Annual Report (Form 10-K), fiscal year 1994

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 of cogeneration and independent power production facilities; Public Service Resources Corporation (PSRC), which has made primarily passive investments; Enterprise Group Development Corporation (EGDC), a diversified nonresidential real estate development and investment business; PSEG Capital Corporation (Capital), which has provided up to $750 million 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, 1994 and December 31, 1993, respectively, PSE&G comprised 85% and 86% of Enterprise's assets. PSE&G's 1994, 1993 and 1992 revenues were 93% of Enterprise's revenues and PSE&G's earnings available to Enterprise for such years were 91%, 96% and 88%, respectively, of Enterprise's net income. Electric and gas production and distribution will continue as the principal business of Enterprise for the foreseeable future.
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.
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 production, 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: an increasingly competitive energy marketplace, sales retention and growth potential in a mature service territory and need to contain costs (see Regulation and Competition); deregulation and the unbundling of energy supplies and services (see Competition); ability to obtain adequate and timely rate relief, cost recovery, and other necessary regulatory approvals (see PSE&G -- Rate Matters; Regulation and Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations (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 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 the often limited range of options available from the local utility, are increasingly turning elsewhere for energy supplies and services. Competition has arrived and, as a consequence, 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 shift costs among customer categories is impacted by State regulation, including the historic utility mandate to serve all customers. (See MD&A -- Competition.)
Federal energy laws and regulations are designed to make more efficient use of all energy, introduce price competition and encourage the use of nonconventional energy sources and to 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. (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 (NEPA), continues to impact upon PSE&G. As a result of changes brought about by NEPA, 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 announced a corporate reorganization on February 22, 1995, effective March 1, 1995, that includes the creation of a new ventures and services corporation ("Ventures") as a subsidiary of PSE&G to develop and market new energy-related products and services and the establishment of three new separate business units: fossil generation; electric and gas transmission and distribution; and customer services. Previously in the Fall of 1994, PSE&G reorganized its nuclear operations as a business unit, (see Nuclear Operations). Ventures is expected to be the foundation for new businesses through the development of energy-related products and services that may be marketed beyond traditional boundries. It will include such existing businesses as Public Service Conservation Resources Corporation (PSCRC) offering demand side management (DSM) services (see PSE&G Demand Side Management) and U.S. Energy Partners (USEP) a natural gas marketing company (see EDHI -- PSRC). (See PSE&G -- Customers and MD&A -- Competition.) Competition may also adversely impact upon the economics of certain regulatory-created incentives, such 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.
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. NEPA, by facilitating the development of the wholesale power market, has lead 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, but not New Jersey to date, has brought to the forefront the issue of potential stranded costs within the electric utility industry (see MD&A - Competition).
NEPA 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 NEPA, FERC has, in a Notice of Inquiry, requested comments on a wide array of policy and legal questions related to wholesale transmission pricing, alternative power pooling institutions and stranded costs. NEPA also amended PUHCA to permit EWGs, which are not subject to PUHCA regulation. NEPA permits both independent companies and utility affiliates to participate in the development of EWGs' 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 in November 1994 issued the first phase of a draft revised Energy Master Plan. The revised Energy Master Plan acknowledges the need for regulatory flexibility that is responsive to the competitive realities of today's energy marketplace and the competitive pressures being experienced by energy customers in New Jersey. The revised Energy Master Plan calls for legislation that would allow PSE&G and other New Jersey utilities to propose, subject to BPU approval, alternatives to existing rate base/rate-of-return pricing and allow for pricing flexibility under certain standards for customers with competitive options and for the equalization of the impact of tax policy upon energy producers (see PSE&G -- Customers). The revised Energy Master Plan also calls for integrated resource planning and a competitive supply procurement process for electric utilities as measures that would accommodate competition and support the State's environmental and energy conservation goals. Repeal of the Certificate of Need (Certificate) process for new electric capacity also is recommended (see Regulation).
PSE&G is in agreement with the essential elements of this first phase of the revised Energy Master Plan and is encouraged that the plan acknowledges the need for legislation that would provide much needed regulatory flexibility in meeting the needs of customers and New Jersey's economy. PSE&G has supported such legislation in the past and will review the precise terms and conditions of any proposed legislation. The BPU is expected to begin consideration of a second phase of the revised Energy Master Plan during the second quarter of 1995. This second phase is expected to address the future structure of the utility industry, including retail wheeling and wholesale competition. PSE&G intends to actively participate in the public debate concerning the revised Energy Master Plan. PSE&G cannot predict the impact of any regulatory or legislative changes which might ultimately be adopted.
Gas
Competition in the natural gas industry was dramatically accelerated with the issuance by FERC of its Order Nos. 636 and 636-A (636 Orders) which transformed it from an industry driven by regulation to one driven by competitive market forces. The principal effect of the 636 Orders has been to cause interstate natural gas pipelines to reconfigure their services so that services provided to third-party shippers are now fully comparable to the services that pipelines had historically provided in their role as gas merchants. To this end, the 636 Orders required the unbundling of interstate pipeline services (i.e., transportation service and sales service bundled together for one price) in order to develop a more competitive interstate natural gas industry. While unbundling of services provides PSE&G and certain of its customers with greater access to lower cost gas supplies, it also results in pipeline transition costs being borne by pipeline ratepayers and their customers. Although each pipeline has completed the restructuring of its services in order to comply with the 636 Orders, numerous parties have appealed the 636 Orders to the U.S. Court of Appeals for the Eleventh Circuit and for the D.C. Circuit. PSE&G has been granted status as an intervenor in these appeals, which remain pending. However, the appeals have not had the effect of staying the 636 Orders.
In November 1993, the BPU adopted a proposal for the unbundling of traditional services provided by the local gas distribution companies, such as PSE&G, within the State of New Jersey in order to promote unrestricted access to natural gas and related services in New Jersey for all customer classes except the residential end user.
On November 30, 1994, the BPU approved PSE&G's proposed new rate schedules, effective December 1, 1994, to implement the BPU guidelines on unbundled gas services. This will enable PSE&G's industrial and commercial gas customers, who represent about half of PSE&G's sales volumes, to participate in the competitive market. The transportation rate schedules produce the same non-fuel revenue per therm as the customers' existing sales service rate schedules. Thus, PSE&G's earnings are unaffected whether the customers remain on sales service or convert to transportation service. PSE&G cannot predict how its gas business may be affected in the future should additional modifications to the New Jersey public utility regulations be made. (See Note 2 - Rate Matters of Notes to Consolidated Financial Statements.)
Construction and Capital Requirements
PSE&G
PSE&G has substantial commitments as part of its ongoing construction program which includes 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 plans, 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.
Based on PSE&G's current IRP and construction program, construction expenditures are expected to aggregate approximately $3.2 billion during the years 1995 through 1999, including $484 million for nuclear fuel and $78 million of allowance for funds used during construction (AFDC). For additional information, see MD&A -- Liquidity and Capital Resources and Note 12 -- Commitments and Contingent Liabilities -- Construction and Fuel Supplies of Notes to Consolidated Financial Statements.
PSE&G's estimate of its electric construction expenditures, including AFDC, for the years 1995 through 1999, described above, recognizes the current and planned results of PSE&G's Demand Side Management (DSM) Incentive Resource Plan (DSM Plan) which is designed to reduce the rate of growth in its electric system peak demand and improve system load factor without restricting the continued economic development of PSE&G's service area. PSE&G's DSM Plan includes rebates for high efficiency appliances and heating equipment, audits, loans, seal-ups and for larger customers, an overall standard offer for eligible DSM end-users. PSE&G's 1994 IRP includes a demand forecast average
compound annual rate of growth through the year 2004 of electric system peak demand of 0.6%. Aggressive conservation and load management efforts are expected to reduce the system peak by 843 Megawatts (MW) by 1998. By the year 2004, 1,412 MW are expected to be saved through these programs. It is important to note that, through its "Standard Offer" program, PSE&G only pays for its verified, audited conservation (see PSE&G -- 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. Gross additions to PSE&G's utility plant during the three-year period ended December 31, 1994 amounted to approximately $2.5 billion, including $92 million of AFDC.
EDHI
As of December 31, 1994 and 1993, EDHI's long-term investments aggregated $1.6 billion and $1.5 billion, respectively. Its property, plant and equipment (net of accumulated depreciation and amortization and valuation allowances) aggregated $.7 billion and $.6 billion, respectively. As of December 31, 1994 and December 31, 1993, respectively, EDHI comprised 15% and 14% of Enterprise's assets.
Enterprise has an agreement in place with the BPU that it will not permit its investments in EDHI, as defined in the agreement, to exceed 20% of its consolidated assets without prior notice to the BPU and that debt supported by a minimum net worth maintenance agreement (see EDHI -- Capital) between Enterprise and Capital will be limited to $750 million, with a good faith effort to eliminate such support over a six-to-ten-year period from April 1993. Effective January 31, 1995, the maximum amount of Capital debt that may be outstanding was reduced to $650 million. As of December 31, 1994, Capital's long-term and short-term portion of long-term debt was $478 million and $154 million, respectively. (See Regulation and MD&A -- Liquidity and Capital Resources.)
For further discussion of capital requirements, investments and internal generation of cash from operations, see MD&A -- Liquidity and Capital Resources, and Note 7 -- Long-Term Investments, of Notes to Consolidated Financial Statements. For a discussion of sinking fund payments and maturities through 1999, see Note 6 -- Schedule of Consolidated Debt of Notes to Consolidated Financial Statements.
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 1994, see MD&A -- Liquidity and Capital Resources and Item 5. - Market for Registrant's Common Equity and Related Stockholder Matters. Enterprise's Common Stock is listed on the New York and Philadelphia Stock Exchanges.
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 to Consolidated Financial Statements.
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 to Consolidated Financial Statements.
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 such ratings, or any of them, 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 to Consolidated Financial Statements.)
PSE&G
Rate Matters
For information concerning PSE&G's rate matters, see Note 2 -- Rate Matters of Notes to Consolidated Financial Statements.
For information concerning PSE&G's Energy Remediation and Fuel Adjustment Clauses, see MD&A. For information concerning PSE&G's Under (Over) recovered Electric Energy and Gas Fuel Costs, see Note 5 -- Deferred Items of Notes to Consolidated Financial Statements.
For a discussion of the repowering of Bergen Generating Station, see Note 12 -- Commitments and Contingent Liabilities of Notes to Consolidated Financial Statements.
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 such NPS, see Note 12 -- Commitments and Contingent Liabilities of Notes to Consolidated Financial Statements.
Customers
As of December 31, 1994, 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, 1994, PSE&G's operating revenues aggregated $5.5 billion, of which 68% was from its electric operations and 32% from its gas operations. These revenues were derived as follows:
Customers of PSE&G, as well as those of other New Jersey electric and gas utilities, pay New Jersey Gross Receipts and Franchise Tax (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 this occurs, it could result in a significant decrease in PSE&G's revenues and earnings. (See Competition.)
In January 1995, PSE&G and its second-largest industrial customer submitted a petition to the BPU to approve a tariff modification for this customer that would vary the electric price hourly to reflect changes in PSE&G's marginal cost of energy. The proposed pricing would result in a bill reduction for the customer of approximately $7 million or about 25%. This reduction in revenues would be partially offset by a proposed decrease of $1.8 million in PSE&G's State tax 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. BPU approval is pending. A tariff modification to reduce electric costs of PSE&G's largest industrial customer by approximately $9 million, or about 23%, was approved by the BPU in December 1993.
PSE&G has signed each of its three existing wholesale electric customers, aggregating 40 mw of load, to new 5-year full service agreements with mid-term extension options. Two of these agreements are pending approval by FERC.
Beginning in 1995, under the terms of a previously negotiated 10-year wholesale power transaction negotiated in 1992, PSE&G will receive $12.5 million in annual revenues from Old Dominion Electric Cooperative.
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.
Integrated Resource Plan
Pursuant to its 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, 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 NUGs and DSM.
Pennsylvania -- New Jersey -- Maryland Interconnection
PSE&G is a member of Pennsylvania -- New Jersey -- Maryland Interconnection (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, reflects 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, 1994, the aggregate installed generating capacity of the PJM companies was 56,073 MW. The peak one-hour demand experienced by the PJM power pool was 45,992 MW which occurred on July 8, 1994. The 1994 peak was 437 MW lower than the record-setting 1993 summer peak of 46,429 MW which occurred on July 8, 1993. PSE&G's capacity obligations to 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 1995-96 period.
Power Purchases
A component of PSE&G's IRP consists of expected capacity additions from NUGs. These additions are projected to be 57 MW and are scheduled for service by 1998. NUG projects are expected to comprise approximately 7% of 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 Mid-Atlantic Area Coordination Agreement 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 late 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 NEPA and the revised 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 presents a two-phase approach -- a core program that includes many of the conservation programs now available to customers and a performance-based program that offers payments for introducing DSM technology and services that result in measurable energy savings. The performance-based proposal uses a technique that provides direct payments for kilowatthours of electricity and therms of gas saved through investments in DSM. 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, 1994, assets totaled $49.6 million, of which $38.1 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, 1994:
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, 1994, PSE&G's share of installed generating capacity was 10,497 MW, as shown in the following table:
For information regarding construction see Item 1. Business -- Construction and Capital Expenditures.
As of December 31, 1994, PSE&G owned 40 switching stations with an aggregate installed capacity of 31,351,000 kilovolt-amperes, and 224 substations with an aggregate installed capacity of 7,277,000 kilovolt-amperes. In addition, 6 substations having an aggregate installed capacity of 139,250 kilovolt-amperes were operated on leased property. All of these facilities are located in New Jersey. Also at that date, PSE&G owned undivided interests in similar jointly owned facilities at jointly owned generating facilities in New Jersey and Pennsylvania as indicated in the table above.
As of December 31, 1994, PSE&G's transmission and distribution system included 149,533 circuit miles, of which 34,868 miles were underground, and 782,031 poles, of which 533,017 poles were jointly owned. Approximately 99% of this property is located in New Jersey.
In addition, as of December 31, 1994, PSE&G owned 4 electric distribution headquarters and five subheadquarters in four operating divisions all located in New Jersey.
Gas Properties
As of December 31, 1994, the daily gas capacity of PSE&G's 100%-owned peaking facilities (the maximum daily gas delivery available during the three peak winter months) consisted of liquid petroleum air gas (LPG) and liquefied natural gas (LNG) and aggregated 2,973,000 therms (approximately 297,300 Mcf. on an equivalent basis of 1,000 Btu/cubic foot) as shown in the following table:
As of December 31, 1994, PSE&G owned and operated approximately 15,406 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 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, N. J., 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
See the following, at the pages indicated:
(1) Page 4. 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 5. Proceedings before FERC relating to restructuring of natural gas industry pursuant to Orders 636. (In Re Pipeline Service Obligations and Revisions to Regulations Governing Self-Implementing Transportation Under Part 284 of the Commission's Regulations, Docket No. RM91-11-000).
(3) Page 10. Proceedings before the BPU relating to PSE&G's Second Largest Customer, filed January 6, 1995, in Docket No. ER95010005.
(4) Page 31. 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).
(5) Pages 35 through 41. 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 98. Proceedings before the BPU relating to PSE&G's LGAC, filed July 1, 1994, in Docket No. GR94070292.
(7) Page 98. Proceedings before the BPU relating to PSE&G's LEAC, filed July 1, 1994, in Docket No. ER94070293.
(8) Page 123. On November 7, 1988, PSE&G filed a lawsuit in the United States District Court for the District of New Jersey against Associated Electric & Gas Insurance Services, Ltd., Certain Underwriters at Lloyd's of London, and Certain London Market Companies (PSE&G v. AEGIS, et al., Civ. Action No. 884811.) The suit seeks insurance coverage from these insurers for claims that have been made against PSE&G by the NJDEP and certain private parties. The claims concern alleged contamination at former gas manufacturing plant sites in New Jersey that are either currently owned by PSE&G or that were previously owned by PSE&G or one of its predecessors.
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, 1994, there were 185,941 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. Beginning in 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.
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 (MIPS) of Public Service Electric and Gas Capital, L.P. (see Note 4. -- Schedule of Consolidated Capital Stock and Other Securities of Notes to Consolidated Financial Statements), 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 MIPS. 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 free of these restrictions at December 31, 1994 was $1.5 billion and $1.3 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
Following are the significant factors affecting the consolidated financial condition and the results of operations of Public Service Enterprise Group Incorporated (Enterprise) and its subsidiaries. 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 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.
As of December 31, 1994 and December 31, 1993, PSE&G comprised 85% and 86%, respectively, of Enterprise assets. For each of the years 1994, 1993 and 1992, PSE&G revenues were 93% of Enterprise's revenues and PSE&G's earnings available to Enterprise for such years were 91%, 96% and 88%, 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 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").)
PSE&G Energy and Fuel Adjustment Clauses
PSE&G has fuel and energy tariff rate adjustment clauses 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. Charges under the clauses are primarily based on energy and gas supply costs which are normally projected over twelve-month periods. The changes in the Levelized Gas Adjustment Charge (LGAC) and the electric Levelized Energy Adjustment Clause (LEAC) do not directly affect earnings because such costs are adjusted monthly to match amounts recovered through revenues. However, the carrying of underrecovered costs ultimately increases financing costs. PSE&G is also required to pay interest on net overrecovered costs. Under the clauses, if actual costs differ from the costs recovered, the amount of the underrecovery or overrecovery is deferred and is reflected in the average cost used to determine the fuel and energy tariff rate adjustment for the period in which it is recovered or repaid. Actual costs otherwise includable in the LEAC are subject to adjustment by the BPU in accordance with its nuclear performance standard (NPS). (See Note 2 -- Rate Matters and Note 12 -- Commitments and Contingent Liabilities of Notes.)
Competition
Ongoing initiatives affecting PSE&G's electric and gas utility businesses associated with the continuing transition to a competitive market environment will have an increasingly significant impact on Enterprise and PSE&G. Federal legislation, including the National Energy Policy Act (NEPA), as well as regulatory initiatives at both the federal and state levels that are designed to promote competition and lessen regulation of the energy supply industry can be expected to result in additional pressures on customer retention due to energy prices, especially with respect to larger industrial and commercial customers. Growth potential is limited in PSE&G's mature service territory.
The shift of rate regulation from traditional concepts based upon rate base/rate of return to concepts based upon market competition and service is accelerating. As a result, added emphasis will be placed upon cost reduction. Utilities and their regulators will need to develop flexible ratemaking strategies to minimize adverse impacts which might otherwise occur to revenues and earnings and to maximize potential opportunities presented by deregulation. The manner in which regulators address evolving competitive issues will also affect utility credit quality and the carrying value of assets.
The transition to a competitive market environment will cause changes from traditional utility ratemaking and is likely to affect utilities' ability to recover costs, resulting in these costs being "stranded." Stranded costs are costs and liabilities that were incurred by regulated utilities as a result of the regulatory compact among utilities, regulators and customers which are no longer recoverable from such customers due to changes in the regulatory framework that allow such customers to change electric suppliers before paying for the costs the utility has incurred on their behalf. Potential stranded costs include but are not limited to: generation assets; long-term purchase power and fuel contracts; "regulatory assets" -- Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71), which are expenses that have been deferred pending recovery from customers; and costs which regulators have ordered utilities to incur to fulfill a variety of broader social purposes (including such things as energy conservation costs such as demand-side management (DSM) costs). More competitive electric wholesale markets, proposals to authorize retail wheeling or direct retail access within utility franchise areas, but not New Jersey to date, as well as the recent Federal Energy Regulatory Commission's (FERC) notice of proposed rulemaking on stranded costs have brought to the forefront the issue of potential stranded costs. If changes in rate regulation ultimately require a recognition of any such stranded costs, asset write-downs for utilities, including PSE&G, may occur. At this time, management cannot predict the level of transition costs or stranded costs resulting from industry deregulation, if any, or whether utility regulators will allow recovery of any such transition costs from customers. In addition, PSE&G cannot presently quantify what the financial statement impact may be if depreciation expense is determined absent regulation. However, if any such amounts are not recovered, the impact on the financial position, results of operations or net cash flows of PSE&G and Enterprise could be material. (See Note 1 -- Organization and Summary of Significant Accounting Policies and 2 -- Rate Matters of Notes.)
Further, competition will force utilities, including PSE&G, to operate more cost effective and efficient plants, particularly in light of the technological advantages available to new entrants, which unlike utilities, do not operate older, less efficient units. Recovery of related costs by utilities, including PSE&G, will depend upon the decisions of the regulators, which cannot be predicted, or the ability to sell the electricity generated by such plants in the emerging wholesale power market. For discussion of PSE&G's renovation project at Bergen, see Note 12 - Commitments and Contingent Liabilities of Notes.
The BPU has issued the first phase of a draft revised Energy Master Plan which acknowledges the need for regulatory flexibility as competition unfolds and calls 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), upon energy producers. Management cannot predict the ultimate form of any legislative or regulatory changes which may be adopted as a result of this revised Energy Master Plan.
Enterprise Earnings
Earnings per share of Enterprise Common Stock were $2.78 in 1994, $2.50 in 1993 and $2.17 in 1992. The changes are summarized as follows:
The average shares of Enterprise Common Stock outstanding were 244,470,794 for 1994, 240,663,599 for 1993 and 232,306,492 for 1992, respectively.
PSE&G
In 1994, PSE&G's earnings available to Enterprise increased by $42 million. The increase was primarily due to higher electric commercial sales and firm gas residential and commercial sales. Electric kilowatthour (KWH) commercial sales increased 2% and total gas therms sold and transported increased 2.3%, respectively, principally due to weather and a modest improvement in New Jersey's economy. Also benefitting earnings was the decrease in Federal income tax expense resulting from the receipt of a nontaxable insurance benefit partially offset by higher pre-tax operating income. In addition, higher AFDC was a benefit to earnings due to greater construction, partially offset by a slightly reduced 1994 AFDC rate. The major factors adversely affecting earnings were higher other operation expenses, comprised primarily of miscellaneous nuclear production expenses, employee benefits expenses and increased accruals for uncollectible customer accounts, increased depreciation and amortization expenses due to more utility plant in service, higher interest charges due to a higher average daily balance of short-term debt outstanding at higher interest rates and higher maintenance expenses, principally at Hope Creek nuclear station due to the spring 1994 refueling outage.
In 1993, excluding the $33 million net effect of the settlement of litigation against Philadelphia Electric Company, now known as PECO Energy, Inc. (PECO), in connection with the 1987 shutdown of Peach Bottom Atomic Power Station, Units 2 and 3 (Peach Bottom) by the NRC, PSE&G's earnings available to Enterprise increased by $166 million. The principal contributing factors to the increase in earnings available to Enterprise were PSE&G's higher electric and gas base rates that became effective January 1, 1993 and a substantial increase in electric KWH sales. (See Revenues below.) The increase in electric sales was primarily due to the abnormally warm summer weather. Partially offsetting the increase in earnings were higher other operation expenses (comprised primarily of labor and employee benefits costs and miscellaneous nuclear production costs), higher depreciation and amortization and higher Federal income taxes resulting from increased pre-tax operating income and an increase in the Federal corporate income tax rate, effective January 1993. (See Note 10 -- Federal Income Taxes of Notes.)
EDHI
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).
To the extent that the prices at which EDC is able to sell gas remain low, EDHI's earnings may continue to be negatively impacted. For information concerning certain of PSRC's direct-finance aircraft leases, see Note 12 -- Commitments and Contingent Liabilities of Notes.
The net income of EDHI was $24 million in 1993, a decrease of $36 million from 1992. The decrease in EDHI's net income was due primarily to EGDC's recording of an impairment related to certain real estate properties, including properties upon which management revised its intent from a long-term investment strategy to a short-term hold for sale status, reflecting such properties at their net realizable value. This impairment reduced EDHI's earnings by $51 million, after tax, or 21 cents per share of Enterprise Common Stock. Partially offsetting this decrease was an increase in the earnings of EDC due to the higher price of natural gas. Exclusive of the recorded impairment, EDHI's net income would have been $75 million for 1993.
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.
Dividends paid to holders of Enterprise Common Stock increased $6 million during 1994 compared to 1993 and increased $18 million during 1993 compared to 1992. The increase in dividend payments for 1994 over 1993 and for 1993 over 1992, respectively, was due to the issuance of additional shares of Enterprise Common Stock.
Dividends paid to holders of PSE&G's Preferred Stock increased $2 million during 1994 compared to 1993 and $6 million during 1993 compared to 1992. The increase in such dividends was due to the issuance of additional shares of PSE&G's Preferred Stock, partially offset by reduced dividend requirements resulting from the redemption of certain higher cost series of Preferred Stock. (See Liquidity and Capital Resources.)
Dividends payable to holders of Monthly Income Preferred Securities (MIPS) of Public Service Electric and Gas Capital, L.P. (Partnership), a limited partnership of which PSE&G is the general partner, aggregated $2 million for 1994. (See Note 4 -- Schedule of Consolidated Capital Stock and Other Securities of Notes.)
Revenues
PSE&G Electric
Revenues increased $40 million, or 1.1%, in 1994 from 1993; 1993 revenues increased $285 million, or 8.4%, compared to 1992. The significant components of these changes follow:
Changes in kilowatthour sales by customer category are described below:
1994 -- The increase in electric revenues was primarily due to higher kilowatthour sales, partially offset by lower recovery of energy costs. The increase in kilowatthour sales is due to higher commercial and industrial sales as a result of an improving economy. Residential sales were below last year's levels due to the abnormally warm summer weather experienced in 1993.
1993 -- The increase in electric revenues over 1992 was primarily due to the base rate increase which became effective January 1, 1993, partially offset by the larger LEAC credit also effective January 1, 1993. Abnormally warm summer weather resulted in a significant increase in weather sensitive sales during 1993. Increased competition from nonutility generators (NUGs) and an unscheduled maintenance shutdown at PSE&G's largest industrial customer negatively impacted industrial sales.
PSE&G Gas
Revenues increased $184 million, or 11.6%, during 1994 over 1993; 1993 revenues increased $8 million, or 0.5%, over 1992. The significant components of these changes follow:
Changes in gas revenues sold and transported by customer category are described below:
1994 -- The increase in gas revenues was primarily due to an increase in the recovery of fuel costs, principally due to higher fuel rates, higher sales and significantly lower customer refunds. Residential, commercial and industrial sales increased due to favorable weather conditions and an improving economy. Sales to cogenerators was the largest contributor to the increase in industrial sales as cogeneration average customer usage continues to increase. Transportation sales decreased due to storm-related service interruptions in January and February.
1993 -- The increase in gas revenues over 1992 was primarily attributable to the base rate increase which became effective January 1, 1993 and the higher recovery of fuel-related costs. Sales to cogenerators was the largest contributor to the increase in industrial sales as cogeneration average customer usage for electric generation continued to increase. Transportation service sales reflect the movement of some interruptible customers to transportation service.
EDHI
EDHI revenues decreased $23 million, or 5%, during 1994 from 1993; 1993 revenues increased $30 million, or 7%, over 1992. The significant components contributing to such results were as follows:
1994 -- EDC's revenues decreased due to lower natural gas volumes ($29 million) and prices ($17 million). CEA's revenues increased as a result of greater income from operating projects. PSRC's revenues increased due to higher income from partnerships.
1993 -- EDC was the largest contributor to the EDHI revenue increase due to the higher price of natural gas. CEA revenues increased as a result of greater income from operating projects. PSRC revenues decreased due to unrealized losses on investments and lower income from leases.
Electric Energy Costs
Electric energy costs decreased $21 million, or 3.0%, in 1994 compared to 1993 and $59 million, or 7.7%, in 1993 compared to 1992. The significant components of these changes follow:
(A) Reflects the change in the deferred over(under)recovered energy costs, which in the years 1994, 1993 and 1992 amounted to $(135) million, $(93) million and $13 million, respectively. (See PSE&G Energy and Fuel Adjustment Clauses and Note 2 -- Rate Matters of Notes.)
1994 -- The decrease in total costs was principally due to the underrecovery of energy costs, partially offset by a 12% increase in purchased power costs and a 1% increase in kilowatthour generation.
1993 -- The decrease in total costs was the result of an adjustment in the recovery of energy costs resulting from the base rate case decision effective January 1, 1993, partially offset by a 17% increase in nuclear kilowatthour generation and an 11% increase in purchased power costs.
Gas Supply Costs
Gas supply costs increased $126 million, or 14.0%, in 1994 compared to 1993 and $39 million, or 4.6%, in 1993 compared to 1992. The significant components of these changes follow:
(A) Reflects the change in the deferred over(under)recovered gas supply costs, which in the years 1994, 1993 and 1992 amounted to $26 million, $(100) million and $52 million, respectively. (See PSE&G Energy and Fuel Adjustment Clauses and Note 2 -- Rate Matters of Notes.)
1994 -- The increase in total costs was principally due to the overrecovery of fuel costs and increased sales to nonutility generators (NUGs), partially offset by lower gas prices.
1993 -- The increase in total costs was principally due to greater sales to NUGs and other customers, higher gas costs and higher therm sendout resulting from the colder 1993 winter season compared to the 1992 winter season. The increase in costs was reduced by deferred underrecovered 1993 gas costs resulting from the BPU approved adjustment in PSE&G's LGAC, effective January 1, 1993 of $71 million on an annualized basis through December 31, 1993. The adjustment reflects lower gas costs and the inclusion of $15.1 million of conservation program costs in LGAC. In addition, gas customers received $45 million of credits during the first quarter of 1993.
Liquidity and Capital Resources
Enterprise's liquidity is affected by maturing debt (see Note 6 -- Schedule of Consolidated Debt of Notes), investment and acquisition activities, the capital requirements of PSE&G's construction program, permitted regulatory recovery of expenses and collection of revenues. Capital resources available to meet such requirements depend upon the factors noted above under Overview. (See Construction, Investments and Other Capital Requirements Forecast below.)
PSE&G
For 1994, PSE&G had utility plant additions, including AFDC, of $887 million, a decrease of $3 million versus 1993 additions of $890 million. Additions in 1993 increased $63 million from 1992 additions of $827 million. AFDC for 1994, 1993 and 1992 amounted to $38 million, $27 million and $26 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 $34 million, $48 million and $40 million for the cost of plant removal (net of salvage) in 1994, 1993 and 1992, respectively. Construction expenditures from 1995 through 1999 are expected to aggregate $3.2 billion. Forecasted construction expenditures are related to improvements in PSE&G's existing power plants, transmission and distribution system, gas system and common facilities. (See Construction, Investments and Other Capital Requirements Forecast below.)
Decommissioning and other special funds, excluding interest, increased $35 million, $46 million and $9 million in 1994, 1993 and 1992, respectively. (See Note 3 -- PSE&G Nuclear Decommissioning and Amortization of Nuclear Fuel of Notes.)
PSE&G expects that it will be able to generate internally a majority of its capital requirements including construction expenditures over the next five years, assuming adequate and timely recovery of costs as to which no assurances can be given. (See Note 2 -- Rate Matters and Note 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.) EDHI's focus is on CEA and EDC, its energy-related core businesses. CEA is expected to be the primary vehicle for EDHI's business growth, both domestically and internationally. 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 is projected to grow its reserve base, principally through exploration and drilling, in order to maintain an annual production level of 130-140 billion cubic feet equivalent (BCFE). EDC's worldwide 1994 production totaled 108 BCFE and at year end had proved reserves of 888 BCFE. EDC expended approximately $188 million, $109 million and $56 million in 1994, 1993 and 1992, respectively, to
acquire, discover or develop domestic and international reserves. Of these expenditures, $154 million, $91 million and $36 million in 1994, 1993 and 1992, respectively, were capitalized. These amounts included capitalized interest of $4 million, $3 million and $4 million, respectively.
PSRC will limit new investments to those which support EDHI's core 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. Any inability to extend or replace maturing debt at current levels and interest rates may affect future earnings and result in an increase in EDHI's cost of capital.
A partnership, in which EGDC is an 80% partner ($21 million equity investment), is currently negotiating to extend or replace a mortgage financing of $40.2 million which is maturing on February 28, 1995. EGDC has guaranteed $5.3 million of the financing. No assurances can be given that EGDC or the partnership will be able to extend this loan or obtain a replacement loan in the amount of the existing loan. Failure to extend or replace the existing loan at the current outstanding loan balance, or at current interest rates, may result in an increase in the amount of capital which EGDC will require.
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, 1994, $134 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, 1994 and 1993, EDHI had consolidated debt to equity ratios of 1.15:1 and 1.34:1 and, for the years ended December 31, 1994, 1993 and 1992, EBIT coverage ratios, as defined to exclude the effects of EGDC of 1.94:1, 2.13:1 and 1.88:1, respectively. Compliance with applicable financial covenants will depend upon future levels of earnings, among other things, 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, which are primarily those of EDHI, decreased $58 million and $67 million in 1994 and 1993, respectively, and increased $61 million in 1992. The decrease in 1994 is primarily due to a $73 million net decrease in PSE&G's investment in an insurance contract, partially offset by an increase in Public Service Conservation Resources Corporation's (a PSE&G subsidiary) Long-Term Investments of $23 million. The decrease in 1993 is due primarily to EDHI's decrease in Long-Term Investments of $63 million. The increase in 1992 is due primarily to EDHI's increase in investments in real estate of $77 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 1999, 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.
Internal Generation of Cash from Operations
Enterprise's cash provided by operating activities for 1994 increased $200 million to $1.232 billion when compared to 1993. This increase was primarily due to the increase in net income of $78 million, higher recovery of electric energy and gas costs through PSE&G's LEAC and LGAC of $74 million, a decrease in accounts receivable of $152 million, a decrease in accrued taxes of $35 million, a positive net change in certain other current assets and liabilities of $57 million and a positive net change in certain noncurrent assets and liabilities, primarily deferred amounts, of $61 million. Partially offsetting these cash inflows were a decrease in accounts payable of $181 million and the loss from property impairments in 1993 of $78 million. (For additional information see Enterprise Earnings and Revenues.)
Although net income increased in 1993 (see Enterprise Earnings and Revenues), net cash provided by operating activities decreased by $292 million from 1992 to $1.032 billion. This decrease was primarily due to an underrecovery of electric energy and gas costs through PSE&G's LEAC and LGAC of $306 million, a decrease in accrued taxes of $332 million (primarily increased NJGRT payments), and a decrease in depreciation and amortization of $42 million. Partially offsetting these cash outflows were the increase in net income of $97 million, increases in deferred income taxes of $112 million, inventory decreases in fuel and materials and supplies of $54 million, increases in accounts payable of $57 million and a loss from property impairments of $78 million.
External Financings
ENTERPRISE CONSOLIDATED CASH FLOWS FROM FINANCING ACTIVITIES
(A) During 1994, Enterprise issued 1,009,674 shares of Common Stock through its Dividend Reinvestment and Stock Purchase Plan (DRIP) and various employee benefit plans. The net proceeds from such sales, aggregating approximately $28 million, were used by Enterprise to make equity investments in its subsidiaries. Book value per share was $21.70 at December 31, 1994, compared to $21.07 at December 31, 1993. (See Note 4 -- Schedule of Consolidated Capital Stock and Other Securities of Notes.)
(B) See Dividends.
(C) Under the terms of PSE&G's Mortgage and Restated Certificate of Incorporation at December 31, 1994, PSE&G would qualify to issue an additional $3.511 billion of its First and Refunding Mortgage Bonds (Bonds) at a rate of 8.875% or $3.017 billion of Preferred Stock at a rate of 8.750%. PSE&G's Restated Certificate of Incorporation currently limits the issuance of Preferred Stock to $1.0 billion, of which $535 million is outstanding.
In addition, as a prerequisite to the issuance of additional Bonds, PSE&G's Mortgage requires a 2:1 ratio of earnings to fixed charges as computed thereunder. For 1994, such ratio was 3.62:1. The ratio of earnings to fixed charges as required by the Securities and Exchange Commission was 3.35:1.
The BPU has authorized PSE&G to issue $370 million of Bonds/Medium-Term Notes (MTNs) through 1996 for refunding purposes.
The BPU has authorized PSE&G to issue not more than $1 billion of its short-term obligations at any one time outstanding, consisting of commercial paper and other unsecured borrowings from banks and other lenders through January 1, 1997. On December 31, 1994, PSE&G had $308 million of short-term debt outstanding.
PSE&G renewed and increased to $800 million a revolving credit agreement with a group of commercial banks through September 14, 1995. On December 31, 1994, there were no short-term borrowings outstanding under this credit agreement.
For additional detail, see Note 4 -- Schedule of Consolidated Capital Stock and Other Securities and Note 6 -- Schedule of Consolidated Debt of Notes.
(D) 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, 1994, Fuelco had commercial paper of $93.7 million outstanding under such program.
(E) Enterprise's long-term debt aggregated $5.181 billion as of December 31, 1994, of which $4.487 billion was attributable to PSE&G and $694 million to EDHI.
During 1994, PSE&G issued a total of $850 million principal amount of its Bonds/MTNs. The net proceeds from the sale of the Bonds were used by PSE&G to redeem or defease $474 million of its higher cost Bonds and to pay a portion of its current construction program.
For additional detail see Note 6 -- Schedule of Consolidated Debt of Notes.
(F) In February 1994, PSE&G issued and sold $75 million of its Cumulative Preferred Stock. In March 1994, PSE&G used the funds from the above sale to redeem $45 million of its higher priced Preferred Stock. The remaining funds were added to the general funds of PSE&G and used to pay a portion of its then outstanding short-term debt obligations, which were principally incurred to fund a portion of its construction expenditures. In December 1994, PSE&G redeemed an additional $75 million of its Preferred Stock.
The BPU has authorized PSE&G to issue not more than $180 million of Preferred Stock through 1995.
For additional detail see Note 4 -- Schedule of Consolidated Capital Stock and Other Securities of Notes.
(G) In November 1994, Public Service Electric and Gas Capital, L.P. (Partnership) issued $150 million of Monthly Income Preferred Securities (MIPS), the proceeds of which were loaned to PSE&G and used to redeem $75 million of Preferred Stock and the payment of construction expenditures.
For additional detail see Note 4 -- Schedule of Consolidated Capital Stock and Other Securities of Notes.
(H) Funding has a commercial paper program, supported by a commercial bank letter of credit and credit facility, through November 18, 1995 in the amount of $225 million. As of December 31, 1994, Funding had $90 million of borrowings outstanding under this program.
Funding has a $225 million revolving credit facility which terminates on November 18, 1995. As of December 31, 1994, Funding had no borrowings outstanding under this facility.
Funding is in the process of amending its letter of credit and revolving credit facility in order to adjust pricing and extend the maturity to early 1998.
Capital's MTN program provides for an aggregate principal amount of up to $750 million of MTNs provided that its total debt outstanding at any time, including MTNs, shall not exceed such amount. Effective January 31, 1995, Capital will not have more than $650 million of debt outstanding at any time. In November 1994, Capital repaid $50 million of its 7.40% MTNs. At December 31, 1994, Capital had $467 million of MTNs outstanding and total debt outstanding of $632 million.
For additional detail see Note 6 -- Schedule of Consolidated Debt of Notes.
PSE&G
Following are the significant factors affecting the consolidated financial condition and the results of operations of PSE&G and its subsidiaries. This discussion refers to the Consolidated Financial Statements and related Notes of PSE&G and should be read in conjunction with such statements and notes.
Except as modified below, 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; PSE&G Energy and Fuel Adjustment Clauses; Enterprise Earnings: Dividends; Revenues -- PSE&G Electric, PSE&G Gas; PSE&G Electric Energy Costs; Liquidity and Capital Resources, PSE&G, Long-Term Investments and Real Estate; Construction, Investments and Other Capital Requirements Forecast; and External Financings.
Gas Supply Costs
Gas supply costs increased $117 million or 12.7% in 1994 compared to 1993 and $17 million or 1.8% in 1993 compared to 1992. The significant components of these changes follow:
(A) Reflects the change in the deferred over(under)recovered gas supply costs, which in the years 1994, 1993 and 1992 amounted to $26 million, $(100) million and $52 million, respectively. (See PSE&G Energy and Fuel Adjustment Clauses and Note 2 -- Rate Matters of Notes.)
1994 -- The increase in total costs was principally due to the overrecovery of fuel costs and increased sales to NUGs, partially offset by lower gas prices.
1993 -- The increase in total costs was principally due to greater sales to cogenerators and other customers, higher gas costs and higher therm sendout resulting from the colder 1993 winter season compared to the 1992 winter season. The increase in costs was reduced by deferred underrecovered 1993 gas costs resulting from the BPU approved adjustment in PSE&G's LGAC, effective January 1, 1993, of $71 million on an annualized basis through December 31, 1993. The adjustment reflects lower gas costs and the inclusion of $15.1 million of conservation program costs in LGAC. In addition, gas customers received $45 million of credits during the first quarter of 1993.
Liquidity and Capital Resources
Internal Generation of Cash from Operations
PSE&G's cash provided by operating activities increased $229 million to $1,061 million for 1994 compared to the corresponding period in 1993. This increase was primarily due to an increase in net income of $45 million, a decrease in accounts receivable of $154 million, a greater recovery of electric energy and gas costs through PSE&G's LEAC and LGAC of $74 million, an increase in depreciation and amortization of $38 million, a decrease in accrued taxes of $25 million, a positive net change in certain other current assets and liabilities of $64 million and a positive net change in certain noncurrent assets and liabilities, primarily deferred amounts, of $69 million, partially offset by a decrease in accounts payable of $183 million and a decrease in deferred income taxes of $68 million. (For additional information see PSE&G - Earnings and Revenues.)
Although net income increased for 1993 (See Enterprise Earnings -- PSE&G and Revenues -- PSE&G Electric and PSE&G Gas), PSE&G's net cash provided by operating activities decreased by $338 million from 1992 to $832 million. This decrease was primarily due to an underrecovery of electric energy and gas costs through PSE&G's LEAC and LGAC of $306 million, a decrease in accrued taxes of $306 million (primarily increased NJGRT payments), a decrease in depreciation and amortization of $43 million and a negative net change in certain other current assets and liabilities of $28 million and a negative net change in certain noncurrent assets and liabilities, primarily deferred amounts, of $32 million. Partially offsetting these cash outflows were the increase in net income of $139 million, an increase in deferred income taxes of $154 million, a decrease in fuel and materials and supplies inventories of $54 million and an increase in accounts payable of $36 million.
ITEM 8.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENT RESPONSIBILITY
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 LLP, 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 LLP, 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, 1994, 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 LLP. 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 LLP 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
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 LLP, 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 LLP, 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, 1994, 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 LLP. 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 LLP, 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 accompanying consolidated balance sheets of Public Service Enterprise Group Incorporated and its subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, retained earnings, and cash flows for each of the three years in the period ended December 31, 1994. 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 audit 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, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 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, 1992, 1991, and 1990, and the related consolidated statements of income, retained earnings, and cash flows for the years ended December 31, 1991 and 1990 (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, 1994 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, 1995 Parsippany, New Jersey
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Public Service Electric and Gas Company:
We have audited the accompanying consolidated balance sheets of Public Service Electric & Gas Company and its subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, retained earnings, and cash flows for each of the three years in the period ended December 31, 1994. 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 audit 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, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 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, 1992, 1991, and 1990, and the related consolidated statements of income, retained earnings, and cash flows for the years ended December 31, 1991 and 1990 (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, 1994 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, 1995 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
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 owns all of PSE&G's common stock (without nominal or par value). Of the 150,000,000 authorized shares of such common stock at December 31, 1994, 1993 and 1992, 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 nonutility 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 (MIPS). (See Note 4 -- Schedule of Consolidated Capital Stock and Other Securities.)
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 of cogeneration and independent power production facilities; Public Service Resources Corporation (PSRC), which makes 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), 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 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.)
Amounts charged to operations for depreciation expense reflect estimated useful lives and methods, that include estimated cost of removal and salvage, prescribed and approved by regulators rather than those that might otherwise apply to unregulated enterprises. PSE&G cannot presently quantify what the financial statement impact may be if depreciation expense is 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 properties are retired or otherwise disposed of, the original cost less net salvage value is charged to accumulated depreciation.
For financial reporting purposes, 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 3.51% in 1994, 3.46% in 1993 and 3.48% in 1992.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Decontamination and Decommissioning -- PSE&G
In September 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 (NEPA). 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. While PSE&G expects to recover such special assessments through its electric Levelized Energy Adjustment Clause (LEAC) no assurances can be given that the BPU will authorize such recovery from customers. (See 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 of cogeneration and power production facilities. (See Note 7 -- Long-Term Investments.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
PSRC's security derivatives are recorded at fair value. Realized and unrealized changes in fair values are recognized in revenues in the period in which the changes occur. (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 units-of-production basis. Drilling and equipping costs, except exploratory dry holes, are capitalized and depreciated over the proved developed reserves on a units-of-production basis. Estimated future abandonment costs of offshore proved properties are depreciated on a units-of-production basis over the proved developed reserves. 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.
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.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Allowance for Funds Used During Construction and Capitalized Interest
PSE&G -- Allowance for Funds Used During Construction (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 1994, 1993 and 1992 were 6.48%, 6.96% and 7.80%, respectively. These rates are 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 and participating affiliates, after completing one year of service, are covered by a noncontributory trusteed pension plan (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 $29 million, $28 million, and $24 million in 1994, 1993 and 1992, respectively. The current cost of these benefits is charged to expense when paid and is currently being recovered from ratepayers.
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.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. RATE MATTERS
Levelized Gas Adjustment Charge
On July 1, 1994, PSE&G petitioned the BPU to increase its Levelized Gas Adjustment Charge (LGAC) rates to recover an additional $23.7 million, to be effective October 1, 1994. On August 4, 1994, the matter was transmitted to the Office of Administrative Law of the State of New Jersey (OAL) for adjudication. Due to recent projections of lower gas prices, the parties reached a stipulated settlement on October 6, 1994 which provides for the implementation of the Gas Remediation Adjustment Charge (RAC) with an equal corresponding offsetting adjustment to the current LGAC rate. These LGAC and RAC rates, when combined, produce a charge which results in a zero increase to the firm customers for the LGAC period ending September 30, 1995. The settlement was approved by the BPU on December 21, 1994.
The BPU, on January 24, 1995, approved PSE&G's proposal to credit a total of $50 million to its firm gas sales customers during February and March 1995. Specifically, PSE&G will credit approximately $30 million in February and $20 million in March 1995. The opportunity to provide these credits was due principally to abnormally warm winter weather, lower gas prices and a lower current short-term price forecast.
Electric Levelized Energy Adjustment Clause
On July 1, 1994, PSE&G petitioned the BPU to increase its LEAC rates, effective October 1, 1994, to recover an additional $130 million of energy costs. A significant part of the need for an increase is the larger percentage of power that PSE&G is obligated to purchase under prior BPU approved contracts with non-regulated power producers. On November 1, 1994, the parties reached a stipulated settlement which provides for the implementation of provisional LEAC rates, subject to refund, designed to recover an additional $98 million over the period November 1994 through May 1995. The stipulation provided sufficient rate relief to recover current fuel costs and to begin to reduce the accumulated underrecovered balance while affording the parties the opportunity to continue litigating unresolved issues of: a) rate treatment for the Bergen repowering project (See Note 12 -- Commitments and Contingent Liabilities - Bergen Station Repowering); b) an alleged overearnings issue; c) recovery of the costs related to the April 7, 1994 shutdown at Salem 1 nuclear unit; and d) the appropriateness of PSE&G's gas to electric transfer and pricing calculations pertaining to the 1993 agreement with PSE&G's largest industrial customer (Bayway Decision and Order). This stipulation was approved by the BPU without modification and became effective on November 4, 1994.
With respect to the litigated issues outlined above, an Administrative Law Judge (ALJ) decision was filed with the BPU on January 30, 1995 recommending that (1) the issue of alleged overearnings is not a LEAC issue and PSE&G is not earning in excess of its rate of return; (2) a hearing convene regarding the Salem 1 shutdown to determine replacement power costs and whether any limitations imposed by the New Jersey Public Utility Fault Determination Act should be triggered; (3) a reduction of the 1993 Nuclear Performance Standard (NPS) reward to $1.9 million from $3.9 million be made; (4) the joint position of the parties on gas to electric pricing and the accounting procedures approved by the BPU in its Bayway Decision and Order should not be revised; (5) a decrease of $700 thousand in DSM program costs; and (6) the BPU should address the RAC costs in the LEAC. PSE&G filed exceptions to the ALJ's decision on February 14, 1995 addressing the 1993 NPS reward; DSM estimates; replacement power costs for the April 7, 1994 Salem outage and the treatment of RAC charges. However, neither Enterprise nor PSE&G is able to predict what action, if any, the BPU may take concerning the ALJ's decision. (See Note 3 -- PSE&G Nuclear Decommissioning and Amortization of Nuclear Fuel.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On July 7, 1994, the BPU approved a stipulation which made permanent the LEAC rates that went into effect on January 1, 1993 on an interim basis and closed out the previous LEAC for the period ended December 31, 1992. The stipulation also provided a credit of $2.5 million to the deferred fuel balance for LEAC customers in resolution of all outstanding issues related to the November 9, 1991 Salem 2 turbine generator outage and a credit of $1.3 million to reflect an adjustment of estimated New Jersey Gross Receipts and Franchise Tax (NJGRT) unit tax rates to actual unit tax rates.
Remediation Adjustment Charge
In accordance with the BPU Order dated September 15, 1993 and the BPU approved Technical Conference Decision and Order dated November 4, 1993, PSE&G proposed to recover, effective October 1, 1994, $3.7 million from its gas customers and $2.4 million from its electric customers for costs incurred during the period October 1, 1992 through July 31, 1994 with respect to PSE&G's Manufactured Gas Plant Remediation Program (Remediation Program). Pursuant to the above-referenced Board Order and Technical Conference Stipulation, costs are to be included in a RAC and are amortized over a rolling seven-year period, 60 percent to be recovered through the gas RAC and the remaining 40 percent to be recovered through the electric RAC. This Remediation Program has been and continues to be carried out under the direction and supervision of the New Jersey Department of Environmental Protection (NJDEP). On December 21, 1994, the BPU approved a LGAC Stipulation allowing PSE&G to recover $3.1 million of Remediation Program costs from gas customers. (See Note 12 -- Commitments and Contingent Liabilities of Notes.) All recovery of costs through PSE&G rates are subject to audit and verification by the BPU.
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. On September 30, 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. On December 31, 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 does not provide final resolution of the consolidated tax issue for any subsequent base rate filing. While Enterprise continues to account for these entities 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 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.)
Peach Bottom Settlement
In the first quarter of 1992, Enterprise and PSE&G allocated 75% of the net proceeds of the Peach Bottom settlement to income attributable to shareholders and deferred 25% attributable to ratepayers. Pursuant to the base rate case settlement, such allocations were adjusted in December 1992 to an equal sharing of the benefits of the Peach Bottom settlement.
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. At December 31, 1994 and 1993, the accumulated provision for depreciation and amortization included reserves for nuclear decommissioning for PSE&G's units of $249 million and $211 million, respectively. As of December 31, 1994 and 1993, PSE&G has contributed $190 million and $155 million, respectively, into external qualified and nonqualified nuclear decommissioning trust funds.
Based upon current regulatory requirements, PSE&G must file a decommissioning cost update by January 1, 1996 based on a site-specific study or upon the generic NRC guidelines.
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, including decommissioning. If current electric utility
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 NEPA, 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 $66 million (adjusted for inflation). To date, PSE&G has paid $13 million, resulting in a balance due of $53 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. PSE&G cannot predict the outcome, amount or timing of any recovery associated with this matter. In addition, as of December 31, 1994, PSE&G has recorded a liability of $3 million relating to low level radioactive waste costs incurred at its nuclear generating stations.
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.
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
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 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 projects. 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 cancelled Hydrogen Water Chemistry System Projects. While PSE&G expects the BPU to authorize recovery of such costs from electric customers, no assurances can be given.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Oil and Gas Property Write-Down
On December 31, 1992, the BPU approved the recovery of the EDC write-down through PSE&G's LGAC over a ten-year period beginning January 1, 1993. At December 31, 1994 and 1993, the remaining balance to be amortized was $41.2 million and $46.4, respectively.
NOTE 6. SCHEDULE OF CONSOLIDATED DEBT
LONG-TERM
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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, 1994 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.
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NOTE 7. LONG-TERM INVESTMENTS
Long-Term Investments are primarily those of EDHI. A summary of Long-Term Investments is as follows:
PSRC's leveraged leases are reported net of principal and interest on nonrecourse loans and unearned income, including deferred tax credits. Income and deferred tax credits are recognized at a level rate of return from each lease during the periods in which the net investment is positive. For information concerning PSRC's three direct-finance leases with Continental Airlines, see Note 12 -- Commitment and Contingent Liabilities of Notes.
Partnership investments are those of PSRC, EGDC and CEA and are undertaken with other investors. PSRC is a limited partner in various partnerships and is committed to make investments from time to time, upon the request of the respective general partners. As of December 31, 1994, $134 million remained as PSRC's unfunded commitment subject to call.
PSRC has invested in securities and limited partnerships investing in securities, which are recorded at fair value. Realized investment gains and losses on the sale of investment securities are determined utilizing the specific cost identification method. (See Note 8 -- Financial Instruments and Risk Management.)
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NOTE 8. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Enterprise's operations give rise to exposure to market risks from changes in crude oil and natural gas prices, interest rates, foreign exchange rates and security prices of investments recorded at fair value. Enterprise's policy is to use derivatives for the purpose of managing market risk consistent with its business plans and prudent practices. Enterprise does not hold or issue financial instruments for trading purposes.
The notional amounts of derivatives summarized below do not represent amounts exchanged by the parties and, thus, are not a measure of the exposure of Enterprise through its use of derivatives. The amounts exchanged, under the terms of the derivatives, are calculated on the basis of the notional amounts. Enterprise limits its exposure to credit-related losses in the event of nonperformance by counterparties by limiting its counterparties to those with high credit ratings.
Natural Gas Hedging
EDC sold futures contracts outstanding at December 31, 1994 which hedged 10,650,000 mmbtu representing approximately 13% of anticipated domestic natural gas production in 1995 at an average sales price of $1.95 per mmbtu. The deferred unrealized gain at December 31, 1994 related to EDC's futures contracts was $2.6 million. EDC did not have any outstanding futures contracts at December 31, 1993.
Interest Rate Swap
Capital entered into an interest rate swap on December 7, 1990 to allow EDHI to borrow at floating rates and effectively swap them into fixed rates. The interest differential to be received or paid under the interest rate swap agreement is accrued over the life of the agreement as an adjustment to the interest expense of the related borrowing. The swap terminates on December 11, 1995.
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Foreign Exchange
During 1994, PSRC entered into a forward purchase contract for foreign currency to hedge an EDC firm purchase commitment denominated in pound sterling. The EDC commitment related to the acquisition of Industrial Scotland Energy Limited (ISE) for approximately 21 million pounds. The realized gain of approximately $800 thousand on the forward purchase contract for foreign currency was used to reduce the net acquisition cost allocated to ISE's assets upon completion of the acquisition in June 1994.
Currently, substantially all of Enterprise's foreign revenues and expenses are denominated in U.S. dollars.
Security Swap
During 1994, PSRC entered into two agreements to swap portions of its ownership interest in certain equity securities, held in a partnership, to the S&P 500 return. The purpose of the swap was to minimize PSRC's exposure to the potential price volatility of such equity securities. One agreement with a notional amount of $17.6 million expires in June 1995; the other agreement, with a notional amount of $12.9 million, expires in September 1995.
The notional amount swapped and the year end gain during 1994 for these two agreements were as follows:
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Fair Value of Financial Instruments
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9. CASH AND CASH EQUIVALENTS
The December 31, 1994 and 1993 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 rates of 35% in 1994 and 1993 and 34% in 1992 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:
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Since 1987, Enterprise's Federal alternative minimum tax (AMT) liability has exceeded its regular Federal income tax liability. This excess can be carried forward indefinitely to offset regular income tax liability in future years. Enterprise expects to utilize these AMT credits in the future as regular tax liability exceeds AMT. As of December 31, 1994, 1993 and 1992, Enterprise had AMT credits of $256 million, $247 million and $212 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. On March 20, 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 $97 million as of December 31, 1994 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 ratemaking 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, 1994, PSE&G had recorded a deferred tax liability and an offsetting regulatory asset of $791 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 1994 Federal income tax rate of 35%.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SFAS 109
The following is an analysis of accumulated deferred income taxes:
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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.
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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 an 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 -- 42.59%; Hope Creek -- 95%; and Peach Bottom -- 42.49%. PSE&G operates Salem and Hope Creek, while Peach Bottom is operated by PECO.
The penalty/reward under the NPS is a percentage of replacement power costs. (See table below.) The NPS provides that the penalties will be calculated to the edge of each capacity factor range. For example, a 30% penalty applies to replacement power costs incurred in the 55% to 65% range and a 40% penalty applies to replacement power costs in the 45% to 55% range.
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 1994, the five nuclear units in which PSE&G has an ownership interest aggregated a 74% combined capacity factor.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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(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) Includes up to $250 million for premature decommissioning costs.
(E) In the event of a second industry loss triggering NEIL II - coverage, the maximum retrospective premium assessment can increase to $17.5 million.
(F) Weekly indemnity for 52 weeks which commences after the first 21 weeks of an outage. Beyond the first 52 weeks of coverage, indemnity of $2.8 million per week for 104 weeks is afforded. Total coverage amounts to $473.2 million over three years.
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.
PSE&G purchases property insurance, including decontamination expense coverage and premature decommissioning coverage, with respect to loss or damage to its nuclear facilities. PECO has advised PSE&G that it maintains similar insurance coverage with respect to Peach Bottom. Under the terms of the various insurance agreements, PSE&G could be subject to a maximum retrospective assessment for a single incident of up to $26.5 million. 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 Nuclear Regulatory Commission (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 shut down.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PSE&G is a member of an industry mutual insurance company, NEIL, which provides replacement power cost coverage in the event of a major accidental outage at a nuclear station. The policies provide for a weekly indemnity payment of $3.5 million for 52 weeks, subject to a 21-week waiting period. The policies provide for weekly indemnity payments of $2.8 million for a 104-week period beyond the first year's indemnity. The premium for this coverage is subject to retrospective assessment for adverse loss experience. Under the policies, PSE&G's present maximum share of any retrospective assessment in any year is $12.4 million.
Construction and Fuel Supplies
PSE&G has substantial commitments as part of its ongoing construction program which includes 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 plans, 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 integrated electric resource plan (IRP), PSE&G periodically reevaluates its forecasts of future customers, load and peak growth, sources of electric generating capacity and DSM to meet such projected growth, including the need to construct new electric generating capacity. The 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 cogeneration and other nonutility capacity projected to be available.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Based on PSE&G's 1995-1999 construction program, construction expenditures are expected to aggregate approximately $3.2 billion, which includes $484 million for nuclear fuel and $78 million of AFDC during the years 1995 through 1999. 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 increase 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 1995 through 1999.
Bergen Station Repowering
PSE&G is presently engaged in a construction project to renovate (or "repower") the Bergen Station pursuant to an air pollution control permit issued by the NJDEP in May 1993. The current effort would maintain the existing electric supply of the station (with a small increase from 629 MW to 669 MW), improve operational reliability and efficiency and significantly improve the environmental effects of operation of the facility.
In July 1993, an association of competitors of PSE&G appealed the NJDEP's issuance of the air permit for the project to the Appellate Division of the New Jersey Superior Court, alleging that PSE&G is first required to obtain a Certificate of Need (Certificate) under the New Jersey Need Assessment Act (NJNAA). The NJDEP determined that the NJNAA was inapplicable to this renovation project. The Appellate Division of New Jersey Superior Court affirmed this determination. The New Jersey Supreme Court has denied certification of the petition for review of this decision.
As of December 31, 1994, the repowering project was about 95% complete and PSE&G had spent approximately $291 million on this effort. The final cost is estimated to be approximately $400 million. In order for PSE&G to recover its costs for the project, PSE&G would need either BPU authorization to recover such costs in its rates or be successful in selling the station's output in the emerging wholesale market.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Hazardous Waste
Certain Federal and State laws authorize the EPA and the 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, 1994 for the Remediation Program amounted to $51.4 million. In addition, at December 31, 1994, PSE&G's estimated liability for estimated remediation costs aggregated $105.7 million through 1997.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In accordance with a Stipulation approved by the BPU in January 1992, PSE&G is recovering $32 million of its actual remediation costs to reflect costs incurred through September 30, 1992 over a six-year period. PSE&G will recover $5.3 million in each of its next two LGAC periods ending in 1996. The regulatory treatment of the remediation costs covered by this Stipulation was not changed in the BPU's September 15, 1993 written order, allowing continued collection under the terms of the January 1992 Stipulation. As of December 31, 1994, PSE&G has recovered $22.2 million through its LGAC.
The September 1993 decision concluded that PSE&G had met its burden of proof for establishing the reasonableness and prudence of remediation costs incurred in operating and decommissioning these facilities in the past. The remediation costs incurred during the period July 1, 1992 through September 30, 1992 were subject to audit and verification in PSE&G's 1992-93 LGAC. The audit has been completed and resulted in no disallowance of any costs. (See Note 2 - - Rate Matters - Remediation Adjustment Charge). A final Board Order was received on November 4, 1994, memorializing the above September 15, 1993 Stipulation.
Also in 1988, PSE&G filed suit against certain of its insurers to recover the costs associated with addressing and resolving environmental issues of the Remediation Program. PSE&G has settled its claim with one insurer and there is a trial scheduled for March 1995 with the remaining insurers. Pending full recovery of Remediation Program costs through rates or under its insurance policies, neither of which can be assured, PSE&G will be required to finance the unreimbursed costs of its Remediation Program.
Public Service Resources Corporation
PSRC has leased three wide-body aircraft to Continental Airlines (Continental) through direct-finance leases. The leases for two A-300 aircraft expire December 2000, while the lease for one DC 10-30 aircraft expires June 2002. At December 31, 1994, PSRC had investments in the A-300 leases and the DC 10-30 lease of $43.0 million and $33.1 million, respectively. Continental has failed to make full payment of its required lease payments due February 1, 1995 and has advised PSRC of its intent to seek the termination of the A-300 leases and return the A-300 aircraft to PSRC. Continental also advised PSRC of its intention, effective February 1, 1995, to reduce its rental payments due under all three leases by approximately 50%. Continental indicated that payments under these leases could include debt securities convertible into equity in lieu of full cash payments. Under the leases, PSRC rents receivable and pre-tax lease income in 1995 would have been $9.4 million and $4.1 million, respectively for the A-300 aircraft and $5.5 million and $2.7 million, respectively for the DC 10-30 aircraft. PSRC has informed Continental that it expects all of Continental's lease obligations to be satisfied in full. Negotiations are continuing concerning this matter. No assurances can be given that PSRC will be able to obtain new leases, sell or otherwise dispose of any such aircraft on satisfactory terms in the event of an unscheduled lease termination. Enterprise believes the ultimate resolution of this matter will not have a material effect on its financial position, results of operations or net cash flows.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 of its unfunded obligation of $609.3 million at January 1, 1993. Prior to 1993, Enterprise and PSE&G recognized postretirement health care and insurance costs in the year that the benefits were paid. The following table discloses the significant components of the net periodic postretirement benefit obligation:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The discount rate used in determining the PSE&G net periodic postretirement benefit cost was 7.25% and 7.50% for 1994 and 1993, 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 $4.7 million, or 10.5%, and increase the accumulated postretirement benefit obligation as of December 31, 1994 by $54.4 million, or 11.3%.
The assumed health care cost trend rates used in measuring the accumulated postretirement benefit obligation in 1994 were: medical costs for pre-age sixty-five retirees -- 13.5%, medical costs for post-age retirees -- 9.5% and dental costs -- 7.5%; such rates are assumed to gradually decline to 5.5%, 5.0% and 5.0%, respectively, in 2010. 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 ratemaking 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 1994 were $29.2 million and accrued OPEB costs deferred were $57.8 million. The amount of the unfunded liability, at December 31, 1994, as shown below, is $585.9 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.
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. PSE&G intends to request the BPU for full SFAS 106 recovery in accordance with
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1994, PSE&G has deferred $116.4 million of such costs.
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, 1994 and 1993 were as follows:
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The following table shows the Pension Plan's funded status:
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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. EGDC's real estate held for sale of $13.5 million and $33.8 million at December 31, 1994 and 1993 are presented in "Other Assets -- net," respectively, in the accompanying consolidated balance sheets.
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 onlyof 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, 1994 and 1993 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, 1994 and 1993 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 18, 1995, 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, 1995 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 18, 1995, present committee memberships, business experience during the last five years and other present directorships.
LAWRENCE R. CODEY has been a director since 1988. Age 50. 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, and 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. Age 53. Chairman of Executive Committee. President of PSE&G from July 1986 to September 1991. Director of Enterprise and of EDHI and its subsidiaries, CEA, EDC, PSRC, EGDC, Capital and Funding. Director of First Fidelity Bancorporation, First Fidelity Bank, N.A., Foster Wheeler Corporation and The Hartford Steam Boiler Inspection and Insurance Company.
RAYMOND V. GILMARTIN has been a director since July 20, 1993. Age 54. 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 of Merck & Co., Inc. from June 1994 to November 1994. Was Chairman of the Board, President and Chief Executive Officer of Becton Dickinson and Company (manufactures medical devices and diagnostic systems) from November 1992 to June 1994 and President and Chief Executive Officer of Becton Dickinson and Company from February 1989 to November 1992. Director of Merck & Co., Inc. and Providian Corporation.
SHIRLEY A. JACKSON has been a director since July 20, 1993. Was previously a director from 1987 to February 1988. Age 48. Director of Enterprise. Has been Professor of Physics, Rutgers University, since 1991 and has been a theoretical physics consultant since 1991 and was a theoretical physicist from 1976 to 1991 at AT&T Bell Laboratories (performs research and development in areas related to telecommunications for AT&T Corp.). Director of Core States Financial Corporation, Core States/New Jersey National Bank, New Jersey Resources Corporation and Sealed Air Corporation. Trustee of Massachusetts Institute of Technology.
IRWIN LERNER has been a director since July 20, 1993. Was previously a director from 1981 to February 1988. Age 64. 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 (manufactures pharmaceuticals, vitamins, fine chemicals and provides home health care and diagnostic products and services). Director of Humana Inc. and Affymax, N.V.
JAMES C. PITNEY has been a director since July 20, 1993. Was previously a director from 1979 to February 1988. Age 68. 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 and sixteen funds of the Seligman family of funds.
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 18, 1995, which definitive Proxy Statement is expected to be filed with the Securities and Exchange Commission on or about March 1, 1995 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, 1994 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
(8) Includes $75,000 paid pursuant to Mr. Murray's employment agreement.
OPTION GRANTS IN LAST FISCAL YEAR (1994)
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR (1994) AND FISCAL YEAR-END OPTION VALUES (12/31/94)
Employment Contracts and Arrangements
Employment agreements were entered into with Messrs. Ferland and Murray at the time of their employment. For Mr. Ferland, the remaining applicable provisions of these agreements provide for additional credited service for pension purposes in the amount of 22 years. The principal remaining applicable terms of the agreement with Mr. Murray provide for payment of severance in the amount of one year's salary, if discharged without cause during his first five years of employment, for a lump sum cash payment of $25,000 in 1995 to align Mr. Murray with MICP payments for other executive officers, and additional years of credited service for pension purposes for allied work experience of five years after completion of five years of employment, and up to fifteen years after completion of ten years of service.
Compensation Committee Interlocks and Insider Participation
PSE&G does not have a compensation committee. Decisions regarding compensation of PSE&G's executive officers are made by the Organization and Compensation Committee of Enterprise. Hence, during 1994 the PSE&G Board of Directors did not have, and no officer, employee or former officer of PSE&G participated in any deliberations of such Board, concerning executive officer compensation.
Compensation of Directors and Certain Business Relationships
A director who is not an officer of Enterprise or its subsidiaries and affiliates, including PSE&G, is paid an annual retainer of $22,000 and a fee of $1,200 for attendance at any Board or committee meeting, inspection trip, conference or other similar activity relating to Enterprise, PSE&G or EDHI. Each of the directors of PSE&G is also a director of Enterprise. No additional retainer is paid for service as a director of PSE&G. Effective July 1, 1994, 50 percent of the annual retainer is payable each January in Enterprise Common Stock for the twelve-month period beginning the preceding July 1 and ending the following June 30.
Enterprise has a Retirement Plan for outside directors. Under this Plan, directors with five years of service who have not been employees of Enterprise or its subsidiaries, who leave service after age 65, or for disability, receive an annual retirement benefit payable for life equal to the annual Board retainer in effect at the time the director's service terminates. The benefit payment is prorated for directors with less than 10 years of service on the Board.
During 1994, Dr. Shirley A. Jackson, a director of Enterprise and PSE&G, was the liaison member for the Board of Directors on and Chair of PSE&G's Nuclear Oversight Committee (NOC). The NOC met three times during 1994, with two meetings lasting two days and one meeting lasting three days. In accordance with the compensation policy for all NOC members, Dr. Jackson received an annual retainer of $28,000 and $1,000 per day for each NOC meeting attended.
COMPENSATION PURSUANT TO PENSION PLANS
PENSION PLAN TABLE
The above table illustrates annual retirement benefits expressed in terms of single life annuities based on the average final compensation and service shown and retirement at age 65. A person's annual retirement benefit is based upon a percentage that is equal to years of credited service plus 30, but not more than 75%, times average final compensation at the earlier of retirement, attainment of age 65 or death. These amounts are reduced by Social Security benefits and certain retirement benefits from other employers. Pensions in the form of joint and survivor annuities are also available.
Average final compensation, for purposes of retirement benefits of executive officers, is generally equivalent to the average of the aggregate of the salary and bonus amounts reported in the Summary Compensation Table above under 'Annual Compensation' for the five years preceding retirement, not to exceed 120% of the average annual salary for such five year period. Messrs. Ferland, Codey, Murray, Dougherty and Selover will have accrued approximately 48, 41, 39, 48 and 43 years of credited service, respectively, as of age 65.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Enterprise
The information required by Item 12 of Form 10-K with respect to directors and executive officers is set forth under the heading 'Security Ownership of Directors and Management' in Enterprise's definitive Proxy Statement for the Annual Meeting of Stockholders to be held April 18, 1995 which definitive Proxy Statement is expected to be filed with the Securities and Exchange Commission on or about March 1, 1995 and such information set forth under such heading is incorporated herein by this reference thereto.
PSE&G
All of PSE&G's 132,450,344 outstanding shares of Common Stock are owned beneficially and of record by PSE&G's parent, Enterprise, 80 Park Plaza, P.O. Box 1171, Newark, New Jersey.
The following table sets forth beneficial ownership of Enterprise Common Stock, including options, by the directors and executive officers named below as of January 31, 1995. None of these amounts exceed 1% of the Enterprise Common Stock outstanding at such date. No director or executive officer owns any PSE&G Preferred Stock of any class.
- ---------------
(1) Includes options to purchase 11,500 additional shares, 3,400 of which are currently exercisable.
(2) Includes the equivalent of 639 shares held under Thrift and Tax-Deferred Savings Plan. Include options to purchase 7,400 additional shares, 1,600 of which are currently exercisable.
(3) Includes the equivalent of 8,788 shares held under Thrift and Tax-Deferred Savings Plan. Includes options to purchase 22,600 additional shares, 5,600 of which are currently exercisable.
(4) Includes the equivalent of 555 shares held under Thrift and Tax-Deferred Savings Plan. Includes options to purchase 7,400 additional shares, 1,600 of which are currently exercisable.
(5) Disclaims beneficial ownership of 273 shares. Includes options to purchase 7,600 additional shares, 3,500 of which are currently exercisable.
(6) Includes 275 shares owned by relatives as to which beneficial ownership is disclaimed. Also includes the equivalent of 10,699 shares held under Thrift and Tax-Deferred Savings Plan. Includes options to purchase 78,400 additional shares, of which 21,000 are currently exercisable.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Enterprise
The information required by Item 13 of Form 10-K is set forth under the heading "Executive Compensation" in Enterprise's definitive Proxy Statement for the Annual Meeting of Stockholders to be held April 18, 1995, which definitive Proxy Statement is expected to be filed with the Securities and Exchange Commission on or about March 1, 1995. Such information set forth under such heading is incorporated herein by this reference thereto.
PSE&G
None.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements:
(1) Enterprise Consolidated Statements of Income for the years ended December 31, 1994, 1993, and 1992, on page 83.
Enterprise Consolidated Balance Sheets for the years ended December 31, 1994 and 1993, on pages 84 and 85.
Enterprise Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992 on page 86.
Enterprise Statements of Retained Earnings for the years ended December 31, 1994, 1993 and 1992 on page 87.
Enterprise Notes to Consolidated Financial Statements on pages 93 through 131.
(2) PSE&G Consolidated Statements of Income for the years ended December 31, 1994, 1993 and 1992, on page 88.
PSE&G Consolidated Balance Sheets for the years ended December 31, 1994 and 1993, on pages 89 and 90.
PSE&G Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992 on page 91.
PSE&G Statements of Retained Earnings for the years ended December 31, 1994, 1993 and 1992 on page 92.
PSE&G Notes to Consolidated Financial Statements on pages 132 through 135.
(b) The following documents are filed as a part of this report:
(1) Enterprise Financial Statement Schedules:
Schedule VIII -- Valuation and Qualifying Accounts for each of the three years in the period ended December 31, 1994 (page 149).
(2) PSE&G Financial Statement Schedules:
Schedule VIII -- Valuation and Qualifying Accounts for each of the three years in the period ended December 31, 1994 (page 150).
Schedules other than those listed above are omitted for the reason that they are not required or are not applicable, or the required information is shown in the consolidated financial statements or notes thereto.
(c) The following exhibits are filed herewith:
(1) Enterprise:
[S] [C] 4b(4) -- Indenture dated November 1, 1994 10a(15) -- Letter Agreement, as amended, with Leon R. Eliason dated September 14, 1994 12 -- Computation of Ratios of Earnings to Fixed Charges. 21 -- Subsidiaries of Registrant. 23 -- Independent Auditors' Consent. 27 -- Financial Data Schedule
(See Exhibit Index on pages 153 through 159).
(2) PSE&G:
[S] [C] 3b -- Copy of By-Laws of PSE&G, as in effect September 1, 1994 4b(4) -- Indenture dated November 1, 1994 10a(14) -- Letter Agreement, as amended, with Leon R. Eliason dated September 14, 1994 12(a) -- Computation of Ratios of Earnings to Fixed Charges. 12(b) -- Computation of Ratios of Earnings to Fixed Charges Plus Preferred Stock Dividend Requirements. 23 -- Independent Auditors' Consent. 27 -- Financial Data Schedule
(See Exhibit Index on page 153 and pages 160 through 165).
(d) The following reports on Form 8-K were filed by the registrant(s) named below during the last quarter of 1994 and the 1995 period covered by this report under Item 5:
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 23, 1995 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 23, 1995
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