ML18082A353

Annual Financial Rept 1979

ML18082A353
Person / Time
Site:	Salem, Hope Creek
Issue date:	02/15/1980
From:	Betz J, Rich Smith Public Service Enterprise Group
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Edison Centennial of Light About the Cover Thomas A. Edison's invention of the first practical incandescent lamp on October 21, 1879, is depicted artisti-ca ll y to dramatize his historic accomplish-mcn t. The electric utility industry, as well as countless others, owe their existence to his genius.

The IOOth anniversary of his invention was observed during 1979 by the "Centennial of Light." The centennial not only honored Edison fo r his contribu-tions to mankind, but also sought to sti1n ulatc interest in science and technology as a means of renewing the nation's technical leadership.

Sym bol of the Centennial of Light 1879-1979 1979 Annual Report Table of Contents 1

Financial Highlights 2

Message to Shareholders 4

Edison Tribute 8

Financial Review 10 Construction Expenditures 11 Energy Production 16 Energy Distribution 19 Energy Usage 23 Energy Research 27 Community, Employee Information 28 Transport of New Jersey 29 Financial Statement Responsibility 29 Accounting Policies 31 Financial Statements 42 Operating Statistics 44 Financial Statistics 46 Management's Discussion and Analysis of the Statements of Income 47 Independent Accountants' Opinion 48 Directors and Officers About the Company Public Service Electric and Gas Com-pany, New Jersey's largest utility, serves about 5.5 million people, more than three-fourths of the state's popu-lation. The Company's service area stretches across the state's industrial corridor from the New York state line on the north to below Camden in the south. The territory, a center of trans-portation, contains a well-balanced mixture of industrial, commercial and residential development. Included in the area arc New Jersey's six largest cities and nearly 300 smaller subur-ban and rural communities.

Annual Meeting Please note that the Annual Meeting of Stockholders of the Company will be held at the Robert Treat Hotel, 50 Park Place, Newark, New Jersey, Tuesday, April 15, 1980, at 2:00 PM. A summary of the meeting will be sent to stockholders at a later date.

Financial and Statistical Review A comprehensive statistical sup-plement to this report, containing financial and operating data for the years 1969-1979, will be available this Spring. If you wish to receive a copy, please write to the Vice President and Treasurer Public Service Electric and Gas Con.;pany, P.O. Box 5 70, Newark, N.J. 07101.

Stock Symbol PEG The Company's Common Stock and the $1.40 Dividend Preference Common Stock are traded on the New York Stock Exchange and the Philadelphia Stock Exchange.

Transfer Agents All Stocks Morgan Guaranty Trust Company of New York, 30 West Broadway, New York, N.Y 10015 Stock Transfer Department, Public Service Electric and Gas Company, 80 Park Place, Newark, N.J. 07101 Registrars All Stocks Fidelity Union Trust Company, 765 Broad Street, Newark, N.J. 07101 Morgan Guaranty Trust Company of New York, 30 West Broadway, New York, N.Y 10015 Capitalization Ratios (Year-End) 20 40 Debt Preferred Stock Com mon Equity 60 80 100 PS~G Financial Highlights Earnings per average share of Common Stock Shares of Common Stock Average Year-end Dividends paid per share of Common Stock Book Value per share of Common Stock Total Operating Revenues Total Opera ting Expenses Earnings Available for Common Stock Gross Additions to Utility Plant Total Utility Plant Earnings and Dividends per Share

$1 Dividends Earnings

$2

$3 Public Service Electric and Gas Company 80 Park Place, Newark, New Jersey 07101 (201) 430-7000 Stockholder Information - Tull Free New Jersey residents Outside New Jersey (800) 242-0813 (800) 526-8050 1979 1978

$2.85

$2.95 65,409,000 61,783,000 68,914,000 64, 120,000

$2.20

$2.08

$26.26

$26. 13

$2,416,707,000 $2,219,785,000

$2,093,086,000 $1,899,385,000

$ 186,530,000 $ 181,987,000

$ 538,135,000 $ 513,757,000

$6,325,033,000 $5,810,329,000 Times Fixed Charges Earned (Befo re Incom e Taxes)

Change (3) 6 7

6 9

10 2

5 9

1978 ~------------

2 Docket#

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Control # ~oo r;o c:; o '/-O ~

Date s/ 01 J &t>_of Documeat:

REGULA'fORY'DOCKET fllE 3

4

Message to Shareholders 2

The year 1979 was a difficult one for PSE&G as it was for many utility companies, especially those in the Northeast. A dramatic increase in oil prices, accelerating inflation, high money costs and reactions to the Three Mile Island accident in Pennsylvania contributed to an adverse operating environment for utilities. Further, abnormal weather conditions in our territory, combined with high energy costs, tended to reduce demands for both gas and electricity. As a result of these unfavorable circumstances the Company's earnings per share of Common Stock dropped to $2.85 in 1979, 3.4% below the $2.95 realized in 1978, when there were 3,626,588 fewer average shares outstanding.

Total revenues in 1979 rose to $2.4 billion from $2.2 billion in 1978 a 9% increase, while net income 1

available for Common Stock increased 2.5% from $182 million to $186.5 million.

The dividend on Common Stock was increased in 1979 for the fourth time.in as many years. Beginning with the first quarter; the dividend was raised by two cents a share to 55 cents from the 53 cents paid in the fourth quarter of 1978. Dividends on Com-mon Stock paid in 1979 increased to

$2.20 compared with $2.08 in 1978.

As we have stated on numerous occa-sions, we are committed to a program of regular dividend increases as long as fmancial conditions permit.

Rate Increase On. ~pril 2, 1979, the Company filed a petition for a rate increase of $374.5 million with the New Jersey Board of Public Utilities. Hearings on the peti-tion were held during the year and the record closed on December 14, except for ISsues relating to unrecovered fuel costs. As of this date an initial deci-sion by the administ~ative law judge 111 the proceeding has been issued, and an order by the New Jersey Board is expected in March.

Nuclear Power The Three Mile Island accident on March 28, 1979, focused attention on the generation of electricity by nu-clear power. Although PSE&G has no involvement in either the ownership or operation of the Three Mile Island station, repercussions of the accident have had a significant effect on our Company. When the accident oc-curred, the No. 2 nuclear unit at our Salem Generating Station was near completion. We were expecting to re-ceive an operating license in April and, after testing, to begin commercial operation by late summer or early fall.

As a consequence of the accident, the Nuclear Regulatory Commission halted the issuance of operating licenses and construction permits. We do not now expect to receive an operating license before the spring of 1980.

The No. 1 Salem unit, which had an excellent performance record in the first quarter of 1979, was shut down April 2 for refueling and maintenance work. We had originally scheduled the return of this unit to service in late June but because of a number of requirements, some stemming from the Three Mile Island accident its return.was delayed until Dece~ber.

Dunng 1979 nuclear power provided 22% of the Company's electric output, a large part of which came from the Peach Bottom station in Pennsylvania in which we have a 42.49% interest. We had anticipated a greater portion of our electric output would come from nuclear but the unavailability of the Salem units reduced our expected nuclear genera ti on.

Robert I. Smith, Chairman of the Board !left), and john F. Betz, Pres-ident, photographed with model for aquaculture project, emphasiz-ing PSE&G's dedication to energy research and development in the tradmon of Edison.

Immediately following the Three Mile Island accident, the Company and other utilities operating nuclear plants, established task forces to investigate the accident and apply the "lessons learned" to their nuclear stations. Improvements in safety systems and operating procedures at Salem were made. Management of the Company, after reviewing all the facts reaffirmed its commitment to nuclear' power.

Oil Reduction The low-_sulphur oil that the Company bums ongmates abroad and it is im-perative for both economic and politi-cal reasons that we reduce its use.

Events in 1979, particularly in Iran, emphasized the need for the Company and the nation to lessen dependence on foreign oil.

The price of oil rose from $15.51 a barrel at the end of 1978 to $29.36 at the close of 1979 and the current price is $31.34 - more than double what it was at the end of 1978. Obviously, the contmuously increasing price of oil as well as the continuity of supply are of deep concern.

Our use of oil for electric generation was reduced from 35% in 1978 to 25%

in 1979 by burning gas and by purchas-mg coal-generated electricity from the Pennsy 1 vania-New Jersey-Mary land Interconnection.

In order to further reduce oil im-ports we are studying conversion of existing oil burning plants to coal where this can be done economically without harmful environmental effects.

Gas Supply An improvement in natural gas supplies made it possible for the company to add 20,804 new house heating installations during the year.

Of this total, 15,065 were conversions to gas from fuel oil as a result of the rapidly escalating oil price.

Our natural gas supply has been enhanced by deliveries from Energy Development Corporation (EDC), our subsidiary engaged in gas exploration and development. At the end of 1979 we were receiving gas from fields dis-covered by EDC at the rate of about 3 million cubic feet a day.

Energy Research As this report shows, the Company is participating in extensive research on a number of alternate energy sources.

However; our basic conclusion is that we will have to place primary reliance on coal and nuclear for the near-term future because none of the alternates, nor all of them together, can make a meaningful contribution to energy supply between now and the end of the century.

We were much encouraged during 1979 by the progress made toward the development of fusion energy. It now appears that, with sufficient funding, a fusion demonstration plant could be on line by the year 2000. We have sup-ported fusion research for a number of years and we are looking forward to the time when the tremendous poten-tial of this energy source can be com-mercially utilized.

Research Advisory Council In the latter part of 1979, a Research Advisory Council was established.

The function of this group of some twenty people from various back-grounds outside of the utility industry is to provide advice and guidance for our research activities. Consumers, environmentalists, the media, aca-demia and various businesses are represented on the council.

Energy Education During the year, the Company ex-panded its energy education program, stressing the need for nuclear power.

The program included employee education sessions, newspaper adver-tising and television commercials.

The company's speakers bureau increased its activity and made quali-fied speakers available for any group interested in learning more about the energy situation.

We urge you to actively support our nuclear program if you are convinced, as we are, that nuclear power must play an important role in the overall national energy policy.

Effects of Inflation Over the past decade, inflation has become a significant factor in the economy and in our business. During this period the Consumer Price Index has doubled, indicating that the dollar currently will purchase half as much as in 1970. Financial statements have not shown the impact of inflation.

In recognition of this problem, the accounting profession through the Financial Accounting Standards Board has issued a statement requiring that certain inflation-adjusted data be pre-sented in 1979 annual reports. This information, on page 39, is supple-mental to the primary financial state-ments and is designed to show the effects that inflation has had on the Company.

Transport of New f ersey During 1979, legislation enacted by the State of New Jersey established the New Jersey Transit Corporation to acquire privately-owned transporta-tion companies. Our wholly-owned suhsidiary, Transport of New Jersey, is presently receiving operating sub-sidies from the State of New Jersey and we have indicated our willing-ness to sell this subsidiary to the State for a reasonable price. Negotia-tions are presently in progress for State acquisition.

Looking to the Future A bright aspect of 1979 for the elec-tric industry was celebration of the "International Centennial of Light" which marked the lOOth anniversary of Thomas A. Edison's invention of the first practical incandescent lamp.

The Company had a special interest in the observance because Edison's inventions not only gave rise to the electric utility industry, but he carried out most of his life's work in New Jersey, and in our service area.

As we embark on the decade of the 80's, we do so with the same kind of determination that characterized Edison's efforts to find solutions to problems. The decade of the 70's was a period of trial and upheaval for the utility industry. Triggered by the Arab oil embargo of 1973 we have been buffeted by crisis after crisis as the result of rising fuel costs and rampant inflation. The rate of growth in de-mand for electricity has been slowed by high prices and by recognition of the need to conserve and make more efficient use of our energy resources.

As we enter the 1980's, we are aggres-sively gearing our plans to the lower growth rates which we expect to per-sist for some time. We are dedicated to reducing our dependence on for-eign oil. We are exploring alternate energy sources for the future and we are pursuing all possible ways to improve the efficiency and economy of our operations.

As 1979 ended, a new corporate home for the Company was nearing completion - a modem, 26-story gleaming glass walled structure that gives added dimension to Newark's downtown skyline.

The Company will occupy 22 floors of the office tower and a satellite three-story plaza building. Named 80 Park Plaza, the complex is adjacent to and east of the 80 Park Place head-quarters, the Company's home since 1915.

This spring the first of 3,300 em-ployees will begin moving into the new quarters. After the old building is empty, it will be demolished and a landscaped plaza developed.

The new headquarters, which was built and is owned by subsidiaries of Rockefeller Center, Inc., will provide greater efficiency through consolida-tion of operations in a more favorable

~orking environment as well as sig-nificant savings from energy conservation.

During 1979, as in years past, the dedication and support of Company employees, and of you, the stock-holders, has been of incalculable value. We look forward to the decade of the 1980's with confidence, know-ing that your interest and trust will continue.

r-~_s;L._.d Robert I. Smith Chairman of the Board and Chief Executive Officer

~~&~

John F. Betz President and and Chief Operating Officer February 15, 1980 3

CENTENNIAL OF LIGHT J

1879 1979

The incandescent light was the hardest one of all; it took many years, not only of concentrated thought, but also of world-wide research.

Thomas Alva Edison's first practical incandescent lamp burned out after 40 hours4.62963e-4 days <br />0.0111 hours <br />6.613757e-5 weeks <br />1.522e-5 months <br />, but its afterglow and reflections continue to illuminate and enrich mankind 100 years later.

Of all Edison's inventions-he patented 1,093-the lamp he lighted in the third week of October of 1879 in his Menlo Park laboratory outshone all the others. The world always would be a brighter and better place in which to live.

In 1979, a year-long "International Centennial of Light" observance commemorated Edison's historic ac-complishment. Robert I. Smith, chairman and chief executive officer of PSE&.G, served as chairman of the centennial committee.

Centennial events were held throughout the nation and abroad. A number took place in New Jersey where Edison lived and worked most of his life.

As part of the observance, PSE&.G on October 19 illuminated a "Centen-nial of Light" display on the facade of its headquarters building in Newark.

At the ceremony in Military Park, fac-ing the headquarters building, Smith borrowed the words spoken in 1929 by Thomas N. McCartei; the Company's foundei; in honoring Edison on the SOth anniversary of his invention:

"We of the electric light and power industry owe to Mr. Edison much more than is involved in the discov-ery of a practical incandescent lamp, important as that discovery was. We owe to him the very basis of our in-dustry. He gave to us the first practi-cal commercial central station and he developed for us the first practical method of generating and distribut-ing electrical energy."

New Jersey claims Edison as her own, and rightfully so, for it was in the state that he produced most of his inventions. As a young inventor of 22 he had arrived in Newark and set up manufacturing facilities for the pro-duction of stock tickers.

Newark at the time was a bustling, growing industrial city in which inventors-would-be and successful-abounded. Edison already had estab-lished himself as an inventor by mak-ing improvements to the stock ticker that had brought him $40,000.

In 1876 Edison established what he called an "invention factory" in Menlo Park. There, amidst quiet country surroundings, he planned to tum out "a minor invention every 10 days and a major one every six months."

At the Menlo Park laboratory for the first time a group of talented people was assembled in one location, furnished with scientific equipment and supplies and encouraged to in-vent. It was the first industrial re-search laboratory in America.

"Remember, nothing that's good works by itself, just to please you,"

Edison told his associates. "You've got to make the damn thing work."

Edison boasted publicly in 1878 that he could devise in about six weeks a system to light streets, homes and fac-tories with electricity. Weeks became months as Edison and his Menlo Park assistants sought to develop a practi-cal incandescent lamp, a vital re-quirement.

After 1,600 other materials had been tried, a filament of cotton thread im-pregnated with carbon was placed in a glass bulb and a vacuum created on October 19, 1879. The lamp, powered by a string of batteries, was lighted and glowed for the 40 hours4.62963e-4 days <br />0.0111 hours <br />6.613757e-5 weeks <br />1.522e-5 months <br /> that would make history.

News of Edison's suc-cessful incandescent lamp was met with skepticism and doubt. But by De-cember 260 lamps had been produced and tested.

On New Year's Eve Edison illumi-nated his laboratory and the streets of Menlo Park with his lamps. More than 3,000 persons traveled by excur-sion trains to see the display.

Edison then began devising and producing the necessary equipment to supply electricity for a section of lower Manhattan from a central generating station. The result was the historic Pearl Street Station. On Sep-tember 4, 1882 Edison threw a switch and the world's first electric light and power system was energized. Some 85 customers received power to light a total of 400 lamps in the Wall Street area.

"It was not until 7 o'clock when it began to be dark that the electric light bulb really made itself known and showed how bright al1d steady it New jersey Energy Commis-sioner Joel Jacobson speaks at the illumination of "Centennial of Light" display on facade of PSE&G's headquarters on October

19. Robert I. Smith, Company board chairman (seated at left!,

and John T. Cunningham, author and historian, also participated.

was," the New York Times reported.

"/have accomplished all that I promised," Edison said.

Although Edison's accom-plishments received wide at-tention and acclaim, the elec-trical age did not arrive over-night. Edison had established a factory to produce electric lamps in East Newark, now Harrison, in 1881. Some 135,000 bulbs were produced during the first year, but there was no market for most of them.

The nation's major cities and larger towns were illuminated by gas lamps, and Edison knew from the beginning that electrical illumination not only had to be demonstrated as better, but also more economic than gas lighting.

"/shall make electric light so cheap that only the rich will be able to burn candles," Edison declared. He had cal-culated all the costs of capital, labor and fuel to assure himself that his s s-tem was competitive with gas.

There also were fears to be over-come. Many people objected to the "newfangled" system, believing that they would be injured, or that their homes would be set on fire. The gas companies were keenly watching every move and ready to take maximum advantage from any failure.

The Edison Electric Light Company gradually incr; ased the capacity of the Pearl Street station and extended the distribution system. A subsidiary, the Edison Company for Isolated Lighting, was organized to establish electric plants and systems for towns and vil-lages, factories, stores, hotels and steamships.

The first village electric plant was built in Roselle, New Jersey, by the subsidiary. Construction began in 1882 and on the night of January 19, 1883, dynamos whirled, a switch was thrown and the railroad station, the telegraph office, a number of homes, and other buildings were illuminated by Edison electric lamps.

During eight years at Menlo Park, Edison and his associates produced 420 inventions. Among them were the phonograph, the first practical electric power generator, an electric railway, and a variety of electrical switches, fuses, sockets and other equipment.

In 1884 Edison built a new labora-tory 10 times larger in West Orange.

Instead of a dozen or so assistants, he now had 50. The laboratory was the finest of the day with the most sophisticated equipment of the era.

Edison's genius kept the West Orange laboratory and a factory busy for more than 40 years. There were improvements in earlier in-ventions and new ones-motion

pictures, the fluoro-scope, a non-acid storage

battery, a process for making carbolic acid, and designs for plants to produce coal-tar derivatives and cement.

During his lifetime, Edison wit-nessed the improvement his inven-tions had brought in the quality of life. He also saw the creation of the utility and other industries.

In 1926 he toured the newly-completed Kearny Generating Station of Public Service which incorporated the most advanced production technology of the day.

"Marvelous! But we had a lot more trouble back in the Eighties than you do now," he told his host, Thomas N.

Mc Carter.

On the SOth anniversary of his in-vention of the incandescent lamp, Edison re-enacted his work in the Menlo Park laboratory. The laboratory was then part of the Greenfield Village in

Dearborn,

Mich., where it had been moved by Henry Ford, an Edison friend and admirer. In 1979, as part of the centennial observance, the inven-tion was again re-enacted there.

A 130-foot Tower of Light, erected on the SOth anniversary, is on the spot where the laboratory stood in Menlo Park. PSE&G played a significant role in the tower's construction.

Edison's laboratory in West Orange, and his home there in Llewellyn Park, where he died October 18, 1931, arc national historical sites.

The incandescent light heralded a century of scientific, technological and industrial progress that made the United States the most powerful nation on earth.

The "Centennial of Light" obser-vance in 1979 not only honored the memory of Edison, but also sought to rekindle in young people Edison's en-thusiasm for discovering new ways to improve the quality of life. A better environment for research and devel-opment and an upgrading of scien-tific education were other goals.

Thomas N. McCarter points out a feature of the Kearny Generating Station t0 Thomas A. Edison and Governor A. Harry Moore at the facility's dedication in 1926.

New ideas, inventions and tech-nologies are needed today to provide solutions to fundamental problems and to restore the nation's technical leadership.

Most of all, new Edisons are needed-and many of them.

Financial Review.

Escalating inflation, record-high money rates and a less-than-buoyant economy during the second half adversely affected the Company's financial performance in 1979.

Despite this inclement climate, earnings of $2.85 a share of Common Stock were recorded, compared with

$2.95 in 1978 when 3,626,588 fewer average shares were outstanding.

Revenues Rise Total revenues rose to $2.4 billion, up $197 million, or 8.9% from 1978.

Electric revenues were $1. 7 billion, an increase of $125 million, and accounted for 70% of the total. Gas revenues were $727 million and represented the other 30%.

The higher revenues resulted from an increase in base rates which became effective in June 1978, increases in the energy adjustment charge for electricity and the raw materials charge for gas, and higher sales.

The sources of 1979 revenues by customer classification were:

Electric Gas Combined Residential 32%

57%

40%

Commercial 37 25 33 Industrial 29 18 25 Street Lighting and Other 2

2 Total 100% 100%

100%

Expenses Up Operating expenses in 1979 increased

$194 million, or 10.2% to $2.1 bil-lion from $1.9 billion in 1978.

PSE&G's new 80 Park Plaza head-quarters for which cornerstone laying ceremony was held De-cember 4 gives added dimension to downtown Newark skyline.

Company will occupy 22 floors of 26-story office tower and threc-story satellite building. Em-ployees will begin moving in dur*

ing Spring. Complex is owned by a subsidiary of Rockefeller Center, Inc.

Production expenses rose $151 million, or 15%. Of this increase, electric costs jumped $97 million, equal to 15%, and gas expenses $54 million, or 16%.

Skyrocketing oil prices and delays in the return to opera ti on of Salem No. 1 unit after refueling and in licensing of Salem No. 2, plus the forced outage of Hudson No. 2, the Company's largest coal-burning unit, resulted in higher power production costs. The increased costs were mitigated somewhat by greater use of natural gas as a fuel for electric generation. The cost of power inter-changed through the Pennsylvania-New Jersey-Maryland Interconnection increased by 147% during the year, because of higher unit costs and 56%

greater purchases.

Higher prices for natural gas were mainly responsible for the increase in cost of gas purchased and produced.

The costs of raw materials to make gas also continued to rise.

Maintenance expenses increased 17%, reflecting repair work at the Bergen, Linden and Salem generating stations as well as costs for the restoration of service disrupted by Tropical Storm David in September.

The 1979 Income Dollar Wh ere It Came From

$.68 Electric Revenues

. 2 9 Gas Revenues Allowance/or Funds Used

.03 During Construction

$1.00 Where It Went Fuel, Purchased

$.40 Power & Gas

.09 Salaries & Wages

.09 Mat erials & Services

.19 Taxes

.06 Interest

.08 Dividends

.09 Reinvested in Business

$1.00 Labor costs increased $17 million, mainly because of wage increases provided for in union contracts.

Three-year labor agreements which expire April 30, 1980 provided for a reopening for wage discussions in the third year. Under this provision the Company negotiated a wage increase of 7.0% effective May 1, 1979.

Because of higher revenues, the New Jersey gross receipts taxes increased by $26 million, from $296 million in 1978 to $322 million in 1979.

The Company also was affected by amendments to the Pennsylvania Public Utility Realty Tax Act which subjected additional jointly-owned property of the Company to the Act.

The Company's additional tax liability was $6.9 million for 1979, including a non-recurring surtax of

$5.4 million.

Dividend Increased Beginning with the first quarter of 1979, the quarterly dividend on Common Stock was increased by two cents a share to 55 cents from the 53 cents paid in the fourth quarter of 1978. The increase resulted in dividends paid in 1979 totalling $2.20, compared with $2.08 in 1978. This was the fourth consecutive year in which the dividend was increased.

The Company has estimated t'hat, subject to Internal Revenue Service approval, 40.5% of the dividend paid on Common Stock in 1979 is nontaxable for Federal Income tax purposes. The nontaxable portion represents a return of capital which should be applied to reduce the cost of shares owned in computing gain or loss on a subsequent disposition.

Dividends on $1.40 Dividend Preference Common Stock and Preferred Stock for 1979 are fully taxable.

Stock Data Common Stock 1979 1978 Quarterly Dividends Paid Per Share 55¢ 53¢*

Price Range:

Rate Increase Requested On April 2, the Company filed a petition with the New Jersey Board of Public Utilities asking for an overall increase of $374.5 million in annual revenues. Of the amount, $289.6 million was requested for electric service and $84.9 million for gas service.

The request was based on 1979 as the test year, a return on rate base of 9.50 per cent, and a return on common equity of 14.25 per cent. In the Company's previous rate case the Board approved a return on rate base of 8.83 per cent and a 13 per cent return on common equity with an increase in annual revenues of $153.l million, effective June 1, 1978. The Company agreed to a stipulation in that case which prohibited an additional increase in base rates prior to March 1, 1980.

Hearings on the current petition were completed during the year and the record closed in December. The actual amount of any rate relief will be determined by the Board by its final order in the proceeding. A decision is expected to be issued in March 1980.

On February 6, 1980, the Adminis-trative Law Judge who heard the case filed his initial decision. He found the Company entitled to $213.8 million in additional annual revenues, an over-all rate of return of 9.64% and a return on equity of 14.25%.

An important question in the case is the treatment of $329.5 million of costs for the Atlantic Generating Station Project which was abandoned by the Company in December 1978.

After the tax effect of the abandon-ment, approximately $18 7. 7 million remains to be recovered. It has been agreed by the active parties in the proceeding that the legitimate costs

$1.40 Dividend Preference Com mon Stock 1979 1978 35¢ 35¢ First Quarter

$ 22%-20 1/s $23-21 1/2

$143/4-l4 l/s

$16~8-l 5 1/4 Second Quarter 22 1/4-20 24l/s-22 14112 -13 112 15 ~s-14 5/s Third Quarter 22 l/s -193/s 24%-22114 14 1/4-13 112 16

-14112 Fourth Quarter 20112-18 3/s 23 3..4 -20 133/4-11 112 15%- 14l/s

• 49¢ first quarter only 9

associated with the Atlantic Project should be recovered from customers through rates over a 20-year period.

The Company believes that all Atlan-tic Project costs are legitimate and that the $187.7 million net cost after taxes should be recovered through rates. However, other parties in the case have argued that certain Atlantic Project costs should not be permitted to be recovered through rates.

In the February 6, 1980 initial decision, the Administrative Law Judge concluded that about $168.5 million of the Atlantic Project costs should be recovered through rates, leaving' about $19.2 million of net unrecovered costs. The Company has filed exceptions to the initial decision.

If any net Atlantic Project costs are not permitted to be recovered through rates, the Company would be required to reduce net income for 1980 by that amount.

The decision of the Administrative Law Judge also adopted a stipulation agreed to by the active parties in the case that $140 million of unrecovered fuel costs as of December 31, 1979, should be recovered by the Company over a 28-month period through the levelized energy adjustment clause.

These unrecovered costs are largely due to the sharp increase in the price of oil and the Salem uni ts not being in service as anticipated.

Construction Outlays Up Construction expenditures, including Allowance for Funds Used During Construction (AFDC), payments for nuclear fuel and advances to subsidiaries, increased to $5 79 million in 1979 from $537 million in 1978.

Expenditures in 1980 are estimated at

$781 million.

In the five years through 1984, expenditures are estimated at $4.0 billion which includes $674 million of AFDC. Spending over the next five years for construction of nuclear generating units *and the fuel to operate them will b~ approximately

$2.4 billion. The fuel costs include advance payments to uranium suppliers.

The Company expects to generate internally approximately 50% of its construction expenditures, excluding AFDC, for the next five years, assuming adequate rate increases are received and inflation is kept within bounds. The balance will be financed by the sale of long-term securities.

10 Estimated Construction Expenditures:

Year 1980 1981 1982 1983 1984 (Milli ons)

Totals

$781 $794 $810 $813 $806 Bonds, Common Stock Sold During 1979, the Company raised more than $363 million through the sale of Mortgage Bonds and Common Stock. In July, "$100 million principal amount of First and Refunding Mortgage Bonds, 93/ 4 % Series K due 2009 were sold. A total of $45.6 million of First and Refunding Mortgage Bonds, Pollution Control Series B and Cat an interest rate of 6.90% were issued in September. Sale of three million shares of Common Stock to underwriters provided more than $57.3 million in October. In November $125 million of First and Refunding Mortgage Bonds,12% Series L due 2009 were sold. In addition, the Company raised $33 million through sales of 1,665,561 shares of Common Stock through the Automatic Dividend Reinvestment Plan and $2.6 million through issuance of shares under the Employee Stock Purchase Plan.

Short-term capital needs were financed during the year through the sale of commercial paper. At year end, the Company had $95 million in short-term debt outstanding.

The Company expects to raise approximately $500 million in 1980 through the sale of long-term securities.

Stockholders Increase The number of stockholders of record at the end of 1979 totalled 271,006 compared with 267,386 at the end of 1978, an increase of 1.4% per cent.

There were 226,339 holders of Com-mon Stock, 13,319 holders of $1.40 Dividend Preference Common Stock, and 31,348 holders of Preferred Stock.

A new computerized stockholder accounting system was installed in the third quarter of 1979. The system improves maintenance and expedites processing of the Company's 256,311 stockholder accounts.

Reinvestment Plan Popular Participants in the Company's Automatic Dividend Reinvestment Plan rose to 42, 734 at year end, up from 38,625 at the close of 1978. A 5 per cent discount from the market price for plan participants who rein-vest their Common Stock dividends has created a greater interest in the plan. Participants also may purchase additional shares with optional cash payments of up to $3,000 per quarter, although not at a discount.

Informational Meeting Held The Company's first regional stock-holders informational meeting was held October 18 at Cherry Hill.

More than 800 stockholders attended the meeting at which top Company officers discussed operations and answered questions. The Company expects to hold similar meetings in the future at various locations.

Fair Return Sought The utility industry is the most capital intensive in the United States.

PSE&G's large investment in generat-ing, transmission and distribution facilities when related to annual revenues is typical of the industry.

For each dollar of annual revenues, the Company has more than 2.62 dol-lars invested in facilities compared with 45 cents for the average manu-facturing company.

The Company constantly seeks a fair return on invested capital so that shareholders can be adequately compensated for use of their funds. A basic objective is to set a dividend that is sustainable and can be raised on a reasonable basis.

In our rate cases we have empha-sized the need for adequate income and earnings to finance our construc-tion program on a sound basis.

Strong cash flow, adequate interest coverage, high quality credit ratings and conservative accounting practices are major elements in our long-term financial policy.

Management seeks to maintain a sound capital structure so that new funds to finance the Company's construction program can be raised at reasonable cost. The Company's current objective is for capitalization ratios in the range of 46-48% debt, 12% preferred stock, and 40-42%

common equity Over the longer range we recognize the need to further reduce the level of debt to approxi-mately 45% of capitalization.

Energy Production Electric output in 1979 increased slightly compared with 1978. Total kilowatthours produced, purchase.¥'

and interchanged amounted t~CT' billion, up 1.2% from the previous year. Demand for electricity was held down by customer conservation, the effect of setting thermostats in public buildings at 78 degrees for air con-ditioning, and a hesitant New Jersey economy in the second half of the year.

Peak demand during 1979 was 6, 736,000 kilowatts on August 2. This was 1.8% higher than 1978's peak of 6,615,000 kilowatts, but 2.3% below the record peak of 6,895,000 kilowatts reached in 1977. The maximum day's output of 127,380,000 net kilowatt-hours, 2% below that in 1978, also occurred on August 2.

At the time of the peak load and at the end of the year the Company's installed generating capacity was 9,023,000 kilowatts. This was down from 9,061,000 kilowatts at year-end 1978 due to rerating of a combus-tion turbine unit. Installed generating reserve at the time of the 1979 peak was 34%. The planning peak electric loads, installed generating capacities and percent reserve generating capacities expected for the next ten years are shown on the following table.

Salem Generating Station and Hope Creek construction (right) arc silhouetted against skyline in this view from across marshland of Artificial Island on Lower Delaware River. Salem has been completed and Hope Creek units arc scheduled for operation in 1985 and 1987.

11

Generating Capacity Forecast Planning Installed Year Peak Load Capacity Reserve (M egawatts}

1980 7,118 9,023 27 1981 7,320 9,228 26 1982 7,525 9,228 23 1983 7,730 9,416 22 1984 7,950 9,477 19 1985 8,173 10,091 23 1986 8,388 10,091 20 1987 8,598 10,812 26 1988 8,797 10,812 23 1989 9,012 10,812 20 Salem No. 2 Completed Construction of Salem No. 2 nuclear unit was substantially completed early in 1979 and the Company had anticipated receiving an operating license for the unit and placing it in commercial operation in late summer or early fall. However, issuance of an operating license was delayed by the Nuclear Regulatory Commission because of the Three Mile Island accident. The Company does not expect to receive a license before the spring of 1980. After receipt of a license it will require about five months for fuel loading and testing before commercial opera ti on can begin.

PSE&G and Philadelphia Electric Company each own and are entitled to receive 42.59% of the output of the Salem station. Atlantic City Electric Company and Delmarva Power &

Light Company each have a 7.41 %

share.

Peach Bottom Record During 1979, the No. 2 unit of the Peach Bottom Atomic Power Station in Pennsylvania, in which PSE&G holds a 42.49% interest, established a record for maximum electrical energy produced by a single generating unit, including nuclear or fossil-fueled.

Philadelphia Electric Company, which operates the station, reported the unit produced 8.2 billion kilowatt-hours of net electric energy for the year.

Work On Hope Creek Continues The Hope Creek Generating Station, being built adjacent to Salem, was about 20% completed at year end.

The two 1,067-megawatt units are now scheduled for operation in 1985 and 1987. PSE&G owns 95% of the station and Atlantic City Electric the other 5%. When the two units are in operation it is anticipated that about one-half of the Company's electricity will be generated by nuclear power.

Task Force Appointed After the Three Mile Island nuclear generating plant accident March 28 in

• Pennsylvania, the Company promptly set up a task force which conducted a thorough review of safety systems and equipment, as well as operating instructions and procedures at the Salem Generating Station. As a result of the task force's work, as well as other studies of the accident, improvements in safety systems and operating procedures at Salem were made.

Although the Salem units are pressurized water reactors, as are those at Three Mile Island, they are of different design and were built by a different manufacturer. The Company has no involvement in the ownership or the operation of the Three Mile Island plant.

Training Center Planned In November, the Company announced plans to build a training center for gen-erating station personnel. The center will include simulated control rooms of the Salem and Hope Creek generating stations to provide nuclear operator license training and refresher instruc-tion for licensed operators and supervisors.

The two-story 40,000 square-foot facility also will contain classrooms, shops and laboratories. The center is to be constructed in South Jersey in the vicinity of the Salem-Hope Creek stations.

Major Maintenance Performed During the year extensive mainte-nance and repair work was performed on a number of large generating units in the Company's system.

The Salem No. 1 nuclear unit was shut down on April 2 for refueling and maintenance, including retubing of New fuel assemblies arc moved into place at

o. 1 unit of Salem Generating Station during refuel-ing operation. Refueling was the first since unit went into com-mercial operation in 1977.

the main condensers. The unit had been originally scheduled to return to service late in June, but was delayed until December because of work nec-essary to correct a number of problems which were discovered. These included damage to some metal support grids of fuel rod assemblies, cracks in rod-lets of six of 53 control rod assemblies, and cracking in sections of the steam generator feedwater lines. The return of the unit also was delayed by Nuclear Regulatory Commission requirements relating to seismic-stress analyses and required modifications on safety-related piping systems.

On August 29 the largest coal-buming unit in the PSE& G sys tern, the No. 2 unit at the Hudson Generating Station, was forced out of service by a generator stator coil failure which necessitated rewinding of the stator and repairs to the generator field.

The unit is expected to return to service in March of 1980. While the unit is off line annual overhaul activities planned for 1980 will be accomplished, including major boiler repairs.

Substantial maintenance work also was done in 1979 on units at the Bergen, Linden, Sewaren and Mercer generating stations.

Conversion Th Coal Studied The economic, technological and environmental factors involved in converting to coal some steam gen-erating units which now bum oil is being analyzed by a study group formed during the year. A total of 1,991 mega-watts of generation could be converted in approximately two years at a signif-icant cost if environmental require-ments were relaxed. Considerably longer conversion periods and substantial additional costs would be required to comply fully with existing environ-mental regulations.

Oil Prices Jump The price of oil used by the Company to produce electricity increased dra-matically during 1979 mainly as an outgrowth of the Iranian oil cutoff in December of 1978. Tight market con-ditions which prevailed during 1979 were intensified late in the year by the U.S. embargo on Iranian oil. The cost of a barrel of low sulphur heavy oil increased from $15.51 a barrel at the end of 1978 to $29.36 at the close of 1979.

Coal prices escalated primarily as a result of transportation cost increases.

The average delivered coal cost for 1979 was 4% above that of 1978.

Oil and coal costs are expected to increase in 1980. Oil prices will con-tinue to increase because of actions by the OPEC members, *and the domestic crude oil price decontrol plan. Coal prices are expected to rise further as a result of higher transportation costs and from wage increases scheduled under terms of labor agreements with the mine workers.

Fuel purchased for the Company's New Jersey production facilities in-cluded 14.6 million barrels of oil and 1.6 million tons of coal, both of low sulphur content. Fuel oil and coal requirements were met during 1979 despite a cutback in fuel oil deliveries by one of the Company's principal suppliers beginning in March and an extended tugboat strike that ham-pered coal deliveries to one location for 90 days.

Uranium Shipments Received A substantial portion of the uranium required to operate the Salem and Hope Creek generating stations from 1980 to 1995 is expected to be provided under agreements with Kerr-McGee Nuclear Corporation and Homestake Mining Company. The Company in 1979 continued to receive shipments of uranium, begun in the fourth quarter of 1978, from the Kerr-McGee South Powder River Basin project in Wyoming. Surface mining operations at the basin are expected to produce approximately 4.2 million pounds of uranium over the next 10 years. A partially developed under-ground mine has been placed in a stand-by condition for up to three years and may be reactivafed at the option of the Company.

Under the Homestake agreement, ex-ploration continued in 1979 in another section of Wyoming and reserves of about 4 million pounds of uranium have been proven. The exploration will continue toward its objective of prov-ing sufficient reserves to justify develop-ment of a mining and milling complex.

During 1979 market prices for uran-ium remained stable.

Bird's-eye view of Artificial Island show Hope Creek Generating Station under construction in foreground and Salem station in upper right. After Hope Creek units are on line in late 1980s about half the Company's electric output will be from nuclear power.

13

Gas Sendout Increases Total gas sendout for the year was 1.93 billion therms, 4.2% more than 1.85 billion therms in 1978. The increase was made possible by greater deliveries from pipeline suppliers and from Energy Development Corporation, the Com-pany's exploration subsidiary.

During February of 1979, two rec-ords were set in gas output. Daily gas sendout for the month, one of the coldest Februarys on record, averaged 10,844,690 therms. This was 5% more than the previous record of 10,297,538 therms set in January of 1977. Total gas sendout for the month was 303,651,311 therms, the highest for any February on record and exceeding by 9% the prior mark of 279,093,205 recorded for that month in 1972.

The highest 24-hour sendout of 13,349,009 therms in 1979 occurred on February 17 when the average tempera-ture was 6°F. This was exceeded only once before in the Company's history, on January 17, 1977, when the sendout was 14,005,789 therms and the aver-age temperature was 2.6°F.

The number of gas customers served under interruptible contracts increased to 80 at the end of the year compared with 71 a year earlier. New customers were added under authoriza-tions by the New Jersey Board of Public Utilities. Interruptions of service in 1979 totaled 13 calendar days, down substantially from 136daysin1978, be-cause of the improvement in availa-bility of natural gas.

Capacity Unchanged The Company's effective daily gas capacity, excluding the effect of pipe-line curtailments, was 18,639,000 therms per day during the year, the same as in 1978. Composition of the daily capacity on December 31, 1979 was:

Type of Gas Natural Gas Liquefied Petroleum Gas Synthetic Natural Gas Oil Gas Refinery Gas Total Supplies Improved Therms Per Day 13,892,000 1,981,000 1,325,000 1,186,000 255,000 18 639 000 The supply situation for natural gas improved significantly during the year. A major factor in the improve-ment was the passage of Federal energy legislation in late 1978 which allowed the Company's pipeline suppliers to compete more effectively for onshore supplies in gas producing states.

Another factor was greater efforts by suppliers in developing new sources and reserves.

Contractual pipeline deliveries were curtailed by an average of 17.6% or 1.1 million therms a day compared with 29% or 1.9 million therms daily in the previous year, a substantial improve-ment. Hurricanes in the Gulf of Mexico caused curtailments between July 11 and 31 at rates ranging from 31 % to 44 % by one pipeline supplier.

The cost of natural gas to the Com-pany averaged $1.80 a million Btu's, up 17% from the 1978 figure of $1.54.

Approximately 48% of the Company' natural gas capacity is made up of high-load factor gas that is available every day of the year. The rest comes from field storage, liquefied storage and contract peaking service.

The Company entered into a new long-term contract in 1979 with Trans-continental Gas Pipe Line Corporation which increased total underground gas storage capacity from 415.2 million therms in 1978 to 446.0 million therms in 1979.

Increased Deliveries By Subsidiary At the end of 1979 Energy Develop-ment Corporation (EDC), the Company's exploration subsidiary, was delivering natural gas to the Company at a rate of 277,000 therms a day compared with 110,000 therms at the close of 1978, an increase in flow of 152%. The first deliveries of gas from offshore wells discovered in the Gulf of Mexico by EDC began in 1979.

During the year; record highs were set by EDC not only in gas deliveries, but also in earnings. Net income was

$3.2 million in 1979, a substantial increase over the prior year. Revenues from sales of oil and gas were $23 million, an increase of 118%.

EDC participated in 1979 in drilling 85 wells, of which 16 were started in 1978. Of the total, 27 were onshore and 58 offshore.

A major effort by the Company to lessen the effects of electric pro-duction facilities on surrounding bodies of water advanced in 1979 with the construction and opera-tion of expanded and upgraded waste water treatment facilities.

The installation of facilities such as that shown substantially im-proved the quality of water dis-charged. Total cost at seven generating stations will be over

$55 million.

The onshore program was concen-trated in the Gulf Coast region of Texas and Louisiana. Onshore opera-tions involved drilling of 7 successful wells and 14 that were abandoned.

At year end 6 wells were still being drilled.

Offshore activity increased as addi-tional blocks were acquired. During the year 3 7 wells were completed as commercial producers, 18 were abandoned, and 3 were being drilled at the close of the year.

EDC owned an interest ranging from 5.9% to 25.0% in 9 commercial offshore discoveries at the end of 1979.

All but 2 of these blocks are expected to be producing by the end of 1980.

The other blocks should be producing during 1981. These offshore discov-eries during their peak production life should make up nearly 70% of EDC's total gas supply to PSE&G.

Two federal lease sales were held for the Gulf of Mexico blocks in 1979.

EDC, as part of a group, bid $50.l million on 21 blocks and placed high bids on 5 blocks totalling $9.6 million in its interest.

At year end, EDC owned an interest in 43 offshore blocks, of which 20 were in the Atlantic Outer Conti-nental Shelf. Exploratory drilling off the Atlantic Coast was extended to the Southeast Georgia Embayment.

Oil Replaced By Gas The Company received a temporary exemption from the provisions of the Fuel Use Act which placed severe restrictions on the use of natural gas as fuel for electric generation. In order to help ease the oil supply shortage that developed during 1979, the U.S.

Department of Energy established temporary procedures allowing electric utilities to make direct purchases of natural gas to save fuel oil. PSE&G purchased 95.5 million therms of natural gas for this purpose during 1979, which reduced the con-sumption of oil by approximately 1.5 million barrels and resulted in cost savings of approximately $11.4 million.

Supplemental Gas Supplies The Company bought 79.l million therms of refinery gas in 1979 from Exxon's Bayway refinery. This gas accounted for 4.1 % of PSE&G's total gas supply for the year. The cost of this gas averaged $4.41 a million Btu's compared with $3.21 in 1978. In October a contract renegotiation reduced the price of refinery gas to a parity with heavy oil.

PSE&G supplements its supplies of natural gas and refinery gas with synthetic natural gas (SNG) produced from naphtha, oil gas produced from kerosene and liquefied petroleum gas produced from propane. The daily capacity for production of these gases was 4,492,000 therms in 1979. Total production in 1979 fell to 11.0 million therms, from 41.2 million therms in 1978 as a result of an improvement in natural gas supplies. These manu-factured gases amounted to less than 1 % of PSE&G's total gas sendout during the year.

LNG Plans Changed In order to meet anticipated increases in demand for natural gas in the future, additional storage to meet peak demands in winter will be required. Efforts were intensified in 1979 to put in use two large liquefied natural gas storage tanks on Staten Island. The tanks are owned by Energy Terminal Services Corpora ti on, a subsidiary.

Originally the tanks were to be used as a terminal for imported liquefied natural gas. Because of uncertainties and delays relating to the importation project, including lack of regulatory approval, the terminal was not placed in operation.

On March 1, 1979, the application before the Federal Energy Commis-sion was amended to seek approval for use of one of the tanks for storage of domestic gas for use during periods of peak demand. Early in 1980 it is planned to ask approval for similar use of the second tank.

Operation of the facility for peaking service will require construction of a liquefaction unit and other facilities on the site. It is also anticipated that a pipeline under the Arthur Kill will be required to bring the gas to New Jersey An Energy Management Standards Program has been de-veloped by the Electric Produc-tion Department to improve power plant operating efficiency and reduce fuel costs. It involves monitoring key operating parameters and uses a computer to compare them against tested standards thereby operating units in the most efficient manner. Pro-gram already has saved $3.4 mil-lion in fuel costs.

15

Energy Distribution The Company's transmission and distribution systems were expanded and improved in 1979, but nature provided the most dramatic event of the year.

Tropical Storm David struck on September 6 with tornado-like winds and driving rains which felled count-less trees and limbs that knocked down thousands of wires in the overhead distribution system. The storm, one of the most destructive in the Com-pany's history, interrupted electric serv-ice to more than 433,000 of our 1.6 million electric customers throughout the Company's territory. Bergen and Hudson counties were hit the hardest.

All available electric transmission and distribution personnel were mo-bilized to restore service as quickly as possible. These forces were augmented by gas transmission and distribution employees, neighboring utility per-sonnel and tree crews of contractors.

Service was restored to 94% of the interrupted customers within 48 hours5.555556e-4 days <br />0.0133 hours <br />7.936508e-5 weeks <br />1.8264e-5 months <br /> and to the last individual house service in five days. This compared favorably with performance following Hurricane Hazel in 1954 which required six days to restore service to 411,000 customers.

Transmission Line Completed The electric transmission system was expanded in 1979 with the addition of a 230,000-volt pipe-type underground cable between Hawthorne Substation and Hinchmans Avenue Substation in Wayne. This completed the transmis-sion path between the Waldwick and Cedar Grove Switching Stations.

Completion of this addition per-mitted research to proceed for accurately determining the capacity of underground cables. The research is being done under a $1.1 million U.S.

Department of Energy contract. Heat sensing devices were inserted during manufacture of the newly-installed cable. The communications system to report these temperatures to a central computer for analysis has been completed. Data being collected will provide necessary information to permit maximum use of all trans-mission cables.

A 230,000-volt pipe-type underground cable was installed between Sewaren Generating Station and Raritan River Steel Company, a major new electric customer. Work also progressed on another 230,000-volt cable between Aldene and Essex

. switching stations.

Cable hmovations To Cut Costs Since the 1930's, when PSE&G installed its first 132,000 volt underground transmission line, the Company has been a lead~r in high

'The magnitude of the work of re-storing electrical service dis-rupted by Tropical Storm David in Scptem ber is i II us tra ted drama ti-call y by photo of two repair crews working in a street devastated by high winds. Storm was one of the most destructive in the Com-pany's history.

voltage cable development. During 1979 Company staff engineers persuaded manufacturers to market pipe-type cables incorporating PSE&G-developed design innovations which will contribute markedly to lower construction costs and greater operating efficiencies. The improve-ments will produce savings in a major, four-year reinforcement of PSE&G's transmission system in the northern portion of the service area where additional overhead transmission is no longer practicable.

By 1982, over 40 miles of 230,000-volt and 345,000-volt underground cables will be added to the 154 miles of cable that were in service at the beginning of 1979. The additions will serve growing electric demands and improve service reliability.

500,000 Volt Facilities Planned PSE&G participated with other New Jersey utilities in development of plans for building approximately 70 miles of 500,000-volt transmission system to meet energy needs of the state in the 1980s.

The Company and Atlantic City Electric Company completed plans for facilities required to transmit the output of Hope Creek Generating Station to load centers throughout their systems. Implementation of the project is being coordinated with 500,000-volt transmission develop-ment of Jersey Central Power &

Light Company.

'Live-Line' Maintenance Progresses "Live-line" maintenance advanced during the year with the purchase in January of an aerial lift vehicle with a specially insulated boom that has a reach of 150 feet. The lift permits work on high voltage transmission lines, up to 500,000 volts, while the line is carrying current. Use of the lift is the latest step in a six-year accident-free program in which a carefully instructed and trained group of specialists has been developing and perfecting various "live-line" methods.

Gas Lines Extended Gas transmission and distribution construction activities increased to meet demand of new customers.

During the year 724,000 feet of new main and 860,000 feet of new service pipe were installed to meet customer requirements.

Environmental Costs Rise Approximately $233 million was spent in 1979, compared with $177 million in 1978, to minimize the impact of Company operations on the environment. The cost of environ-mental protection has been rising substantially. This is due primarily because of the increasing differential between the cost of fuels for which many of the Company's facilities were designed to burn and the price of low sulfur oil and coal.

Specially-traineJ group carries out

'live-line' maintenance work, in-cluding replacement of insulators, high up on a 500,000-volt trans-mission line. The work is part of a program in which a carefully in-structed and trained group of specialists has been developing and perfecting a number of 'livc-line' techniques.

Illustrat10ns show 500,000-volt cables enclosed m steel pipe. The longer om: 1s filled with liquid mtrogen, insulated, and operates at extremely low temperatures.

This gives 1t four times the capac nv of the conventmnal cable w\\11ch 1s filled wnh oil. PSE"'C 1s evaluating apphcat10n of this cryogemc technology to under-ground eahle c1rcuits.

Merrill Creek Project Planned During 1979 plans advanced for the construction of the Merrill Creek Project by PSE&G and six other utilities who use Delaware River water. A contract was awarded for architectural and engineering services for the proposed dam and reservoir in Harmony Township.

The utilities have proposed the Merrill Creek Project in response to a 1976 order by the Delaware River Basin Commission that they provide a supplemental water source to help protect the river flow during dry periods. The commission has 5ched-uled a decision on the project in 1980.

Crew lmes up 12-inch poly-ethylene pipe for insertion in 16-inch cast iron main under the Ran tan River between New Brunswick and Edison Township.

Insertion of polyethylene pipe into mains mstead of their re-placement provided substantial savings for the Company. Re-placement costs for the 2,000 feet of pipe were estimated at more than $1 million while the cost of using the polyethylene pipe was less than half that amount.

Energy Usage Substantial new industrial electric load was added in 1979. A major addition was the Raritan River Steel Company's electric arc furnace facility in Perth Amboy. The new plant, which was completed in November, will be the Company's second largest electric customer with a demand of 89 m egawatts and annual revenues of $13.3 million anticipated.

Another steel company, John A.

Roehling Steel Corporation, began opera ti on in the former Colorado Fuel

& Iron facility in Florence Township.

Production initially requires 14 megawatts of electrical power but is expected to increase eventually to 35 megawatts.

Connection of the two steel companies and other new customers with high load demands resulted in 280 megawatts of additional demand and $36 million in annual revenues.

New industrial and commercial gas installations of 63 customers, yielding

$9.6 million in annual revenues, were connected during the year. C-E Glass of Cinnaminson, a manufacturer of tempered glass, will use nearly 5 million cubic feet of gas a day.

New Heating Customers A flood of requests by customers for gas heating service highlighted marketing activities in 1979. The applications were triggered by reports in mid-year that heating oil prices would rise substantially in the Fall and that there might be a fuel shortage.

As a consequence, the Company connected a much greater number of new gas installations than had been anticipated. They.included 20,804 residential, 1,830 commercial, and 334 industrial units. Of the residential installations, 15,065 were heating conversions, a new record, surpassing the figure of 10,246 set in 1963.

In two steps, in May and September, the New Jersey Board of Public Utili-ties approved Company requests to add a total of 7 billion cubic feet of gas load on an annual basis. The volume was in addition to 7.3 billion cubic feet authorized in 1978.

The availability of natural gas coupled with the growing popularity of electric heat pumps for heating and cooling resulted in employment of either gas or electricity for heating in most new construction in PSE&G territory.

Marketing personnel continued to encourage builders and consumers to install electric heat pumps because of their efficient use of energy. During the year 2,079 heat pumps were con-nected to Company lines.

The new gas and electric connec-tions will provide $ 26. l million in additional revenues annually.

Street Lights Converted A total of 9,669 vapor lights were in-stalled in 1979 as the state and municipalities continued to improve street lighting. The state is converting from incandescent lights on state highways to the energy-efficient vapor units. In addition, 4,510 dusk-to-dawn lighting units were installed, bringing the total on Company lines to 52, 780.

Customer Relations Improved Other facets of marketing activities during the year included preparation for implementation of the Company's new solar water heating program, expanded conservation services and closer liaison with customers.

More than 88,000 contacts with custom ers were made by personal visits, group meetings, correspondence and telephone. Consumer advisers conducted lectures on subjects such as the efficient use of energy, alternate energy sources, energy costs and nuclear power.

The higher cost of energy increased conservation activities. PSE&G with other utilities in the state participated in a Home Energy Savings Plan of the New Jersey Department of Energy.

Energy audits were offered home-owners and assistance given in the selection of contractors and in the financing of energy-saving equipment.

Bucket of molten metal gives off intense heat and brilliance at Raman River Steel Company's new plant in Perth Amboy. The facility, which uses electric arc furnaces, began production in 1979.

19

The Company also is participating in a study with the Princeton University Center for Energy and Environment Studies to determine the effectiveness of various energy conservation approaches in residential facilities.

Marketing representatives per-formed energy management surveys for numerous large industrial and commercial customers.

New governmental regulations have resulted in building temperature restrictions, maximum lighting rules, incremental pricing of natural gas, energy conservation measures and other programs requiring increased marketing operations.

As part of the Company's effort to improve customer relations, a new communications training program involving over 600 customer-contact employees was begun in 1979.

Training was specifically designed to help employees respond more effectively to customer concerns. A random mail survey was conducted throughout the year to determine attitudes toward the Company and its service.

Customer Accowits Computerized The first phase of a new computer-based system for customer accounts became operational at all commercial office locations in 1979. Any part of a customer's record can be displayed on a terminal screen in four to seven seconds by entering the account number or address. This improves accuracy and speed in answering customer inquiries.

The second phase of the system, expected to be operational in 1980, will provide for centralization of incoming customer telephone calls, and for processing of electric and gas service orders by computer.

A change in the method of record-ing monthly meter readings from a key-entry system to optical scanning of marked cards was begun. The new method will significantly improve efficiency and productivity of meter readers as well as customer billing operations. Computerized procedures for estimating customer use when readings cannot be obtained also will be improved.

Solar Water Heating Program A residential solar water heating program for homeowners in the Company's electric service area was announced in September at a "Solar Summit" sponsored by the New Jersey Board of Public Utilities. The program will offer customers whose homes meet certain criteria the opportunity to purchase a soundly-engineered solar water heating system installed under PSE&G supervision and backed by service from the Company The units will consist of roof mounted, flat plate solar collectors employed in a closed system which will include a 120-gallon insulated storage tank. Electric resistance heating elements will supply supple-mental energy. Cost of the units will be approximately $2,600.

Approval is being sought for a solar provision in the Residential Load Management rate which will provide a low rate for the supplemental electric energy in the off-peak period between 9 p.m. and 7 a.m.

The Company will purchase the solar systems from a manufacturer and retain qualified contractors to do installation work.

Before the program can be imple-mented a waiver from the U.S.

Department of Energy will be neces-sary because of restrictions placed on utilities by the National Energy Act of 1978. A petition for a waiver has been filed.

The solar program, which is an outgrowth of experience the Company gained in its solar demonstration program over the last two years, is but one of a number of activities involving load management. Others include storage of thermal energy, utility control of customer appliances, industrial and commercial time-of-day rates, and interruptible service electric rates.

Employees who arc in contact with customers attend training session. The classes arc designed to improve abilities of employees in responding to inquiries of cus-tomers. The program involves more than 600 employees. Cus-tomer questions cover numerous topics, includ ing higher energy costs, conservation, and nuclear and solar power.

As part of the Company's

• energy conservation program, PSEi;._G representatives con-duct a home energy audit.

Among the energr savmg measures especia ly recom-mended arc storm windows and caulkmg. The Company is participating in a Home Energy Savings Plan of the cw Jersey Department of Ern:rgy. PSEi;._G f ersonnel have received spccia trainmg to conduct the audits.

Appliance Control Study Continued A load management study of utility control of customer-owned air con-ditioners and electric water heaters, begun in 1978 in the Vincentown retirement community, continued in 1979. The project involves use of a remote control system by the Com-pany to tum off the appliances at intervals to reduce load on the electric system.

"Headqu.arters, N. J."

"More and more of America's leading companies are moving to convenient urban, suburban or rural locations in New Jersey. That is why the state now has the third highest concentration of corporate headquarters in the nation,"

says the Company's promotional book-let "Headquarters, N.J." which was issued in 1979.

The statement was supported by a survey of Fortune Magazine of the 1,000 largest industrial corporations which indicated that New Jersey is a "most likely choice" for the loca-tion of new corporate headquarters facilities within the next five years.

The location and expansion of major corporate and regional office facilities as well as other office buildings con-tinued last year at a rapid pace, bearing out these statements.

Interest in the Company's territory was generated by an extremely effec-tive area development advertising campaign.

The establishment and expansion of large computer and data processing centers also had a major impact on development in the Company's serv-ice area. Campus-type locations and the availability of technically-trained employees were factors in the growth.

During the year 3 70 major indus-trial firms, employing approximately 16, 700 persons, located or expanded in PSE&G territory. Lost were 49 com-panies, employing3,450, leavinganet gain of 13,250 jobs.

Zurich-American Insurance Company's eastern processing center in Mt. Laurel is typical of the faci lities that have been at-tracted to the Company's service area. Leading companies have found cw Jersey advantageous for corporate headquarters, as well as divisional and regional facilities.

21

Thermal Storage Research During the year the Company in-stalled and began testing electric furnaces with ceramic cores in the homes of 30 of its electric heating customers. The furnaces normally use electricity only at night, thus reducing the demand for energy during the daytime period.

The ceramic cores consist of a "pile" of special bricks which are capable of storing large quantities of heat provided by embedded electric coils. The Company determines the best time to deliver electricity for core heating and, using special telephone lines, signals the equipment to receive it. When the home thermostat signals the need for heat, air circulates over the bricks and through the heating system.

A specially controlled electric water heater capable of heating large quanti-ties of water at night for use during the day also is being tested.

The U.S. Department of Energy and PSE&G are funding the two-year study. When it is completed, operation of the equipment and the associated communications system, customer reaction and the impact on the Company system will be analyzed.

Impact Of Energy Forecast The effect which the various load management activities are expected to have upon Company operations is included in the corporate energy forecast. It is estimated that as a result of these, and other programs, the system peak electric demand in the year 2008 will be curtailed by about 1,900 megawatts. At the same time an additional 3,800 million kilowatt-hours of off-peak sales are expected to be realized.

The New Jersey Sports and Expo-s1t10n Authority complex in East Rutherford continues to be one of the most successful enterprises of Its kind m the nation. Dommat-mg the complex 1s Giants Stadium with the Meadowlands Race Track m upper left and the new 20,000-seat indoor arena under construction m upper right.

Arena 1s scheduled to be com-pleted m December of 1980.

Cable Monitoring System Landfill Gas Ozone Monitoring r

Solar Research Energy Research The Company's research and devel-opment program was expanded and broadened in 1979. A number of new projects were initiated and work ad-vanced on those already under way.

Research and development goals include development of alternate energy technologies to reduce depen-dence on foreign oil, improvement in opera ting efficiencies, investigation of new business ventures to broaden the base of Company revenues, and con-servatitm of energy.

Total expenditures for research and development were $14.4 million of which $5.2 million came from out-side agencies. The Company's cost for internal research work was $9.1 million of which $4.4 million was for support of outside general research through industry organizations.

Efforts continued to increase fund-ing from outside sources for industry-wide research performed by PSE&G.

In 1979 the Company received 13 research contracts amounting to $4.0 million of which $3.9 million is being provided by outside agencies.

BEST Facility Completed Construction of the Battery Energy Storage (BEST) Facility in Hillsborough was completed and installation of ma-jor equipment began. The facility will be the center of a national effort for development, testing and demonstra-tion of large-scale battery energy stor-age systems and power conversion equipment.

l'SEc-.G's research and develop-ment activities encompass diverse technologies that range across the Company's service area. Representattw pro1ects de-picted illustrate the scope of the effort to meet the overall goal of providing safe, reliable energy as economically as possible with emphasis on conservation and mmimal environmental impact.

23

Since 1970, PSEo..G has sup-ported fusion research work at Princeton University Plasma Physics Laboratory where the most flexible tokamak device yet built, the Poloidal Divertor Experiment (PDX) has been constructed. The POX is de-signed to provide answers to several highly significant physics questions. The Com-pany's fuswn research effort was expanded with three new projects in 1979. The subjects include the use of fusion for the production of fossil and synthetic fuels.

The project is co-sponsored by the U.S. Department of Energy and the Electric Power Research Institute, which is supported by the nation's electric utilities. PSE&G provided the building.

In October the scope of the $13.6 million project was increased by $3.1 million which permits PSE&G to design and build a second test bay for advanced system testing.

Successful development of large-scale batteries would permit power produced during night time periods of low demand by nuclear and coal gene-rating units to be stored and used during day time hours of peak electric requirements. This would mean that fewer genera ting uni ts would be needed to meet demand during peak periods and reduce the use of oil.

Coal Gasification Investigated Under a grant from the U.S. Depart-ment of Energy, PSE&G and Burns and Roe Industrial Services Corp. are investigating the technical and eco-nomic feasibility of building a coal gasification plant in the Company's territory. The plant would provide supplemental gas supply for power plant and industrial processes.

Environmental, regulatory and institu-tional factors also will be studied.

Such a plant could increase the use of coal as a replacement for oil.

Methane From Landfill The Company in 1979 placed in operation facilities that obtain methane gas from a sanitary landfill in Cinnaminson. The operation was the first of its kind in the eastern United States. A large industrial customer adjacent to the site is being provided with 700,000 cubic feet of gas per day. The output is expected to reach a million cubic feet a day when full production is achieved.

Radiation information is col-lected 111 an effort to assure the public of low levels in the area and promote confidence in nu-clear power. The Research and Testing Laboratory began installa-tion in 1979 of radiation detection equipment at the Company's four solar-data weather stations.

Diagram illustrates bioconver-sion process through which waste products municipal solid waste and sewage sludge could be converted into a marketable synthetic natural gas. The Company has been participating in "energy from refuse" projects for several years. Work was completed in 1979 and a report submitted to the U.S. Department of Energy on a study of the technical and economic feasibility of inte-grating a 5 megawatt fuel cell into a sewage treatment proc-ess to produce heat and elec-tricity from methane gas.

The project will help determine the feasibility of recovering methane from landfills over an extended period. If the project continues to be commer-cially successful, it may demonstrate that landfills can become a small, but significant source of gas for the Company.

Park Plaza Energy Analyzed The U.S. Department of Energy (DOE) is funding a program to evaluate energy conservation techniques using the Company's new 80 Park Plaza headquarters building as a source of information. Hundreds of instru-ments have been installed in the heating, ventilating and air condi-tioning system s to measure the flow of energy within the building. The building automation computer will collect data from the instruments every 15 minutes over a period of about three years.

Data will be used to help measure the efficiency of the building's heating and air conditioning system; to validate results of a new DOE energy analysis computer program; to compare several design standards, including the DOE's new Building Performance Standards; and to com-pare energy consumed when various system control sequences are utilized.

Additional studies will be carried out on the 16th floor, where Company research personnel will be located.

Lights in perimeter areas will be dimmed when natural daylight is available. Lights in some offices will be automatically switched off when they are empty. General lighting will be controlled by a hew electronic time controller. Electrical energy use on the floor will be compared with that of other levels.

Tishman Research Corporation is managing the program with co-operation from PSE&G Research Corporation.

Members of new Research Ad-visory Council meet to discuss Company energy projects. The independent council was formed in 1979 to enhance the activities of PSEi,,G Research Corporation. Composed of prominent citizens represent-ing a broad public interest in energy, the council will review the research and development program from a social and economic viewpoint and ad-vise on broad program priorities.

25

.i Company research employee checks photovoltaic test panels of silicon cells which were 111stalled during 1979 on roof of the Research and Test-111g Laboratory 111 Maplewood.

' Two excellent crops of to-matoes and one of lettuce were grown in 1979 in a pro-totype greenhouse at the Mercer Generating Station.

The greenhouse uses the warm water discharge as a source of heat and humidity. Research into aquaculture at Mercer was an extension of aquacul-ture research, now in its fifth year, 111 which nearly 60,000 Ra111bow trout were reared during 1979.

Solar Research Expanded During the year the solar energy research program was extended into photovoltaics. Photovoltaic energy conversion is a process which converts solar energy directly to electricity through the use of semiconductor devices such as silicon solar cells.

Several panels containing silicon solar cells were installed for test purposes on the roof of the Research and Testing Laboratory in Maplewood.

Basic information is being sought about the ability of solar cells to produce reliable amounts of electric energy.

The Company's solar demonstration program continued at the homes of 12 customers. As an outgrowth of this program, the Company decided to offer solar water heaters to customers in its electric service territory. The program is discussed on Page 20.

5 Year R fr) D Program

$Million 35 30 25 20 IS -

JO 5

0 1979 80 81 82 83 84 Condenser Studies Conducted Under a contract with the Electric Power Research Institute, an assess-ment and comparison of generating station condenser bio-fouling control with ozone and chlorine was made at Bergen Generating Station. Model condensers, mounted on a trailer, were employed. Additional work is expected to be done at Mercer Generating Station.

A mobile test trailer also was used at the Bergen station to evaluate the biological effects of chlorinated and ozonated discharge water on aquatic life and environment. The trailer facilities were connected to receive the treated water from the model condensers. This program, funded by the U.S. Department of Energy, will be continued at the Mercer station.

All employees were informed of the Company's expanded public information program at meetings, such as this one, held at various work locations before the pro-gram's public introduction. The program was in response to a Television commercials were part of the expanded public informa-tion program and included one (left) which emphasized the need to reduce the nation's dependence on foreign oil, and another ex-greater public interest in energy issues. A broad range of topics was covered in television and radio commercials as well as newspaper and billboard advertising.

plaining the Company's rates for electric and gas service. Other commercials emphasized PSE&G's expanded research pro-gram, including solar energy.

Community, Employee Information The Company expanded its public information program in 1979 partially in response to heightened interest in energy issues that stemmed from the Three Mile Island accident.

The program was first outlined to all employees so that they could help carry the Company's message to the public. In addition, the information program within the Company for employees was expanded.

Included in the public program were television and radio commercials, newspaper, magazine and billboard advertising, and bumper stickers.

Newspaper advertisements featured statements by prominent scientists, acknowledged energy experts, who gave affirmative opinions concerning the importance and safety of nuclear energy.

Efforts were co-ordinated with a national program of the Edison Electric Institute in assisting in the creation of a New Jersey Chapter of the Nuclear Energy Women. On October 18, designated as Nuclear Energy Education Day, some 100 meetings were held in* New Jersey.

On November 27 press conferences were held in northern and southern New Jersey at which top company officials and representatives of the Electric Power Research Institute and the Institute of Nuclear Power Operations discussed the changes that have been made in nuclear plant opera-tions in the light of Three Mile Island.

The accident at the Three Mile Island plant in Pennsylvania foc-used public attention on nuclear power. Although the Company is not involved in the ownership or operation of the plant, numerous

• inquiries about nuclear opera-tions were answered. At left, a television reporter conducts an interview at the Salem Generat-ing Station, and, at right, Robert I.

Smith, Company Chairman, talks to reporters at a press conference.

27

Company representatives sought greater opportunities to discuss such topics as nuclear energy, the environment and solar energy. A total of 227 talks were given before nearly 13,000 persons in 1979.

Company personnel conducted generating station tours for the general public and sponsored educa-tion programs for students. More than 29,406 people visited the Second Sun, the Company's floating energy information center where a special multi-media program entitled "Century of Light" was shown to mark the lOOth anniversary of Edison's development of the first successful incandescent light bulb.

Centennial of Light activities also included sponsorship of a puppet show which was presented to 76,000 elementary school children; creation of window and shopping mall dis-plays, and distribution of a customer bill insert describing Edison's legacy.

Community Activities PSE&G employees in 1979 were involved in numerous community activities aimed at improving the quality of life in the Company's service area.

Company programs were admin-istered by several departments.

Employees served in a broad range of voluntary capacities in many civic, cultural, chartitable and educational organizations.

Throughout its service territory the Company maintained traditional affiliations with many community organizations.

Agencies.which serve the needs of urban children from pre-school through college were supported. Aid also was provided to community organization programs for ethnic and cultural development, and education.

The Company's commitment to urban renewal and improvement was dramatized as its new headquarters building in downtown Newark neared completion. PSE&G believes that as part of the business community it has a responsibility to help improve living standards of disadvantaged citizens in the area it serves.

Employee Relations Company employees at the end of 1979 numbered 13,176, an increase of 10 compared with the total at the end of 1978. Wages and salaries for 1979 amounted to $297 million, including

$10.l million for disability benefits and workers' compensation.

During the year the Company continued to stress its Affirmative Action Program in relation to the employment of women and members of minority groups. Effective in January, the Company implemented two additional Affirmative Action plans to cover handicapped individ-uals and veterans.

At the end of 1979, there were 1,845 female employees and 1, 731 minority group employees. These figures reflected increases of 3.8 per cent and 4.2 per cent, respectively, of each group's representation in the overall workforce during the year.

Transport of New Jersey The Public Transportation Act of New Jersey, which was enacted in July 1979, permits State acquisition by purchase or condemnation of privately-owned bus companies. State officials have expressed interest in acquiring, under this law, Transport of New Jersey, PSE&G's transpor-tation subsidiary, and Maplewood Equipment Company, Transport's wholly-owned operating trans-portation subsidiary. Preliminary discussions relating to such acqui-sition have been held with repre-sentatives of the State.

Transport of New Jersey and Maplewood Equipment Company had net earnings of $465,000 in 1979 after receiving $28, 786,000 in operating assistance from the State of New Jersey to supplement fare box revenues. This compares with a net loss of $117,000 in 1978 after receiving

$28,166,000 in operating assistance from the State.

Private Reinvestment Capital Corporation, a wholly-owned nonoperating subsidiary of Transport of New Jersey, had net income of

$1,35 7,000 in 1979 compared with

$834,000 in 1978.

Company commun ity relations representatives conduct programs for school children as well as numerous civic organizations. A variety of energy-related subjects were covered through the year and included presentations about Thomas A. Edison's invention of the first practical electric light bulb JOO years ago.

Financial Statement Responsibility The management of PSE&G is responsible for the integrity and objectivity of the financial statements of the Company. These statements are prepared by the Company in accordance with generally accepted accounting principles applied on a consistent basis.

Management believes that they fully disclose the Company's financial affairs.

To facilitate the gathering of financial data, PSE&G maintains an accounting system established with sound accounting and business policies which are communicated to the appropriate personnel. The system, together with its related internal controls, is reviewed by the Company's staff of internal auditors and its independent public accountants.

Summary of Significant Accounting Policies Ratemaking The Company's accounting policies are in accordance with the rate-making decisions by the Board of Public Utilities of the State of New Jersey (BPU). As a result, the applications of accounting principles by the Company differ in certain respects from applications by nonregulated businesses.

System of Accounts The Company is under the jurisdiction of the Federal Energy Regulatory Commission (FERC) and the BPU and maintains its accounts in accor-dance with their prescribed Uniform Systems of Accounts, which are substantially the same.

Investments in Subsidiaries The Company's investments in its subsidiaries, which in the aggregate are not significant as defined by the Securities and Exchange Commission, are reported in the accompanying financial statements on the equity method of accounting.

Revenues Revenues are recorded based on estimated service rendered, but are generally billed to customers through monthly cycle billings on the basis of actual usage.

Amortization of Def erred Items Deferred Debits are amortizable as detailed below.

Amounts estimated to be recoverable within one year, together with related taxes, are classified as Management feels the effectiveness of this system is enhanced by a program of continuous and selective training of our employees.

The Board of Directors carries out its responsibility of financial disclosure through the Audit Committee currently consisting of five outside directors. The Audit Committee meets periodically with manage-ment as well as representatives of the internal and independent auditors and reviews the work of each to ensure that their respective responsibilities are being carried out, and to discuss related matters.

Internal and independent auditors have full and free access to the Audit Committee.

current items in the balance sheets. Prior to 1979, all such items had been considered deferred until amortized. The 1978 financial statements presented herein reflect appropriate restatements to conform with the current policy.

Fuel Costs The Company projects the costs of fuel for electric generation, interchanged power, gas purchased and materials for gas produced for twelve-month periods.

Adjustment clauses in the Company's rates allow the recovery of the excess of such projected costs over those included in the Company's base rates through levelized monthly charges over the period of projection. Any under or overrecoveries are deferred and charged to operations in the period in which they are recovered.

Prior to July 1, 1977, the date of establishment of the levelized electric adjustment clause, the Company recovered increases in electric energy costs approximately two months subsequent to their incurrence and charged operations in the period in which these costs were recovered. The balance of unrecovered electric energy costs remaining from this procedure is being amortized through base rates over a period ending January 31, 1984. In addition, electric energy costs which had not been recovered through levelized adjustment clauses will be amortized by a surcharge in the adjustment clauses over a 28-month period in accordance with the BPU order expected in March 1980.

29

30 Prior to January 2, 1976, the date of the levelized gas adjustment clause, increases in costs of purchased gas and materials used to produce gas were recovered in months subsequent to their incurrence and were charged to operations principally as they were incurred. Unrecovered gas costs which were not included in the levelized rate established December 2, 1977 are being amortized through base rates over a period of three years.

Gross Receipts Tax Effective January 1, 1973, the Company began accruing New Jersey gross receipts tax on current revenues rather than on the previous basis of taxes paid. The gross receipts tax on 1972 revenues was deferred and is being charged to operations by an amount equivalent to 1/ 2 % of revenues subject to the gross receipts tax.

Unamortized Debt Expense Unamortized Debt Expense represents costs associated with the issuance or reacquisition of debt which are deferred and amortized over the lives of the related issues. This amount consists principally of costs associated with the Company's tender offer for its 12% Series E Mortgage Bonds in May 1977.

Extraordinary Property Losses Extraordinary Property Losses are deferred and amortized over various periods. The amount consists principally of unrecovered abandonment costs, before tax reduction, applicable to the Atlantic Project. The recoverability of such costs is subject to determination by the BPU. (See note 5 of Notes to Financial Statements.)

Depreciation and Utility Plant Depreciation, for financial reporting purposes, is computed under the straight-line method and is based on estimated average remaining lives of the several classes of depreciable property. Depreciation applicable to nuclear plant provides for estimated costs of dismantling or decommissioning. These estimates are reviewed continuously and adjust-ments are made as required. Depreciation provisions for the years 1979 and 1978 stated in percentages of original cost of depreciable property are 3.48% and 3.49%, respectively.

The cost of maintenance, repairs and replacements of minor items of property is charged to appropriate expense accounts. The cost of replacements of units of property is charged to utility plant. At the time depreciable properties are retired or otherwise disposed of, the original cost less net salvage value is charged to the appropriate accumulated depreciation account.

Amortization of Nuclear Fuel Nuclear energy bumup costs are charged to fuel expense on the basis of the number of units of thermal energy produced as they relate to total thermal units expected to be produced over the life of the fuel. The rate calculated for fuel used at the Company's Salem plant includes a provision for estimated spent fuel disposal costs. In accordance with procedures established by the operating company of the Peach Bottom plant, the rates for fuel used at that plant assume a zero net salvage value of the discharged fuel.

Income Taxes The Company and its subsidiaries file a consolidated Federal income tax return and income taxes are allocated, for reporting purposes, to the Company and its subsidiaries based on the taxable income or loss of each.

Def erred income taxes are provided for differences between book and taxable income to the extent permitted for rate-making purposes.

Investment tax credits are deferred and amortized over the average life of the related plant.

Allowance for Funds Used During Construction Allowance for funds used during construction (AFDC) is a cost accounting procedure whereby the approximate net composite interest and equity costs of capital funds used to finance construction are transferred from the income statement to construction work in progress (CWIP) in the balance sheet. This procedure is intended to remove the effect of the cost of financing construction activity from the income statement, and results in treating such cost in the same manner as construction labor and material costs. The rate used for calculating AFDC was 8% for 1979 and 1978 which was within the limits set by the FERC.

The BPU issued rate orders in 1975 allowing the Company to recover the financing cost on

$250,000,000 of CWIP through current operating revenues and since then no AFDC has been accrued on that amount.

Pension Plan Pension costs are accounted for on the basis of an acceptable actuarial method and are charged to operating expenses, utility plant and other accounts.

The Company's policy is to fund pension costs accrued. Prior service costs are being funded over a period of 35 years which began January 1, 1967.

Statements of Income For the Years Ended December 31, Operating Revenues Electric Gas Total Operating Revenues Operating Expenses Operation Fuel for Electric Generation and Interchanged Power-net Gas Purchased and Materials for Gas Produced Other Operation Expenses Maintenance Depreciation Taxes Other than Federal Income Taxes Federal Income Taxes (note 1)

Total Operating Expenses Operating Income Other Income Allowance for Funds Used During Construction-Equity Miscellaneous Other Income-net Earnings of Subsidiaries-net (note 2)

Total Other Income Income Before Interest Charges Interest Charges Long-Term Debt Short-Term Debt Other Allowance for Funds Used During Construction-Debt Net Interest Charges Net Income Dividends on Cumulative Preferred Stock and

$1.40 Dividend Preference Common Stock Earnings Available for Common Stock Shares of Common Stock Outstanding End of Year Average for Year Earnings per average share of Common Stock Dividends paid per share of Common Stock 1979 1978 (Thousands of Dollars)

$1,689,857

$1,564,834 726,850 654,951 2,416,707 2,219,785 620,546 541,802 384,759 327,990 287,389 268,769 149,027 127,423 162,989 158,248 364,411 328,216 123,965 146,937 2,093,086 1,899,385 323,621 320,400 36,887 26,609 4,542 3,722 1,721 793 43,150 31,124 366,771 351,524 146,673 133,605 2,448 612 4,027 3,217 (19,706)

(14,696) 133,442 122,738 233,329 228,786 46,799 46,799

$ 186,530

$ 181,987 68,914,349 64, 120,433 65,409,325 61,782,737

$2.85

$2.95

$2.20

$2.08 See Summary of Significant Accounting Policies, Notes to Financial Statements and Management's Discussion and Analysis of the Statements of Income 31

Balance Sheets December 31, 1979 1978 Assets Utility Plant-original cost (Thousands of Dollars)

Electric Plant

$3,922,891

$3,793,434 Gas Plant 918,249 869,615 Common Plant 80,281 73,586 Nuclear Fuel 22,300 20,314 Utility Plant in Service 4,943,721 4,756,949 Less Accumulated Depreciation and Amortization 1,589,046 1,447,035 Net Utility Plant in Service 3,354,675 3,309,914 Construction Work in Progress 1,360,651 1,033,249 Plant Held for Future Use 20,658 20,127 Net Utility Plant 4,735,984 4,363,290 Other Property and Investments Nonutility Property, net of accumulated depreciation-1979, $550; 1978, $508 4,858 6,193 Investments in and Advances to Subsidiaries (note 2) 184,294 152,549 Total Other Property and Investments 189,152 158,742 Current Assets Cash (note 3) 5,405 14,282 Working Funds 8,223 7,857 Pollution Control Bonds Escrow Funds (note 4) 11,248 Accounts Receivable, net of allowance for doubtful accounts-1979, $5, 778; 1978, $4,900 233,184 213,457 Unbilled Revenues 113,877 118,605 Fuel, at average cost 175,696 134,671 Underrecovered Electric Energy Costs 19,410 677 Materials and Supplies, at average cost 24,270 17,935 Prepayments 4,314 3,246 Current Portion of Deferred Debits 78,478 23,172 Total Current Assets 674,105 533,902 Deferred Debits Extraordinary Property Losses (note 5) 323,838 324,141 Gross Receipts Tax 51,012 63,976 Unamortized Electric Energy and Gas Fuel Costs 105,782 50,299 Unamortized Debt Expense 24,310 24,428 Total Deferred Debits 504,942 462,844 Total

$6,104,183

$5,518,778 See Summary of Significant Accounting Policies and Notes to Financial Statements.

32

Liabilities Capitalization Common Equity:

Common Stock (see statement, page 35)

Premium on Capital Stock Paid-In Capital Retained Earnings Total Common Equity Non-Redeemable Preferred Stock (see statement, page 35)

Redeemable Preferred Stock (see statement, page 35)

Long-Term Debt (see statement, page 36)

Total Capitalization Current Liabilities Long-Term Debt due within one year Preferred Stock to be redeemed within one year Commercial Paper (note 6)

Accounts Payable Taxes Accrued, including New Jersey gross receipts tax-1979, $322,696; 1978, $306,390 Deferred Income Taxes (note 1)

Overrecovered Gas Fuel Costs Interest Accrued Gas Purchased Other Total Current Liabilities Deferred Credits Accumulated Deferred Income Taxes (note 1)

Accumulated Deferred Investment Tax Credits (note 1)

Other Total Deferred Credits Commitments and Contingent Liabilities (note 8)

Total 1979 1978

{Thousands of Dollars)

$1,106,824 557 26,065 747,076 1,880,522 554,994 31,500 2,256,919 4,723,935 24,199 3,500 94,875 121,316 362,650 90,576 15,417 42,615 48,945 37,942 842,035 430,405 106,275 1,533 538,213

$6,104,183

$1,014,184 557 26,065 704,909 1,745,715 554,994 35,000 2,017,484 4,353, 193 57,087 131,597 333,723 60,850 10,614 33,795 39,383 36,511 703,560 360,945 95, 736 5,344 462,025

$5,518, 778 33

34 Statements of Retained Earnings For the Years Ended December 31, Balance January 1 Add Net Income Total Deduct Cash Dividends:

Preferred Stock, at required annual rates

$1.40 Dividend Preference Common Stock Common Stock Total Cash Dividends Capital Stock Expenses Total Deductions Balance December 31 Statements of Changes in Financial Position For the Years Ended December 31, Source of Funds Net Income Non-cash Items:

Depreciation and Amortization Provision for Deferred Income Taxes-Atlantic Project Abandonment Provision for Deferred Income Taxes-Other-net Investment Tax Credit Adjustments-net Allowance for Funds Used During Construction (AFDC)

Other Total Funds from Operations Unamortized Energy Costs Recoverable Currently Total Funds from Internal Sources Net proceeds from sales of:

Long-Term Debt Common Stock Total Security Sales Miscellaneous Total Funds Provided Application of Funds 1979 1978 (Thousands of Dollars)

$704,909

$651,885 233,329 228, 786 938,238 44,954 1,881 144,146 190,981 181 191,162

$747,076 1979 880,671 44,918 1,881 128,485 175,284 478 175,762

$704,909 1978 (Thousands of Dollars)

$233,329

$228,786 169,927 69,460 10,539 (56,593)

(4,206) 422,456 64,502 486,958 268,073 92,459 360,532 14,317

$861,807 168,435 132,203 27,099 (21,576)

(41,305)

(3,019) 490,623 10,289 500,912

\\

9Q,968 93,957 193,925 16,695

$711,532 Additions to Utility Plant, excluding AFDC

$481,542

$472,452 Atlantic Project Abandonment (note 5):

Total Costs, including AFDC- $45,134 (329,467)

Extraordinary property loss 319,904 Other charges 9,563 Investments in and Advances to Subsidiaries 28,743 15,106 Reductions of Long-Term Debt 28,342 62,425 Cash Dividends 190,981 175,284 Deferral of Electric Energy Costs 119,985 Miscellaneous 10,486 4,399

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~'--~~~~~____;_

Total Funds Applied 860,079 729,666 Changes in Working Capital-Increase (Decrease):

Short-Term Debt Current Portion of Deferred Debits Long-Term Debt due within one year Accounts Payable Other Net Increase (Decrease) in Working Capital Total Funds Applied and Changes in Working Capital See Summary of Significant Accounting Policies and Notes to Financial Statements.

(94,875) 55,306 32,888 10,281 (1,872) 1,728

$861,807 96,892 2,024 (51,271)

(64,471)

(1,308)

(18,134)

$711,532

Statements of Capital Stock

\\.

Curren t Refundin3 Outstanding Redemption Restricte Shares Price Prior to December 31, (note A)

Per Share (note B) 1979 1978 Cumulative Preferred Stock (note C)

(Thousands of Dollars)

Redeemable (note D)

$100 par value 12.25% Series 350,000

$112.00 2/1/85

$ 35,000

$ 35,000 Less amount to be redeemed within one year 3,500 Redeemable Preferred Stock

$ 31,500

$ 35,000 Non-Redeemable (note E)

$25 par value-Series:

9.75%

1,600,000

$ 27.50 1/1/81

$ 40,000

$ 40,000 8.70%

2,000,000 27.00 10/1/81 50,000 50,000

$100 par value-Series:

4.08%

250,000 103.00 25,000 25,000 4.18%

249,942 103.00 24,994 24,994 4.30%

250,000 102.75 25,000 25,000 5.05%

250,000 103.00 25,000 25,000 5.28%

250,000 103.00 25,000 25,000 6.80%

250,000 104.00 25,000 25,000 9.62%

350,000 109.50 7 /1/80 35,000 35,000 7.40%

500,000 106.00 50,000 50,000 7.52%

500,000 106.00 50,000 50,000 8.08%

150,000 106.00 15,000 15,000 7.80%

750,000 106.00 75,000 75,000 7.70%

600,000 106.56 60,000 60,000 8.16%

300,000 108.90 10/1/82 30,000 30,000 Non-Redeemable Preferred Stock

$554,994

$554,994 Dividend Preference Common Stock and Common Stock

$1.40 Dividend Preference Common Stock (no par)- 1,343,999 shares authorized, issued and outstanding; current redemption price $35.00 per share (note F)

$1,106,824

$1,014,184 Common Stock (no par)-authorized 100,000,000 shares (note G); issued and outstanding as of December 31, 1979, 68,914,349 shares (4, 793,916 shares issued for $92,640 in 1979 and 4,314,517 shares issued for $94,432 in 1978)

Notes:

A. In addition, there are 2,500,058 shares of $100 par value and 6,400,000 shares of $25 par value Cumulative Preferred Stock which are authorized and unissued, and which may possess either redeemable or non-redeemable characteristics upon issuance.

B. Prior to the date specified, none of the shares of each such series may be redeemed, other than through the operation of a sinking fund, through refunding of such shares by the incurring of debt or the issuance of Preferred Stock where the cost of such debt or such Preferred Stock is less than the cost to the Company of each such series.

C. As of December 31, 1979 the annual dividend requirement and embedded dividend cost were

$4,288,000 and 12. 70%, respectively, for Redeemable Preferred Stock and $40,629,000 and 7.38%,

respectively, for Non-Redeemable Preferred Stock.

If dividends upon any shares of these stocks are in arrears to an amount equal to the annual dividend thereon, voting rights for the election of a majority of the Board of Directors become operative and continue until all accumulated and unpaid dividends thereon have been paid, whereupon all such voting rights cease, subject to being again revived from time to time.

D. Redeemable Preferred Stock consists of the outstanding 12.25% series of nonparticipating cumulative preferred stock which, beginning on February 1, 1980, is subject to a mandatory annual sinking fund redemption of 17,500 shares, plus redemption of up to an additional 17,500 shares at the option of the Company at a redemption price of

$100 per share. In addition, such Preferred Stock is also subject to redemption at the option of the Company upon payment of a higher redemption price plus in each case accumulated and unpaid dividends to the date fixed for redemption.

E. Non-Redeemable Preferred Stock is outstanding nonparticipating cumulative preferred stock which is subject to redemption solely at the option of the Company upon payment of the redemption price plus accumulated and unpaid dividends to the date fixed for redemption.

F. Each share of $1.40 Dividend Preference Common Stock is entitled to cumulative dividends, to two votes, and, on liquidation or dissolution, to twice as much as each share of Common Stock.

G. Includes 3,203, 709 shares of Common Stock reserved for possible issuance under the Company's Automatic Dividend Reinvestment Plan, Tax Reduction Act Employee Stock Ownership Plan and Employee Stock Purchase Plan.

35 See Summary of Significant Accounting Policies and Notes to Financial Statements.

36 Statements of Long-Term Debt December 31, 1979 1978 First and Refunding (Thou sands of Dollars)

Mortgage Bonds Series (note A) 2%% June 1, 1979 53,242 23/4 % May 1, 1980 18,443 18,648 3 1/4% October 1, 1983 22,079 22,313 3 1/4% May 1, 1984 50,000 50,000 4%% November 1, 1986 50,000 50,000 4%% September 1, 1987 60,000 60,000 4%% August 1, 1988 60,000 60,000 51/so/o June 1, 1989 50,000 50,000 43/4% September 1, 1990 50,000 50,000 4%% August 1, 1992 40,000 40,000 4%% June 1, 1993 40,000 40,000 4%% September 1, 1994 60,000 60,000 4314% September 1, 1995 60,000 60,000 6V4% June 1, 1997 75,000 75,000 7 % June 1, 1998 75,000 75,000 7%% April 1, 1999 75,000 75,000 91/s o/o March 1, 2000 98,000 98,000 8%% A May 15, 2001 69,300 69,300 7%% B November 15, 2001 80,000 80,000 7V2% C April 1, 2002 125,000 125,000 8 1/2% D March 1, 2004 90,000 90,000 12 % E October 1, 2004 10,730 11,730 8314% F April 1, 2006 60,000 60,000 8.45% G September 1, 2006 60,000 60,000 8V4% H June 1, 2007 125,000 125,000 8 1/s o/o I September 1, 2007 59,900 59,900 9%% J November 1, 2008 100,000 100,000 9314% K July 1, 2009 100,000 12 % L November 1, 2009 125,000 8 % June 1, 2037 7,463 7,463 5 % July 1, 2D37 7,538 7,538 Pollution Control Bonds 6.30% A October 1, 2006 14,300 14,300 6.90% B September 1, 2009 42,620 6.90% C September 1, 2009 2,990 Total First and Refunding Mortgage Bonds

$1,963,363

$1, 747,434 Notes:

A. The Company's Mortgage, securing the First and Refunding Mortgage Bonds, constitutes a direct first mortgage lien on substantially all property and franchises.

B. As of December 31, 1979 the annual interest requirement on Long-Term Debt was $167,099,000 of which $144,261,000 was the requirement for First and Refunding Mortgage Bonds. The embedded interest cost on Long-Term Debt was 7.48%.

See Summary of Significant Accounting Policies and Notes to Financial Statements.

1979 1978 Debenture Bonds unsecured (Thousands of Dollars) 4%% October 1, 1981 31,289 32,429 4%% October 1, 1983 26,595 27,113 5314% June 1, 1991 43,782 44,540 7V4% December 1, 1993 30,659 31,596 9 % November 1, 1995 58,549 60,276 7314% August 15, 1996 61,993 63,268 8314% November 1, 1996 46,580 47,355 6 % July 1, 1998 18,195 18,195 Total Debenture Bonds 317,642 324,772 Other Long-Term Debt 61/2 % Note due serially to November 15, 1983 2,160 2,640 Total Long-Term Debt Principal amount out-standing (note B) 2,283,165 2,074,846 Less amount due within one year (note C) 24,199 57,087 Long-Term Debt excluding amount due within one year (note C) 2,258,966 2,017,759 Net Unamortized Discount (2,047)

(275)

Long-Term Debt less Net Unamortized Discount

$2,256,919

$2,017,484 C. The aggregate principal amount of requirements for sinking funds and maturities for each of the five years following December 31, 1979 is as follows:

Sinking Year Funds Maturities Total (Thousands of Dollars) 1980

$ 5,2'76

$ 18,923

$ 24,199 1981 9,550 31,480 41,030 1982 9,550 480 10,030 1983 8,450 46,820 55,270 1984 8,450 50,000 58,450

$41,276

$147,703

$188,979 For sinking fund purposes, certain First and Refunding Mortgage Bond issues require annually the retirement of $19,400,000 principal amount of bonds or the utilization of bondable property additions at 60% of cost, and the portion expected to be met by property additions has been excluded from the table above. Also, the Company may, at its option, retire additional amounts up to $6,200,000 annually through sinking funds of certain debenture bonds. The election of any such option is included in long-term debt due within one year.

Notes to financial Statements

1. Federal Income Taxes A reconciliation of reported Net Income with pre-tax income and of Federal income tax expense with the amount computed by multiplying pre-tax income by the statutory Federal income tax rate of 46% for 1979 and 48% for 1978 is as follows:

Net Income Federal income taxes included in:

Operating income:

Current provision Provision for deferred income taxes-net*

Investment tax credit adjustments-net Total included in operating income Miscellaneous other income-net Total Federal income tax provisions Total Earnings of subsidiaries-net Pre-tax income Tax expense at the statutory rate Adjustments to pre-tax income, computed at statutory rates, for which deferred taxes are not provided under current rate-making policies:

Tax depreciation (over) under book depreciation Allowance for funds used during construction Overhead costs capitalized Other Total Amortization of deferred tax items Total Total Federal income tax provisions 1979 1978 (Thousands of Dollars)

$233,329

$228,786 14,359 8,233 99, 187 159,941 10,41 9 (21,237) 123,965 146,937 1,952 3,012 125,917 149,949 359,246 378,735 (1,72 1)

(793)

$357,525

$377,942

$164,462

$181,412 I l,357 7,454 (26,033)

(19,826)

(6,935)

(6,351)

(1,276)

(98)

(22,887)

(!8,82 1)

( 15,658)

(12,642)

(38,545)

(3 1,463)

$125,917 $149,949

• ~~~~~~~~~~~~-

• The provision for deferred income taxes represents the tax effects of the following items:

Current Liabilities Un billed revenues Under (Over) recovered fuel costs Current portion of deferred debits Total Deferred Credits Atlantic Project Abandonment Additional tax depreciation Repair allowance property Gross receipts tax Unamortized fuel costs Loss on reacquired debt Other Total Total

$ (2, 175) 6,604 25,298 29,727 32,287 6,701 5,647 25,232 (571) 164 69,460

$ 99,187 5,829 (6,502) 1,313 640 132,203 33,257 5,782 (5,547)

(4,939)

(4 15)

(1,040) 159,301

$159,941 The 1978 current provision for Federal income taxes is primarily due to the recapture of investment tax credits resulting from abandonment of the Atlantic Project.

The balance of investment tax credits not utilized as of December 31, 1979 in the amount of $96 million is available as a carryover to future years and will expire as follows: 1984-$10 million, 1985-$36 million, and 1986-$50 million. The carryover results

2.

principally from the abandonment of the Atlantic Project. The Tax Reduction Act of 1975 provides that for the year 1978 investment tax credits can be utilized to offset 80% of tax liability, and for 1979, 70% of tax liability before investment credit.

The Company has a Tax Reduction Act Employee Stock Ownership Plan (TRASOP) under provisions of the Tax Reduction Act of 1975, as amended.

Such provisions permit the Company to elect an additional 1 % investment tax credit if the Company transfers to the TRASOP an equivalent amount of its Common Stock or cash for the purchase of shares of Common Stock and thereby funds its TRASOP through a reduction in its Federal income tax payments. In 1978 the TRASOP was amended to permit the Company to claim an additional 1/2 %

investment tax credit for 1977 and subsequent tax years if it contributes an equivalent amount of Common Stock or cash, but only to the extent that such amount is matched by contributions by participants.

Investments in and Advances to Subsidiaries Investments in and advances to subsidiaries (including the Company's equity in undistributed earnings or losses) are summarized as follows:

December 31, 1979 1978 Transport of New Jersey Investment*

Energy Development Corporation Investment Advances Other Subsidiaries, primarily LNG Project Investments Advances Total

• For information regardi ng possible sale, sec page 28.

(Thousands of Dollars)

$ 12,732

$ 10,909 8,5 14 5,283 80,554 54,404 2,066 4,11 8 80,428 77,835

$184,294

$152,549 The major subsidiary included in "Other Subsidi-aries" above is Energy Terminal Services Corporation (ETSC). The principal asset of ETSC is a Liquefied Natural Gas (LNG) terminal on Staten Island, in the New York City harbor area. Annual expenditures for protection and maintenance of the terminal, including local real estate taxes, are approximately

$4,400,000.

The Company had originally intended to utilize the terminal for the importation of LNG. However; due to uncertainties and delays relating to the importation project, including lack of regulatory approvals and a supply of LNG, the terminal has not been placed in operation. The Company is now pursuing the utilization of the two storage tanks at the terminal to store supplies of domestic natural gas in order to meet the demands of its customers for gas on the coldest winter days. This will necessitate the construction of a liquefaction facility at the site. The additional construction will not proceed until the necessary permits are obtained from the appropriate federal, state and local regulatory agencies.

37

38 The ultimate realization of the carrying value of the investment may depend, among other things, upon the Company's ability to place the facilities in operation and the rate-making treatment granted by the regulatory agencies.

through rates and leave $19.2 million of net unrecovered costs. The Company has filed excep-tions to the initial decision. The actual amount of such costs to be recovered through rates will be determined by the BPU by its order in the proceed-ing. If any net Atlantic Project costs should not be permitted to be recovered through rates, the Com-pany would be required to reduce Net Income in 1980 by that amount.

For additional tax information, see note 1.

Any loss the Company may incm; if the above condi-tions are not resolved, is not presently determinable; however, in the opinion of the management of the Company, such loss, if any, would not have a material effect on the financial position of the Company or the results of its operations.

6. Commercial Paper

3. Compensating Balances Cash at December 31, 1979 and December 31, 1978 consisted primarily of compensating balances under informal arrangements with various banks to com-pensate them for services and to support lines of credit of $199,900,000 and $198,150,000, respectively There are no legal restrictions placed on the with-drawal or other use of these bank balances.

4. Pollution Control Bonds Escrow Funds This balance represents proceeds received from the sale of Pollution Control Bonds which are released to the Company as reimbursement of costs for pollution control facilities during construction.

5. Abandonment of Atlantic Project Commercial paper represents the Company's unsecured bearer promissory notes sold to dealers at a discount with a term of nine months or less.

Certain information regarding commercial paper follows:

Maximum amount outstanding at any month-end Daily average outstanding IA)

Weighted average annual interest rate IB)

Weighted average interest rate for commercial paper outstanding at year end 1979 1978 (Thousands of Dollars)

$94,875

$20,658 11.85%

13.44%

$58,750

$ 9,010 6.79%

IA) Computed by multiplying the principal amounts of commercial paper by the days outstanding and dividing the sum of the products by the number of days in the year.

IB) Computed by dividing short-term interest expense by the daily average short-t_erm borrowings.

In December 1978, the Company cancelled its floating nuclear plant project and terminated its contract with Offshore Power Systems for the construction of four generating units. Total costs applicable to the project are accounted for as follows:

7. Pension Plan Total Atlantic Project costs, including

. AFDC of $45, 134 Less other charges:

uclear fuel enrichment services:

Assigned to Hope Creek 2 Sold Charged to various income, expense and property accounts Total other charges Unrecovered costs charged to Extraordinary Property Losses, before tax reduction (Thousaruls of Dollars)

$5,015 3,453 1,095

$329,467 9,563

$3 19,904*

• This amount plus $3,934 and $4,237 for other property losses represent the balances in Extraordinary Property Losses at December 31, 1979 and December 3 1, 1978, respectively.

The tax reduction associated with unrecovered Atlantic Project costs is $132,203,000 and is included 8.

in Accumulated Deferred Income Taxes.

In accordance with the rate order in May 1978, all legitimate costs applicable to the Atlantic Project, to be determined by the BPU after an appropriate investigation, are to be amortized over a period of 20 years, commencing with the effective date of the Company's next rate order but not sooner than March 1, 1980. The Company believes that all Project costs are legitimate costs, and, in its current rate proceeding, has requested that the net loss after tax reduction, $187.7 million, be amortized and recovered through rates. However; on February 6, 1980 the Administrative Law Judge in this proceeding issued an initial decision which would permit the recovery of $168.5 million of such costs The Company has a non-contributory, trusteed plan covering all employees who complete one year of service. As of December 31, 1979, the unfunded prior service cost was approximately $288,893,000 and vested benefits were approximately $3 71,213,000.

The market value of the plan assets, $204,638,000 at December 31, 1979, increased by $44,620,000 over the previous year as a result of contributions (net of pension payments), investment income, and a net appreciation in market value. The Company's annual contribution is actuarially determined to provide for full funding by December 31, 2001.

Pension costs for the past two years were charged as follows:

1979 1978 (Thousands of Dollars)

Operating Expenses

$34,452

$32,426 Utility Plant and Other Accounts 9,662 9,681 Total Pension Costs

$44,114

$42, 107 Commitments and Contingent Liabilities The Company has substantial commitments as part of its construction program as well as commitments to obtain sufficient sources of fuel for electric generation and adequate gas supplies. Construction expenditures, including AFDC, of $4.0 billion are expected to be incurred during the years 1980 through 1984.

Under the Price-Anderson liability provisions of the Atomic Energy Act of 1954, there is a limit of $560 million on each nuclear generating unit for public liability claims that could arise from a single nuclear incident. The Company is insured for each unit to the extent of its ownership against this liability to a maximum of $160 million by private insurance (the maximum amount presently available), and against

the balance of $400 million by a combination of a mandatory program of retrospective premiums to be assessed against owners of nuclear reactors after a nuclear incident (up to $5 million per incident but not more than $10 million in any calendar year for each licensed nuclear reactor in the United States),

and indemnity agreements with the Nuclear Regulatory Commission. In the event of a nuclear incident involving any licensed reactor in the United States the Company could be assessed, on the basis of the three reactors now in service in which it owns a percentage interest, a maximum of $6.38 million for any such incident, but not more than $12.76 million in any year.

The Company is a member of Nuclear Mutual Limited (NML) which provides insurance coverages, up to $300 million, for property damage to nuclear generating facilities of member companies. In the event of losses at any plant covered by NML, the Company would be subject to a maximum assess-ment of fourteen times its annual premium. Such maximum assessment would currently amount to approximately $13.4 million.

The Company, under an agreement entered into in May 1972, agreed to provide a limited guaranty of not more than $76 million of the legal obligations of the Company's unconsolidated subsidiary, Transport of New Jersey (Transport), under its pension plan in the event Transport failed to meet such obligations, limited to pension benefits accrued to the date of the agreement. As of December 31, 1979 the actuarially computed value of the Company's obligation under the guaranty was approximately $46.6 million, which would be reduced by applicable pension fund assets. Under an interpretation of the Employee Retirement Income Security Act of 1974, the Company could be liable to the Pension Benefit Guaranty Corporation, a corporation established within the United States Department of Labor, for deficiencies in plan assets if the subsidiaries' pension plans were terminated. As of December 31, 1979, vested benefits of the Company's subsidiaries' pension plans exceeded fund assets by approximately

$76 million. Any payments made under the guaranty would have the effect of reducing the Company's potential liability to the Pension Benefit Guaranty Corporation.

9. Jointly-Owned Facilities The utility industry has long recognized the benefits of the construction, operation and financing of jointly-owned electric and gas facilities. The Company has been a participant and has ownership interests in a number of such facilities. In compli-ance with reporting requirements of the Securities and Exchange Commission, disclosure is made of certain data regarding the Company's interests in its jointly-owned projects in the annual report to the SEC on Form 10-K.

10. Accounting for Leases The Company has certain leases for property and equipment which meet the criteria for capitalization, but in accordance with rate-making treatment are accounted for as operating leases. The capitalization of such leases would not have a significant effect on assets, liabilities or operating expenses.

11. Supplementary Information Concerning the Effects of Inflation (Unaudited)

The Company's financial statements are prepared in accordance with generally accepted accounting principles and are stated on the basis of historical costs, namely, the prices that were in effect when the underlying transactions occurred. The following supplementary financial information purports to show certain effects of general inflation on the Company's Utility Plant, Depreciation, and certain other data as prescribed by the Financial Accounting Standards Board in Statement No. 33, Financial Reporting and Changing Prices. As further pre-scribed, no adjustments were made to income tax expense. The general method used in developing this data is the Constant Dollar method which is based, fundam entally, on the Consumer Price Index for All Urban Consumers (1967= 100). The effects of inflation are not recognized for income tax or ratemaking purposes.

The Company advises readers of the imprecise nature of this data and of the many subjective judgments required in the restatement of selected historical costs to constant dollars. This data should not be used to adjust the Company's primary financial statements and the related Earnings per average share of Common Stock other than that which is shown in the supplementary statements.

Supplementary Financial Data Adjusted for the Effects of General Inflation for the Year Ended December 3 1, 1979 Historical Cost (Con-densed from the Financial Statements)

Adjusted for Constant Dollar (In Average 1979 Dollars)

(Thousands of Dollars)

Operating Revenues Operating Expenses Operation and Maintenance Depreciation Taxes Total Operating Expenses Operating Income Other (including Interest Expenses)

!Ii.come from Continuing Operations (excluding Reduc-tion of Utility Plant to Lower Recoverable Amount)

Purchasing Power Gain on Net Monetary Liabilities Owed During the Year Reduction of Utility Plant at Historical Cost to Lower Recoverable Amount Net

$2,416,707

$2,4 16,707 1,44 1,72 1 1,441,721 162,989 318, 782 488,376 488,376 2,093,086 2,248,879 323,621 167,828 (90,292)

(90,292)

$ 233,329 77,536*

$ 272,480 413,526

$ (141,046)

• Including the Reduction of Utility Plant to Lower Recoverable Amount, the Income (Loss) from Continuing Operations on a Constant Dollar basis for 1979 would have been $(335,990).

39

40 Supplementary Five-Year Comparison of Selected Financial Data Adjusted for General Inflation (Historical figures are audited; all others are unaudited)

(000 omitted where applicable)

For the Years Ended December 31, 1979 1978 1977 1976 1975 (Average 1979 Dollars)

Operating Revenues Historical Adiusted

$2,416,707

$2,41 6,707

$2,219,785

$2,469,710

$2,032,795

$2,434,874

$1,869,535

$2,383,794

$1,630,525

$2,198,983 Income From Continuing Operations (excluding Reduction of Utility Plant to Lower Recoverable Amount)

Historical Ad;usted

$ 233,329 77,536 Income From Continuing Operations per Average Common Share (excluding Reduction of Utility Plant to Lower Recoverable Amount)

Historical Adiusted 2.85*

0.47*

Purchasing Power Gain on Net Monetary Liabilities Owed During the Year Reduction of Utilit y Plant at Historical Cost to Lower l~ eco verab le Amount

$ 272,480 413,526 Net

$ (141,046)

Net Assets at Year End**

Historical

$2,435,516 Adjusted

$2,303,094 Cash Dividends Declared per Common Share Histori cal Adiusted Market Price per Common Share at Year End Historical Adjusted Average Consumer Price Index ( 1967 = 100)

$ 2.20

$ 2.08

$ 2.20

$ 2.31

$19.25

$20.25

$18.20

$21. 70 217.4 195.4

$ 1.92

$ 1.78

$ 1.72

$ 2.30

$ 2.27

$ 2.32

$22.88

$23.00

$18.13

$26.72

$28. 69

$23.69 181.5 170.5 161.2

• After deducting the historical amounts of Cumulative Preferred Stock and $1.40 Dividend Preference Common Stock dividends.

• • Reflects Common Equity and Non-Redeemable Preferred Stock.

General-Constant Dollar costs were determined by adjusting historical costs of Utility Plant and certain other items into dollars of the same general purchasing power by using the Consumer Price Index for All Urban Consumers (CPI-U). All adjusted figures are in average 1979 dollars. This method purports to show the effects of general inflation on the Company.

Income from Continuing Operations (excluding Reduction of Utility Plant to Lower Recoverable Amount)-As prescribed by the Financial Accounting Standards Board, items in the income Statement, other than Depreciation, were not adjusted.

Depreciation - Depreciation expense calculated under the Constant Dollar method was determined using the rates and methods for computing book depreciation and applied to the historical depreciable Utility Plant balances. Such plant balances were first adjusted to reflect the decline in the purchasing power of the dollar by using the CPI-U.

Purchasing Power Gain on Net Monetary Liabilities Owed During the Year-The Company by holding monetary assets such as cash and receivables tends to lose purchasing power during periods of inflation because such monetary assets will buy fewer goods and services as the general price level rises.

Conversely, by holding monetary liabilities, primarily long-term debt, future payments of such liabilities tend to be made with dollars having less purchasing power.

The Company has significant amounts of long-term debt outstanding, which, it is currently estimated, will be paid back in dollars having less purchasing power. During 1979 the Company's monetary liabilities (primarily long-term debt) exceeded monetary assets and therefore resulted in a net monetary gain. This gain, howeve:i; does not represent receipt of cash and should not be considered as providing funds to the Company.

Reduction of Utility Plant to Lower Recoverable Amount-The rate regulatory process of utilities in New Jersey limits the Company to the recovery of the historical cost of plant and equipment. However, the Financial Accounting Standards Board requires plant and equipment to be stated either in constant dollars or a lower recoverable amount. The Company's historical cost of Net Utility Plant, when restated to average 1979 dollars, would result in a lower recoverable amount.

Since the gain from the decline in purchasing power is primarily attributable to long-term debt which has

12.

been used to finance utility plant, the Reduction of Utility Plant to a Lower Recoverable Amount is netted against the Purchasing Power Gain on Net Monetary Liabilities.

Replacem ent Cost (Unaudited)-lt is anticipated that the actual cost of replacing productive capacity, when incurred, will be recovered through depreciation recognized, together with a return on Financial Information by Business Segments the unrecovered investment thereon, in future rates allowed by regulatory bodies in the same manner that historic costs and returns on investments are being recovered in current rates. In compliance with reporting requirements of the Securities and Exchange Commission and Financial Accounting Standards Board, estimated replacement cost information is disclosed in the Company's annual report to the SEC on Form 10-K.

Electric Gas Total For the Years Ended December 31, 1979 Operating Revenues

$1,689,857 Depreciation 122,953 Operating Income Before Income Taxes 369,409 Gross Additions to Utility Plant 484,356 December 3 1, Net Utility Plant 4, 156, 122 Gas Exploration Subsidiary and LNG Project Other Corporate Assets Total Assets

13. Selected Quarterly Data (Unaudited)

The information shown below in the opinion of the Company includes all adjustments, consisting only of normal recurring accruals, necessary to a fair presentation of such amounts. Due to the seasonal nature of the business, quarterly amounts vary significantly during the year.

Calendar Quarter Ended March 31, 1979 1978 Operating Revenues

$664,707 $601,98 1 Operating Income 90,377 77,910 Net Income 68,055 56,052 Earnings Available for Common Stock 56,355 44,352 Earnings per Average Share of Common Stock

$.88

$.74 Average Shares of Common Stock Outstanding 64,143 59,808 1978

$1,564,834 119,346 386,054 472,795 3,799,254 1979

$5 17,813 71,140 49,3 12 37,612

$.57 64,53 1 1979 1978 1979 1978 (Thousands of Dollars)

$726,850

$654,951

$2,41 6,707 $2,219,785 40,036 38,902 162,989 158,248 78,468 81,288 447,877 467,342 53,779 40,962 538, 135 513,757 579,862 564,036 4,735,984 4,363,290 171,552 141,630 171,552 141,630 1,196,647 1,013,858

$6,104,183 $5,5 18,778 June 30, September 30, December 3 1, 1978 1979 1978 1979 1978 (Thousands)

$485,209

$592,069 $547,478

$642,11 8 $585,11 7 66,467 89,954 94,104 72,150 81,919 46,054 68,2 10 70,8 14 47,752 55,866 34,354 56,51 I 59, 11 5 36,052 44, 166

$.57

$.87

$.95

$.53

$.69 60,134 64,973 63,362 67,954 63,765 41

Operating Statistics

% Annual Increase - 1979 compared with (000 omitt ed where applicable) 1979 1978 1978 1969 Electric Revenues from Sales of Electricity (a)

Residential

$ 545,049

$ 512,071 6.44 13.03 Commercial 625,596 574,557 8.88 15.48 Industrial 484,037 444,595 8.87 13.88 Public Street Lighting 31,437 29,925 5.05 9.72 Total Revenues from Sales to Customers 1,686,119 1,561,148 8.01 14.05 Interdepartmental 1,559 1,670 (6.65) 12.53 Total Revenues from Sales of Electricity 1,687,678 1,562,818 7.99 14.05 Other Electric Revenues 2,179 2,016 8.09 11.68 Total Operating Revenues

$1,689,857

$1,564,834 7.99 14.04 Energy Adjustment Revenues (included above) 78,794 12,583 526.19 8.93 Sales of Electricity-kilowatthours (a)

Residential 7,777,369 7,760,868

.21 2.25 Commercial 10,336,445 10,152,827 1.81 4.91 Industrial 11,185,952 l l, 134,634

.46

.27 Public Street Lighting 260,915 260,922 1.21 Total Sales to Customers 29,560,681 29,309,251

.86 2.21 Interdepartmental 26,629 32,638 (18.41)

.61 Total Sales of Electricity 29,587,310 29,341,889

.84 2.21 Kilowatthours Produced and Interchanged-net 32,021,737 3 1,628,876 1.24 2.28 Load Factor 54.3%

54.6%

Heat Rate-Btu of fuel per net kwh generated 10,566 10,599

(.31)

(.19)

Net Installed Generating Capacity at December 31-kilowatts 9,023 9,061

(.42) 3.90 Net Peak Load-kilowatts (60-minute integrated) 6,736 6,615 1.83 2.63 Cooling Degree Hours 7,201 7, 188

.18

.08 Temperature Humidity Index Hours 14,545 13,899 4.65

.13 Average Annual Use per Residential Customer -

kwh 5,233 5,378 (2.70) 1.38 Meters in Service at December 31 1,724 1,713

.64

.58 Gas Revenues from Sales of Gas (a)

Residential

$ 415,157

$ 399, 134 4.01 10.72 Commercial 179,970 163,931 9.78 13.61 Industrial 129,665 90,240 43.69 16.02 Street Lighting 274 248 10.48 13.39 Total Revenues from Sales to Customers 725,066 653,553 10.94 12.19 Interdepartmental 790 802 (1.50) 8.24 Total Revenues from Sales of Gas 725,856 654,355 10.93 12.18 Other Gas Revenues 994 596 66.78 32.63 Total Operating Revenues

$ 726,850

$ 654,951 10.98 12.20 Raw Materials Adjustment Revenues (included above) 62,765 25,554 145.62 16.22 Sales of Gas-therms (a)

Residential 970,462 1,013,043 (4.20)

.22 Commercial 456,902 447,923 2.00 2.14 Industrial 410,605 306,672 33.89

.51 Street Lighting 350 367 (4.63)

(2.24)

Total Sales to Customers 1,838,319 1,768,005 3.98

.73 Interdepartmental 2,328 2,490 (6.51)

(3.95)

Total Sales of Gas 1,840,647 1,770,495 3.96

.72 Gas Produced and Purchased-therms 1,931,549 1,852,869 4.25

.77 Effective Daily Capacity at December 31-therms 18,639 18,639 2.65 Maximum 24-hour Gas Sendout-therms 13,349 12,235 9.11 2.53 Heating Degree Days (a) 4,677 5,317 (12.04)

(.88)

Average Annual Use per Residential Customer-therms 833 893 (6.72)

(.30)

Meters in Service at December 31 1,357 1,350

.52

.31 la) Starting in 1973, revenues and sales by customer classifica-heating degree days are also reported on a calendar-year basis tion include accrued and unbilled dollar amounts and sales effective with 1973. For 1969, heating degree days remain on a 42 volumes from meter reading date to the end of the calendar year.

sales year basis.

To better reflect temperature effect on these recorded sales,

1977 1976 1975 1974 1969

$ 492,473

$ 443,531

$ 413,005

$ 364,674

$ 160, 159 53 1,118 474,791 429,428 377,184 148,359 414,058 367,470 341,749 336,250 131,900 27,622 25,863 23,375 20,473 12,437 1,465,271 1,311,655 1,207,557 1,098,581 452,855 1,916 1,585 1,573 1,183 479 1,467,187 1,313,240 1,209,130 1,099, 764 453,334 2,931 2,837 4,358 1,201 722

$1,470,118

$1,316,077

$1,213,488

$1,100,965

$ 454,056

$ 257,902

$ 307,530

$ 419, 154

$ 414,798 33,507 7,769,629 7,711,953 7,598,964 7,514,365 6,226,250 9,747,908 9,514,574 8,994,855 8,687,964 6,398,908 10,627,734 10,472,054 10,144,917 11,244,117 10,890,176 259,277 259,151 256,755 253,395 231,264 28,404,548 27,957,732 26,995,491 27,699,841 23,746,598 38,331 34,996 39,910 31,072 25,055 28,442,879 27,992,728 27,035,401 27,730,913 23,771,653 30,771,719 30,376,187 29,255,628 29,730,774 25,554,653 50.9%

55.9%

53.3%

53.7%

56.2%

10,677 10,593 10,582 10,779 10, 766 9,247 8,741 8,829 8,892 6,154 6,895 6,190 6,270 6,316 5,195 8,269 6,513 6,543 7,501 7,147 14,883 12, 701 13,612 13,154 14,363 5,403 5,395 5,348 5,312 4,562 1,704 1,697 1,689 1,683 1,627

$ 344,444

$ 342,524

$ 259,095

$ 220,364

$ 149,897 137,811 140,809 102,656 86,463 50,237 78,474 68,341 54,369 46,971 29,341 178 159 116 94 78 560,907 551,833 416,236 353,892 229,553 572 476 647 481 358 561,479 552,309 416,883 354,373 229,911 1,198 1,149 154 535 59

$ 562,677

$ 553,.458

$ 417,037

$ 354,908

$ 229,970

$ 113,787

$ 154,526

$ 106,795 62,448 13,957 980,570 1,045,627 968,487 977,994 949,154 432,810 468,761 447,600 459,074 369,731 329,211 307,949 344,987 407,840 390,256 376 389 404 428 439 1,742,967 1,822,726 1,761,478 1,845,336 1,709,580 2,064 1,764 3,204 3,088 3,482 1,745,031 1,824,490 1,764,682 1,848,424 1,713,062 1,811,019 1,895,041 1,823, 191 1,913,826 1, 788,981 18,933 19,449 19,575 19,324 14,350 14,006 12,803 11,077 11, 763 10,400 5, 155 5,349 4,653 4,629 5,111 862 924 862 872 858 1,350 1,354 1,355 1,352 1,316 43

financial Statistics (000 omitted where applicable) 1979 1978 Condensed Statements of Income (a)

Amount Amount Operating Revenues Electric

$1,689,857 70

$1,564,834 70 Gas 726,850 30 654,951 30 Total Operating Revenues 2,416,707 100 2,219,785 100 Operating Expenses Fuel for Electric Generation and Interchanged Power-net 620,546 26 541,802 24 Gas Purchased and Materials for Gas Produced 384,759 16 327,990 15 Other Operation Expenses 287,389 12 268,769 12 Maintenance 149,027 6

127,423 6

Depreciation 162,989 7

158,248 7

Taxes Other than Federal Income Taxes 364,411 15

~28,2 1 6 15 Federal Income Taxes 123,965 5

146,937 7

Total Opera ting Expenses 2,093,086 87 1,899,385 86 Operating Income Electric 269,443 11 266,513 12 Gas 54,178 2

53,887 2

Total Operating Income 323,621 13 320,400 14 Allowance for Funds Used During Construction (Debt and Equity) 56,593 3

41,305 2

Other Income-net 6,263 4,515 Interest Charges (153,148)

(6)

(137,434)

(6)

Net Income 233,329 10 228,786 10 Preferred and Preference Stock Dividends 46,799 2

46,799 2

Earnings Available for Common Stock

$ 186,530 8

$ 181,987 8

Shares of Common Stock Outstanding End of Year 68,914 64,120 Average for Year 65,409 61,783 Earnings per average share of Common Stock

$2.85

$2.95 Dividends Paid per Share

$2.20

$2.08 Payout Ratio 77%

71%

Rate of Return on Average Common Equity (b) 10.39%

11.00%

Ratio of Earnings to Fixed Charges Before Income Taxes (c) 3.36 3.77 Book Value per Common Share (d)

$26.26

$26.13 Utility Plant

$6,325,033

$5,810,329 Accumulated Depreciation and Amortization

$1,589,049

$1,447,039 Capitalization Mortgage Bonds

$1,940,513 41

$1,692,642 39 Debenture Bonds 314,726 7

322,682 7

Other Long-Term Debt 1,680 2,160 Total Long-Term Debt 2,256,919 48 2,01 7,484 46 Redeemable Preferred Stock 31,500 35,000 1

Non-Redeemable Preferred Stock 554,994 12 554,994 13

$1.40 Dividend Preference Common Stock and Common Stock 1,106,824 23 1,014,184 23 Premium on Capital Stock 557 557 Paid-In Capital 26,065 1

26,065 1

Retained Earnings 747,076 16 704,909 16 Total Common Equity 1,880,522 40 1,745, 715 40 Total Capitalization

$4,723,935 100

$4,353,193 100 la) See Summary of Significant Accounting Policies, page 29, lb) Balance available for $1.40 Dividend Preference Common and Notes to Financial Statements, page 37.

Stock and Common Stock divided by the average of beginning and end-of-year Total Common Equity.

44

1977 1976 1975 1974 1969 Amount Amount Amount Amount Amount

$1,470,118 72

$1,316,077 70

$1,213,488 74

$1,100,965 76

$ 454,056 66 562,677 28 553,458 30 417,037 26 354,908 24 229,970 34 2,032,795 100 1,869,535 100 1,630,525 100 1,455,873 100 684,026 100 536,801 27 484,174 27 478,312 30 456,439 32 84,670 12 257,897 13 261, 190 14 198,653 12 144,020 10 77,851 11 253,831 12 227,395 12 201,865 12 192,168 13 125,087 18 124,876 6

99,617 5

83,494 5

91,467 6

53, 180 8

147,652 7

133,087 7

122,634 8

106,683 7

74,105 11 293,796 14 275,254 15 240,967 15 213,576 15 95,504 14 120,969 6

100,380 5

54,368 3

21,061 1

30,772 5

1,735,822 85 1,581,097 85 1,380,293 85 1,225,414 84 541,169 79 250,385 13 236,359 12 217,429 13 187,593 13 110,870 16 46,588 2

52,079 3

32,803 2

42,866 3

31,987 5

296,973 15 288,438 15 250,232 15 230,459 16 142,857 21 49,540 2

43,547 3

43,325 3

56,027 4

9,605 1

1,447 2,654 1,758 (2,037) 994 (133,718)

(7)

(130,615)

(7)

(136,709)

(8)

(130,609)

(9)

(62,380)

(9) 214,242 10 204,024 11 158,606 10 153,840 11 91,076 13 45,065 2

41,257 2

36,008 2

31,813 3

9,304 1

169,177 8

$ 162,767 9

$ 122,598 8

$ 122,027 8

81,772 12 59,806 58,976 56,523 52,531 32,704 59,243 58,308 54,513 51,918 31,102

$2.86

$2.79

$2.25

$2.35

$2.63

$1.92

$1.78

$1.72

$1.72

$1.64 67%

64%

76%

73%

62%

10.96%

11.18%

9.01%

9.68%

11.72%

3.52 3.34 2.56 2.33 2.96

$25.57

$24.71

$24.02

$24.25

$21.19

$5,654,097

$5,255,286

$4,920,768

$4,636,344

$2,810,3 13

$1,314,916

$1,194,467

$1,078,124

$ 965,160

$ 639,517

$1,647,445 40

$1,549,579 39

$1,418,854 36

$1,422,525 38

$884,377 42 330,812 8

341,511 9

380,619 10 389,640 10 333,306 16 2,640 3,120 153,600 4

153,600 4

1,980,897 48 1,894,210 48 1,953,073 so 1,965,765 52 1,217,683 58 35,000 1

35,000 1

35,000 1

554,994 13 524,994 13 474,994 12 434,994 12 149,994 7

919,752 22 900,384 22 855,874 22 797,386 21 374,538 18 557 550 550 550 252 26,065 26,065 1

26,065 1

26,065 1

26,065 1

651,885 16 596,745 15 540,041 14 515,267 14 349,093 16 1,598,259 38 1,523,744 38 1,422,530 37 1,339,268 36 749,948 35

$4, 169,150 100

$3,977,948 100

$3,885,597 100

$3,740,027 100

$2,117,625 100 le) Net Income plus Income Taxes, Deferred Income Taxes, Id) Total Common Equity divided by year-end Common Stock Investment Tax Credits and Fixed Charges divided by Fixed shares plus double the $1.40 Dividend Preference Common Charges. Fixed Charges include Interest on Long-Term and Stock shares.

Short-Term Debt and Other Interest Expense.

45

46 Management's Discussion and Analysis of the Statements of Income The following is a summary of the year-to-year changes followed by a discussion of those items which had a significant effect on the Company's results of operations.

Increase or !Decrease) 1979 VS. 1978 1978 VS. 1977 Amount Amount (Thousands of Dollars)

Electric Operating Revenues

$125,023 Gas Operating Revenues 71,899 8.0

$ 94,716 11.0 92,274 6.4 16.4 Fuel for Electric Generation and Interchanged Power-net 78,744 14.5 5,001 9

Gas Purchased and Mate-rials for Gas Produced 56,769 17.3 70,093 27.2 Maintenance Taxes Other than Federal Income Taxes 21,604 36, 195 122,972) 17.0 11.0 115.6) 2,547 2.0 34,420 11.7 25,968 21.5 Federal Income Taxes Allowance for Funds Used During Construction 15,288 37.0 18,235) 116.6)

Interest Charges 15,714 11.4 3,716 2.8 Electric Operating Revenues Revenues increased 8% in 1979 and 6% in 1978. The components of these changes are highlighted in the table below:

Rate changes including recoveries of energy costs through base rates Recoveries of energy costs through lcvelizcd energy adjustment charges I I)

Increased kilowatthour sales Increase or !Decrease) 1979 vs. 1978 I978 vs. 1977 (Millions of Dollar.\\)

$ 37 77 11

$125

$8 1 119) 33

$95 I I) Represents revenues received as recovery of energy costs in excess of amounts included in base rates.

Growth in 1979 sales was limited to 1 % by a lack-luster New Jersey economy and the continuing con-servation efforts by customers. In 1978, commercial and industrial sales rose 4% and 5%, respectively, responding to an improved economy. The 1978 im-provement was restrained by the effect of a greater portion of sales being in the lower revenue per kilowatthour classes of business.

Gas Operating Revenues Revenues rose 11 % in 1979 and 16% in 1978. The principal factors are shown below:

Rate changes including recoveries of gas costs through base rates Recoveries of gas costs through levclizcd adjustment charges I I)

Increased Therm sales Increase or !Decrease) 1979 vs. 1978 1978 vs. 1977 (Millions of Dollars)

$ 9 49 14

$72

$10 70 12

$92 Ill Represents revenues received as recovery of gas costs in excess of amounts included in base rates.

The 1979 increase was slightly tempered by the ef-fect of a greater portion of sales being in the lower revenue per therm classes of business. The increased sales, mainly in the interruptible and off-peak cate-gory, generated $26 million in additional revenue.

The sharp reduction in the days of interruptions, 13 in 1979 against 136 in 1978, as well as the favorable price of gas compared to alternate fuels were the prime factors. However, gas sales to the remaining classes of customers decreased, reflecting both con-tinued conservation and a less severe winter.

The higher gas sales in 1978 reflect improvement in the State's economy as well as the colder weather experienced during the year. Although total gas sales increased slightly, interruptible sales declined sharply as the result of the 136 days of curtailments, a 33% rise over the previous year, and because a number of interruptible customers turned to less expensive sources of fuel.

Fuel for Electric Generation and Interchanged Power-net The Company belongs to the Pennsylvania -New Jersey-Maryland Interconnection (PJM) and is there-by able to optimize its generation-interchange mix, using the lowest cost energy available in the inter-connection system at any given time. Energy costs are adjusted to match revenues recovered through the operation of the levelized electric energy adjust-ment clause. Total energy costs increased 15% and 1 % in 1979 and 1978, respectively, as described below:

Increase or I Decrease) 1979 vs. 1978 1978 vs. 1977 Prices paid for fuel supplies and interchanged power (Millions of Dollars)

$2 18

$145)

Increased kilowatthour output 7

16 Adjustment of actual costs to match recoveries through revenues 1146) 34

$ 79

$ 5 The substantial price increases in 1979 reflect the spiralling fuel prices, most notably oil, and the re-duced availability of lower cost nuclear generation both in the Company's capacity and in the PJM system. The lower energy prices in 1978 demon-strated the advantage of greater nuclear capacity and utilization.

Gas Purchased and Materials for Gas Produced Gas costs are adjusted to match revenues recovered through the operation of the levelized gas adjust-ment clause. Costs were 17% higher in 1979 and 27% higher in 1978. Contributing factors are shown below:

Higher prices paid for gas supplies Refunds from pipeline suppliers Increased therm sendout Adjustment of actual costs to match recoveries through revenues Increase or !Decrease) 1979 vs. 1978 1978 vs. 1977 -

(Millions of Dollars)

$54

$24 1121 7

14 7

32

$57

$70

Maintenance The 17% increase during 1979 is primarily due to higher cost of maintenance at certain of the Com-pany's steam and nuclear generating stations. Addi-tional expenses were incurred in order to restore service following Tropical Storm David and in main-taining the distribution system.

Tuxes Other than Federal Income Tuxes Taxes Other than Federal Income Taxes consists principally of New Jersey gross receipts tax which varies in direct proportion to electric and gas operat-ing revenues. The $36 million or 11 % rise experi-enced during 1979 was primarily attributable to an increase of $26 million in such gross receipts taxes and to an additional $7 million resulting from a revi-sion of the Pennsylvania Public Utility Realty Tax which subjected additional jointly-owned property of the Company to the Act's provisions and imposed a one-time surtax payable in 1979. The $34 million rise in 1978 consists principally of a $26 million in-crease in gross receipts taxes and to a reversal in 1977 of $6 million of accrued Pennsylvania Public Utility Realty tax.

Federal Income Taxes Federal income taxes decreased 16% in 1979 due to a decline in pre-tax operating income and the change in the statutory tax rate from 48% to 46%. The 22%

increase experienced in 1978 was attributable to greater pre-tax operating income and a decrease in tax depreciation in excess of book depreciation for which deferred taxes are not provided. (See note 1 of Notes to Financial Statements.)

Independent Accountants' Opinion Deloitte Haskins+Sells Certified Public Accountants 550 Broad Street Newark, New Jersey 07102 Tu the Stockholders and Board of Directors of Public Service Electric and Gas Company:

We have examined the balance sheets and state-ments of capital stock and long-term debt of Public Service Electric and Gas Company as of December 31, 1979 and 1978 and the related statements of in-come, retained earnings, and changes in financial po-sition for the years then ended. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other audit-ing procedures as we considered necessary in the circumstances.

Allowance for Funds Used During Construction The $15 million or 37% rise in total AFDC experi-enced during 1979 is principally attributable to higher levels of Construction Work in Progress. The 17% decrease in 1978 resulted primarily from the suspension of accruals on the Atlantic Project effec-tive June 1, 1978 and the discontinuance of AFDC on Salem 1 due to its transfer to Utility Plant in Service on June 30, 1977.

Interest Charges The increase in 1979 is principaliy due to the is-suance of mortgage bonds and increased short-term borrowings at significantly higher rates.

Form 10-K Available The Company is required by Securities and Ex-change Commission (SEC) regulations to file with that agency a Form 10-K annual report containing certain detailed financial and other data. There are no accounting differences between the financial statements presented in this Annual Report to Stockholders and those in the Form 10-K report, but it does provide other information as required by SEC regulations.

Stockholders or other interested persons who wish to have a copy of the Company's Form 10-K report may obtain one without charge after March 31, 1980, by writing to the Vice President and Treasurer, Public Service Electric and Gas Company, 80 Park Place, Newark, New Jersey 07101. The copy so obtained will be without exhibits. Exhibits may be purchased for a specified fee.

In our opinion, such financial statements, appearing on pages 29 to 41, inclusive, present fairly the finan-cial position of Public Service Electric and Gas Company as of December 31, 1979 and 1978 and the results of its operations and the changes in its finan-cial position for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis.

February 15, 1980 47

Board of Directors John F Betz l'resi1/ent and Chief Operoting Officet of the Co1111wnv Member of Executive and Finance Commit tees Reynold E. Burch, M.D.

The private proc/lce of medicine in the 1peciolt1* of obstetrics ond )!,l'llecolog1: Ea1t Orange. Ne11* /erse\\'; Clinical Assouate Professor of Ohstet rics (/Ill/ C: _1*necolo,~.1 '. Ne11*

/erse\\' Medico/ School. Ne1\\'a rl<. Ne\\\\' /er.1e1:

Jlelllber of Audi/ Committee C. Malcolm Davis Chairman of the Hoaul anil director. Fidelit1*

Unwn HoncorJ'oration. Ne11*orl<. Ne\\\\' /ersev

,\\.1ember of Executive and Finance Commit tees ond Choimwn of Nominal ing Colllmit tee W. Robert Davis Clwirlllon of the lioaul. Chief l:xerntive

()/Iicer ond 1/irector, Boncshores of Ne1v /erse1-.

\\1oore.1to11*n. Ne11* /er'1' \\'; Choir111on of the Boon! and director. The Bani< of Ne11* /er1e1:

Can){/en. Ne11* /er\\e)'

Choimwn of Audit Committee a/){/ Member of Nominoting Comlllittee Edward R. Eberle Former Chairmon of the Hoord of the Com1wn1*

,\\!1ember of F111ance and Nominoting Committee' Margery Somers Foster Emeritu1 Pmfe."or of Economics ond former Dean of Oougla11 College, l~utger1. The State Universit y, New Brumwich. New /er.1ey Member of Audit Committee D. Wayne Hallstein Director am/ former !'resident. lngerrnll-lfond Compan_\\' (diversified manufacturer of nwch1ner.1: e1/UI/ll1Jent and tools}. Woodcliff Lahe. Ne1v /er1e1

• Member of Fuwnce Comm II tee and Or,~oni=at ion and Compe11.1at ion Commit tee James C. Pitney Partner of the firm of Pitne1: Hardin & Kipp, counsellors-at -lalV, Ne1Varl; al)(/ MorristolVn, Ne"' /er,e1*

Member of Audit Com111ittee Kenneth C. Rogers President. Stevens Institute of Tech1wlog_1:

Hobohen. Ne\\\\' /er1e1

• Member of Nominoting Co111mittee and Organi=at ion and Compen.rnt ion Committee William E. Scott Executive Vice l're.1ident - Finonce of the Companv Memher of Execu111*e Com ml/tee and Chairman of F111once Comnnttee Robert I. Smith Cha1mwn of the Boord al)(/ Chief Exerntive Officer of the Com11om*

Clwirman of Executive Com111ittee a]){/

Me111her of Finance Commit tee Robert V. Van Fossan Chairman of the Hoard. Chief Executive Officer and director, The Mutual Benefit Life l11'ura11ce Companl'. Ne11*orh. Ne11* /erse.1*

Member of Executive and Finance Comlll1ttees and Chairman of Organi=ation and Compensotion Committ ee Nathan H. Wentworth Former Cha1mwn of the Board. The Continental Corporotion (property and cosualt y life and accident and health, and other t1*pes of insurance. and other financial services} and The Continenwl Insurance ComJ'anies. Ne\\\\' Yori-:.. Neil' Yori<

Member of Audit OIHI Finan ce Committees and Orgoni=at ion ond Compensation Commit tee

- ---------------~-~---------------------------------~

Officers Robert I. Smith Chairman of the Board and Chief Executive Officer John F. Betz President and Chief Opera I ing Officer Edward G. Outlaw Executive Vice President - Corporate Planning William E. Scott Executive Vice President - Finance James B. Randel, Jr.

Senior Vice President of I he Company 11n1/

Pre.>ident of Energy Development Corpor111 ion Harold W. Sonn Senior Vice President of the Compan1 1 and President of PSE&G Research Corporal ion Richard M. Eckert Senior Vice President -Energy Suppl.1* unrl Engineering Charles H. Hoffman Senior Vice President - Sp/em Plunning and Int erconnect ions Robert W. Lockwood Senior Vice Pre,illent -Administration John F. McDonald Senior Vice President-Governmental Af(ai" Everett L. Morris Senior Vice l'resident -Cu,tomer Operation' Donald A. Anderson Vice President -Computer S.1*stems and Services Frederick M. Broadfoot Vice President - Law Malcolm Carrington, Jr.

Vice President and Secretary Changes in Organization The Board of Directors, at a meeting held on September 18, 1979, adopted a resolution increasing the number of Directors from twelve to thirteen and, effective the same date, elected James C. Pitney a Director. Mr. Pitney, an attorney, is a partner of the law firm of Pitney, Hardin & Kipp of Newark and Morristown, New jersey Robert C. Lydecker, Vice President and Assistant to the Chairman of the Board, retired on June 29, 1979, after more than 42 years of service.

Robert M. Crockett Vice President -Fuel Supply and !'resident of Eascogas LNG, Inc.

Fredrick R. DeSanti Vice President-Rates al7ll Load Management Gifford Griffin Vice President-Int erconnections Carroll D. James Vice President-Administrative !'fanning Edward J. Lenihan Vice President - Public Rel at ions Charles E. Maginn, Jr.

Vice President-Human Resource>

Wallace A. Maginn Vice President and Treasurer Stephen A. Mallard Vice President - S1*)/em Planning Winthrop E. Mange, Jr.

Vice President -Corporate Services Thomas J. Martin Vice /'resident -Engineering and Const ruction Parker C. Petem1an Vice President and Comp I roller Louis L. Rizzi Vice President - CtVitomer and Morl<et i ng Services Frederick W. Schneider Vice President-Product ion Robert J. Selbach Vice President-Transmission and' Distribution Robert W. Hodge, Vice President-Commercial and Consumer Affairs, retired effective January 2, 1980, after nearly 34 years with the Company Louis L. Rizzi, General Manager of Consumer Affairs, was elected to succeed him, effective January 2, 1980.

Mr. Rizzi was designated Vice President-Customer and Marketing Services, effective January 15, 1980, in conformance with a change in the designation of the department.