ML18101A637

Public Svc Enterprise Group Inc Annual Rept 1994.

ML18101A637
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Site:	Salem, Hope Creek
Issue date:	12/31/1994
From:	Ferland E PUBLIC SERVICE ENTERPRISE GROUP
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Enterprise Diversified Holdings Incorporated EDHI Net Income (doll ars in millions) 74.6 60.1 60.1 Earnings for Enterprise Diversified Holdings Incorporated (EDHI) , parent company of Enterprise's nonutility businesses, were $60.1 million in 1994, compared with $74.6 million in 1993 before the EGDC recorded impairment.

26.6 24.2 Community Energy Alternatives Incorporated (CEA)

(104 9)

~

90 1

91 92 93 94 CEA is an investor in and developer of cogeneration and power production facilities. CEA has investments in 19 projects, of which 18 are in operation with one scheduled for start up during the first quarter of 1995.

CEA's year-end assets totaled $232 million in 1994, compared with $211

• Without EGDC Im pairmen t million in 1993. At year-end, CEA had 478 equity megawatts in operation or under construction. Earnings in 1994 were $15.7 million , compared with

$13.8 mil lion in 1993.

World Operations Energy Development Corporation (EDC)

EDC is an oil and gas exploration and production and marketing company based in Houston , Texas.

At year-end, EDC had assets of $729 million, compared with $679 million in 1993. At year-end, EDC also had proved reserves of 888 billion cubic feet of natural gas equ ivalent, an increase of 10%, compared to 1993. During 1994, EDC earned $12.5 million, a decrease from 1993 earnings of $46.3 million, due primarily to lower gas prices and volu mes.

• Where we do busi ness Public Service Resources Corporation (PSRC)

PSRC makes primarily passive investments in leveraged leases, limited partner-Total Assets ships and securities. Future investments will have a focus on the energy sector.

(doll ars in billi ons) PSRC 's assets totaled $1.34 billion in 1994, compared with $1.32 billion in 2.5 2.5 1993. Earnings in 1994 were $33.8 million, compared with $19.7 million in 1993.

2.4 2.4 2.1 Enterprise Group Development Corporation (EGDC)

EGDC is a diversified nonresidential real estate development and investment business with investments in office and retail properties. EDHI has announced its intention to exit this business over time.

At year-end, EGDC had interests in 10 properties in five states. EGDC's assets 90 91 92 93 94 totaled $189 million at year-end 1994, compared with $203 million in 1993.

EGDC recorded a loss of $1.9 million during 1994.

PSEG 1994- ANNUA L REPORT

• ~

Public Service Enterprise Group 1994 Operations Overview Public Service Electric and Gas Company PSE&G Revenues from Electric Sales (billions of dollars) 0.71 0 69 0.73 0.68 0.70 174 1.51 1.57 1 56 1.68 Electric Business Results Favorable weather increased the demand for electricity during 1994, resu lting in $3.73 billion in revenues, compared with $3.69 billion in 1993, 1.1 7 l.19 an increase of 1.1 %.

l.04 11 2 l.04 Earnings for 1994 were $502.3 million, compared with $493.2 million in 1993.

90 91 92 93 94 Electric sales to customers increased 1.0%, compared with 1993.

• Industria l Residential electric sales (0.4%)

• Commercial Commercial electric sales +2.0%

• Residen tial Industrial electric sales +0.5%

PSE&G Nuclear Business Unit Formed Operating Areas PSE&G 's nuclear activities were consolidated into a Nuclear Business Unit in 1994. The new organization will focus its efforts on four fundamental areas to

• Electric Only improve performance. They are: high safety standards; operational excellence;

• Gas On ly cost competitiveness; and customer focus.

• Electric and Gas PSE&G has ownership interest in five nuclear units:

Hope Creek 95.00%

Salem 1 42.59%

Salem 2 42.59%

Peach Bottom 2 42.49%

Peach Bottom 3 42.49%

Reve nues from Gas Sold an d Transported (billions of dollars)

Gas Business Results

.04 Gas revenues totaled $178 billion in 1994, compared with $1.59 billion in 1993,

.04 .04 .31

.24 30 an increase of 11. 6%.

.51

.01

.02

.46 Earnings for 1994 were $116.6 million, compared with $83.6 million in 1993 .

.14 .48 13

.41 .43 89

.8I .78

.67 .70 Gas sales were up 3.2%, compared with 1993.

Residential gas sales +4.5%

Commercial gas sales +0.3%

90 91 92 93 94 Industrial gas sales +4.1%

• Transportation Service Gas transportation service decreased 2.3%, compared withl993. Total gas sold and transported

• Industri al increased 2.3%.

• Commercial In 1994, PSE&G installed more than 284 miles of new gas distribution mains. The additional

• Residential construction brings PSE&G 's total gas distribution system to 15,406 miles.

PSEG 1994 ANNUAL REP O RT

~ -

Enterprise 1994 Financial Highlights Public Service Enterprise Group Dollars in thousands where applicable 1994 1993 % Change Incorporated (Enterprise) is a diversified public utility holding company: Public Total Operating Revenues $ 5,915,843 $ 5,705,559 4 Service Electric and Gas Company Total Operating Expenses $ 4,751,750 $ 4,598,712 3 (PSE&G) , the principal subsidiary, is a Net Income $ 679,033 $ 600,933 13 regulated utility providing electric and gas Common Stock service to more than two million customers and more than five-and-a-half million Shares Outstanding -Average (Thousands) 244,471 240,664 2 residents of New Jersey. It is the state's Shares Outstanding - Year-end (Thousands) 244,698 243,688 largest utility and one of America's largest Earnings Per Average Share $ 2.78 $ 2.50 11 combined electric and gas companies. Dividends Paid Per Share $ 2.16 $ 2.16 Enterprise Diversified Holdings Book Value Per Share - Year-end $21.70 $21.07 3 Incorporated (EDHI) , a subsidiary of Enterprise, is the parent company of Market Price Per Share - Year-end $26.50 $32.00 (17)

Enterprise's non utility businesses. These Ratio of Earnings to Fixed Charges 2.76 2.59 activities, which are focused on the Ratio of Earnings to Fixed Charges - PSE&G 3.35 3.30 unregulated energy industry, include investments in oil and gas exploration Gross Additions to Utility Plant $ 887,283 $ 890,374 and production, independent power Total Gross Utility Plant $16,566,058 $15,861,484 4 production and other investments.

See Notes to Consolidated Financial Statements.

Net Income Annual Earnings and Dividend Payo ut per Share (dollars in millions) (in doll ars) 90 91 92 93 94 90 91 92 93 94

• Earnings per Share

• Annual Dividend Payout Contents Allocation of Assets at December 31, 1994 Source of Consolidated Earnings per Share Enterprise Total Assets - $16.7 billion Letter to Shareholders 2 ADialog with Management 4 Shaping Tomorrow Today 7 Financial Report 12 Officers and Directors 40 Corporate and Stock Information 41 PSE&G EDHI Earnings per share (rounded)

• Electric 72%

• PSRC 8%

• Electric $2.05

• EDC $.05

• Gas 13%

• EDC 5%

• Gas$~

• CM$~

• EGDC 1%

• PSRC $ 14 EGDC ($ 01)

CEA 1%

- - - - - - - - - - - --1 2 I PSEG 1994 ANN U A L REP O RT Jim Ferland, centm~ meeting with employees *

Dear Shareholder:

to discuss their concerns and elicit their views on corporate initiatives.

For a second consecutive year, your company achieved record-setting financial performance. Enterprise's consolidated earnings for 1994 were $679 million, or $2.78 per share of common stock, compared with $601 million and $2.50 per share in 1993.

Our 1994 performance was facilitated, in part, by our efforts to prepare for a more competitive future by controlling and reducing costs. Earnings were also benefitted by favorab le weather conditions for part of the year and the refinancing in 1994 of $592.3 million of debt and preferred stock to take advantage of lower interest rates. In addition , 1993 results reflected a one-time charge to earnings of

$50.5 million, or 21 cents per share, for impairment in the value of certain real estate properties.

While we are pleased with our recent financial performance, we remain hard at work preparing ourselves for tomorrow's more competitive environment. In that regard, we are encouraged by the measures recommended by the New Jersey Board of Public Utilities (BPU) in its draft revised Energy Master Plan to introduce more flexibility into New Jersey's rate-making mechanisms and to change state tax policy to create more equity in taxes among energy suppliers.

These proposed modifications represent an important first step toward bringing the present utility regulatory process in New Jersey up to date with the competitive realities of today's global energy marketplace. Equally important, they wou ld enable PSE&G to more competitively position its services to customers with other choices, such as self-generation or even relocation to states where the costs of doing business are lower. electric bill with no financial impact on other PSE&G customers. In return fo r qualifying for the new rate, Co-Steel Raritan would agree Competition and Deregulation Continue to Pose Challenges to remain in New Jersey and invest $37 mi llion to refurbish and Through its draft revised Energy Master Plan, the BPU has made some upgrade its facility.

progress in clarifying the shape of the new competitive energy market- On the gas side of our business, a BPU policy which took effect on place in New Jersey. However, a good deal of uncertainty still surrounds November 30 for PSE&G 's large customers separated the purchase of the fu ll future impact of competition and deregulation, particularly in the commodity, natural gas, from its transportation. As a resu lt, all the areas of electric generation, gas supply and gas service. of PSE&G's 170,000 industrial and commercial customers will be In regard to our electric business, we are watching developments able to purchase gas from virtually any supplier and pay PSE&G only in other parts of the country- notably in California-while we the cost of delivering the gas to them.

continue to work to promote the kind of regulatory changes we need This change is not expected to affect PSE&G's profitability since to compete successfully in ew Jersey, the Mid-Atlantic region and approved transportation service rates have been designed to maintain possibly beyond. adequ ate margins. We believe that over time our gas distribution The effects of competition are being felt here in New Jersey as we business wi ll evolve into a common carrier activity- essentially have renegotiated contracts with PSE&G's three municipal electric "renting" our pipelines with little or no responsibility for gas customers, providing modest price discounts in order to retain their acquisition and sale. .

business. And increasingly, our larger industrial customers are In response to this new unbundling initiative in New Jersey and to pressuring us for lower rates to help them reduce their costs and similar action in other states, we formed a gas marketing company, remain competitive. U.S. Energy Partners (USEP) , in partnership with Cincinnati Gas and Most recently, on January 17, 1995, we proposed to the BPU a plan Electric Company.

that wou ld provide a competitive electric rate to Co-Steel Raritan - USEP's goal in 1995 is to market its natural gas and related PSE&G's second-largest customer at a single location - to keep the services to industrial and commercial customers in New Jersey and steel mill and its 500 jobs in Perth Amboy, NJ increase its market penetration in the Midwest region.

The plan hinges on a proposed new experimental hourly energy In our gas service business, we continue to enhance and expand pricing service rate schedu le that would result in -an approximate our appliance service offerings to bring customers a wider range of

$7.3 million reduction in Co-Steel Raritan's annual $26 million services than our competitors can provide.

PSEG 1994 ANN UAL REPORT I 3 Our Response to the Competitive Environment EDHI will increasingly focus on its core businesses: Energy Our success in a more competitive energy marketplace hinges on our Development Corporation (EDC), our oi l and natural gas exploration ability to reduce costs, provide better service to our customers, and and production company, and Community Energy Alternatives recognize and develop new products and services. During 1994, we Incorporated (CEA), our independent power production company.

continued to focus on six key business strategies to help us compete During 1994, we refocused our efforts at EDC from acquisition of successfu lly in the future. These are: reserves to exploration to find oil and gas more cheaply than the

+ cost control; competition and in sufficient quantities to replace current production.

+ increased asset utilization; Also du ring 1994, we named Malcolm Butler, who previously

+ improving nuclear operating performance; directed EDC's United Kingdom operations, as EDC's president. Under

+ customer retention; his leadership, there will be renewed attention given to EDC's three

+ creating new products and services; and primary challenges: replacing reserves through exploration at low

+ the strategic development of Enterprise Diversified Holdings finding costs; maintaining low-cost operations; and strengthening the Incorporated (EDHI) . company's marketing capability.

We will continue our unrelenting focus on cost reduction whi le Meanwhile, CEA has developed a growth strategy to become a aggressively pursuing even better service reliability and improved major participant in the independent power industry. The strategy customer satisfaction. Using total qual ity management tools, we will focus on pursuing domestic and international opportunities.

have made substanti al progress in reworking major business Public Service Resources Corporation (PSRC) , which makes processes, reducing handoffs, eliminating redundant efforts and primarily passive investments, will continue to focus on energy-improving both efficiency and effectiveness. related investment opportunities.

We have been taking deliberate steps to improve the competitiveness Wi th the sale of two properties in 1994, we are continuing our of our existing assets. Our repowering and rehabilitation projects are controlled exit from Enterprise Group Development Corporation's equipping us with a modern, state-of-the-art fossil generating system (EGDC) real estate business. EGDC's efforts center on the effective which meets Clean Air Act requirements, reduces energy costs and better management of occupancy levels and the maintenance of existing positions PSE&G to compete against other energy producers. properties wh ile seeking app ropri ate opportunities for disposition.

While the overall performance of the five jointly-owned nuclear generating stations was solid during 1994 - operating at 74% capacity

Conclusion:

Shaping Tomorrow Today

- performance of individual units was uneven. Specifically, our In the new energy marketplace, customers are demanding choices, Salem units continued to present challenges. hi gh quality service and competitive prices. As utilities adjust to the On April 7, operating and equipment problems at our Salem 1 Un it chal lenges and opportun ities deregulation wi ll bring, the boundary led to a shutdown of the plant for 58 days. Areview of the incident li nes between the regul ated and nonregul ated sides of Enterprise identified six violations of Nuclear Regu latory Commission continue to blur. The structure of our industry is changing foreve r and requirements, for which the agency levied a $500,000 fine. we must rapidly transform our company to meet the challenges of a This event accelerated our plans to take aggressive steps to improve verydifferent future.

station operations. In September, we created a separate nuclear By the time that you read this report, we will have announced business unit and appointed Leon Eliason, previously with Northern certain organizational changes which are part of our ongoing States Power Company, as ch ief nuclear officer and nuclear business initiative to meet the challenges of a deregulated and competitive unit president. marketplace. More information wi ll be made available in the next Other changes included naming a new station manager and quarterly report and at the annual shareholders meeting in April.

several new senior staff members. With this management team in The vanguard of the competition for which we have been preparing place, we expect Salem to make good progress toward achieving the is arriving. We are not daunted by its arrival. While it will require that level of operating excel lence enjoyed by our Hope Creek Station. we defend our existin g customer base, we know it presents us with Our efforts to retain large customers concentrate on finding significant opportun ities to demonstrate the superior quality of our innovative ways to provide services and satisfy customer needs. The services, the skills and capabilities of our employees and the cornerstone of this activity is deployment of a Superior Service unparalleled level of customer satisfaction we can provide.

Strategy to differentiate PSE&G as a service provider. We, at Enterprise, are confident about the future. We look with And, where possible, we will work with large utilitycustomers and prom ise toward 1995 and beyond, and we remain committed to the regulators in negotiating agreements that will keep the customers on continued success of your company.

our system and in New Jersey.

We will continue to seek out new profitable business opportunities wh ich draw on the knowledge and skills of our work force, utilize ex isting resources and complement those services and programs we

.J~

E. James Ferland

+- ~-

have in place. Chairman of the Board, President and Chief Executive Officer Our final strategy concentrates on deve loping EDHI into a leading Public Service Enterprise Group Incorporated independent energy business. February 14, 1995

~ .

4 I PSEG 1994 ANN UAL REP O RT ..

ADialog With Management Jim Ferland *****

Murray: Is there also a focus on curtailing capital spending?

As 1994 drew to a close, Enterprise's senior Ferland: In a competitive environment, executives engaged in a roundtable discussion on it is not only important to reduce the expense side of our operations. It is just as issues raised by many shareholders during the important to control the dollars we invest course of the year. Chief Financial Officer in our generation, transmission and distribution assets needed to provide Bob Murray moderated the conversation, service to our customers. We have removed expressing shareholders' areas of interest in the about a billion dollars from PSE&G's five-year construction program.

form of questions to Chairman of the Board Jim Ferland, PSE&G President Larry Codey and *****

Murray: PSE&G still has an annual EDHI President Paul Way. Excerpts of their construction program that, at the moment, conversation are presented here. exceeds the half-billion-dollar mark.

Explain some of that spending.

Murray: As deregulation occurs, the electric and gas utility industry Ferland: We make capital investments in the wisest fashion possible to help strengthen will come under increasing competitive pressure. Uppermost in our our competitive position. We have one of the shareholders' minds is whether our principal business, PSE&G, can largest utility infrastructures in the country, survive and grow in this kind of environment. Is there real cause and it is our responsibility to assure that for concern?

the system remains safe and reliable. This requires capital each year to replace old or Ferland: Make no mistake about it: Enterprise recognizes that our well-worn facilities and upgrade other facilities to make them more industry is going to be very different in the future. But if you competitive. Along these lines, we have repowered certain generating listen to the message that we have been conveying and pay attention units, with the most ambitious effort at PSE&G's Bergen Generating to the actions that we have been taking, you will find evidence that Station. When it resumes operation in mid-1995, Bergen will use we are performing in a way that will make us competitive in tomor- state-of-the-art technology to produce electricity at a heat rate 34%

row's business environment. Some examples: We are keeping our lower than the original equipment. Its fuel will be natural gas, operating and maintenance budgets flat year over year. We are helping to reduce the unit's environmental impact by about 90%. And trimming our inventory levels to curtail costly carrying charges. We it will require half the number of employees to operate the plant.

are refinancing higher-cost debt. We are combining or streamlining a number of our work groups in both operating and support depart-ments. And we are reducing our employee levels while encouraging Murray: We can cut costs for only so long in order to be more those who remain to perform more efficiently. Today, PSE&G has competitive and help improve earnings at the same time. Sooner or roughly 2,000 fewer employees than it did in the 1980s; in fact, it now later, we have to concentrate on growing revenues. Comments, please, has fewer employees than it did a half century ago when we had a on such efforts.

fraction of the customers that we have today, and we expect further reductions of at least 1,500 over the next several years. Ferland: Enterprise has been pursuing new business opportunities to create growth. We have established a company to generate additional Codey: We are able to take these steps because of our proven ability income in the area of conservation services. We have launched a to adapt to change. For instance, when we were building our nuclear natural gas marketing company to take advantage of deregulated power plants back in the 1970s, we managed our capital needs and opportunities in that arena. And, we are close to setting up an electric construction program very well. PSE&G was the only utility to brokering company. Most recently, we have joined forces with AT&T to maintain a double-A bond credit during a major nuclear construc- jointly develop technology which offers new business opportunities tion program. More recently, we have introduced total quality behind the customer's meter.

management as an important work ethic in PSE&G. The program provides a roadmap for employees to carry out their responsibilities Codey: In the new energy marketplace, franchise boundaries may by initiating process improvement activities and meeting competitive begin to erode, particularly if retail wheeling is ultimately permitted.

challenges as a team focused on achieving excellence in providing Some utility companies tend to focus on that prospect as being a threat service to customers and value to shareholders. to their existing level of sales. But we see it as an opportunity to sell

PSEG 1994 A UAL REP O RT I 5 electricity on a competitive basis in other franchise jurisdictions. Ferland: What we need in the near term is flexibility in establishing If competition unfolds as we be! ieve it eventually wi ll, our potential the prices we charge in delivering energy to our customers. Com-market will be much larger than the one we now have in New Jersey. petition is already acting in a way that will make it very beneficial and even necessary for us to be able to move quickly - often on a Murray: There seems to be a consensus that, to the extent that customer-by-customer basis - in negotiating new terms and conditions for energy services to preserve the integrity of our overall PSE&G's customers are open to competitive inroads, it will come first customer base.

to the industrial sector. What about our vulnerability to the loss of industrial customers? *****

Murray: How will environmental issues affect the new competitive Ferland: Approximately 23% of PSE&G's electric sales are to marketplace?

industrial customers, which is about average for the industry. We have signed up our two largest industrial customers to long-term Codey: Environmental issues need to be dealt with on a regional contracts involving discounts and we will probably reach similar basis so that we can operate on a level playing field. Without fair agreements with other large-volume customers. Since retail wheeling standards, utilities in states with less stringent environmental rules is not currently permitted in ew Jersey, self-generation, cogenera- will have a competitive advantage. Without the need for certain tion and relocation are the only alternatives now available to large* p.ollution control technology, these utilities wil l be able to produce electric custome1's. But, of PSE&G's largest 300 industrial customers, energy at a cheaper price and, of course, New Jersey will pay the price there are only a handful for which this makes econom ic sense. And we in the form of polluted air. We can't allow this to happen.

know that by providing a modest discount on current rates, we can make it desirable for those customers to stay on PSE&G's system.

• Murray:

• • • • Afew words, now, on the unbundling that has occurred in Murray: Many shareholders tell us that they have been following the distribution of natural gas in New Jersey. Good news or bad news?

developments in California, which is fostering an aggressive Ferland: Generally, it's good news. Previously, PSE&G had no transition toward competition. Is New Jersey on the same path? opportunity to make a profit on gas sales, and we had to demonstrate our prudence in purchasing gas to be allowed to pass those costs on to Codey: There is no evidence that ew Jersey will move as quickly as customers. This presents a situation of risk but no potential reward.

California appears to be moving. Over the In the future, it is likely th at PSE&G will increasingly become a gas next year, New Jersey's Board of Public Larry Codey transportation company, at least for industrial and commercial Utilities will be conducting a study of retail customers. For the first time, Enterprise will have the opportunity to wheeling and "auction pools" and their earn a profit on the sale of the commodity through our unregulated potential impact on the state, including gas marketing business.

PSE&G and its customers. Indications are that the BPU will move ca,refully and cautiously. And, keep in mind that these Murray: Of considerable interest to our shareholders is the may not be the only models for the performance of Enterprise's nonutility businesses, which were competitive delivery of energy. Others could established in the 1980s as a means of increasing earnings. How about emerge that will have to be considered. an update?

Murray: How best can our regulators and Way: EDHI is currently producing about 9% of Enterprise's earnings, and the growth prospects appear encouraging. Our objective is to legislators assure a level playing field for improve the earnings of our core businesses: Community Energy utilities, including PSE&G? Alternatives Incorporated (CEA) , our.independent power production company, and Energy Development Corporation (EDC), our oil and Codey: New Jersey's laws governing utility gas company.

regulation are 75 years old and have to be modified to provide the Board of Public Utilities with more flexibility. Our Murray: Specifics, please, on the future of EDC and CEA.

shareholders who live in New Jersey can be of valuable assistance in this effort by Way: EDC has grown successfully through acquisitions. In the future, communicating to their legislators how we will place more emphasis on replacing and expanding reserves important it is for them to protect the through exploration and development, which should provide greater interests of Enterprise investors. returns, as well as a firmer foundation for future growth. We have

6 I PSEG 199 4 A1 N UAL REPOR T ..

substantial acreage to explore, using state-Paul War *****

Murray: Asummary, then, on Enterprise's efforts to enhance of-the-art technology. At CEA, we have implemented a strategy to increase our list shareholder value.

of potential projects globally. We have opened development offices in Hong Kong, Codey: Our clear objective is to grow the Enterprise portfolio and New Delhi and Buenos Aires. At both EDC the profitability of its various elements, especially PSE&G's electric and CEA, we are developing the talent and and gas segments. We are scrutini zing market opportunities in all the resources to compete successfully. corners of our businesses. We are workin g toward becoming a significantly more productive and more efficient company that strives to provide qu ality services and gather more information from our Murray: Some shareholders have customers in order to serve them better. Remember, in a competitive wondered about the added risks in CEA's environment, unless we have a thoroughly satisfied customer, we are foreign activities. not going to be able to finalize a sale. If we can't make the sale, we won 't realize the appropriate profit to satisfy our shareholders.

Way: The returns we expect should com-pensate us for these risks. Many of CEA's *****

Murray: Which brings us to the subject of greatest interest to our employees have foreign expertise, and we intend to grow this business with partners shareholders - the security of the dividend.

who have expertise in the international arena. Finally, we are making investments Codey: Three years ago, our Board of Directors agreed on a strategy on a project-by-project basis over a period to stabilize our dividend at the current level of $2.16. We correctly of time. In other words, we are not putting anticipated that there would be pressure on utility company payout significant dollars at risk in any one project ratios because of increased risks associated with the uncertainties of at any one point in time. competition. Our dividend policy is to pay out a dividend that is sustainable over time .

Murray: Any way to counter declining Ferland: By holding the dividend level steady for the past several natural gas prices, which suppressed EDC's 1994 earnings? years, we have reduced Enterprise's dividend payout ratio to 78%in 1994- representing a healthy decline from a payout of 100%in Way: There are several ways, such as hedging prices. To a limited 1992. Given the ongoing uncertainties in our industry, this has been extent, we will be making use of hedging and other techniques to a prudent policy and needs to be continued for the near-term future help dampen the effect of lower gas prices on EDC's 1995 earnings. to further reduce our payout ratio below 70%. In so saying, it is But, when looking at EDC, you should not focus on just price swings important for shareholders to realize that, while they may not receive that cause volatility in earnings. You should also recognize the value dividend increases for a period of time, they are getting value from in our oi l and gas reserves, which is enhanced through the success of the earnings the company retains. To the extent that we reinvest our exploration and development efforts. those funds in the company, we are strengthening our ability to grow future earnings .

Murray: Aquestion raised repeatedly by shareholders revolves *****

Murray: Afew final words, Jim, on Enterprise's prospects.

around mergers of companies undergoing transition to a competitive environment. How about the utility industry?

Ferland: We are about to go through an important and challenging Ferland: The degree to which consolidations occur will be time, and we are starting from a strong fin ancial position. The influenced by the way deregulation takes place. Some utilities may be company earned more in 1994 than it has ever earned. Because of the forced to find a merger partner if they sustain major losses from significant reductions in our capital construction program and because investments that are stranded or left unneeded or unused, because of of a generally sufficient level of generating capacity, we are in our the departure of customers to other energy suppliers. I see no strongest cash flow position in years, able to generate more than evidence at this time that we eventually are going to have, say, only 100%of our utility construction needs from internal sources. The 10 utilities in the country. On the other hand, some of the smaller company's balance sheet is the strongest in decades. We have the companies or companies that are thinly capitalized may find strategies in place to deal with the various issues we will be facing.

themselves in a position where it is necessary to merge. As for We have a management team that is up to the challenge. And we are Enterprise, we are making sure our balance sheet will put us in a working hard on the legislative and regulatory fronts to make sure position to take advantage of any opportunities that may develop. our place in the competitive environment is fair and reasonable and that our stockholders' interests are well served.

• 8 I PSEG 1994 AN U A L REP O RT Strong West Coast Shaping Tomorrow Today: Performance CEA ended 1994 on a high note in terms of Enhancing the operational performance of its five San Francisco Bay area plants, which combine to produce 115 megawatts of electric power. The plants are owned and operated by GWF Power Systems Company, Inc., a Operational partnership of CEA and Harbert International, Inc. During 1994, the GWF plants surpassed their estimated capacity factor of 88% by operating at 92.4%of their theoretical capability. This strong Performance performance was favorably influenced by reduced maintenance outage periods, low forced outage rates and no curtailments of electric production.

Matching Skills to a Job Our future performance will hinge on a revamped organization with new kinds of work force competencies. In 1994, PSE&G introduced a new process of strategic staffing into its business planning. Strategic staffing identifies the skills, competencies and staffing levels required to support business plans and helps pinpoint where gaps currentlyexist. The process also helps to better position employees in jobs where their knowledge and abilities can best be utilized. As part of the process, many jobs have been redefined and some areas of PSE&G, including the customer services and marketing departments, have been reorganized.

EDC Expands Reserves EDC will emphasize oil exploration and development in 1995 to lessen its dependence on natural gas because a decline in domestic natural gas prices during the second half of 1994 reduced the earnings of EDC, as well as those of most other gas producers in the United States. EDC attained a reserve level of 888 billion cubic feet of natural gas equivalent (BCFE) at year-end, an Leaner, Cleaner Energy Production increase during the year of 79 BCFE of proved reserves. Key factors contributing to this Construction continues on the Bergen Generating Station success were major exploratory discoveries in southern Louisiana and the Gulf of Mexico and repowering project, with completion scheduled for acquisition of six production platforms and facilities in the Gulf of Mexico. In addition, EDC summer 1995. The conversion of the existing units to a acquired Industrial combined-cycle operation will add 40 megawatts to the station's Scotland Energy Limited, 629 megawatt capacity, while improving efficiency by 50%- a which expanded its significant competitive advantage. The improvements to the growing onshore/offshore station will enable PSE&G to cut back on the operation of presence in the United some of our older, less efficient plants- further trimming energy Kingdom.

costs. Capital expenditures have been significantly reduced through the use of the existing water treatment plant, transmission lines, transformers, steam turbine generators, roads and infrastructure. Among the project's environmental benefits, nitrogen oxide emissions will be reduced by96%, and thermal water discharge to the Hackensack River will be virtually eliminated.

PSEG 1994 A N NUA L REPORT I 9 Shaping Tomorrow Today:

Innovative Delivering Superior Service An employee team has developed a service strategy to differentiate PSE&G from its competitors through the delive ry Solutions for of superior service to customers. During 1994, PSE&G began implementing several superior service recommendations including dedicating more account managers to serve its largest customers and Customers developing service guarantees to achieve 100%of the basic service delivery require-ments, 100%of the time, to all customers.

Offering Power Quality Expertise Businesses today employ a variety of new technologies and industrial processes which depend on compati-bility between their equipment and on-premise electrical systems and PSE&G's electric distribution system. Despite PSE&G's high standards for electric service quality, occasionally problems arise. To help customers address such situations, PSE&G's Power QualityServices Group (PQSG) provides customers with system-wide solutions to help achieve compatibility between their equipment, systems and internal electric infrastructure and PSE&G 's electric power supply. During 1994, the PQSG assisted 176 customers, a 60%increase over 1993. To enhance its services, the group developed the Premium Electric Power Placing Control in the Customer's Hands Program which, pending regulatory approval, will offer customers enhanced During a press conference at the Statehouse, PSE&GPresident, Larry Codey, power protection products and devices to ensure the protection and improve Governor Christine Todd Whitman and President of AT&T Advance Technology the performance of sensitive customer equipment. Systems, Charles McQueary, announced an agreement between PSE&Gand AT&T to develop an interactive util ity management system to help residential and business customers better control their energy use and costs. The system will also enable utilities to increase efficiency, reduce costs and offer newservices. Using information superhi ghway technology to link utilities to their customers, the system will allowfor automatic meter reading, remote control and monitoring of energy use, automated power outage detection and real-time control of energy conservation devices. By 2001 ,

PSE&Gexpects to have the technology in place at 500,000 customer sites.

Discounts to Retain Municipal Customers While electric utilities in the emerging competitive marketplace will seek out new customers, they must also retain existing ones. During 1994, PSE&Gnegotiated five-year agreements offering price discounts to two municipalities, Milltown and South Rive r, to keep them on its system.

PSE&G, which has supplied Milltown with electric power fo r 70 years, will conti nue to do so under the terms of an arrangement that will save the municipality a total of $1.5 million. The agreement with South Rive r will save that borough approximately $3 million. The towns are among nine in New jersey- and three in PSE&G's service territory- which own municipally-run electric companies. In 1993, Park Ridge also signed a five-year agreement to continue purchasing power from PSE&G.

10 I PSEG 1994 A , N LI A L REP O RT Shaping Tomorrow Today:

Exploration of New Markets and Services Jump-starting the NGV Market The Board of Public Utilities (BPU) injune gave final approval to a three-part PSE&G proposal to encourage the use of natural gas vehicles ( GVs) , including a vehicle-rate schedule for compressed natural gas, Reducing Demand, Increasing Revenues a $1 ,000 rebate to purchasers of GVs and through Conservation a plan to establish fueling stations. An PSE&G's Core Conservation and Standard Offer programs are a win important first step in building the for both customers and PSE&G. Customers benefit from lower monthly necessary fueling infrastructure came in energy costs; PSE&G from the avoided costs of not having to build August, when PSE&G reached an new electric generation facilities to satisfy demand and from rate-agreement with the Shell Oil Company to making treatment that compensates for conservation initiatives.

install a compressed natural gas fueling CEA Poised for Core Conservation programs include rebates, energy audits and facility at a Shell station in jersey City near International Sales conservation loans. The Standard Offer is the first utility demand-the Holland Tunnel. Making natural gas During 1994, CEA completed an extensive market side management (DSM) program in the United States to provide more available as a motor vehicle fuel research study to identify high potential domestic customers with standardized contract payments for measured energy provides attractive transportation options and international markets. Using that information, savings achieved through conservation investments. Some 600 for New jersey residents and businesses and CEA established a goal to build international customers currently participate. The Standard Offer has helped helps the state meet Clean Air Act investments to 50%of its total portfolio by 2000.

create a new industry in New jersey by allowing independent energy mandates. PSE&G has incorporated 273 The goal will be achieved through a combination service companies (ESCOs) to contract for energy savings on a NGVs into its corporate fleet. By the year of new project development and acquisition customer's behalf. During 1994, our own ESCO, Public Service 2000, PSE&G expects that 60% of its fleet initiatives with strategic partners in target country Conservation Resou rces Corporation , signed contracts for the will be powered by natural gas. markets. To better position itself in its target development or financing of DSM projects representing 35 markets, CEA established an international megawatts of peak demand savings.

office network. Regional offices were opened in 237 San Francisco, Houston, Hong Kong, ew Delhi and Buenos Aires.

Offering Services to Other Utilities In reviewing its customer services operation, PSE&G has recogni zed an opportunity to develop and market new services using its existing resources. Beginning in I995, PSE&G will offer its meter reading, billing, payment processing, inquiry center and collections services to municipalities and select utilities. Initially, PSE&G will target the 88 municipal and six private water utilities with meters which overlap a portion of its electric and/or gas franchise territory. Asix-month pilot project to provide payment processing services was launched in September. Under the arrangement, PSE&G's Hoboken customer service center is accepting payments for Hoboken Water Services.

PSEG 1994 A IN LI A L REPORT I 11 Generating Less, Shaping Tomorrow Today: Recycling More In 1992, PSE&G established two Initiatives to corporate goals: to recycle 75% of all nonhazardous solid waste, and to reduce its generation of hazardous waste by 30%by 1995. As of year-end 1994, PSE&G has achieved both objectives. Achange in Protect Our our materials management philosophy was critical to our success. By linking our procurement and waste disposal functions, PSE&G has been able to more carefully control inventory and reduce Environment disposal costs. PSE&G is now using a corporate-wide waste accounting system to identify and track waste streams. In addition, PSE&G is now processing solid waste at the state's first automated materials recovery facility instead of landfills. PSE&G established a corporate resource recovery center in Paulsboro, N.j., to extend the useful life of many products. And, PSE&G is recycl ing more of its waste products, such as asphalt, scrap wire and metal, concrete and coal ash, into useful materials.

New Water Discharge Permit for Salem Station In July, the ew jersey Department of Environmental Protection issued a five-yea r water discharge permit for PSE&G' Salem Station. That action ended nearly fou r years of debate since the agency outlined conditions of a proposed permit in 1990 The 1990 permit would have required PSE&G to severely limit the withdrawal of water from the Delaware River and spend up to $2 billion to build cooling towers in an effort to minimi ze the station's impact on marine life.

The permit is based on a proposal made by PSE&G Cutting Emissions at Mercer to make certain plant modifications and enh ance the PSE&G is pursuing multiple strategies for ecology of the Delaware Estuary in a balanced way that reducing air emissions at its fossil fuel electric makes both environmental and economic sense.

generating stations. Specifically, at Mercer One aspect of the permit requires PSE&G to restore or Generating Station, PSE&G recentlycompleted enhance 10,000 acres of wetlands. The permit also testing of an in-duct selective catalytic requires PSE&G to conduct a biological monitoring reduction (SCR) system at Mercer Unit 2. This program to determine whether the plant's operation was the first application of this technology on has an impact on aquatic life.

a wet bottom coal-fired boiler in the world.

The in-duct SCR technology demonstrated nitrogen oxide (NOx) emission reductions of more than 80%. As a result, PSE&G is planning a phased-in installation of the technology at various facilities begin ning in 1997.

Leading the Way for Cleaner Air PSE&G has emerged as a leader in the quest for a healthier environment. In 1992, PSE&G established the most aggressive air emission reduction target set by any utility to cut emissions of NOx by 60% by 1995 and 80% by 2000. In March, PSE&G and Northeast Utilities Company announced an agreement outlining the first interstate Ox emissions trade. Working with Merck and Co.,

Inc. and Texaco Inc., PSE&G also helped lead the way for a regional strategy to cut the Ox emissions of large stationarysources throughout the Northeast.

To help reduce greenhouse gas emissions, PSE&G was the first utility in the country to sign on to the U.S. Department of Energy's voluntary Global Climate Challenge by pledging to stabilize carbon dioxide emissions at 1990 levels by the year 2000. PSE&G on February 7, 1995, became the only electric utility in the nation to enter into a separate agreement with the Environmental Defense Fund to certify achievement of emission reduction goals. Present for the signing at the Uni ted Nations headquarters were PSE&G President Larry Codey and the Executive Director of the Environmental Defense Fund, Fred Krupp.

12 I PSEG 1994 A NN UAL REP O RT Management's Discussion and Analysis of PSE&G Energy and Fuel Adjustment Clauses PSE&G has fuel and energy tariff rate adjustment clauses which are Financial Condition and Results of Operations designed to permit adjustments for changes in electric energy and gas supply costs and certain other costs as approved by the BPU, when Enterprise compared to cost recovery included in base rates. Charges under the Following are the significant factors affecting the consolidated clauses are primarily based on energy and gas supply costs which are financial condition and the results of operations of Public Service normally projected over twelve-month periods. The changes in the Enterprise Group Incorporated (Enterprise) and its subsidiaries. This Levelized Gas Adjustment Charge (LGAC) and the electric Levelized discussion refers to the Consolidated Financial Statements and Energy Adjustment Clause (LEAC) do not directly affect earnings related Notes of Enterprise and should be read in conjunction with because such costs are adjusted monthly to match amounts recovered such statements and notes. through revenues. However, the carrying of underrecovered costs ultimately increases financing costs. PSE&G is also required to pay Overview interest on net overrecovered costs. Under the clauses, if actual costs Enterprise has two direct wholly owned subsidiaries, Public Service differ from the costs recovered, the amount of the underrecovery or Electric and Gas Company (PSE&G) and Enterprise Diversified overrecovery is deferred and is reflected in the average cost used to Holdings Incorporated (EDHI). Enterprise's principal subsidiary, determine the fuel and energy tariff rate adjustment for the period in PSE&G, is an operating public utility providing electric and gas service which it is recovered or repaid. Actual costs otherwise includable in in certain areas in the State of New Jersey. the LEAC are subject to adjustment by the BPU in accordance with its EDHI is the parent of Enterprise's nonutility businesses: Energy nuclear performance standard (NPS) . (See Note 2 - Rate Matters Development Corporation (EDC), an oil and gas exploration and and Note 12 - Commitments and Contingent Liabilities of otes.)

production and marketing company; Community Energy Alternatives Incorporated (CEA) , an investor in and developer of cogeneration and Competition independent power production (!PP) facilities and exempt wholesale Ongoing initiatives affecting PSE&G's electric and gas utility businesses generators (EWGs); Public Service Resources Corporation (PSRC), associated with the continuing transition to a competitive market which has made primarily passive investments; and Enterprise Group environment will have an increasingly significant impact on Enterprise Development Corporation (EGDC) , a diversified nonresidential real and PSE&G. Federal legislation, including the National Energy Policy estate development and investment business. EDHI also has two finance Act (NEPA), as well as regulatory initiatives at both the federal and state subsidiaries: PSEG Capital Corporation (Capital), which provides levels that are designed to promote competition and lessen regulation privately placed debt financing on the basis of a minimum net worth of the energy supply industry can be expected to result in additional maintenance agreement from Enterprise and Enterprise Capital pressures on customer retention due to energy prices, especially with Funding Corporation (Funding), which provides privately placed debt respect to larger industrial and commercial customers. Growth financing guaranteed by EDHI but without direct support from potential is limited in PSE&G's mature service territory.

Enterprise. The shift of rate regulation from traditional concepts based upon As of December 31, 1994 and December 31, 1993, PSE&G comprised rate base/rate of return to concepts based upon market competition and 85% and 86%, respectively, of Enterprise assets. For each of the years service is accelerating. As a result, added emphasis will be placed upon 1994, 1993 and 1992, PSE&G revenues were 93% of Enterprise's cost reduction. Utilities and their regulators will need to develop revenues and PSE&G 's earnings available to Enterprise for such years flexible ratemaking strategies to minimize adverse impacts which were 91%, 96% and 88%, respectively, of Enterprise's net income. might otherwise occur to revenues and earnings and to maximize The major factors which will affect Enterprise's future results potential opportunities presented by deregulation. The manner in include general and regional economic conditions, PSE&G's customer which regulators address evolving competitive issues will also affect retention and growth, the ability of PSE&G and EDHI to meet competi- utility credit quality and the carrying value of assets.

tive pressures and to contain costs, the adequacy and timeliness of rate The transition to a competitive market environment will cause relief, cost recovery and necessary regul atory approvals, the ability to changes from traditional utility ratemaking and is likely to affect continue to operate and maintain nuclear programs in accordance utilities' ability to recover costs, resulting in these costs being with Nuclear Regulatory Commission (NRC) and New Jersey Board of "stranded." Stranded costs are costs and liabilities that were incurred Public Utilities (BPU) requirements, the impact of environmental by regulated utilities as a result of the regulatorycompact among regulations, continued access to the capital markets and continued utilities, regulators and customers which are no longer recoverable favorable regulatory treatment of consolidated tax benefits. (See Note 2 from such customers due to changes in the regulatory framework that

- Rate Matters, Note 10 - Federal Income Taxes and Note 12 - allow such customers to change electric suppliers before paying for the Commitments and Contingent Liabilities of Notes to Consolidated costs the utility has incurred on their behalf. Potential stranded costs Financial Statements ("Notes").) include but are not limited to: generation assets; long-term purchase power and fuel contracts; "regulatory assets" - Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71), which are expenses that have been deferred pending recovery from customers; and costs which regulators have ordered utilities to incur to fulfill a variety of broader social purposes (including such things as energy conservation costs

PSEG 199 4 AN U A L REPO RT I 13 such as demand-side management (DSM)). More competitive electric EDHI wholesale markets, proposals to authorize retail wheeling or direct retail PSRC 14 .06 (7) (.04)

CEA 2 .01 3 .01 access within utility franchise areas, but not New Jersey to date, as well EDC (34) (.14) 17 .07 as the recent Federal Energy Regulatory Commission's (FERC) notice of EGDC 54 .22 (49) (.20) proposed rulemaking on stranded costs have brought to the forefront the Subtotal 36 .15 (36) (.16) issue of potential stranded costs. If changes in rate regulation ultimately Net Income $ 78 .32 $ 97 .42 require a recognition of any such stranded costs, asset write-downs for Effect of additional shares of Enterprise utilities, including PSE&G, may occur. At this time, management Common Stock issued (.04) (.09) cannot predict the level of transition costs or stranded costs resulting Total $.28 $.33 from industry deregulation, if any, or whether utility regulators will The average shares of Enterprise Common Stock outstanding were allow recovery of any such transition costs from customers. In addition, 244,470,794 for 1994, 240,663,599 for 1993 and 232,306,492 for 1992, PSE&G cannot presently quantify what the financial statement impact respectively.

may be if depreciation expense is determined absent regulation.

However, if any such amounts are not recovered, the impact on the financial position, results of operations or net cash flows of PSE&G and PSE&G Enterprise could be material. (See Note 1- Organization and In 1994, PSE&G's earnings available to Enterprise increased by Summary of Significant Accounting Policies and Note 2- Rate Matters $42 million . The increase was primarily due to higher electric of Notes.) commercial sales and firm gas residential and commercial sales.

Further, competition will force utilities, including PSE&G, to Electric kilowatthour (KWH) commercial sales increased 2%and total operate more cost effective and efficient plants, particularly in light of gas therms sold and transported increased 2.3%, respectively, the technological advantages available to new entrants, which unlike principally due to weather and a modest improvement in New Jersey's utilities, do not operate older, less efficient units. Recovery of related economy. Also benefitting earnings was the decrease in Federal costs by utilities, including PSE&G, will depend upon the decisions of income tax expense resulting from the receipt of a nontaxable the regulators, which cannot be predicted, or the ability to sell the insurance benefit partially offset by higher pre-tax operating income.

electricity generated by such plants in the emerging wholesale power In addition, higher AFDC was a benefit to earnings due to greater market. For discussion of PSE&G's renovation project at Bergen, see construction, partially offset by a slightly reduced 1994 AFDC rate. The Note 12 - Commitments and Contingent Liabilities of Notes. major factors adversely affecting earn ings were higher other operation The BPU has issued the first phase of a draft revised Energy Master expenses, comprised primarily of miscellaneous nuclear production Plan which acknowledges the need for regulatory flexibility as expenses, employee benefits expenses and increased accruals for competition unfolds and calls for legislation that would allow New uncollectible customer accounts, increased depreciation and Jersey utilities to propose, subject to BPU approval, alternatives to amortization expenses due to more utility plant in service, higher existing rate base/rate of return pricing, allow for pricing flexibility interest charges due to a higher average daily balance of short-term under certain standards for customers with competitive options and debt outstanding at higher interest rates and higher maintenance equalize the impact of tax policies, such as New Jersey Gross Receipts expenses, principally at Hope Creek nuclear station due to the spring and Franchise Tax (NJGRT), upon energy producers. Management 1994 refueling outage. .

cannot predict the ultimate form of any legislative or regulatory In 1993, excluding the $33 million net effect of the settlement of changes which may be adopted as a result of this revised Energy litigation against Philadelphia Electric Company, now known as Master Plan. PECO Energy, Inc. (PECO) , in connection with the 1987 shutdown of Peach Bottom Atomic Power Station, Units 2 and 3 (Peach Bottom)

Enterprise Earnings by the NRC, PSE&G's earnings available to Enterprise increased by Earnings per share of Enterprise Common Stock were $2.78 in 1994, $2.50 $166 million. The principal contributing factors to the increase in in 1993 and $2.17 in 1992. The changes are summarized as follows: earnings available to Enterprise were PSE&G's higher electric and gas 1994 vs. 1993 1993 VS . 1992 base rates that became effective January 1, 1993 and a substantial In millions, except per share data Amount Per Share Amount Per Share increase in electric KWH sales. (See Revenues below.) The increase in PSE&G electric sales was primarily due to the abnormally warm summer Revenues (net of fuel costs and weather. Partially offsetting the increase in earnings were higher gross receipts taxes) $ 144 $ .60 $347 $1.49 other operation expenses (comprised primarily of labor and Peach Bottom Settlement (net of Federal income taxes) - - (33) (.14) employee benefits costs and miscellaneous nuclear production costs) ,

Other operation expenses (77) (.32) (62) (.26) higher depreciation and amorti zation and higher Federal income Maintenance expenses (3) (.02) 3 .01 taxes resulting from increased pre-tax operating income and an Depreciation and amortization expenses (29) (. 12) (1 5) (.06)

Federal income taxes 14 .06 (113) (.49) increase in the Federal corporate income tax rate, effectiveJanuary Other taices (9) (.04) (I) - 1993. (See Note 10 - Federal Income Taxes of Notes.)

Interest charges (6) (.02) 12 .05 Allowance for Funds used During Construction (AFDC) 11 .05 - - EDHI Preferred Securities Dividend Requirements (4) (.02) (6) (.02) The net income of EDHI was $60 million in 1994. Excluding the Other income and expenses 1 - 1 - impact of an impairment of assets of $51 million, after tax, by EGDC Earnings Available to Enterprise 42 .17 133 58 in 1993, EDHI's earnings in 1994 decreased $15 million in compari-

14 I PSEG 1994 A N UAL REPORT .

son to 1993. Increased income from PSRC (higher investment income, Increase or (Decrease) lower income taxes compared to 1993 which included the effects of a In millions 1994 VS. 1993 1993 VS . 1992 Federal income tax increase and lower interest charges) and CEA Kilowatthour sales $ 69 $ 67 (higher income from operating plants) was offset by lower EDC Base rate increase effective January I, 1993 244 earn ings (lower gas volumes and prices and higher exploration and Tax Reform Act of 1986 13 Recovery of energy costs (26) (52) development expenditures due to increased drilling activities). NJGRT (4) 17 To the extent that the prices at which EDC is able to sell gas remain Other operating revenues 1 (4) low, EDHI's earnings may continue to be negatively impacted. For infor- Total Electric Revenues $ 40 $285 mation concerning certain of PSRC's direct-finance aircraft leases, see Note 12 - Commitments and Contingent Liabilities of Notes. Changes in kilowatthour sales by customer category are described The net income of EDHI was $24 million in 1993, a decrease of $36 below:

Increase or (Decrease) million from 1992. The decrease in EDHI's net income was due primarily to EGDC's recording of an impairment related to certain 1994vs 1993 1993vs 1992 real estate properties, including properties upon which management Residential (0.4)% 83%

revised its intent from a long-term investment strategy to a short-term Commercial 2.0 3.7 Industrial 0.5 (1.0) hold for sale status, reflecting such properties at their net realizable Total Sales of Electricity to Customers 1.0 3.7 value. This impairment reduced EDHI's earnings by $5 1 million, after tax, or 21 cents per share of Enterprise Common Stock. Partially 1994 - The increase in electric revenues was primarily due to offsetting this decrease was an increase in the earnings of EDC due to higher kilowatthour sales, partially offset by lower recovery of energy the higher price of natural gas. Exclusive of the recorded impairment, costs. The increase in kilowatthour sales is due to higher commercial EDHI's net income would have been $75 million for 1993.

and industrial sales as a result of an improving economy. Residential sales were below last year's levels due to the abnormally warm Dividends summer weather experienced in 1993.

The ability of Enterprise to declare and pay dividends is contingent 1993 - The increase in electric revenues over 1992 was primarily upon its receipt of dividend payments from its subsidiaries. PSE&G due to the base rate increase which became effective January 1, 1993, has made regular payments to Enterprise in the form of dividends on partially offset by the larger LEAC credit also effective January 1, 1993.

outstanding shares of its common stock since Enterprise was formed Abnormallywarm summer weather resulted in a significant increase in in 1986. In addition, commencing in 1992, EDHI has also made weather sensitive sales during 1993. Increased competition from nonutil-payments to Enterprise in the form of dividends on its outstanding ity generators (NUGs) and an unscheduled maintenance shutdown at common stock. .

PSE&G's largest industrial customer negatively impacted industrial sales.

Dividends paid to holders of Enterprise Common Stock increased

$6 million during 1994 compared to 1993 and increased $18 million PSE&G Gas during 1993 compared to 1992. The increase in dividend payments Revenues increased $184 million, or 11.6%, during 1994 over 1993; for 1994 over 1993 and for 1993 over 1992, respectively, was due to 1993 revenues increased $8 million, or 0.5%, over 1992. The significant the issuance of additional shares of Enterprise Common Stock.

components of these changes follow:

Dividends paid to holders of PSE&G's Preferred Stock increased $2 Increase or (Decrease) million during 1994 compared to 1993 and $6 million during 1993 In millions 1994 VS. 1993 1993 VS. 1992 compared to 1992. The increase in such dividends was due to the Therm sales $ 61 $(29) issuance of additional shares of PSE&G's Preferred Stock, partially Base rate increase effective January 1, 1993 48 offset by reduced dividend requirements resulting from the Recovery of fuel costs 121 15 JGRT (12) (5) redemption of certain higher cost series of Preferred Stock. (See Other operating revenues 14 (21)

Liquidity and Capital Resources.)

Total Gas Revenues $ 184 $ 8 Dividends payable to holders of Monthly Income Preferred Securities (MIPS) of Public Service Electric and Gas Capital, L.P.

Changes in gas revenues sold and transported by customer (Partnership), a limited partnership of which PSE&G is the general category are described below:

partner, aggregated $2 million for 1994. (See Note 4 - Schedule of Increase or (Decrease)

Consolidated Capital Stock and Other Securities of Notes.) 1994 VS. 1993 1993 VS. 1992 Residential 4.5% 1.2%

Revenues Commercial 3 .4 Industrial 4.1 18.5 Transportation Service (2.3) 2.6 PSE&G Electric Revenues increased $40 million, or 1.1%, in 1994 from 1993; 1993 Total Gas Sold and Transported 2.3 4.9 revenues increased $285 million, or 8.4%, compared to 1992. The significant components of these changes follow: 1994 - The increase in gas revenues was primarily due to an increase in the recovery of fuel costs, principally due to higher fuel rates, higher sales and significantly lower customer refunds.

Residential, commercial and industrial sales increased due to

PSEG 1994 A N U A L REPO RT I 15 favorable weather conditions and an improving economy. Sales to Gas Supply Costs cogenerators was the largest contributor to the increase in industrial Gas supply costs increased $126 million, or 14.0%, in 1994 compared sales as cogeneration average customer usage continues to increase. to 1993 and $39 million, or 4.6%, in 1993 compared to 1992. The Transportation sales decreased due to storm-related service significant components of these changes follow:

interruptions in January and February. Increase or (Decrease) 1993 - The increase in gas revenues over 1992 was primarily In millions 1994 vs. 1993 1993 vs. 1992 attributable to the base rate increase which became effective January Change in prices paid for gas supplies $(10) $ 117 1, 1993 and the higher recovery of fuel-related costs. Sales to Therm sendou t 31 41 Refunds from pipeline suppliers (2 1) 33 cogenerators was the largest contributor to the increase in industrial Adjustment of actual costs to match recoveries sales as cogeneration average customer usage for electric generation through revenues (A) 126 (152) continued to increase. Transportation service sales reflect the Total Gas Supply Co ts $126 $ 39 movement of some interruptible customers to transportation service.

(A) Reflects the change in the deferred over(under)recovered gas supply costs,which in the years 1994, 1993 and 1992 amou nted to $26 million, $(100)million and $52 EDHI million, respectively. (See PSE&G Energy and Fuel Adjustment Clauses and ote 2 EDHI revenues decreased $23 million, or 5%, during 1994 from 1993; - Rate Matters of Notes.)

1993 revenues increased $30 million, or 7%, over 1992. The 1994- The increase in total costs was principally due to the significant components contributing to such results were as follows: overrecovery of fuel costs and increased sales to nonutility generators Increase or (Decrease) ( UGs), partially offset by lower gas prices.

• In millions 1994 vs. 1993 I993 vs. 1992 1993 - The increase in total costs was principally due to greater EDC $(46) $30 sales to NUGs and other customers, higher gas costs and higher therm CEA 17 10 sendout resulting from the colder 1993 winter season compared to the PSRC 10 (11)

EGDC (4) I 1992 winter season. The increase in costs was reduced by deferred Total EDHI Revenues $(23) $30 underrecovered 1993 gas costs resulting from the BPU approved adjustment in PSE&G's LGAC, effective January 1, 1993 of $71 million 1994 - EDC's revenues decreased due to lower natural gas on an annualized basis through December 31, 1993. The adjustment volumes ($29 million) and prices ($17 million). CEA's revenues reflects lower gas costs and the inclusion of $15.1 million of increased as a result of greater income from operating projects. conservation program costs in LGAC. In addition, gas customers PSRC's revenues increased due to higher income from partnerships. received $45 million of credits during the first quarter of 1993.

1993 - EDC was the largest contributor to the EDHI revenue Liquidity and Capital Resources increase due to the higher price of natural gas. CEA revenues Enterprise's liquidity is affected by maturing debt (see Note 6-increased as a result of greater income from operating projects.

Schedule of Consolidated Debt of Notes), investment and acquisition PSRC revenues decreased due to unrealized losses on investments activities, the capital requirements of PSE&G's construction program, and lower income from leases.

permitted regulatory recovery of expenses and collection of revenues.

Capital resources available to meet such requirements depend Electric Energy Costs upon the factors noted above under Overview. (See Construction, Electric energy costs decreased $21 million, or 3.0%, in 1994 Investments and Other Capital Requirements Forecast below.)

compared to 1993 and $59 million, or 7.7%, in 1993 compared to 1992. The significant components of these changes follow: PSE&G Increase or (Decrease) For 1994, PSE&G had utility plant additions, including AFDC, of $887 mil-In millions 1994 vs. 1993 1993 vs. 1992 lion, a decrease of $3 million versus 1993 additions of $890 million. Addi-Change in prices paid for fuel and power purchases $ 12 $ 18 tions in 1993 increased $63 million from 1992 additions of $827 million.

Kilowatthour generation 9 29 AFDC for 1994, 1993 and 1992 amounted to $38 million, $27 million Adjustment of actual costs to match recoveries through revenues (A) (42) (106) and $26 million, respectively. Construction expenditures were related to improvements in PSE&G's existing power plants, Total Electric Energy Costs $ (21) $ (59) transmission and distribution system, gas system and common (A) Reflects the change in the deferred over(under) recovered energy costs, which in facilities. PSE&G also expended $34 million, $48 million and $40 the years 1994, 1993 and 1992 amounted to $(135) million, $(93)mi llion and $13 million, respectively. (See PSE&G Energy and Fuel Adjustment Clauses and Note 2 million for the cost of plant removal (net of salvage) in 1994, 1993

- Rate Matters of Notes.) and 1992, respectively. Construction expenditures from 1995 through 1999 are expected to aggregate $3.2 billion. Forecasted construction 1994- The decrease in total costs was principally due to the expenditures are related to improvements in PSE&G's existing power underrecovery of energy costs, partiallyoffset by a 12%increase in plants, transmission and distribution system, gas system and purchased power costs and a 1%increase in kilowatthour generation. common facilities. (See Construction, Investments and Other Capital 1993- The decrease in total costs was the result of an adjustment Requirements Forecast below.)

in the recovery of energycosts resulting from the base rate case decision effective January 1, 1993, partially offset by a 17% increase in nuclear kilowatthour generation and an 11%increase in purchased power costs.

16 I PSEG 1994 A NUAL REPORT Decommissioning and other special funds, excluding interest, effects of EGDC of 1.94:1, 2.13:1and1.88:1, respectively. Compliance increased $35 million, $46 million and $9 million in 1994, 1993 and with applicable financial covenants will depend upon future levels of 1992, respectively. (See ote 3- PSE&G uclear Decommissioning earnings, among other things, as to which no assurance can be given.

and Amortization of Nuclear Fuel of Notes.) (See Note 6- Schedule of Consolidated Debt and Note 16 - Property PSE&G expects that it will be able to generate internally a majority Impairment of Enterprise Group Development Corporation of Notes.)

of its capital requirements including construction expenditures over the next five years, assuming adequate and timely recovery of costs as to Long-Term Investments and Real Estate which no assurances can be given. (See Note 2 - Rate Matters and Long-Term Investments and Real Estate, which are primarily those of ote 12 - Commitments and Contingent Liabilities of otes.) EDHI, decreased $58 million and $67 million in 1994 and 1993, respectively, and increased $61 million in 1992. The decrease in 1994 EDHI is primarily due to a $73 million net decrease in PSE&G's investment During the next five years, a majority of EDHI's capital requirements are in an insurance contract, partially offset by an increase in Public expected to be provided from operational cash flows. (See Construction, Service Conservation Resources Corporation's (a PSE&G subsidiary)

Investments and Other Capital Requirements Forecast below.) EDHI's Long-Term Investments of $23 million. The decrease in 1993 is due focus is on CEA and EDC, its energy-related core businesses. CEA is primarily to EDHI's decrease in Long-Term Investments of $63 expected to be the primary vehicle for EDHI's business growth, both million. The increase in 1992 is due primarily to EDHI's increase in domestically and internationally. Asignificant portion of CEA's growth is investments in real estate of $77 million. (For more details, see Note 7 expected to occur in the international arena, due to the current and - Long-Term Investments and Note 11- Leasing Activities -As anticipated growth in electric capacity required in certain regions of the Lessor of Notes.)

world. EDC is projected to grow its reserve base, principally through exploration and drilling, in order to maintain an annual production Construction, Investments and level of 130-140 billion cubic feet equivalent (BCFE). EDC's worldwide Other Capital Requirements Forecast 1994 production totaled 108 BCFE and at year end had proved reserves of The estimated construction requirements of PSE&G, including AFDC, 888 BCFE. EDC expended approximately $188 million, $109 million and investments and other capital requirements of PSE&G and EDHI for

$56 million in 1994, 1993 and 1992, respectively, to acquire, discover or 1995 through 1999 are based on expected project completion dates, develop domestic and international reserves. Of these expenditures, $154 included anticipated escalation due to inflation of approximately 3%

million, $91 million and $36 million in 1994, 1993 and 1992, for utility projects and are as follows:

respectively, were capitalized. These amounts included capitalized In millions 1995 1996 1997 1998 1999 Total interest of $4 million, $3 million and $4 million, respectively. PSE&G PSRC will limit new investments to those which support EDHI's Electric core businesses, while EGDC will exit the real estate business in a uclear Production Facilities $ 89 85 66 $ 65 $ 66 $ 371 prudent manner. Over the next several years, EDHI and its subsidiaries Nuclear Fuel 96 90 87 112 99 484 Transmission and Distribution 165 185 175 163 175 863 will also be required to refinance a portion of their maturing debt in Other Production 166 118 42 52 58 436 order to meet their capital requirements. Any inability to extend or Conservation and Other 45 39 37 33 29 183 replace maturing debt at current levels and interest rates may affect Total Electric 561 517 407 425 427 2,337 future earnings and result in an increase in EDHI's cost of capital. Gas Apartnership, in which EGDC is an 80% partner ($21 million equity Production Facilities 2 2 4 investment), is currently negotiating to extend or replace a mortgage Transmission and Distribution 136 141 143 143 143 706 financing of $40.2 million which is maturing on February 28, 1995. Total Gas 138 143 143 143 143 710 EGDC has guaranteed $5.3 million of the financing. No assurances can Miscellaneous Corporate 46 38 35 35 35 189 be given that EGDC or the partnership will be able to extend this loan Total Construction or obtain a replacement loan in the amount of the existing loan. Requirements of PSE&G 745 698 585 603 605 3,236 Failure to extend or replace the existing loan at the current outstanding EDHI 242 175 125 153 149 844 loan balance, or at current interest rates, may result in an increase in Mandatory Retirement of Securities:

the amount of capital which EGDC will require. PSE&G 310 300 118 100 828 EDHI 190 91 125 196 200 802 PSRC is a limited partner in various limited partnerships and is committed to make investments from time to time, upon the request of 500 91 425 314 300 1,630 the respective general partners. At December 31, 1994, $134 million Working Capital and Other-net 101 43 41 21 21 227 remained as PSRC's unfunded commitment subject to call.

EDHI and each of its subsidiaries are subject to restrictive business Total Capital Requirements $1,588 $1,007 $1 ,176 $1,091 $1 ,075 $5,937 and financial covenants contained in existing debt agreements and are required to not exceed various debt to equity ratios which vary from 3:1 While the above forecast includes capital costs to comply With revised to 1.75:1. EDHI is also required to maintain a twelve-months earnings Federal Clean Air Act (CAA) requirements through 1999, it does not (before interest and taxes) to interest (EBIT) coverage ratio of at least include additional requirements being developed under the CAA by 1.35:1. As of December 31, 1994 and 1993, EDHI had consolidated debt Federal and State agencies. Such additional costs cannot be to equity ratios of 1.15:1and1.34:1 and, for the years ended December reasonably estimated at this time. PSE&G believes that such CAA costs 31, 1994, 1993 and 1992, EBIT coverage ratios, as defined to exclude the would be recoverable from electric customers.

PSEG 1994 AN UAL REPORT I 17 Internal Generation of Cash from Operations (C) Under the terms of PSE&G's Mortgage and Restated Certificate of Incorporation at Enterprise's cash provided by operating activities for 1994 increased December 31, 1994, PSE&G would qualify to issue an additional $3.511 billion of its First and Refunding Mortgage Bonds (Bonds) at a rate of 8.875% or $3.017 billion of Preferred

$200 million to $1.232 billion when compared to 1993. This increase Stock at a rate of 8.750%. PSE&G's Restated Certificate of Incorporation currentlylimits the was primarily due to the increase in net income of $78 million, higher issuance of Preferred Stock to $1.0 billion, of which $535 million is outstanding.

recovery of electric energy and gas costs through PSE&G's LEAC and ln addition, as a prerequisite to the issuance of additional Bonds, PSE&G's Mortgage LGAC of $74 million, a decrease in accounts receivable of $152 requires a 2: I ratio ofearnings to fixed charges as computed thereunder. For 1994, such million, a decrease in accrued taxes of $35 million, a positive net ratio was 3.62: I. The ratio of earnings to fixed charges as required bythe Securities and Exchange Commission was 3.35: I.

change in certain other current assets and liabilities of $57 million The BPU has authorized PSE&G to issue $370 million of Bonds/Medium-Term Notes and a positive net change in certain noncurrent assets and liabilities, (MTNs) through 1996 for refunding purposes.

primarily deferred amounts, of $61 million. Partially offsetting these The BPU has authorized PSE&G to issue not more than$ l billion of its short-term cash inflows were a decrease in accounts payable of $181 million and obligations at any one time outstanding, consisting of commercial paper and other the loss from property impairments in 1993 of $78 million. (For unsecured borrowings from banks and other lenders through January 1, 1997. On December 31 , 1994, PSE&G had $308 million of short-term debt outstanding.

additional information see Enterprise Earnings and Revenues.)

PSE&G renewed and increased to $800 million a revolving credit agreement with a group Although net income increased in 1993 (see Enterprise Earnings of commercial banks through September 14, 1995 On December 31, 1994, there were no and Revenues), net cash provided by operating activities decreased by short-term borrowings outstanding under this credit agreement.

$292 million from 1992 to $1.032 billion. This decrease was primarily For additional detail, see Note 4-Schedule of Consolidated Capital Stock and Other due to an underrecovery of electric energy and gas costs through Securities and Note 6-Schedule of Consolidated Debt of Notes.

PSE&G's LEAC and LGAC of $306 million, a decrease in accrued taxes (D) PSE&G Fuel Corporation (Fuelco) has a $150 million commercial paper program to of $332 million (primarily increased NJGRT payments) , and a finance a 42.49% share of Peach Bottom nuclear fuel, supported by a $150 million revolving credit facility with a group of banks, which expires on June 28, 1996 PSE&G has guaranteed decrease in depreciation and amortization of $42 million. Partially repayment of Fuelco's respective obligations. As ofDecember 31, 1994, Fuelco had offsetting these cash outflows were the increase in net income of $97 commercial paper of $93.7 million outstanding under such program.

million, increases in deferred income taxes of $112 million, inventory (E) Enterprise's long-term debt aggregated $5.181 billion as of December 31 , 1994, of which decreases in fuel and materials and supplies of $54 million, increases $4.487 billion was attributable to PSE&G and $694 million to EDH I.

in accounts payable of $57 million and a loss from property impair- During 1994, PSE&G issued a total of $850 million principal amount of its Bonds/ MTNs.

ments of $78 million. The net proceeds from the sale of the Bonds were used by PSE&G to redeem or defease $474 million of its higher cost Bonds and to paya portion of its current construction program.

External Financings For additional detail see Note 6-Schedule of Consolidated Debt of Notes.

Enterprise Consolidated Cash Flows from Financing Activities (F) In February 1994, PSE&G issued and sold $75 million of its Cumulative Preferred Stock.

In March 1994, PSE&G used the funds from the above sale to redeem $45 million of its In millions 1994 1993 1992 higher priced Preferred Stock. The remaining funds were added to the general funds of Enterprise (Parent Company) PSE&G and used to pay a portion of its then outstanding short-term debt obligations, which Issuance of Common Stock (A) $ 28 $ 273 $ 237 were principally incurred to fund a portion of its construction expenditures. In December Cash Dividends paid on Common Stock (B) (528) (522) (503) 1994, PSE&G redeemed an additional $75 million of its Preferred Stock.

Total Enterprise (Parent Company) (500) (249) (266) The BPU has authorized PSE&G to issue not more than $180 million of Preferred Stock through 1995 PSE&G (C) For additional detail see ote 4-Schedule of Consolidated Capital Stock and Other Net (decrease) increase in Short-Term Debt (D) (131) 275 92 24 (JO) 24 Securities of Notes.

Increase (decrease) in Book Overdrafts Issuance of Long-Term Debt (E) 850 1,973 850 (G) In November 1994, Public Service Electric and Gas Capital, L.P.(Partnership) issued Redemptions of Long-Term Debt (479) (1 ,716) (l ,032) $150 million of MonthlyIncome Preferred Securities (M !PS), the proceeds of which were Long-Term Debt Issuance and Redemption Costs (30) (68) (19) loaned to PSE&G and used to redeem $75 million of Preferred Stock and the payment of Issuance of Preferred Stock (F) 75 75 75 construction expenditures.

Redemption of Preferred Stock (120)

For additional detail see Note 4-Schedule of Consolidated Capital Stock and Other Issuance of Monthly Income Preferred Securities (G) 150 Other (2) (6) (6) Securities of Notes.

Total PSE&G 337 523 (16) (H) Funding has a commercial paper program, supported by a commercial bank letter of credit and credit facil ity, through November 18, 1995 in the amount of $225 million. As of EDHI (H) December 31, 1994, Funding had $90 million of borrowings outstanding under this program.

Net increase (decrease) in Short-Term Debt 45 (90) (89)

Funding has a $225 million revolving credit facility which terminates on ovember 18, Issuance of Long-Term Debt 165 30 Redemptions of Long-Term Debt (115) (367) (27) 1995. As ofDecember 31, 1994, Funding had no borrowings outstanding under this facility.

Other (4) Funding is in the process of amending its letter of credit and revolving credit facility in order to adjust pricing and extend the maturity to early 1998.

Total EDHI (70) (296) (86)

Capital's MTN program provides for an aggregate principal amount of up to $750 mil-Net cash used in financing activities $(233) $ (22) $ (368) lion of MTNs provided that its total debt outstanding at any time, including MTNs, shall not exceedsuch amount. Effective January 31, 1995, Capital will not have more than $650 (A) During I994, Enterprise issued l,009,674 shares of Common Stock through its Dividend million of debt outstanding at anytime. In November 1994, Capital repaid $50 million of its Reinvestment and Stock Purchase Plan (DRIP) and various employee benefit plans. The net 7.40% MTNs. At December 31 , 1994, Capital had $467 million of MTNs outstanding and total proceed from such sales, aggregating approximately$28 million, were used byEnterprise debt outstanding of $632 million.

to make equityinvestments in its subsidiaries. Book value per share was $21.70 at December For additional detail see Note 6-Schedule of Consolidated Debt of Notes.

31, 1994, compared to $2 l.07 at December 31, 1993. (See Note 4-Schedule of Consoli-dated Capital Stock and Other Securities of Notes.)

(B) See Dividends.

18 I p EG 199 4 ANN U A L REPO RT Financial Statement Responsibility The Internal Auditing Department of PSE&G conducts audits and appraisals of accounting and other operations of Enterprise and its subsidiaries and evaluates the effectiveness of cost and other controls and recommends to management, where appropriate, improvements Management of Enterprise is responsible for the preparation, integrity thereto. Management has considered the internal auditors' and and objectivity of the consolidated financial statements and related Deloitte & Touche's recommendations concerning the corporation's notes of Enterprise. The consolidated financial statements and related system of internal accounting controls and has taken actions that, in notes are prepared in accordance with generally accepted accounting its opinion, are cost-effective in the circumstances to respond principles. The financial statements reflect estimates based upon the appropriately to these recommendations. Management believes that, judgment of management where appropriate. Management as of December 31, 1994, the corporation's system of internal account-believes that the consolidated financial statements and related notes ing controls is adequate to accomplish the objectives discussed herein.

present fairly Enterprise's financial position and results of operations. The Board of Directors of Enterprise carries out its responsibility Information in other parts of this Annual Report is also the responsi- of financial overview through its Audit Committee, which presently bility of management and is consistent with these consolidated consists of six directors who are not employees of Enterprise or any of financial statements and related notes. its affiliates. The Audit Committee meets periodically with manage-The firm of Deloitte & Touche LLP, independent auditors, is ment as well as with representatives of the internal auditors and engaged to audit Enterprise's consolidated financial statements and Deloitte & Touche LLP. The Audit Committee reviews the work of each related notes and issue a report thereon. Deloitte & Touche's audit is to ensure that its respective responsibilities are being carried out and conducted in accordance with generally accepted auditing standards. discusses related matters. Both the internal auditors and Deloitte &

Management has made available to Deloitte & Touche LLP, all the Touche LLP periodically meet alone with the Audit Committee and corporation's financial records and related data, as well as the have free access to the Audit Committee, and its individual members, minutes of directors' meetings. Furthermore, management believes at any time.

that all representations made to Deloitte & Touche LLP, during its audit were valid and appropriate.

~;a~I Management has established and maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded, and that transactions are executed in accordance with E. James Ferland management's authorization and recorded properly for the prevention Chairman of the Board, Vice President and and detection of fraudulent financial reporting, so as to maintain the President and Chief Financial Officer integrity and reliability of the financial statements. The system is Chief Executive Officer designed to permit preparation of consolidated financial statements and related notes in accordance with generally accepted accounting principles. The concept of reasonable assurance recognizes that the costs of a system of internal accounting controls should not exceed the related benefits. Management believes the effectiveness of this system is Patricia A. Rado enhanced by an ongoing program of continuous and selective Vice President and Controller training of employees. In addition, management has communicated Principal Accounting Officer to all employees its policies on business conduct, safeguarding assets and internal controls. February 14, 1995

PSEG 1994- A U A L REPORT I 19 Consolidated Statements of Income In thousands for the years ended December 31, 1994 1993 1992 Operating Revenues Electric $ 3,733,113 $ 3,693,083 $ 3,407,819 Gas 1,778,528 1,594,341 1,586,181 onutility Activities 404,202 418,135 362,781 Total Operating Revenues 5,915,843 5,705,559 5,356,781 Operating Expenses Operation Fuel for Electric Generation and Interchanged Power 695,763 717,136 776,571 Gas Purchased and Materials for Gas Produced 1,023,956 897,885 858,737 Other l,l16,263 1,012,757 924,942 Maintenance 308,080 304,403 307,726 Depreciation and Amortization 629,688 600,264 642,548 Property Impairment (note 16) 77,637 Taxes Federal Income Taxes (note 10) 312,551 313,680 221 ,469 New Jersey Gross Receipts Taxes 583,167 597,898 585,770 Other 82,282 77,052 72,883 Total Operating Expenses 4,751,750 4,598,712 4,390,646 Operating Income 1, 164,093 1,106,847 966,135 Other Income Allowance for Funds Used During Construction - Equity 12,789 12,265 12,828 Peach Bottom Settlement- net of Federal income taxes 1992, $16,985 (note 2) 32,970 Miscellaneous - net 6,430 (3,778) 30,188 Total Other Income 19,2 19 8,487 75,986 Income Before Interest Charges and Dividends on Preferred Securities 1,183,312 1,115,334 1,042,121 Interest Charges (note 6)

Long-Term Debt 459,158 469,120 479,898 Short-Term Debt 23,962 13,860 14,858 Other 12,805 19,554 29,269 Total Interest Charges 495,925 502,534 524,025 Allowance for Funds Used During Construction - Debt and Capitalized Interest (33,793) (20,833) (17,928)

Net Interest Charges 462,132 481,701 506,097 Preferred Securities Dividend Requirements (note 4) 42, 147 38,114 31,907 Income before cumulative effect of accounting change 679,033 595,519 504,117 Cumulative effect of change in accounting for income taxes (note 10) 5,414 Net Income $ 679,033 $ 600,933 $ 504,117 Shares of Common Stock Outstanding End of Year 244,697,930 243,688,256 235,395,751 Average for Year 244,470,794 240,663,599 232,306,492 Earnings Per Average Share of Common Stock Income before cumulative effect of accounting change $2.78 $2.48 $2.17 Cumulative effect of change in accounting fo r income taxes .02 Total Earnings Per Average Share of Common Stock 2.78 2.50 2.17 Dividends Paid Per Share of Common Stock $2.16 $2 .16 $2.16 See Notes to Consolidated Financial Statements.

20 I PSEG 199 4 A NN UA L REPO RT

• ~

Consolidated Balance Sheets I I

In thousands at December 31, 1994 1993 Assets I Utility Plant- Original Cost (note 15)

Electric $12,345,919 $11,920,894 Gas 2,318,233 2,177,841 Common 545,131 520,285 Total 15,209,283 14,619,020 Less accumulated depreciation and amortization 5,147,105 4,772,942 Net 10,062,178 9,846,078 uclear Fuel in Service, net of accumulated amortization - 1994, $302,906; 1993, $275,638 205,273 205,237 Net Utility Plant in Service 10,267,451 10,051,315 Construction Work in Progress, including Nuclear Fuel in Process - 1994, $65,429; 1993, $98,780 806,934 735,356 Plant Held for Future Use 23,860 17,709 Net Utility Plant 11,098,245 10,804,380 Investments and Other Noncurrent Assets (notes 3, 7, 8, 11, 12 and 16)

Long-Term Investments, net of amortization - 1994, $2,365; 1993, $572, and net of valuation allowances- 1994, $17,104; 1993, $18,018, respectively 1,625,952 1,630,996 Oil and Gas Property, Plant and Equipment, net of accumulated depreciation and amortization -

1994, $748,245; 1993, $695,791 577,913 506,047 Real Estate, Property and Equipment, net of accumulated depreciation - 1994, $14,242; 1993, $10,840, and net of valuation allowances- 1994, $23,264; 1993, $16,684, respectively 115,210 110,661 Other Plant, net of accumulated depreciation and amortization - 1994, $4,653; 1993, $3,735 36,063 28,327 Nuclear Decommissioning and Other Special Funds 233,022 189,282 Other Assets - net 85,478 103,538 Total Investments and Other Noncurrent Assets 2,673,638 2,568,851 Current Assets Cash and Cash Equivalents (note 9) 67,866 71,372 Accounts Receivable:

Customer Accounts Receivable 434,207 446,629 Other Accounts Receivable 211,779 230,373 Less: allowance for doubtful accounts 40,915 27,932 Unbilled Revenues 204,056 244,497 Fuel, at average cost 268,927 285,943 Materials and Supplies, net of inventory valuation reserves - 1994, $18,200; 1993, $8,525, respectively 148,285 172,438 Deferred Income Taxes (note 10) 25,311 12,934 Miscellaneous Current Assets 37,356 49,860 Total Current Assets 1,356,872 1,486,114 Deferred Debits (note 5)

Property Abandonments - net 88,269 105,536 Oil and Gas PropertyWrite-Down 41,232 46,386 Unamortized Debt Expense 134,599 121,278 Deferred OPEB Costs (notes 1 and 13) 116,476 58,593 Underrecovered Electric Energy and Gas Costs - net 172,563 62,034 Unrecovered Environmental Costs (notes 2 and 12) 135,499 138,531 Unrecovered Plant and Regulatory Study Costs 37, 128 35,196 Unrecovered SFAS 109 Deferred Income Taxes (note 10) 791,393 789,795 Deferred Decontamination and Decommissioning Costs (note 3) 53,016 56,055 Other 18,510 56,907 Total Deferred Debits 1,588,685 1,470,311 Total $16,717,440 $16,329,656 See Notes to Consolidated Financial Statements.

PSEG 19 9 4 AN UAL REP O RT I 21 In thousands at December 31, 1994 1993 Capitalization (notes 4, 5 and 6)

Common Equity Common Stock $ 3,801,157 $ 3,772,662 Retained Earnings 1,510,010 1,361,018 Total Common Equity 5,311,167 5,133,680 Subsidiaries' Securities and Obligations Preferred Securities

. Preferred Stock Without Mandatory Redemption 384,994 429,994 Preferred Stock With Mandatory Redemption 150,000 150,000 Monthly Income Preferred Securities 150,000 Long-Term Debt 5,180,657 5,256,321 Total Capitalization 11,176,818 10,969,995 Other Long-Term Liabilities Decontamination and Decommissioning Costs (note 3) 56,149 56,055 Environmental Costs (notes 2 and 12) 105,684 111,000 Capital Lease Obligations 53,770 53,104 Total Other Long-Term Liabilities 215,603 220,159 Current Liabilities long-Term Debt due within one year 499,738 168,064 Commercial Paper and Loans (note 6) 491,586 577,636 Book Overdrafts 86,576 62,992 Accounts Payable 433,471 519,261 New Jersey Gross Receipts Taxes Accrued 263,357 Other Taxes Accrued 44,149 39,610 Interest Accrued 107,962 107,027 Estimated Liability for Vacation Pay 27,080 26,993 Customer Deposits 33,698 36,668 Liability for Injuries and Damages 29,814 28,338 Miscellaneous Environmental Liabilities 15,365 4,475 Other 87,480 61,277 Total Current Liabilities 1,856,919 1,895,698 Deferred Credits Accumulated Deferred Income Taxes (note 10) 2,905,390 2,702,386 Accumulated Deferred Investment Tax Credits 412,466 432,713 Deferred OPEB Costs (notes 1 and 13) 116,476 58,593 Other 33,768 50,112 Total Deferred Credits 3,468,100 3,243,804 Commitments and Contingent Liabilities (note 12)

Total $16,717,440 $16,329,656

22 I PSEG 1994 ANN U AL REPO RT Consolidated Statements of Cash Flows In thousands for the years ended December 31 , 1994 1993 1992 Cash Flows From Operating Activities:

Net Income $ 679,033 $ 600,933 $ 504,117 Adjustments to reconcile net income to net cash flows from operating activities:

Depreciation and Amortization 629,688 600,264 642,548 Amortization of Nuclear Fuel 95,173 102,718 91 ,903 (Deferral) Recovery of Electric Energy and Gas Costs - net (110,529) (184,770) 121,371 Loss From Property Impairments 77,637 Cumulative Effect of Change in Accounting for Income Taxes (5,414)

Amortization of Discounts on Property Abandonments and Disallowance (6,743) (7,801) (11 ,293)

Unrealized Gains on Investments - net (26,329) (8,694) (24,843)

Provision for Deferred Income Taxes - net 138,919 168,406 56,846 Investment Tax Credits - net (20,247) (11,655) (20,342)

Allowance for Funds Used During Construction - Debt and Equity and Capitalized Interest (46,582) (33,098) (30,756)

Proceeds from Leasing Activities - net 27,682 14,780 30,295 Changes in certain current assets and liabilities Net decrease (increase) in Accounts Receivable and Unbilled Revenues 84,440 (68,382) (68,525)

Net decrease (increase) in Inventory - Fuel and Materials and Supplies 41 ,169 16,438 (37,083)

Net (decrease) increase in Accounts Payable (85,790) 95,331 38,589 Net (decrease) increase in Accrued Taxes (258,818) (293,919) 37,892 Net change in Other Current Assets and Liabilities 36,748 (19,505) 8,263 Other 53,976 '(11,598) (14,538)

Net cash provided by operating activities 1,231,790 1,031,671 1,324,444 Cash Flows From Investing Activities:

Additions to Utility Plant, excluding AFDC (849,174) (863,294) (800,344)

Additions to Oil and Gas Property, Plant and Equipment, excluding Capitalized Interest (149,523) (87,968) (32,337)

Net decrease (increase) in Long-Term Investments and Real Estate 58,416 66,659 (61 ,099)

Increase in Decommissioning and Other Special Funds, excluding interest (35,394) (45,508) (9,262)

Cost of Plant Removal - net (33,962) (47,791) (40,111)

Other 7, 154 (14,938) (6,000)

Net cash used in investing activities (1,002,483) (992,840) (949,153)

Cash Flows From Financing Activities:

Net (decrease) increase in Short-Term Debt (86,050) 185,654 2,932 Increase (decrease) in Book Overdrafts 23,584 (10,078) 24,009 Issuance of Long-Term Debt 849,800 2,137,700 880,000 Redemption of Long-Term Debt (593,790) (2,083,453) (1,058,179)

Long-Term Debt Issuance and Redemption Costs (29,811) (72,114) (19,753)

Issuance of Preferred Stock 75,000 75,000 75,000 Redemption of Preferred Stock (120;000)

Issuance of Monthly Income Preferred Securities 150,000 Issuance of Common Stock 28,495 273,479 237,045 Cash Dividends Paid on Common Stock (528,071) (521,572) (503,197)

Other (1,970) (6,772) (5,719)

Net cash used in financing activities (232,813) (22,156) (367,862)

Net (decrease) increase in Cash and Cash Equivalents (3,506) 16,675 7,429 Cash and Cash Equivalents at Beginning of Year 71,372 54,697 47,268 Cash and Cash Equivalents at End of Year $ 67,866 $ 71 ,372 $ 54,697 Income Taxes Paid $ 155,104 $ 140,172 $ 143,211 Interest Paid $ 432,873 $ 458,956 $ 486,396 See Notes to Consolidated Financial Statements

PSEG 1994 ANNUA L RE PO RT I 23 Consolidated Statements of Retained Earnings In thousands for the years ended December 31, 1994 1993 1992 Balance January 1 $1 ,361,018 $1 ,282,931 $1,282,029 Add Net Income 679,033 600,933 504, 117 Total 2,040,051 1,883,864 1,786,146 Deduct Dividends on Common Stock (A) 528,071 521,572 503,197 Capital Stock Expenses 1,970 1,274 18 Total Deductions 530,041 522,846 503,215 Balance December 31 $1 ,510,010 $1 ,361,018 $1 ,282,931 (A) The ability of Enterprise to declare and pay dividends is contingent ~pon its receipt of dividend payments from its subsidiaries. PSE&G, Enterprise's principal subsidiary, has restrietions on the payment of dividends which are contained in its Restated Certificate of Incorporation, as amended, certain of the indentures supplemental to its Mortgage, and certain debenture bond and other indentures. However, none of these restrictions presently limits the payment of dividends out of current earnings.

The amount of PSE&G's restricted retained earnings at December 31, 1994, 1993 and 1992 was $10 million.

See Notes to Consolidated Financial Statements.

Independent Auditors' Report Deloitte &

ToucheuP 0

To the Stockholders and Board of Directors of In our opinion, such consolidated financial statements present Public Service Enterprise Group Incorporated: fairly, in all material respects, the financial position of Public Service Enterprise Group Incorporated and its subsidiaries at December 31, We have audited the accompanying consolidated balance sheets of 1994 and 1993, and the results of their operations and their cash flows Public Service Enterprise Group Incorporated and its subsidiaries as for each of the three years in the period ended December 31, 1994 in of December 31, 1994 and 1993, and the related consolidated conformity with generally accepted accounting principles. Also, in our statements of income, retained earnings, and cash flows for each of opinion, such consolidated financial statement schedules, when the three years in the period ended December 31, 1994. Our audits considered in relation to the basic consolidated financial statements also included the consolidated financial statement schedules listed taken as a whole, present fairly in all material respects the in the Index in Item l 4(b) (1). These consolidated financial information set forth therein.

statements and the consolidated financia l statement schedules are We have also previously audited, in accordance with generally the responsibility of the Company's management. Our responsibility accepted auditing standards, the consolidated balance sheets as of is to express an opinion on these consolidated financial statements December 31, 1992, 1991, and 1990, and the related consolidated and consolidated financial statement schedules based on our audits. statements of income, retained earnings, and cash flows for the years We conducted our audits in accordance with generally accepted ended December 31, 1991 and 1990 (none of which are presented auditing standards. Those standards require that we plan and herein) and we expressed unqualified opinions on those consolidated perform the audit to obtain reasonable assurance about whether the financial statements. In our opinion, the information set forth in the financial statements are free of material misstatement. An audit Selected Financial Data for each of the five years in the period ended includes examining, on a test basis, evidence supporting the December 31, 1994 for the Company, presented in Item 6, is fairly amounts and disclosures in the financial statements. An audit also stated in all material respects, in relation to the consolidated financial includes assessing the accounting principles used and significant statements from which it has been derived.

estimates made by management, as well as evaluating the overall financi al statement presentation. We believe that our audits provide a reasonable basis for our opinion . cH-~-r-~ J-?7 Deloitte & Touche LLP February 14, 1995 Parsippany, ewJersey

24 I PSEG 1994 ANNUAL REPORT Notes to Consolidated Financial Statements PSE&G prepares its financial statements in accordance with the provisions of Statement of Financial Accounting Standards No. 71 _

"Accounting for the Effects of Certain Types of Regulation" (SFAS Note 1. Organization and Summary of Significant 71). In general, SFAS 71 recognizes that accounting for rate-Accounting Policies regulated enterprises should reflect the relationship of costs and revenues. As a result, a regulated utility may defer recognition of cost Organization (a regulatory asset) or recognize an obligation (a regulatory Enterprise has two direct wholly owned subsidiaries, Public Service liability) if it is probable that, through the rate-making process, there Electric and Gas Company (PSE&G) and Enterprise Diversified will be a corresponding increase or decrease in revenues. Accordingly, Holdings Incorporated (EDHI). Enterprise's principal subsidiary, PSE&G has deferred certain costs, which will be amortized over PSE&G, is an operating public utility providing electric and gas various periods. To the extent that collection of such costs or payment service in certain areas in the State of New Jersey. Enterprise owns all of liabilities is no longer probable as a result of changes in regulation of PSE&G's common stock (without nominal or par value). Of the and/or PSE&G's competitive position, the associated regulatory asset 150,000,000 authorized shares of such common stock at December or liability will be reversed with a charge or credit to income. (See 31, 1994, 1993 and 1992, there were 132,450,344 shares outstanding, Note 5 - Deferred Items.)

with an aggregate book value of $2.6 billion. Amounts charged to operations for depreciation expense refiect PSE&G has a finance subsidiary, PSE&G Fuel Corporation estimated useful lives and methods, that include estimates of cost of (Fuelco), providing financing, unconditionally guaranteed by removal and salvage, prescribed and approved by regulators rather PSE&G, of up to $150 million aggregate principal amount at any one than those that might otherwise apply to unregulated enterprises.

time of a 42.49% interest in the nuclear fuel acquired for Peach PSE&G cannot presently quantify what the financial statement impact Bottom Atomic Power Station Units 2 and 3 (Peach Bottom). PSE&G may be if depreciation expense is determined absent regulation.

also has a nonutility subsidiary, Public Service Conservation Resources Corporation (PSCRC) which offers demand side Utility Plant and Related Depreciation - PSE&G management (DSM) services to utility customers. In 1994, Public Additions to utility plant and replacements of units of property are Service Electric and Gas Capital, L.P. (Partnership), a limited capitalized at original cost. The cost of maintenance, repairs and partnership in which PSE&G is the general partner, was formed for replacements of minor items of property is charged to appropriate the purpose of issuing monthly income preferred securities (MIPS). expense accounts. At the time units of depreciable properties are (See Note 4 - Schedule of Consolidated Capital Stock and Other retired or otherwise disposed of, the original cost less net salvage Securities.) value is charged to accumulated depreciation.

EDHI is the parent of Enterprise's nonutility businesses: Energy For financial reporting purposes, depreciation is computed under Development Corporation (EDC), an oil and gas exploration and the straight-line method. Depreciation is based on estimated average production and marketing company; Community Energy Alternatives remaining lives of the several classes of depreciable property. These Incorporated (CEA), an investor in and developer of cogeneration estimates are reviewed on a periodic basis and necessary adjustments and independent power production facilities; Public Service are made as approved by the BPU. Depreciation provisions stated in Resources Corporation (PSRC), which makes primarily passive percentages oforiginal cost of depreciable property were 3.51% in investments; and Enterprise Group Development Corporation 1994, 3.46% in 1993 and 3.48% in 1992.

(EGDC), a diversified nonresidential real estate development and investment business. EDHI also has two finance subsidiaries: PSEG Decontamination and Decommissioning - PSE&G Capital Corporation (Capital), and Enterprise Capital Funding In September 1993, FERC issued Order No. 557 on the accounting Corporation (Funding) . and rate-making treatment of special assessments levied under the ational Energy Policy Act of 1992 (NEPA). Order o. 557 provides Consolidation Policy that special assessments are a necessary and reasonable current cost The consolidated financial statements include the accounts of of fuel and shall be fully recoverable in rates in the same manner as Enterprise and its subsidiaries. All significant intercompany accounts other fuel costs. While PSE&G expects to recover such special and transactions have been eliminated in consolidation. Certain assessments through its electric Levelized Energy Adjustment Clause reclassifications of prior years' data have been made to conform with (LEAC) no assurances can be given that the BPU will authori ze such the current presentation. recoveryfrom customers. (See Note 3 - PSE&G Nuclear Decommissioning and Amortization of Nuclear Fuel-Uranium Regulation - PSE&G Decontamination and Decommissioning Fund.) '

The accounting and rates of PSE&G are subject, in certain respects, to Amortization ofNuclear Fuel - PSE&G the requirements of the ew Jersey Board of Public Utilities (BPU) and the Federal Energy Regulatory Commission (FERC). As a result uclear energy burnup costs are charged to fuel expense on a units-PSE&G maintains its accounts in accordance with their prescribed ' of-production basis over the estimated life of the fuel. Rates for the Uniform Systems of Accounts, which are the same. The applications recovery of fuel used at all nuclear units include a provision of one of Generally Accepted Accounting Principles by PSE&G differ in mill per kilowatthour (KWH) of nuclear generation for spent fuel certain respects from applications by non-regulated businesses. disposal costs. (See Note 3 - PSE&G uclear Decommissioning and Amortization of Nuclear Fuel.)

PSEG 1994 A NN UAL REPORT I 25 Revenues and Fuel Costs - PSE&G Effective January I, 1993, Enterprise and its subsidiaries adopted Revenues are recorded based on services rendered to customers Statement of Financial Accounting Standards o. 109 "Accounting during each accountin g period. PSE&G reco rds unbilled revenues for Income Taxes" (SFAS 109) . Under SFAS 109, deferred income representing the estimated amount customers will be billed for taxes are provided for all temporary differences between the financial services rendered from the time meters were last read to the end of statement carrying amounts and the tax bases of existing assets and the respective accounting period. Rates include projected fuel costs liabilities irrespective of the treatment for rate-making purposes. For fo r electric generation , purchased and interch anged power, gas periods prior to January 1, 1993, PSE&G provided deferred income purchased and materials used for gas production. Any under or taxes to the extent permitted for rate-making purposes. (See Note 10 overrecoveries, together with interest (in the case of net overrecov- - Federal Income Taxes.)

eries), are deferred and included in operations in the period in which they are reflected in rates. Allowance for Funds Used During Construction and Capitalized Interest Long-Term Investments PSE&G-Allowance for Funds Used During Construction (AFDC)

PSRC has invested in secu rities and limited partnerships investing in represents the cost of debt and equityfunds used to finance the securities, which are recorded at fair value, and various leases and construction of new utility facilities. The amount of AFDC capitalized is other limited partnerships. EGDC is a participant in the nonresiden- reported in the Consolidated Statements of Income as a reduction of tial real estate markets. CEA is an investor in and developer of interest charges for the borrowed funds component and as other cogeneration and power production facilities. (See ote 7 - Long- income for the equity funds component. The rates used for calculating Term Investments.) AFDC in 1994, 1993 and 1992 were 6.48%, 6.96%and 7.80%, respectively.

These rates are within the limits set by FERC.

Derivatives EDHI - The operating subsidiaries of EDHI capitalize interest Gains and losses on hedges of existing assets or liabilities are costs allocable to construction expenditures at the average cost of included in the carrying amounts of those assets and liabilities and borrowed funds.

are ultimately recognized in income as part of those carrying amounts. Gains and losses related to qualifying hedges of firm Pension Plan and Other Postretirement Benefits commitments or anticipated transactions also are deferred and The employees of PSE&G and participating affiliates, after recognized in income or as adjustments of carrying amounts when completing one year of service, are covered by a noncontributory the hedged transaction occurs. trusteed pension plan (Pension Plan). The policy is to fund pension PSRC's security derivatives are re.corded at fair va lue. Realized costs accrued. PSE&G also provides certain health care and life and unrealized changes in fa ir values are recognized in revenues in insurance benefits to active and retired employees. The portion of the period in which the changes occur. (See Note 8 - Financial such costs pertaining to retirees amounted to $29 million, $28 Instruments and Risk Management.) million, and $24 million in 1994, 1993 and 1992, respectively. The current cost of these benefits is charged to expense when paid and is Oil and Gas Accounting - EDC currently being recovered from ratepayers.

EDC uses the successful efforts method of accounting under which On January 1, 1993, Enterprise and PSE&G adopted Statement of proved leasehold costs are capitalized and amorti zed over the proved Financial Accounting Standards No. 106, "Employers Accounting for developed and undeveloped reserves on a units-of-production basis. Postretirement Benefits Other Than Pensions" (SFAS 106), which Drilling and equ ipping costs, except exploratory dry holes, are requires that the expected cost of employees' postretirement health capitalized and depreciated over the proved developed reserves on a care benefits be charged to expense during the years in which units-of-production basis. Estimated future abandonment costs of employees render service. Prior to 1993, Enterprise and PSE&G offshore proved properties are depreciated on a units-of-production recognized postretirement health care costs in the year in which the basis over the proved developed reserves. Unproved leasehold costs benefits were paid. PSE&G elected to amortize over 20 years its are capitalized and not amortized, pending an evaluation of the unfunded obligation at January 1, 1993. (See Note 13- Postretire-exploration results. Unproved leasehold and producing properties ment Benefits Other Than Pensions and Note 14- Pension Plan.)

costs are assessed periodically to determine if an impairment of the cost of significant individual properties has occurred. The cost of an Note 2. Rate Matters impairment is charged to expe nse. Costs incurred for exploratory dry holes, exploratory geological and geophysical work and delay rentals Levelized Gas Adjustment Charge are charged to expense as incurred. On July 1, 1994, PSE&G petitioned the BPUto increase its Levelized Gas Adjustment Charge (LGAC) rates to recover an additional $23.7 Income Taxes million, to be effective October 1, 1994. On August 4, 1994, the matter Enterprise and its subsidiaries file a consolidated Federal income tax was transm itted to the Office of Administrative Law of the State of return and income taxes are allocated to Enterprise's subsidiaries New Jersey (OAL) for adjudication. Due to recent projections of lower based on taxable income or loss of each. Investment tax credits are gas prices, the parties reached a stipulated settlement on October 6, deferred and amortized over the useful lives of the related property, 1994 which provides for the implementation of the Gas Remediation including nuclear fuel. Adjustment Charge (RAC) with an equal corresponding offsetting adjustment to the current LGAC rate. These LGAC and RAC rates,

26 I PSEG 199 4 ANN U A L REPORT when combined, produce a charge which results in a zero increase to $2.5 million to the deferred fuel balance for LEAC customers in the firm customers for the LGAC period ending September 30, 1995. resolution of all outstanding issues related to the November 9, 1991 The settlement was approved by the BPU on December 21, 1994. Salem 2 turbine generator outage and a credit of $1.3 million to The BPU, on January 24, 1995, approved PSE&G's proposal to reflect an adjustment of estimated ew Jersey Gross Receipts and credit a total of $50 million to its firm gas sales customers during Franchise Tax ( JGRT) unit tax rates to actual unit tax rates.

February and March 1995. Specifically, PSE&G will credit approximately $30 million in February and $20 million in March Remediation Adjustment Charge 1995. The opportunity to provide these credits was due principally to In accordance with the BPU Order dated September 15, 1993 and the abnormally warm winter weather, lower gas prices and a lower BPU approved Technical Conference Decision and Order dated current short-term price forecast. November 4, 1993, PSE&G proposed to recover, effective October 1, 1994, $3.7 million from its gas customers and $2.4 million from its Electric Levelized Energy Adjustment Clause electric customers for costs incurred during the period October 1, 1992 On July 1, 1994, PSE&G petitioned the BPU to increase its LEAC rates, through July 31, 1994 with respect to PSE&G's Manufactured Gas Plant effective October 1, 1994, to recover an additional $130 million of Remediation Program (Remediation Program) . Pursuant to the above-energy costs. Asignificant part of the need for an increase is the referenced Board Order and Technical Conference Stipulation, costs are larger percentage of power that PSE&G is obligated to purchase under to be included in a RAC and are amortized over a rolling seven-year prior BPU approved contracts with non-regulated power producers. period, 60 percent to be recovered through the gas RAC and the On November 1, 1994, the parties reached a stipulated settlement remaining 40 percent to be recovered through the electric RAC. This which provides for the implementation of provisional LEAC rates, Remediation Program has been and continues to be carried out under subject to refund, designed to recover an additional $98 million over the direction and supervision of the New Jersey Department of the period November 1994 through May 1995. The stipulation Environmental Protection ( JDEP). On December 21, 1994, the BPU provided sufficient rate relief to recover current fuel costs and to approved a LGAC Stipulation allowing PSE&G to recover $3.1 million of begin to reduce the accumulated underrecovered balance while Remediation Program costs from gas customers. (See Note 12 -

affording the parties the opportunity to continue litigating Commitments and Contingent Liabilities of Notes.) All recovery of costs unresolved issues of: a) rate treatment for the Bergen repowering through PSE&G rates are subject to audit and verification by the BPU.

project (See ote 12 - Commitments and Contingent Liabilities -

Bergen Station Repowering); b) an alleged overearnings issue; c) Consolidated Tax Benefits recovery of the costs related to the April 7, 1994 shutdown at Salem 1 In a case affecting another utility in which neither Enterprise nor nuclear unit; and d) the appropriateness of PSE&G's gas to electric PSE&G were parties, the BPU considered the extent to which tax transfer and pricing calculations pertaining to the 1993 agreement savings generated by nonutility affiliates included in the consolidated with PSE&G 's largest industrial customer (Bayway Decision and tax return of that utility's holding company should be considered in Order). This stipulation was approved by the BPU without setting that utility's rates. On September 30, 1992, the BPU approved modification and became effective on November 4, 1994. an order in such case treating certain consolidated tax savings With respect to the litigated issues outlined above, an Adminis- generated after June 30, 1990 by that utility's nonutility affiliates as a trative Law Judge (ALJ) decision was filed with the BPU on January reduction of its rate base. On December 31, 1992 the BPU issued an 30, 1995 recommending that (1) the issue of alleged overearnings is order approving a stipulation in PSE&G's 1992 base rate proceeding not a LEAC issue and PSE&G is not earning in excess of its rate of which resolved the case without separate quantification of the return; (2) a hearing convene regarding the Salem 1 shutdown to consolidated tax issue. The stipulation does not provide final determine replacement power costs and whether any limitations resolution of the consolidated tax issue for any subsequent base rate imposed by the New jersey Public Utility Fault Determination Act filing. While Enterprise continues to account for these entities on a should be triggered; (3) a reduction of the 1993 Nuclear Performance stand-alone basis, resulting in a realization of the tax benefits by the Standard (NPS) reward to $1.9 million from $3.9 million be made; entity generating the benefit, an ultimate unfavorable resolution of (4) the joint position of the parties on gas to electric pricing and the the consolidated tax issue could reduce PSE&G's and Enterprise's accounting procedures approved by the BPU in its Bayway Decision future revenue and net income. In addition, an unfavorable and Order should not be revised; (5) a decrease of $700 thousand in resolution may adversely impact Enterprise's nonutility investment DSM program costs; and (6) the BPU should address the RAC costs in strategy. Enterprise believes that PSE&G's taxes should be treated on the LEAC. PSE&G filed exceptions to the AL]'s decision on February a stand-alone basis for rate-making purposes, based on the separate 14, 1995 addressing the 1993 NPS reward; DSM estimates; nature of the utility and nonutility businesses. However, neither replacement power costs for the April 7, 1994 Salem outage and the Enterprise nor PSE&G is able to predict what action, if any, the BPU treatment of RAC charges. However, neither Enterprise nor PSE&G is may take concerning consolidation of tax benefits in future rate able to predict what action, if any, the BPU may take concerning the proceedings. (See Note 10 - Federal Income Taxes.)

AL]'s decision. (See Note 3 - PSE&G Nuclear Decommissioning and Amortization of Nuclear Fuel.) Peach Bottom Settlement On July 7, 1994, the BPU approved a stipulation which made In the first quarter of 1992, Enterprise and PSE&G allocated 75%of permanent the LEAC rates that went into effect on January 1, 1993 on the net proceeds of the Peach Bottom settlement to income an interim basis and closed out the previous LEAC for the period attributable to shareholders and deferred 25% attributable to ended December 31, 1992. The stipulation also provided a credit of

PSEG 199 4 ANN U A L REPO RT I 27 ratepayers. Pursuant to the base rate case settlement, such (DOE) Uranium Enrichment Enterprise (now a federal government allocations were adjusted in December 1992 to an equal sharing of corporation known as the United States Enrichment Corporation the benefits of the Peach Bottom settlement. (USEC)) . These amounts are being collected over a period of 15 years or until $2.25 billion (adjusted for inflation) has been collected.

Note 3. PSE&G Nuclear Decommissioning and Under this legislation, PSE&G's obligation for the nuclear generating Amortization of Nuclear Fuel stations in which it has an interest is $66 million (adjusted for inflation). To date, PSE&G has paid $13 million, resulting in a The BPU's decision in PSE&G's 1992 base rate case utilized studies balance due of $53 million. PSE&G has deferred the expenditures based on the prompt removal/dismantlement method of decommis- incurred to date as part of deferred underrecovered electric energy sioning for all of PSE&G's nuclear generating stations. This method costs and expects to recover its costs in the next LEAC. PSE&G cannot consists of removing all fuel , source material and all other radioactive predict the outcome, amount or timing of any recovery associated materials with activity levels above accepted release limits from the with this matter. In addition, as of December 31, 1994, PSE&G has nuclear sites. PSE&G has an ownership interest in five nuclear units: recorded a liability of $3 million relating to low level radioactive Salem 1 and Salem 2 - 42.59% each, Hope Creek - 95% and Peach waste costs incurred at its nuclear generating stations.

Bottom 2 and 3 - 42.49% each. In accordance with rate orders received from the BPU, PSE&G has established an external master Spent Nuclear Fuel Disposal Costs nuclear decommissioning trust for all of its nuclear units. The In accordance with the Nuclear Waste Policy Act (NWPA), PSE&G has Internal Revenue Service (IRS) has ruled that payments to the trust entered into contracts with the DOE for the disposal of spent nuclear are tax deductible. PSE&G's total estimated cost of decommissioning fuel. Payments made to the DOE for disposal costs are based on its share of these 5 nuclear units is estimated at $681 million in nuclear generation and are included in Fuel for Electric Generation year-end 1990 dollars (the year that the site specific estimate was and Interchanged Power in the Statements of Income. These costs are prepared), excluding contingencies. The 1992 base rate decision recovered through the LEAC.

provided that $15.6 million of such costs are to be collected through base rates and an additional annual amount of $7.0 million in 1993 Note 4. Schedule of Consolidated Capital Stock and and $14 million each year thereafter are to be recovered through Other Securities Current PSE&G's LEAC. At December 31, 1994 and 1993, the accumulated Redemption December 31, provision for depreciation and amortization included reserves for Out.standing Price nuclear decommissioning for PSE&G's units of $249 million and $211 Jn thousands Shares Per Share 1994 1993 million, respectively. As of December 31, 1994 and 1993, PSE&G has Enterprise Common Stock (no par) - (note A) -

contributed $190 million and $155 million, respectively, into external authorized 500,000,000 shares; issued and out.standing at December 31, 1994, 244,697,930 shares, at qualified and nonqualified nuclear decommissioning trust funds. December 31 , 1993, 243,688,256 shares, and at Based on current regulatory requirements, PSE&G must file a December 31, 1992, 235,395,751 shares. 3,801,157 3,772,662 decommissioning cost update by January 1, 1996 based on a site- Enterprise Preferred Securities (note B) specific study or upon the generic NRC guidelines. PSE&G Cumulative Preferred Securities (note C)

The staff of the Securities and Exchange Commission (SEC) has Without Mandatory Redemption (notes Dand E)

$100 par value series questioned certain of the current accounting practices of the electric 4.08% 250,000 $ 103.00 25,000 25,000 utility industry, including PSE&G, regarding the recognition, 4.18% 249,942 103.00 24,994 24,994 measurement and classification of decommissioning costs for 430% 250,000 102.75 25,000 25,000 5.05% 250,000 103 00 25,000 25,000 nuclear generating stations in the financial statements of electric 5.28% 250,000 103 00 25,000 25,000 utilities. In response to these questions, the Financial Accounting 6.80% 250,000 102.00 25,000 25,000 Standards Board (FASB) has agreed to review the accounting for 692% 600,000 103.46 60,000 7.40% 500,000 101.00 50,000 50,000 removal costs, including decommissioning. If current electric utility 7.52% 500,000 101.00 50,000 50,000 industry accounting practices for such decommissioning are 7.80% 750,000 75,000 changed: (1) annual provisions for decommissioning could increase, 7.70% 600,000 100.79 60,000 60,000 (2) the estimated cost for decommissioning could be recorded as a 8.08% 150,000 15,000 8.16% 300,000 30,000 liability rather than as accumulated depreciation and (3) trust fund income from the external decommissioning trusts could be reported $25 par value series 6.75% 600,000 15,000 as investment income rather than as a reduction to decommissioning Total Preferred Stock without Mandatory Redemption $ 384,994 429,994 expense.

With Mandatory Redemption (notes Dand F)

Uranium Enrichment Decontamination and $100 par value series 7.44% 750,000 $ 103.72 75,000 $ 75,000 Decommissioning Fund 5.97% 750,000 102.99 75,000 75,000 In accordance with NEPA, domestic utilities that own nuclear Total Preferred Stock with Mandatory Redemption (note G) $ 150,000 $ 150,000 generating stations are required to pay a cumulative total of $150 Monthly Income Preferred Securities (notes F and G) million each year (adjusted for inflation) into a decontamination 9 375% 6,000,000 25.00 $ 150,000 and decommissioning fund, based on their past purchases of Total Monthly Income Preferred Securities $ 150,000 enrichment services from the United States Department of Energy

28 I PSEG 1994 A I UAL REP O RT ' .

Notes to Schedule of Consolidated Capital Stock Under(Over)Recovered Electric Energy And Gas Costs - net (A) Total authori zed and unissued shares include 7,302,488 shares of Enterprise Common Stock reserved for issuance through Enterprise's Dividend Reinvestment and Recoveries of electric energy and gas costs are determined by the BPU Stock Purchase Plan and various employee benefit plans. In 1994, 1,009,674 shares of under the LEAC and LGAC. PSE&G's deferred fuel balances as of Enterprise Common Stock were issued and sold for $28,495, 122; in 1993, 8,292,505 December 31, 1994 and December 31, 1993, reflect underrecovered shares were issued and sold for $273,479,342, including a public offering of 4,400,000 costs as follows:

shares issued and sold for $142,670,000.

In thousands December 31 ,

(B) Enterprise has authorized a class of 50,000,000 shares of Preferred Stock without par value, none of wh ich is outstanding. 1994 1993 (C) As of December 31, 1994, there were 2,300,058 shares of $100 par value and Underrecovered Electric Energy Costs $1720 $35.2 9,400,000 shares of $25 par value Cumulative Preferred Stock which were authorized Underrecovered Gas Fuel Costs .6 26.8 and unissued, and which upon issuance mayor may not provide for mandatory sinking fund redemption. If dividends upon any shares of Preferred Stock are in Total $172.6 $62.0 arrears in an amount equal to the annual dividend thereon, voting rights for the election of a majority of PSE&G's Board of Directors become operative and continue Unrecovered Plant and Regulatory Study Costs until all accumulated and unpaid dividends thereon have been paid, whereupon all such voting ri ghts cease, subject to being again revived from time to time. Amounts shown in the consolidated balance sheets consist of costs associ-(D) At December 31, 1994, the an nual dividend requirement and embedded dividend ated with developing, consolidating and documenting the specific design for Preferred Stock without mandatory redemption were $24,666,763 and 6.39%, basis of PSE&G's jointlyowned nuclear generating stations, as well as respectively, and for Preferred Stock with mandatory redemption were $10,057,500 and PSE&G's share of costs associated with the cancellation of the Hydrogen 6.75%, respectively.

At December 31, 1993, the an nual dividend requirement and embedded dividend for Water Chemistry System Project at Peach Bottom. PSE&G has received Preferred Stock without mandatory redemption were $29,012,000 and 6.75%, respec- both BPU and FERG approval to defer and amortize, over the remaining tively and for Preferred Stock with mandatory redemption were $10,057,500 and 6.71%, life of the Salem and Hope Creek nuclear units, costs associated with respectively. configuration baseline documentation projects. PSE&G has received (E) In February 1994, PSE&G sold 600,000 shares of its 6.92% Cumulative Preferred FERG approval to defer and amortize over the remaining life of the Stock ($100 Par) and 600,000 shares of its 6.75% Cumulative Preferred Stock ($25 par).

PSE&G redeemed the 150,000 shares of its outstanding 8.08% Cumulative Preferred applicable Peach Bottom units, costs associated with the configuration Stock ($ 100 par) on March I, 1994 at a redemption price of $101.00. In addition, baseline documentation and the cancelled Hydrogen Water Chemistry PSE&G redeemed on March I, 1994, all of the 300,000 shares of its outstanding 8. 16% System Projects. While PSE&G expects the BPUto authorize recovery of Cumulative Preferred Stock ($ 100 par), at a redemption price of $100.74. On December such costs from electric customers, no assurances can be given.

16, 1994, PSE&Gredeemed all of the outstanding 750,000 shares of its 7.80%cumulative preferred stock ($ 100 par), at a redemption price of $!01.00.

Unamortized Debt F:xpense (F) Public Service Electric and Gas Capital, L.P. (Partnership) was formed for the purpose of issuing Monthly Income Preferred Securities (MIPS). The proceeds of MIPS Gains and losses and the costs of issuing and redeeming long-term debt sales are lent to PSE&G and evidenced by PSE&G's Deferrable Interest Subordinated for PSE&G are deferred and amortized over the life of the applicable debt.

Debentures. If and for as long as payments on PSE&G's Deferred Interest Subordinated Debentures have been deferred, or PSE&Ghas defaulted on the indenture related thereto Oil and Gas Property Write-Down or its guarantee thereof, PSE&G may not payany dividends on its Capital Stock. On On December 31, 1992, the BPU approved the recovery of the EDC write-November 9, 1994, the Partnership issued $6,000,000 of its 9Ys% MIPS, Series A, with a stated liquidation preference of $25 each. down through PSE&G's LGAC over a ten-year period beginning January 1, 1993. At December 31, 1994 and 1993, the remaining balance to be (G) For information concerning fai r value of financial instruments, see Note 8-Financial Instruments and Risk Management. amortized was $41.2 million and $46.4 million, respectively.

Note 5. Deferred Items Note 6. Schedule of Consolidated Debt Long-Term Property Abandonments In thousands December 31, The BPUhas authorized PSE&G to recover after-tax property abandonment costs from its customers. The following table reflects Interest Rates Due 1994 1993 the application of Statement of Financial Accounting Standards No. PSE&G 90, "Regulated Enterprises - Accounting for Abandonments and First and Refunding Mortgage Bonds (note A)

Disallowances of Plant Costs," as amended (SFAS 90) , on property 4%% 1994 $ - $ 60,000 abandonments, and related tax effects, for which no return is earned. 4%%- 6% 1995 310,000 310,000 6Vs%- 7Ys% 1997 300,000 300,000 The net-of-tax discount rate used was between 4.443% and 7.801%. 6% 1998 100,000 I00,000 (See Note 2 - Rate Matters.) The following table reflects property . 8%% 1999 100,000 100,000 abandonments: 6%- 8Vs% 2000-2004 1,400,000 1,400,000 6.30%- 9Ys% 2005-2009 359,310 184,510 In thousands at December 31, 1994 1993 6.80%- loY2% 2010-2014 198,500 313,300 6.45%- 8.10% 2015-2019 29,600 25,000 Discounted Discounted 7% - 9Y4% 2020-2024 1,244,500 1,368,500 Property Abandonments Cost Taxes Cost Taxes 5.2%- 6.55% 2025-2029 179,955 87,000 Atlantic Project $70, 130 $29,453 $ 81,475 $34,229 5.45%- 6.40% 2030-2034 487,445 145,200

~-8% w~ 15,001 15,001 LNG Project 7,287 2,635 11,362 4,227 Uranium Projects 10,852 4,677 12,699 5,442 Medium-term Notes

$88,269 7.15%- 7.18% 2023 40,500 40,500

$36,765 $!05,536 $43,898 8.10%-8.16% 2009 60,000 Total First and Refunding Mortgage Bonds $4,824,811 $4,449,011

PSEG 1994 A N UAL REPORT I 29 In thousands December 31 , (D) Funding provides debt financing fo r EDHI's businesses other than EGDC on the basis of unconditional guarantees from EDHI.

Interest Rates Due 1994 1993 (E) At December 31, 1994 and 1993, the annual interest requirement on long-term Debenture Bonds Unsecured debt was $422.7 million and $421.2 million, of which $335.6 million and $327.5 6% 1998 $ 18,195 18,195 million was the requirement for Bonds. The embedded interest cost on long-term Total Debenture Bonds 18,195 18,195 debt on such date was 7.79%and 8.06%, respectively.

Principal Amount Outstanding (note F) 4,843,006 4,467,206 (F) For information concerning fair value of financial instruments, see ote 8-Amounts Due Within One Year (note B) (3 10,200) (61,700) Financial Instruments and Risk Management.

Net Unamortized Discount (46,019) (4 1,069) (G) At December 31, 1994 and 1993, PSE&G's annual interest requirement on long-term debt was $343.3 million and $331.5 million, or wh ich $335.6 million and Total Long-Term Debt or PSE&G (note G) $4,486,787 $4,364,437 $327.5 million, respectively, was the requirement for bonds. The embedded interest EDHI Capital (note C) cost on long-term debt was 7.59%and 7.85%, respecti vely.

Senior Notes Short-Term (Commercial Paper and Loans) 9.875%-10.05% 1998 165,000 207,500 Commercial paper represents unsecured bearer promissory notes sold Medium-Term Notes through dealers at a discount with a term of nine months or less.

7.40% 1994 50,000 Bank loans represent PSE&G 's unsecured promissory notes issued 5.65% - 9.55% 1995 112,000 112,000 under informal credit arrangements with various banks and have a 900% 1996 20,000 20,000 5.79%-5.9 1% 1997 27,000 27,000 term of eleven months or less.

9.00% 1998 75,000 75,000 8.95%- 9.93% 1999 155,000 155,000 PSE&G 6.54% 2000 78,000 78,000 In mi llions 1994 ' 1993 1992 Principal Amount Outstanding (note F) 632,000 724,500 Principal amount outstanding at end Amounts Due Within One Year (note B) (154,405) (92,436) of year, primarily commercial paper $402 $258

$533 Net Unamortized Discount (1 ,278) (1,746) Weighted average interest rate fo r Total Long-Term Debt or Capital 476,317 630,318 Short-Term Debt at year-end 6.07% 3.34% 364%

Funding (note D)

PSE&Ghas authorization from the BPUto issue and have 9.54% 1995 35,000 35,000 outstanding not more than $1 billion of its short-term obligations at 9 55% 1996 28,000 28,000 any one time, consisting of commercial paper and other unsecured 6.85%-9 59% 1997 55,000 55,000 9.95% 1998 83,000 83,000 borrowings from banks and other lenders. This authorization expires 7.58% 1999 45,000 45,000 January 1, 1997.

Principal Amount Outstanding (note F) 246,000 246,000 PSE&Ghas an $800 million revolving credit agreement with a Amounts Due Within One Year (note B) (35,000) group of banks which expires September 14, 1995. As of December 31, Total Long-Term Debt or Funding 211 ,000 246,000 1994, there was no short-term debt outstanding under this agreement.

EGDC Mortgage Notes Fuelco has a $150 million commercial paper program to finance a 42.49%share of Peach Bottom nuclear fuel, supported by a $150 518%- 7.736% 1994 13,638 million revolving credit facility with a group of banks, wh ich expires 5.75% 1998 9,050 10.625% - 12.75% 2012 6,686 6,806 in June 1996. PSE&G has guaranteed repayment of Fuelco's Principal Amount Outstanding (note F) 6,686 respective obligations. As of December 31, 1994, 1993 and 1992, 29.494 Amounts Due Within One Year (note B) (133) (13,928) Fuelco had commercial paper of $93.7 million , $108.7 million and

$122.5 million, respectively, outstanding under such program , which Total Long-Term Debt of EGDC 6,553 15,566 amounts are included in the table above.

Total Long-Term Debt of EDHl 693,870 891,884 Consolidated Long-Term Debt (note E) $5,180,657 $5,256,321 EDHJ (A) PSE&G's Mortgage, securing the Bonds, constitutes a direct first mortgage lien on In millions 1994 1993 1992 substantially all PSE&G'S property and franchises.

Principal amount outstanding at end of year $90 $45 $134 (B) The aggregate principal amounts of mandatory req uirements for sinking funds Weighted average interest rate for and maturities for each or the five years following December 31, 1994 are as follows: Short-Term Debt at year-end 5.97% 347% 3.76%

In thousands Sinking Funds Maturities At December 31, 1994, Funding had a $225 million commercial Year PSE&G Capital PSE&G Capital EGDC Funding Total paper program supported by a direct pay commercial bank letter of 1995 $ 200 $ 42,500 $310,000 $11 2,000 $133 $ 35,000 $ 499,833 credit and revolving credit fac ility and a $225 million revolving 1996 200 42,500 - 20,000 149 28,000 90,849 credit faci lity, each of which expires in ovember 1995.

1997 300 42,500 300,000 27,000 166 55,000 424,966 1998 300 37,500 118,195 75,000 184 83,000 314,179 1999 300 - 100,000 155,000 205 45,000 300,505 Enterprise

$1,300 $165,000 $828,195 $389,000 $837 $246,000 $1,630,332 At each of December 31, 1994, 1993 and 1992, Enterprise had a $25 million line of credit supported bycompensating balances under an (C) Capital has provided up to $750 million debt financing for EDHl's businesses on the basis of a et Worth Maintenance agreement with Enterprise. Effective January 31, 1995, informal arrangement with a bank. At each of December 31, 1994, 1993 Capital will not have more than $650 million of debt outstanding at any one time. and 1992, Enterprise had no lines of credit compensated for byfees.

30 I PSEG 1994 AN UAL REPO RT Note 7. Long-Term Investments Natural Gas Hedging EDC sold futures contracts outstanding at December 31, 1994 which Long-Term Investments are primarily those of EDHL Asummary of hedged 10,650,000 mmbtu representing approximately 13% of antici-Long-Term Investments is as follows: pated domestic natural gas production in 1995 at an average sales In millions 1994 1993 price of $1.95 per mmbtu. The deferred unrealized gain at December 31, 1994 related to EDC's futures contracts was $2.6 million . EDC did Lease Agreements (see Note 11 - Leasing Activities):

Leveraged Leases $ 789 $ 738 not have any outstanding futures contracts at December 31, 1993.

Direct-Financing Leases 76 85 Other Leases 6 8 Interest Rate Swap Total 871 831 Capital entered into an interest rate swap on December 7, 1990 to Partnerships: allow EDHI to borrow at floating rates and effectively swap them into General Partnerships 157 152 fixed rates. The interest differential to be received or paid under the Limited Partnerships 437 433 interest rate swap agreement is accrued over the life of the agreement Total 594 585 as an adjustment to the interest expense of the related borrowing.

Joint Ventures 37 35 The swap terminates on December 11, 1995.

Securities 75 82 Valuation Allowances (17) (18) In thousands 1994 1993 Other Investments 66 116 Pay-fi xed swap Total Long-Term Investments $1,626 $1,63 1 Notional amount $100,000 $100,000 Pay rate 8.0% 8.0%

PSRC's leveraged leases are reported net of principal and interest Average receive rate 4.1% 3.5%

Year-end receive rate 6.8% 34%

on nonrecourse loans and unearned income, including deferred tax credits. Income and deferred tax credits are recogni zed at a level rate of return from each lease during the periods in which the net Foreign &change investment is positive. For information concerning PSRC's three During 1994, PSRC entered into a forward purchase contract for direct-finance leases with Continental Airlines, see Note 12 - foreign currency to hedge an EDC firm purchase commitment Commitment and Contingent Liabilities. denominated in pound sterling. The EDC commitment related to the Partnership investments are those of PSRC, EGDC and CEA and acquisition of Industrial Scotland Energy Limited (ISE) for approxi-are undertaken with other investors. PSRC is a limited partner in mately 21 million pounds. The realized gain of approximately various partnerships and is committed to make investments from $800 thousand on the forward purchase contract for foreign currency time to time, upon the request of the respective general partners. As was used to reduce the net acquisition cost allocated to ISE's assets of December 31, 1994, $134 million remained as PSRC's unfunded upon completion of the acquisition in June 1994.

commitment subject to call. Currently, substantially all of Enterprise's foreign revenues and PSRC has invested in securities and limited partnerships investing expenses are denominated in U.S. dollars.

in securities, which are recorded at fair value. Reali zed investment gains and losses on the sale of investment securities are determined Security Swap utilizing the specific cost identification method. (See Note 8 - During 1994, PSRC entered into two agreements to swap portions of its Financial Instruments and Risk Management) ownership interest in certain equity securities, held in a partnership, to the S&P 500 return. The purpose of the swap was to minimize PSRC's Note 8 . Financial Instruments and Risk Management exposure to the potential price volatility of such equity securities. One agreement with a notional amount of $17.6 million expires in June Enterprise's operations give rise to exposure to market risks from 1995; the other agreement, with a notional amount of $12.9 million, changes in crude oil and natural gas prices, interest rates, foreign expires in September 1995.

exchange rates and security prices of investments recorded at fair The notional amount swapped and the year end gain during 1994 value. Enterprise's policy is to use derivatives for the purpose of for these two agreements were as follows:

managing market risk consistent with its business plans and prudent Fair Value Gain practices. Enterprise does not hold or issue financial instruments for In thousands Notional amount Year End trading purposes. $30,489 $3,801 The notional amounts of derivatives summarized below do not represent amounts exchanged by the parties and, thus, are not a Fair Value of Financial Instruments measure of the exposure of Enterprise through its use of derivatives. The The estimated fair value was determined using the market quotations amounts exchanged, under the terms of the derivatives, are calculated or values of securities with similar terms, credit ratings, remaining on the basis of the notional amounts. Enterprise limits its exposure to maturities and redemptions at the end of 1994 and 1993, respectively.

credit-related losses in the event of nonperformance bycounterparties by limiting its counterparties to those with high credit ratings.

~----:J

PSEG 199 4 A t N U AL REPO RT I 31 In millions 1994 1993 (A) The provision for deferred income taxes represents the tax effects of the Carrying Fair Carrying Fair following items:

Amount Value Amount Value In thousands 1994 1993 1992 Long-Term Debt: Deferred Credits:

EDHI $ 884,686 $ 900,000 $ 999.994 $1,200,000 Additional tax depreciation and PSE&G 4,843,006 4,500,000 4,467,206 4,700,000 amorti zation $109, 106 $112,814 $136,073 Leasing Activities 60,129 34,958 56,087 Preferred Securities Subject to PropertyAbandon ments (6,606) (6,632) (34,739)

Mandatory Redemption: Oil and Gas Property Write-Down (2,451) (2,45l) (6,393)

PSE&GCumulative Deferred fuel costs - net 39,361 63,330 (40,148)

Preferred Securities 150,000 145,900 150,000 158,000 Other (13,260) (3,000) 2,666 Monthly Income Preferred Securities 150,000 158,300 Total $186,279 $199,01 9 $113,546 Since 1987, Enterprise's Federal altern ative minimum tax (AMT)

Note 9. Cash and Cash Equivalents liability has exceeded its regul ar Federal income tax liability. This excess can be carried fo rward indefinitely to offset regular income tax The December 31, 1994 and 1993 balances consist primarily of liability in future years. Enterprise expects to utilize these AMT credits working funds and highly liquid marketable securities (commerci al in the future as regular tax liability exceeds AMT. As of December 31, paper) with a maturity of three months or less. 1994, 1993 and 1992, Enterprise had AMT credits of $256 million, $247 mi ll ion and $212 mi llion, respectively.

Note 10. Federal Income Taxes Since 1986, Enterprise has fi led a consolidated Federal income tax return on behalf of itself and its subsidiaries. Prior to 1986, PSE&G Areconciliati on of reported Net Income with pretax income and of filed consolidated tax returns..On March 20, 1992, the Intern al Federal income tax expense with the amount computed by multi- Revenue Service (IRS) issued a Revenue Agent's Report (RAR) plying pretax income bY. the statutory Federal income tax rates of foll owing completion of ex ~in ation of PSE&G's consolidated tax 35%in 1994 and 1993 and 34%in 1992 is as follows: return fo r 1985 and Enterprise's consolidated tax returns fo r 1986 and In thousands 1994 1993 1992 1987, proposing various adj ustments fo r such years which would Net Income $ 679,033 $600,933 $504, 11 7 increase Enterprise's consolidated Federal income tax liability by Preferred securities dividend requirements 40,467 38, 114 31,907 SFAS 109 Cumu lative Effect (5,4 14) approximately $121 million, exclusive of interest and penalties, of Subtotal 536,024 which approximately $118 million is attributable to PSE&G . Interest 719,500 633,633 after taxes on these proposed adjustments is currentlyestimated to be Federal income taxes:

Operating income: approximately $97 million as of December 31, 1994 and will continue Current provision 162,52 1 151,208 151,509 to accrue at the Federal rate fo r large corporate underpayments, Provision fo r deferred income currently 11%annually.

taxes - net (A) 173,327 186,256 91,595 Investment tax credits - net (23,297) (23,784) (2 1,635) The most sign ificant of these proposed adjustments relates to the IRS contention th at PSE&G's Hope Creek nuclear unit is a partnership Total included in operating income 312,551 313,680 22 1,469 Miscellaneous other income: with a short 1986 taxable year. In addition, the IRS contends th at the Current provision (8, 186) (14,340) 4,946 tax in-service date of that unit is four months later than the date Provision fo r deferred income taxes (A) 10,422 9,815 19,261 claimed by PSE&G. InJune 1992, Enterprise and PSE&Gfiled a protest SFAS 90 deferred income taxes (A) 2,530 2,948 2,690 with the IRS disagreeing with certain of the proposed adjustments Total Federal income tax provisions 317,3 17 312,103 248,366 (including those related to Hope Creek) contained in the RAR for Pretax income $1,036,817 $945,736 $784,390 taxable years 1985 th rough 1987 and continue to contest these issues.

Reconciliation between total Federal income tax provisions and Any tax adjustments resulting from the RAR would reduce Enterprise's tax computed at the statutory tax rate on pretax income: and PSE&G 's respective deferred credits fo r accumul ated deferred In thousands 1994 1993 1992 income taxes. While PSE&G believes that assessments attributable to it Tax computed at the statutory rate $362,887 $331,008 are generally recoverable from its customers in rates, no assu rances can

$266,693 be given as to what regul atory treatment may be afforded by the BPU.

Increase (decrease) attributable to fl ow through of certain tax adjustments: OnJanuary 1, 1993, Enterprise adopted SFAS 109 without restating Depreciation (4,597) 3,347 19,330 prior years' fi nancial statements which resulted in Enterprise Amo rti zation of plant abandonments and recording a $5.4 million cumulative effect increase in its net income.

wri te-downs (2,046) (2,239) (18,867)

Amorti zation of investment tax credits (23,297) (23,784) (20,681) Under SFAS 109, deferred taxes are provided at the enacted statutory Other (1 5,630) 3,771 1,89 1 tax rate for all temporarydifferences between the financ ial statement Subtotal (45,570) (18,905) (18,327) carrying amounts and the tax bases of existing assets and liabilities Total Federal income tax provisions $3 17,3 17 $3 12,103 $248,366 irrespective of the treatment for ratemakin g purposes. Since management believes that it is probable that the effects of SFAS 109 on Effective Federal income tax rate 306% 33.0% 31.7%

PSE&G, principally the accumulated tax benefi ts that previously have been treated as a flow-through item to customers, will be recovered from utilitycustomers in the future, an offsetting regulatory asset was established. As of December 31, 1994, PSE&Ghad recorded a deferred

32 I PSEG 1994 ANNUA L REP O RT tax liability and an offsetting regulatory asset of $791 million Future minimum lease payments for noncancelable capital and representing the future revenue expected to be recovered through rates operating leases at December 31, 1994 were:

based upon established regulatory practices which permit recovery of Capital Operating In thousands Leases Leases cu rrent taxes payable. This amount was determined using the 1994 Federal income tax rate of 35%. 1995 $ 13,174 $15,013 1996 13,174 13,933 1997 13,175 11,945 SPAS 109 1998 13,176 8,631 The followin g is an analysis of accumulated deferred income taxes: 1999 13,177 6,442 Later Years 202,064 18,426 Accumulated Deferred Income Taxes In thousands 1994 Minimum Lease Payments 267,940 $74,390 1993 Assets: Less: Amount representing estimated executory costs, Current (net) 25,311 $ 12,934 together with any profit thereon, included in Non-Current: minimum lease payments 132,453 Unrecovered Investment Tax Credits 136,402 143, 125 Net minimum lease payments 135,487 Nuclear Decommissioning 25,082 25,211 Less: Amount representing interest 81,717 Hope Creek Cost Disallowance 10,127 20,231 Construction Period Interest and Taxes 15,913 9,811 Present value of net minimum lease payments (A) $ 53,770 Vacation Pay 6,822 6,721 (A) Reflected in the Consolidated Balance Sheets for 1994 and 1993 were Capital Lease AMT Credit 255,828 246,862 Obligations of $53.770 million and $53.104 million which includes Capital Lease Real Estate Impairment 20,932 27,173 Obl igations due within one year of $659 thousand and $574 thousand, respectively.

Other 6,863 14,845 Total Non-Current $ 477,969 $ 493,979 The following schedule shows the composition of rent expense Total Assets $ 503,280 $ 506,913 included in Operating Expenses:

For The Years Ended December 31, Liabilities:

Non-Current: In thousands 1994 1993 1992 Plant Related Items $2,268,688 $2,169,861 Interest on Capital Lease Obligations $ 6,156 $ 6,074 $ 6,129 Leasing Acti vities 580,4 15 520,286 Amortization of Utility Plant under PropertyAbandonments 26,971 32,206 Capital Leases 588 513 457 Oil and Gas Property Write-Down 14,925 16,790 Deferred Electric Energy& Gas Costs 59,884 20,133 Net minimum lease payments relating Unamortized Debt Expense 37,599 38,768 to Capital Leases 6,744 6,587 6,586 Taxes Recoverable Through Future Rates (net) 270,684 270,518 Other Lease payments 28,447 22,095 21 ,739 Other 124,193 127,803 Total Rent Expense $35,191 $28,682 $28,325 Total on-Current $3,383,359 $3,196,365 Total Liabilities $3,383,359 $3, 196,365 As Lessor Summary - Accumu lated Deferred Income Taxes PSRC's net investments in leveraged and direct financing leases are Net Current Assets $ 25,311 $ 12,934 composed of the following elements:

et Deferred Liability $2,905,390 $2,702,386 December 31, 1994 December 31, 1993 Total $2,880,079 $2,689,452 Direct Direct Leveraged Financing Leveraged Financing In millions Leases Leases Total Leases Leases Total Note 11. Leasing Activities Lease rents receivable $ 990 $92 $1,082 980 $114 $1,094 As Lessee Estimated residual value 622 13 635 595 12 607 The Consolidated Balance Sheets include assets and related 1,612 105 1,7 17 1,575 126 1,701 obligations applicable to capital leases under which PSE&G is a Unearned and lessee. The total amortization of the leased assets and interest on the deferred income (823) (29) (852) (837) (41) (878) lease obligations equals the net minimum lease payments included Total investments 789 76 865 738 85 823 in rent expense for capital lease . Deferred taxes (333) (20) (353) (267) (20) (287)

Capital leases of PSE&G relate primarily to its corporate head- Net investments $ 456 $56 $ 512 $ 471 $65 $ 536 qu arters and other capital equipment. Certain of the leases contain renewal and purchase options and also contain escalation clauses. PSRC's other leases are with various regional, state and city Enterprise and its other subsidiaries are not lessees in any authorities for transportation equipment and aggregated $6 million capitalized leases. and $8 million as of December 31, 1994 and 1993, respectively.

Utility plant includes the following amounts for capital leases at For information concerning PSRC's three direct-finance leases December 31: with Continental Airlines, see Note 12 - Commitments and Contingent Liabilities- Public Service Resources Corporation.

In thousands 1994 1993 Common Plant $58,610 $56,812 Less: Accumulated Amortization 4,840 3,708 et Assets under Capital Leases $53,770 $53, 104

PSEG 1994 A N U A L REPO RT I 33 Note 12. Commitments and Contingent Liabilities (D) Includes up to $250 million for premature decommissioning costs.

(E) In the event of a second industry loss triggering NEIL!! - coverage, the maximum Nuclear Performance Standard retrospective premium assessment can increase to $17.5 million.

The BPU has established an NPS for nuclear generating stations (F) Weekly indemnity for 52 weeks which commences after the first 21weeks of an owned by New Jersey electric utilities, including the five nuclear units outage. Beyond the first 52 weeks of coverage, indemnity of $2.8 million per week for 104 weeks is afforded. Total coverage amounts to $473.2 million over three years.

in which PSE&G has an ownership interest: Salem - 42.59%; Hope Creek- 95%; and Peach Bottom - 42.49%. PSE&G operates Salem Price-Anderson sets the "limit of liability" for claims that could and Hope Creek, while Peach Bottom is operated by PECO. arise from an incident involving any licensed nuclear facility in the The penalty/reward under the NPS is a percentage of replacement nation. The "limit of liability" is based on the number of licensed power costs. (See table below.) The NPS provides that the penalties nuclear reactors and is adjusted at least every five years based on the will be calculated to the edge of each capacity factor range. For Consumer Price Index. The current "limit of liability" is $8.9billion.

example, a 30%penalty applies to replacement power costs incurred All utilities owning a nuclear reactor, including PSE&G, have provided in the 55% to 65% range and a 40% penalty applies to replacement for this exposure through a combination of private insurance and power costs in the 45% to 55% range. mandatory participation in a fin ancial protection pool as established Capacity Factor Range Reward Penalty by Price-Anderson. Under Price-Anderson, each party with an owner-ship interest in a nuclear reactor can be assessed its share of $79.3 Equal to or greater than 75% 30%

Equal to or greater than 65% and less than 75% None None million per reactor per incident, payable at $10 million per reactor per Equal to or greater than 55%and less than 65% 30% incident per year. If the damages exceed the "limit of liability," the Equal to or greater than 45%and less than 55% 40% President is to submit to Congress a plan for providing additional Equal to or greater than 40%and less than 45% 50%

Below40% BPUIntervenes compensation to the injured parties. Congress could impose further revenue raising measures on the nuclear industry to pay claims.

Under the NPS, the capacity factor is calculated annually using PSE&G's maximum aggregate assessment per incident is $210.2 maximum dependable capability of the five nuclear units in which million (based on PSE&G's ownership interests in Hope Creek, Peach PSE&G owns an interest. This method takes into account actual Bottom and Salem) and its maximum aggregate annual assessment operating conditions of the units. per incident is $26.5 million.

While the NPS does not specifically have a gross negligence PSE&G purchases property insurance, including decontamination provision, the BPU has indicated that it would consider allegations of expense coverage and premature decommissioning coverage, with gross negligence brought upon a sufficient factual basis. Afinding of respect to loss or damage to its nuclear facilities. PECO has advised gross negligence could result in penalties other than those prescribed PSE&G that it maintains similar insurance coverage with respect to under the NPS. During 1994, the five nuclear units in which PSE&G Peach Bottom. Under the terms of the various insurance agreements, has an ownership interest aggregated a 74%combined capacity factor. PSE&G could be subject to a maximum retrospective assessment for a single incident of up to $26.5 million. Certain of the policies also Nuclear Insurance Coverages and Assessments provide that the insurer may suspend coverage with respect to all PSE&G's insurance coverages and maximum retrospective nuclear units on a site without notice if the Nuclear Regulatory assessments for its nuclear operations are as follows: Commission (NRC) suspends or revokes the operating license for any Type and Source of Coverages PSE&G Maximum unit on a site, issues a shutdown order with respect to such unit or Total Site Assessments for In millions Coverages a Single Incident issues a confirmatory order keeping such unit shut down.

PSE&G is a member of an industry mutual insurance company, Public Liability:

American Nuclear Insurers $ 200.0 $ NEIL, which provides replacement power cost coverage in the event of Indemnity (A) 8,720.3 210.2 a major accidental outage at a nuclear station. The policies provide

$8,920.3(B) $210.2 for a weekly indemnity payment of $3.5 million for 52 weeks, subject Nuclear Worker Liability:

to a 21-week waiting period. The policies provide for weekly indemnity American Nuclear Insurers (C) $ 200.0 8.2 payments of $2.8 million for a 104-week period beyond the first year's Property Damage: indemnity. The premium for this coverage is subject to retrospective Nuclear Mutual Limited $ 500.0 11.6 assessment for adverse loss experience. Under the policies, PSE&G's Nuclear Electric Insurance Ltd. (NEIL II) 1,400 O(D) 8.2(E) present maximum share of any retrospective assessment in any year is Nuclear Electric Insurers Ltd. (NEIL Ill) 8500 6.7

$12.4 million.

$2,750.0 26 5 Replacement Power: Construction and Fuel Supplies Nuclear Electric Insurance Ltd. (NEIL I) $ 3 5(F) 12.4 PSE&G has substantial commitments as part of its ongoing construction (A) Retrospective premium program under the Price-Anderson liabilityprovisions of the program which includes capital requirements for nuclear fuel. PSE&G's Atomic EnergyAct of 1954, as amended (Price-Anderson). Subject to retrospective construction program is continuously reviewed and periodically revised assessment with respect to loss from an incident at any licensed nuclear reactor in the as a result of changes in economic conditions, revised load forecasts, United States. Assessment adjusted for inflation effective August 20, 1993.

changes in the scheduled retirement dates of existing facilities, changes (B) Limit of liability for each nuclear incident under Price-Anderson.

in business plans, site changes, cost escalations under construction (C) Industry aggregate limit representing the potential liability from workers claiming contracts, requirements of regulatory authorities and laws, the timing exposure to the hazard of nuclear radiation. This policy includes automatic reinstate-ments up to an aggregate of $200 million, thereby providing total coverage of $400 of and amount of electric and gas rate changes and the ability of million. This policy does not increase PSE&G's obligation under Price-Anderson. PSE&G to raise necessary capital. Pursuant to an integrated electric

r

• 34 I PSEG 199 4 ANN U A L REP O RT resource plan (IRP), PSE&G periodically reevaluates its forecasts of of gas, various by-products and substances are or were produced or future customers, load and peak growth, sources of electric generating handled which contain constituents classified as hazardous. PSE&G capacity and DSM to meet such projected growth, including the need to generally provides for the disposal or processing of such substances construct new electric generating capacity. The IRP takes into account through licensed independent contractors. However, these statutory assumptions concerning future demands of customers, effectiveness of provisions impose joint and several responsibility without regard to conservation and load management activities, the long-term condition fau lt on all responsible parties, including the generators of the of PSE&G's plants, capacity available from electric utilities and other hazardous substances, for certain investigative and remediation costs suppliers and the amounts of cogeneration and other nonutility at sites where these substances were disposed of or processed. PSE&G capacity projected to be available. has been notified with respect to a number of such sites and the Based on PSE&G's 1995-1999 construction program, construction remediation of these potentially hazardous sites is receiving greater expenditures are expected to aggregate approximately $3.2 billion, attention from the government agencies involved. Generally, actions which includes $484 million for nuclear fuel and $78 million of AFDC directed at fund ing such site investigations and remediation include during the years 1995 through 1999. The estimate of construction all suspected or known responsible parties. PSE&G does not expect its requirements is based on expected project completion dates and expenditures for any such site to have a material effect on its includes anticipated escalation due to inflation of approximately 3%, financial position, results of operations or net cash flows.

annually. Therefore, construction delays or higher inflation levels could cause significant increase in these amounts. PSE&Gexpects to PSE&G Manufactured Gas Plant Remediation Program generate internally the funds necessary to satisfy its construction In 1988, NJDEP notified PSE&G th at it had identified the need for expenditures over the next five years, assuming adequate and timely PSE&G, pursuant to a formal arrangement, to systematically recovery of costs, as to which no assurances can be given. In addition , investigate and, if necessary, resolve environmental concerns extant PSE&G does not presently anticipate anydifficulties in obtaining at PSE&G's former manufactured gas plant sites. To date, NJDEP and sufficient sources of fuel for electric generation or adequate gas PSE&G have identified 38 former gas plant sites. PSE&G is currently supplies during the years 1995 through 1999. working with NJDEP under a program to assess, investigate and, if necessary, remediate environmental concerns at these sites Bergen Station Repowering (Remedi ation Program). The Remediation Program is periodically PSE&G is presentlyengaged in a construction project to renovate (or reviewed and revised by PSE&G based on regulatory requirements, "repower") the Bergen Station pursuant to an air pollution control experience with the Remediation Program and available technologies.

permit issued by the NJDEP in May 1993. The current effort would The cost of the Remediation Program cannot be reasonably estimated, maintain the existing electric supply of the station (with a small but experience to date indicates that costs of at least $20 million per increase from 629 MW to 669 MW), improve operational reliability year could be incurred over a period of more than 30 years and that and efficiency and significantly improve the environmental effects of the overall cost could be material to PSE&G's financi al position ,

operation of the facility. results of operations or net cash flows.

In July 1993, an association of competitors of PSE&G, appealed the Costs incurred through December 31, 1994 for the Remediation NJDEP's issuance of the air permit for the project to the Appellate Program amounted to $51.4 million. In addition, at December 31, Division of the New Jersey Superior Court, alleging that PSE&G is first 1994, PSE&G's estimated liability for estimated remediation costs required to obtain a Certificate of Need (Certificate) under the New aggregated $105.7 million through 1997. In accordance with a Jersey Need Assessment Act (NJNM). The NJDEP determined that the Stipulation approved by the BPU in January 1992, PSE&G is recovering NJNM was inapplicable to this renovation project. The Appellate $32 million of its actual remediation costs to reflect costs incurred Division of New Jersey Superior Court affirmed this determination. through September 30, 1992 over a six-year period. PSE&G will The New Jersey Supreme Court has den ied certification of the petition recover $5.3 million in each of its next two LGAC periods ending in for review of this decision. 1996. The regulatory treatment of the remediation costs covered by As of December 31, 1994, the repowering project was about 95% this Stipulation was not changed in the BPU's September 15, 1993 complete and PSE&G had spent approximately $291 million on this written order, allowing continued collection under the terms of the effort. The final cost is estimated to be approximately $400 million. In January 1992 Stipulation. As of December 31, 1994, PSE&G has order for PSE&G to recover its costs for the project, PSE&G would need recovered $22.2 million th rough its LGAC.

either BPU authorization to recover such costs in its rates or be success- The September 1993 decision concluded that PSE&G had met its ful in selling the station's output in the emerging wholesale market. burden of proof for establishing the reasonableness and prudence of remediation costs incurred in operating and decommissioning these Hazardous Waste facilities in the past. The remediation costs incurred during the period Certain Federal and State laws authorize the EPA.and the NJDEP, July 1, 1992 through September 30, 1992 were subject to audit and among other agencies, to issue orders and bring enforcement actions verification in PSE&G's 1992-93 LGAC. The audit has been completed to compel responsible parties to take investi gative and remedial and resulted in no disallowance of any costs. (See Note 2 - Rate actions at any site that is determined to present an imminent and Matters - Remediation Adjustment Charge). Afinal Board Order was substantial danger to the public or the environment because of an received on November 4, 1994, memorializing the above September actual or threatened release of one or more hazardous substances. 15, 1993 Stipulation.

Because of the nature of PSE&G's business, including the production of electricity, the distribution of gas and, formerly, the manufacture

PSEG 1994 A NN UAL REP O RT I 35 Also in 1988, PSE&G filed suit against certain of its insurers to The discount rate used in determining the PSE&G net periodic postre-recover the costs associated with addressing and resolving tirement benefit cost was 7.25% and 7.50%for 1994 and 1993, respectively.

environmental issues of the Remediation Program. PSE&G has settled Aone-percentage-point increase in the assumed health care cost its claim with one insurer and there is a trial scheduled for March trend rate for each year would increase the aggregate of the service and 1995 with the remaining insurers. Pending full recovery of interest cost components of net periodic postretirement health care cost Remediation Program costs through rates or under its insurance by approximately $4.7 million, or 10.5%, and increase the accumulated policies, neither of which can be assured, PSE&G will be required to postretirement benefit obligation as of December 31, 1994 by $54.4 finance the unreimbursed costs of its Remediation Program. million, or 11.3%.

The assumed health care cost trend rates used in measuring the Public Service Resources Corporation accumulated postretirement benefit obligation in 1994 were: medical PSRC has leased three wide-body aircraft to Continental Airlines costs for pre-age sixty-five retirees- 13.5%, medical costs for post-(Continental) through direct-finance leases. The leases for two A-300 age retirees - 9.5% and dental costs - 7.5%; such rates are assumed aircraft expire December 2000, while the lease for one DC 10-30 to gradually decline to 5.5%, 5.0% and 5.0%, respectively, in 2010. The aircraft expires June 2002. At December 31, 1994, PSRC had medical costs above include a provision for prescription drugs.

investments in the A-300 leases and the DC 10-30 lease of $43.0 million In its 1992 base rate case, PSE&G requested full recovery of the and $33.1 million, respectively. Continental has failed to make full costs associated with postretirement benefits other than pensions payment of its required lease payments due February 1, 1995 and has (OPEB) on an accrual basis, in accordance with SFAS 106. The advised PSRC of its intent to seek the termination of the A-300 leases BPU's December 31, 1992 base rate order provided that (1) PSE&G's and return the A-300 aircraft to PSRC. Continental also advised PSRC pay-as-you-go basis OPEB costs will continue to be included in cost of its intention, effective February 1, 1995, to reduce its rental payments of service and will be recoverable in base rates on a pay-as-you-go due under all three leases by approximately 50%. Continental indicated basis; (2) prudently incurred OPEB costs, that are accounted for on that payments under these leases could include debt securities an accrual basis in accordance with SFAS 106, will be recoverable in convertible into equity in lieu of full cash payments. Under the leases, future rates; (3) PSE&Gshould account for the differences between PSRC rents receivable and pre-tax lease income in 1995 would have its OPEB costs on an accrual basis and the pay-as-you-go basis being been $9.4 million and $4.1 million, respectivelyfor the A-300 aircraft recovered in rates as a regulatory asset; and (4) the issue of cash and $5.5 million and $2.7 million, respectively for the DC 10-30 versus accrual accounting will be revisited and in the event that aircraft. PSRC has informed Continental that it expects all of FASB or the SEC requires the use of accrual accounting for OPEB Continental's lease obligations to be satisfied in full. Negotiations are costs for ratemaking purposes, the regulatory asset will be recover-continuing concerning this matter. No assurances can be given that able, through rates, over an appropriate amortization period.

PSRC will be able to obtain new leases, sell or otherwise dispose of any Accordingly, PSE&G is accounting for the differences between its such aircraft on satisfactory terms in the event of an unscheduled lease SFAS 106 accrual cost and the cash cost currently recovered through termination . Enterprise believes the ultimate resolution of this matter rates as a regulatory asset. OPEB costs charged to expenses during 1994 will not have a material effect on its financial position, results of were $29.2 million and accrued OPEB costs deferred were $57.8 million.

operations or net cash flows. The amount of the unfunded liability, at December 31, 1994, as shown below, is $585.9 million and funding options are currently being Note 13. Postretirement Benefits Other Than Pensions explored. The primaryeffect of adopting SFAS 106 on Enterprise's and PSE&G's financial reporting is on the presentation of their financial On January 1, 1993, Enterprise and PSE&G adopted SFAS 106, which positions with minimal effect on their results of operations.

requires that the expected cost of employees' postretirement health DuringJanuary 1993 and subsequent to the receipt of the Order, care and insurance benefits be charged to expense during the years the FASB's Emerging Issues Task Force (EITF) concluded that in which employees render service. PSE&Gelected to amortize over deferral of such costs is acceptable, provided regulators allow SFAS 20 years of its unfunded obligation of $609.3 million at January 1, 106 costs in rates within approximately five years of the adoption of 1993. Prior to 1993, Enterprise and PSE&G recognized postretirement SFAS 106 for financial reporting purposes, with any cost deferrals health care and insurance costs in the year that the benefits were recovered in approximately twenty years. PSE&G intends to request paid. The following table discloses the significant components of the the BPUfor full SFAS 106 recovery in accordance with the EITF's view net periodic postretirement benefit obligation: of such standard and believes that it is probable that any deferred Net Periodic Postretirement Benefit Obligation costs will be recovered from utility customers within such twenty-year In millions, at December 31, 1994 1993 time period. As of December 31, 1994, PSE&G has deferred $116.4 Service cost ILi 117 million of such costs.

Interest on accumulated postretirement obligation 45.4 44.4 Amortization of transition obligations 30 5 305 Deferral of current expense (578) (58.6)

Annual net expense $ 292 $ 28.0

36 I PSE G 1994 ANNUAL REP O RT In accordance with SFAS 106 disclosure requirements, a reconcili- Note 15. Financial Information By Business Segments ation of the funded status of the plan is as follows:

In millions, December 31, 1994 1993 Information related to the segments of Enterprise's business is Accumulated postretirement benefit obligation: detailed below:

Retirees $(379.2) $(406.4) For the Year Ended December 31, 1994 Fully eligible active plan participants (45.7) (35 0) Nonutility Other active plan participants (161.0) (215 6) In thousands Electric Gas Activities(A) Total Total (585.9) (657.0) Operating Revenues $ 3,733, 113 $1,778,528 416,947 $ 5,928,588 Plan assets at fair value Eliminations (lnterseg-ment Revenues) (12,745) (12,745)

Accumulated postretirement benefit obligation in excess of plan assets (585.9) (6570) Total Operating Revenues 3,733,113 1,778,528 404,202 5,915,843 Unrecogn ized net (gain)/loss from past experience different Depreciation and from that assumed and from changes in assumptions (788) 19 6 Amortization 82,656 629,688 467,570 79,462 Unrecognized prior service cost Operating lncome Unrecognized transition obligation 548.3 5788 Before Income Taxes 1,482,151 1,083,155 226,196 172,800 Accrued postretirement obligation $(116.4) $ (586) Capital Expenditures 734,100 153,183 168,741 1,056,024 The discount rate used in determining the accumulated post- December 31, 1994 retirement benefit obligation as of December 31, 1994 was 8.50% and Net Utility Plant 9,642,177 1,456,068 11,098,245 Oil and Gas Property, 7.25% for 1994 and 1993, respectively. Plant & Equipment 577,913 577,913 Other Corporate Assets 2,589,348 576,806 1,875, 128 5,041,282 Note 14. Pension Plan Total Assets $12,231,525 $2,032,874 $2,453,041 $16,717,440 The discount rates, expected long-term rates of return on assets and average compensation growth rates used in determining the Pension For the Year Ended December 31, 1993 Plan's funded status and net pension cost as of December 31, 1994 Nonutility In thousands Electric Gas Activities(A) Total and 1993 were as follows:

1994 1993 Operating Revenues $ 3,693,083 $1,594,341 440, 120 $ 5,727,544 Funded Status: Eliminations (lnterseg-Discount Rate Used to Determine Benefit Obligations 8Y2% 7Y4% ment Revenues) (21 ,985) (21,985)

Average Compensation Growth Total Operating Revenues 3,693,083 1,594,341 418,135 5,705,559 to Determine Benefit Obligations 45% 5.5%

et Pension Cost: Depreciation and Discount Rate 7Y4% 7Yz% Amortization 439,83 1 69,375 91,058 600,264 Expected Long-Term Return on Assets 8% 8% Operating Income Average Compensation Growth 55% 6% Before Income Taxes 1, 117,739 173,916 135,472 1,427,127 Capital Expenditures 738,362 152,012 94,014 984,388 The following table shows the Pension Plan's funded status: December 31, 1993 In thousands, at December 31, 1994 1993 et Uti lity Plant 9,451,581 1,352,799 10,804,380 Actuarial present value of benefit obligations: Oil and Gas Property, Accumulated benefit obligations, Plant & Equipment 506,047 506,047 including vested benefits of $1,151 ,677 Other Corporate Assets 2,313,394 866,524 1,839,311 5,019,229 in 1994 and $1,04 5,035 in 1993 $(1,235,930) $(1,144,214) Total Assets $11,764,975 $2,219,323 $2,345,358 $16,329,656 Effect of projected future compensation (261,846) (346,416)

Projected benefit obi igations (1,497,776) (1,490,630) For the Year Ended December 31, 1992 Plan assets at fair value, primarily listed equity and Nonutility debt securities 1,270,116 1,3 12,619 In thousands Electric Gas Activities(A) Total Projected benefit obligations in excess of plan assets (227,660) (178,011) Operating Revenues $ 3,407,819 $1,586, 181 $ 407,404 $ 5,401 ,404 Unrecognized net gain (loss) from past experience and Eliminations (lnterseg-effects of changes in assumptions 32,815 (20,981) ment Revenues) (44,623) (44,623)

Prior service cost not yet recognized in net pension cost 119,783 113,397 Unrecognized net obligations being recogni zed Total Operating Revenues 3,407,819 1,586,181 362,781 5,356,781 over 16.7 years 69,387 77,486 Depreciation and Accrued pension expense $ (5,675) (8,109) Amortization 435,104 116,907 90,537 642,548 Operating Income The net pension cost for the years ending December 31, 1994, 1993 Before Income Taxes 861 ,066 124,893 206,783 1,192,742 Capital Expenditures 668,537 158,224 61 ,048 887,809 and 1992, include the fo llowing components:

In thousands December 31, 1992 1994 1993 1992 Service cost- benefits earned during year $ 42,904 Net Utility Plant 9,224,543 1,246,769 10,471,312

$ 42,948 $ 36, 125 Oil and Gas Property, Interest cost on .projected benefit obligations 108,394 103,118 94,233 5,022 (166,916) Plant & Equipment 506,814 506,814 Return on assets (62,323)

Other Corporate Assets 1,315,564 486,981 1,997,061 3,799,606 Net amortization and deferral (90,752) 90,958 (14,035)

Total Assets $10,540,107 $1 ,733,750 $2,503,875 $14,777,732 Total $ 65,568 $ 70,108 $ 54,000 (A) The Nonutility Activities include amounts applicable to Enterprise, the parent See Note 1 - Organization and Summary of Significant corporation.

Accounting Policies.

PSEG 1994 ANNUAL REPORT I 37 ote 15 (continued) Note 16. Property Impairment of Enterprise Group Information related to Property, Plant and Equipment of PSE&G is Development Corporation detailed below:

In thousands, December 1994 1993 1992 As a result of a management review of each property's current Utility Plant-Original Cost value and the potential for increasing such value through Electric Plant in Service operating and other improvements, EGDC recorded an impairment Steam Production $ 1,810,674 $ 1,763,253 $ 1,668, 198 in 1993 related to certain of its properties, including properties Nuclear Production 5,931,049 5,873,274 5,819,755 Transmission 1,078,928 1,034,150 1,024,843 upon which EDHI's management revised its intent from a long-Distribution 2,877,862 2,724,202 2,573,226 term investment strategy to a hold for sale status, reflecting Other 647,406 526,015 479,647 such properties on its books at their net realizable value. This Total Electric Plant in Service 12,345,919 11,920,894 11 ,565,669 impairment reduced the estimated value of EGDC's properties by Gas Plant in Service $77.6 million and 1993 net income by $50.5 million, after tax, or Transmission 62,213 63,395 57,405 21 cents per share of Enterprise Common Stock. EGDC's real estate Distribution 2,131,816 1,993,044 1,870,462 Other 124,204 121,402 117,077 held for sale of $13.5 million and $33.8 million at December 31, Total Gas Plant in Service 2,318,233 2,177,841 2,044,944 1994 and 1993 are presented in "Other Assets - net," respectively, in the accompanying consolidated balance sheets.

Common Plant in Service Capital Leases 58,610 56,812 56,812 General 486,521 463,473 423, 160 Total Common Plant in Service 545,131 520,285 479,972 Total $15,209,283 $14,619,020 $14,090,585 Note 17. Jointly-Owned Facilities - Utility Plant PSE&G has ownership interests in and is responsible for providing its share of the necessary fin ancing fo r the following jointly owned facilities.

All amounts reflect the share of PSE&G's jointly owned projects and the corresponding direct expenses are included in Consolidated Statements of Income as operating expenses. (See Note 1 - Organization and Summary of Significant Accounting Policies.)

In thousands Ownership Plant Accumulated Plant Under Plant- December 31, 1994 Interest In Service Depreciation Construction Coal Generating Conemaugh 22.50% $176,463 $ 35,044 $ 16,150 Keystone 22.84 111,360 30,935 2,615 Nuclear Generating Peach Bottom 42.49 729,317 286,565 28,239 Salem 42.59 1,021,588 358,492 39,550 Hope Creek 95.00 4,120,538 938,535 5,104 Nuclear Support Facilities Various 158,400 28,211 6,342 Pumped Storage Generating Yards Creek 50.00 23,645 8,721 2,886 Transm ission Facilities Various 120,274 34,720 9 Merrill Creek Reservoir 13.91 37,184 10,492 Linden Gas Plant 90.00 15,872 18,532 Note 18. Selected Quarterly Data (Unaudited)

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

Calendar Quarter Ended March 31, June 30, September 30, December 31, In thousands where applicable 1994 1993 1994 1993 1994 1993 1994 1993 Operating Revenues $1,794,425 $1,594,708 $1,278,363 $1,246,337 $1,374,976 $1,402,037 $1,468,079 $1,462,477 Operating Income $ 348,948 $ 336,505 $ 252,725 $ 248,658 $ 311,920 $ 318,785 $ 250,500 $ 202,899 Net Income $ 230,127 $ 215,418 $ 129,885 $ 119,782 $ 187,178 $ 192,231 $ 131,843 $ 73,502 Earnings Per Share of Common Stock $ 0.94 $ 0.91 $ 0.53 $ 0.49 $ 0.76 $ 0.79 $ 0.54 $ 0.30 Average Shares of Common Stock Outstanding 243,777 236,919 244,698 240,920 244,698 241,889 244,698 242,848

3s I PSEG 1994 AN U A L REP O RT 'y

• Consolidated Financial Statistics <A)

Dollars in thousands where applicable 1994 1993 1992 1991 1990 Selected Income Information Operating Revenues Electric $ 3,733,113 $ 3,693,083 $ 3,407,819 $ 3,519,806 $ 3,380,742 Gas 1,778,528 1,594,341 1,586,181 1,307,849 1,236,747 Nonu ti lity Activities 404,202 418,135 362,781 283,766 230,075 Total Operating Revenues $ 5,915,843 $ 5,705,559 $ 5,356,781 $ 5,111,421 $ 4,847,564 Net Income $ 679,033 $ 600,933 $ 504,117 $ 543,035 $ 403,663 Earnings per average share of Common Stock $2.78 $2.50 $2.17 $2.43 $1.90 Dividends Paid per Share $2.16 $2. 16 $2.16 $2.13 $2.09 Payout Ratio 78% 86% 100% 88% 110%

Rate of Return on Average Common Equity (B) 12.94% 11.91% 10.69% 12.24% 9.66%

Ratio of Earnings to Fixed Charges 2.76 2.59 2.30 2.54 2.09 Book Value per Common Share (C) $21.70 $2 1.07 $20.32 $20.04 $19.44 Gross Utility Plant $16,566,058 $15,861 ,484 $15,081 ,907 $14,426,560 $12,836,874 Accumulated Depreciation and Amortization of Utility Plant $ 5,467,813 $ 5,057, 104 $ 4,610,595 $ 4,243,979 $ 3,963,093 Total Assets $16,717,440 $16,329,656 $14,777,732 $14,804,354 $13,713,248 Consolidated Capitalization Common Stock $ 3,801,157 $ 3,772,662 $ 3,499,183 $ 3,262, 138 $ 3,043,402 Retained Earnings 1,510,010 1,361,018 1,282,931 1,282,029 1,203,772 Common Equity 5,3 11,167 5,133,680 4,782,114 4,544, 167 4,247,174 Long-Term Debt 5,180,657 5,256,321 4,977,579 5,128,373 4,668,024 Preferred Stock without Mandatory Redemption 384,994 429,994 429,994 429,994 429,994 Preferred Stock with Mandatory Redemption 150,000 150,000 75,000 Month ly Income Preferred Securities 150,000 Total Capitalization $11 ,176,818 $10,969,995 $10,264,687 $10,102,534 $ 9,345,192 (A) See Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes to Consolidated Financi al Statements.

(B) et Income for a twelve-month period divided by the thirteen-month average of Common Equity.

(C) Total Common Equity divided by end-of-period Common Shares outstanding.

,,' . PSEG 1994 ANN UAL REP O RT I 39 Operating Statistics Public Service Electric and Gas Company Dollars in thousands where applicable 1994 1993 1992 1991 1990 Electric Revenues from Sales ofElectricity Residential $1, 187, 103 $1,175,875 $1,037,099 $1,116,699 $1,038,906 Commercial 1,734,901 1,678,011 1,554,956 1,575,547 1,516,755 Industrial 693,535 710,206 683,750 728,411 697,571 Public Street Lighting 52,353 51,019 47,729 46,400 45,418 Total Revenues from Sales to Customers 3,667,892 3,615,111 3,323,534 5,467,057 3,298,650 Interdepartmental 1,710 1,737 1,544 1,599 1,652 Non-Jurisdictional Sales 35,223 48,625 51,313 19,763 48,325 Total Revenues from Sales of Electricity 3,704,825 3,665,473 3,376,391 3,488,419 3,348,627 Other Electric Revenues 28,288 27,610 31,428 31,387 32,115 Total Operating Revenues $3,733, 113 $3;693,083 $3,407,819 $3,519,806 $3,380,742 Sales ofElectricity - megawatthours Residential 10,594,134 10,631,402 9,816,046 10,505,547 9,875,569 Commercial 18,466,863 18,096,312 17,454,352 17,596,569 17,054,495 Industrial 9,249,233 9,203,839 9,298,741 9,406, 109 9,457,985 Public Street Lighting 334,726 329,828 325,545 320,900 314,936 Total Sales to Customers 38,644,956 38,261,381 36,894,684 37,829,125 36,702,985 Interdepartmental 17,755 18,514 19,012 19,719 19,822 Non-Jurisdictional Sales 1,320,170 2,245,884 2, 116,049 1,858,590 1,625,016 Total Sales of Electricity 39,982,881 40,525,779 39,029,745 39,707,434 38,347,823 Gas Revenues from Sales of Gas Residential $ 889,541 $ 780,195 $ 809,559 $ 699,696 $ 667,077 Commercial 510,829 460,340 481 ,960 426, 110 406,577 Industrial 312,405 299,762 243,527 138,394 130,273 Street Lighting 491 467 468 468 385 Total Revenues from Sales to Customers 1,713,266 1,540,764 1,535,514 1,264,668 1,204,312 Interdepartmental 3,976 3,078 2,572 2,689 2,157 Total Revenues from Sales of Gas 1,717,242 1,543,842 1,538,086 1,267,357 1,206,469 Transportation Service Revenues 35,057 37,081 34,739 27,036 15,654 Other Gas Revenues 26,229 13,418 13,356 13,456 14,624 Total Operating Revenues $1,778,528 $1,594,341 $1,586,181 $1,307,849 $1,236,747 Sales of Gas - kilotherms Residential 1,337,267 1,280,128 1,265,270 1,140,887 1,097,034 Commercial 945,950 943,054 939,021 893,069 837,650 Industrial 912,689 876,421 739,508 399,385 341,467 Street Lighting 668 666 668 666 657 Total Sales to Customers 3,196,574 3,100,269 2,944,467 2,434,007 2,276,808 Interdepartmental 9,316 7,509 5,967 6,174 5,144 Total Sales of Gas 3,205,890 3, 107,778 2,950,434 2,440,181 2,281,952 Transportation Service 544,539 557,403 543,097 381,497 182,056 Total Gas Sold and Transported 3,750,429 3,665,181 3,493,531 2,821,678 2,464,008

40 I PSEG 1994 A UAL REPORT Officers and Directors Public Service Directors E. James Ferland Irwin Lerner James C. Pitney Enterprise Group Chairman of the Board, President Retired Chairman, Board of Partner in the law firm of Incorporated Lawrence R. Codey and Ch ief Executive Officer of Di rectors and Executive Committee, Pitney, Hardin, Kipp & Szuch.

President and Chief Operating the Corporation. Hoffmann-La Roche, Inc. Chairman of Finance Committee, Officers Officer, PSE&G. Chairman of Executive (manufactures pharmaceuticals, Member ofAudit Committee, Member of Executive Commiltee Committee. vitamins and fine chemicals, and Nominating Committee and E. James Ferland and Finance Committee. provides home health care and Organization and Compensation Chai rman of the Board, President Raymond V. Gilmartin diagnostic products and services). Committee.

and Chief Executive Officer Ernest H. Drew Chairman of the Board, President Chairman ofNominating Member, Board of Management, and Chief Executive Officer, Merck Committee, Member ofAudit Richard J. Swift Robert C. Murray Hoechst AG (manufactures & Co., Inc. (d iscovers, develops, Committee, Nuclear Committee Chairman of the Board and Chief Vice President and Chief Financial pharmaceuticals, chemicals, fibers, produces and markets human Executive Officer, Foster Wheeler and Organization and Officer film , specialties and advanced and animal health products). Corporation (provides design, Compensation Committee.

materials). Member of Finance Committee, engineering, con truction, Patricia A. Rado Member ofAudit Commillee, Nuclear Committee and Marilyn M. Pfaltz manufacturi ng, management, plant Vice President and Controller Finance Committee and Organization and Compensation Partner of P and RAssociates operations and environmental R. Edwin Selover Nominating Committee. Committee. (communication special ists). services).

Vice President and General Counsel Member ofAudit Committee, Member of Audit Committee, T.J. Dermot Dunphy Shirley A. Jackson Nominating Commiltee and Finance Committee and Nuclear Francis]. Riepl President, Chief Executive Officer Professor of Physics, Rutgers Organization and Compensation Committee.

Treasurer and director, Sealed Air University, and Theoretical Committee.

Corporation (manufactures Physics Consultant, AT&T Bell Josh S. Weston Robert S. Smith protective packaging products Laboratories. Chairman of the Board and Chief Secretary and systems). Chair ofNuclear Committee, Executi ve Offi ce r, Automatic Data Chairman ofAudit Committee, Member ofAudit Committee, Processing, Inc.

Member of Executive Committee Finance Committee and Chairman of Organization and and Organization and Nominating Committee. Compensation Committee, Compensation Committee. Member of Executive Committee and Finance Committee.

Public Service Electric Leon R. Eliason Francis E. Delany, Jr. John H. Maddocks Directors and Gas Company Chief Nuclea r Officer and Vice President and Corporate Rate Vice President- Public Affairs Pres ident - Nuclear Business Un it Counsel E. James Ferland Officers Martin P. Mellett Lawrence R. Codey Robert C. Murray John A. Gartman Vice President - Hum an Resources Senior Vice President - Finance Vice President - Gas Supply and Raymond V. Gilmartin E. James Ferland Jagruti Oza Shirley A. Jackson and Chief Financial Officer Planning Cha irman of the Board and Chief Vice President - Corporate Planning Irwin Lerner Executive Officer R. Edwin Selover Curti s W. Grevenitz Patricia A. Rado James C. Pitn ey Sen ior Vice President and General Vice President - Organ ization Lawrence R. Codey Vice President and Controller Counsel Effectiveness President and Chief Ope rating Officer Rudolph D. Stys Joseph]. Hagan Francis ]. Riepl Vice President and Treasurer Senior Vice President - Gas Vice President - Nuclear Operations Harold W. Borden , Jr.

Senior Vice President - External William]. Budney, Jr. Stanley LaBruna Glenn M. Rogers Affairs Vice President - Info rmation Vice President - Distr ibution Vice President - Nuclear Systems and Co rporate Services Systems Enginee ring Thomas M. Crimmins, Jr.

Senior Vice President - Customer Frank Cassidy Pierre R.H. Landrieu Robert S. Smith Operations Vice President and Secretary Vice President - Transmission Vice President - Fossil Production Robert]. Dougherty, Jr. Systems Frederick W. Lark Senior Vice President - Electric Vice President - Marketing Enterprise Diversified Paul T. Bradshaw Directors Presidents of Paul H. Way Holdings Incorporated Vice President and General Counsel Subsidiary Companies Enterprise Group Development Ernest H. Drew Corporation Officers Michael L. Gallup Vice President - Busi ness T.J. Dermot Dunphy Arthur S. islick Eileen A. Moran Development E. James Ferland Community Energy Alternatives Public Se rvice Resources E. James Ferland Marilyn M. Pfaltz Incorporated Corporation Chairman of the Board and Chief Madeleine W. Ludlow Richard J. Swift Executive Officer Vice President and Treasu rer Malcolm Butler Paul H. Way Energy Development Corporation Paul H. Way John W. Nabial Josh S. Weston President and Vice President and Controller Chief Operating Officer

PSEG 199 4 ANN UAL REPO RT I 41 Corporate and Stock Information Dividends Dividends on the common stock of Enterprise, as declared by the Board of Directors, are generally payable on the last business day of Stock Exchange Listings March, June, September and December of each year. Regular quarterly New York (Enterprise common and PSE&G preferred) dividends on PSE&G's preferred stock are payable on the last business Philadelphia (Enterprise common) day of March, June, September and December of each year.

Trading Symbol: PEG Direct Deposit of Dividends Annual Meeting o more dividend checks delayed in the mail. No waiting in bank Please note that the Annual Meeting of Stockholders of Public Service lines. Your quarterly common and preferred stock dividend payments Enterprise Group Incorporated will be held at Newark Symphony Hall, can be deposited electronically to your personal checking or savings 1020 Broad Street, Newark, NJ, on Tuesday, April 18, 1995 at 2 p.m. account. To use this free service, call us at 1-800-242 -0813.

Security Analysts and Institutional Investors Stockholder Services Stockholder inquiries about stock transfer, dividends, dividend For information contact:

reinvestment, direct deposit, missing or lost certificates, change of Director - Investor Relations (201) 430-6564 address notification and other account information should be Available Publications directed to: Stockholder Services Department, Public Service Electric

& Gas Company, P.O. Box 1171, Newark, NJ 07101-1171. Please Form 10-K: Acopy of Enterprise's 1994 Annual Report to the include your account number or social security number. Securities and Exchange Commission, filed on Form 10-K, may be obtained by contacting:

Stockholders can also phone our toll-free number 1-800-242 -0813, Director- Investor Relations Monday through Friday, with questions about stock transfer and Public Service Electric and Gas Company T6B registration , shares held in the Dividend Reinvestment and Stock P.O. Box 570 Purchase Plan and our other stockholder se rvices. Hours are: 10 a.m. Newark, NJ 07101 to noon and 1:30 p.m. to 3:30 p.m. Eastern time. The telephone Telephone (201) 430-6503 number for the hearing impaired with special equipment is The copy so provided wi ll be without exhibits. Exhibits may be TDD 1-800-732-3241. Please have your account number or social purchased for a specified fee.

security number ready when you cal I.

Financial and Statistical Review: Acomprehensive statistical report Transfer Agents containing historical financial and operating data may also be The transfer agents for the common and preferred stocks are: obtained from the Director - Investor Relations.

Stockholder Services Department, Public Service Electric and Gas Company CEA and EDC Annual Reports: Copies may be obtained from the P.O. Box 1171 Director - Investors Relations after June 1, 1995.

ewark, NJ 07101-1171 Environmental Progress Report: Acopy of PSE&G's 1995 First Chicago Trust Company of ew York Environmental Progress Report may be obtained by contacting:

General Manager - Environmental Affairs P.O. Box 2506 Public Service Electric and Gas Company Tl 7G Jersey City, J 07303-2506 P.O. Box 570 Dividend Reinvestment Plan Newark, J 07101 Enterprise offers a Dividend Reinvestment and Stock Purchase Plan Common S~ock - Market Price and Dividends Per Share under which all common and PSE&G preferred stockholders may 1994 1993 reinvest dividends and/or make direct cash payments to acquire High Low Div. High Low Div.

Enterprise common stock. Purchases of common stock are made for First Quarter 32 27 ~ $.54 34!4 30 $. 54 the Plan directly from Enterprise, at its sole discretion, and/or in the 25 .54 31% .54 Second Quarter 29 ~ 35 open market. All brokerage and other fees are absorbed by Enterprise. Third Quarter 28% 23iil .54 36)( 34 .54 To participate, call 1-800-242-0813 for a prospectus and Fourth Quarter 27!.i 25 .54 35X 30 .54 authorization form. ..

The number of holders of record of Public Service Enterprise Group Incorporated common shares as of December 31, 1994 was 185,941.

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