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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, 1993.

Overview: Enterprise is a public utility holding company. PSE&G provides electric and gas service to approximately 70% of New Jersey's population. PSE&G comprised 86% of Enterprise's assets and 93% of its revenues in 1993. The company operates in a transitioning energy market characterized by deregulation, increased competition from independent power producers, and significant environmental regulatory requirements.

Key Financial Metrics (1993)

Material Changes vs. Prior Period

• Revenue Growth: Enterprise total operating revenues increased 6.5% to $5.7 billion, driven by a base rate increase effective January 1, 1993, and higher electric sales due to abnormally warm weather.
• Earnings Increase: Net income rose 19.2% to $600.9 million. Excluding a one-time $33 million settlement gain in 1992 related to Peach Bottom litigation, PSE&G earnings increased by $166 million.
• Nonutility Impairment: Enterprise Diversified Holdings Inc. (EDHI) recorded a $77.6 million property impairment charge (reducing net income by $50.5 million after tax) related to Enterprise Group Development Corporation (EGDC) real estate assets.
• Cash Flow Decline: Despite higher net income, operating cash flow decreased by $332 million to $1.0 billion, primarily due to underrecovery of energy costs through adjustment clauses and increased New Jersey Gross Receipts and Franchise Tax (NJGRT) payments.

Guidance, Outlook, and Risks

Capital Requirements

Construction expenditures for PSE&G are forecast to aggregate approximately $4.2 billion for the period 1994 through 1998. This includes $483 million for nuclear fuel. The company expects to generate internally a majority of these capital requirements, assuming adequate and timely rate relief.

Regulatory and Environmental Risks

• Salem Station Permit: A revised draft permit for the Salem nuclear station requires approximately $75 million in capital modifications. If cooling towers are ultimately required instead, costs could range from $720 million to $2.0 billion.
• Environmental Cleanup: PSE&G is involved in numerous Superfund and state environmental cleanup actions. While individual site costs are generally not expected to be material, the aggregate cost of the Manufactured Gas Plant Remediation Program is estimated to be material over a 30+ year period.
• Consolidated Tax Benefits: The New Jersey Board of Regulatory Commissioners (BRC) has not resolved the issue of whether consolidated tax savings from nonutility affiliates should be shared with utility ratepayers. An unfavorable resolution could reduce future revenues.

Competition

The company faces increasing competition from independent power producers and nonutility generators. PSE&G has implemented flexible pricing tariffs to retain large industrial customers.

Investor Verification Checklist

• Rate Relief: Verify the timing and sufficiency of future rate increases to cover the $4.2 billion construction program and environmental compliance costs.
• Salem Station Outcome: Monitor the final permit decision for the Salem nuclear station to determine if the $75 million estimate holds or if the $720 million+ cooling tower scenario materializes.
• EDHI Strategy: Assess the progress of EDHI's strategy to limit nonutility investments to 20% of consolidated assets and the potential impact of the real estate impairment on future earnings.
• Environmental Liabilities: Review the status of the Manufactured Gas Plant Remediation Program and the BRC's approval of cost recovery mechanisms.
• Consolidated Tax Treatment: Track BRC proceedings regarding the allocation of consolidated tax benefits between the utility and nonutility segments.