and credit facility, in the amount of $225 million expiring in March 1998. As of December 31, 1995, Funding had $182 million of borrowings outstanding under this commercial paper program.
Additionally, Funding has a $225 million revolving credit facility expiring in March 1998. As of December 31, 1995, Funding had $100 million of borrowings outstanding under this facility.
Capital's MTN program has previously provided for an aggregate principal amount of up to $750 million of MTNs so that its total debt outstanding at any time, including MTNs, would not exceed such amount. Effective January 31, 1995, Capital will not have more than $650 million of debt outstanding at any time. In 1995, Capital repaid $112 million of its MTNs. At December 31, 1995, Capital had total debt outstanding of $478 million, including $355 million of MTNs.
PSE&G
The information required by this item is incorporated herein by reference to the following portions of Enterprise's Management's Discussion and Analysis of Financial Condition and Results of Operations, insofar as they relate to PSE&G and its subsidiaries: Overview; Competition; PSE&G Energy and Fuel Adjustment Clauses; Accounting for Stock Compensation; Corporate Policy for the Use of Derivatives; Nuclear Operations; Results of Operations; Dividends; Liquidity and Capital Resources; Long-Term Investments and Real Estate; Construction; Investments and Other Capital Requirements Forecast; and External Financings.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENT RESPONSIBILITY - ENTERPRISE
Management of Enterprise is responsible for the preparation, integrity and objectivity of the consolidated financial statements and related notes of Enterprise. The consolidated financial statements and related notes are prepared in accordance with generally accepted accounting principles. The financial statements reflect estimates based upon the judgment of management where appropriate. Management believes that the consolidated financial statements and related notes present fairly Enterprise's financial position and results of operations. Information in other parts of this Annual Report is also the responsibility of management and is consistent with these consolidated financial statements and related notes.
The firm of Deloitte & Touche LLP, independent auditors, is engaged to audit Enterprise's consolidated financial statements and related notes and issue a report thereon. Deloitte & Touche's audit is conducted in accordance with generally accepted auditing standards. Management has made available to Deloitte & Touche, all the corporation's financial records and related data, as well as the minutes of directors' meetings. Furthermore, management believes that all representations made to Deloitte & Touche, during its audit were valid and appropriate.
Management has established and maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded, and that transactions are executed in accordance with management's authorization and recorded properly for the prevention and detection of fraudulent financial reporting, so as to maintain the integrity and reliability of the financial statements. The system is designed to permit preparation of consolidated financial statements and related notes in accordance with generally accepted accounting principles. The concept of reasonable assurance recognizes that the costs of a system of internal accounting controls should not exceed the related benefits. Management believes the effectiveness of this system is enhanced by an ongoing program of continuous and selective training of employees. In addition, management has communicated to all employees its policies on business conduct, safeguarding assets and internal controls.
The Internal Auditing Department of PSE&G conducts audits and appraisals of accounting and other operations of Enterprise and its subsidiaries and evaluates the effectiveness of cost and other controls and recommends to management, where appropriate, 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, 1995, the corporation's system of internal accounting controls is adequate to accomplish the objectives discussed herein.
The Board of Directors of Enterprise carries out its responsibility of financial overview through its Audit Committee, which presently consists of six directors who are not employees of Enterprise or any of its affiliates. The Audit Committee meets periodically with management as well as with representatives of the internal auditors and Deloitte & Touche. The Audit Committee reviews the work of each to ensure that its respective responsibilities are being carried out and discusses related matters. Both the internal auditors and Deloitte & Touche periodically meet alone with the Audit Committee and have free access to the Audit Committee, and its individual members, at any time.
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 recommends to management, where appropriate, 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, 1995, the corporation's system of internal accounting controls is adequate to accomplish the objectives discussed herein.
The Board of Directors carries out its responsibility of financial overview through the Audit Committee of Enterprise, which presently consists of six directors who are not employees of Enterprise or any of its affiliates. The Enterprise Audit Committee meets periodically with management as well as with representatives of the internal auditors and Deloitte & Touche. The Audit Committee reviews the work of each to ensure that their respective responsibilities are being carried out and discusses related matters. Both the internal auditors and Deloitte & Touche, periodically meet alone with the Audit Committee and have free access to the Audit Committee, and its individual members, at any time.
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, 1995 and 1994, and the related consolidated statements of income, retained earnings, and cash flows for each of the three years in the period ended December 31, 1995. Our audits also included the consolidated financial statement schedules listed in the Index in Item 14(b)(1). These consolidated financial statements and the consolidated financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and consolidated financial statement schedules 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, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. Also, in our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present 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, 1993, 1992, and 1991, and the related consolidated statements of income, retained earnings and cash flows for the years ended December 31, 1992 and 1991 (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, 1995 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
February 14, 1996 Parsippany, New Jersey
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 & Gas Company and its subsidiaries (the "Company") as of December 31, 1995 and 1994, and the related consolidated statements of income, retained earnings, and cash flows for each of the three years in the period ended December 31, 1995. Our audits also included the consolidated financial statement schedules listed in the Index in Item 14(b)(2). These consolidated financial statements and the consolidated financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and consolidated financial statement schedules 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 & Gas Company and its subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. Also, in our opinion, such consolidated financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present 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, 1993, 1992, and 1991, and the related consolidated statements of income, retained earnings and cash flows for the years ended December 31, 1992 and 1991 (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, 1995 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
February 14, 1996 Parsippany, New Jersey
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS
ASSETS
See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
See Notes to Consolidated Financial Statements.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED STATEMENTS OF 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
Public Service Enterprise Group (Enterprise) has two direct wholly owned subsidiaries, Public Service Electric and Gas Company (PSE&G) and Enterprise Diversified Holdings Incorporated (EDHI). Enterprise's principal subsidiary, PSE&G, is an operating public utility providing electric and gas service to customers in certain areas in the State of New Jersey. As of December 31, 1995, PSE&G comprised 85% of Enterprise's assets and for the year ending on that date, 93% of its revenues. Of the 150,000,000 authorized shares of PSE&G common stock at December 31, 1995, there were 132,450,344 shares outstanding, with an aggregate book value of $2.6 billion.
PSE&G has a finance subsidiary, PSE&G Fuel Corporation (Fuelco), providing financing, unconditionally guaranteed by PSE&G, of up to $150 million aggregate principal amount at any one time of a 42.49% interest in the nuclear fuel acquired for Peach Bottom Atomic Power Station Units 2 and 3 (Peach Bottom). PSE&G also has a subsidiary, Public Service Conservation Resources Corporation (PSCRC) which offers demand side management (DSM) services to utility customers. In 1994, Public Service Electric and Gas Capital, L.P. (Partnership), a limited partnership in which PSE&G is the general partner, was formed for the purpose of issuing Monthly Income Preferred Securities. (See Note 4 -- Schedule of Consolidated Capital Stock and Other Securities.) In 1995, PSE&G created a new subsidiary, Enterprise Ventures and Services, to pursue products and services beyond traditional geographic and industry boundaries.
EDHI is the parent of Enterprise's nonutility businesses: Energy Development Corporation (EDC), an oil and gas exploration and production and marketing company; Community Energy Alternatives Incorporated (CEA), an investor in and developer and operator of cogeneration and independent power production facilities; Public Service Resources Corporation (PSRC), which makes primarily passive investments; and Enterprise Group Development Corporation (EGDC), a nonresidential real estate development and investment business. EDHI also has two finance subsidiaries: PSEG Capital Corporation (Capital) and Enterprise Capital Funding Corporation (Funding).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Consolidation Policy
The consolidated financial statements include the accounts of Enterprise and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications of prior years' data have been made to conform with the current presentation.
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 applications of Generally Accepted Accounting Principles (GAAP) by PSE&G differ 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 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 cost (a regulatory asset) or recognize an obligation (a regulatory liability) if it is probable that, through the rate-making process, there will be a corresponding increase or decrease in revenues. Accordingly, PSE&G has deferred certain costs, which will be amortized over various periods. To the extent that collection of such costs or payment of liabilities is no longer probable as a result of changes in regulation and/or PSE&G's competitive position, the associated regulatory asset or liability will be reversed with a charge or credit to income. (See Note 5 -- Deferred Items.) If PSE&G were to discontinue the application of SFAS 71, the accounting impact would be an extraordinary, non-cash charge to operations that could be material to the financial position and results of operations of Enterprise and PSE&G.
Amounts charged to operations for depreciation expense reflect estimated useful lives and methods, which include estimates of cost of removal and salvage, prescribed and approved by regulators rather than those that might otherwise apply to non-regulated enterprises. PSE&G cannot presently quantify what the financial statement impact may be if depreciation expense were to be determined absent regulation.
Utility Plant and Related Depreciation -- PSE&G
Additions to utility plant and replacements of units of property are capitalized at original cost. The cost of maintenance, repairs and replacements of minor items of property is charged to appropriate expense accounts. At the time units of depreciable property are retired or otherwise disposed of, the original cost less net salvage value is charged to accumulated depreciation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 provisions stated in percentages of original cost of depreciable property were 3.52% in 1995, 3.51% in 1994 and 3.46% in 1993.
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 on 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. In accordance with its filed Alternative Rate Plan, PSE&G has requested to have separate mechanisms to ensure continued recovery of costs associated with activities mandated or approved by state or federal agencies, but no assurances can be given that the BPU will authorize such recovery from customers. (See Note 2 -- Rate Matters and Note 3 -- PSE&G Nuclear Decommissioning and Amortization of Nuclear Fuel - Uranium, Decontamination and Decommissioning Fund.)
Amortization of Nuclear Fuel -- PSE&G
Nuclear energy 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 kilowatthour (KWH) of nuclear generation for spent fuel disposal costs. (See Note 3 -- PSE&G Nuclear Decommissioning and Amortization of Nuclear Fuel.)
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, gas purchased and materials used for gas production. Any under 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.
Long-Term Investments
PSRC has invested in securities and limited partnerships investing in securities, which are recorded at fair value, and various leases and other limited partnerships. EGDC is a participant in the nonresidential real estate markets. CEA is an investor in and developer and operator of cogeneration and power production facilities. (See Note 7 -- Long-Term Investments.)
Derivatives
Gains and losses on hedges of existing assets or liabilities are included in the carrying amounts of those assets and liabilities and are ultimately recognized in income as part of those carrying amounts. Gains and losses related to qualifying hedges of firm commitments or anticipated transactions also are deferred and recognized in income or as adjustments of carrying amounts when the hedged transaction occurs. (See Note 8 -- Financial Instruments and Risk Management.)
Oil and Gas Accounting -- EDC
EDC uses the successful efforts method of accounting under which proved leasehold costs are capitalized and amortized over the proved developed and undeveloped reserves on a unit-of-production basis. Drilling and equipping costs, except exploratory dry holes, are capitalized and depreciated over the proved developed reserves on a unit-of-production basis. Estimated future abandonment costs of offshore proved properties are depreciated on a unit-of-production basis over the proved developed reserves. Estimated future abandonment costs of onshore properties are estimated to be offset by the salvage value of the tangible equipment. Unproved leasehold costs are capitalized and not amortized, pending an evaluation of the exploration results. Unproved leasehold and producing properties costs are assessed periodically to determine if an impairment of the cost of significant individual properties has occurred. The cost of an impairment is charged to expense. Costs incurred for exploratory dry holes, exploratory geological and geophysical work and delay rentals are charged to expense as incurred.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
Enterprise and its subsidiaries file a consolidated Federal income tax return and income taxes are allocated to Enterprise's subsidiaries based on taxable income or loss of each. Investment tax credits are deferred and amortized over the useful lives of the related property, including nuclear fuel.
Effective January 1, 1993, Enterprise and its subsidiaries adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS 109). Under SFAS 109, deferred income taxes are provided 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. For periods prior to January 1, 1993, PSE&G provided deferred income taxes to the extent permitted for rate-making purposes. (See Note 10 -- Federal Income Taxes.)
Allowance for Funds Used During Construction (AFDC) and Capitalized Interest
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 1995, 1994 and 1993 were 6.98%, 6.48% and 6.96%, respectively. These rates were within the limits set by FERC.
EDHI -- The operating subsidiaries of EDHI capitalize interest costs allocable to construction expenditures at the average cost of borrowed funds.
Pension Plan and Other Postretirement Benefits
The employees of PSE&G, other than non represented employees commencing service after January 1, 1996, as well as those of participating affiliates, are covered by a noncontributory trusteed pension plan (Pension Plan) from the date of hire. New represented employees of PSE&G who commence service after January 1, 1996 are covered by a Cash Balance Pension Plan. The policy is to fund pension costs accrued. PSE&G also provides certain health care and life insurance benefits to active and retired employees. The portion of such costs pertaining to retirees amounted to $33 million, $29 million, and $28 million in 1995, 1994 and 1993, respectively. The current cost of these benefits is charged to expense when paid and is currently being recovered from ratepayers.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On January 1, 1993, Enterprise and PSE&G adopted Statement of Financial Accounting Standards No. 106, "Employers Accounting for Postretirement Benefits Other Than Pensions" (SFAS 106), which requires that the expected cost of employees' postretirement health care benefits be charged to expense during the years in which employees render service. Prior to 1993, Enterprise and PSE&G recognized postretirement health care costs in the year in which the benefits were paid. PSE&G elected to amortize over 20 years its unfunded obligation at January 1, 1993. (See Note 13 -- Postretirement Benefits Other Than Pensions and Note 14 -- Pension Plan.)
NOTE 2. RATE MATTERS
Alternative Rate Plan
On January 16, 1996, PSE&G proposed to the BPU major changes in utility regulation that include an immediate $50 million rate reduction for its electric customers, various types of rate freezes, assurances that future price increases related to controllable costs will be lower than the rate of inflation and funding of up to an aggregate of $55 million in two economic development initiatives.
The seven-year "New Jersey Partners in Power" Plan (Plan), if approved, would give PSE&G the mechanisms and incentives to compete more effectively on several fronts, including the ability to develop revenue from non-regulated products and services, accelerate or modify depreciation schedules to help mitigate any potential stranded asset issue and more aggressively manage the control of costs. In addition, the Plan would provide the foundation for ongoing price flexibility without the need for prolonged, adversarial regulatory proceedings.
The Plan begins the process for a transition to a more competitive energy marketplace while substantially shifting the business and financial risks and opportunities involved in this transition away from customers to PSE&G and enhancing PSE&G's ability to make the necessary human, intellectual and financial investments required to stimulate innovation and productivity.
Key energy pricing features of the proposed Plan are as follows:
Upon the BPU's approval of the Plan, PSE&G will reduce electric rates across the board by $50 million annually as an upfront guaranteed share of the productivity improvements that it expects to achieve over the life of the Plan.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
New rates for all PSE&G electric customers reflecting the reduction would be established through a merger of existing base tariffs and the electric Levelized Energy Adjustment Clause (LEAC) and would be frozen at these levels through December 31, 1996. In addition, the Plan proposes the elimination of the BPU's existing Nuclear Performance Standard (NPS). This discontinuance of the LEAC and NPS would result in substantially shifting the risks and opportunities involved in managing changes in fuel and replacement power costs from customers to PSE&G. Gas fuel costs will continue to be recovered on a dollar for dollar basis from customers under the existing Levelized Gas Adjustment Charge (LGAC).
In order to create incentives to lower costs and improve efficiency and productivity, the Plan would rely on a comprehensive external price cap index based upon changes in the Gross Domestic Product Price Index (GDPPI) and a separate fuel price index mechanism, reduced by a fixed productivity offset of 0.30% to establish optional annual price changes each January 1st for electricity. In addition, the Plan would rely on an index for non-fuel gas prices calculated on the basis of changes in the GDPPI, reduced by a fixed productivity offset of 0.35%, to establish optional annual price changes each January 1st. The price cap mechanisms would become effective on January 1, 1997 and would assure that any rate increase related to controllable costs would be below the rate of inflation, guaranteeing that these costs would decline in real terms.
Under the Plan, PSE&G would establish an initial service block equal to the first 150 kilowatthours (KWH) of usage for residential electric customers who would be protected from price cap index increases through December 31, 2002, the proposed expiration date of the Plan. Similarly, an initial service block equal to 40 therms would be set for residential gas customers and protected from index increases over the same period of time. In addition, public street lighting prices would not be subject to index increases for the life of the Plan.
The Plan includes a productivity gains sharing mechanism. This mechanism has been designed to provide incentives to maximize efficiency and productivity improvements and ensure that electric and gas customers receive an increasing share of productivity gains using returns on equity as a proxy for these gains. The gains, which would be awarded through bill credits, would be based on a threshold earnings level defined as PSE&G's established return on equity of 12% plus a 100 basis points neutral zone above that level. Customers would receive a 10% share of the gains from the first 50 basis points above the threshold level. Their share would increase by an additional 10% for each subsequent increase of 50 basis points up to a maximum of 50%.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Separate mechanisms also would be established to ensure continued recovery of costs associated with activities mandated or approved by state or federal agencies or otherwise out of PSE&G's control. These costs include demand side management programs, environmental remediation, costs associated with non-utility electric generators, nuclear decommissioning funding and nuclear fuel assessment costs. These mechanisms would assure that PSE&G recovers only actual costs related to these activities.
The Plan would allow for electric and non-fuel gas prices to be changed to reflect exogenous events beyond the control of PSE&G and would be subject to modification for industry restructuring.
The Plan calls for an increase of $50 million in annual depreciation expenses for PSE&G's Hope Creek nuclear generating station -- $25 million effective January 1, 1997, and an additional $25 million effective January 1, 1998. In addition, the Plan proposes a transfer of depreciation reserves totaling $253 million from transmission and distribution to fossil steam electric generating accounts. The Plan would permit depreciation to be changed annually following BPU review and approval.
In addition to the pricing features, the Plan guarantees enhanced quality of customer services through PSE&G's recently established service guarantee program for electric and gas customers and specific incentive and penalty mechanisms based on various service indicators.
The Plan would establish a program of rewards and penalties in key overall service indicators such as duration of customer power outages compared to a historic five-year average.
In addition to these service quality incentives, the Plan would establish rewards and penalties based on the movement of PSE&G's average electric residential rate measured against the national average of residential electric rates. Rewards or penalties of up to $5 million would be implemented if comparisons indicate that PSE&G's residential rates decreased or increased by more than one-half of one percent relative to the national average.
A major component of the Plan is a proposed economic and market development and retention assurance program. This would allow flexible pricing and promote special economic development activities designed to enhance the economic vitality of the State of New Jersey. One aspect of the program would give PSE&G the ability to quickly establish new optional electric or gas rates or individual customer contracts to serve new markets and retain or attract individual customers.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Also under the Plan, PSE&G would fund two economic development initiatives. The first is a private sector leadership investment of $5 million in the New Jersey Fund for Community Economic Development. The second new initiative is the establishment of the PSE&G Economic Development Fund in which PSE&G would commit to investing up to $50 million for financing significant economic development projects within PSE&G's service territory over the seven years of the Plan.
In addition, the Plan calls for establishment of a State Emissions Trading Bank (Bank) for economic development and environmental improvement. PSE&G would donate 1,000 tons of nitrogen oxide emissions credits to the Bank for use in economic development. This is intended as a key step to linking economic development with sound environmental policy and building on New Jersey's leadership role in seeking a regional solution to air pollution problems.
Under the Plan, price levels associated with the recovery of Gross Receipts and Franchise Tax (GRFT) or successor taxes will be directly adjusted in such a manner as to insure their full and timely recovery from ratepayers.
PSE&G cannot predict what action, if any, may be taken by the BPU with respect to the Plan.
Levelized Gas Adjustment Charge
On October 2, 1995, PSE&G petitioned the BPU for modifications to its LGAC, requesting that:
(a) The LGAC be renamed to the Levelized Gas Incentive Clause (LGIC);
(b) A benchmark be established for certain gas delivered from the Gulf Coast, and any difference between PSE&G's actual gas purchase costs and the benchmark price, either positive or negative, be shared 50/50 between customers and PSE&G;
(c) The current annual LGAC rate be converted to a monthly rate for firm commercial and industrial customers; and
(d) A fixed annual margin would be credited to LGAC for certain interruptible rate schedules, while actual margins from such sales will be retained by PSE&G. Any differences, positive or negative, will be absorbed by PSE&G.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On December 20, 1995, the BPU approved an interim Stipulation to include the implementation of monthly pricing on the commodity portion of the LGAC rate for firm commercial and industrial customers effective January 1, 1996. The incentive proposal relating to interruptible sales (request (d)) above was withdrawn. The remaining aspects of PSE&G's October 2, 1995 petition remain the subject of continued investigation and litigation.
Electric Levelized Energy Adjustment Clause
By Order dated May 5, 1995, the BPU approved PSE&G's LEAC. Such Order also required that a hearing be convened regarding the April 1994 Salem 1 shutdown, to determine whether PSE&G should be allowed to recover replacement power costs of approximately $8 million which have been deferred. On October 18, 1995, this matter was ordered to be transmitted to the Office of Administrative Law (OAL) for hearing. PSE&G cannot predict the outcome of this proceeding.
Remediation Adjustment Charge
On July 21, 1995, PSE&G petitioned the BPU to recover Remediation Program costs incurred during the period August 1, 1994 through July 31, 1995. In accordance with a BPU Order dated November 4, 1994, the petition proposes to recover, effective October 1, 1995, $2.5 million from gas customers and $1.6 million from electric customers.
Consolidated Tax Benefits
In a case affecting another utility in which neither Enterprise nor PSE&G were parties, the BPU considered the extent to which tax savings generated by nonutility affiliates included in the consolidated tax return of that utility's holding company should be considered in setting that utility's rates. In September, 1992, the BPU approved an order in such case treating certain consolidated tax savings generated after June 30, 1990 by that utility's nonutility affiliates as a reduction of its rate base. In December, 1992, the BPU issued an order approving a stipulation in PSE&G's 1992 base rate proceeding which resolved the case without separate quantification of the consolidated tax issue. The stipulation did not provide final resolution of the consolidated tax issue for any subsequent base rate filing. While Enterprise continues to account for its two wholly-owned subsidiaries on a stand-alone basis, resulting in a realization of the tax benefits by the entity generating the benefit, an ultimate unfavorable resolution of the consolidated tax issue could reduce PSE&G's and Enterprise's future revenue and net income. In addition, an unfavorable resolution
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
may adversely impact Enterprise's nonutility investment strategy. Enterprise believes that PSE&G's taxes should be treated on a stand-alone basis for rate-making purposes, based on the separate nature of the utility and nonutility businesses. However, neither Enterprise nor PSE&G is able to predict what action, if any, the BPU may take concerning consolidation of tax benefits in future rate proceedings. (See Note 10 -- Federal Income Taxes.)
Other Rate Matters
On July 21, 1995, the BPU initiated a generic proceeding to expeditiously adopt specific standards to guide utility "off-tariff" negotiated rate agreement programs, which proceeding would consider minimum prices, confidentiality, maximum contract duration, filing requirements and such other standards as necessary for compliance with the law. A Written Summary Decision and Order was issued on October 27, 1995, which ordered each New Jersey electric utility, including PSE&G, to file initial minimum tariffs, consistent with the terms of such Order, and further, indicated that such Order will be supplemented by a Final Decision and Order to fully discuss and explain the rationale for the BPU's overall decision. On November 13, 1995 PSE&G filed its compliance filing. PSE&G cannot predict what impact, if any, the generic tariff may have on its electric revenues and earnings.
In September 1994, the BPU initiated a generic proceeding regarding recovery of capacity costs associated with electric utility power purchases from cogeneration and small power procedures. The initial phase of the proceeding, which has been transmitted to the Office of Administrative Law, seeks to determine whether there was any such overrecovery and, if so, the amount overrecovered.
The New Jersey Division of Ratepayer Advocate has intervened in the proceeding and alleges, among other things, that PSE&G has overrecovered such costs ranging from $250 to $300 million during the period from August 1991 to December 1994. PSE&G denies such overrecovery because its capacity cost recovery mechanisms were approved by the BPU as to each of its cogeneration contracts and as to its base rates. Additionally, PSE&G contends that a review of any individual cost item is inappropriate and that the BPU has previously found that, during the period under review, PSE&G did not overearn compared to its established return. Moreover, PSE&G contends that the Ratepayer Advocate's assertion is proscribed as retroactive ratemaking.
While PSE&G cannot predict the outcome of this proceeding, the final resolution of this issue may impact the financial position, results from operations or net cash flows of Enterprise and PSE&G on a prospective basis.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. PSE&G NUCLEAR DECOMMISSIONING AND AMORTIZATION OF NUCLEAR FUEL
The BPU decision in PSE&G's 1992 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 all 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 of its nuclear units. The Internal Revenue Service (IRS) has ruled that payments to the trust are tax deductible. PSE&G's total estimated cost of decommissioning its share of these 5 nuclear units is estimated at $681 million in year-end 1990 dollars (the year that the site specific estimate was prepared), excluding contingencies. The 1992 base rate decision provided that $15.6 million of such costs are to be collected through base rates and an additional annual amount of $7.0 million in 1993 and $14 million each year thereafter are to be recovered through PSE&G's LEAC. In accordance with the filed Alternative Rate Plan, PSE&G has requested to have separate mechanisms to ensure continued recovery of costs associated with activities mandated or approved by state or federal agencies, but no assurances can be given that the BPU will authorize such recovery from customers (see Note 2 -- Rate Matters). At December 31, 1995 and 1994, the accumulated provision for depreciation and amortization included reserves for nuclear decommissioning for PSE&G's units of $292 million and $249 million, respectively. As of December 31, 1995 and 1994, PSE&G had contributed $220 million and $190 million, respectively, into independent external qualified and nonqualified nuclear decommissioning trust funds.
On January 3, 1996, PSE&G filed with the BPU its 1995 nuclear plant decommissioning cost update. The filing includes decommissioning cost updates for PSE&G's respective ownership share of Salem, Hope Creek and Peach Bottom. PSE&G's filing was based on the existing Nuclear Regulatory Commission (NRC) generic formula(s). PSE&G does not believe that the NRC generic estimates provide an accurate estimate of the cost of decommissioning because the NRC formula does not factor into its cost estimates the cost of removal of nonradiological structures and equipment and interim spent fuel storage installations. PSE&G is currently completing site specific studies in order to update its filing with the BPU during 1996.
The Staff of the Securities and Exchange Commission (SEC) has questioned certain of the current accounting practices of the electric utility industry, including PSE&G, regarding the recognition, measurement and classification of decommissioning costs for nuclear generating stations in the financial statements of electric utilities. In response to these questions, the Financial Accounting Standards Board (FASB) has agreed to review the accounting for removal costs,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
including decommissioning. If current electric utility industry accounting practices for such decommissioning are changed: (1) annual provisions for decommissioning could 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.
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 enrichment services from the United States Department of Energy (DOE) Uranium Enrichment Enterprise (now a federal government corporation known as the United States Enrichment Corporation (USEC)). 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 $67 million (adjusted for inflation). Since 1993, PSE&G has paid $17 million, resulting in a balance due of $50 million. PSE&G has deferred the expenditures incurred to date as part of deferred underrecovered electric energy costs and expects to recover its costs in the next LEAC. In accordance with the filed Alternative Rate Plan, PSE&G has requested to have separate mechanisms to ensure continued recovery of costs associated with activities mandated or approved by state or federal agencies, but no assurances can be given that the BPU will authorize such recovery from customers (see Note 2 -- Rate Matters).
Spent Nuclear Fuel Disposal Costs
In accordance with the Nuclear Waste Policy Act (NWPA), PSE&G has entered into contracts with the DOE for the disposal of spent nuclear fuel. Payments made to the DOE for disposal costs are based on nuclear generation and are included in Fuel for Electric Generation and Interchanged Power in the Statements of Income. These costs are recovered through the LEAC. In accordance with the filed Alternative Rate Plan, PSE&G has requested to have separate mechanisms to ensure continued recovery of costs associated with activities mandated or approved by state or federal agencies, but no assurances can be given that the BPU will authorize such recovery from customers (see Note 2 -- Rate Matters).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. SCHEDULE OF CONSOLIDATED CAPITAL STOCK AND OTHER SECURITIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5. DEFERRED ITEMS
Property Abandonments
Under (Over) Recovered Electric Energy and Gas Costs -- net
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Unrecovered Plant and Regulatory Study Costs
Amounts shown in the consolidated balance sheets consist of costs associated with developing, consolidating and documenting the specific design basis of PSE&G's jointly owned nuclear generating stations, as well as PSE&G's share of costs associated with the cancellation of the Hydrogen Water Chemistry System Project (HWCS Project) at Peach Bottom. PSE&G has received both BPU and FERC approval to defer and amortize, over the remaining life of the Salem and Hope Creek nuclear units, costs associated with configuration baseline documentation and the canceled HWCS Project. PSE&G has received FERC approval to defer and amortize over the remaining life of the applicable Peach Bottom units, costs associated with the configuration baseline documentation and the canceled HWCS Project. In accordance with the filed Alternative Rate Plan, PSE&G has requested to have separate mechanisms to ensure continued recovery of costs associated with activities mandated or approved by state or federal agencies or otherwise out of PSE&G's control (see Note 2 -- Rate Matters).
Unamortized Debt Expense
Gains and losses and the costs of issuing and redeeming long-term debt for PSE&G are deferred and amortized over the life of the applicable debt.
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. At December 31, 1995 and 1994, the remaining balance to be amortized was $36.1 million and $41.2, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. SCHEDULE OF CONSOLIDATED DEBT
LONG-TERM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTES:
(A) PSE&G's Mortgage, securing the Bonds, constitutes a direct first mortgage lien on substantially all PSE&G'S property and franchises.
(B) The aggregate principal amounts of mandatory requirements for sinking funds and maturities for each of the five years following December 31, 1995 are as follows:
SHORT-TERM (Commercial Paper and Loans)
Commercial paper represents unsecured bearer promissory notes sold through dealers at a discount with a term of nine months or less.
Bank loans represent PSE&G's unsecured promissory notes issued under informal credit arrangements with various banks and have a term of eleven months or less.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9. CASH AND CASH EQUIVALENTS
The December 31, 1995 and 1994 balances consist primarily of working funds and highly liquid marketable securities (commercial paper) with a maturity of three months or less.
NOTE 10. FEDERAL INCOME TAXES
A reconciliation of reported Net Income with pretax income and of Federal income tax expense with the amount computed by multiplying pretax income by the statutory Federal income tax rate of 35% is as follows:
Reconciliation between total Federal 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:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Between the years 1987 and 1994, Enterprise's Federal alternative minimum tax (AMT) liability exceeded its regular Federal income tax liability. This excess can be carried forward indefinitely to offset regular income tax liability in future years. Enterprise commenced using these AMT credits in 1995 and expects to continue using them in future years as regular tax liability exceeds AMT. As of December 31, 1995, 1994 and 1993, Enterprise had AMT credits of $203 million, $256 million and $247 million, respectively.
Since 1986, Enterprise has filed a consolidated Federal income tax return on behalf of itself and its subsidiaries. Prior to 1986, PSE&G filed consolidated tax returns. In March, 1992, the Internal Revenue Service (IRS) issued a Revenue Agent's Report (RAR) following completion of examination of PSE&G's consolidated tax return for 1985 and Enterprise's consolidated tax returns for 1986 and 1987, proposing various adjustments for such years which would increase Enterprise's consolidated Federal income tax liability by approximately $121 million, exclusive of interest and penalties, of which approximately $118 million is attributable to PSE&G. Interest after taxes on these proposed adjustments is currently estimated to be approximately $119 million as of December 31, 1995 and will continue to accrue at the Federal rate for large corporate underpayments, currently 11% annually.
The most significant of these proposed adjustments relates to the IRS contention that PSE&G's Hope Creek nuclear unit is a partnership with a short 1986 taxable year. In addition, the IRS contends that the tax in-service date of that unit is four months later than the date claimed by PSE&G. In June 1992, Enterprise and PSE&G filed a protest with the IRS disagreeing with certain of the proposed adjustments (including those related to Hope Creek) contained in the RAR for taxable years 1985 through 1987 and continue to contest these issues. Any tax adjustments resulting from the RAR would reduce Enterprise's and PSE&G's respective deferred credits for accumulated deferred income taxes. While PSE&G believes that assessments attributable to it are generally recoverable from its customers in rates, no assurances can be given as to what regulatory treatment may be afforded by the BPU.
On January 1, 1993, Enterprise adopted SFAS 109 without restating prior years' financial statements which resulted in Enterprise recording a $5.4 million cumulative effect increase in its net income. Under SFAS 109, deferred taxes are provided 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. Since management believes that it is probable that the effects of SFAS 109 on PSE&G, principally the accumulated tax benefits that previously have been treated as a flow-through item to customers, will be recovered from utility customers in the future, an offsetting regulatory asset was established. As of December 31, 1995, PSE&G had recorded a deferred tax liability and an offsetting regulatory asset of $769 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 1995 Federal income tax rate of 35%.
SFAS 109
The following is an analysis of accumulated deferred income taxes:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11. LEASING ACTIVITIES
As Lessee
The Consolidated Balance Sheets include assets and related obligations applicable to capital leases under which PSE&G is a lessee. The total amortization of the leased assets and interest on the lease obligations equals the net minimum lease payments included in rent expense for capital leases.
Capital leases of PSE&G relate primarily to its corporate headquarters and other capital equipment. Certain of the leases contain renewal and purchase options and also contain escalation clauses.
Enterprise and its other subsidiaries are not lessees in any capitalized leases.
Utility plant includes the following amounts for capital leases at December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As Lessor
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12. COMMITMENTS AND CONTINGENT LIABILITIES
Nuclear Performance Standard
The BPU has established its NPS for nuclear generating stations owned by New Jersey electric utilities, including the five nuclear units in which PSE&G has an ownership interest: Salem Units 1 and 2 - -- 42.59%; Hope Creek -- 95%; and Peach Bottom Units 2 and 3 -- 42.49%. PSE&G operates Salem and Hope Creek, while Peach Bottom is operated by PECO Energy, Inc. (PECO).
The penalty/reward under the NPS is a percentage of replacement power costs. (See table below.)
Under the NPS, the capacity factor is calculated annually using maximum dependable capability of the five nuclear units in which PSE&G owns an interest. This method takes into account actual operating conditions of the units.
While the NPS does not specifically have a gross negligence provision, the BPU has indicated that it would consider allegations of gross negligence brought upon a sufficient factual basis. A finding of gross negligence could result in penalties other than those prescribed under the NPS. During 1995, the five nuclear units in which PSE&G has an ownership interest aggregated a 62% combined capacity factor which resulted in a penalty for 1995 of approximately $3.5 million. On January 16, 1996, PSE&G filed its Alternative Rate Plan with the BPU which proposes the elimination of the NPS. See Note 2.
Based upon current projections and assumptions regarding PSE&G's five nuclear units during 1996, including the return of Hope Creek to service in early March, the return of Salem 2 in the third quarter and
the continued outage of Salem 1 for the remainder of the year, the 1996 aggregate capacity factor would be approximately 57%, which would result in a penalty ranging from $11 to $12 million. Both of the Salem units are currently out of service and their return dates are subject to completion of testing, analysis, repair activity and NRC concurrence that they are prepared to restart. Restart of Salem 1, which had originally been scheduled for the second quarter of 1996, will be delayed for a substantial period as a result of the ongoing steam generator inspection and analysis. Salem 2, which is also undergoing steam generator inspection and analysis is still scheduled to return to service in the third quarter of 1996. The inability to successfully return these units to continuous, safe operation could have a material effect on the financial position, results of operation and net cash flows of Enterprise and PSE&G.
Certain of the owners of Salem have indicated that they may seek to hold PSE&G responsible for their share of costs of the current outage. PSE&G cannot predict what actions, if any, may be taken.
Nuclear Insurance Coverages and Assessments
PSE&G's insurance coverages and maximum retrospective assessments for its nuclear operations are as follows:
(A) Retrospective premium program under the Price-Anderson liability provisions of the Atomic Energy Act of 1954, as amended (Price- Anderson). Subject to retrospective assessment with respect to loss from an incident at any licensed nuclear reactor in the United States. Assessment adjusted for inflation effective August 20, 1993.
(B) Limit of liability for each nuclear incident under Price- Anderson.
(C) Industry aggregate limit representing the potential liability from workers claiming exposure to the hazard of nuclear radiation. This policy includes automatic reinstatements up to an aggregate of $200 million, thereby providing total coverage of $400 million. This policy does not increase PSE&G's obligation under Price- Anderson.
(D) In the event of a second industry loss triggering NEIL II - coverage, the maximum retrospective premium assessment can increase to $18.5 million.
(E) Represents limit of coverage available to co-owners of Salem and Hope Creek, for each plant. Each co-owner purchases its own policy. PSE&G is currently covered for its percent ownership interest of this limit for each plant.
Price-Anderson sets the "limit of liability" for claims that could arise from an incident involving any licensed nuclear facility in the nation. The "limit of liability" is based on the number of licensed nuclear reactors and is adjusted at least every five years based on the Consumer Price Index. The current "limit of liability" is $8.9 billion. All utilities owning a nuclear reactor, including PSE&G, have provided for this exposure through a combination of private insurance and mandatory participation in a financial protection pool as established by Price-Anderson. Under Price- Anderson, each party with an ownership interest in a nuclear reactor can be assessed its share of $79.3 million per reactor per incident, payable at $10 million per reactor per incident per year. If the damages exceed the "limit of liability," the President is to submit to Congress a plan for providing additional compensation to the injured parties. Congress could impose further revenue raising measures on the nuclear industry to pay claims. PSE&G's maximum aggregate assessment per incident is $210.2 million (based on PSE&G's ownership interests in Hope Creek, Peach Bottom and Salem) and its maximum aggregate annual assessment per incident is $26.5 million.
Further, a recent decision by the U.S. Court of Appeals for the Third Circuit, not involving PSE&G, held that the Price Anderson Act did not preclude awards based on state law claims for punitive damage.
PSE&G is a member of two industry mutual insurance companies; Nuclear Mutual Limited (NML), and Nuclear Electric Insurance Limited (NEIL). NML provides the primary property insurance at Salem and Hope Creek. NEIL provides excess property insurance through its NEIL II and NEIL III policies and replacement power coverage through its NEIL I policy. Both companies 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 of the policies also 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. All coverages at Salem and Hope Creek remain fully in effect.
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, changes in the scheduled retirement dates of existing facilities, changes in business strategies, site changes, cost escalations under construction contracts, requirements of regulatory authorities and laws, the timing of and amount of electric and gas rate changes and the ability of PSE&G to raise necessary capital. Pursuant to an electric integrated resource plan (IRP), PSE&G periodically reevaluates its forecasts of future customers, load and peak growth, sources of electric generating capacity and demand side management (DSM) to meet such projected growth, including the need to construct new electric generating capacity. The IRP takes into account assumptions concerning future demands of customers, effectiveness of conservation and load management activities, the long-term condition of PSE&G's plants, capacity available from electric utilities and other suppliers and the amounts of co-generation and other non-utility capacity projected to be available.
Based on PSE&G's construction program, construction expenditures are expected to aggregate approximately $2.8 billion, which includes $428 million for nuclear fuel and $84 million of Allowance for Funds used During Construction (AFDC) during the years 1996 through 2000. 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 internally the funds necessary to satisfy its construction expenditures over the next five years, assuming adequate and timely recovery of costs, as to which no assurances can be given. In addition, PSE&G does not presently anticipate any difficulties in obtaining sufficient sources of fuel for electric generation or adequate gas supplies during the years 1996 through 2000.
Hazardous Waste
Certain Federal and State laws authorize the United States 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 take investigative and remedial actions at any site that is determined to present an imminent and substantial danger to the public or the environment because of an actual or threatened release of one or more hazardous substances. Because of the nature of PSE&G's business, including the production of electricity, the distribution of gas and, formerly, the manufacture of gas, various by-products and substances are or were produced or handled which contain constituents classified as hazardous. PSE&G generally provides for the disposal or processing of such substances through licensed independent contractors. However, these statutory provisions impose joint and several responsibility without regard to fault on all responsible parties, including the generators of the hazardous substances, for certain investigative and remediation costs at sites where these substances were disposed of or processed. PSE&G has been notified with respect to a number of such sites and the remediation of these potentially hazardous sites is receiving greater attention from the government agencies involved. Generally, actions directed at funding such site investigations and remediation include all suspected or known responsible parties. PSE&G does not expect its expenditures for any such site to have a material effect on its financial position, results of operations or net cash flows.
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 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 (Remediation Program). The Remediation Program is periodically reviewed and revised by PSE&G based on regulatory requirements, experience with the Remediation Program and available technologies. The cost of the Remediation Program cannot be reasonably estimated, but experience to date indicates that costs of at least $20 million per year could be incurred over a period of more than 30 years and that the overall cost could be material to PSE&G's financial position, results of operations or net cash flows.
Costs incurred through December 31, 1995 for the Remediation Program amounted to $64.6 million, net of certain insurance proceeds. In addition, at December 31, 1995, PSE&G's estimated liability for remediation costs through 1998 aggregated $96.3 million.
In accordance with a Stipulation approved by the BPU in 1992, PSE&G is recovering through its LEAC over a six-year period $32 million of its actual remediation costs to reflect costs incurred through September 30, 1992. As of December 31, 1995, PSE&G has recovered $27.8 million of the $32 million of such costs. PSE&G is expected to recover the balance of $4.2 million in its currently filed LGAC period ending in 1996.
NOTE 13. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
On January 1, 1993, Enterprise and PSE&G adopted SFAS 106 which requires that the expected cost of employees' postretirement health care and insurance benefits be charged to expense during the years in which employees render service. PSE&G elected to amortize, over 20 years, its unfunded obligation of $609.3 million at January 1, 1993. The following table discloses the significant components of the net periodic postretirement benefit obligation:
(a) Reflects change in Plan Assumptions.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The discount rate used in determining the PSE&G net periodic postretirement benefit cost was 8.50% and 7.25% for 1995 and 1994, respectively.
A one-percentage-point increase in the assumed health care cost trend rate for each year would increase the aggregate of the service and interest cost components of net periodic postretirement health care cost by approximately $2.6 million, or 5.6%, and increase the accumulated postretirement benefit obligation as of December 31, 1995 by $34.8 million, or 5.9%.
The assumed health care cost trend rates used in measuring the accumulated postretirement benefit obligation in 1995 were: medical costs for pre-age sixty-five retirees -- 13.0%, medical costs for post-age sixty-five retirees -- 9.0% and dental costs -- 7.0%; such rates are assumed to gradually decline to 5.0%, 5.0% and 5.0%, respectively, in 2011. The medical costs above include a provision for prescription drugs.
In its 1992 base rate case, PSE&G requested full recovery of the costs associated with postretirement benefits other than pensions (OPEB) on an accrual basis, in accordance with SFAS 106. The BPU's December 31, 1992 base rate order provided that (1) PSE&G's pay-as-you-go basis OPEB costs will continue to be included in cost of service and will be recoverable in base rates on a pay-as-you-go basis; (2) prudently incurred OPEB costs, that are accounted for on an accrual basis in accordance with SFAS 106, will be recoverable in future rates; (3) PSE&G should account for the differences between its OPEB costs on an accrual basis and the pay-as-you-go basis being recovered in rates as a regulatory asset; and (4) the issue of cash versus accrual accounting will be revisited and in the event that FASB or the SEC requires the use of accrual accounting for OPEB costs for rate-making purposes, the regulatory asset will be recoverable, through rates, over an appropriate amortization period.
Accordingly, PSE&G is accounting for the differences between its SFAS 106 accrual cost and the cash cost currently recovered through rates as a regulatory asset. OPEB costs charged to expenses during 1995 were $32.6 million and accrued OPEB costs deferred were $50.7 million. The amount of the unfunded liability, at December 31, 1995, as shown below, is $717.9 million and funding options are currently being explored. The primary effect of adopting SFAS 106 on Enterprise's and PSE&G's financial reporting is on the presentation of their financial positions with minimal effect on their results of operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During January 1993 and subsequent to the receipt of the Order, the FASB's Emerging Issues Task Force (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 for financial reporting purposes, with any cost deferrals recovered in approximately twenty years. In accordance with the Alternative Rate Plan filed, PSE&G expects full SFAS 106 recovery in accordance with the EITF's view of such standard and believes that it is probable that any deferred costs will be recovered from utility customers within such twenty-year time period. As of December 31, 1995, PSE&G has deferred $167.2 million of such costs. However, if recovery of SFAS 106 costs is not approved by the BPU , the impact on the financial position and results of operations would be material.
In accordance with SFAS 106 disclosure requirements, a reconciliation of the funded status of the plan is as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14. PENSION PLAN
The discount rates, expected long-term rates of return on assets and average compensation growth rates used in determining the Pension Plan's funded status and net pension cost as of December 31, 1995 and 1994 were as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table shows the Pension Plan's funded status:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15. FINANCIAL INFORMATION BY BUSINESS SEGMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED)
NOTE 16. PROPERTY IMPAIRMENT OF ENTERPRISE GROUP DEVELOPMENT CORPORATION
As a result of a management review of each property's current value and the potential for increasing such value through operating and other improvements, EGDC recorded an impairment in 1993 related to certain of its properties, including properties upon which EDHI's management revised its intent from a long-term investment strategy to a hold for sale status, reflecting such properties on its books at their net realizable value. This impairment reduced the estimated value of EGDC's properties by $77.6 million and 1993 net income by $50.5 million, after tax, or 21 cents per share of Enterprise Common Stock.
NOTE 17. JOINTLY OWNED FACILITIES -- UTILITY PLANT
PSE&G has ownership interests in and is responsible for providing its share of the necessary financing for the following jointly owned facilities. All amounts reflect the share of PSE&G's jointly owned projects and the corresponding direct expenses are included in Consolidated Statements of Income as operating expenses. (See Note 1 -- Organization and Summary of Significant Accounting Policies.)
NOTE 18. SELECTED QUARTERLY DATA (UNAUDITED)
The information shown below, in the opinion of Enterprise, includes all adjustments, consisting only of normal recurring accruals, necessary to a fair presentation of such amounts. Due to the seasonal nature of the utility business, quarterly amounts vary significantly during the year.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PSE&G
Except as modified below, the Notes to Consolidated Financial Statements of Enterprise are incorporated herein by reference insofar as they relate to PSE&G and its subsidiaries:
Note 1. - Organization and Summary of Significant Accounting Policies Note 2. - Rate Matters Note 3. - PSE&G Nuclear Decommissioning and Amortization of Nuclear Fuel Note 4.- Schedule of Consolidated Capital Stock and Other Securities Note 5. - Deferred Items Note 6. - Schedule of Consolidated Debt Note 7. - Long-Term Investments Note 8. - Financial Instruments and Risk Management Note 11.- Leasing Activities -- As Lessee Note 12.- Commitments and Contingent Liabilities Note 13.- Postretirement Benefits Other Than Pensions Note 14.- Pension Plan Note 15.- Financial Information by Business Segments Note 17.- Jointly Owned Facilities -- Utility Plant
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation Policy
The consolidated financial statements include the accounts of PSE&G and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications of prior years' data have been made to conform with the current presentation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9. CASH AND CASH EQUIVALENTS
The December 31, 1995 and 1994 balances consist primarily of working funds.
NOTE 10. FEDERAL INCOME TAXES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SFAS 109
The following is an analysis of accumulated deferred income taxes:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED)
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.
NOTE 19. ACCOUNTS PAYABLE TO ASSOCIATED COMPANIES -- NET
The balance at December 31, 1995 and 1994 consisted of the following:
PART III
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Enterprise and PSE&G, none.
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
DIRECTORS OF THE REGISTRANTS
Enterprise
The information required by Item 10 of Form 10-K with respect to present directors who are nominees for election as directors at Enterprise's Annual Meeting of Stockholders to be held on April 16, 1996, and directors whose terms will continue beyond the meeting, is set forth under the heading "Election of Directors" in Enterprise's definitive Proxy Statement for such Annual Meeting of Stockholders, which definitive Proxy Statement is expected to be filed with the Securities and Exchange Commission on or about March 1, 1996 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 16, 1996, 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, see Part I - Business, Item 3 - Legal Proceedings.
LAWRENCE R. CODEY has been a director since 1988. Age 51. Member of Executive Committee. Has been President and Chief Operating Officer of PSE&G since September 1991. Was Senior Vice President - Electric of PSE&G from January 1989 to September 1991. Director of Enterprise. Director of Sealed Air Corporation, The Trust Company of New Jersey, United Water Resources Inc. and Blue Cross & Blue Shield of New Jersey.
E. JAMES FERLAND has been a director since 1986. Age 54. Chairman of Executive Committee. Chairman of the Board, President and Chief Executive Officer of Enterprise since July 1986, Chairman of the Board and Chief Executive Officer of PSE&G since September 1991 and Chairman of the Board and Chief Executive Officer of EDHI since June 1989. President of PSE&G from July 1986 to September 1991. Director of Enterprise and of EDHI and its principal subsidiaries. Director of Foster Wheeler Corporation and The Hartford Steam Boiler Inspection and Insurance Company.
RAYMOND V. GILMARTIN has been a director since 1993. Age 55. Director of Enterprise. Has been Chairman of the Board, President and Chief Executive Officer of Merck & Co., Inc., Whitehouse Station, New Jersey (discovers, develops, produces and markets human and animal health products) since November 1994. Was President and Chief Executive Officer from June 1994 to November 1994. Was Chairman of the Board, President and Chief Executive Officer of Becton Dickinson and Company from November 1992 to June 1994 and President and Chief Executive Officer from February 1989 to November 1992. Director of Merck & Co., Inc. and Providian Corporation.
IRWIN LERNER has been a director since 1993. Age 65. Was previously a director from 1981 to February 1988. Director of Enterprise. Was Chairman, Board of Directors and Executive Committee from January 1993 to September 1993 and President and Chief Executive Officer from 1980 to December 1992 of Hoffmann-La Roche Inc., Nutley, New Jersey (prescription pharmaceuticals, vitamins and fine chemicals, and diagnostic products and services). Director of Humana Inc., Sequana Therapeutics, Inc. and Medarex, Inc.
JAMES C. PITNEY has been a director since 1993. Age 69. Was previously a director from 1979 to February 1988. Member of Executive Committee. Director of Enterprise. Has been a partner in the law firm of Pitney, Hardin, Kipp & Szuch, Morristown, New Jersey, since 1958. Director of Tri-Continental Corporation, sixteen funds of the Seligman family of funds and Seligman Quality, Inc.
FORREST J. REMICK has been a director since May 1995. Age 65. Director of Enterprise. Has been an engineering consultant since July 1994. Was Commissioner, United States Nuclear Regulatory Commission, from December 1989 to June 1994. Was Associate Vice President - Research and Professor of Nuclear Engineering at Pennsylvania State University, from 1985 to 1989.
Executive Officers of the Registrants
The following table sets forth certain information concerning the executive officers of Enterprise and PSE&G, respectively.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
ENTERPRISE
The information required by Item 11 of Form 10-K is set forth under the heading "Executive Compensation" in Enterprise's definitive Proxy Statement for the Annual Meeting of Stockholders to be held April 16, 1996, which definitive Proxy Statement is expected to be filed with the Securities and Exchange Commission on or about March 1, 1996 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, 1995 is set forth below. Amounts shown were paid or awarded for all services rendered to Enterprise and its subsidiaries and affiliates including PSE&G.
SUMMARY COMPENSATION TABLE
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR (1995) AND FISCAL YEAR-END OPTION VALUES (12/31/95)
Compensation Pursuant to Pension Plans
PENSION PLAN TABLE
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 Date: February 22, 1996 and Chief Executive Officer
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.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PUBLIC SERVICE ELECTRIC AND GAS COMPANY
By E. JAMES FERLAND ------------------------------- E. James Ferland Chairman of the Board and Chief Executive Officer Date: February 22, 1996
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.
EXHIBIT INDEX
Certain Exhibits previously filed with the Commission and the appropriate securities exchanges are indicated as set forth below. Such Exhibits are not being refiled, but are included because inclusion is desirable for convenient reference.
(a) Filed by PSE&G with Form 8-A under the Securities Exchange Act of 1934, on the respective dates indicated, File No. 1-973.
(b) Filed by PSE&G with Form 8-K under the Securities Exchange Act of 1934, on the respective dates indicated, File No. 1-973.
(c) Filed by PSE&G with Form 10-K under the Securities Exchange Act of 1934, on the respective dates indicated, File No. 1-973.
(d) Filed by PSE&G with Form 10-Q under the Securities Exchange Act of 1934, on the respective dates indicated, File No. 1-973.
(e) Filed by Enterprise with Form 10-K under the Securities Exchange Act of 1934, on the respective dates indicated, File No. 1-9120.
(f) Filed with registration statement of PSE&G under the Securities Exchange Act of 1934, File No. 1-973, effective July 1, 1935, relating to the registration of various issues of securities.
(g) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-4995, effective May 20, 1942, relating to the issuance of $15,000,000 First and Refunding Mortgage Bonds, 3% Series due 1972.
(h) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-7568, effective July 1, 1948, relating to the proposed issuance of 200,000 shares of Cumulative Preferred Stock.
(i) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-8381, effective April 18, 1950, relating to the issuance of $26,000,000 First and Refunding Mortgage Bonds, 2 3/4% Series due 1980.
(j) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-12906, effective December 4, 1956, relating to the issuance of 1,000,000 shares of Common Stock.
(k) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-59675, effective September 1, 1977, relating to the issuance of $60,000,000 First and Refunding Mortgage Bonds, 8 1/8% Series I due 2007.
(l) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-60925, effective March 30, 1978, relating to the issuance of 750,000 shares of Common Stock through an Employee Stock Purchase Plan.
(m) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-65521, effective October 10, 1979, relating to the issuance of 3,000,000 shares of Common Stock.
(n) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-74018, filed on June 16, 1982, relating to the Thrift Plan of PSE&G.
(o) Filed with registration statement of Public Service Enterprise Group Incorporated under the Securities Act of 1933, No. 33-2935 filed January 28, 1986, relating to PSE&G's plan to form a holding company as part of a corporate restructuring.
(p) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 33-13209 filed April 9, 1987, relating to the registration of $575,000,000 First and Refunding Mortgage Bonds pursuant to Rule 415.
ENTERPRISE
PSE&G