ML18082A353

Annual Financial Rept 1979

ML18082A353
Person / Time
Site:	Salem, Hope Creek, 05000355
Issue date:	02/15/1980
From:	Betz J, Rich Smith Public Service Enterprise Group
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ML18082A342	List: ML18082A340 ML18082A343 ML18082A348 ML18082A351 ML18082A353
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NUDOCS 8005090418
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1979 Annual Report Edison Table of Contents About the Company Centennial 1 Financial Highlights Public Service Electric and Gas Com-pany, New Jersey's largest utility, of Light 2 Message to Shareholders serves abo ut 5.5 million people, more About the Cover 4 Edison Tribute than three-fourths of the state's popu-Th omas A. Edison's 8 Financial Review lati on. The Company's service area invention of th e fir st prac ti cal in candescent 10 Construction Expenditures stretches across the state's industrial lamp on Octobe r 2 1, 11 Energy Production corridor from the New York state line 1879, is depicted artisti - 16 Energy Distribution ca ll y to dra mat ize hi s on the north to below Camden in the hi stori c accomplish- 19 Energy Usage south. The territory, a center of trans-m cn t. The el ectric 23 Energy Research portation, contains a well-balanced utility ind ustry, as 27 Community, Employee well as countl ess mixture of industrial, commercial and oth ers, owe their Information residential development. In cluded in ex isten ce to h is gen ius. 28 Transport of New Jersey the area arc New Jersey 's six largest Th e IOOth annive rsary of hi s invention was 29 Financial Statement cities and nearly 300 smaller subur-observed during 1979 by Responsibility ban and rural communities.

the "Centenni al of 29 Accounting Policies Light ." T he centennial not on ly honored 31 Financial Statements Annual Meeting Edison fo r his contribu - 42 Operating Statistics Please note that the Annual Meeting ti ons to mankind, 44 Financial Statistics but also sought to of Stockholders of the Company will sti1n ul atc interest in 46 Management's Discussion and be held at the Robert Treat Hotel, sc ience and techn ology Analysis of the Statements of 50 Park Place, Newark, New Jersey, as a mea ns of renew ing th e natio n's techni ca l Income Tuesday, April 15, 1980, at 2:00 PM. A leadership. 47 Independent Accountants' summary of the meeting will be sent Opinion to stockholders at a later date.

48 Directors and Officers 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.

Sym bol of th e Centennial of Light 1879- 1979

PS~G Public Service Electric and Gas Company 80 Park Place , Newark , New Jersey 07101 (201) 430- 7000 Stockholder Information - Tull Free New Jersey residents (800) 242-0813 Outside New Jersey (800) 526-8050 Stock Symbol PEG Financial Highlights  %

The Company's Common Stock 1979 1978 Change and the $1.40 Dividend Preference Earnings per average share of Common Stock are traded on the Common Stock $2.85 $2.95 (3)

New York Stock Exchange and the Philadelphia Stock Exchange. Shares of Common Stock Average 65,409,000 6 1,783,000 6 Transfer Agents All Stocks Year-end 68,914,000 64, 120,000 7 Morgan Guaranty Trust Company of New York, 30 West Broadway, Dividends paid per share of New York, N .Y 10015 Common Stock $2.20 $2.08 6 Book Value per share of Stock Transfer Department, Public Common Stock $26 .26 $26. 13 Service Electric and Gas Company, Total Operating Revenues $2,416,707,000 $2,219,785,000 9 80 Park Place, Newark, N .J. 07101 Total Opera ting Expenses $2,093 ,086 ,000 $ 1,899,385,000 10 Registrars All Stocks Earnings Available for Common Stock $ 186 ,530 ,000 $ 181 ,987,000 2 Fidelity Union Trust Company, Gross Additions to Utility Plant $ 538,135,000 $ 5 13,757,000 5 765 Broad Street, Newark, N. J. 07101 Total Utility Plant $6 ,325 ,033 ,000 $5,810,329,000 9 Morgan G uaranty Trust Company of New York, 30 West Broadway, New York, N.Y 10015 Capitalization Ratios Earnings and Dividends per Share Times Fixed Charges Earned (Yea r-End) (Befo re Incom e Taxes )

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

20 40 60 80 100 $1 $2 $3 2 3 4

• De bt

• Dividends Docket# ~o- z... ?1...

Earnin gs Prefe rred St ock Control # ~oo r;o c:; o '/-O ~

Co m mo n Eq uit y Date s/ 01 J&t>_of Documeat:

REGULA'fORY'DOCKET fllE

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

The year 1979 was a difficult one for Immediately following the Three PSE&G as it was for many utility Mile Island accident, the Company companies, especially those in the and other utilities operating nuclear Northeast. A dramatic increase in oil plants, established task forces to prices, accelerating inflation, high investigate the accident and apply the money costs and reactions to the "lessons learned" to their nuclear Three Mile Island accident in stations. Improvements in safety Pennsylvania contributed to an systems and operating procedures at adverse operating environment for Salem were made. Management of the utilities. Further, abnormal weather Company, after reviewing all the facts conditions in our territory, combined reaffirmed its commitment to nuclear' with high energy costs, tended to power.

reduce demands for both gas and electricity. As a result of these Oil Reduction unfavorable circumstances the The low-_sulphur oil that the Company Company's earnings per share of bums ongmates abroad and it is im-Common Stock dropped to $2.85 in perative for both economic and politi-1979, 3.4% below the $2.95 realized in cal reasons that we reduce its use.

1978, when there were 3,626,588 Events in 1979, particularly in Iran, fewer average shares outstanding. emphasized the need for the Company Total revenues in 1979 rose to $2.4 and the nation to lessen dependence billion from $2.2 billion in 1978 a involvement in either the ownership on foreign oil.

1 9% increase, while net income or operation of the Three Mile Island The price of oil rose from $15.51 a available for Common Stock increased station, repercussions of the accident barrel at the end of 1978 to $29.36 at 2.5% from $182 million to $186.5 have had a significant effect on our the close of 1979 and the current price million. Company. When the accident oc- is $31.34 - more than double what it The dividend on Common Stock curred, the No. 2 nuclear unit at our was at the end of 1978. Obviously, the was increased in 1979 for the fourth Salem Generating Station was near contmuously increasing price of oil as time.in as many years. Beginning with completion. We were expecting to re- well as the continuity of supply are of the first quarter; the dividend was ceive an operating license in April deep concern.

raised by two cents a share to 55 cents and, after testing, to begin commercial Our use of oil for electric generation from the 53 cents paid in the fourth operation by late summer or early fall. was reduced from 35% in 1978 to 25%

quarter of 1978. Dividends on Com- As a consequence of the accident, the in 1979 by burning gas and by purchas-mon Stock paid in 1979 increased to Nuclear Regulatory Commission mg coal-generated electricity from the

$2.20 compared with $2.08 in 1978. halted the issuance of operating Pennsy 1vania-New Jersey-Mary land As we have stated on numerous occa- licenses and construction permits. We Interconnection.

sions, we are committed to a program do not now expect to receive an In order to further reduce oil im-of regular dividend increases as long operating license before the spring ports we are studying conversion of as fmancial conditions permit. of 1980. existing oil burning plants to coal The No. 1 Salem unit, which had an where this can be done economically Rate Increase excellent performance record in the without harmful environmental first quarter of 1979, was shut down effects.

On . ~pril 2, 1979, the Company filed a April 2 for refueling and maintenance petition for a rate increase of $374.5 work. We had originally scheduled million with the New Jersey Board of Gas Supply the return of this unit to service in Public Utilities. Hearings on the peti- late June but because of a number of An improvement in natural gas tion were held during the year and the requirements, some stemming from supplies made it possible for the record closed on December 14, except the Three Mile Island accident its company to add 20,804 new house for ISsues relating to unrecovered fuel return.was delayed until Dece~ber. heating installations during the year.

costs. As of this date an initial deci- Dunng 1979 nuclear power provided Of this total, 15,065 were conversions sion by the administ~ative law judge 22% of the Company's electric to gas from fuel oil as a result of the 111 the proceeding has been issued, and rapidly escalating oil price.

output, a large part of which came an order by the New Jersey Board is from the Peach Bottom station in Our natural gas supply has been expected in March. Pennsylvania in which we have a enhanced by deliveries from Energy 42.49% interest. We had anticipated a Development Corporation (EDC), our Nuclear Power greater portion of our electric output subsidiary engaged in gas exploration The Three Mile Island accident on would come from nuclear but the and development. At the end of 1979 March 28, 1979, focused attention on unavailability of the Salem units we were receiving gas from fields dis-the generation of electricity by nu- reduced our expected nuclear covered by EDC at the rate of about 3 clear power. Although PSE&G has no genera ti on. million cubic feet a day.

2

Energy Research has doubled, indicating that the dollar As we enter the 1980's, we are aggres-As this report shows, the Company is currently will purchase half as much sively gearing our plans to the lower participating in extensive research on as in 1970. Financial statements have growth rates which we expect to per-a number of alternate energy sources. not shown the impact of inflation. sist for some time. We are dedicated However; our basic conclusion is that In recognition of this problem, the to reducing our dependence on for-we will have to place primary reliance accounting profession through the eign oil. We are exploring alternate on coal and nuclear for the near-term Financial Accounting Standards Board energy sources for the future and we future because none of the alternates, has issued a statement requiring that are pursuing all possible ways to nor all of them together, can make a certain inflation-adjusted data be pre- improve the efficiency and economy meaningful contribution to energy sented in 1979 annual reports. This of our operations.

supply between now and the end of information, on page 39, is supple- As 1979 ended, a new corporate the century. mental to the primary financial state- home for the Company was nearing We were much encouraged during ments and is designed to show the completion - a modem, 26-story 1979 by the progress made toward the effects that inflation has had on the gleaming glass walled structure that development of fusion energy. It now Company. gives added dimension to Newark's appears that, with sufficient funding, downtown skyline.

a fusion demonstration plant could be Transport of New f ersey The Company will occupy 22 floors on line by the year 2000. We have sup- During 1979, legislation enacted by of the office tower and a satellite ported fusion research for a number of the State of New Jersey established three-story plaza building. Named 80 years and we are looking forward to the New Jersey Transit Corporation to Park Plaza, the complex is adjacent to the time when the tremendous poten- acquire privately-owned transporta- and east of the 80 Park Place head-tial of this energy source can be com- tion companies. Our wholly-owned quarters, the Company's home since mercially utilized. suhsidiary, Transport of New Jersey, is 1915.

presently receiving operating sub- This spring the first of 3,300 em-Research Advisory Council sidies from the State of New Jersey ployees will begin moving into the In the latter part of 1979, a Research and we have indicated our willing- new quarters. After the old building is Advisory Council was established. ness to sell this subsidiary to the empty, it will be demolished and a The function of this group of some State for a reasonable price. Negotia- landscaped plaza developed.

twenty people from various back- tions are presently in progress for The new headquarters, which was grounds outside of the utility industry State acquisition. built and is owned by subsidiaries of is to provide advice and guidance for Rockefeller Center, Inc., will provide our research activities. Consumers, Looking to the Future greater efficiency through consolida-environmentalists, the media, aca- A bright aspect of 1979 for the elec- tion of operations in a more favorable demia and various businesses are tric industry was celebration of the ~orking environment as well as sig-represented on the council. "International Centennial of Light" nificant savings from energy which marked the lOOth anniversary conservation.

Energy Education of Thomas A. Edison's invention of During 1979, as in years past, the During the year, the Company ex- the first practical incandescent lamp. dedication and support of Company panded its energy education program, The Company had a special interest employees, and of you, the stock-stressing the need for nuclear power. in the observance because Edison's holders, has been of incalculable The program included employee inventions not only gave rise to the value. We look forward to the decade education sessions, newspaper adver- electric utility industry, but he carried of the 1980's with confidence, know-tising and television commercials. out most of his life's work in New ing that your interest and trust will The company's speakers bureau Jersey, and in our service area. continue.

As we embark on the decade of the r-~_s;L._.d increased its activity and made quali-fied speakers available for any group 80's, we do so with the same kind of interested in learning more about the determination that characterized energy situation. Edison's efforts to find solutions to We urge you to actively support our problems. The decade of the 70's was Robert I. Smith nuclear program if you are convinced, a period of trial and upheaval for the Chairman of the Board as we are, that nuclear power must utility industry. Triggered by the Arab and Chief Executive Officer play an important role in the overall oil embargo of 1973 we have been national energy policy.

Effects of Inflation buffeted by crisis after crisis as the result of rising fuel costs and rampant inflation. The rate of growth in de-

~~&~

Over the past decade, inflation has mand for electricity has been slowed John F. Betz become a significant factor in the by high prices and by recognition of President and economy and in our business. During the need to conserve and make more and Chief Operating Officer this period the Consumer Price Index efficient use of our energy resources. February 15, 1980 3

CENTENNIAL OF LIGHT 1879 1979 J

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 As part of the observance, PSE&.G In 1876 Edison established what he incandescent lamp burned out after 40 on October 19 illuminated a "Centen- called an "invention factory" in hours, but its afterglow and reflections nial of Light" display on the facade of Menlo Park. There, amidst quiet continue to illuminate and enrich its headquarters building in Newark. country surroundings, he planned to mankind 100 years later. At the ceremony in Military Park, fac- tum out "a minor invention every 10 Of all Edison's inventions-he ing the headquarters building, Smith days and a major one every six patented 1,093-the lamp he lighted in borrowed the words spoken in 1929 by months."

the third week of October of 1879 in Thomas N. McCartei; the Company's At the Menlo Park laboratory for his Menlo Park laboratory outshone foundei; in honoring Edison on the the first time a group of talented all the others. The world always SOth anniversary of his invention: people was assembled in one location, would be a brighter and better place in "We of the electric light and power furnished with scientific equipment which to live. industry owe to Mr. Edison much and supplies and encouraged to in-In 1979, a year-long "International more than is involved in the discov- vent. It was the first industrial re-Centennial of Light" observance ery of a practical incandescent lamp, search laboratory in America.

commemorated Edison's historic ac- important as that discovery was. We "Remember, nothing that's good complishment. Robert I. Smith, owe to him the very basis of our in- works by itself, just to please you,"

chairman and chief executive officer dustry. He gave to us the first practi- Edison told his associates. "You've got of PSE&.G, served as chairman of the cal commercial central station and he to make the damn thing work."

centennial committee. developed for us the first practical Edison boasted publicly in 1878 that Centennial events were held method of generating and distribut- he could devise in about six weeks a throughout the nation and abroad. A ing electrical energy." system to light streets, homes and fac-number took place in New Jersey New Jersey claims Edison as her tories with electricity. Weeks became where Edison lived and worked most own, and rightfully so, for it was in months as Edison and his Menlo Park of his life. the state that he produced most of his assistants sought to develop a practi-inventions. As a young inventor of 22 cal incandescent lamp, a vital re-he had arrived in Newark and set up quirement.

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.

After 1,600 other materials had been was," the New York Times reported. In 1884 Edison built a new labora-tried, a filament of cotton thread im- "/have accomplished all that I tory 10 times larger in West Orange.

pregnated with carbon was placed in a promised," Edison said. Instead of a dozen or so assistants, he glass bulb and a vacuum created on Although Edison's accom- now had 50. The laboratory was the October 19, 1879. The plishments received wide at- finest of the day with the most lamp, powered by a string tention and acclaim, the elec- sophisticated equipment of the era.

of batteries, was lighted trical age did not arrive over- Edison's genius kept the West and glowed for the 40 night. Edison had established Orange laboratory and a hours that would make a factory to produce electric factory busy for more history. lamps in East Newark, now than 40 years. There News of Edison's suc- Harrison, in 1881. Some were improvements in cessful incandescent lamp 135,000 bulbs were produced earlier in-was met with skepticism during the first year, but there ventions and doubt. But by De- was no market for most of and new cember 260 lamps had them. ones- motion been produced and tested. The nation's major cities pictures, On New Year's Eve Edison illumi- and larger towns were illuminated by the fluoro-nated his laboratory and the streets of gas lamps, and Edison knew from the scope, a Menlo Park with his lamps. More beginning that electrical illumination non-acid than 3,000 persons traveled by excur- not only had to be demonstrated as storage sion trains to see the display. better, but also more economic than battery, Edison then began devising and gas lighting. a process producing the necessary equipment to "/shall make electric light so cheap for making supply electricity for a section of that only the rich will be able to burn carbolic acid, and designs for plants lower Manhattan from a central candles," Edison declared. He had cal- to produce coal-tar derivatives and generating station. The result was the culated all the costs of capital, labor cement.

historic Pearl Street Station. On Sep- and fuel to assure himself that his s s- During his lifetime, Edison wit-tember 4, 1882 Edison threw a switch tem was competitive with gas. nessed the improvement his inven-and the world's first electric light and There also were fears to be over- tions had brought in the quality of power system was energized. Some 85 come. Many people objected to the life. He also saw the creation of the customers received power to light a "newfangled" system, believing that utility and other industries.

total of 400 lamps in the Wall Street they would be injured, or that their In 1926 he toured the newly-area. homes would be set on fire. The gas completed Kearny Generating Station "It was not until 7 o'clock when it companies were keenly watching of Public Service which incorporated began to be dark that the electric every move and ready to take the most advanced production light bulb really made itself known maximum advantage from any failure. technology of the day.

and show ed how bright al1d steady it 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 New jersey Energy Commis- the phonograph, the first practical sioner Joel Jacobson speaks at the electric power generator, an electric illumination of "Centennial railway, and a variety of electrical of Light" display on facade of PSE&G 's headquarters on October switches, fuses, sockets and other

19. Robert I. Smith, Company equipment.

board chairman (seated at left!,

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

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 Thomas N. McCarter points out a feature of the Kearny Generating national historical sites. Station t0 Thomas A. Edison and The incandescent light heralded a Governor A. Harry Moore at the century of scientific, technological facility's dedication in 1926.

and industrial progress that made the United States the most powerful New ideas, inventions and tech-nation on earth. nologies are needed today to provide The "Centennial of Light" obser- solutions to fundamental problems vance in 1979 not only honored the and to restore the nation's technical memory of Edison, but also sought to leadership.

rekindle in young people Edison's en- Most of all, new Edisons are "Marvelous! But we had a lot more thusiasm for discovering new ways to needed-and many of them.

trouble back in the Eighties than you improve the quality of life. A better do now," he told his host, Thomas N. environment for research and devel-Mc Carter. opment and an upgrading of scien-On the SOth anniversary of his in- tific education were other goals.

vention of the incandescent lamp, Edison re-enacted his work in the Menlo Park laboratory. The laboratory

Financial Review .

Escalating inflation, record-high m oney ra tes and a less- than-buoyan t economy during the second half adversely affected the Company's financial performance in 1979.

Despite this inclem ent 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 satell ite building. Em-ployees will begin moving in dur*

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

Production expenses rose $151 Labor costs increased $17 million, Rate Increase Requested million, or 15%. Of this increase, mainly because of wage increases On April 2, the Company fil ed a electric costs jumped $97 million, provided for in union contracts. petition with the New Jersey Board of equal to 15%, and gas expenses $54 Three-year labor agreements which Public Utilities asking for an overall million, or 16% . expire April 30, 1980 provided for a increase of $374.5 million in annual Skyrocketing oil prices and delays reopening for wage discussions in the revenues. Of the amount, $289.6 in the return to opera ti on of Salem third year. Under this provision the million was requested for electric No. 1 unit after refueling and in Company negotiated a wage increase service and $84.9 million for gas licensing of Salem No. 2, plus the of 7.0% effective May 1, 1979. service.

forced outage of Hudson No. 2, the Because of higher revenues, the New The request was based on 1979 as Company's largest coal-burning unit, Jersey gross receipts taxes increased the test year, a return on rate base of resulted in higher power production by $26 million, from $296 million 9 .50 per cent, and a return on costs. The increased costs were in 1978 to $322 million in 1979. common equity of 14.25 per cent. In mitigated somewhat by greater use of The Company also was affected by the Company's previous rate case the natural gas as a fuel for electric amendments to the Pennsylvania Board approved a return on rate base generation. The cost of power inter- Public Utility Realty Tax Act which of 8.83 per cent and a 13 per cent changed through the Pennsylvania- subjected additional jointly-owned return on common equity with an New Jersey-Maryland Interconnection property of the Company to the Act. increase in annual revenues of $153.l increased by 147% during the year, The Company's additional tax million, effective June 1, 1978. The because of higher unit costs and 56% liability was $6.9 million for 19 79, Company agreed to a stipulation in greater purchases. including a non-recurring surtax of that case which prohibited an High er prices for natural gas were $5.4 million. additional increase in base rates mainly responsible for the increase in prior to March 1, 1980.

cost of gas purchased and produced . Dividend Increased Hearings on the current petition The costs of raw materials to make Beginning with the first quarter of were completed during the year and gas also continued to rise. 1979, the quarterly dividend on the record closed in December. The Maintenance expenses increased Common Stock was increased by two actual amount of any rate reli ef will 17%, reflecting repair work at the cents a share to 55 cents from the 53 be determined by the Board by its Bergen, Linden and Salem generating cents paid in the fourth quarter of final order in the proceeding. A stations as well as costs for the 1978. The increase resulted in decision is expected to be issued in restoration of service disrupted by dividends paid in 1979 totalling $2.20, March 1980.

Tropical Storm David in September. compared with $2.08 in 1978. This On February 6, 1980, the Adminis-was the fourth consecutive year in trative Law Judge who heard the case which the dividend was increased. filed his initial decision. He found the The 1979 Income Dollar The Company has es timated t'hat, Company entitled to $213 .8 million subject to Internal Revenue Service in additional annual revenues, an over-Wh ere It Came From approval, 40.5% of the dividend all rate of return of 9.64% and a return paid on Common Stock in 1979 is on equity of 14.25%.

nontaxable for Federal Income tax An important question in th e case purposes. The nontaxable portion is the treatment of $329.5 million of represents a return of capi tal which costs for the Atlantic Generating should be applied to reduce the cost Station Proj ect which was abandoned

$ .68 Electric Revenu es of shares owned in computing gain by the Company in December 1978.

.2 9 Gas Revenu es or loss on a subsequent disposition . After the tax effect of the abandon-Dividends on $1.40 Dividend ment, approximately $18 7. 7 million Allo wance/or Funds Used

.03 During Constru ction Preference Common Stock and remains to be recovered. It has been

$1.00 Preferred Stock for 1979 are fully agreed by the active parties in the taxable. proceeding that the legitimate costs Wh ere It Went

$1.40 Divide nd Fuel, Purchased

$ .40 Power & Gas Stock Data Common Stock Preference Com mon Stock

.09 Sa laries & Wages 19 79 1978 1979 1978

.09 Mat eria ls & Services Quarterly Dividends Paid Per Share 55¢ 53¢* 35 ¢ 35¢

.19 Ta xes

.06 Interes t Price Range:

.08 Dividends First Quarter $ 22% -20 1/s $23-21 1/2 $143/4-l4 l/s $16~8- l 5 1/4

.09 Reinves ted in Bus in ess Second Quarter 22 1/4-20 24l/s-22 14112 -13 112 15 ~s- 14 5/s

$1.00 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 %- 14 l/s

• 49¢ first quarter only 9

associated with the Atlantic Project Estimated Construction Expenditures: has created a greater interest in the should be recovered from customers Year 1980 1981 1982 1983 1984 plan. Participants also may purchase through rates over a 20-year period . (Milli ons) additional shares with optional cash The Company believes that all Atlan- Totals $781 $794 $810 $813 $806 payments of up to $3,000 per quarter, tic Project costs are legitimate and although not at a discount.

that the $187.7 million net cost after Bonds, Common Stock Sold taxes should be recovered through Informational Meeting Held rates. However, other parties in the During 1979, the Company raised more than $363 million through the The Company's first regional stock-case have argued that certain Atlantic holders informational meeting was sale of Mortgage Bonds and Common Project costs should not be permitted held October 18 at Cherry Hill.

Stock. In July, "$100 million principal to be recovered through rates. More than 800 stockholders attended amount of First and Refunding In the February 6, 1980 initial the meeting at which top Company Mortgage Bonds, 9 3/ 4 % Series K due decision, the Administrative Law officers discussed operations and 2009 were sold. A total of $45 .6 Judge concluded that about $168.5 million of First and Refunding answered questions. The Company million of the Atlantic Project costs Mortgage Bonds, Pollution Control expects to hold similar meetings in should be recovered through rates, Series B and Cat an interest rate of the future at various locations.

leaving' about $19.2 million of net 6.90% were issued in September. Sale unrecovered costs. The Company has of three million shares of Common Fair Return Sought filed exceptions to the initial decision. Stock to underwriters provided more The utility industry is the most If any net Atlantic Project costs are capital intensive in the United States.

than $57.3 million in October. In not permitted to be recovered through November $125 million of First and PSE&G's large investment in generat-rates, the Company would be required Refunding Mortgage Bonds,12% Series ing, transmission and distribution to reduce net income for 1980 by that L due 2009 were sold. In addition, the facilities when related to annual amount. Company raised $33 million through revenues is typical of the industry.

The decision of the Administrative For each dollar of annual revenues, sales of 1,665,561 shares of Common Law Judge also adopted a stipulation Stock through the Automatic Dividend the Company has more than 2.62 dol-agreed to by the active parties in the lars invested in facilities compared Reinvestment Plan and $2 .6 million case that $140 million of unrecovered with 45 cents for the average manu-through issuance of shares under fuel costs as of December 31, 1979, the Employee Stock Purchase Plan. facturing company.

should be recovered by the Company The Company constantly seeks a Short-term capital needs were over a 28-month period through the fair return on invested capital so that financed during the year through the levelized energy adjustment clause. shareholders can be adequately sale of commercial paper. At year end, These unrecovered costs are largely compensated for use of their funds. A the Company had $95 million in due to the sharp increase in the price basic objective is to set a dividend short-term debt outstanding.

of oil and the Salem uni ts not being in that is sustainable and can be raised The Company expects to raise service as anticipated. on a reasonable basis.

approximately $500 million in 1980 through the sale of long-term In our rate cases we have empha-Construction Outlays Up securities. sized the need for adequate income Construction expenditures, including and earnings to finance our construc-Allowance for Funds Used During Stockholders Increase tion program on a sound basis.

Construction (AFDC), payments for The number of stockholders of record Strong cash flow, adequate interest nuclear fuel and advances to at the end of 1979 totalled 271,006 coverage, high quality credit ratings subsidiaries, increased to $5 79 million compared with 267,386 at the end of and conservative accounting practices in 1979 from $537 million in 1978. 1978, an increase of 1.4% per cent. are major elements in our long-term Expenditures in 1980 are estimated at There were 226,339 holders of Com- financial policy.

$781 million. mon Stock, 13,319 holders of $1.40 Management seeks to maintain a In the five years through 1984, Dividend Preference Common Stock, sound capital structure so that new expenditures are estimated at $4 .0 and 31,348 holders of Preferred Stock. funds to finance the Company's billion which includes $674 million of A new computerized stockholder construction program can be raised AFDC. Spending over the next five accounting system was installed in at reasonable cost. The Company's years for construction of nuclear the third quarter of 1979. The system current objective is for capitalization generating units *and the fuel to improves maintenance and expedites ratios in the range of 46-48% debt, operate them will b~ approximately processing of the Company's 256,311 12% preferred stock, and 40-42%

$2.4 billion. The fuel costs include stockholder accounts. common equity Over the longer advance payments to uranium range we recognize the need to further suppliers. Reinvestment Plan Popular reduce the level of debt to approxi-The Company expects to generate mately 45% of capitalization.

internally approximately 50% of its Participants in the Company's construction expenditures, excluding Automatic Dividend Reinvestment AFDC, for the next five years, Plan rose to 42, 734 at year end, up assuming adequate rate increases are from 38,625 at the close of 1978. A received and inflation is kept within 5 per cent discount from the market bounds . The balance will be financed price for plan participants who rein-vest their Common Stock dividends by the sale of long-term securities.

10

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 PSE&G and Philadelphia Electric in operation it is anticipated that Planning Install ed %

Company each own and are entitled about one-half of the Company's Year Pea k Load Capa city Reserve to receive 42.59% of the output of the electricity will be generated by nuclear (M egawat ts} Salem station. Atlantic City Electric power.

1980 7, 118 9,023 27 Company and Delmarva Power &

1981 7,320 9,228 26 Light Company each have a 7.41 % Task Force Appointed 1982 7,525 9,228 23 share. After the Three Mile Island nuclear 1983 7,730 9,416 22 generating plant accident March 28 in

• 1984 7,950 9,477 19 Peach Bottom Record Pennsylvania, the Company promptly 1985 8,173 10,091 23 During 1979, the No. 2 unit of the set up a task force which conducted a 1986 8,388 10,091 20 Peach Bottom Atomic Power Station thorough review of safety systems 1987 8,598 10,812 26 in Pennsylvania, in which PSE&G and equipment, as well as operating 1988 8,797 10,812 23 holds a 42.49% interest, established a instructions and procedures at the 1989 9,012 10,812 20 record for maximum electrical energy Salem Generating Station. As a result produced by a single generating unit, of the task force 's work, as well as Salem No. 2 Completed including nuclear or fossil-fueled. other studies of the accident, Construction of Salem No. 2 nuclear Philadelphia Electric Company, which improvements in safety systems unit was substantially completed early operates the station, reported the unit and operating procedures at Salem in 1979 and the Company had produced 8.2 billion kilowatt-hours were made.

anticipated receiving an operating of net electric energy for the year. Although the Salem units are license for the unit and placing it in pressurized water reactors, as are commercial operation in late summer Work On Hope Creek those at Three Mile Island, they are or early fall. However, issuance of an Continues of different design and were built operating license was delayed by the by a different manufacturer. The Nuclear Regulatory Commission The Hope Creek Generating Station, being built adjacent to Salem, was Company has no involvement in the because of the Three Mile Island ownership or the operation of the accident. The Company does not about 20% completed at year end.

The two 1,067-megawatt units are Three Mile Island plant.

expect to receive a license before the spring of 1980. After receipt of a license now scheduled for opera tion in 1985 and 1987. PSE&G owns 95% of the Training Center Planned it will require about five months for station and Atlantic City Electric the In November, the Company announced fuel loading and testing before plans to build a training center for gen-commercial opera ti on can begin. other 5% . When the two units are 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 m aintenance, 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 wen t into com-mercia l operation in 1977.

the main condensers. The unit had Conversion Th Coal Studied The average delivered coal cost for been originally scheduled to return to The economic, technological and 1979 was 4% above that of 1978.

service late in June, but was delayed environmen tal factors involved in Oil and coal costs are expected to until December because of work nec- converting to coal som e steam gen- increase in 1980. Oil prices will con-essary to correct a number of problems era ting units which now bum oil is tinue to increase because of actions by which were discovered. These included being analyzed by a study group formed the OPEC members, *and the domestic damage to some m etal support grids during the year. A total of 1,991 mega- crude oil price decontrol plan. Coal of fuel rod assemblies, cracks in rod- watts of generation could be converted prices are expected to rise further as lets of six of 53 control rod assemblies, in approximately two years at a signif- a result of higher transportation costs and cracking in sections of the steam icant cost if environmental require- and from wage increases scheduled generator feedwater lines. The return ments were relaxed. Considerably longer under terms of labor agreements with of the unit also was delayed by N uclear conversion periods and substantial the mine workers.

Regulatory Commission requirem en ts additional costs would be required to Fuel purchased for the Company's relating to seismic-stress analyses comply fully with existing environ- New Jersey production facilities in-and required modifications on safety- m ental regulations. cluded 14.6 million barrels of oil and related piping systems. 1.6 million tons of coal, both of low On August 29 the largest coal- sulphur content. Fuel oil and coal buming unit in the PSE&G sys tern, the Oil Prices Jump requirements were met during 1979 N o. 2 unit at the Hudson Genera ting The price of oil used by the Company despite a cutback in fuel oil deliveries Station, was forced out of service by to produce electricity increased dra- by one of the Company's principal a gen erator stator coil fa ilure w hich matically during 1979 mainly as an suppliers beginning in March and an necessitated rewinding of the stator outgrowth of th e Iranian oil cutoff in extended tugboat strike that ham-and repairs to the genera tor field. December of 1978 . Tight market con- pered coal deliveries to one location The unit is expected to return to service ditions which prevailed during 1979 for 90 days.

in March of 1980. While the unit were intensified late in the year by is off line annual overhaul activities the U.S. embargo on Iranian oil. The Uranium Shipments Received planned for 1980 will be accomplished, cost of a barrel of low sulphur heavy A substantial portion of the uranium including m ajor boiler repairs. oil increased from $15 .51 a barrel at required to operate the Salem and Substantial maintenance work also the end of 1978 to $29.36 at the close Hope Creek generating stations was done in 1979 on units at the of 1979. from 1980 to 1995 is expected to be Bergen, Linden, Sewaren and Mercer Coal prices escalated primarily as a provided under agreements with Kerr-generating stations. result of transportation cost increases. 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 cons truction in foregro und and Sa lem statio n in upper righ t. After Hope Creek units are on line in late 1980s abou t half t he Company's electric ou tp ut will be from nuclear power.

13

Gas Sendout Increases customers were added under authoriza- compete more effectively for onshore Total gas sendout for the year was 1.93 tions by the New Jersey Board of Public supplies in gas producing states.

billion therms, 4.2% more than 1.85 Utilities. Interruptions of service in Another factor was greater efforts by billion therms in 1978. The increase 1979 totaled 13 calendar days, down suppliers in developing new sources was made possible by greater deliveries substantially from 136daysin1978, be- and reserves.

from pipeline suppliers and from Energy cause of the improvement in availa- Contractual pipeline deliveries were Development Corporation, the Com- bility of natural gas. curtailed by an average of 17.6% or 1.1 pany's exploration subsidiary. million therms a day compared with During February of 1979, two rec-Capacity Unchanged 29% or 1.9 million therms daily in the ords were set in gas output. Daily gas The Company's effective daily gas previous year, a substantial improve-sendout for the month, one of the capacity, excluding the effect of pipe- ment. Hurricanes in the Gulf of Mexico coldest Februarys on record, averaged line curtailments, was 18,639,000 caused curtailments between July 11 10,844,690 therms . This was 5% more therms per day during the year, the and 31 at rates ranging from 31 % to than the previous record of 10,297,538 same as in 1978. Composition of the 44 % by one pipeline supplier.

therms set in January of 1977. Total daily capacity on December 31, 1979 The cost of natural gas to the Com-gas sendout for the month was was : pany averaged $1.80 a million Btu's, up 303,651,311 therms, the highest for Type of Gas Therms Per Day 17% from the 1978 figure of $1.54.

any February on record and exceeding Approximately 48% of the Company' Natural Gas 13,892,000 by 9% the prior mark of 279,093,205 natural gas capacity is made up of Liquefied Petroleum Gas 1,981,000 recorded for that month in 1972. high-load factor gas that is available Synthetic Natural Gas 1,325,000 The highest 24-hour sendout of Oil Gas every day of the year. The rest comes 1,186,000 13,349,009 therms in 1979 occurred on from field storage, liquefied storage Refinery Gas 255,000 February 17 when the average tempera- and contract peaking service.

Total 18 639 000 The Company entered into a new ture was 6°F. This was exceeded only once before in the Company's history, long-term contract in 1979 with Trans-on January 17, 1977, when the sendout Supplies Improved continental Gas Pipe Line Corporation was 14,005,789 therms and the aver- The supply situation for natural gas which increased total underground gas age temperature was 2.6°F. improved significantly during the storage capacity from 415 .2 million The number of gas customers year. A major factor in the improve- therms in 1978 to 446.0 million therms served under interruptible contracts ment was the passage of Federal energy in 1979.

increased to 80 at the end of the year legislation in late 1978 which allowed compared with 71 a year earlier. New the Company's pipeline suppliers to 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- nental Shelf. Exploratory drilling off compared with $3.21 in 1978. In trated in the Gulf Coast region of the Atlantic Coast was extended to October a contract renegotiation Texas and Louisiana. Onshore opera- the Southeast Georgia Embayment. reduced the price of refinery gas to a tions involved drilling of 7 successful parity with heavy oil.

wells and 14 that were abandoned. Oil Replaced By Gas PSE&G supplements its supplies of At year end 6 wells were still being The Company received a temporary natural gas and refinery gas with drilled. exemption from the provisions of the synthetic natural gas (SNG) produced Offshore activity increased as addi- Fuel Use Act which placed severe from naphtha, oil gas produced from tional blocks were acquired. During restrictions on the use of natural gas kerosene and liquefied petroleum gas the year 3 7 wells were completed as as fuel for electric generation. In order produced from propane. The daily commercial producers, 18 were to help ease the oil supply shortage capacity for production of these gases abandoned, and 3 were being drilled that developed during 1979, the U.S. was 4,492,000 therms in 1979. Total at the close of the year. Department of Energy es tablished production in 1979 fell to 11.0 million EDC owned an interest ranging temporary procedures allowing therms, from 41.2 million therms in from 5.9% to 25 .0% in 9 commercial electric utilities to make direct 1978 as a result of an improvement in offshore discoveries at the end of 1979. purchases of natural gas to save fuel natural gas supplies. These manu-All but 2 of these blocks are expected oil. PSE&G purchased 95.5 million factured gases amounted to less than to be producing by the end of 1980. therms of natural gas for this purpose 1% of PSE&G's total gas sendout The other blocks should be producing during 1979, which reduced the con- during the year.

during 1981. These offshore discov- sumption of oil by approximately 1.5 eries during their peak production million barrels and resulted in cost LNG Plans Changed life should make up nearly 70% of savings of approximately $11.4 In order to meet anticipated increases EDC's total gas supply to PSE&G. million. in demand for natural gas in the Two federal lease sales were held for future, additional storage to meet the Gulf of Mexico blocks in 1979. Supplem ental Gas Supplies peak demands in winter will be EDC, as part of a group, bid $50.l required. Efforts were intensified in million on 21 blocks and placed high The Company bought 79.l million therms of refinery gas in 1979 from 1979 to put in use two large liquefied bids on 5 blocks totalling $9.6 million natural gas storage tanks on Staten in its interest. Exxon's Bayway refinery. This gas accounted for 4.1 % of PSE&G's total Island. The tanks are owned by Energy At year end, EDC owned an interest Terminal Services Corpora ti on, a in 43 offshore blocks, of which 20 gas supply for the year. The cost of this gas averaged $4.41 a million Btu's subsidiary.

were in the Atlantic Outer Conti- 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 bilized to res tore service as quickly as report these temperatures to a central possible. These forces were augmented computer for analysis has been Distribution by gas transmission and distribution completed. Data being collected will employees, neighboring utility per- provide necessary information to sonnel and tree crews of contractors. permit maximum use of all trans-Service was restored to 94% of the mission cables.

interrupted customers within 48 A 230,000-volt pipe- type hours and to the last individual house underground cable was installed service in five days. This compared between Sewaren Generating Station favorably with performance following and Raritan River Steel Company, a Hurricane Hazel in 1954 which major new electric customer. Work required six days to restore service to also progressed on another 230,000-411,000 customers. volt cable between Aldene and Essex The Company's transmission and . switching stations.

distribution systems were expanded Transmission Line Completed and improved in 1979, but nature The electric transmission system was Cable hmovations To Cut Costs provided the most dramatic event of expanded in 1979 with the addition of the year. Since the 1930's, when PSE&G a 230,000-volt pipe-type underground installed its first 132,000 volt Tropical Storm David struck on cable between Hawthorne Substation September 6 with tornado-like winds underground transmission line, the and Hinchmans Avenue Substation in Company has been a lead~r in high and driving rains which felled count- Wayne. This completed the transmis-less trees and limbs that knocked down sion path between the Waldwick and thousands of wires in the overhead Cedar Grove Switching Stations.

distribution system. The storm, one Completion of this addition per-of the most destructive in the Com- mitted research to proceed for pany's history, interrupted electric serv- accurately determining the capacity ice to more than 433,000 of our 1.6 'The magnitude of the work of re-of underground cables. The research storing electrical service dis-million electric customers throughout is being done under a $1.1 million U.S. rupted by Tropical Storm David in the Company's territory. Bergen and Department of Energy contract. Heat Scptem ber is i II us tra ted drama ti-call y by photo of two repair crews Hudson counties were hit the hardest . sensing devices were inserted during working in a street devastated by All available electric transmission manufacture of the newly-installed high winds. Storm was one of the and distribution personnel were mo- most destructive in the Com-cable. The communications system to pany's history.

voltage cable development. During output of Hope Creek Generating pipe were installed to meet customer 1979 Company staff engineers Station to load centers throughout requirements.

persuaded manufacturers to market their systems. Implementation of the pipe-type cables incorporating project is being coordinated with Environmental Costs Rise PSE&G-developed design innovations 500,000-volt transmission develop- Approximately $233 million was which will contribute markedly to ment of Jersey Central Power & spent in 1979, compared with $177 lower construction costs and greater Light Company. million in 1978, to minimize the operating efficiencies. The improve- impact of Company operations on the ments will produce savings in a major, 'Live-Line' Maintenance environment. The cost of environ-four-year reinforcement of PSE&G's Progresses mental protection has been rising transmission system in the northern substantially. This is due primarily "Live-line" maintenance advanced portion of the service area where because of the increasing differential during the year with the purchase in additional overhead transmission is between the cost of fuels for which January of an aerial lift vehicle with a no longer practicable. many of the Company's facilities specially insulated boom that has a By 1982, over 40 miles of 230,000- were designed to burn and the price of reach of 150 feet . The lift permits volt and 345,000-volt underground low sulfur oil and coal.

work on high voltage transmission cables will be added to the 154 miles lines, up to 500,000 volts, while the of cable that were in service at the line is carrying current. Use of the beginning of 1979. The additions will lift is the latest step in a six-year serve growing electric demands and accident-free program in which a improve service reliability.

carefully instructed and trained group of specialists has been developing 500,000 Volt Facilities Planned and perfecting various "live-line" PSE&G participated with other New methods .

Jersey utilities in development of Specially-traineJ group carries out plans for building approximately 70 'live-line' maintenance work, in-miles of 500,000-volt transmission Gas Lines Extended cluding replacement of insulators, system to meet energy n eeds of the Gas transmission and distribution high up on a 500,000-volt trans-construction activities increased to mission line. The work is part of state in the 1980s. a program in which a carefully in-The Company and Atlantic City meet demand of new customers. structed and trained group of During the year 724,000 feet of new specialists has been developing Electric Company completed plans for and perfecting a number of 'livc-facilities required to transmit the main and 860,000 feet of new service 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 with high load demands resulted in 280 megawatts of additional demand add a total of 7 billion cubic feet of gas load on an annual basis. The volume and $36 million in annual revenues. was in addition to 7.3 billion cubic New industrial and commercial gas feet authorized in 1978.

installations of 63 customers, yielding The availability of natural gas

$9.6 million in annual revenues, were coupled with the growing popularity connected during the year. C-E Glass of electric heat pumps for h eating and of Cinnaminson, a manufacturer of cooling resulted in employment of tempered glass, will use nearly 5 either gas or electricity for h eating in million cubic feet of gas a day. most n ew construction in PSE&G territory.

New Heating Customers Marketing personnel continued to A flood of requests by customers for encourage builders and consumers to Substantial n ew industrial electric install electric h eat pumps because of gas heating service highlighted load was added in 1979. A major their efficient use of energy. During marketing activities in 1979. The addition was the Raritan River Steel the year 2,079 h eat pumps were con-applications were triggered by reports Company's electric arc furnace n ected to Company lines.

in mid-year that heating oil prices facility in Perth Amboy. The new The new gas and electric connec-would rise substantially in the Fall plant, which was completed in tions will provide $ 26. l million in and that there might be a fuel November, will be the Company's additional revenues annually.

shortage.

second larges t electric customer with As a consequence, the Company a demand of 89 m egawatts and annual Street Lights Converted connected a much greater number of revenu es of $13.3 million anticipated.

new gas installations than had been A total of 9,669 vapor lights were in-Another steel company, John A.

anticipated. They.included 20,804 stalled in 1979 as the state and Roehling Steel Corporation, began residential, 1,830 commercial, and 334 municipalities continued to improve opera ti on in the former Colorado Fuel industrial units. Of the residential street lighting. The state is converting

& Iron facility in Florence Township.

installations, 15,065 were heating from incandescent lights on state Production initially requires 14 conversions, a new record, surpassing highways to the energy-effi cient vapor megawatts of electrical power but is the figure of 10,246 set in 1963. units. In addition, 4,510 dusk- to-dawn expected to increase eventually to In two steps, in May and September, lighting units were installed, bringing 35 megawatts.

the New Jersey Board of Public Utili- the total on Company lines to 52, 780.

Connection of the two steel ties approved Company requests to companies and other n ew customers 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. Consum er advisers conducted lectures on subj ects su ch as the efficient u se of en ergy, alterna te 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 en ergy-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 Customer Accowits Solar Water Heating Program in a study with the Princeton Computerized A residential solar water heating University Center for Energy and The first phase of a new computer- program for homeowners in the Environment Studies to determine based system for customer accounts Company's electric service area was the effectiveness of various energy became operational at all commercial announced in September at a "Solar conservation approaches in residential office locations in 1979. Any part of a Summit" sponsored by the New Jersey facilities. customer's record can be displayed on Board of Public Utilities. The program Marketing representatives per- a terminal screen in four to seven will offer customers whose homes formed energy management surveys seconds by entering the account meet certain criteria the opportunity for numerous large industrial and number or address. This improves to purchase a soundly-engineered commercial customers. accuracy and speed in answering solar water heating system installed New governmental regulations have customer inquiries. under PSE&G supervision and backed resulted in building temperature The second phase of the system, by service from the Company restrictions, maximum lighting rules, expected to be operational in 1980, The units will consist of roof incremental pricing of natural gas, will provide for centralization of mounted, flat plate solar collectors energy conservation measures and incoming customer telephone calls, employed in a closed system which other programs requiring increased and for processing of electric and gas will include a 120-gallon insulated marketing operations. service orders by computer. storage tank. Electric resistance As part of the Company's effort to A change in the method of record- heating elements will supply supple-improve customer relations, a new ing monthly meter readings from a mental energy. Cost of the units will communications training program key-entry system to optical scanning be approximately $2,600.

involving over 600 customer-contact of marked cards was begun. The new Approval is being sought for a solar employees was begun in 1979. method will significantly improve provision in the Residential Load Training was specifically designed efficiency and productivity of meter Management rate which will provide to help employees respond more readers as well as customer billing a low rate for the supplemental effectively to customer concerns. A operations. Computerized procedures electric energy in the off-peak period random mail survey was conducted for estimating customer use when between 9 p.m. and 7 a.m.

throughout the year to determine readings cannot be obtained also will The Company will purchase the attitudes toward the Company and be improved. solar systems from a manufacturer its service. 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 w ith customers attend training session . The classes arc designed to improve abilities of employees in responding to inquiries of cus-tomers. The program invo lves more than 600 employees. Cus-tomer questions cover numerous topics, includ ing higher energy costs, conservation, and nuclear and solar power.

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 As part of the Company's and caulkmg. The Company is a "most likely choice" for the loca-

• energy conservation program, participating in a Home tion of new corporate headquarters PSEi;._G representatives con- Energy Savings Plan of the duct a home energy audit. cw Jersey Department of facilities within the next five years.

Among the energr savmg f Ern:rgy. PSEi;._G ersonnel have received spccia trainmg to The location and expansion of major measures especia ly recom- corporate and regional office facilities mended arc storm windows conduct the audits.

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 lit ies 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 custom ers. The furnaces normally use electricity only at night, thus reducing the dem and for energy during the daytime period.

The ceramic cores consist of a "pile" of special bricks which are capable of storing large quantities of h eat 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 hea t, air circulates over the bricks and through the hea ting system .

A specially controlled electric water heater capable of heating large quanti-ties of water at night for u se during the day also is being tes ted.

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

Impact Of Energy Forecast The effect which the various load m anagem ent 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 dem and in the year 2008 will be curtailed by abou t 1,900 m egawatts. 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 Ozone Energy Research Monitoring r

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 Landfill Gas Solar Research mmimal environmental impact.

23

The project is co-sponsored by the U. S. Department of Energy an d 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 advan ced sys tem 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 requirem ents. This would mean that fewer genera ting uni ts would be needed to m eet demand during peak periods and reduce the use of oil.

Coal Gasification Investigated Under a grant from the U. S. Depart-m ent of Energy, PSE&G and Burns and Roe Industrial Services Corp. are inves tigating the technical and eco-nomic feasibility of building a coal Since 1970, PSEo..G has sup- Experiment (PDX) has been was expanded with three new gasification plant in the Company's ported fusion research work at constructed. The POX is de- projects in 1979. The subjects Princeton University Plasma signed to provide answers to include the use of fusion for territory. The plant would provide Physics Laboratory where the several highly significant the production of fossil and supplem ental gas supply for power most flexible tokamak device physics questions. The Com- synthetic fuels.

yet built, the Poloidal Divertor pany's fuswn research effort plant and industrial processes.

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

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

Methane From Landfill The Company in 1979 placed in operation faciliti es that obtain m ethane gas from a sanitary landfill in Cinnaminson . The operation was the first of its kind in the eastern United States. A large industrial custom er 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.

The project will help determine the feasibility of recovering m ethane 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. D epartment of Energy (DOE) is funding a program to evaluate en ergy conservation techniques using the Company's new 80 Park Plaza headquarters building as a source of information. Hundreds of instru-m ents have been installed in the heating, ventilating and air condi-tioning sys tem s to m easure 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.

D ata will be used to help m easure the effici ency of the building's heating and air conditioning sys tem; to validate results of a new DOE Diagram illustrates bioconver- gas. The Company has been on a study of the technical and en ergy analysis computer program; to sion process through which participating in "energy from economic feasibility of inte-waste products municipal refuse" projects for several grating a 5 megawatt fuel cell compare several design standards, solid waste and sewage sludge years. Work was completed in into a sewage treatment proc- including th e DOE's new Building could be converted into a 1979 and a report submitted to ess to produce heat and elec-marketable synthetic natural the U.S. Department of Energy tricity from methane gas.

Performance Standards; and to com-pare energy consum ed when various system control sequ ences are utilized.

Additional studies will be carri ed out on th e 16th fl oor, where Compan y research personnel will be located.

Lights in perimeter areas will be dimmed when natural daylight is available. Lights in som e offices will be au tom atically switched off wh en th ey are empty . General lighting will be controlled by a hew electroni c 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 Corporati on.

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 researc h and development program from a social and economic viewpoint and ad-vise on broad program priorities.

25

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

.i Company research employee 30 .....--

' Two excellent crops of to- heat and humidity. Research .....--

checks photovoltaic test panels of silicon cells which matoes and one of lettuce were grown in 1979 in a pro-into aquaculture at Mercer was an extension of aquacul- 25 - -

were 111stalled during 1979 on roof of the Research and Test-111g Laboratory 111 Maplewood.

totype greenhouse at the Mercer Generating Station.

The greenhouse uses the warm water discharge as a source of ture research, now in its fifth year, 111 which nearly 60,000 Ra111bow trout were reared during 1979.

20 -

IS JO -

5 0

19 79 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.

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 All employees were informed of greater public interest in energy public. In addition, the information the Company's expanded public issues. A broad range of topics information program at meetings, was covered in television and program within the Company for such as this one, held at various radio commercials as well as employees was expanded.

work locations before the pro- newspaper and billboard gram's public introduction. The advertising. Included in the public program were program was in response to a 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 Television commercials were part plaining the Company's rates for officials and representatives of the of the expanded public informa- electric and gas service. Other Electric Power Research Institute tion program and included one commercials emphasized (left) which emphasized the need PSE&G's expanded research pro- and the Institute of Nuclear Power to reduce the nation's dependence gram, including solar energy. Operations discussed the changes that on foreign oil, and another ex- 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 Sa lem Generat-ing Station, and, at righ t, Robert I.

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

27

Company representatives sought Company programs were admin- $10.l million for disability benefits greater opportunities to discuss istered by several departments. and workers' compensation.

such topics as nuclear energy, the Employees served in a broad range of During the year the Company environment and solar energy. A total voluntary capacities in many civic, continued to stress its Affirmative of 227 talks were given before nearly cultural, chartitable and educational Action Program in relation to the 13,000 persons in 1979. organizations. employment of women and members Company personnel conducted Throughout its service territory the of minority groups. Effective in generating station tours for the Company maintained traditional January, the Company implemented general public and sponsored educa- affiliations with many community two additional Affirmative Action tion programs for students. More organizations. plans to cover handicapped individ-than 29,406 people visited the Agencies .which serve the needs of uals and veterans.

Second Sun, the Company's floating urban children from pre-school At the end of 1979, there were 1,845 energy information center where a through college were supported. Aid female employees and 1, 731 minority special multi-media program entitled also was provided to community group employees. These figures "Century of Light" was shown to organization programs for ethnic and reflected increases of 3.8 per cent and mark the lOOth anniversary of cultural development, and education. 4.2 per cent, respectively, of each Edison's development of the first The Company's commitment to group's representation in the overall successful incandescent light bulb. urban renewal and improvement was workforce during the year.

Centennial of Light activities also dramatized as its new headquarters included sponsorship of a puppet building in downtown Newark neared show which was presented to 76,000 completion. PSE&G believes that as elementary school children; creation part of the business community it has Transport of New Jersey of window and shopping mall dis- a responsibility to help improve living plays, and distribution of a customer standards of disadvantaged citizens in The Public Transportation Act of New bill insert describing Edison's legacy. the area it serves. Jersey, which was enacted in July 1979, permits State acquisition by Community Activities Employee Relations purchase or condemnation of PSE&G employees in 1979 were Company employees at the end of privately-owned bus companies. State involved in numerous community 1979 numbered 13,176, an increase of officials have expressed interest in activities aimed at improving the 10 compared with the total at the end acquiring, under this law, Transport quality of life in the Company's of 1978. Wages and salaries for 1979 of New Jersey, PSE&G's transpor-service area. amounted to $297 million, including 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 re lations representatives conduct programs for school chil dren as we ll 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 Management feels the effectiveness of this system is integrity and objectivity of the financial statements enhanced by a program of continuous and selective of the Company. These statements are prepared by training of our employees.

the Company in accordance with generally accepted The Board of Directors carries out its responsibility accounting principles applied on a consistent basis.

of financial disclosure through the Audit Committee Management believes that they fully disclose the currently consisting of five outside directors. The Company's financial affairs.

Audit Committee meets periodically with manage-To facilitate the gathering of financial data, PSE&G ment as well as representatives of the internal maintains an accounting system established with and independent auditors and reviews the work of sound accounting and business policies which are each to ensure that their respective responsibilities communicated to the appropriate personnel. The are being carried out, and to discuss related matters.

system, together with its related internal controls, Internal and independent auditors have full and free is reviewed by the Company's staff of internal access to the Audit Committee.

auditors and its independent public accountants.

Summary of Significant Accounting Policies Ratemaking The Company's accounting policies are in current items in the balance sheets. Prior to 1979, all accordance with the rate-making decisions by the such items had been considered deferred until Board of Public Utilities of the State of New Jersey amortized. The 1978 financial statements presented (BPU). As a result, the applications of accounting herein reflect appropriate restatements to conform principles by the Company differ in certain respects with the current policy.

from applications by nonregulated businesses.

Fuel Costs System of Accounts The Company projects the costs of fuel for electric The Company is under the jurisdiction of the generation, interchanged power, gas purchased and Federal Energy Regulatory Commission (FERC) materials for gas produced for twelve-month periods.

and the BPU and maintains its accounts in accor- Adjustment clauses in the Company's rates allow dance with their prescribed Uniform Systems of the recovery of the excess of such projected costs Accounts, which are substantially the same. over those included in the Company's base rates through levelized monthly charges over the period of Investments in Subsidiaries projection. Any under or overrecoveries are deferred The Company's investments in its subsidiaries, and charged to operations in the period in which which in the aggregate are not significant as defined they are recovered.

by the Securities and Exchange Commission, are reported in the accompanying financial statements Prior to July 1, 1977, the date of establishment of the on the equity method of accounting. levelized electric adjustment clause, the Company recovered increases in electric energy costs Revenues approximately two months subsequent to their Revenues are recorded based on estimated service incurrence and charged operations in the period in rendered, but are generally billed to customers which these costs were recovered. The balance of through monthly cycle billings on the basis of actual unrecovered electric energy costs remaining from this usage. procedure is being amortized through base rates over a period ending January 31, 1984. In addition, electric Amortization of Def erred Items energy costs which had not been recovered through Deferred Debits are amortizable as detailed below. levelized adjustment clauses will be amortized by a Amounts estimated to be recoverable within one surcharge in the adjustment clauses over a 28-month year, together with related taxes, are classified as period in accordance with the BPU order expected in March 1980.

29

Prior to January 2, 1976, the date of the levelized gas Amortization of Nuclear Fuel adjustment clause, increases in costs of purchased Nuclear energy bumup costs are charged to fuel gas and materials used to produce gas were recovered expense on the basis of the number of units of in months subsequent to their incurrence and were thermal energy produced as they relate to total charged to operations principally as they were thermal units expected to be produced over the life incurred. Unrecovered gas costs which were not of the fuel. The rate calculated for fuel used at the included in the levelized rate established December Company's Salem plant includes a provision for 2, 1977 are being amortized through base rates over estimated spent fuel disposal costs. In accordance a period of three years. with procedures established by the operating company of the Peach Bottom plant, the rates for Gross Receipts Tax fuel used at that plant assume a zero net salvage Effective January 1, 1973, the Company began value of the discharged fuel.

accruing New Jersey gross receipts tax on current revenues rather than on the previous basis of taxes Income Taxes paid. The gross receipts tax on 1972 revenues was The Company and its subsidiaries file a consolidated deferred and is being charged to operations by an Federal income tax return and income taxes are amount equivalent to 1/ 2 % of revenues subject to the allocated, for reporting purposes, to the Company gross receipts tax. and its subsidiaries based on the taxable income or loss of each.

Unamortized Debt Expense Def erred income taxes are provided for differences Unamortized Debt Expense represents costs associated with the issuance or reacquisition of debt between book and taxable income to the extent permitted for rate-making purposes.

which are deferred and amortized over the lives of the related issues. This amount consists principally Investment tax credits are deferred and amortized of costs associated with the Company's tender offer over the average life of the related plant.

for its 12% Series E Mortgage Bonds in May 1977.

Allowance for Funds Used During Construction Extraordinary Property Losses Allowance for funds used during construction Extraordinary Property Losses are deferred and (AFDC) is a cost accounting procedure whereby amortized over various periods. The amount consists the approximate net composite interest and equity principally of unrecovered abandonment costs, costs of capital funds used to finance construction before tax reduction, applicable to the Atlantic are transferred from the income statement to Project. The recoverability of such costs is subject to construction work in progress (CWIP) in the balance determination by the BPU. (See note 5 of Notes to sheet. This procedure is intended to remove the Financial Statements.) effect of the cost of financing construction activity from the income statement, and results in treating Depreciation and Utility Plant such cost in the same manner as construction labor Depreciation, for financial reporting purposes, is and material costs. The rate used for calculating computed under the straight-line method and is AFDC was 8% for 1979 and 1978 which was within based on estimated average remaining lives of the the limits set by the FERC.

several classes of depreciable property. Depreciation The BPU issued rate orders in 1975 allowing applicable to nuclear plant provides for estimated costs of dismantling or decommissioning. These the Company to recover the financing cost on

$250,000,000 of CWIP through current operating estimates are reviewed continuously and adjust-ments are made as required. Depreciation provisions revenues and since then no AFDC has been accrued for the years 1979 and 1978 stated in percentages of on that amount.

original cost of depreciable property are 3.48% and 3.49%, respectively. Pension Plan Pension costs are accounted for on the basis of an The cost of maintenance, repairs and replacements acceptable actuarial method and are charged to of minor items of property is charged to appropriate operating expenses, utility plant and other accounts.

expense accounts. The cost of replacements of units The Company's policy is to fund pension costs of property is charged to utility plant. At the time accrued. Prior service costs are being funded over a depreciable properties are retired or otherwise period of 35 years which began January 1, 1967.

disposed of, the original cost less net salvage value is charged to the appropriate accumulated depreciation account.

30

Statements of Income For the Years Ended December 31, 1979 1978 Operating Revenues (Th ousands of Dollars)

Electric $1,689,857 $1,564,834 Gas 726,850 654,951 Total Operating Revenues 2,416,707 2,219,785 Operating Expenses Operation Fuel for Electric Generation and Interchanged Power-net 620,546 541,802 Gas Purchased and Materials for Gas Produced 384,759 327,990 Other Operation Expenses 287,389 268,769 Maintenance 149,027 127,423 Depreciation 162,989 158,248 Taxes Other than Federal Income Taxes 364,411 328,216 Federal Income Taxes (note 1) 123,965 146,937 Total Operating Expenses 2,093,086 1,899,385 Operating Income 323,621 320,400 Other Income Allowance for Funds Used During Construction-Equity 36,887 26,609 Miscellaneous Other Income-ne t 4,542 3,722 Earnings of Subsidiaries- net (note 2) 1,721 793 Total Other Income 43,150 3 1,124 Income Before Interest Charges 366,771 351,524 Interest Charges Long-Term Debt 146,673 133,605 Short-Term Debt 2,448 612 Other 4,027 3,217 Allowance for Funds Used During Construction- Debt (19,706) (14,696)

Net Interest Charges 133,442 122,738 Net Income 233,329 228,786 Dividends on Cumulative Preferred Stock and

$1.40 Dividend Preference Common Stock 46,799 46,799 Earnings Available for Common Stock $ 186,530 $ 181,987 Shares of Common Stock Outstanding End of Year 68,914,349 64, 120,433 Average for Year 65,409,325 61,782,737 Earnings per average share of Common Stock $2.85 $2.95 Dividends paid per share of Common Stock $2.20 $2.08 See Summary of Significant Accounting Policies, Notes to Financial Statements and Management's Disc ussion and Analysis of the Statements of Incom e 31

Balance Sheets December 31, 1979 1978 Assets Utility Plant- original cost (Tho usands 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 Investmen ts 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) 323,838 324,14 1 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 Significa nt Accounting Policies and No tes to Financial Statem ents.

32

1979 1978 Liabilities Capitalization {Th ousan ds of Dollars)

Common Equity:

Common Stock (see statement, page 35) $1,106,824 $ 1,0 14, 184 Premium on Capital Stock 557 557 Paid-In Capital 26,065 26,065 Retained Earnings 747,076 704,909 Total Common Equity 1,880,522 1,745,715 Non-Redeemable Preferred Stock (see statement, page 35) 554,994 554,994 Redeemable Preferred Stock (see statement, page 35) 31,500 35,000 Long-Term Debt (see statement, page 36) 2,256,919 2,017,484 Total Capitalization 4,723,935 4,353, 193 Current Liabilities Long-Term Debt due within one year 24,199 57,087 Preferred Stock to be redeemed within one year 3,500 Commercial Paper (note 6) 94,875 Accounts Payable 121,316 131,597 Taxes Accrued, including New Jersey gross receipts tax - 1979, $322,696; 1978, $306,390 362,650 333,723 Deferred Income Taxes (note 1) 90,576 60,850 Overrecovered Gas Fuel Costs 15,417 10,6 14 Interest Accrued 42,615 33,795 Gas Purchased 48,945 39,383 Other 37,942 36,511 Total Current Liabilities 842,035 703,560 Deferred Credits Accumulated Deferred Incom e Taxes (note 1) 430,405 360,945 Accumulated Deferred Investment Tax Credits (note 1) 106,275 95, 736 Other 1,533 5,344 Total Deferred Credits 538,213 462,025 Commitments and Contingent Liabilities (note 8)

Total $6,104,183 $5,5 18, 778 33

Statements of Retained Earnings For the Years Ended December 31, 1979 1978 (Thousands of Dollars)

Balance January 1 $704,909 $651,885 Add Net Income 233,329 228, 786 Total 938,238 880,671 Deduct Cash Dividends:

Preferred Stock, at required annual rates 44,954 44,918

$1.40 Dividend Preference Common Stock 1,881 1,881 Common Stock 144,146 128,485 Total Cash Dividends 190,981 175,284 Capital Stock Expenses 181 478 Total Deductions 191,162 175,762 Balance December 31 $747,076 $704,909 Statements of Changes in Financial Position For the Years Ended December 31, 1979 1978 Source of Funds (Th ousands of Dollars)

Net Income $233,329 $228,786 Non-cash Items:

Depreciation and Amortization 169,927 168,435 Provision for Deferred Income Taxes- Atlantic Project Abandonment 132,203 Provision for Deferred Income Taxes-Other-net 69,460 27,099 Investment Tax Credit Adjustments-net 10,539 (21,576)

Allowance for Funds Used During Construction (AFDC) (56,593) (41,305)

Other (4,206) (3,019)

Total Funds from Operations 422,456 490,623 Unamortized Energy Costs Recoverable Currently 64,502 10,289 Total Funds from Internal Sources 486,958 500,912 Net proceeds from sales of: \

Long-Term Debt 268,073 9Q,968 Common Stock 92,459 93,957 Total Security Sales 360,532 193,925 Miscellaneous 14,317 16,695 Total Funds Provided $861,807 $711,532 Application of Funds 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 (94,875) 96,892 Current Portion of Deferred Debits 55,306 2,024 Long-Term Debt due within one year 32,888 (51,271)

Accounts Payable 10,281 (64,471)

Other (1,872) (1,308)

Net Increase (Decrease) in Working Capital 1,728 (18,134)

Total Funds Applied and Changes in Working Capital $861,807 $711,532 See Summary of Significant Accounting Policies and Notes to Financial Statements.

34

\.

Statements of Capital Stock Curren t Refundin3 Outstanding Redempti on Res tri cte 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: D. Redeemable Preferred Stock consists of the A. In addition, there are 2,500,058 shares of $100 par outstanding 12.25% series of nonparticipating value and 6,400,000 shares of $25 par value cumulative preferred stock which, beginning on Cumulative Preferred Stock which are authorized February 1, 1980, is subject to a mandatory annual and unissued, and which may possess either sinking fund redemption of 17,500 shares, plus redeemable or non-redeemable characteristics upon redemption of up to an additional 17,500 shares at issuance. the option of the Company at a redemption price of

$100 per share. In addition, such Preferred Stock is B. Prior to the date specified, none of the shares of also subj ect to redemption at the option of the each such series may be redeemed, other than Company upon payment of a higher redemption through the operation of a sinking fund, through price plus in each case accumulated and unpaid refunding of such shares by the incurring of debt or dividends to the date fixed for redemption.

the issuance of Preferred Stock where the cost of such debt or such Preferred Stock is less than the E. Non-Redeemable Preferred Stock is outstanding cost to the Company of each such series. nonparticipating cumulative preferred stock which is subject to redemption solely at the option of the C. As of December 31, 1979 the annual dividend Company upon paym ent of the redemption price requirement and embedded dividend cost were plus accumulated and unpaid dividends to the date

$4,288,000 and 12. 70% , respectively, for Redeemable fixed for redemption.

Preferred Stock and $40,629,000 and 7.38%, F. Each share of $1.40 Dividend Preference Common respectively, for Non-Redeemable Preferred Stock. Stock is entitled to cumulative dividends, to two If dividends upon any shares of these stocks are in votes, and, on liquidation or dissolution, to twice as arrears to an amount equal to the annual dividend much as each share of Common Stock.

thereon, voting rights for the election of a majority G. Includes 3,203, 709 shares of Common Stock of the Board of Directors become operative and reserved for possible issuance under the Company's continue until all accumulated and unpaid dividends Automatic Dividend Reinvestment Plan, Tax thereon have been paid, whereupon all such voting Reduction Act Employee Stock Ownership Plan and rights cease, subject to being again revived from time Employee Stock Purchase Plan.

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

Statements of Long-Term Debt December 31, 1979 1978 1979 1978 First and Refunding (Thou sands of Dollars) Debenture Bonds unsecured (Thousands of Dollars)

Mortgage Bonds 4%% October 1, 1981 $ 31,289 $ 32,429 Series (note A) 4%% October 1, 1983 26,595 27,113 5314% June 1, 1991 43,782 44,540 2% % June 1, 1979 $ $ 53,242 7V4% December 1, 1993 30,659 31,596 2 3/4 % May 1, 1980 18,443 18,648 3 1/4% October 1, 1983 22,079 22,313 9 % November 1, 1995 58,549 60,276 3 1/4% May 1, 1984 50,000 50,000 7314% August 15, 1996 61,993 63,268 8314% November 1, 1996 46,580 47,355 4% % November 1, 1986 50,000 50,000 18,195 6 % July 1, 1998 18,195 4% % September 1, 1987 60,000 60,000 4% % August 1, 1988 60,000 60,000 Total Debenture Bonds 317,642 324,772 5 1/s o/o June 1, 1989 50,000 50,000 Other Long-Term Debt 4 3/4% September 1, 1990 50,000 50,000 6 1/2% Note due serially to 4% % August 1, 1992 40,000 40,000 November 15, 1983 2,160 2,640 4% % June 1, 1993 40,000 40,000 Total Long-Term Debt 4%% September 1, 1994 60,000 60,000 Principal amount out-4314% September 1, 1995 60,000 60,000 standing (note B) 2,283,165 2,074,846 6 V4% June 1, 1997 75,000 75,000 Less amount due within 7 % June 1, 1998 75,000 75,000 one year (note C) 24,199 57,087 7%% April 1, 1999 75,000 75,000 Long-Term Debt excluding 9 1/s o/o March 1, 2000 98,000 98,000 amount due within one 8% % A May 15, 2001 69,300 69,300 year (note C) 2,258,966 2,017,759 7% % B November 15, 2001 80,000 80,000 Net Unamortized 7V2% C April 1, 2002 125,000 125,000 Discount (2,047) (275) 8 1/2% D March 1, 2004 90,000 90,000 Long-Term Debt less Net 12 % E October 1, 2004 10,730 11,730 Unamortized Discount $2,256,919 $2,017,484 8314% F April 1, 2006 60,000 60,000 8.45% G September 1, 2006 60,000 60,000 8 V4% 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 C. The aggregate principal amount of requirements 12 % L November 1, 2009 125,000 for sinking funds and maturities for each of the five 8 % June 1, 2037 7,463 7,463 years following December 31, 1979 is as follows:

5 % July 1, 2D37 7,538 7,538 Sinking Pollution Control Bonds Yea r Funds Maturities Total (Thou sands of Dollars) 6.30% A October 1, 2006 14,300 14,300 1980 $ 5,2'76 $ 18,923 $ 24, 199 6.90% B September 1, 2009 42,620 198 1 9,550 3 1,480 41 ,030 6.90% C September 1, 2009 2,990 1982 9,550 480 10,030 1983 8,450 46,820 55,270 Total First and Refunding 1984 8,450 50,000 58,450 Mortgage Bonds $1,963,363 $1, 747,434 $41 ,2 76 $ 147,703 $188,979 Notes:

A. The Company's Mortgage, securing the First and For sinking fund purposes, certain First and Refunding Mortgage Bonds, constitutes a direct first Refunding Mortgage Bond issues require annually mortgage lien on substantially all property and the retirement of $19,400,000 principal amount franchises . of bonds or the utilization of bondable property additions at 60% of cost, and the portion expected B. As of December 31, 1979 the annual interest to be met by property additions has been excluded requirement on Long-Term Debt was $167,099,000 of from the table above. Also, the Company may, at its which $144,261,000 was the requirement for First option, retire additional amounts up to $6,200,000 and Refunding Mortgage Bonds . The embedded annually through sinking funds of certain debenture interest cost on Long-Term Debt was 7.48%. bonds. The election of any such option is included in See Su m mary of Significa nt Accoun tin g Policies and Notes to long-term debt due within one year.

36 Financial Statements.

Notes to financial Statements

1. Federal Income Taxes principally from the abandonment of the Atlantic A reconciliation of reported Net Income with pre-tax Project. The Tax Reduction Act of 1975 provides that income and of Federal income tax expense with the for the year 1978 investment tax credits can be amount computed by multiplying pre-tax income by utilized to offset 80% of tax liability, and for 1979, the statutory Federal income tax rate of 46% for 70% of tax liability before investment credit.

1979 and 48% for 1978 is as follows:

The Company has a Tax Reduction Act Employee 1979 1978 Stock Ownership Plan (TRASOP) under provisions (Thousands of Dollars) of the Tax Reduction Act of 1975, as amended.

Net Income $233,329 $228,786 Such provisions permit the Company to elect an Federal incom e tax es included in :

Operating income:

additional 1% investment tax credit if the Company Current provision 14,359 8,233 transfers to the TRASOP an equivalent amount of Provision for deferred inco m e taxes- net* 99, 187 159,94 1 its Common Stock or cash for the purchase of shares Investm ent tax credit adjustments- net 10, 41 9 (21,237) of Common Stock and thereby funds its TRASOP Total included in operating income 123,965 146,937 through a reduction in its Federal income tax Miscellaneous other income-net 1,952 3,0 12 payments. In 1978 the TRASOP was amended to Total Federal income tax provisions 125,917 149,949 permit the Company to claim an additional 1/2 %

Total 359,246 378,735 investment tax credit for 1977 and subsequent tax Earnings of subsidiaries- net (1,72 1) (793) years if it contributes an equivalent amount of Pre- tax income $357,525 $377,942 Common Stock or cash, but only to the extent that such amount is matched by contributions by Tax expense at the statutory rate $164,462 $ 181,412 participants.

Adjustments to pre-tax income, comp uted at statutory rates, for which defe rred 2. Investments in and Advances to Subsidiaries tax es are not provided under current Investments in and advances to subsidiaries rat e-making policies:

Tax depreciati on (over) und er book (including the Company's equity in undistributed depreciation I l,357 7,454 earnings or losses) are summarized as follows :

Allowance for funds used during Decem ber 31, 1979 1978 construction (26,033) (19,826)

(Thousands of Dollars)

Overhead costs capitalized (6,935) (6,35 1) Transport of New Jersey Other (1 ,276 ) (98) Investment* $ 12,732 $ 10,909 Total (22,887) (!8,82 1) Energy Development Corporation Am ortiza tion of deferred tax items (15,658) (12,642) In vestment 8,5 14 5,283 Total (38,545) (3 1,463) Advances 80,554 54,404 Other Subsidiaries, prim ari ly LNG Pro ject Total Federal income tax prov isi ons $ 125,9 17 $ 149,949 Investments 2,066 4, 11 8

• ~~~~~~~~~~~~-

Advances 80,428 77,835

• The provision for deferred in come taxes represents th e tax effects of the Total $ 184,294 $152,549 following items: *For info rma ti on regardi ng possible sal e, sec page 28.

Current Liabilities Un billed revenues $ (2, 175) $ 5,829 The major subsidiary included in "Other Subsidi-Und er (Over) recovered fue l costs 6,604 (6,502) aries" above is Energy Terminal Services Corporation Current porti on of deferred de bits 25,298 1,3 13 (ETSC). The principal asset of ETSC is a Liquefied Total 29,727 640 Natural Gas (LNG) terminal on Staten Island, in Deferred Credits the New York City harbor area. Annual expenditures Atl antic Project Abandonment 132,203 for protection and maintenance of the terminal, Additional tax depreciation 32,287 33,257 Repair all owance property 6,70 1 5,782 including local real estate taxes, are approximately Gross receipts tax 5,647 (5,547) $4,400,000.

Unamortiz ed fu el cos ts 25,232 (4,939) The Company had originally intended to utilize Loss on reacq uired debt (571) (4 15)

Other 164 (1,040) the terminal for the importation of LNG. However; Total 69,460 159,30 1 due to uncertainties and delays relating to the Total $ 99,187 $159,941 importation project, including lack of regulatory approvals and a supply of LNG, the terminal has not The 1978 current provision for Federal income taxes been placed in operation. The Company is now is primarily due to the recapture of investment tax pursuing the utilization of the two storage tanks at credits resulting from abandonment of the Atlantic the terminal to store supplies of domestic natural Project. gas in order to meet the demands of its customers for gas on the coldest winter days. This will The balance of investment tax credits not utilized as necessitate the construction of a liquefaction facility of December 31, 1979 in the amount of $96 million at the site. The addi tional construction will not is available as a carryover to future years and will proceed until the necessary permits are obtained expire as follows: 1984-$10 million, 1985-$36 from the appropriate federal, state and local million, and 1986-$50 million. The carryover results regulatory agencies. 37

The ultimate realization of the carrying value of the through rates and leave $19.2 million of net investment may depend, among other things, upon unrecovered costs. The Company has filed excep-the Company's ability to place the facilities in tions to the initial decision. The actual amount of operation and the rate-making treatment granted by such costs to be recovered through rates will be the regulatory agencies. determined by the BPU by its order in the proceed-ing. If any net Atlantic Project costs should not be Any loss the Company may incm; if the above condi-permitted to be recovered through rates, the Com-tions are not resolved, is not presently determinable; pany would be required to reduce Net Income in however, in the opinion of the management of the 1980 by that amount.

Company, su ch loss, if any, would not have a material effect on the financial position of the Company or For additional tax information, see note 1.

the results of its operations.

6. Commercial Paper

3. Compensating Balances Commercial paper represents the Company's Cash at December 31, 1979 and December 31, 1978 unsecured bearer promissory notes sold to dealers at consisted primarily of compensating balances under a discount with a term of nine months or less.

informal arrangements with various banks to com- Certain information regarding commercial paper pensate them for services and to support lines of follows: 1979 1978 credi t of $199,900,000 and $198,150,000, respectively (Thousands of Dollars)

There are no legal restrictions placed on the with- Maximum amount outstanding at any drawal or other use of these bank balances. month-end $94,875 $58,750 Dai ly average outstanding IA) $20,658 $ 9,010

4. Pollution Control Bonds Escrow Funds Weighted average annual interest rate IB ) 11.85% 6.79%

Weighted average interest rate for This balance represents proceeds received from the comm ercial paper outstanding sale of Pollution Control Bonds which are released to at year end 13.44%

the Company as reimbursement of costs for pollution control faciliti es during construction. IA ) Co mputed by multipl ying th e principal amounts of comm ercial paper by th e days outstanding and dividing the su m of the products by th e number of da ys in the year.

5. Abandonment of Atlantic Project IB ) Computed by dividing short -term interest expense by the In December 1978, the Company cancelled its dail y average short-t_erm borrowings.

floating nuclear plant project and terminated its contract with Offshore Power Systems for the 7. Pension Plan construction of four generating units. Total costs The Company has a non-contributory, trusteed plan applicable to the project are accoun ted for as follows : covering all employees who complete one year of service. As of December 31, 1979, the unfunded prior (Tho usaruls of Dollars) service cost was approximately $288,893,000 and Total Atlantic Projec t costs, including vested benefits were approximately $3 71,213,000 .

. AFD C of $45, 134 $329,467 Less oth er charges: The market value of the plan assets, $204,638,000 at ucl ear fu el enri chm ent se rvices: December 31, 1979, increased by $44,620,000 over Assigned to Hope Cree k 2 $5,0 15 the previous year as a result of contributions (net of Sold 3,453 pension payments), investment income, and a net Charged to vari ous incom e, expense appreciation in market value. The Company's and property accounts 1,095 annual contribution is actuarially determined to Total oth er charges 9,563 provide for full funding by December 31, 2001.

Unrecovered costs charged to Pension costs for the past two years were charged as Extraordinary Property Losses, before tax redu cti on $3 19,904* follows: 1979 1978

• This amount plus $3,934 and $4,237 fo r oth er propert y losses (Tho usands of Dollars) represent th e balances in Extrao rdinary Propert y Losses at Operating Expenses $34,452 $32,426 December 3 1, 1979 and December 3 1, 1978, respec tiv ely. Utility Plant and Other Accounts 9,662 9,681 Total Pensi on Cos ts $44, 114 $42, 107 The tax reduction associated with unrecovered Atlantic Project costs is $132,203,000 and is included 8. Commitments and Contingent Liabilities in Accumulated Deferred Income Taxes. The Company has substantial commitments as part In accordance with the rate order in May 1978, all of its construction program as well as commitments legitimate costs applicable to the Atlantic Project, to to obtain sufficient sources of fuel for electric be determined by the BPU after an appropriate generation and adequate gas supplies. Construction investigation, are to be amortized over a period of 20 expenditures, including AFDC, of $4.0 billion are years, commencing with the effective date of the expected to be incurred during the years 1980 Company's next rate order but not sooner than through 1984.

March 1, 1980. The Company believes that all Under the Price-Anderson liability provisions of the Project costs are legitimate costs, and, in its current Atomic Energy Act of 1954, there is a limit of $560 rate proceeding, has requested that the net loss after million on each nuclear generating unit for public tax reduction, $187.7 million, be amortized and liability claims that could arise from a single nuclear recovered through rates. However; on February 6, incident. The Company is insured for each unit to 1980 the Administrative Law Judge in this the extent of its ownership against this liability to a proceeding issued an initial decision which would maximum of $160 million by private insurance (the permit the recovery of $168.5 million of such costs maximum amount presently available), and against 38

the balance of $400 million by a combination of a capitalization of such leases would not have a mandatory program of retrospective premiums to be significant effect on assets, liabilities or operating assessed against owners of nuclear reactors after a expenses.

nuclear incident (up to $5 million per incident but 11. Supplementary Information Concerning the Effects not more than $10 million in any calendar year for of Inflation (Unaudited) each licensed nuclear reactor in the United States), The Company's financial statem ents are prepared in and indemnity agreements with the Nuclear accordance with generally accepted accounting Regulatory Commission . In the event of a nuclear principles and are stated on the basis of historical incident involving any licensed reactor in the United costs, namely, the prices that were in effect when the States the Company could be assessed, on the basis underlying transactions occurred. The following of the three reactors now in service in which it owns supplem entary financial information purports to a percentage interest, a maximum of $6.38 million show certain effects of general inflation on the for any such incident, but not more than $12.76 Company's Utility Plant, Depreciation, and certain million in any year. other data as prescribed by the Financial Accounting The Company is a member of Nuclear Mutual Standards Board in Statem en t N o. 33, Financial Limited (NML) which provides insurance coverages, Reporting and Changing Prices. As further pre-up to $300 million, for property damage to nuclear scribed, no adjustments were made to income tax generating facilities of m ember companies. In the expense. The general m ethod used in developing this event of losses at any plant covered by NML, the data is the Constant Dollar method which is based, Company would be subj ect to a maximum assess- fundam entally, on the Consumer Price Index for ment of fourteen times its annual premium. Such All Urban Consumers (1 967 = 100). The effects of maximum assessment would currently amount to inflation are not recognized for incom e tax or approximately $13.4 million. ratem aking purposes.

The Company, under an agreem ent entered into in The Company advises readers of the imprecise May 1972, agreed to provide a limited guaranty of nature of this data and of the many subj ective not more than $76 million of the legal obligations of judgments required in the restatem ent of selected the Company's unconsolidated subsidiary, Transport historical costs to constant dollars. This data should of New Jersey (Transport), under its pension plan in not be used to adjust the Company's primary the event Transport failed to m eet such obligations, financial statem ents and the related Earnings per limited to pension benefits accrued to the date of the average share of Common Stock other than that agreement. As of December 31, 1979 the actuarially which is shown in the supplem entary statem ents.

computed value of the Company's obligation under the guaranty was approximately $46.6 million, Supplem entary Financial Data Adjusted which would be reduced by applicable pension fund for the Effects of General Inflation assets. Under an interpretation of the Employee for the Year Ended D ecember 3 1, 1979 Retirement Income Security Act of 1974, the Company could be liable to the Pension Benefit Historical Adjusted for Cost (Con- Constan t Guaranty Corporation, a corporation established densed from Doll ar within the United States Department of Labor, for th e Financial (In Average deficiencies in plan assets if the subsidiaries' pension Sta tement s) 19 79 Dollars) plans were terminated. As of December 31, 1979, (Th ousan ds of Dollars) vested benefits of the Company's subsidiaries' Operating Revenu es $2,4 16,707 $2,4 16,707 pension plans exceeded fund assets by approximately Opera ting Expenses

$76 million. Any payments made under the guaranty Operati on and Maintenance 1,44 1,72 1 1,441 , 72 1 Depreciation 162,989 3 18, 782 would have the effect of reducing the Company's Taxes 488,3 76 488,376 potential liability to the Pension Benefit Guaranty Corporation. Total Operating Expenses 2,093,086 2,248,879 Operating Income 323,62 1 167,828

9. Jointly-Owned Facilities Oth er (including In terest The utility industry has long recognized the benefits Expenses) (90,292) (90,292) of the construction, operation and financing of !Ii.come from Con tin ui ng jointly-owned electric and gas facilities. The Opera ti ons (excluding Red uc-tion of U tili ty Plan t to Lower Company has been a participant and has ownership Recovera ble Amount ) $ 233,329 $ 77,536*

interests in a number of such facilities. In compli-ance w ith reporting requirem ents of the Securities Purchasing Power Gain on Net Monetary Liabilities Owed and Exchange Commission, disclosure is m ade of During the Year $ 272,480 certain data regarding the Company's interests in Reducti on of Utility Plant at its jointly-owned projects in the annual report to Historical Cost to Lower the SEC on Form 10-K. Recoverable Am ou nt 4 13,526 Net $ (141 ,046)

10. Accounting for Leases The Company has certain leases for property and equipment which m eet the criteria for *Includin g the Redu ction of Ut ility Plant to Lower Recoverable capitalization, but in accordance with rate-making Am ou nt, th e Incom e (Loss) fro m Contin uing Opera ti ons on a treatment are accounted for as operating leases. The Constant Dollar basis fo r 1979 would have been $(33 5,990).

39

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

(000 omitted wh ere applicable)

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

Operating Revenues Historical $2,416, 707 $2,2 19,785 $2,032, 795 $1 ,869,535 $1,630,525 Adiusted $2, 41 6,707 $2,469,710 $2, 434,874 $2,383,794 $2,198,983 Incom e From Continuing Opera tions (excluding Reduction of Utility Plant to Lower Recoverable Amount)

Histori cal $ 233,329 Ad;usted $ 77,536 Income From Contin ui ng Operations per Average Common Share (excluding Reduc tion of Utility Plant to Lower Recovera ble Amount)

Hi storical $ 2.85*

Adiusted $ 0.47*

Purchasing Pow er Gain on Ne t Monetary Liabilities Owed During th e Year $ 272,480 Reduction of Utilit y Plant at Histori cal Cos t to Low er l~ eco ve rab le Am ount 413,526 Ne t $ (141 ,046)

Net Assets at Yea r End**

Hi stori cal $2,435,516 Adjusted $2, 303,094 Cash Dividends Declared per Common Share Histori cal $ 2.20 $ 2.08 $ 1.92 $ 1. 78 $ 1.72 A diusted $ 2.20 $ 2.3 1 $ 2.30 $ 2.2 7 $ 2.32 Market Price per Common Share at Year End Hi sto ri cal $ 19.25 $20.25 $22.88 $23.00 $18.13 Adjusted $18.20 $21. 70 $26.72 $28. 69 $23.69 Average Consumer Price Index (1967 = 100) 2 17.4 195.4 18 1.5 170.5 161.2

• After deducting the historical amou nts of Cumul ative Preferred Stock and $ 1.40 Dividend Preference Co mmon Stock dividends.

• • Refle cts Common Equity and Non-Redeemable Preferred Stock.

General - Constant Dollar costs were determined by because such monetary assets will buy fewer adjusting historical costs of Utility Plant and certain goods and services as the general price level rises.

other items into dollars of the same general Conversely, by holding monetary liabilities, purchasing power by using the Consumer Price primarily long-term debt, future payments of such Index for All Urban Consumers (CPI-U) . All adjusted liabilities tend to be made with dollars having less figures are in average 1979 dollars. This method purchasing power.

purports to show the effects of general inflation on The Company has significant amounts of long-term the Company. debt outstanding, which, it is currently estimated, will be paid back in dollars having less purchasing In come from Continuing Operations (excluding power. During 1979 the Company's monetary Reduction of Utility Plant to Lower Recoverable liabilities (primarily long-term debt) exceeded Amount)-As prescribed by the Financial monetary assets and therefore resulted in a net Accounting Standards Board, items in the income monetary gain. This gain, howeve:i; does not Statement, other than Depreciation, were not represent receipt of cash and should not be adjusted. considered as providing funds to the Company.

Depreciation - Depreciation expense calculated Reduction of Utility Plant to Lower Recoverable under the Constant Dollar method was determined Amount-The rate regulatory process of utilities in using the rates and m ethods for computing book New Jersey limits the Company to the recovery of depreciation and applied to the historical depreciable the historical cost of plant and equipment. However, Utility Plant balances. Such plant balances were first the Financial Accounting Standards Board requires adjusted to reflect the decline in the purchasing plant and equipment to be stated either in constant power of the dollar by using the CPI-U. dollars or a lower recoverable amount. The Company's historical cost of Net Utility Plant, when Purchasing Power Gain on Net Mon etary Liabilities restated to average 1979 dollars, would result in a Owed During th e Year-Th e Company by holding lower recoverable amount.

monetary assets such as cash and receivables tends Since the gain from the decline in purchasing power to lose purchasing power during periods of inflation is primarily attributable to long-term debt which has 40

been used to finance utility plant, the Reduction of the unrecovered investment thereon, in future rates Utility Plant to a Lower Recoverable Amount is allowed by regulatory bodies in the same manner netted against the Purchasing Power Gain on Net that historic costs and returns on investments are Monetary Liabilities. being recovered in current rates. In compliance with reporting requirements of the Securities and Replacem ent Cost (Unaudited)-lt is anticipated Exchange Commission and Financial Accounting that the actual cost of replacing productive capacity, Standards Board, estimated replacement cost when incurred, will be recovered through information is disclosed in the Company's annual depreciation recognized, together with a return on report to the SEC on Form 10-K.

12. Financial Information by Business Segments Elec tri c Gas To tal For th e Years Ended December 31, 1979 1978 1979 19 78 1979 1978 (Th ousan ds of Dollars)

Operating Revenues $ 1,689,857 $ 1,564,834 $726,850 $654,95 1 $2,41 6,707 $2,2 19,785 Depreciati on 122,953 11 9,346 40,036 38,902 162,989 158,248 Operating Income Before Income Taxes 369,409 386,054 78,468 81,288 44 7,877 467,342 Gross Additions to Utility Plant 484,356 472,795 53,779 40,962 538, 135 513,757 December 3 1, Net Utility Plant 4, 156, 122 3,799,254 579,862 564,036 4,735,984 4,363,290 Gas Explorati on Subsidiary and LNG Proj ec t 171 ,552 141 ,630 171 ,552 141 ,630 Oth er Co rporate Asse ts 1, 196,647 1,01 3,858 Total Asse ts $6,104, 183 $5,5 18,778

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 , Jun e 30, September 30, December 3 1, 1979 1978 1979 1978 1979 1978 1979 1978 (Th ousands)

Operating Revenues $664,707 $60 1,98 1 $5 17,813 $485,209 $592,069 $547,478 $642, 11 8 $585, 11 7 Operat ing Income 90,377 77,9 10 71 , 140 66,467 89,954 94, 104 72, 150 8 1,9 19 Ne t Income 68,055 56,052 49,3 12 46,054 68,2 10 70,8 14 47,752 55,866 Earnings Available for Co mm on Stock 56,355 44,352 37,6 12 34,354 56,5 1 I 59, 11 5 36,052 44, 166 Earnings per Ave rage Share of Comm on Stock $.88 $.74 $.57 $.57 $.87 $.95 $.53 $.69 Average Shares of Co mm on Stock Outstanding 64, 143 59,808 64,53 1 60, 134 64,973 63,362 67,954 63,765 41

Operating Statistics

% Annual Increase - 1979 compared with (000 omitt ed wh ere 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 1,56 1,148 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 2,01 6 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 29,309,25 1 .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 9,06 1 (.42) 3.90 Net Peak Load- kilowatts (60-minute integrated) 6,736 6,6 15 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 179,970 163,93 1 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 $ 654,95 1 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-th erms 18,639 18, 639 2.65 Maximum 24-hour Gas Sendout- th erms 13,349 12,235 9.11 2.53 Heating Degree Days (a) 4,677 5,3 17 (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 report ed on a calendar-year basis ti on include accrued and unbilled dollar amounts and sales effective with 1973. For 1969, heating degree days remain on a volumes from meter reading date to the end of th e calendar year. sales year basis.

42 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 4 14,058 367,470 341,749 336,250 131,900 27,622 25,863 23,375 20,473 12,437 1,465,271 1,311,655 1,207,557 1,098,58 1 452,855 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 9,514,5 74 8,994,855 8,687,964 6,398,908 10,627,734 10,472,054 10,144,9 17 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 30,77 1,719 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 13,6 12 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 68,34 1 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 1,3 16 43

financial Statistics (000 omitted w h ere 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 Produ ced 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 Incom e Taxes 364,411 15 ~28,2 1 6 15 Federal Incom e Taxes 123,965 5 146,937 7 Total Opera ting Expenses 2,093,086 87 1,899,385 86 Operating Incom e Electric 269,443 11 266,513 12 Gas 54,178 2 53,887 2 Total Operating Incom e 323,621 13 320,400 14 Allowance for Funds Used During Construction (Debt and Equity) 56,593 3 41,305 2 Other Incom e- 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 Redeem able Preferred Stock 31,500 35,000 1 N on-Redeemable Preferred Stock 554,994 12 554,994 13

$1.40 Dividend Preference Common Stock and Comm on 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 Su mmary of Significant Accou n ti ng Poli cies, page 29, lb) Balance availab le fo r $ 1.40 Dividend Preference Common and Notes to Financial Statements, page 37. Stock and Common Stock divided by th e 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 99,6 17 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 21,06 1 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 3 1,987 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) 2 14,242 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 3 1,102

$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 $2 1.19

$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 $ 639,5 17

$1,647,445 40 $1,549,579 39 $1 ,418,854 36 $1,422,525 38 $884,377 42 330,812 8 34 1,511 9 380,6 19 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, D eferred Income Taxes, Id ) Total Common Equit y divided by year-end Co mmon Stock Investment Tax Credits and Fixed Charges divided by Fixed shares plus doubl e th e $1.40 Dividend Preference Comm on Charges. Fixed Charges include Interest on Long-Term and Stock shares.

Short-Term Debt and Oth er Interes t Expense. 45

Management's Discussion The 1979 increase was slightly tempered by the ef-fect of a grea ter portion of sales being in the lower and Analysis of the revenue per therm classes of business. The increased Statements of Income sales, mainly in the interruptible and off-peak cate-gory, generated $26 million in additional revenue.

The following is a summary of the year-to-year The sharp reduction in the days of interruptions, 13 changes followed by a discussion of those items in 1979 against 136 in 1978, as well as the favorable which had a significant effect on the Company's price of gas compared to alternate fuels were the results of operations. prime factors. However, gas sales to the remaining Increase or !Decrease) classes of customers decreased, reflecting both con-1979 VS. 1978 1978 VS. 1977 tinued conservation and a less severe winter.

Amount  % Amount  %

(Thousands of Dollars) The higher gas sales in 1978 reflect improvement in Electric Operating the State's economy as well as the colder weather Reven ues $125,023 8.0 $ 94,716 6.4 experienced during the year. Although total gas sales Gas Operating Revenues 71,899 11.0 92,274 16.4 increased slightly, interruptible sales declined Fuel for Electric Generation sharply as the result of the 136 days of curtailments, and Interchanged a 33% rise over the previous year, and because a Power-net 78,744 14.5 5,001 9 number of interruptible customers turned to less Gas Purchased and Mate- expensive sources of fuel.

rials for Gas Produced 56,769 17.3 70,093 27.2 Maintenance 2 1,604 17.0 2,547 2.0 Fuel for Electric Generation and Interchanged Taxes Other than Federal Power- net Income Taxes 36, 195 11.0 34,420 11.7 The Company belongs to the Pennsylvania -New Federal Income Taxes 122,972) 115.6) 25,968 21.5 Jersey- Maryland Interconnection (PJM) and is there-Allowance for Funds Used by able to optimize its generation-interchange mix, During Construction 15,288 37.0 18,235) 116.6) using the lowest cost energy available in the inter-Interest Cha rges 15,714 11.4 3,716 2.8 connection system at any given time. Energy costs are adjusted to match revenues recovered through Electric Operating Revenues the operation of th e levelized electric energy adjust-Revenues increased 8% in 1979 and 6% in 1978. The ment clause. Total energy costs increased 15% and components of these changes are highlighted in the 1% in 1979 and 1978, respectively, as described table below: below:

Increase or !Decrease) Increase or IDecrease) 1979 vs. 1978 I978 vs. 19 77 1979 vs. 1978 1978 vs. 1977 (Millions of Dollar.\ ) (Millions of Dollars)

Rate changes including recoveries Prices paid for fue l supplies and of ene rgy costs through base interchanged power $2 18 $145) rates $ 37 $8 1 Inc reased kilowatthour output 7 16 Recoveries of energy costs through lcvelizcd energy Adjustment of actu al costs to adjustment charges I I) 77 119) match recove ri es th rough revenues 1146) 34 Increased kilowatthour sa les 11 33

$ 79 $ 5

$125 $95 I I) Represents revenues received as recovery of energy costs in The substantial price increases in 1979 reflect the excess of amo unts included in base rates. spiralling fuel prices, most notably oil, and the re-Growth in 1979 sales was limited to 1% by a lack- duced availability of lower cost nuclear generation luster New Jersey economy and the continuing con- both in the Company's capacity and in the PJM servation efforts by customers. In 1978, commercial system. The lower energy prices in 1978 demon-and industrial sales rose 4% and 5%, respectively, strated the advantage of greater nuclear capacity responding to an improved economy. The 1978 im- and utilization.

provement was restrained by the effect of a greater Gas Purchased and Materials for Gas Produced portion of sales being in the lower revenue per Gas costs are adjusted to match revenues recovered kilowatthour classes of business. through the operation of the levelized gas adjust-Gas Operating Revenues ment clause. Costs were 17% higher in 1979 and Revenues rose 11 % in 1979 and 16% in 1978. The 27% higher in 1978. Contributing factors are shown principal factors are shown below:

• below:

Increase or !Decrease)

Increase or !Dec rease) 1979 vs. 19 78 1978 vs. 1977 1979 vs. 1978 1978 vs. 1977 (Million s of Dollars) (Millions of Dollars)

Rate changes including recoveries Higher prices paid for gas supplies $54 $24 of gas costs through base rates $ 9 $10 Refunds from pipeline suppli ers 1121 7 Recoveries of gas costs through Increased therm sendout 14 7 levclizcd adjustment charges I I) 49 70 Adjustment of actual costs to Increased Therm sales 14 12 match recoveries through revenues 32

$72 $92

$57 $70 Ill Represents revenues received as recovery of gas costs in 46 excess of amounts included in base rates.

Maintenance Allowance for Funds Used During Construction The 17% increase during 1979 is primarily due to The $15 million or 37% rise in total AFDC experi-higher cost of maintenance at certain of the Com- enced during 1979 is principally attributable to pany's steam and nuclear generating stations. Addi- higher levels of Construction Work in Progress. The tional expenses were incurred in order to restore 17% decrease in 1978 resulted primarily from the service following Tropical Storm David and in main- suspension of accruals on the Atlantic Project effec-taining the distribution system. tive June 1, 1978 and the discontinuance of AFDC on Salem 1 due to its transfer to Utility Plant in Service Tuxes Other than Federal Income Tuxes on June 30, 1977.

Taxes Other than Federal Income Taxes consists principally of New Jersey gross receip ts tax which Interest Charges varies in direct proportion to electric and gas operat- The increase in 1979 is principaliy due to the is-ing revenues. The $36 million or 11 % rise experi- suance of mortgage bonds and increased short-term enced during 1979 was primarily attributable to an borrowings at significantly higher rates.

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 Form 10-K Available The Company is required by Securities and Ex-which subjected additional jointly-owned property of change Commission (SEC) regulations to file with the Company to the Act's provisions and imposed a that agency a Form 10-K annual report containing one-time surtax payable in 1979. The $34 million certain detailed financial and other data. There are rise in 1978 consists principally of a $26 million in-crease in gross receipts taxes and to a reversal in 1977 no accounting differences between the financial of $6 million of accrued Pennsylvania Public Utility statements presented in this Annual Report to Realty tax. Stockholders and those in the Form 10-K report, but it does provide other information as required by SEC Federal Income Taxes regulations.

Federal income taxes decreased 16% in 1979 due to a Stockholders or other interested persons who wish decline in pre-tax operating income and the change to have a copy of the Company's Form 10-K report in the statutory tax rate from 48% to 46% . The 22% may obtain one without charge after March 31, 1980, increase experienced in 1978 was attributable to by writing to the Vice President and Treasurer, Public greater pre-tax operating income and a decrease in Service Electric and Gas Company, 80 Park Place, tax depreciation in excess of book depreciation for Newark, New Jersey 07101. The copy so obtained which deferred taxes are not provided. (See note 1 of will be without exhibits. Exhibits may be purchased Notes to Financial Statements.) for a specified fee.

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- In our opinion, such financial statements, appearing ments of capital stock and long-term debt of Public on pages 29 to 41, inclusive, present fairly the finan-Service Electric and Gas Company as of December cial position of Public Service Electric and Gas 31, 1979 and 1978 and the related statements of in- Company as of December 31, 1979 and 1978 and the come, retained earnings, and changes in financial po- results of its operations and the changes in its finan-sition for the years then ended. Our examinations cial position for the years then ended, in conformity were made in accordance with generally accepted with generally accepted accounting principles auditing standards and, accordingly, included such applied on a consistent basis.

tests of the accounting records and such other audit-ing procedures as we considered necessary in the circumstances.

February 15, 1980 47

Board of Directors John F Betz James C. Pitney l'resi1/ent and Chief Operoting Officet of the Partner of the firm of Pitne1: Hardin & Kipp, Co1111wnv counsellors-at -lalV, Ne1Varl; al)(/ MorristolVn, Member of Executive and Finance Ne"' /er,e1*

Commit tees Member of Audit Com111ittee Re ynold E. Burch, M.D. Kenneth C. Rogers The private proc/lce of medicine in th e President. Stevens Institute of Tech1wlog _1:

1peciolt1* of obstetrics ond )!,l'llecolog1 : Ea1t Hobohen. Ne\\' /er1e1

• Orange. Ne11* /erse\'; Clinical Assouate Member of Nominoting Co111mittee and Professor of Ohstet rics (/Ill/ C:_1*necolo,~ .1 '. Ne11* Organi=at ion and Compen .rnt ion Committee

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

Jlelllber of Audi/ Committee William E. Scott Executive Vice l're.1ident - Finonce of the C. Malcolm Davis Companv Chairman of the Hoaul anil director. Fidelit1

• Memher of Execu111*e Com ml/tee and Unwn HoncorJ'oration. Ne11 *orl<. Ne\\' /ersev Chairman of F111once Comnnttee

,\.1ember of Executive and Finance Commit tees ond Choimwn of Nominal ing Robert I. Smith Colllmit tee Cha1mwn of the Boord al)(/ Chief Exerntive Officer of the Com11om

• W. Robert Davis Clwi rman of Exec u tive Com111ittee a]){/

Clwirlllon of the lioaul. Chief l:xerntive Me111her of Finance Commit tee

()/Iicer ond 1/irector, Boncshores of Ne1v /e rse1-.

\1oore.1to11*n. Ne11 * /er'1' \'; Choir111on of the Boon! and director. The Bani< of Ne11* /er1e1: Robert V. Van Fossan Can){/en. Ne11 * /er\e)' Chairman of the Hoard. Chief Executive Officer and director, The Mutual Benefit Life Choimwn of Audit Committee a/){/ Member l11'ura11ce Companl'. Ne11 *orh. Ne11* /erse .1*

of Nominoting Comlllittee Member of Executive and Finance Comlll1ttees and Chairman of O rgani=ation Edward R. Eberle and Compensotion Comm itt ee Former Chairmon of the Hoord of the Com1wn1*

Nathan H. Wentworth

,\!1ember of F111ance and Nominoting Former Cha1mwn of the Board. The Committee' Continental Corporotion (property and cos ualt y life and accident an d hea lth , and Margery Somers Foster other t1*pes of insurance. and other financial Emeritu 1 Pmfe." or of Economics ond former services} and The Continenwl Insurance Dean of Oougla11 College , l~utger1. The State ComJ'anies. Ne\\' Yori-:.. Neil' Yori<

Univ ers it y, New Brumwich. New /er.1ey Member of Audit OIHI Finan ce Committees Member of Audit Committee and Orgoni=at ion ond Compensation Commit tee D. Wayne Hallstein Di rector am/ former !'resident. lngerrnll-lfond Compan _\' (dive rsified 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

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

Officers Robert I. Smith Robert M. Crockett Cha irman of th e Board and Chief Executive Vice President -Fuel Supply and !'resident of Officer Eascogas LNG, Inc.

John F. Betz Fredrick R. DeSanti Pres ident and Chief Opera I ing Officer Vice President-Rates al7ll Load Management Edward G. Outlaw Gifford Griffin Executive Vice President - Corporate Planning Vice President- Int erconnections William E. Scott Carroll D. James Executive Vice President - Finance Vice President-Administrative !'fanning James B. Randel, Jr. Edward J. Lenihan Sen ior Vice President of I he Company 11n1/ Vice Presiden t - Public Rel at ions Pre.>ident of Energy Development Corpor111 ion Charles E. Maginn, Jr.

Harold W. Sonn Vice President-Human Resource>

Senior Vice President of the Compan1 and 1

Pres ident of PSE&G Research Co rporal ion Wallace A. Maginn Vi ce President and Treas urer Richard M. Eckert Senior Vice President -Energy Suppl.1* unrl Stephen A. Mallard Engineering Vice President - S1*)/em Planning Charles H . Hoffman Winthrop E. Mange, Jr.

Senior Vi ce President - Sp/em Plunning and Vice President -Corporate Services Int erconnect ions Thomas J. Martin Robert W. Lockwood Vice /'resident -Engineering and Const ruction Senior Vice Pre,illen t -Administration Parker C. Petem1an John F. McDonald Vice President and Comp I roller Senior Vice President-Governmental Af(ai" Louis L. Rizzi Everett L. Morris Vi ce President - CtVitomer and Morl<et i ng Senior Vi ce l' res ident -Cu,tomer Operation' Services Donald A. Anderson Frederick W. Schneider Vice President -Computer S.1*stems and Vice President-Product ion Services Robert J. Selbach Frederick M . Broadfoot Vi ce President- Transmission and' Distribution Vi ce President - Law Malcolm Carrington, Jr.

Vice President and Secretary Changes in Organization The Board of Directors, at a m ee ting Robert W. Hodge, Vice President-held on September 18, 1979, adopted a Co mmercial and Consumer Affairs, resolution increasing the number of retired effective January 2, 1980, after Directors from twelve to thirteen and, nearly 34 years with the Company effective the same date, elected Jam es Louis L. Rizzi , General Manager of C. Pitney a Director. Mr. Pitney, an Consumer Affairs, was elected to attorney, is a partner of the law firm of succeed him, effective January 2, 1980.

Pitney, Hardin & Kipp of Newark and Mr. Rizzi was designated Vice Morristown, New jersey President-Customer and Marketing Robert C. Lydecker, Vice President Services, effective January 15, 1980, in and Assistant to the Chairman of the conformance with a ch ange in th e Board, retired on June 29, 1979, after designation of the department.

more than 42 years of service.