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Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 1995, for Public Service Enterprise Group Incorporated (Enterprise) and its principal subsidiary, Public Service Electric and Gas Company (PSE&G). Enterprise is a holding company engaged in the electric and gas utility business through PSE&G, as well as non-utility energy and financial activities through subsidiaries like EDHI. The financial statements are unaudited but reflect all normal recurring accruals.

Key Financial Metrics (Nine Months Ended Sept 30, 1995)

Material Changes vs. Prior Period

• Earnings Decline: Enterprise Net Income decreased by $37.1 million (6.8%) for the nine months ended September 30, 1995, compared to the same period in 1994. Earnings per share dropped from $2.24 to $2.08.
• Revenue Mix: Total operating revenues increased slightly by $45.9 million. Electric revenues rose $222.3 million due to economic growth and weather-related demand, while Gas revenues fell $184.4 million due to a mild winter reducing sales volumes.
• Expense Increases: Operating expenses increased, driven primarily by higher fuel costs for electric generation ($168.1 million increase) and increased maintenance and operating expenses at the Salem nuclear plant due to its extended outage.
• Cash Flow Improvement: Despite lower net income, cash provided by operating activities increased significantly by $287.8 million to $1.047 billion. This was driven by a $149 million greater recovery of electric and gas costs through adjustment clauses (LEAC/LGAC) and a $239 million net decrease in prepaid/accrued taxes.
• Capital Structure: Enterprise issued $60 million of Monthly Income Preferred Securities in September 1995 to redeem preferred stock. Total long-term debt remained relatively stable, though short-term debt increased to fund operations and construction.

Outlook, Risks, and Management Commentary

Management Commentary

Management attributes the earnings decline to higher operating expenses at the Salem nuclear plant and increased interest/dividend costs, which offset revenue gains from electric sales. The company maintains a constant dividend rate, resulting in a reduced payout ratio, which management views as a prudent policy.

Key Risks and Contingencies

• Nuclear Operations (Salem): Both Salem Units 1 and 2 are out of service for the remainder of 1995. Unit 1 is now expected to return in Q2 1996 (delayed from Q1). Additional 1995 operating expenses related to Salem are estimated at $22 million, with 1996 costs expected to materially exceed initial estimates. Replacement power costs are approximately $5 million per month per unit.
• Nuclear Performance Standard (NPS): PSE&G estimates the 1995 aggregate capacity factor for its nuclear units will be 62-63%, below the 65% BPU standard. This is expected to result in a penalty of $2 million to $4 million.
• Regulatory and Competition: The transition to a competitive market environment poses risks to customer retention and revenue growth. The BPU is reviewing alternative regulatory pricing plans (e.g., rate caps) which PSE&G intends to file later in 1995.
• Environmental Remediation: PSE&G is engaged in a long-term remediation program for former manufactured gas plant sites. Costs incurred through September 1995 were $57.4 million, with an estimated liability of $103.4 million. Total program costs could be material over 30+ years.
• Legal/DOE Dispute: PSE&G and other utilities have sued the Department of Energy (DOE) regarding the failure to begin accepting spent nuclear fuel in 1998 as contractually required.

Investor Verification Checklist

• Salem Restart Timeline: Verify the progress of the work scope assessment for Salem Units 1 and 2 and the likelihood of the Q2 1996 restart date.
• Cost Recovery: Monitor the BPU's approval of the Levelized Gas Incentive Clause (LGIC) and the recovery of Salem-related replacement power costs and remediation expenses.
• Nuclear Penalties: Confirm the final 1995 capacity factor and the exact amount of the NPS penalty.
• Competitive Strategy: Review the details of the alternative economic regulatory proposal (rate cap plan) PSE&G plans to file to mitigate competitive pressures.
• Environmental Liabilities: Track the annual costs of the Manufactured Gas Plant Remediation Program against the estimated $20 million+ annual run rate.