ML18101B329

Public Svc Enterprise Group Inc,1995 Summary Annual Rept

ML18101B329
Person / Time
Site:	Salem, Hope Creek
Issue date:	12/31/1995
From:	Ferland E PUBLIC SERVICE ENTERPRISE GROUP
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1995 FINANCIAL HIGHLIGHTS Dollars in thousands where applicable 1995 1994

% Change Total Operating Revenues

$ 6, 164, 153

$ 5,922,443 4

Total Operating Expenses

$ 5,006,443

$ 4,758,350 5

Net Income 662,323 679,033 (2)

Common Stock Shares Outstanding-Average (Thousands) 244,698 244,471 Shares Outstanding-Year-end (Thousands) 244,698 244,698 Earnings per Average Share

$ 2.71

$ 2.78 (3)

Dividends Paid per Share

$ 2.16

$ 2.16 Book Value per Share-Year-end

$22.25

$21.70 3

Market Price per Share-Year-end

$30.63

$26.50 16 Ratio of Earnings to Fixed Charges 2.77 2.76 Ratio of Earnings to Fixed Charges-PSE&G 3.25 3.35 Gross Additions to Utility Plant 686,1 50 887,283 (23)

Total Gross Utility Plant

$16, 925,280

$16,566,058 2

The detailed consolidated financial statements and related discussion appear in Appendix A to the Proxy Statement.

PSE&G serves the intensely developed corridor between New York City and Philadelphia.

Net Income (dollars in millions) 543 504 601 679 662 I

I I

I I

I I

I 91 92 93 94 95 Allocation of Assets at December 31, 1995 Enterprise Total Assets -

$17.2 billion PSE&G EDHI Electric 72%

PSRC 8%

Gas 13%

EDC 4°/o CEA 2%

EGDC 1%

Annual Earnings and Dividend Payout per Share (dollars) 2.43 2.17 2.50 12.13 2.16 12.16 I

I I

I I

91 92 93

• Earnings per Share Annual Dividend Payout 2.78 I 2.16 I

I 94 Sources of Consolidated Earnings per Share Enterprise Earnings per Average Share -

$2.71 Earnings per Share Electric $2.03 EDC

$.14 Gas

$.35 CEA

$.05 PSRC

$.1 4 2.71 I 2.16 I

I 95 1

DEAR SHAREHOLDER, P

ublic Service Enterprise Group delivered a solid financial performance in 1995. Consolidated earnings were $662 million, or $2.71 per share compared with last year's earnings of $679 million, or

$2.78 per share. Our company generated $i.5 billion in cash, reinvested $900 million for future growth, paid out $530 million in common stock dividends, and used the balance to reduce outstanding debt.

Weather impacted results for Public Service Electric and Gas Company (PS E&G), Enterprise's pri-mary subsidiary. While hot summer weather boosted electric sales, mild winter months in 1995 resulted in lower sales of natural gas. PSE&G's earnings also were affected by higher operating and maintenance expenses associated with the upgrade of Salem Nuclear Generating Station.

Enterprise Diversified Holdings Incorporated (EDH I), parent company of our non utility businesses, contributed $80 million, or 33 cents per share, to 1995 earnings, up from $60 million, or 25 cents per share, a year ago. These results included a one-time settlement of nine cents per share from the bankruptcy of Columbia Gas Transmission Company.

Emerging Marketplace The energy and energy services industry is being reshaped by the expectations of customers for more choices, better service and lower costs. As the attitudes of customers are being fully translated into the new rules of a competitive marketplace, our company has 2

E. James Ferland Chairman of the Board, President and Chief Executive Officer, Public Service Enterprise Group Incorporated.

been and is taking decisive action to shape public pol-icy, redesign and refocus operations, lower costs, develop new products and services that customers want and need, and find more productive partnerships with our employees. These efforts will place us in posi*

tion to lead and succeed in the marketplace of the next century, and are geared to the primary imperatives of building customer loyalty through superior service and better value. By doing our job well, we will also increase the value of your investment.

Alternative Regulation Early in 1996, the company took a bold step toward shaping its competitive destiny. We unveiled a prece-dent-setting alternative regulation plan that is designed to guarantee our customers the superior service they expect, provide our employees the incentives to build a secure future for themselves, contribute to the eco-nomic strength of New Jersey, and provide you, our shareholder, with the increasing value you deserve.

In filing this innovative plan, PSE&G became one of the first major utilities in the nation and the first in New Jersey to seek approval of a shift from traditional cost-plus regulation to a regulatory compact that respects and rewards efficiency, innovation, and service quality.

Appropriately named New Jersey Partners in Power in recognition of the economic benefits it offers the state, the plan will give PSE&G the mechanisms and incentives to compete effectively in the evolving electric and gas utility marketplace. The plan's major com po-The New Jersey Partners in Power plan will give PSE&G the mechanisms and incentives to compete effec-tively in the evolving el-ic and gas utility marketplace.

As we pursue alternative re.lion, we have made additional strategic moves to stay on the cutting edge of competitive change.

nent replaces the existing and unwieldy rate base/rate of return price-setting methodology with an indexed or price-capped approach for both electric and gas opera-tions. We are asking that the plan remain in effect through the year 2002, barring any major restructuring of our industry.

Only last July, New Jersey Governor Christine Todd Whitman signed into law the regulatory reform measure that paved the way for this alternative to the state's 80-year-old method of establishing energy prices. We strongly endorsed the legislation, which included such public interest benefits as lower energy costs, better service, and increased attention to the economic and environmental health of New Jersey.

We are convinced the New Jersey Partners in Power plan meets the standards set forth in the new law. It is a well-balanced plan, and contains many innovative fea-tures. These include an immediate $so million annual rate reduction for electric customers, various rate freezes, incentives for improving the quality of service, and a pledge by PSE&G to invest up to $ss million in economic development programs.

Equally important, the plan will help us meet the tests of the evolving competitive marketplace. We will have the ability to develop additional revenues from nonregulated products and services; we will be better able to mitigate any potential stranded asset costs that may emerge in the transition to a fully competitive mar-ket; we will be encouraged to manage costs aggres-sively; and we will have the ability to custom-tailor prices without the need for prolonged, adversarial regu-latory proceedings. Our company looks forward to the timely approval of the plan by the New Jersey Board of Public Utilities (BPU).

Nuclear Operations Our aggressive action to improve performance of PSE&G's nuclear generating units marks a second major initiative for Enterprise. Under the direction of a new nuclear management team, we are engaged in an exhaustive examination and upgrade of the equipment, employees and work processes at our Salem station.

Our efforts are designed to identify the corrective action necessary to assure safe, sustained, reliable operation into the twenty-first century.

The team leading this critical undertaking is com-posed of nuclear industry experts who have managed some of the nation's premier commercial nuclear pro-grams. Their collective track record of results demon-strates leadership and the ability to restore operations in the most adverse plant settings. Our team leader is PSE&G Chief Nuclear Officer Leon R.

Eliason, who formerly oversaw Northern States Power Company's highly regarded nuclear operations. This new team has developed and presented to the Nuclear Regulatory Commission (NRC) a comprehensive Salem station restart plan and is keeping the agency informed of our progress and developments. We will not seek the NRC's concurrence to restart Salem 1 and 2 until we are confident the units can achieve safe, sustained, reliable service.

The new management team is taking the same focused approach to improving operations at our Hope Creek Generating Station.

This effort to improve Salem and Hope Creek opera-tions increases our operating and maintenance expenses and adds to our replacement power costs. But in the long term we will be more than compensated for our current actions. In tomorrow's competitive electric generation marketplace, safe and reliable operation of our nuclear units will be critical. We believe this invest-ment of time and money will be paid back many times over during the remaining lives of these facilities.

Other Strategic Initiatives As we pursue alternative regulation we have made addi-tional strategic moves to stay on the cutting edge of competitive change:

• We have created a new functional organization for Enterprise that reflects our evolution toward stand -

alone energy and energy services businesses designed to compete successfully. In doing so, we clearly defined the lines among generation, transmission and distribu-tion, and customer services. Of the three, we foresee full competition reaching the generation market first.

Consequently, we have completed or have initiatives under way to reduce annual fossil generation operating and maintenance expenses, cut annual fossil capital expenditures, and close five older, inefficient generating units. Also, we brought into service the repowered Burlington and Bergen Generating Stations, state-of-the-art facilities that provide our fossil fleet a source of highly efficient and environmentally clean generating capacity.

• As part of this new corporate structure, we created Enterprise Ventures and Services Corporation to identify and bring to market new products and services that will create shareholder value. We have already stepped up activities in several emerging new business arenas: nat-ural gas marketing in the wake of deregulation of that industry, conservation and energy management ser-vices, and a product development venture with AT&T to 3

pilot and market two-way customer communications systems and services.

• We continue to exhibit our leadership at the state and federal levels where the rules governing our industry are developed and implemented.

In New Jersey, we are aggressively participating in the BPU's review of industry restructuring. In a forum known as Phase 11 of the Energy Master Plan, we are advocating a workable regional wholesale power pool as the most equitable and competitive system. We are also endorsing the recovery of stranded costs that may result from the transition to this system.

On the federal level, we reiterated our support for a wholesale power pool in response to various proposals by the Federal Energy Regulatory Commission (FERC) to open up the nation's high voltage transmission system to competition. Further, we elicited the support of 19 major environmental organizations and four other energy companies in urging FERC to mitigate the poten-tial for serious environmental impact inherent in its pro-posed open-access policy. We are also proposing the imposition of a uniform air quality standard for all elec-tric generators using the nation's transmission grid, which will help foster fair and equitable competition in this market.

• In recognition of the value of each of our customers, PSE&G became the first utility in the Northeast to imple-ment a service guarantee program. It covers nine key service areas and provides direct bill credits to cus-tomers should we fail to live up to our promises.

• Through EDHI, particularly its independent power pro-duction business, Community Energy Alternatives Incorporated (CEA), we continue to take advantage of business opportunities in key international markets.

During 1995, CEA closed on a total of four projects in China and South America and will continue to invest in target countries, forge strategic alliances and drive toward additional closings over the upcoming years, provided that opportunities with rewarding returns remain available. CEA now has investments in 22 oper-ating power projects around the world with a gross out-put of 1,816 megawatts.

• As a business strategy, we have instilled Total Quality at all levels of the corporation as a tool for our employ-ees to exhibit the highest standards in delivering energy services to our customers. More than ever, we are look-ing to our work force to provide the talent, efficiency, and productivity necessary for success. This year, for the first time, we are directly linking compensation with performance for all nonrepresented employees, and in 1996, we will be seeking ground-breaking new union agreements reflective of our competitive needs.

4 Financial Outlook As we shape public policy and revitalize our operating strength so that we may better serve customers, please be assured that management is keenly focused on our financial performance.

Over the next five years we will fund a streamlined utility construction program entirely through internally generated cash and we intend to strengthen consider-ably our balance sheet by retiring more than $1 billion of PSE&G's outstanding debt. Deleveraging the utility and lowering its interest expense are particularly essential tactics in confronting the competitive challenges on the horizon.

Initially, Enterprise's level of net income will be moderately pressured by the up-front rate reduction and various freezes proposed in our alternative regu-lation plan. But the incentives embodied in this plan will provide the potential to begin growing Enterprise's earnings well beyond the $2.71 per share realized in 1995.

At every juncture management will seek ways to reward your confidence in Enterprise. An immediate example of this is our recently announced intention to divest in 1996 Energy Development Corporation (EDC),

our non regulated oil and gas exploration and produc-tion company. After careful analysis of the evolving marketplace, we concluded that ownership of large oil and natural gas reserves is no longer necessary to pro-vide efficient energy solutions to our customers.

Further, we do not believe the true market value of EDC is being reflected in the price of Enterprise stock and expect its sale or spin-off will unlock that value for our shareholders.

Finally, in a period of volatility where some compa-nies have cut or omitted their dividends, we are striving to keep secure Enterprise's annual dividend, which cur-rently is at $2.16 per share. Retention and reinvestment of earnings will provide the basis for future dividend growth once we are certain of the direction that compe-tition will ultimately take us.

I am grateful for your continued support and speak for all of us at Enterprise when I say we are confident of our ability to make the necessary decisions and take the correct actions that will build a profitable and rewarding future for our shareholders, customers, and employees.

E. James Ferland Chairman of the Board, President and Chief Executive Officer, Public Service Enterprise Group Incorporated February 14, 1996 Retention and reinvestment of earnings.

provide the basis for future dividend growth once we are certain of the direction that competition will ultimately take us.

"When they said we would give our cus-tomers their money back if we didn't keep these guaran-tees, I said: 'No way. We're good, but not that good.'"

But that was before Lauretta Pettis, customer service repre-sentative, joined a cross-functional team of 14 employees that helped make PSE&G the first utility in the Northeast to guarantee excellent service -

with cash to back it up. After going through an extensive training program with her teammates, Lauretta proudly boasts that she is in a great position to back up the nine-point service guarantee program. That's because she talks to customers every day.

"What makes the program work,"

reveals Lauretta, "is that the company pushed the accountability down."

Those who have contact with customers actually see the commitment through.

There's no red tape.

PSE&G created the program from the comments of customers. "We talked to around 900 business and residential customers, as well as organizations outside our industry that are known for service excellence," explains marketing manager Pete Kelly. "We asked: 'what services do you value?' Our customers designed the list of guarantees for us."

Service excellence used to be taken for granted. Not anymore. Our goal is to become the best provider of energy services. We've set a higher standard-to provide the best service of any company.

6

c~'t wait 'tit F

resh fish has just been laid out on the crushed ice in the display case. It's another 90° July scorcher. In the distance is the rumble of thunder. The noise grows louder. Lights flicker and then go dark. How long will the power be out? Will the ice keep? Do you send out for dry ice, or try to get a backup generator trucked in? A quick call to PSE&G's Inquiry Center brings relief. "A service tech-nician will be there in less than 30 minutes. Guaranteed," assures the PSE&G service representative. With the technician's diagnosis, you will be able to plan with certainty.

When service is interrupted, customers don't need explanations, they need accu-rate information. We do all we can to prevent power interruptions. When they do hap-pen, we scramble to get our customers back on line. And during those moments of downtime, we let them know how quickly their power will be restored.

The goal is to build customer loyalty. When the competition arrives -

and it will -

customer loyalty will determine who comes out ahead. And we have every intention of being at the front of the pack. That's why we have nine service guaran-tees. Guarantees like: "We'll respond to a power outage within the quoted time."

Guarantees that clearly say: "We will perform." And to show our confidence, we put those guarantees in writing.

(See the rest of our service guarantees on page 23.)

7

S teel mills use a lot of energy. They are important customers and excellent employers. We'll do what it takes to keep them satisfied, even if it means competing on price. This is exactly what we did when Co-Steel Raritan, our second largest customer at a single location, considered shutting down in New Jersey and moving to another state.

We cut Co-Steel Raritan's rate through imaginative "real-time" pricing. And we're adding special features to its plant to reduce energy use in the future.

When you consume as much power as a steel mill, energy conservation is a big cost-saver.

Our innovative 10-year contract will shave $7.1 million off Co-Steel Raritan's

$26 million annual electric bill, and keep this important business in our service territory.

Success! We kept a great customer and 500 local employees kept their jobs.

This is an unbeatable story. It's about coming up with innovative solutions to what were once considered "unworkable" problems. Thanks to the collaborative efforts of our employees and customers, we're writing more success stories like this every day. The competitive arena we are entering demands nothing less.

8

No, this wasn't going to be an easy day for Rich Aiello, a PSE&G strategic account manager. He knew it as soon as he approached the guard shack on his way in to Co-Steel Raritan's offices. An employee working in the shack looked up, recog-nized Rich and asked: "Well?"

It was the same question he got from every employee at the plant. This had been going on for weeks (although it seemed to Rich like years) while New Jersey's Board of Public Utilities (BPU) had been reviewing and consi-dering the proposal that PSE&G and Co-Steel Raritan had worked out to lower the steel mill's power costs over a 10-year period. Every employee in the plant knew what was at stake. Jobs.

Co-Steel CEO Bill Shields sized it up this way: "Without an agreement, it was not possible for us to continue operations in New Jersey."

When the agreement finally received a written BPU approval in November, "it was an early Christmas present for everyone," Rich recalls.

These days, Rich's plant site visits lack the drama that led up to the agreement's approval. But you won't hear Rich complaining. He and his PSE&G coworkers are busy helping Co-Steel Raritan identify additional energy management ideas. Such energy efficiency has taken on added impor-tance because the plant is expanding its output from 850,000 to 1.1 million tons of steel -

right here in New Jersey.

9

"Two or three years ago, we saw a need to give our customers more information and control," explains PSE&G's Dennis Ragone, project manager, two-way customer communications.

"So we started looking for a partner on the communi-cations technology side."

Coincidentally, Lucent Technologies (one of the new companies created by the recent AT&T trivestiture) had the same idea of turning carriers of electrical current into carriers of information. What LucentTechnologies needed was an energy company to turn the vision into reality. The two companies came together, built a team, and developed the technology.

Five years from now, over 500,000 PSE&G customers could be living in "smart homes."

What is a "smart home"? When your utility can communicate with your appliances. When your air conditioning and pool filter can switch on when electric costs are lowest. When a repair crew is sent out to your home the minute your power goes out. These are just a sampling of options that will make a home "smart."

A key part of the "smart home" technol-ogy is flexibility. The customer selects only those options that he or she prefers. The cus-tomer can play either an active or passive role in the information transactions. "We give the customer a choice," points out Dennis. "The customer can make all of the energy decisions using the technology, or the utility can assist with the decisions while monitoring the perfor-mance of electric and gas appliances."

Saving customers money is one outcome; showcasing PSE&G's entrepreneurial spirit is another. This joint project is a fitting symbol of PSE&G's continuing transition from a provider of energy to a provider of energy services. Competition? Bring it on.

10 w

W hat if your house could tell the utility that your power is out... even if you 're not home? What if you could direct your appliances to automatically turn on ~hen energy costs are low, and shut off when costs are high? Or your utility could inform you when an appliance -

such as an inefficient furnace -

is consuming more power than it should be?

What if there were a system that could identify power theft, thwarting thieves who steal power and drive up the price for all customers?

What if? It's coming. The "Integrated Broadband Utility Solution," as it is known, is the first of its kind in the country. Th is year it will be introduced to about 1,000 customers in New Jersey. By the turn of the century, over half a million customers are scheduled to be exchanging information with PSE&G.

"The technology puts information and tools in our customers' hands, allowing them to make informed energy decisions while we increase our operating effi-ciency and develop a potential new source of revenue," explains Enterprise Ventures and Services president, Bob Dougherty.

You see, wires can do more than carry electrical currents to power your com-puter, lights, appliances and tools. They can carry information. Information that can give you greater control over your energy use and cost.

Sounds like innovative, futuristic stuff? Not really. The people at PSE&G and Lucent Technologies put their heads together and figured out that they both had something of value for each other as well as for PSE&G's shareholders and cus-tomers: advanced communications technology and new energy from PSE&G.

?

• 11

The Chinese need our knowledge of how a free-market economy works.

We need growing markets to find new revenue.

A perfect fit, which helped CEA land two major projects and form an important alliance in China.

Nancy Yeh, the manager of project coordi-nation for CEA, and a native ofTaiwan, says:

"We're in the right business. The Chinese gov-ernment is encouraging more independent power producers."

But patience and perseverance are vital qualities. "Project finance is a new concept for the Chinese, which slows things down,"

explains Nancy. Ben Sisson, project manager for CEA, adds: "You're dealing with the Chinese government; even the smallest bureau is tied to the government. The Chinese, in turn, have some difficulty understanding that, in speaking to us, they are not talking to our government."

China's plan is to move from the 195o's to the 199o's, all within 10 years. Roads, infra-structure, buildings and mass transit are all being created at the same time. "This is an unprecedented opportunity for an energy services company to apply the rigors of market knowledge in a rapidly expanding and changing economy," says Ben. "CEA's success in China gives us a distinct advantage for future projects."

CEA is also planning to capitalize on emerging markets in India, Indonesia, Thailand, Brazil, Peru and other developing markets around the globe.

12

(

hina needs power, and lots of it. In many areas of China, the annual growth in energy demand is about 15%.

To put this in perspective, in the United States the projected demand for energy is expected to grow by less than 2'/2% per year.

While we continue to seek ways to profit from our mature U.S. market, we are also seeking new markets.

Community Energy Alternatives Incorporated (C EA), an independent power-producing subsidiary of Enterprise Diversified Holdings Incorporated, is partnering with the Chinese government to build, own and operate a 600 MW coal-fired plant in Gansu Province. As part of a consortium, CEA has a 15% stake in the project, and is the first U.S.

power company to reach such an agreement with the Chinese.

Our new customer, the Chinese provincial government, is challenged by rapidly growing energy needs due to unprecedented economic growth and industry expansion. CEA is fully prepared to help by carefully cultivating rela-tionships, hiring the right people, and understanding cultural differences and Chinese economic policies.

In addition to its stake in the coal-fired power plant, CEA has been hired to be the exclusive provider of com-mercialized steam, hot water, and a cooling system to all industrial and commercial tenants of the Jinqiao Export Processing Zone in the Pudong New Development Area near Shanghai. Pudong is the largest and fastest growing economic development region in China.

"We are committed to the long term development of independent power in China, and we view this venture as an excellent first step," comments Art Nislick, CEA's President and CEO.

In addition to strategically positioning ourselves to share in the economic prosperity of China, we're helping it balance economic and environmental objectives. CEA's objective is to exceed existing Chinese standards.

It adds up to new business opportunities for CEA and a brighter future for the people of China.

13

M any companies in the Northeast are finding it increasingly difficult to comply with the Clean Air Act.

Merck, a prominent customer and major New Jersey employer, needed to reduce by 255 tons the nitrogen oxide emissions from its Rahway, New Jersey, plant. The pharmaceutical giant was able to shave off 245 tons of emissions by installing pollution abatement equipment. But keeping the extra 10 tons from going up the smokestack was going to be costly.

PSE&G, which had already reduced its own nitrogen oxide emissions by 7,000 tons, agreed to sell 10 tons with an option for up to 300 tons of nitrogen oxide emissions credits at a price of $1,650 per ton. The tonnage Merck expects to buy represents half of what it would have cost to retool its Rahway boiler.

It's a win-win arrangement. Merck gets credit for complying with the law while saving money. PSE&G generates cash from the credits, strengthens its relationship with a vital customer and, more importantly, is part of an approach that ensures cleaner air.

How so? PSE&G is helping a company cost-effectively comply, and both companies have promoted an emis-sions trading program that accelerates the environmental cleanup since, with each trade, 10% of the emissions reduction in any trade must be retired. And to generate a credit in the first place, as PSE&G has done, a company must come in way under the federal pollution limits. No wonder Robert Shinn, New Jersey's Commissioner of Environmental Protection, says: "Emissions reduction credit trading helps New Jersey meet its clean air goals and provide industry with the incentives and flexibility it needs to comply with the law."

Emissions trading is another example of how PSE&G continues to create market-based solutions that allow its customers to prosper. "Our sale of nitrogen oxide emissions credits is a symbol of our willingness to explore and effect novel customer solutions," says Eric Svenson, manager of environmental strategy and policy.

14

"With trading, emissions will fall dramatically from current levels," says Al Wallace, a senior staff engineer who has been involved in making PSE&G's fossil-fueled gener-ating fleet more environmen-tally friendly. The trading program cleans the air because the buyer must purchase more emissions reductions in the form of credits than would have been needed to achieve compliance through installation of emissions control equipment.

"The problem for many companies has been that the cost of compliance has simply become too high," adds Eric Svenson, manager of environmental strategy and policy, when asked about actions to comply with the Clean Air Act. For these companies, there has been no alternative other than seeking special waivers from air regulators, or trying to change the Clean Air Act. "But market-based systems give appropriate incentives for identifying low-cost reduction opportunities, whether these are from power plants, cars, energy conservation, manu-facturing process changes or fuels," says Eric, who spearheaded the credit swap with Merck.

The arrangement with Merck is just the beginning. A growing number of companies have approached PSE&G to work out similar arrangements so they can remain in compliance with the federal law and stay in New Jersey.

PSE&G is taking these discussions seriously, seeing them as a way to keep customers from leaving the state to do business elsewhere.

As Al Wallace points out, "Rather than sitting around and waiting for the rules to be written, we helped write them."

The value of the Merck deal goes far beyond dollars and cents. "It demonstrates our understanding of the marketplace, a prerequi-site to creative solutions," says Al. To the extent that we can solve customer problems, we're that much better off.

15

OPERATIONAL HIGHLIGHTS Public Service Enterprise Group continues to pursue a strategy of enhancing shareholder value through retention and reinvestment of earnings and keeping secure its annual dividend.

This shows the value on December 31 of each year of $loo invested in Enterprise on December 31, 1990 (assumes reinvested dividends).

(dollars) 100 120.20 136.26 150.50 135.05 168.11 I

90 I

91 I

92 I

I I

I I

93 94 95 As capital expenditures continue to decline, utility construction will be fully funded through internally generated cash.

(dollars in million s) 1,056 I

I 94

• EDHI

• PSE&G 827 I

95 934 I

I 96*

729 I

97*

• Projected 772 I

98*

Return on Average Common Equity for 1995 was 12.3%, reflecting a year of solid financial results.

(percent) 12.2 10.7 11.9 12.9 12.3 I

I I

I I

I I

I I

91 92 93 94 95 One of our key objectives is to strengthen the balance sheet by deleveraging PSE&G, thereby lowering its interest expense, as reflected in this capitalization ratio.

(percent) 100 I

-46

-46

-46

-6

-6

-6 1-08

-08 1-*

I 94 I

95 I

96*

I 97*

• Equity

-43

-6

-51

• Long-Term Debt Preferred Stock

• Projected I

98*

Enterprise Ventures and Services Corporation, a new corporate entity, will identify and bring to market new products and services that will enhance shareholder value.

16

-40

-6

- 54

PSE&G, New Jersey's largest utility, continued to improve efficiency and better manage overall costs despite higher operating and maintenance expenses associated with the upgrade of its nuclear stations.

The ratio of customers to employees, a measure of efficiency, has grown 17°/o over the past five years.

255:1 262:1 273:1 288:1 300:1 I

I I I I I I

I I

I I

91 92 93 94 95 We supply electricity at the lowest cost per kwh in the state of New Jersey and intend to continue the trend.

(Average revenue per kwh adjusted for inflation.

Base year 1994-1995. Cents per kwh.)

12.9 11.2 10.7 10.6 10.3 10.1 9.7 9.8 9.6 9.8 I I I

I I

I I

I I

I I

I 86 87 88 89 90 91 92 93 94 95 Enterprise Diversified Holdings Incorporated (EDH I) contributed $80 million to 1995 earnings, as its subsidiary, Community Energy Alternatives Incorporated (CEA), continued to take advantage of business opportu-nities in key international markets.

EDH I assets remained relatively constant, in line with Enterprise's strategy to keep them in the $2.5 billion range.

(dollars in millions) 2.457 I

I 91 EGDC EDC 2,510 I

I 92

• CEA

• PSRC 2,349 2,437 2,576 I

I I

I I

93 94 95 Net income reached a record high in 1995, primarily due to Energy Development Corporation's settlement with Columbia Gas Transmission Company for a take or pay contract.

(dollars in millions) 26.6 60.1 74.6 60.1 79.6 I

I I_,.,

I I

I I

I 91 92 93 94 95

• Without EGDC impairment 17

CONDENSED CONSOLIDATED STATEMENTS OF INCOME In thousands (except per share data) for the years ended December 31, 1995 1994 1993 Operating Revenues Electric

$4,020,842

$3,739,713

$3,696,1 14 Gas 1,686,403 1,778,528 1,594,341 Nonutility Activities 456,908 404,202 418,135 Total Operating Revenues 6, 164, I 53 5,922,443 5,708,590 Operating Expenses Fuel for Electric Generation and Interchanged Power 891,782 695,763 717,136 Gas Purchased and Material for Gas Produced 961,539 1,023,956 897,885 Operation and Maintenance 1,431,368 1,426,603 1,318,858 Depreciation and Amortization 674,231 634,028 601,597 Property Impairment 77,637 Taxes 1,047,523 978,000 988,630 Total Operating Expenses 5,006,443 4,758,350 4,601,743 Operating Income 1,157,710 I, 164,093 1,106,847 Allowance for Funds Used During Construction and Capitalized Interest 37,208 33,793 20,833 Other Income -

Net 13,365 19,219 8,487 Interest Charges 496,060 495,925 502,534 Preferred Securities Dividend Requirements and Premium 49,900 42,147 38,1 14 Income Before Cumulative Effect of Accounting Change 662,323 679,033 595,519 Cumulative Effect of Change in Accounting for Income Taxes 5,414 Net Income

$ 662,323

$ 679,033

$ 600,933 Shares of Common Stock Outstanding End of Period 244,697,930 244,697,930 243,688,256 Average for Period 244,697,930 244,470,794 240,663,599 Total Earnings Per Average Share of Common Stock

$2.71

$2.78

$2.50 Dividends Paid Per Share of Common Stock

$2.16

$2.16

$2.16 The detailed consolidated financial statements and related discussion appear in Appendix A to the Proxy Statement.

CONDENSED CONSOLIDATED STATEMENTS OF (ASH FLOWS In thousands for the years ended December 31, 1995 1994 1993 Net Income

$ 662,323 679,033

$ 600,933 Adjustments to net income, primarily depreciation and amortization 830,592 552,757 430,738 Net cash provided by operating activities 1,492,915 1,231,790 1,031,67 1 Net cash used in investing activities, primarily additions to utility plant (888,268)

( 1,002,483)

(992,840)

Net cash used in financing activities (596,280)

(232,813)

(22, I 56)

Net increase (decrease) in Cash and Cash Equivalents 8,367 (3,506) 16,675 Cash and Cash Equivalents at Beginning of Period 67,866 71,372 54,697 Cash and Cash Equivalents at End of Period 76,233 67,866 71,372 The detailed consolidated financial statements and related discussion appear in Appendix A to the Proxy Statement.

18

CONDENSED CONSOLIDATED BALANCE SHEETS In thousands at December 31, Assets Utility Plant:

Utility Plant (including Nuclear Fuel)

Less Accumulated Depreciation and Amortization Net Utility Plant in Service Construction Work in Progress Plant Held for Future Use Net Utility Plant Investments and Other Property Current Assets Deferred Debits Total Capitalization and Liabilities Capitalization:

Common Equity Subsidiaries' Securities and Obligations Preferred Securities:

Preferred Stock without Mandatory Redemption Preferred Stock with Mandatory Redemption Monthly Income Preferred Securities Long-Term Debt Total Capitalization Other Long-Term Liabilities Current Liabilities Deferred Credits Total 1995 1994

$16,532,232

$15,717,462 5,737,849 5,450,011 10,794,383 10,267,451 369,082 806,934 23,966 23,860 11, 187,431 11,098,245 2,866,052 2,673,638 1,560,117 1,356,872 1,557,839 1,588,685

$17, 171,439

$16,717,440

$ 5,444,942

$ 5,311, 167 324,994 384,994 I 50,000 150,000 210,000 150,000 5,189,791 5,180,657 11,319,727 11,176,818 199,832 215,603 1,921,797 1,856,919 3,730,083 3,468,100

$17,171,439

$16,717,440 The detailed consolidated financial statements and related discussion appear in Appendix A to the Proxy Statement.

CONDENSED CONSOLIDATED STATEMENTS OF RETAINED EARNINGS In thousands for the years ended December 31, 1995 1994 1993 Balance January 1

$1,510,0 I 0

$1,361,018

$1,282,931 Add Net Income 662,323 679,033 600,933 Total 2, 172,333 2,040,051 1,883,864 Deduct Dividends on Common Stock 528,548 528,071 521,572 Capital Stock Expenses 1,970 1,274 Total Deductions 528,548 530,041 522,846 Balance December 31

$1,643,785

$1,510,010

$1,361,018 The detailed consolidated financial statements and related discussion appear in Appendix A to the Proxy Statement.

Notes to Consolidated Financial Statements For full text of Organization and Summary of Significant Accounting Policies refer to Note 1 to Consolidated Financial Statements in Appendix A of the Proxy Statement.

For full text of Commitments and Contingent Liabilities refer to Note 12 to Consolidated Financial Statements in Appendix A of the Proxy Statement.

19

(ON SO LI DATED fl NAN CIAL 5TATI STICS 1Al Dollars in thousands where applicable 1995 1994 1993 1992 1991 Selected Income Information e

Operating Revenues Electric

$ 4,020,842

$ 3,739,713

$ 3,696, 114

$ 3,407,830

$ 3,519,806 Gas 1,686,403 1,778,528 1,594,341 1,586, 181 1,307,849 Non utility Activities 456,908 404,202 418, 135 362,781 283,766 Total Operating Revenues

$ 6, 164, 153

$ 5,922,443

$ 5,708,590

$ 5,356,792

$ 5, 111,421 Net Income 662,323 679,033 600,933 504, 117 543,035 Earnings per average share of Common Stock

$ 2.71

$ 2.78

$ 2.50

$ 2.17

$ 2.43 Dividends Paid per Share

$ 2.16

$ 2. 16

$ 2. 16

$ 2. 16

$ 2.13 Payout Ratio 80%

78%

86%

100%

88%

Rate of Return on Average Common Equity1*>

12.31 %

12.94%

11.91 %

10.69%

12.24%

Ratio of Earnings to Fixed Charges 2.77 2.76 2.59 2.30 2.54 Book Value per Common Share e<>

$22.25

$2 1.70

$21.07

$20.32

$20.04 Gross Utility Plant

$16,925,280

$1 6,566,058

$15,861,484

$15,081,907

$14,426,560 Accumulated Depreciation and Amortization of Utility Plant

$ 5,737,849

$ 5,467,813

$ 5,057,104

$ 4,610,595

$ 4,243,979 Total Assets

$17,171,439

$16,7 17,440

$ 16,329,656

$14,777,732

$14,804,354 Consolidated Capitalization Common Stock

$ 3,801, 157

$ 3,801, 157

$ 3,772,662

$ 3,499,183

$ 3,262, 138 Retained Earnings 1,643,785 1,510,010 1,361,018 1,282,931 1,282,029 Common Equity 5,444,942 5,311, 167 5, 133,680 4,782, 114 4,544,167 Long-Term Debt 5, 189,791 5,180,657 5,256,321 4,977,579 5, 128,373 Preferred Stock without Mandatory Redemption 324,994 384,994 429,994 429,994 429,994 Preferred Stock with Mandatory Redemption 150,000 150,000 150,000 75,000

• Monthly Income Preferred Securities 210,000 150,000 Total Capitalization

$11,319,727

$11, 176,818

$I 0,969,995

$ I 0,264,687

$I 0, I 02,534

<AJThe detailed Consolidated Financial Statements and related discussion appear in Appendix A to the Proxy Statement.

<*JNet Income for a twelve-month period divided by the thirteen-month average of Common Equity.

10Total Common Equity divided by end-of-period Common Shares outstanding.

20

FINANCIAL STATEMENT O F RESPONSIBILITY To the Shareholders of Enterprise:

The condensed fi nancial statements in this Summary Annual Report were derived from the consolidated financial statements included in Public Service Enterprise Group Inc. Proxy Statement of the 1996 Annual Meeting of Shareholders, which has been enclosed in the same mailing as this Summary Annual Report. The integrity and objec-tivity of the financial information presented in the Proxy Statement and this Summary Annual Report are the responsi-bility of the management of Public Service Enterprise Group Inc. The financial statements report on management's accountability for corporate operations and assets. To this end management maintains a highly developed system of internal controls and procedures designed to provide reasonable assurance that the company's assets are protected and that all transactions are accounted for in conformity with generally accepted accounting principles. The system includes documented policies and guidelines, augmented by a comprehensive program of internal and independent audits conducted to monitor overall accuracy of financial information and compliance with established procedures.

The consolidated financial statements included in the Proxy were audited by Deloitte & Touche LLP, independent audi-tors, whose report on the condensed consolidated financial statement appears herein.

E. James Ferland Chairman of the Board, President and Chief Executive Officer February 14, 1996 Robert C. Murray Vice President and Chief Financial Officer I NDEPENDEN T AUDITORS ' R EPOR T Patricia A. Rado Vice President and Controller, Principal Accounting Officer Deloitte&

ToucheLLP 0

To the Stockholders and the Board of Directors of Public Service Enterprise Group Incorporated:

We have audited the consolidated balance sheets of Public Service Enterprise Group Incorporated and its subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1995. Such consolidated financial statements and our report thereon dated February 14, 1996, expressing an unqualified opinion (which are not presented herein) are included in Appendix A to the Proxy Statement for the 1996 Annual Meeting of Stockholders. The accompanying con-densed consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on such condensed consolidated financial statements in relation to the complete consolidated financial statements.

In our opinion, the information set forth in the accompanying condensed balance sheets as of December 31, 1995 and 1994 and the related condensed consolidated statements of income, retained earnings and cash flows for each of the three years in the period ended December 31,1995 is fairly stated in all material respects in relation to the basic consolidated financial statements from which it has been derived.

February 14, 1996 Parsippany, New Jersey 21

ENTERPRISE PORTFOLIO OF SERVICES Keeping Customer Needs in Focus Enterprise, through all of its operating units, is com-mitted to providing superior energy-related products and services to satisfy customer requirements in a sound business manner. In addition to the traditional activities associated with utilities over the years, emerging markets and customer demands have spurred a growth in the range of options available, some reaching outside our franchised territory.

ENERGY PURCHASING

• energy supply and risk management

• access to reliable, cost-competitive energy

• on-site generation and storage

• backup power ENERGY CONSULTING AND PLANNING

• energy efficiency evaluation

• environmental and regulatory compliance

• energy audits

• on-site generation/cogeneration analysis

• information management

• project engineering

• load management

• real-time pricing

• emissions credits INTEGRATED ENERGY MANAGEMENT SERVICES

• increased facility comfort and control

• greater control of facility management and operating costs OPERATIONS AND MAINTENANCE SUPPORT

• plant systems testing, monitoring and diagnostics

• equipment performance testing, monitoring and diagnostics

• maintenance services

• mechanical and electrical equipment overhaul INDUSTRIAL AND COMMERCIAL GAS

• gas conversion and energy cost estimates

• gas air conditioning for energy cost savings and environ-mental compliance

• gas transportation services

• gas supply purchases

• compressed natural gas vehicle conversion assistance for fleet owners and operators, including passenger cars, vans and trucks, and forklifts

• information and assistance in applying advanced gas process technologies 22 RESIDENTIAL GAS PRODUCTS AND SERVICES

• information on gas heating conversions

• gas service contracts on home heating and water heat-ing equipment

• Superior Inspection Service of home heating equip-ment, including a carbon monoxide test

• gas appliance repair

• carbon monoxide detectors INDUSTRIAL AND COMMERCIAL ELECTRIC

• electrotechnology solutions to production problems and environmental compliance

• industrial/large commercial power quality analysis, problem identification and solutions

• curtailable electric service -

incentives for reducing demand during periods of critical electric systems operations

• dusk-to-dawn lighting for security and safety for a flat monthly fee, with no up-front cost and free year-round maintenance DEMAND-SIDE MANAGEMENT PROGRAMS

• Energy Efficient Home Program -

incentive payments, promotional and advertising assistance to builders of residential homes who install high-efficiency heating and cooling systems

• In Concert with the Environment -

an innovative, computer-based environmental education program available to middle and high schools within the service territory

• residential heat pump rebate for the installation of units with high seasonal efficiency ratios

• Standard Offer -

a performance-based energy con-servation program that pays business customers for measured energy savings over a contractual term through the installation of energy-efficient equipment OTHER SERVICES

• Sunburst Customer Solutions for municipalities and investor-owned water utilities, including meter read-ing, billing, payment processing, and collections

• Tradelink export assistance program to determine busi-ness customers' potential for exporting goods and services, including market analysis reports and refer-rals to export professionals

• Business Enhancement Program -

a communication network and referral system in conjunction with the New Jersey Department of Commerce and Economic Development to provide businesses with access to public and private assistance services

f>SAamongthe leaders in customer satisfaction Th-erican Customer Satisfaction Index is based on random telephone surveys of roughly 30,000 consumers. The independent study measures the response of the actual users of various products and services. In the category of utilities -

electric service, PSE&G scored third highest in the nation with a satisfaction rating of 80%, a 2.6% increase from last year.

SERVICE GUARANTEES PSE&G is committed to customer service. In fact, we back that commitment with nine written guarantees that say we'll pay our customers if we don't perform. We'll credit residential customers $25 and business customers $z5 to $500 if we fail to keep any of the following guarantees:

1. We will fix it right the first time.

2. We will turn on existing service by the date promised.

3. We will repair dusk-to-dawn or streetlights within three working days.

4. We will ensure accurate bills.

5. We will keep all appointments.

6. We will install new dusk-to-dawn or streetlights within 10 working days.

7. We will provide new electric service within five working days.

8. We will provide new gas service on the date promised.

9. We will respond to a no-heat problem or an individual power outage within the quoted time.

Some restrictions and limitations apply.

For more information about service guarantees or any of the PSE&G services outlined on the preceding page, or for a copy of our Welcome Brochure, call 1-800-854-4444.

For FSE~G*s f\\osemar-y Jet"terson, GOmmrtment doesn't end at 5 o'G!oG\\'. =--=~j~

7*-----

a:;,:;::---*-

9. :=...-=::....-:::::--=:-

0 PSl<iG This advertisement is one in a series on service guarantees; it also recognizes our employees' commitment to our customers -

and to the community at large.

23

DIRECTORS AND OFFICERS E. James Ferland Chairman of the Board, President and Chief Executive Officer of the Corporation.

J

• • °"*

T j~~

'~.-

Raymond V. Gilmartin Chairman of the Board, President and Chief Executive Officer, Merck and Co., Inc. (discovers, develops, produces and markets human and animal health products).

Forrest J. Remick Engineering Consultant and Retired Commissioner of the United States Nuclear Regulatory Commission.

Lawrence R. Codey President and Chief Operating Officer, Public Service Electric and Gas Company.

Irwin Lerner Retired Chairman, Board of Directors and Executive Committee, Hoffmann*

La Roche Inc. (prescription pharmaceuticals, vitamins and fine chemicals, and diagnostic products and services).

Richard J. Swift Chairman of the Board, President and Chief Executive Officer, Foster Wheeler Corporation (provides design, engineering, construction, manufacturing, management, plant operations and environmental services).

EXECUTIVE OFFICERS OF ENTERPRISE E. James Ferland Chairman of the Board, President and Chief Executive Officer; Chairman of the Board and Chief Executive Officer of PSE&G; Chairman of the Board and Chief Executive Officer of EDH I.

Lawrence R. Codey President and Chief Operating Officer of PSE&G.

24 Leon R. Eliason Chief Nuclear Officer and President-Nuclear Business Unit of PSE&G.

Robert J. Dougherty, Jr.

Vice President; Senior Vice President of PSE&G; President and Chief Operating Officer, Enterprise Ventures and Services Corporation.

.:1*.**.*.

Ernest H. Drew Member, Board of Management, Hoechst AG, Frankfurt, Germany (manufactures pharmaceuticals, chemicals, fibers, film, specialties and advanced materials).

Marilyn M. Pfaltz Partner of P and R Associates (communication specialists).

Josh S. Weston Chairman of the Board, Chief Executive Officer and Director, Automatic Data Processing, Inc.

Alfred C. Koeppe Senior Vice President-External Affairs of PSE&G.

Robert C. Murray Vice President and Chief Financial Officer; Senior Vice President and Chief Financial Officer of PSE&G.

T.J. Dermot Dunphy President, Chief Executive Officer and Director, Sealed Air Corporation (manufactures protective packaging products and systems).

James C. Pitney Partner in the law firm of Pitney, Hardin, Kipp & Szuch.

R. Edwin Selover Vice President and General Counsel; Senior Vice President and General Counsel of PSE&G.

Paul H.Way President and Chief Operating Officer of EDHI.

Patricia A. Rado Vice President and Controller; Vice President and Controller of PSE&G.

SHAREHOLDER INFORMATI O N Stock Exchange Listings New York (Enterprise common and PSE&G preferred)

Philadelphia (Enterprise common)

Trading Symbol: PEG Annual Meeting Please note that the annual meeting of stockholders of Public Service Enterprise Group Incorporated will be held at Newark Symphony Hall, 1020 Broad Street, Newark, N.J., on Tuesday, April 16, 1996 at 2 p.m.

Stockholder Services Stockholder inquiries about stock transfer, dividends, dividend reinvestment, direct deposit, missing or lost certificates, change of address notification and other account information should be directed to: Stockholder Services Department, Public Service Electric & Gas Company, P.O. Box 1171, Newark, N.J. 07101-1171. Please include your account number or social security number.

Stockholders can also phone our toll -fre e number 1-800-242-0813, Monday through Friday, with questions about stock transfer and registration, shares held in the Dividend Reinvestment and Stock Purchase Plan and our other stockholder services. Hours are: 10 a.m. to 3:30 p.m. Eastern time. The telephone number for the hearing impaired with special equipment is TDD 1-800-732-3241.

Please have your account number or social security number ready when you call.

Stockholders can also reach us by Internet e-mail at:

STKSERV@PSEG.COM.

Transfer Agent s The transfer agents for the common and preferred stocks are:

Stockholder Services Department Public Service Electric and Gas Company P.O. Box 1171 Newark, NJ 07101-1171 First Chicago Trust Company of New York P.O. Box 2506 Jersey City, NJ 07303-2506 Dividend Reinvestment Plan Enterprise offers a Dividend Reinvestment and Stock Purchase Plan under which all common and PSE&G pre-ferred stockholders may reinvest dividends and / or make direct cash payments to acquire Enterprise common stock. Purchases of common stock are made for the Plan directly from Enterprise, at its sole discretion, and / or in the open market. To participate, call 1-800-242-0813 for a prospectus and enrollment form.

Dividends Dividends on the common stock of Enterprise, as declared by the Board of Directors, are generally payable on the last business day of March, June, September and December of each year. Regular quar-terly dividends on PSE&G's preferred stock are payable on the last business day of March, June, September and December of each year.

Direct Deposit of Dividends No more dividend checks delayed in the mail. No wait-ing in bank lines. Your quarterly common and preferred stock dividend payments can be deposited electroni-cally to your personal checking or savings account. To use this free service, call us at 1-800-242-0813.

Security Analysts and Institutional Investors For information contact:

Director-Investor Relations 201-430-6564 Available Publications Form 10-K: A copy of Enterprise's 1995 Annual Report to the Securities and Exchange Commission, filed on Form 10-K, may be obtained by contacting:

Director-Investor Relations Public Service Electric and Gas Company T6B P.O. Box 570 Newark, NJ 07101 Telephone 201-430-6503 The copy so provided will be without exhibits. Exhibits may be purchased for a specified fee.

Financial and Statistical Review: A co mprehensive sta-tistical report containing historical financial and operating data may also be obtained from the Director-Investor Relations.

Common Stock-Market Price and Dividends Per Share 1995 1994 High Low Div.

High Low Div.

First Quarter 29'l's 26

$.54 32 27 1;4 $.54 Second Quarter 301;4 263;4

.54 291/4 25

.54 Third Quarter 293;4 263;4

.54 285/s 23Ys

.54 Fourth Quarter 30J's 263;4

.54 271/s 25

.54 The number of holders of record of Public Service Enterprise Group Incorporated common shares as of December 31, 1995 was 175,831.

This year Enterprise has adopted a summary annual report format, with no loss of information since the full financials are available as an Appendix to the accompanying Proxy Statement. This change is intended to provide shareholders with information in a more reader-friendly format. This report focuses on the key events that made 1995 such a pivotal year in our transition toward a competitive environment. It describes a superior service strategy that meets customer needs, and provides communications that meet shareholder needs. At the same time, the reduced cost of this year's annual report reflects our company's commitment to operating more efficiently.

Printed on recycled paper, using environmentally friendly inks.