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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 1996, for Public Service Enterprise Group Incorporated (Enterprise) and its principal subsidiary, Public Service Electric and Gas Company (PSE&G). Enterprise is a holding company with PSE&G comprising approximately 85% of its assets. The company operates regulated electric and gas utilities in New Jersey and maintains nonutility businesses through Enterprise Diversified Holdings Incorporated (EDHI), including energy development and real estate.

Key Financial Metrics

Note: YTD figures represent the twelve months ended March 31.

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 11.3% in Q1 1996 compared to Q1 1995, driven primarily by a 26% increase in gas revenues due to higher fuel cost recovery and increased residential sales from colder weather. Electric revenues rose 1.4%.
• Earnings Decline: Net income decreased 8.7% in Q1 1996 ($194.1M vs. $212.6M). Earnings per share dropped from $0.87 to $0.79.
• Expense Increases: Maintenance expenses surged $31.4 million in Q1 1996, largely due to the shutdown of the Salem Nuclear Generating Station and the refueling outage at Hope Creek. Other operating expenses increased $23 million due to labor costs and emergency work.
• Liquidity Improvement: Cash and cash equivalents increased significantly to $546.5 million from $131.1 million in the prior year, supported by strong operating cash flows and financing activities.

Outlook, Risks, and Management Commentary

Regulatory and Strategic Initiatives

On January 16, 1996, PSE&G filed the "New Jersey Partners in Power" Alternative Rate Plan with the New Jersey Board of Public Utilities (BPU). The plan proposes a $50 million immediate rate reduction, rate freezes, and mechanisms to compete in non-regulated markets. Final approval is pending.

Nuclear Operations and Contingencies

• Salem Nuclear Station: Both Salem Units 1 and 2 are currently out of service. Salem Unit 2 is scheduled to return by the end of August 1996. Salem Unit 1 faces significant steam generator degradation; repair options are being evaluated, with a potential return to service by mid-1997. The BPU has declared rates for Salem Unit 1 interim and subject to refund pending further hearings.
• Performance Penalties: Based on current projections, the 1996 aggregate nuclear capacity factor is expected to be 57%, resulting in an estimated $12 million penalty under the Nuclear Performance Standard (NPS).
• Hope Creek: Completed its refueling outage on March 25, 1996. The NRC has expressed concerns regarding performance trends and is monitoring the plant closely.

Legal Proceedings

PSE&G and co-owners have sued Westinghouse Electric Corporation regarding the Salem steam generators. Conversely, co-owners have filed lawsuits against Enterprise and PSE&G alleging mismanagement of Salem. Additionally, shareholder derivative actions are pending regarding operations at Salem and Hope Creek.

Divestiture Plans

Enterprise announced plans to divest Energy Development Corporation (EDC) in 1996 via sale or spin-off. A Form S-1 was filed in March 1996 to facilitate a potential IPO of up to 20% of EDC.

Investor Verification Checklist

• Salem Unit 1 Timeline: Verify the final decision on steam generator repair options and the confirmed return-to-service date for Salem Unit 1.
• Regulatory Approval: Monitor the BPU's final decision on the "New Jersey Partners in Power" Alternative Rate Plan and its impact on stranded cost recovery.
• Legal Outcomes: Track the status of lawsuits involving Westinghouse, co-owner disputes, and shareholder derivative actions regarding nuclear operations.
• EDC Divestiture: Confirm the method (sale vs. spin-off) and timing of the Energy Development Corporation divestiture.
• Nuclear Performance Standard: Assess the final 1996 capacity factor and the actual financial impact of the NPS penalty.