Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 1996, for Public Service Enterprise Group Incorporated (Enterprise) and its principal subsidiary, Public Service Electric and Gas Company (PSE&G). Enterprise operates as a holding company for PSE&G, a regulated electric and gas utility, and Enterprise Diversified Holdings Incorporated (EDHI), which manages non-utility energy and real estate investments. A significant corporate event occurred during the period: on July 1, 1996, EDHI entered into an agreement to sell Energy Development Corporation (EDC) to Samedan Oil Corporation for approximately $779 million, with the sale closing on July 31, 1996. Consequently, EDC is classified as discontinued operations.
Key Financial Metrics
Revenue and Profit (Enterprise Consolidated):
- Total Operating Revenues (6 months): $3,133.1 million (1996) vs. $2,904.2 million (1995).
- Net Income (6 months): $328.6 million (1996) vs. $323.3 million (1995).
- Earnings Per Share (6 months): $1.34 (1996) vs. $1.32 (1995).
- Operating Income (6 months): $542.4 million (1996) vs. $552.1 million (1995).
Cash Flow (Enterprise Consolidated):
- Net Cash Provided by Operating Activities (6 months): $591.7 million (1996) vs. $581.9 million (1995).
- Net Cash Used in Investing Activities (6 months): $(293.5) million (1996) vs. $(490.8) million (1995).
- Net Cash Used in Financing Activities (6 months): $(305.4) million (1996) vs. $(81.7) million (1995).
Balance Sheet Highlights (Enterprise Consolidated as of June 30, 1996):
- Total Assets: $16,943.4 million.
- Total Capitalization: $10,996.5 million.
- Long-Term Debt: $4,805.8 million.
- Short-Term Debt (Commercial Paper/Loans): $736.9 million.
- Cash and Cash Equivalents: $54.7 million.
Material Changes vs. Prior Period
Revenue Growth: Total operating revenues increased 7.9% for the six months ended June 30, 1996, compared to the prior year. This was driven by a 2% increase in electric revenues and a 21% increase in gas revenues. The gas revenue surge was primarily due to higher fuel cost recovery and increased residential sales resulting from colder weather during the heating season.
Expense Increases: Maintenance expenses rose significantly by 38% ($51 million) for the six-month period, attributed to refueling outage expenses at the Salem and Hope Creek nuclear units. Other operating expenses increased 8% ($34 million) due to higher labor, material, and conservation costs.
Discontinued Operations: The filing reflects the reclassification of EDC as discontinued operations. EDC contributed $7.8 million to net income for the six months ended June 30, 1996, compared to $0.4 million in the prior year.
Preferred Stock Redemptions: Enterprise recorded a net gain of $18.5 million on the redemption of preferred stock, which positively impacted earnings. This was offset by a decrease in the Allowance for Funds Used During Construction (AFDC) due to reduced construction work in progress.
Guidance, Outlook, Risks, and Contingencies
Regulatory and Rate Matters:
- Alternative Rate Plan: PSE&G filed the "New Jersey Partners in Power" plan with the Board of Public Utilities (BPU), proposing a $50 million rate reduction and mechanisms to compete in a deregulated market. The BPU has commenced the review process, but final approval timing is uncertain.
- Salem Nuclear Investigation: The BPU declared rates for Salem Unit 1 and Unit 2 interim and subject to refund pending hearings on whether the units remain "used and useful." Removal of these units from rate base could materially adversely affect financial results. Replacement power costs are estimated at $4–$6 million per month.
- Nuclear Performance Standard (NPS): Based on current projections, PSE&G faces an estimated $18 million penalty for 1996 due to a composite capacity factor of approximately 53%.
Nuclear Operations:
- Salem Unit 1: Expected to return to service in mid-1997 following the installation of replacement steam generators (cost estimated at $64–$72 million for PSE&G's share).
- Salem Unit 2: Outage extended into the fourth quarter of 1996 due to additional required work.
Capital Resources and Liquidity:
- Enterprise authorized a $350 million common stock repurchase program following the sale of EDC.
- PSE&G expects to internally generate funds for capital requirements over the next five years, assuming timely cost recovery.
- EDHI is subject to financial covenants requiring a debt-to-equity ratio of no more than 2.00:1 and an EBIT coverage ratio of at least 1.50:1 beginning July 31, 1996.
Legal Proceedings:
- Suit filed against Westinghouse Electric Corporation regarding Salem steam generator failures.
- Shareholder derivative actions alleging mismanagement of Salem and Hope Creek operations.
- Proceedings regarding potential overrecovery of capacity costs from cogenerators, with allegations of $250–$300 million in overrecovery.
Investor Verification Checklist
- Salem Nuclear Restart Dates: Verify the actual return-to-service dates for Salem Units 1 and 2 against the projected mid-1997 and late-1996 timelines, as delays impact replacement power costs and NPS penalties.
- BPU Rate Plan Approval: Monitor the status of the "New Jersey Partners in Power" plan and the BPU's decision on the "used and useful" status of Salem units, which directly impacts revenue recovery.
- EDC Sale Closing: Confirm the final purchase price and the realization of the projected $13.5 million after-tax gain from the EDC sale in the third quarter.
- Stock Repurchase Execution: Track the execution of the $350 million common stock repurchase program authorized in July 1996.
- Environmental Liabilities: Review updates on the Manufactured Gas Plant Remediation Program, where costs are estimated at over $20 million annually for more than 30 years.