Business Context and Reporting Period
Company: Public Service Enterprise Group Inc. (Enterprise) and its principal subsidiary, Public Service Electric and Gas Company (PSE&G).
Reporting Period: Fiscal year ended December 31, 1995.
Overview: Enterprise is a public utility holding company. PSE&G provides electric and gas service in New Jersey, comprising 85% of Enterprise's assets and 93% of its revenues. Enterprise Diversified Holdings Incorporated (EDHI) manages nonutility businesses, including oil and gas exploration (EDC), cogeneration (CEA), and real estate (EGDC). Enterprise announced an intent to divest EDC in 1996.
Key Financial Metrics (1995)
| Metric | Value |
|---|---|
| Total Operating Revenues | $6,164 million |
| Net Income | $662 million |
| Earnings Per Share (EPS) | $2.71 |
| Dividends Per Share | $2.16 |
| Total Assets | $17,171 million |
| Long-Term Debt | $5,190 million |
| Common Equity | $5,445 million |
| Ratio of Earnings to Fixed Charges | 2.77 |
| Cash Provided by Operating Activities | $1,493 million |
Material Changes vs. Prior Period
- Revenue: Total operating revenues increased 4.1% to $6.164 billion from $5.922 billion in 1994. Electric revenues rose 7.5% due to higher sales and energy cost recovery, while gas revenues declined 5.2% due to mild winter weather.
- Net Income: Decreased 2.5% to $662 million from $679 million in 1994. The decline was driven by increased operating expenses and lower gas sales, partially offset by gains from EDC litigation settlements and property sales.
- EPS: Declined to $2.71 from $2.78 in 1994.
- Capital Expenditures: PSE&G utility plant additions were $686 million in 1995, down from $887 million in 1994.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Alternative Rate Plan: PSE&G filed a "New Jersey Partners in Power" plan with the BPU. This proposal seeks to transition to a competitive marketplace, eliminate the Nuclear Performance Standard (NPS), and shift fuel cost risks from customers to the utility.
- Divestiture: Enterprise intends to divest Energy Development Corporation (EDC) in 1996.
- Debt Reduction: PSE&G plans to retire over $1 billion of debt over the next five years and fund construction internally.
Risks and Contingencies
- Nuclear Operations (Salem): Salem Units 1 and 2 remain out of service. Steam generator inspections revealed degradation in Salem 1, delaying its restart indefinitely. Salem 2 is targeted for a Q3 1996 restart. The outage incurs replacement power costs of $4–$6 million per month per unit.
- Regulatory Risks: Uncertainty regarding the recovery of stranded costs, consolidated tax benefits, and the approval of the Alternative Rate Plan.
- Environmental Liabilities: Significant potential liabilities exist regarding hazardous waste remediation (e.g., Manufactured Gas Plant sites) and compliance with Clean Air Act requirements.
- Competition: Deregulation and unbundling in gas and electric markets pose risks to customer retention and revenue stability.
Investor Verification Checklist
- Salem Restart Timeline: Verify the status of steam generator repairs and the NRC's approval for Salem 1 and 2 restarts, as delays directly impact earnings.
- Alternative Rate Plan Approval: Monitor the BPU's decision on the "New Jersey Partners in Power" plan, which fundamentally alters cost recovery mechanisms.
- EDC Divestiture: Confirm the terms and timing of the EDC sale to assess the impact on nonutility earnings.
- Environmental Remediation Costs: Review updates on the Manufactured Gas Plant remediation program and potential Superfund liabilities.
- Debt Covenants: Ensure continued compliance with EDHI debt covenants, specifically the debt-to-equity and EBIT coverage ratios.