ML19031A124

Submit 1975 Annual Report

ML19031A124
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Site:	Salem
Issue date:	07/28/1976
From:	Public Service Electric & Gas Co
To:	Office of Nuclear Reactor Regulation
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So- ~7a 311 RECORDS FACILITY BRANCH PS~G The Energy People 1975 Annual Report

Public Service Electric and Gas Company 80 Park Place Newark, N.J. 07101 Contents Page 1 Highlights 2 President's Message to Stockholders and Employees 4 Financial Review Construction Expenditures Two-year Stock History Rate Increases 8 Electric Generating Capacity 10 Gas Supply 13 Research 15 Commercial and Marketing 15 Area Development 17 Community and Employee Activities 19 Transport of New Jersey 20 Accounting Policies 21 Financial Statements 29 Independent Accountant's Opinion 30 Operating Statistics 32 Financial Statistics 34 Management's Discussion and Analysis of the Statement of Income 36 Changes in Organization Inside Back Cover Officers and Board of Directors Annual Meeting Please note that the Annual Meeting of Stockholders of the Com-pany will be held at the Robert Treat Hotel, 50 Park Place, Newark, New Jersey, on Monday, April 19, 1976, at 2:00 p.m. A summary of the meeting will be sent to stockholders at a later date.

Transfer Agents All Stocks Morgan Guaranty Trust Company of New York 30 West Broadway, ew York,

.Y. 10015 Stock Transfer Department Public Service Electric and Gas Company 80 Park Place, Newark,

.J. 07101 Registrars

$1.40 Dividend Preference Common Stock and Common Stock Bankers Trust Company 485 Lexington Avenue, New York,

.Y. 10017 Fidelity Union Trust Company 765 Broad Street,

ewark,

.J. 07101 Preferred Stocks The Chase Manhattan Bank (National Association) 1 New York Plaza, New York, N.Y. 10015 Fidelity Union Trust Company 765 Broad Street, Newark, N.J. 07101 About the Cover America's freedom al-ways has been closely intertwined with the quest for new sources of energy, and New Jersey always has been in the forefront of the quest - from the days of the earliest windmills and water-wheels to today's most sophisticated nuclear generating plants.

New Jerseif s pursuit of energy is a major saga. It is America's first steam engine, its first steamboat and its first steam locomotive. It is America's first planned industrial cihj -Paterson - founded in 1791 by Alexander Hamilton and others.

Herein New Jersey, Thomas A. Edison made the world's first incandescent lamp in 1879, and then put together the first com-plete power generating and distribution system. Electronics is a New Jersei; phenomenon, from the first audion tubes to the first transistors. Today, as the atom is being split or fused to provide nearly unlimited energy fuels, New Jersey again leads the way.

New Jersey's 200 years of energy leadership isa big story. It's a story worth knowing.

Financial and Statistical Review A comprehensive statistical supplement to this report, containing financial and operating data for the years 1965-1975, will be avail-able this spring. If you wish to receive a copy, please write to the Vice President and Treasurer, Public Service Electric and Gas Company, P.O. Box 570, Newark, N.J. 07101

Highlights Financial Earnings per average share of Common Stock Shares of Common Stock Average Year end Dividends paid per share of Common Stock Total Operating Revenues Total Operating Expenses Balance Available for Common Stock Gross Additions to Utility Plant Total Utility Plant Electric Operations Electric Operating Revenues Kilowatthour Sales to Customers Peak Load-Kilowatts Cooling Degree Hours Gas Operations Gas Operating Revenues Therm Sales to Customers Maximum Day's Sendout-Therms Heating Degree Days Increase or 1975 1974 (Decrease)

$2.25

$2.35 54,513,000 51,918,000 56,523,000 52,531,000

$1.72

$1.72

$1,630,525,000

$1,455,873,000

$1,380,293,000

$1,225,414,000

$122,598,000

$122,027,000

$297,418,000

$385,700,000

$4,920,768,000

$4,636,344,000

$1,213,488,000

$1,100,965,000 26,995,491,000 27,699,841,000 6,270,000 6,316,000 6,543 7,501

$417,037,000

$354,908,000 1,761,478,000 1,845,336,000 11,077,000 11,763,000 4,653 4,629 The Company has painted ten of its vehicles in commemoration of the nation's Bicentennial. They carry the theme "New fersei; -

200 Years of Energy Leadership!" throughout our service area.

(4) 5 8

12 13 (23) 6 10 (3)

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(13) 18 (5)

(6) 1 1

President's Message To Stockholders and Employees I

e nation is obseroing its Bicentennial in 1976 and in keeping with the observance, your annual report has an added feature this year. It not only brings you the PSE&G story for 1975, but the history of energy in New Jersey for the past 200 years. The contributions made by our State are important and we hope you find the information of interest.

Another challenging year has passed and although we undoubtedly face more problems in the future, 1975 saw your Company accomplish many things which will be beneficial in the years ahead.

Total revenues for 1975 amounted to $1.6 billion, an increase of 12% over 1974. This increase reflects the effect of rate increases and higher gas costs which were passed on to consumers. Because of the industrial recession, kilowatthour sales of electricity and therm sales of gas were below 1974 levels. Earnings were $2.25 per share, compared to $2.35 per share in the previous year when there were 2,600,000 fewer average shares outstanding.

The principal reasons for the decrease in per share earnings, in addition to the substantial decline in electric and gas industrial sales, were higher depreciation charges coupled with reduced allowance for funds during con-struction, and higher interest charges, taxes and preferred stock dividends. The Common Stock dividend was maintained at $1.72 per share.

The 1975 rate increases - $99 million in June and

$59 million in ovember - along with the interim granted in 1974, brought the total increase to $215.5 million from a petition, filed April 30, 1974, for $257 million. Moreover, it was particularly heartening to note that the New Jersey Board of Public Utility Commissioners stated in its final 2

Order that it would not permit the financial health of your Company to deteriorate. In fact, a number of pronounce-ments by the Board in its final Order were noteworthy because of their recognition of the problems this Com-pany faces with respect to its earnings, cash flow and the maintenance of its credit standing. Nevertheless, the fact remains that the final Order was issued 18 months from the date of our original filing. This repeated lag in obtain-ing needed relief has thwarted our efforts to catch up with the past effects of inflation and made it necessary for us to file a new Petition for relief close on the heels of the final Order. This request, which was filed on January 5, 1976, calls for approximately $447 million in new revenues.

Among our accomplishments in 1975 was the signing of a new agreement with Algeria for a 22-year supply of liquefied natural gas. If all necessary approvals are received and satisfactory transportation is arranged, our gas supply problem will be resolved and we will be able to accept new gas customers once again.

Our subsidiary, Energy Development Corporation, participated in the successful completion of five gas wells in Texas and Louisiana in 1975. Late in the year the Federal Power Commission authorized the sale and transportation of gas from a field discovered in Louisiana to PSE&G in New Jersey.

The year 1975 also saw an increase in our generation of nuclear power and progress in our nuclear power con-struction program. Our customers saved some $80 million in fuel costs by the substitution of nuclear power for fossil-fueled power in 1975, and nuclear generation in future years is expected to bring additional fuel cost savings.

The first of two 1,100-megawatt nuclear units at Salem Generating Station is scheduled to go into service in 1976.

We are 42.6% owners of this unit and have the respon-sibility for design, construction, and operation of the station. Five other nuclear units of similar size have been ordered for installation and operation between 1979 and 1987. The Company has sufficient electric generating capacity now and we foresee no difficulty in maintaining an adequate reserve in the future.

All of us share a concern with our customers over the high prices of electricity and gas. In the near term, the substitution of nuclear fission power for fossil-fueled power will tend to restrain the rising cost of electricity. Our studies show that, with all costs considered, the cost of nuclear power will still be substantially less than oil or coal generated power in 1985 when we expect 65% of our gen-eration to be nuclear. Looking to the turn of the century, we are hopeful that nuclear fusion will prove to be a low cost source of abundant energy, and we are providing funds for fusion research. At the same time, we are keeping abreast of progress in other energy research areas, such as solar power, and will be ready to take advantage of any development which will benefit our customers.

Gas supply has been one of our prime concerns in recent years, and we have concentrated our efforts on projects to assure adequate quantities of gas for our cus-tomers. With regard to the cost of gas, our primary hope for stabilization appears to be the discovery of addi-tional domestic supplies. For this reason, we strongly advocate environmentally acceptable off-shore drilling, particularly in the Baltimore Canyon area off the New Jersey coast, and we are one of the parties in a joint venture which

, may lead to active participation in off-shore exploration.

We are continuing our efforts to reduce expenses wherever possible. In spite of a wage increase of 8% which took effect in May, total wages and salaries decreased in 1975. This was due to continued emphasis on the elimination of overtime and a reduction in the work force from 14,032 to 13,348 employees. Our total number of employees is now less than it was 25 years ago, when electric kilowatthour sales were about one-fifth of the 1975 level.

Electric and gas energy represent valuable resources which should not be wasted, and public information programs to make our customers aware of how and where energy can be saved are being conducted. Further, we are engaged in a time-of-day metering experiment, sampling 600 homes, to see if the incentive of lower cost will persuade customers to shift their usage of electricity to off-peak hours. If this experiment is successful, the long-range result may be a reduction in peak demand and a corresponding reduction in the need for new generating capacity.

During the latter part of the year we began seeing signs that the recession, which had slowed our growth in the last two years, was coming to an end. Indications are that economic recovery will be clearly evident by mid-1976, and we are forecasting an average annual electric growth rate of 4% between now and 1990. Growth in the gas end of our business is dependent upon the avail-ability of new supplies.

Your management recognizes the need to periodically increase the common dividend to keep up with inflation and maintain the attractiveness of our stock in the market place.

Hopefully, earnings will rise to a satisfactory level in the near future to enable us to do this.

The past two years have been unusually difficult ones for the utility business in general and Public Service Electric and Gas Company in particular. This period of rapid inflation and industrial recession has called for decisive action in a constantly changing situation. The equilibrium of the Company has been maintained through these trying times by the dedication and cooperative efforts of our employees and the encouraging support of our stock-holders. As we look toward the future, I am confident that continuation of this effort and support will enable the Company to resume its traditional upward trend.

In closing, I would like to pay particular tribute to Edward R. Eberle who retired as Chairman of the Board of Directors and Chief Executive Officer of the Company on June 30, 1975. Mr. Eberle joined the Company in 1933 and served in a number of capacities, culminating in a four and one half year period as Chief Executive Officer. During his many years, he served with distinction as a corporate and community leader.

February 17, 1976 3

Revenues Increase

$175 Million The effect of the rate increases was evident as revenues rose to $1.6 billion,12% higher than 1974. However, $49 million of the increase represents fuel and purchased energy charges which are passed on to customers without markup, resulting in no additional earnings. Electric revenues went up 10% to $1.2 billion, 74% of total revenues. The other 26%

came from gas revenues, which rose 18% to $417 million.

The sources of 1975 revenues by customer clas-sifications were:

Elrctric Gas Co111bi11ed Residential 34%

62%

41 %

Commercial 36 25 33 Industrial 28 13 24 Street Lighting and Other 2

2 Total 100%

100%

100%

Operating Expenses Up $155 Million Operating expenses rose 13% in 1975 to $1.4 billion. The price of gas continued to rise and was directly responsible for an increase of $55 million in raw material costs. Primarily because of New Jersey's stringent air pollution code and higher fuel costs, we purchased greater quantities of more economic electricity from our power pool, the Pennsyl-vania-New Jersey-Maryland Interconnection, resulting in an increase of $57 million for net interchanged power.

As a result of the $175 million increase in revenues, State gross receipts taxes rose $23 million. Interest charges and preferred stock dividends increased $10 million, re-flecting the issuance of additional securities.

The 1975 Income Dollar Where It Electric Revenues 72¢ Gas Revenues 25¢ Allowance for Funds Used During Construction The only expense to show a decline was maintenance, which was down by $8 million due to a decline in the use of gas turbine generating units.

Allowance for funds used during construction declined $13 million because large production facilities had gone into service during the latter part of 1974 and because of the discontinuance of the allowance for funds on $250 million of construction work in progress, as authorized by the state utility commission in our last rate case. In so doing the commission, in effect, is allowing PSE&G to recover the related financing cost through current revenues.

NEW JERSEY-200 YEARS OF ENERGY LEADERSHJ Indians who watched Henry Hudson's Half Moon sail into Sandy Hook Bay in 1609 might have sensed that a new energy-conscious people had come to America.

The ship's billowing sails dwarfed the energies of a hundred paddlers of canoes. The guns of the newcomers made arrows obsolete. Axes and saws amazed an Indian civilization that felled oaks by slowly burning the trunks until the trees toppled.

Colonists came to seek personal or philosophical freedoms of religion, thought, and government. They also sought space in which to use energy sources that transcended mere individual strength.

The muscles of the newcomers were no match for the Indians, but their tools were more than equalizers. One axe wielder could clear in two weeks a forest space that a full tribe might not open in a year. The loom of one woman could weave cloth beyond Indian dreams.

A nation of energy seekers had begun.

Where It Went:

Purchased Power and Gas 40¢ Reinvested Construction Expenditures Down $32 Million Financing In keeping with our objective to strengthen PSE&G's capital structure and improve financial flexibility, long-term financing in 1975 consisted only of equity securities. In January, $35 million of 12.25%, $100 par, Cumulative Preferred Stock was sold; in June, $50 million was raised through a 1-for-15 Common Stock rights offering at a price of $14.40 per share; and in December, $40 million of 9.75%, $25 par, Cumulative Preferred Stock was sold. In addition, during the year, investments by stockholders through the Dividend Reinvestment Plan produced

$8 million through the sale of 484,808 shares of Common Stock.

The sale of commercial paper was used from time to time to meet short-term requirements, but on a more modest scale than in 1974. There were a number of months when we issued no short-term debt. At year end, out-standing short-term debt was $10 million, compared to

$99 million on December 31, 1974.

During 1976, the Company expects to raise $300 million of long-term capital, of which $150 million will be used to prepay our five-year bank loan.

Expenditures during 1975 for new facilities amounted to

$257 million, down from the $289 million estimated at the beginning of the year.

Investor Relations Construction expenditures, including nuclear fuel, are estimated at $372 million for 1976 and at $2. 9 billion for the five years from 1976 through 1980, as shown below:

PSE&G expanded its program to keep the financial com-munity informed of Company progress and developments.

The basic objective of our program is to maintain open channels of communications with members of the invest-ment community so they may properly appraise the value of our securities.

Estimated Expenditures Year 1976 1977 1978 1979 1980 5-Year Total Total (in 111illions)

$ 372 444 547 671 886

$2,920 During 1975 management visited throughout the country with portfolio managers of many large financial institutions, appeared before major security analyst groups, and also held a series of meetings with New Jersey security brokers. We will continue to pursue an active investor relations program in 1976.

Dutchmen, New Jersei/s first colonists, naturally sought out the fla t marshlands beside the Hudson River and along the creeks meandering through the Hackensack meadows. Just as naturally, they turned for energy to the wind, the power most familiar in their homeland.

HARNESSING THE WIND Windmills rose before 1700 on the flats in what is now Hudson County. Th e slightest breezes were translated into energy to pump water, turn grindstones, and drain swamps.

The Dutch idea of power lingered even after the old Dutch town of Bergen became Jersei; City. Possibly the nation's most famous windmill of all was built in 1815 by Isaac Edge to turn his flour grindstones. Th e noted Jersey City landmark operated until 1839 when it was taken down to make way for railroad tracks.

5

Stockholders Grow Stockholders of record at the end of 1975 were as follows: Common Stock holders, 218,744; $1.40 Dividend Preference Common Stock holders, 14,774; and Pre-ferred Stock holders, 19,468. At year end 20,829 of our Common Stock holders were participating in the Automatic Dividend Reinvestment Plan.

$1.72 Dividend Maintained Dividends totaling $1.72 per share were paid on Common Stock in 1975, the same as in 1974, despite the decline in per share earnings. All of the dividends are considered taxable for income tax purposes.

The Company's Common Stock and $1.40 Dividend Preference Common Stock are traded on the New York Stock Exchange with the stock symbol PEG. The range of the trading prices and the dividends paid for the last two years are shown below:

Dividends Paid and Price Range Com111011 Stock

$1.40 Dividend Preference Com111011 Stock 1975 1974 1975 1974 Quarterly Dividends Paid Per Share

$.43

$.43

$.35

$.35 First Quarter 16%-12 21-183/s 151/4-121/4 17%-163/4 Second Quarter 173/s-143/s 20-121/4 14% -131/z 16%-14 Third Quarter 163/4 -15 14%-101/2 145/s-135/s 14%-123/4 Fourth Quarter 19-153/4 13%-105/s 15-135/s 14 5/s-115/s Rate Increases Needed Increased operating costs and the delay in receiving rate increases to offset them have compelled us to apply to the ew Jersey Public Utility Com mission (PUC) for ari increase in rates to produce additional revenues of $447 million annually, based on estimated sales for 12 months ending June 1976. Of this amount, $342 million would come from electric sales and $105 million from gas sales.

Regulatory lag is still a problem in ew Jersey but the PUC is aware of the problem and is adopting some new procedures to speed up the hearing process. Among them are prefiling of testimony, shorter deadlines for all parties in the case and greater use of stipulations to separate the contested from the agreed upon issues. We are prepared to use these and any other methods allowed by the PUC to expedite this next rate proceeding.

Our management, and the New Jersey Commission, recognize that the quality of senior securities relies on the strength of the common shareholder's position. This attitude on the part of the Commission is illustrated by the following quote from the final order in our last rate case:

"We are now acting several days after oral argument in this matter in order to take even) reasonable step to attempt to maintain petitioner's financial viability and bond ratings. The speed of our determination and the overall revenue treatment of this case should serve as an appropriate signal to the rating agencies that we will not permit petitioner's financial health to deteriorate."

Aside from the increased revenues, there were two other factors in this rate case which will be of significant benefit in the future. One was the inclusion of the

$250 million of "construction work in progress" in the year-end rate base without an offset to operating income for "allowance for funds used during construction." This THE POWER OF WATER When Englishmen followed the Dutch and began settling New Jersey in earnest, water power was their main energy source.

6 Newark's first settlers quickly built mill races to run their gristmills and saw-mills. Westward in the northern New Jersey hills, tumbling streams attracted settlers who knew that this abundant power could make them prosperous and secure.

Water powered the iron forges in Passaic, Morris, and Sussex Counties.

Water, trapped in man-made dams in flatter southern New Jersey, operated glass furnaces and bog iron forges.

Dreamers looked to water in 1791, when Alexander Hamilton and others founded the country's first planned industrial town. They chose the most awesome water power source then known - the Passaic Falls, cascading down 70 feet into a rocky gorge. Here they started a city and named it Paterson.

will improve the quality of earnings and cash flow by allowing us to recover the financing cost of this portion of construction work in progress through current operating revenues. The second factor was the establishment of a projected 12-month gas raw material adjustment clause designed to permit us to recover increased gas costs on a levelized basis. This will eliminate the delay in collecting the increased costs and assure complete recovery which hadn't been the case under the former procedure, with the result that earnings suffered accordingly.

Electric and Gas Production Down Electric output was down in 1975. Total kilowatthours produced, purchased and interchanged amounted to 29.3 billion, which was a decrease of 1.6% from the preceding year. The 1975 peak demand of 6,270,000 kilowatts occurred on August 1 and it was slightly below the 6,316,000-kilowatt peak experienced the year before.

Total sendout of gas for the year was 1.8 billion therms, 4.7% less than in 1974. In 1975, the highest 24-hour sendout was 11,077,000 therms and it occurred on January 20, 1975 when the average temperature was l8°F. This sendout com-pared with 11,763,000 therms on February 5, 1974, a decrease of 6%, when the temperature averaged l7°F.

Chiefly responsible for these declines were the economic slowdown, the increased cost of energy, con-servation efforts, and moderate weather.

The Salem Generating Station is nearing completion with its first 1,100,000-kilowatt nuclear unit scheduled to begin operation in the last half of 1976.

THE PULL OF STEAM England's most jealously guarded 18th cen tury secret was steam power. Thus, Josiah Hornblower had to smuggle dismantled parts of a steam engine to America in 1753. He assembled the engine in Arlington, New Jersey, where in 1755 this coun-try's first steam engine pumped water out of a flooded Bergen County copper mine.

People generally feared steam's pulsing, fiery action. John Fitch, one-time Trenton gunsmith, was an exception. In 1786, his steamboat, the first in America, began regular service from Burlington to Philadelphia.

America's most successful early steam enthusiast was John Stevens of Hoboken, whose steam ferry linked Hoboken and New York before 1809. Stevens turned his atten tion to steam railroading and received America's first railroad charter in 1815. Ten years later, Stevens built this country's first experimental steam locomotive. A new age had dawned: America would follow steam from sea to shining sea.

7

Electric Generating Capacity The Company's portion of the final cost of the above units is currently estimated to be $3.8 billion, including $1.7 billion for Atlantic 1 and 2.

At the end of the year installed generating capacity stood at 8,829,000 kilowatts, 63,000 kilowatts less than 1974.

Some units were rerated and at Bergen Generating Station a 33,000-kilowatt combustion turbine unit was added.

The Company also has a contract with Offshore Power Systems (OPS) for two additional barge-mounted units identical to Atlantic 1 and 2 which are scheduled for com-mercial operation in 1990 and 1992. An estimate of the total cost of these units is not yet available. However, it can be anticipated that such costs will at least equal the cur-rent estimate for the Atlantic units. The size and sophistica-tion of today's electric utility plants and the complexity and delays encountered in obtaining licenses and other regulatory approvals have compelled the Company, as well as other electric utilities, to make substantial expen-ditures and commitments for facilities prior to the completion of licensing and regulatory proceedings.

Although no positive assurances can be given that such permits and licenses will be forthcoming, the licensing activities are moving forward and the Company anticipates that the necessary licenses and authorizations will be received. The Company will continue to comply with all requirements necessary to receive such licenses.

Generating Capacity Forecast Peak Installed Load Capacity Reseroe (Megawatts)

(Megawatts) 1976 6,850 8,726 27 1977 7,150 9,242 29 1978 7,400 9,242 25 1979 7,700 9,717 26 1980 8,000 9,805 23 1981 8,350 10,055 20 1982 8,700 10,455 20 1983 9,050 11,015 22 1984 9,450 11,487 22 1985 9,850 12,407 26 1986 10,250 12,407 21 1987 10,700 13,327 25 Nuclear Generating Facilities To meet the expected long term growth in demand for Salem 1 and 2 are being constructed under con-struction permits issued by the Nuclear Regulatory Commission in 1968. Salem 1 is nearing completion and receipt of an operating license is expected shortly which will allow it to be placed in service in late 1976. Regulatory decisions with respect to an operating license for Salem 2 are not expected until a date closer to its scheduled completion date.

service, the Company is undertaking construction of the following major nuclear generating units:

Scheduled Total Company Commercial Unit Capacity Portion Operation (Megawatts)

Salem 1 1,090 464 1976}

Salem 2 1,115 475 1979 Hope Creek 1 1,067 960 1982}

Hope Creek 2 1,067 960 1984 Atlantic 1 1,150 920 1985}

Atlantic 2 1,150 920 1987 Company's Expenditures through Dec. 31, 1975 (Millions)

$348 113 107 PSE&G and Philadelphia Electric Company each own 42.59% of the output from both of these units and the remaining 14.82% is divided equally between Atlantic City Electric Company and Delmarva Power &

Light Company.

A construction permit for the Hope Creek Generating Station was issued in November 1974 by the Atomic Energy Commission. However, the New Jersey Coastal Area Facility Permit, which is required to start construction, was not received. Early in 1975, due to the continued d elay by the State of New Jersey in issuing the permit, commer-John Stevens, the greatest of steam men, used horses on his first ferryboats. Those river horses also trod treadmills to turn the paddlewheels, and the "team boats" could carry six to eight loaded wagons and a hundred people in one boat.

The power was said to be "equal to 40 oars. "

Paterson's first cotton looms were driven by a bull plodding to nowhere on a treadmill. Steam eventually would move the world, but du ring much of 19th century America followed horse-drawn wagons. Team power was the watchword.

Horses pulled the cars when New Jersey's first railroad started in 1833, and horses also pulled the state's first trolleys in the 1860's.

New Jersey's most unusual use of animal power came in 1848. Jacob Wiss, on his way to Texas, stopped in Newark to sharpen shears on a grindstone driven by a St. Bernard dog on a treadmill. Wiss stayed in Newark, turned to steam as his energy source, and retired his faithful St. Bernard.

cial operation of Hope Creek 1 and 2 was rescheduled to December 1982 and May 1984, respectively.

In September 1975 the New Jersey Department of Environmental Protection announced its intent to grant the permit, provided there were no appeals by intervenor groups. Appeals were filed but the permit was subse-quently issued. With the delay due to these appeals, the start of construction has been delayed into 1976. This delay is making the 1982 and 1984 service dates increas-ingly questionable.

Applications for manufacturing licenses and site construction permits for Atlantic 1and2 were made in 1973 and hearings are in progress. Petitions to intervene by various environmental groups, government agencies and others have been granted in both proceedings. If regulatory approval is given the Atlantic station will be the world's first offshore floating nuclear power plant and will be located approximately 2.8 miles off the Atlantic coast about 12 miles northeast of Atlantic City. PSE&G's entitlement in this plant will be 80% with Atlantic City Electric Com-pany and Jersey Central Power & Light Company dividing the remaining 20% equally.

The concerns expressed by the groups intervening in the hearings for this unique plant are understandable; however, the Company firmly believes, having considered all the facts, that this installation is the best alternative for meeting future generating needs to serve our customers and will therefore ultimately receive regulatory approval.

Nuclear Fuel Five hundred thousand pounds of uranium concentrate (U30s), 35% of the uranium requirement for the initial fuel core of Hope Creek 1, were purchased in February from Eldorado Nuclear Ltd. Uranium and related nuclear fuel services purchased previously will provide for operation of Salem 1 and 2 into 1980.

Delivery and storage of nuclear fuel for the start of Unit# 1 at Sale111 Generating Station has been started. In all, there will be a total of 193 fuel asse111blies in the reactor core, totaling over 50,000 rods and approximately 12,000,000 uranium pellets.

In response to requests for uranium supply, we re-ceived proposals for cooperative exploration, development, and mining ventures. Several such offers for long term supply in the 1980-1990 period are being studied.

BOATS TO CLIMB MOUNTAINS Theoretically, a floating boat uses little energy. Leaders of an emerging America asked themselves: "Why not build waterways from here to there and everywhere to save time and energy?"

So, canal fever struck America in the 1820's and two canals were in full opera-tion in New Jersey in the 1830's. One, the Delaware and Raritan Canal from Bordentown to New Brunswick, proved the canal proponents right. Mules tugged the barges; they found their energy in inexpensive hay.

The Morris Canal, from sea level at Jersey City to Lake Hopatcong, 924 feet above sea level, was a different matter. That canal had to conquer mountains.

Mule power was not enough.

Ingenius, bulky "cradles" carried canal barges up tracks on steep inclined planes. That took energy, supplied usually by water-operated winches which pulled boats up the grades. It worked. But it was wasteful of time and money -and eventu-ally doomed by railroad competition.

9

Electric Peak Load a11d I11stalled Capacity at Time of Peak 9.0 Millions of Kw 8.76 6.27 3.5 1966 67 68 69 70 71 72 73 74 75 In December, our subsidiary, Energy Development Corporation, signed a contract with uclear Assurance Corporation to locate and investigate potential sources of uranium ore in the Colorado Plateau area of Utah and Colorado. Other participants are Long Island Lighting Company and Pennsylvania Power & Light Company.

Fabrication of fuel rods for Salem 1 was completed during the year and nuclear fuel deliveries were made during the period from October through January 1976.

Fossil Fuel Fossil fuel prices remain at the high levels reached in 1974 although there were some upward and downward adjustments during the year. The cost of heavy fuel oil delivered is down 7%, light oil up 14%, and coal up 4%

as compared to December 31, 1974 prices. Price stabiliza-tion can be attributed to a reduced demand for all fuels as a result of the overall slowdown of economic activity during the year 1975.

Gas Peak Se11dout and Daily Capacity at Time of Peak 20 Millions of Therms High-Load-Factor I cas Natura 18.287 11.077 7.415 5.680 1965 66 67 68 69 70 71 72 73 74 1966 67 68 69 70 71 72 73 74 75 Heating Seasons Gas Supply The daily gas capacity at December 31, 1975, excluding the effect of pipeline curtailments, was 19,575,000 therms.

Added during the year were 251,000 therms of delivery capacity from temporary field storage service provided by Consolidated Gas Supply Corporation and Transcontinen-tal Gas Pipe Line Corporation.

Natural Gas The daily supply of natural gas included in the total capacity is 14,383,000 therms. High-load-factor gas, available every day of the year, accounts for 47%; the remainder comes from field storage, liquefied storage, and contract peaking supply.

During 1975, the Company purchased and used 1,654 million therms of natural gas including quantities of BURNING THE BLACK DIAMONDS Grass grew in the streets of Dover and Rockaway in the 1830's. Iron furnaces languished everywhere. New Jersey was running out of wood, once thought to be a limitless source of energy.

10 Westward, in Pennsylvania, rich anthracite coal fields offered the solu-tion, and in the 1840's and 1850's railroads fought to reach the "black diamonds." The Delaware, Lackawanna & Western got there first, and by 1868 the D.L.&W. had earned the nickname of "The Road of Anthracite."

Ironically, the coal trains had to be towed by wood-burning locomotives until the Danforth & Cooke locomotive works in Paterson proclaimed -

and proved - in 1854 that it finally had made an anthracite-burning engine.

Paterson shot ahead to become a center of American locomotive man-ufacture. The rest of northern New Jersey - or at least that part with railroad spurs -found power in anthracite.

liquefied natural gas. This was a decrease of 182 million therms or 10% under 1974, due primarily to increased cur-tailments in pipeline deliveries. The average cost of the natural gas was 90¢ per million Btu's, an increase of 20¢ per million Btu's over 1974.

During each year since 1971, deliveries of natural gas to which the Company was contractually entitled were cut back because of the nationwide shortage. Curtailments were imposed by all three of our suppliers during 1975.

Curtailments of contracted supplies of natural gas averaged 27% orl.8 million therms per day during the yea r.

On the same basis, 1974 curtailments averaged 23% or 1.5 million therms per day.

Refinery Gas Refinery gas purchased and used during 1975 totaled 111 million therms, 73% more than in 1974. A new three-year contract provides for increased annual deliveries at a higher price. The average cost of this gas was $2.28 per mil-lion BTU's in 1975 compared to $1.78 in 1974.

Manufactured Gas The Company supplements its purchased natural gas and refinery gas with synthetic natural gas (S G) manufactured from naphtha, oil gas from kerosene, and liquefied petro-leum gas produced from propane and butane. The daily capacity for producing these gases is 4.9 million therms, unchanged from 1974. During the year 58 million therms of these gases were produced, 44 million therms more than in 1974. The new jointly-owned SNG plant at Linden, which went operational on December 27, 1974, can contribute up to 1,125,000 therms to our daily capacity. This represents 90% of the plant's total daily production capacity, as Elizabethtown Gas Company is entitled to 10%.

Imported LNG Project The Company has been engaged since 1972 in a joint ven-ture with Algonquin Gas TI-ansmission Company to import year-round supplies of liquefied natural gas (L G) from Algeria and to market this gas through a jointly-owned sub-sidiary, Eascogas LNG, Inc. By mid-1972 a gas purchase contract with the Algerians and a transportation contract with Burmah Oil Tankers Ltd., had been signed providing for initial deliveries in 1977. In addition, the Company had signed an agreement with Distrigas of New York Corpora-tion (DO Y) for the delivery of the Eascogas LNG to New Jersey via the Distrigas Staten Island Terminal and a pro-posed pipeline under the Arthur Kill. However, lack of positive regulatory action resulted in project delays and cancellation of very favorably priced contracts.

A new supply contract was negotiated with Sona-trach, Algeria's state-owned gas and oil company, and was signed on November 5, 1975. PSE&G's ultimate share of the total projected Eascogas imports under this contract, after sales to other companies, is expected to be approxi-mately 21.9 billion therms of LNG over some 22 years.

Deliveries could start as early as the winter of1977-78.

In order to do so, it will be necessary to amend the Federal Power Commission application and obtain the required authorization of the FPC to import and sell the L Gin the United States, in addition to having available the required liquefaction, shipping, and terminal facilities.

As part of its agreement with DONY, your Company has participated in financing the construction of the Dis-trigas LNG terminal by purchasing $60 million of Distrigas' first mortgage notes. Because of many delays in bringing the terminal into operation, DONY's parent, Cabot Corporation, which had provided the balance of the approximately

$95 million already spent on the project, announced that it would provide no additional funds. Subsequently, in order to protect our interest and investment in their terminal, PSE&G negotiated with DONY for the transfer of owner-HORSES UNDER THE HOOD Prentice Oil Company opened the nation's first coastal oil refinen; at Bayonne in 1875. Two years later, a young Clevelander named John 0. Rockefeller came to compete. Th e refiners made kerosene - then burned the waste products, including worthless gasoline.

A way had to be found to use the waste fu el. Th e Connelly brothers of Elizabeth built New Jersey's fi rst gasoline motor in 1889 - to run a street car. Th ey never tried the 111otor on a buggy as did the Duryea brothers of Springfield, Mass., who are acclai111ed as America's first automobile makers.

Th omas Edison tested batten) power on vehicles, then in about 1903 encouraged HennJ Ford to push his idea of mass-producing cheap gasoline-fed "horses."

New Jersey had its own makers of horseless carriages (at least 50 before 1920). Such names as Crane, Simplex, and Mercer still evoke sighs from old car enthusiasts.

11

ship of the terminal to the Company. Tentative agreement has been reached to purchase for $6 million the stock of DONY and Distrigas Pipeline Corporation plus additional assets consisting of land and a pipeline easement on the New Jersey side of the Arthur Kill. PSE&G intends to negotiate agreements with other companies operating in the New York-New Jersey area to share in the use of the terminal.

Exploration and Development Energy Development Corporation (EDC) continued its joint exploration program for natural gas with North American Royalties, Inc. during 1975. Of the 38 exploration wells and 22 development wells drilled to date in the Gulf Coast region of Texas and Louisiana, approximately 45% have led to discovery of natural gas or oil in commercial quantities.

Federal Power Commission approval for the trans-portation of gas discovered in Texas was received in 1974.

Gas from that source began flowing to the Company's mar-ket area via pipeline on November 1, 1974. In late 1975 the Company received temporary Commission approval for the transportation of gas from another field in Louisiana and the gas began flowing to New Jersey in December 1975.

In addition, during 1975, EDC entered into two other gas exploration agreements, which will eventually aug-ment the Company's natural gas reserves. One agreement, with Cavalla Energy Exploration Company, provides for drilling in the Texas Gulf Coast area. The other agree-ment, with Era North American Inc., provides for the acquisition and interpretation of seismic and geologic data in the Atlantic Outer Continental Shelf. This data will help determine the highest potential hydrocarbon bearing tracts which will be placed up for bid in the upcoming Federal lease sales.

Transmission and Distribution In this period of lowered business activity, there has been a corresponding decline in the need for construction of new electric transmission and distribution facilities. In 1975, the T&D work force was trimmed and, in order to make optimum use of the remaining personnel, much construc-tion work formerly done by outside contractors was taken over by PSE&G employees.

Over many years, the service reliability of our electric transmission and distribution system has been among the best in the nation. This quality of service continued in 1975 despite a high incidence of severe lightning storms.

Service reliability in our gas transmission and distribu-tion system also remained at a high level.

To help prevent electric and gas service interruptions, PSE&G joined with 11 other New Jersey utilities in a move to prevent excavation damage to underground lines by establishing an underground utilities location service. Calls to a state-wide toll-free telephone number by contractors and others are received at a central office, which in turn teletypes requests to member utilities to locate and mark their underground facilities in the area to be excava ted.

Energy Pooling An agreement between PSE&G, Consolidated Edison Company of New York, and Orange and Rockland Utilities was signed, covering the interconnection between Ramapo, N.Y., and New Milford, N.J. Another agreement was signed with Consolidated Edison for the interconnection between our Hudson Generating Station in Jersey City and their Farragut station in Brooklyn. These two ties sig-nificantly strengthen our network of interconnections, providing greater reliability and economy of operation for our system. Also an agreement was entered into with the UGI Corporation, Pennsylvania, for UGI to share in the out-I 5 Thomas Edison set out at Menlo Park in the summer of 1878 to pursue the will-o'-

th e-wisp of a practical incandescent light. Th e ket) word was practical.

Electric lights were more than a dream. An arc light had been demonstraterl as early as 1809, and Newark had an electric arc street light in 1877. Arc lights proved the potential, but thetJ were glaring and too costly for home use.

Edison quickly madea workable incandescent light, but the platinum filament was far too expensive. The "Wizard of Menlo Park" tried hundreds of other filam ents. All were impractical: Too fragile, too unreliable, too costly.

Finally, on October 19, 1879, Edison turned on a lamp with a filam ent of carbonized sewing thread. Th e lamp burned on and on -for 40 hours4.62963e-4 days <br />0.0111 hours <br />6.613757e-5 weeks <br />1.522e-5 months <br /> - until the current was turned deliberately high to burn it out.

A practical incandescent lamp had been proved in those 40 October hours.

Th e world had found its way out of darkness on a piece of thread.

put of Essex Unit No.1 from June 1, 1975 until May 31, 1977.

Capacity from this unit can be spared from our system and will fill a gap in UGI's supply of electricity for that period.

Research Activities To.maintain the scope of your Company's research and development program, we put greater emphasis on seeking outside funding from such national research agencies as the Electric Power Research Institute (EPRI), the U.S.

Energy Research and Development Administration (ERDA) and the National Science Foundation (NSF).

At this time, 13 proposals are in various stages of pre-paration or have been submitted for a total of $25 million in possible funding.

One project - the $287,000-ERDA/EPRI-funded "Assessment of Energy Storage Systems, Suitable for Use by Electric Utilities" was completed in 1975. It should prove to be a major contribution to the planned develop-ment of new, efficient, economical and environmentally acceptable means of energy storage.

In ovember, EPRI awarded PSE&G a $172,000 con-tract to perform an "Economic Assessment of the Utilization of Fuel Cells in Electric Utility Systems." The work is to be completed in seven months.

Aquaculture Project Our aquaculture program received $128,000 in additional support from the National Science Foundation, which will carry this first phase of the program to completion in November, 1976. Support for this project now totals

$212,000. Thus far we have successfully used warm power plant discharge water to raise commercial-sized shrimp and trout at Mercer Generating Station.

Energy from Refuse PSE&G is currently investigating resource recovery systems to convert municipal solid waste and sewage sludge into clean fuels for power generation or for additions to our gas supply. It has been estimated that each day New Jersey produces about 19,000 tons of waste and 400 tons of sludge.

Almost all of these wastes are used as land fill or dumped in the ocean. Resource recovery systems would enhance the environment while recovering useful materials and energy.

In 1975 ourresearchactivitiesconcentrated on complet-ing arrangements for the use of shredded refuse at Hudson Generating Station and processed refuse at Bergen Gen-erating Station. We are also working to develop waste man-agement programs with the Hackensack Meadowlands Represe11tatives from federal age11cies, U.S. utilities, and the U11ited Ki11gdo111's Ce11tral Electricity Generating Board lisle11 lo an expla11atio11 of the research at Mercer Generating Station during a workshop 011 aquaculture spo11sored by PSE&G.

BIRTH OF A GIANT The Menlo Park lamp was a laboratory curiosity. What the world really needed was a means of generating and distributing electricity-plus such miscellaneous mundane things as lamp bases, sockets, switches, insulated wire, and meters.

Edison was determined to make electricity widely available. The generation and distribution of power would become Edison's greatest task.

After completing the famous Pearl Street generating station in New York in 1882, with power to light 5,000 lamps, Edison installed a 330-volt generator in Roselle, New jersey. This was the first community in the world ligh fed by electricity.

Others also pursued the electric power ques t, most notably Edward Weston of Newark. Weston set up the world's first commercial dynamo factory in Newark in 1877.

Electric energy was well on the way by 1890. However, comparatively few people used the new power at first. Electricity would bea 20th cen fury giant, despite its 19th century birth.

13

Commission, the City of Newark, several counties and muncipalities. Our investigations of regional recycling schemes that could recover methane gas from refuse sludge mixtures continue. We are also attempting to recover gas from existing land fill sites.

Coal Gasification Your Company is contributing funds to the American Gas Association for a joint government-gas industry development program which is supporting several coal gasification projects. PSE&G is also contributing funds to the Electric Power Research Institute which is involved in developing other fuels from coal, including solvent refined coal and low Btu gas.

Electric Vehicles In 1975 the Company's electric vehicle program continued to provide research data and operating experience as part of a nationwide testing program sponsored by the Electric Vehicle Council. Our three electric vans are being used for meter work, carrying light loads and other tasks that involve short trips. Experience to date has proven the vehicles to be well suited to urban and suburban traffic situations. Electric vehicles hold the potential for practical, non-polluting transportation as well as a future market for off-peak electric power.

Fuel Cells PSE&G continued to participate, with eight other utilities, in a program sponsored by the Power Systems Division of United Technologies Corporation to develop 26 megawa tt In research conducted jointly with Princeton University's Center for Environmental Studies and the Electric Power Research Institute (EPRI), PS E&G is test metering residential heat pump installations. This support of an important national effort is to determine heat pump efficiency, reliability, and energy-saving potential.

THE EDISON "EFFECT" Experimenters testing carbon filament lamps at Menlo Park soon recognized that the lamps had a predictable black deposit of soot inside the glass. Then, in 1880, one lamp showed a thin, clear, and unexplained line of "no-deposit" in the soot.

14 Thomas Edison studied the extraordinary effect. In 1883, he found that by inserting a piece of straight wire into a lit incandescent lamp, he could create a current of electricity without a physical connection.

Edison had discovered the basis for radio -an inexhaustible source of free electrons - at a time when the world had no use for free electrons. Edison filed away the then-useless "Effect," as it came to be known.

Free electrons came to full attention and use after 1901, when Guglielmo Marconi of Italy and Lee DeForest, a young technician working in his Jersey City laboratory, competed to make radio practical. DeForest's experiments led to his Audion radio tube, the useful application of the Edison Effect. A bright electronic era had dawned.

fuel cell power plants for installation in substations. The design has been initiated for a one megawatt demonstration power plant which will validate the performance, operat-ing characteristics and design features for 26 megawatt substation size fuel cells.

Commercial and Marketing Every effort is being made to improve customer communi-cations. This has led to better understanding of the reasons for rising energy costs, the need for nuclear power, and the wise use of energy.

In this regard, we have initiated several programs to train employees in customer relations. For example, 640 employees are undergoing 35 hours4.050926e-4 days <br />0.00972 hours <br />5.787037e-5 weeks <br />1.33175e-5 months <br /> of classroom training which will provide them with techniques for improving the relationships between the customer and the Company.

All customer-contact employees are also being trained in telephone courtesy.

Kilowatthour sales declined by three per cent below 1974. The decline was attributable to the depressed economy of the state, the.low level of building construction, conservation of energy, and a summer which was 13 per cent cooler than 1974.

Electric space heating sales were less than in recent years. Increasing costs of electric energy, decreased building activity in all markets and depressed economic conditions were responsible.

In the residential market, 1,207 installations were added, the smallest number since 1964. Total residential installations on the lines at the end of the year were 24,917.

In the industrial and commercial market, 541 installations totaling 66,015 kilowatts, a 21 per cent increase over 1974, were added. This will result in estimated additional annual revenue of $3,499,000.

Therm sales of gas decreased five per cent below the previous year. The Company's inability to accept new or additional gas business, customers' conservation and general economic conditions, all contributed to the decline.

At year end, we were serving electricity to 1,641,353 customers and gas to 1,286,884 customers.

Interruptible Service At the end of 1975, we were serving 83 gas customers under interruptible contracts. Interruptions totaled 108 equivalent full days during the calendar year as compared with 101 days in 1974. In December a new provision was added to the Company's gas tariff which permits certain high priority uses of gas by interruptible customers to be transferred to firm gas rates. These high priority uses are generally described as plant protection, feedstock and process use where a gaseous fuel is the only feasible fuel.

Area Development During the year, 512 major industrial and commercial firms with approximately 20,000 employees located or expanded in PSE&G territory. A total of 77 companies employing 12,676 moved, leaving a net gain of approxi-mately 6,900 jobs.

The New Jersey Economic Development Authority aided many smaller enterprises. The authority, established by the ew Jersey Legislature in 1974, is empowered to issue tax exempt revenue bonds and lend the funds it raises to private companies at low interest rates. At a time when low interest, long-term capital is generally unavailable from other sources, this authority has arranged approximately

$204 million in loans for more than 113 new business development projects, crea ting approximately 11,500 permanent jobs and another 10,000 construction jobs.

On December 23, 1947, three Bell Laboratory scientists started a world revolution whose end is not yet in sight. That day they demonstrated at Murray Hill TO SHRINK THE WORLD that a small semi-conductor device could amplify a speech signal about 20 times.

The transistor had been born.

When the history of the 20th century is written, the key word should be transistors. It has saved vast amounts of energy, spawned space exploration, created pocket radios, gave birth to the computer age, and changed every life.

The transistor has shrunk the world. Without it, man probably would not have walked on the moon.

Transistors made possible the age of miniaturization. Today, a complete electric circuit containing a thousand transistors can fit into a space less than 1/sth inch square! Tiny is the transistor. Amazing is the world it has wrought.

15

In addition, the authority has been working to attract new industrial and commercial firms. It also plans to de-velop urban industrial parks in five orth Jersey cities -

Newark, Elizabeth, Jersey City, Bayonne and Hoboken.

Construction in the New Jersey meadowlands area continues to accelerate.

At the Sports Complex site in East Rutherford, the grandstand for a racetrack is nearing completion and the 77,000-seat football stadium, which is scheduled for use by the New York Giants in the fall of1976, is now taking shape.

An indoor arena, a hotel, an exposition center and other related facilities will be added.

Nearby Hartz Mountain Industries is now offering for sale townhouses which are part of the first phase of its

$25 million residential community on the east bank of the Hackensack River in Secaucus. The project will eventually include 640 condominium townhouses, to be built on a 134-acre site. This is the first housing project under the Hackensack Meadowlands Development Commission's Master Plan.

16 View of the 77,000-seat stadium, future home of the New York Giants professional football tea111, under co11struction in East Rutherford. The stadium is part of a 780-acre, $300 million sports complex, which will include a race track, indoor arena, and other supporting facilities.

U.S. headquarters and distribution center of Panasonic, the Japanese manufacturer of electronic products. Located in Secaucus, the $50 million complex is one of over 280 facilities operated by foreign fi rms in the Co111pa11y's service area.

Prudential 111surance Compa11y's new 280,000 square foot corporate computer center in Roseland. Prudential has recently completed, or has under construction, three additional major office facilities in the Company's territory.

THE WORLD GOES FISSION The Greek philosopher, Democritus, who first used the word atom in 400 BC, believed the atom was "not cuttable". Ever since, scientists have sought to prove him wrong -and, in the proving have created new sources of energy.

Sden tis ts took up the search early in the 20th century. Albert Einstein suggested in 1905 that mass and energy could be converted into one another (E =mc 2).

When two German scientists proved the theon; by splitting a uranium atom in 1938, Einstein had fled Germany to live in Princeton.

Theorists first concentrated on the splitting (fission) of heavy uranium atoms.

New jersey played a vital role. Bloomfield scientists had made pure uranium as early as 1922. During the 1940's, a Princeton professor "boiled" 75 tons of ordinary water down to 10 drops of heavy water, vital for atomic energy.

Since 1945, international leaders have been pledged to use atomic energy in the service of man. Electric generating stations using nuclear energy provide hope for a stable energy source to replace diminishing fossil fuels.

The Commission has also approved a large office-motel complex on a 258-acre site. Currently, a 10-story office building is under construction and future plans call for construction of a 300-unit Hilton Hotel. Hartz has already overseen $150 million in industrial construction at this location.

Also in the meadowlands area, the New York Times has leased 265,000 square feet of space in Carlstadt. The Times is developing a modern satellite printing plant requir-ing a capital investment of $35 million at this location.

The Hackensack Meadowlands Development Com-mission has also announced plans for a $26 million solid waste ma nagement program for the area. The overall plan calls for baling and resource recovery facilities to be de-veloped and installed by January 1, 1977 and November 1, 1977, respectively.

Community Involvement During 1975, our Urban Affairs Department activities have concentrated on strengthening ties with organizations working on inner-city problems. The Department has also continued to support, financially and through the participation of Company personnel, programs designed to improve the quality of life for the urban pop-ulation. Cultural, recreational and educational youth programs were supported, as well as a number of minority organizations seeking to improve the employ-ment and housing situation.

Edward R. Eberle, retired chairman of the board of PSE&G, was chairman of Governor Brendan T. Byrne's Economic Recovery Commission. Area development personnel contributed to this effort which investigated reasons behind New Jersey's current depressed economic condition and recommended solutions. In addition to providing research and resource information, our Area Development people worked with the various committees of the Commission and assisted in developing recom-mendations aimed at improving the State's economy.

Co111pletely self-co11tai11ed 111011itori11g van operated by the Company's Energy Laboratory is shown sa111pli11g efflue11t fro111 stack at Linden Genera ting Sta ti on. All major gaseous cons ti tu en ts of flue gas are measured by this monitoring van to help 11iaintai11 strict e11viro11111e11tal sta11dards. This special testi11g supple111e11ts the routine e111issio11 control by the fixed 111011itori11g equip111e11t at each ge11erati11g statio11.

HEAT AND LIGHT FROM WATER Imagine a pail of sea water being used to provide enough electricity to light an en tire city - and you get an idea of the potential cheap energy available in th e fusing rather than th e splitting (fission) of atoms.

Th ere is no si111ple way to explain either fission or fusion. Both provide vast amounts of energy. Thus far, however, only fission can be controlled for peace-time purposes.

When the fusing of ligh t atomic nuclei to fo r111 heavier nuclei is controlled, much of the credit will go to Princeton scientists who have been working on such th ermonuclear reactions since 1951. Strong industry and govern111ent support underlies this quest for an almost inexhaustible energy supply.

It has been estimated that if controlled th er111onuc/ear reactors can be 111ade, they will supply one thousand times the annual present power consumption for a billion years. Equally importa11t, the most likely fusion fu el, deuterium, is found in water. Water! That's right! Tomorrow's world may be heated and lighted by water transfor111ed !

17

Environmental Affairs In its continuing efforts to preserve and improve our air and water quality, as well as other aspects of our environment, the Company spent approximately $110 million in 1975, in-cluding the $74 million incremental cost of low sulfur fuels.

Our Environmental Affairs Department worked closely with federal, state and local agencies, environmen ta!

and civic groups, inter-and intra-Company associates, and the general public on environmental matters. A special effort is being made to develop an improved working relationship with environmental groups.

The department continues to represent the Company at public hearings, giving testimony and written com-ments on all related aspects of the environment and the Company's operations.

Communications Efforts The Company's public information program continued to emphasize the importance of nuclear energy to help gain independence from foreign oil supplies and to help stabilize energy costs. It was supplemented by audio-visual pro-grams and a variety of printed materials.

Our Community Relations staff, the Environmental Affairs Department, and our home service advisers pre-sented programs to more than 400,000 people. Company executives, members of the Environmental Affairs De-partment, Information Services Department, and Home Service Department also appeared on a number of radio and television programs.

In preparation for our nation's bicentennial, a new multi-media show was created and produced for the Second Sun uclear Information Center. Titled " ew Jersey 200," it tells the story of New Jersey's contributions to the birth and growth of America.

Employees At year end, there were 13,348 employees working for the Company, a reduction of 684 during the year.

ormal attrition accounted for much of the decrease. However, it was found necessary again this year to lay off more than 200 employees in departments where the work load had decreased because of economic conditions.

Wages and salaries for the year totaled $220,648,687, including disability benefits and workmen's compensation of $8,831,673.

egotiations covering union-represented employees resulted in two-year agreements which pro-vided for general wage increases of 8.378% effective May 1, 1975 and 7.98% in May of this year. Improvements in benefit programs were also made.

Personnel development programs continued to attract a high degree of participation at all organizational levels.

There were 475 employees who attended courses to sharpen their supervisory and managerial skills. During the year, a new program was developed to help management person-nel improve their commu ~ ication techniques. In addition, 536 employees attended job related courses in nearby colleges under the Company's tuition aid program.

With respect to the employment of women and minorities, our statistical record is encouraging in light of the reduction in the work force. Of the more than 13,300 employees, 11% are from minority groups. These statistics are only part of the story. Affirmative action has led to the placement of women and minorities in numerous manage-rial and engineering positions. Efforts continued to place women in positions traditionally held in the past by men.

Primitive 111an worshipped the sun as a giver of life (as do summer-time humans basking along the jersey Shore). Mankind always has dreamed of harnessing that sun - to save its warmth and light to use against the cold and dark of night.

The dreams go on, tinged now with touches of realistic nightmare awareness that man's ability to use energy far outstrips his power to 111ake it.

Studies i11 many New ]ersei; laboratories are aimed at partially reining in the sun - through solar batteries, through saving daytime heat for nighttime use, through experiments in using th e sun's heat to create new earthly energies.

Harness the su11? Make it work even more for humanity? Why not? Two centuries ago, it seemed absurd to suggest that steam could replace water power. A century ago, laughter greeted anyone who might suggest that electricity would light homes and power factories. In pre-transistor days, a blast-off to the 1110011 was bei;ond all logic.

Harn ess the sun? Why not? Mankind is yet young.

Transport of New Jersey In 1975 Transport of New Jersey (TNJ) and its subsidiaries experienced a net loss of $1.8 million compared with a net loss of $3.6 million in 1974. The 1975 net loss reflected State subsidies of $17.2 million under general service contracts between TNJ and its subsidiary, Maplewood Equipment Company, and the Commuter Operating Agency (COA) of the ew Jersey State Department of Transportation. In 1974 TNJ received $8.5 million in state subsidies.

Fares Increased In ovember, the COA directed TNJ to raise its intrastate fares by five cents for two-zone trips and ten cents for trips of three and more zones, effective December 15. This represents the only fare increase for intrastate bus service since May 1972. The first zone fare of forty cents, which has been in effect for more than three years, remains the same.

Bus-Buy-Out Program The highlight of 1975 for Transport of ew Jersey was its participation in the New Jersey "Bus-Buy-Out" program which was first proposed in April 1973. This program, jointly sponsored by the State Department of Transpor-tation and the Federal Urban Mass Transportation Adminis-tration, was designed to upgrade bus transportation facilities in New Jersey.

In October 1975, TNJ sold to the New Jersey Department of Transportation 514 of its used buses at their appraised value of approximately $13 million. These buses were then leased back to the Company at no cost for use in daily transit passenger service. The State agency eventually will install air conditioning and the latest anti-pollution devices on these buses.

Additionally, under this "Bus Buy-Out" program forty per cent of the monies which TNJ received from the sale of its buses will be returned to the Department of Transportation to be used as the State's local share which, along with federal funds, will purchase an additional 416 new commuter and transit buses for use by T J. Delivery of these buses is expected during 1976.

Because of the sale of equipment, Transport was required to deposit the sum of $1.3 million with the Trustee, under a First and Refunding Mortgage Bond Indenture, thereby cancelling the Mortgage lien on all of Transport's properties. A payment of $1.2 million was also made to the Trustee in Bankruptcy in the matter of Manufacturers Credit Corporation, et al, for the acquisition of real estate and garages of the Inter-City Complex for use in the operations of TNJ's subsidiary, Maplewood Equipment Company.

Transport is receiving an annual rental from Maplewood Equipment Company for the use of these properties.

The balance of the proceeds from the sale of the Buses are retained by Transport as its assets for use in the im-provement of its bus transportation service.

Subsidies Necessary TNJ, along with its subsidiary Maplewood Equipment Company, provides transportation for nearly one-half million passengers daily. This is substantially more than the total number of passengers carried by all ew Jersey commuter railroads and underscores the importance of TNJ's opera tions to the citizens - and to the economy - of the State. Unfortunately, despite strenuous cost-cutting measures, the future operation of TNJ is dependent upon the continuation of State or Federal subsidies.

Officers John J. Gilhooley Chairman of the Board and President S. A. Caria Executive Vice President Madison L. Edgerton Senior Vice President for Traffic and Community Affairs Richard Fryling Vice President for Law and Secretary George K. Klein Treasurer and Assistant Secretary Jesse J. Cooper Comptroller and Assistant Treasurer 19

Summary of Significant Accounting Policies System of Accou 11 ts The Company is under the jurisdiction of the Federal Power Commission (FPC) and the Board of Public Utility Commissioners of the State of ew Jersey (PUC) and maintains its accounts in accordance with their prescribed Uniform Systems of Accounts, which are substantiaHy_the same. As a result of the rate-making process the accountmg principles applied by th e Company differ in certain respects from those applied by nonregulated businesses.

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

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

Fuel Costs The Company's electric and gas rates include adjustment clauses which permit recovery of increases in electric fuel costs'. purchased gas and materials used to manufacture gas over base penod costs m months subsequent to their incurrence. In accordance with regulatory approval, the Company has charged operations for increases 111 electric fuel costs in the period of recovery while all gas costs have been charged to operations when incurred.

Effective June 16, 1975, in accordance with a rate order received from the PUC, an amount equal to the balance of unbilled fuel costs, at December 31, 1974, is being amortized over a period of eight yea rs.

Effective January 2, 1976, in accordance with a PUC order received late in 1975, the Company is allowed to recover the projected cost of purchased gas and materials used to manufacture gas for the ye_ar 1976 on a current annual basis. The adjustment clause for gas costs will be at a fixed rate for a twelve-month period. Under or over recoveries will be deferred and included in the following year's projected cost for determining the adjustment factor for gas rates.

Gross Receipts Tax As a result of rate orders received from the PUC, the Company, effective January 1, 1973, began accruing gross receipts tax on current revenue rather than on the previous basis of taxes paid. The prov1s10n for gross receipts tax on 1972 revenues is being charged to operations by an amount equivalent to.5% of revenues subject to the gross receipts tax.

Dep recia ti on and Utility Plant Depreciation, for financial reporting purposes, is computed u_nder the straight-line method and is based on estimated average_ remammg lives of the several classes of depreciable property. These estimates are reviewed continuously and adjustments, as approved by the PUC, are made as required. Depreciation provisions for the years 1975 and 1974 stated in percentages of original cost of depreciable property are 3.20%

and 3.02%, respectively.

The cost of maintenance, repairs and replacements of mmor items of property is charged to appropriate expense accounts. The cost of replacements of units of property is charged _to Utility Plant. At thehme depreciable properties are retired or otherwise disposed of, the ongmal cost less net salvage value is charged to the appropriate accumulated provision for depreciation.

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

Deferred income taxes are provided for differences between book and taxable income to the extent permitted by the PUC for rate-making purposes.

The Company prorates investment tax credits utilized over the average life of the related plant.

Allowance for Funds Used During Construction Allowance for funds used during construction (ADC) is a cost accounting procedure whereby the approximate net composite interest and equity costs of capital funds used to finance construction are transferred from the income statement to construction work in progress (CWIP) in the balance sheet. This procedure is intended to remove the effect of the cost of financing construction activity from the income statement, and results in treating such cost in the same manner as construct10n labor and material costs. The rate used for calculating ADC was 8%

in 1975 and 1974.

In a rate order effective June 16, 1975, the PUC allowed the Company to recover the financing cost on $125,000,000 of CWIP th rough current operating revenues. As a result, no ADC has been accrued_ on

$125,000,000 of CWIP since that date. In a subsequent order, effective ovember7, 1975, th e PUC allowed the current recovery of the financing cost on an additional $125,000,000 of CWIP and since that date no ADC has been accrued on a total of $250,000,000 of CWIP.

On May 20, 1975, the FPC issued for comment a notice of proposed revision of the Uniform Systems of Accounts which provides a formula for determining maximum allowable ADC rates, and a credit to interest charges for the portion of ADC allocable to borrowed funds, and limits ADC currently reported as other income and deductions to that portion allocable to other funds used in construction. If the amendments are adopted as proposed, the Company would not expect any material adverse effect on the results of operations. However, earnings ava 1Iable for coverage tests under the provisions in the Company's Mortgage and Restated Certificate of Incorporation could be reduced, and thus the amount of mortgage bonds and preferred stock that could be issued in the future might be less than would be permitted under the present method of calculation.

Pension Plan Pension costs are accounted for on the basis of an acceptable actuarial method and are charged to operating expenses, Utility Plant and other accounts. The Company's policy is to fu nd pension costs accrued.

Prior service costs are being funded over a period of 31 years from January 1, 1976.

Extraordinary Property Losses Extraordinary Property Losses are deferred and amortized over periods prescribed by the PUC, the longest of which ends December 1, 1993.

Statement of Income For the Years Ended December 31, Operating Revenues (note 9)

Electric Gas Total Operating Revenues Operating Expenses Operation Fuel for Electric Generation and Interchanged Power-net Gas Purchased and Materials for Gas Produced Other Operation Expenses Maintenance Depreciation Taxes Other than Federal Income Taxes Federal Income Taxes (note 1) :

Current Deferred Total Operating Expenses Operating Income Other Income Allowance for Funds Used During Construction Miscellaneous Other Income-net (note 2)

Losses of Subsidiaries-net (note 3)

Total Other Income Income Before Interest Charges Interest Charges Long-Term Debt Short-Term Debt Other Total Interest Charges Net Income Dividends on Cumulative Preferred Stock and

$1.40 Dividend Preference Common Stock Balance Available for Common Stock Shares of Common Stock Outstanding End of Year Average for Year Earnings per average share of Common Stock Dividends paid per share of Common Stock See Summary of Significant Accounting Policies and Notes to Financial Statements.

1975 1974 (Thousands of Dollars)

$1,213,488

$1,100,965 417,037 354,908 1,630,525 1,455,873 478,040 456,104 198,589 143,956 202,201 192,567 83,494 91,467 122,634 106,683 240,967 213,576 1,202 (10,263) 53,166 31,324 1,380,293 1,225,414 250,232 230,459 43,325 56,027 2,913 (180)

(1,155)

(1,857) 45,083 53,990 295,315 284,449 134,411 114,267 1,551 16,059 747 283 136,709 130,609 158,606 153,840 36,008 31,813

$ 122,598

$ 122,027 56,523,160 52,531,003 54,512,838 51,917,807

$2.25

$2.35

$1.72

$1.72 21

Balance Sheet December 31, 1975 and 1974 Assets Utility Plant-original cost Electric Plant Gas Plant Common Plant Utility Plant in Service Less Accumulated Depreciation Net Utility Plant in Service Construction Work in Progress, including nuclear fuel, 1975, $47,044; 1974, $30,131 Plant Held for Future Use, net of accumulated depreciation Net Utility Plant Other Property and Investments Nonutility Property, net of accumulated depreciation-1975, $465 ; 1974, $282 Investments in and Advances to Subsidiaries (note 3)

Other Security Investments, cost or less (note 2)

Total Other Property and Investments Current Assets Cash (note 4)

Accounts Receivable, net of accumulated provision for doubtful accounts-1975, $2,860; 197 4, $2,603 Refundable Federal Income Taxes (note 1)

Fuel, at average cost Unbilled Fuel Costs Materials and Supplies, principally at average cost Prepayments Total Current Assets Deferred Debits Gross Receipts Tax Extraordinary Property Losses Other, principally debt expense Total Deferred Debits Total See Summary of Significant Accounting Policies and Notes to Financial Statements.

22 1975 1974 (Thousands of Dollars)

$3,175,218 820,171 35,463 4,030,852 1,078,121 2,952,731 869,261 20,652 3,842,644 6,874 23,349 64,728 94,951 24,528 224,582 1,015 106,197 45,422 16,084 2,133 419,961 105,580 7,708 2,629 115,917

$4,473,473

$3,103,440 785,596 33,470 3,922,506 965,157 2,957,349 695,655 18,180 3,671,184 48,266 22,016 60,030 130,312 30,669 210,982 9,057 91,090 41,635 22,743 2,267 408,443 113,595 5,676 2,051 121,322

$4,331,261

Liabilities Capitalization Common Equity Common Stock (see statement, page 25)

Premium on Capital Stock Paid-In Capital Retained Earnings Reinvested in Business (note 5)

Total Common Equity Preferred Stock (see statement, page 25)

Total Stockholders' Equity Long-Term Debt (see statement, page 26)

Total Capitalization Current Liabilities Long-Term Debt due within one year (see statement, page 26)

Commercial Paper (note 6)

Accounts Payable Taxes Accrued, including gross receipts tax, 1975, $226,090; 1974, $185,469 Deferred Income Taxes (note 1)

Interest Accrued Other Total Current Liabilities Deferred Credits Accumulated Deferred Income Taxes (note 1)

Accumulated Deferred Investment Tax Credits (note 1)

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

Total 1975 1974 (Thousands of Dollars)

$ 855,874 550 26,065 540,041 1,422,530 509,994 1,932,524 1,953,073 3,885,597 5,133 10,000 56,613 241,375 69,859 31,383 59,584 473,947 72,881 34,379 6,669 113,929

$4,473,473

$ 797,386 550 26,065 515,267 1,339,268 434,994 1,774,262 1,965,765 3,740,027 27,268 99,422 61,352 197,106 46,191 30,029 47,813 509,181 51,212 26,550 4,291 82,053

$4,331,261 23

Statement of Retained Earnings Reinvested in Business For the Years Ended December 31, Balance January 1, Add Net Income Total Deduct Cash Dividends Preferred Stock at required annual rates

$1.40 Dividend Preference Common Stock Common Stock Total Cash Dividends Capital stock expenses Total Deductions Balance December 31 (note 5)

Statement of Changes in Financial Position For the Years Ended December 31, Source of Funds:

Net Income Non-cash Items:

Depreciation Amortization of Gross Receipts Tax Provision for Def erred Income Taxes-net Investment Tax Credit Adjustments-net Allowance for Funds Used During Construction Equity in Net Loss of Subsidiaries Other Total from operations Proceeds from sales of:

Long-Term Debt Preferred Stock Common Stock Total Security Sales Proceeds from the sale of nonutility equipment Miscellaneous Total Funds Provided A pplication of Funds:

Additions to Utility Plant, excluding allowance for funds used during construction Investment in Distrigas of New York Corp.

Reductions of Long-Term Debt Dividends Miscellaneous Changes in Working Capital:

• Short-Term Debt-(Increase) Decrease Other-Increase (Decrease)

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

24 1975 1974 (Thousands of Dollars)

$515,267

$483,543 158,606 153,840 673,873 637,383 34,041 29,932 1,881 1,881 93,692 90,061 129,614 121,874 4,218 242 133,832 122,116

$540,041

$515,267 1975 1974 (Thousands of Dollars)

$158,606 125,427 8,016 21,669 7,829 (43,325) 1,262 (1,442) 278,042 72,415 56,855 129,270 40,027 3,592

$450,931

$254,093 4,694 10,548 129,614 5,230 89,422 (42,670)

$450,931

$153,840 109,563 7,397 15,153 (5,837)

(56,027) 3,245 1,648 228,982 238,404 87,104 325,508 1,688

$556,178

$329,673 15,300 31,818 121,874 10,067 5,863 41,583

$556,178

Statement of Capital Stock December 31, Cumulative Preferred Stock

$100 par value-authorized 7,500,000 shares Series issued :

4.08%

4.18%

4.30%

5.05%

5.28%

6.80%

9.62%

7.40%

7.52%

8.08%

7.80%

7.70%

12.25% issued in 1975 (note B)

Unissued-2,800,058 shares

$25 par value-authorized 10,000,000 shares 9.75% Series issued in 1975 Unissued-8,400,000 shares Outstanding Shares 250,000 249,942 250,000 250,000 250,000 250,000 350,000 500,000 500,000 150,000 750,000 600,000 350,000 1,600,000 1975 1974 (Thousands of Dollars) 25,000

$ 25,000 24,994 24,994 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 35,000 35,000 50,000 50,000 50,000 50,000 15,000 15,000 75,000 75,000 60,000 60,000 35,000 40,000 Current Redemption Price Per Share

$103.00 103.00 102.75 103.00 104.00 106.00 109.50 108.00 108.00 108.00 108.00 108.49 112.00 27.50 Refunding Restricted Prior to (note A )

July 1, 1980 April 1, 1976 April 1, 1977 May 1, 1977 November 1, 1977 April 1, 1978 February 1, 1985 January 1, 1981 Total Cumulative Preferred Stock (note C)

$509,994

$434,994 Dividend Preference Common Stock and Common Stock

$1.40 Dividend Preference Common Stock (no par)-1,343,999 shares authorized, issued and outstanding >

current redemption price $35.00 per share (note D)

$855,874

$797,386 Common Stock (no par)-authorized 100,000,000 shares (note E); issued and outstanding as of December 31, 1975, 56,523,160 shares (3,992,157 shares issued for $58,488 in 1975 and 4,670,294 shares issued for

$87,308 in 1974)

Notes :

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

B-On February 1, 1980 and annually thereafter not less than 17,500 shares or more than 35,000 shares must be redeemed through the operation of a sinking fund at a redemption price of $100 per share plus accumulated and unpaid dividends to the date of such redemption.

The sinking fund requirement to redeem not less than 17,500 shares is cumulative.

C-As of December 31, 1975 the annual dividend require-ment on Preferred Stock was $38,119,000. The em-bedded dividend cost was 7.54%.

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

E-Includes 344,898 shares of Common Stock reserved for possible issuance under the Automatic Dividend Reinvestment Plan.

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

25

Statement of Long-Term Debt December 31, 1975 1974 (Thousands of Dollars)

First and Refunding Mortgage Bonds Series (note A) 2Ys% June 1, 1979 54,990 56,050 2%% May 1, 1980 19,160 19,485 3.Y-4% October 1, 1983 22,976 23,551 3.Y-4% May 1, 1984 50,000 50,000 4%% November 1, 1986 50,000 50,000 4Ys% September 1, 1987 60,000 60,000 4%% August 1, 1988 60,000 60,000 5Ys% June 1, 1989 50,000 50,000 4%% September 1, 1990 50,000 50,000 4%% August 1, 1992 40,000 40,000 4%% June 1, 1993 40,000 40,000 4%% September 1, 1994 60,000 60,000 4%% September 1, 1995 60,000 60,000 6.Y-4% June 1, 1997 75,000 75,000 7 % June 1, 1998 75,000 75,000 7%% April 1, 1999 75,000 75,000 9 Ys% March 1, 2000 98,000 98,000 8%% A May 15, 2001 69,300 69,300 7%% B November 15, 2001 80,000 80,000 7Yz% C April 1, 2002 125,000 125,000 8Yz% D March 1, 2004 90,000 90,000 12 % E October 1, 2004 99,000 100,000 8 % June 1, 2037 7,463 7,463 5 % July 1, 2037 7,538 7,538 Total First and Refunding Mortgage Bonds 1,418,427 1,421,387 Notes:

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

B-Five-Year Term Notes were issued to three banks bearing interest at 117°/o of each bank's prime or alter-nate base rate in the first year, and increasing to a maximum of 121% of the prime or alternate base rate during the final year. The notes are subject to prepay-ment at any time without penalty.

C-As of December 31, 1975 the annual interest require-ment on Long-Term Debt was $132,604,000 of which

$92,811,000 was the requirement for First and Refund-ing Mortgage Bonds. The embedded interest cost on Long-Term Debt was 6.76%.

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

1975 1974 (Thousands of Dollars)

Debenture Bonds unsecured 3Yz% October 1, 1975 22,250 4%% March 1, 1977 31,000 31,945 4%% October 1, 1981 35,761 36,615 4%% October 1, 1983 29,645 30,628 5%% June 1, 1991 48,306 49,597 7 \\14% December 1, 1993 34,298 35,000 9

% November 1, 1995 66,784 69,000 7%% August 15, 1996 67,876 69,226 8%% November 1, 1996 52,523 53,551 6 % July 1, 1998 18,195 18,195 Total Debenture Bonds 384,388 416,007 Other Long-Term Debt Five-Year Term Notes due November 26, 1979 (note B) 150,000 150,000 6Yz% Note due serially from May 15, 1977 to November 15, 1983 3,600 3,600 Total Other Long-Term Debt 153,600 153,600 Total Long-Term Debt principal amount outstanding (note C) 1,956,415 1,990,994 Less amount due within one year (note D) 5,133 27,268 Long-Term Debt excluding amount due within one year (note D) 1,951,282 1,963,726 Add Net Unamortized Premium 1,791 2,039 Long-Term Debt and N et Unamortized Premium

$1,953,073

$1,965,765 D-The aggregate principal amount of requirements for sinking funds and maturities for each of the five years following December 31, 1975 is as follows :

Sinking Year Funds Maturities Total

{Thousands of Dollars) 1976

$ 5,133 5,133 1977 10,106 31,480 41,586 1978 10,310 480 10,790 1979 9,560 203,730 213,290 1980 9,300 18,940 28,240

$44,409

$254,630

$299,039 For sinking fund purposes, certain First and Refunding Mortgage Bond issues require annually the retirement of $13,100,000 principal amount of bonds or the utilization of bondable property additions at 60% of cost and the portion expected to be met by property additions has been excluded from the table above. Also, the Company may, at its option, retire additional amounts up to $6,200,000 annually through sinking funds of certain debenture bonds.

Notes to Finandal Statements

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

Net Income Federal income taxes included in:

Operating income:

Current provision

• Provision for deferred income taxes - net Investment tax credit adjustments - net Total deferred Total included in operating income Miscellaneous other income - net Total Federal income tax provisions Total Losses of subsidiaries - net Pre-tax income Tax expense at 48% of pre-tax income Adjustments to pre-tax income, computed at 48%, for which deferred taxes are not provided under current rate making policies:

Tax depreciation in excess of book depreciation Allowance for funds used during construction Overhead costs capitalized Other Total Total Federal income tax provisions

• Represents the tax effects of the following items:

Additional tax depreciation Unbilled revenues Unbilled fuel costs Gross receipts taxes Other Total 1975 1974 (Thousands of Dollars)

$158,606

$153,840 1,202 45,337 7,829 53,166 54,368 154 54,522 213,128 1,155

$214,283

$102,856 (13,956)

(20,796)

(4,408)

(9,174)

(48,334)

$54,522

$20,685 7,514 1,818 14,336 984

$45,337 (10,263) 37,161 (5,837) 31,324 21,061 (495) 20,566 174,406 1,857

$176,263

$84,606 (21,930)

(26,893)

(4,664)

(10,553)

(64,040)

$20,566

$13,069 10,647 15,049 (3,658) 2,054

$37,161 Investment tax credits of approximately $36,000,000 are available as of December 31, 1975 as a carryover to future years. The Tax Reduction Act of 1975 provides that for the years 1975 and 1976 investment tax credits can be utilized to offset 100% of tax liability before investment credit.

Energy Development Corporation, the Company's wholly owned subsidiary engaged in exploration for natural gas, follows the full-cost method of accounting for book purposes and provides for deferred income taxes resulting from the current deduction for income tax purposes of intangible drilling costs.

2. Other Security Investments The Company has purchased $60,000,000 principal amount of interest-bearing first mortgage notes of Distrigas of New York Corporation (DONY), a non-affiliated company, to assist in the construction of DONY's Staten Island LNG terminal. In recognition of the serious problems being encountered by DONY in obtaining (a) sufficient quantities of LNG with related regulatory approvals to permit the economical operation of the terminal facilities and (b) permits and authorizations to operate the facilities, the Company in January 1975, effective for the year 1974, deferred recognition of interest income on these notes, retroactive to the date interest began to accrue. Of the total interest deferred in 1974, which was charged to Miscellaneous Other Income, $2,154,000 related to 1973.

Approximately $95,000,000 has been expended on the terminal to date with Cabot Corporation, the parent company of DONY, having invested $35,000,000 of equity funds. Cabot announced, in early 1975, that it would not provide any additional funds. As a result, in order to protect its interest and investment in the terminal, the Company has negotiated an agreement to purchase, early in 1976, the capital stock of DONY, and its affiliate, Distrigas Pipeline Corporation, together with certain interests in real estate from Cabot for approximately $6,000,000. In addition, during the negotiations, the Company advanced to DONY about$4,600,000 for the payment of New York City taxes and other maintenance expenses.

The conditions necessary to permit the successful operation of the terminal have not been met at this time.

Any loss the Company may incur if these conditions are not resolved is not presently determinable; however, in the opinion of the management of the Company such loss, if any, would not have a material effect on the financial position of the Company or the results of its operations. The ultimate financial effect of these transactions may depend, among other things, upon the Company's ability to find alternate uses for the facilities and the treatment granted by the PUC for rate making purposes. Reference is made to Imported LNG Project on page 11 for additional information.

27

3. Investment in and Advances to Subsidiaries Investments (including the Company's equity in undis-tributed earnings or losses) and advances to subsidiaries are summarized as follows:

December 31, 1975 1974 (Thousands of Dollars) lransport of New Jersey Investment

$10,523

$12,277 Energy Development Corporation Investment 1,941 1,448 Advances 10,880 8,286 Eascogas LNG, Inc.

Investment 5

5 Total

$23,349

$22,016 The Company's equity in the losses of lransport of New Jersey was $1,649,000 in 1975 and $2,163,000 in 1974, which are included in losses of subsidiaries reported in the statement of income. These losses of lransport are net of credits of $105,000 in 1975 and $1,388,000 in 1974 for the income tax effect of including lransport in the Company's consolidated Federal income tax returns.

4. Compensating Balances At December 31, 1975 and December 31, 1974 cash includes approximately $20,590,000 and $21,375,000, respectively, representing compensating balances maintained under informal arrangements with various banks to support lines of credit of $187,200,000 and $158,950,000, respectively. Of the amounts of compensating balances shown above,

$11,742,000 at December 31, 1975 and $12,175,000 at December 31, 1974 were maintained to compensate for other bank services as well as to support lines of credit.

5. Retained Earnings and Dividend Restrictions Certain indentures supplemental to the First and Refunding Mortgage, certain of the Debenture Bond indentures and the Restated Certificate of Incorporation, as amended, contain, among other things, provisions relating to the payment of dividends on both Common Stock and $1.40 Dividend Preference Common Stock and provisions relating to the use of retained earnings. These restrictions do not presently limit the payment of dividends out of current earnings. The amount of retained earnings free of these restrictions as of December 31, 1975 was $530,041,000.

6. Bank Loans and Commercial Paper Bank loans, none of which were outstanding at the end of the periods, represent the Company's unsecured promissory notes issued under informal credit arrange-ments with various banks and have terms of eleven months 28 or less. Commercial paper represents the Company's unsecured bearer promissory notes with a term of nine months or less sold to dealers at a discount. Average interest rates and average and maximum outstanding balances of short-term debt are as follows:

Maximum amount of short-term borrowings outstanding at any month end during the year Average short-term borrowings during the year (A)

Weighted average interest rate of borrowings during the year (B)

Weighted average interest rates for commercial paper outstanding at year end 1975 1974 (Thousands of Dollars)

$52,200

$278,897

$24,435

$139,220 6.35%

11.40%

5.45%

9.72%

(A) Computed by multiplying the principal amounts of short-term debt by the days outstanding and dividing the sum of the products by the number of days such short-term debt was outstanding in the respective years.

(B) Computed by dividing the total interest expense by the average short-term debt.

7. Pension Plan The Company has a non-contributory, trusteed plan covering all permanent employees. Pension costs for the past two years were charged as follows:

1975 1974 (Thousands of Dollars)

Opera ting Expenses

$24,456

$20,714 Utility Plant and Other Accounts 7,978 7,727 Total Pension Costs

$32,434

$28,441 As of December 31, 1975, the unfunded prior service cost was approximately $257,860,000 and vested benefits exceeded the fund assets plus accruals by approximately

$167,600,000.

Amendments to conform the Company's Pension Plan with the requirements of the Employee Retirement Income Security Act of 1974 are expected to be adopted in the near future. Additional pension costs resulting from the amendments are not expected to be material.

8. Commitments and Contingent Liabilities As part of the Company's construction program, substantial construction commitments had been made. Cash expenditures for the years 1976 through 1980 are estimated to be $2.9 billion in connection with this program. Reference is made to Nuclear Generating Facilities on page 8 for additional information.

The Company is a member of Nuclear Mutual Limited (NML) which provides insurance coverages, up to

$150,000,000, for property damage to nuclear generating facilities of member companies. In the event of losses at any

plant covered by ML the Company would be subject to a maximum assessment of fourteen times its annual premium, which currently would not be material for a single assessment.

As of December 31, 1975, vested benefits exceeded fund assets by approximately $70,000,000 under pension plans of the Company's unconsolidated subsidiary, Transport of New Jersey, and its subsidiary, Maplewood Equipment Company. Und er an interpreta tion of the Employee Retirement Income Security Act of 1974, the Company could be liable to the Pension Benefit Guaranty Corporation, a corporation established within the United States Department of Labor, for deficiencies in plan assets if the subsidiaries' pension plans were terminated. With respect to a failure of Transport to meet its legal obliga tions under its pension plan, the Company, under an agreement entered into in May 1972, agreed to provide a limited guaranty of Transport's obligations und er its pension plan in the event Transport fa iled to meet such obligations, limited to pension benefits accrued to the date of the agree-ment in the total amount of not more than $76,000,000.

The actuarially computed value of the Company's obliga-tion under the guaranty was approximately $50,000,000 Independent Accountants' Opinion HASKINS & SELLS Certified Public Accountants 550 Broad Street, Newark, N.J. 07102 To the Stockholders and Board of Directors of Public Seroice Electric and Gas Company:

We have examined the balance sheet of Public Service Electric and Gas Company as of December 31, 1975 and 1974 and the related statements of income, retained earnings.

reinvested in business, and changes in financial position for the years then ended. Our examination was made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

In our opinion, such financial statements present fairly the financial position of Public Service Electric and Gas Company as of December 31, 1975 and 1974 and the results of its operations and the changes in its financial position for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis.

February 13, 1976 as of December 31, 1975. Any payments made under the guaranty would have the effect of reducing the Company's potential liability to the Pension Benefit Guaranty Corporation.

In July 1973, Philadelphia Electric Company consummated arrangements for the supply of all of the nudear fuel for Peach Bottom 2 and 3 through a nuclear energy supply contract. The Company will be responsiple for payment of its proportionate interest (42.49%) of the cost of the fuel burned and of certain operating costs ana interest expense during the term of the contract. Unit 2 was placed in commercial operation in July 1974 and Unit 3 in December 1974.

udear energy costs, calculated at a zero net salvage value, have been charged to fuel expense on the basis of the number of units of thermal energy produced as they relate to total thermal units to be produced over the life of the fuel.

For information regarding the purchase of an L G terminal and related facilities, see Note 2.

9. Other Matters Information describing financing duri ng the year 1975 and subsequent to December 31, 1975 appears on page 5 and informa tion regarding rate relief appears on page 6.

29

Operating Statistics

%Annual Increase-1975 compared with (000 omitted where applicable) 1975 1974 1974 1965 Electric Revenues from Sales of Electricity (a)

Residential

$ 413,005

$ 364,674 13.25 13.25 Commercial 429,428 377,184 13.85 14.52 Industrial 341,749 336,250 1.64 12.97 Public Street Lighting 23,375 20,473 14.17 8.84 Total Revenues from Sales to Customers 1,207,557 1,098,581 9.92 13.49 Interdepartmental 1,573 1,183 32.97 13.18 Total Revenues from Sales of Electricity 1,209,130 1,099,764 9.94 13.49 Other Electric Revenues 4,358 1,201 262.86 23.45 Total Operating Revenues

$1,213,488

$1,100,965 10.22 13.51 Energy Adjustment Revenues '(included above)

$ 419,154

$ 414,798 1.05 39.71 Sales of Electricity-kilowatthours (a)

Residential 7,598,964 7,514,365 1.13 5.80 Commercial 8,994,855 8,687,964 3.53 7.01 Industrial 10,144,917 11,244,117 (9.78) 1.72 Public Street Lighting 256,755 253,395 1.33 1.92 Total Sales to Customers 26,995,491 27,699,841 (2.54) 4.34 Interdepartmental 39,910 31,072 28.44 4.20 Total Sales of Electricity 27,035,401 27,730,913 (2.51) 4.34 Kilowatthours Produced, Purchased, and Interchanged-net 29,255,628 29,730,774 (1.60) 4.33 load Factor 53.3%

53.7";6 Heat Rate-Btu of fuel per net kwh generated 10,582 10,779 (1.83)

Net Installed Generating Capacity at December 31-kilowatts 8,829 8,892

(.71) 6.70 I

Net Peak Load-kilowatts (60-minute integrated) 6,270 6,316

(.73) 5.31 Cooling Degree Hours 6,543 7,501 (12.77)

(1.20)

Average Annual Use per Residential Customer-kwh 5,348 5,312

.68 4.89 Meters in Service at December 31 1,689 1,683

.36

.69 I

Gas Revenues from Sales of Gas (a)

Residential

$ 259,095

$ 220,364 17.58 7.14 Commercial 102,656 86,463 18.73 11.02 Industrial 54,369 46,971 15.75 10.58 Street Lighting 116 94 23.40 4.74 Total Revenues from Sales to Customers 416,236 353,892 17.62 8.39 Interdepartmental 647 481 34.51 14.37 Total Revenues from Sales of Gas 416,883 354,373 17.64 8.39 Other Gas Revenues 154 535 (71.21)

.20 Total Operating Revenues

$ 417,037

$ 354,908 17.51 8.39 Raw Materials Adjustment Revenues (included above)

$ 106,795 62,448 71.01 23.47 Sales of Gas-therms (a)

Residential 968,487 977,994

(.97) 2.03 Commercial 447,600 459,074 (2.50) 6.46 Industrial 344,987 407,840 (15.41) 3.71 Street Lighting 404 428 (5.61)

(2.34)

Total Sales to Customers 1,761,478 1,845,336 (4.54) 3.31 Interdepartmental 3,204 3,088 3.76 8.70 Total Sales of Gas 1,764,682 1,848,424 (4.53) 3.32 Gas Produced and Purchased-therms 1,823,191 1,913,826 (4.74) 3.05 Effective Daily Capacity at December 31-therms 19,575 19,324 1.30 5.98 Maximum 24-hour Gas Sendout-therms 11,077 11,763 (5.83) 2.62 Heating Degree Days (a) 4,653 4,629

.52 (1.10)

Average Annual Use per Residential Customer-therms 862 872 (1.15) 1.59 Meters in Service at December 31 1,355 1,352

.22

.59 (a) Starting in 1973, revenues and sales by customer classification include accrued and unbilled dollar amounts and sales volumes from meter reading date to the end of the calendar year. To better match temperature effects on these recorded sales, heating degree days are also reported on a calendar year basis effective with 1973. For years prior to 1973, heating degree days remain on a sales year basis.

I 30

1973 1972 1971 1970 1965

$274,974

$238,025

$219,614

$176,116

$119,052 264,450 230,176 205,318 163,996 110,661 216,543 188,667 172,902 138,407 100,963 17,086 15,773 14,947 13,114 10,023 773,053 672,641 612,781 491,633 340,699 750 646 605 506 456 773,803 673,287 613,386 492,139 341,155 1,305 1,546 1,251 816 530

$775,108

$674,833

$614,637

$492,955

$341,685

$141,081

$107,582

$111,506

$ 43,756

$ 14,793 8,008,127 7,399,963 7,183,821 6,835,470 4,323,572 8,916,829 8,289,066 7,633,053 7,045,161 4,567,356 11,830,307 11,375,579 11,091,985 11,053,298 8,553,109 249,837 246,496 241,449 235,488 212,253 29,005,100 27,311,104 26,150,308 25,169,417 17,656,290 29,160 25,807 25,500 25,634 26,444 29,034,260 27,336,911 26,175,808 25,195,051 17,682,734 31,164,926 29,509,136 28,055,190 27,022,247 19,144,548 52.2%

54.2%

54.0%

57.1%

58.5%

10,695 10,685 10,642 10,878 9,973 8,306 7,836 7,483 6,597 4,615 6,816 6,201 5,925 5,398 3,737 10,911 7,287 8,717 8,307 7,386 5,703 5,307 5,184 4,967 3,318 1,672 1,656 1,643 1,633 1,577

$186,325

$183,953

$170,380

$159,259

$129,981 71,533 70,953 63,164 56,330 36,081 42,624 40,381 36,831 32,272 19,881 89 88 85 82 73 300,571 295,375 270,460 247,943 186,016 464 552 333 248 169 301,035 295,927 270,793 248,191 186,185 117 143 76 106 151

$301,152

$296,070

$270,869

$248,297

$186,336

$ 39,124

$ 34,913

$ 27,636

$ 17,577

$ 12,969 977,468 1,042,793 1,014,887 1,002,149 791,919 457,955 485,358 454,237 418,803 239,313 494,320 494,454 486,685 437,086 239,569 444 449 444 443 512 1,930,187 2,023,054 1,956,253 1,858,481 1,271,313 3,472 4,463 2,999 2,361 1,391 1,933,659 2,027,517 1,959,252 1,860,842 1,272,704 2,002,206 2,112,844 2,004,791 1,930,507 1,350,522 17,668 16,999 16,372 15,150 10,949 12,341 12,125 12,872 11,872 8,550 4,245 4,879 4,833 5,078 5,195 873 932 908 901 736 1,347 1,338 1,330 1.323 1,278 31

Financial Statistics (000 omitted from applicable dollar amoun ts) 1975 1974 Statement of Income (a)

Amount Amount Operating Revenues Electric

$1,213,488 74

$1,100,965 76 Gas 417,037 26 354,908 24 Total Operating Revenues 1,630,525 100 1,455,873 100 Operating Expenses Fuel for Electric Generation and Interchanged Power (net) 478,040 29 456,104 31 Gas Purchased and Materials for Gas Produced 198,589 12 143,956 10 Other Operations 202,201 12 192,567 13 Maintenance 83,494 5

91,467 6

Depreciation 122,634 8

106,683 7

Taxes Other than Federal Income T<\\xes 240,967 15 213,576 15 Federal Income Taxes :

Current 1,202 (10,263)

(1)

Deferred 53,166 4

31,324 3

Total Operating Expenses 1,380,293 85 1,225,414 84 Operating Income Electric 217,429 13 187,593 13 Gas 32,803 2

42,866 3

Total Operating Income 250,232 15 230,459 16 Other Income Allowance for Funds Used During Construction 43,325 3

56,027 4

M iscellaneous Other Income-net 2,913 (180)

Losses of Subsidiaries-net (1,155)

(1,857)

Total Other Income 45,083 3

53,990 4

Income Before Interest Charges 295,315 18 284,449 20 Interest Charges Long-Term Debt 134,411 8

114,267 8

Short-Term Debt 1,551 16,059 1

Other 747 283 Total Interest Charges 136,709 8

130,609 9

Income before cumulative effect of a change in accounting method 158,606 10 153,840 11 Cumulative effect to January 1, 1973 of accruing estimated unbilled revenues of $41,488, net of related taxes Net Income 158,606 10 153,840 11 Preferred Stock Dividends 34,127 2

29,932 3

Balance 124,479 8

123,908 8

$1.40 Dividend Preference Common Stock Dividends 1,881 1,881 Balance Available for Common Stock

$ 122,598 8

$ 122,027 8

Shares of Common Stock Outstanding End of Year 56,523 52,531 Average for Year 54,513 51,918 Earnings per average share of Common Stock

$2.25

$2.35 Dividends Paid per Share

$1.72

$1.72 Payout Ratio 76%

73%

Ratio of Earnings to Fixed Charges Before Income Taxes (c) 2.56 2.33 1 Book Value per Common Share (d)

$24.02

$24.25 Utility Plant

$4,920,768

$4,636,344 Accumulated Depreciation and Amortization

$1,078,124

$ 965,160 Capitalization Mortgage Bonds

$1,418,854 36

$1,422,525 38 Debenture Bonds 380,619 10 389,640 10 Other Long-Term Debt 153,600 4

153,600 4

Total Long-Term D ebt 1,953,073 50 1,965,765 52 Preferred Stock 509,994 13 434,994 12

$1.40 Dividend Preference Common Stock and Common Stock 855,874 22 797,386 21 Premium on Capital Stock 550 550 Paid-In Capital 26,065 1

26,065 1

Retained Earnings 540,041 14 515,267 14 Total Common Equity 1,422,530 37 1,339,268 36 Total Capitalization

$3,885,597 100

$3,740,027 100 (a) See Summary of Significant Accounting (c) Net Income plus Income Taxes, Investment (d) Total Common Equity divided b.y year-e Policies, page 20, and Notes to Financial*

Tax Credits and Fixed Charges divided by Common Stock shares plus doubled the Statemel).ts, page 27.

Fixed Charges. Fixed Charges include

$1.40 Dividend Preference Common Sto (b) Excludes non-recurring special credit equal Interest on Long-Term and Short-Term Debt shares.

to $.41 per share.

and Other Interest Expense.

32

1973 1972 1971 1970 1965 Amount Amount Amount Amount Amount

$ 775,108 72

$ 674,833 70

$ 614,637 69

$ 492,955 67

$ 341,685 65 301,152 28 296,070 30 270,869 31 248,297 33 186,336 3.;;

1,076,260 100 970,903 100 885,506 100 741,252 100 '

528,021 100 240,782 22 203,204 21 171,323 20 119,889 16 52,816 10 119,746 11 117,838 12 100,205 11 86,286 11 60,255 11 174,508 17 168,381 17 153,457 17 139,621 19 97,510 18 88,257 8

80,215 8

66,789 8

62,204 8

40,744 8

98,239 9

91,037 10 84,474 9

78,291 11 52,862 10 167,545 15 132,827 14 112,576 13 103,108 14 73,304 14 (7,983)

(15,433)

(2) 16,682 2

9,498 1

35,848 7

11,235 1

14,442 2

1,484 (1,765) 2,293 1

892,329 83 792,511 82 706,990 80 597,132 80 415,632 79 152,492 14 141,181 14 142,585 16 109,315 15 84,649 16 31,439 3

37,211 4

35,931 4

34,805 5

27,740 5

183,931 17 178,392 18 178,516 20 144,120 20 112,389 21 56,529 5

45,011 5

33,465 4

20,435 3

1,617 2,566 913 1,226 2,130 472 (1,863)

(6,079)

(1)

(2,504)

(1,650)

(1) 2,357 1

57,232 5

39,845 4

32,187 4

20,915 2

4,446 1

241,163 22 218,237 22 210,703 24 165,035 22 116,835 22*

104,322 10 101,413 10 84,199 10 70,444 10 37,008 7

5,092 505 2,768 2,999 267 266 116 237 (190) 423 109,680 10 102,034 10 87,204 10 73,253 10 37,698 7

131,483 12 116,203 12 123,499 14 91,782 12 79,137 15 18,540 2

150,023 14 116,203 12 123,499 14 91,782 12 79,137 15 28,880 3

19,236 2

13,564 2

9,153 1

5,722 1

121,143 11 96,967 10 109,935 12 82,629 11 73,415 14 1,881 1,881 1,881 1,881 1,881

$ 119,262 11 95,086 10

$ 108,054 12 80,748 11 71,534 14 47,861 43,861 39,475 35,975 31,004 45,680 41,541 36,876 33,504 31,004

$2.20 (b)

$2.29

$2.93

$2.41

$2.31

$1.72

$1.70

$1.64

$1.64

$1.38Yi 78%

74%

56%

68%

60%

2.22 2.08 2.60 2.34 4.12

$24.14

$23.48

$23.14

$21.79

$17.36

$4,369,141

$3,999,474

$3,577,248

$3,157,661

$2,070,280

$ 916,346

$ 831,673

$ 765,642

$ 703,173

$ 452,258

$1,236,364 36

$1,239,602 39

$1,116,127 40

$ 983,483 41

$ 689,196 43 420,387 12 430,857 14 440,028 16 398,837 16 198,793 12 103,600 3

1,760,351 51 1,670,459 53 1,556,155 56 1,382,320 57 887,989 55 434,994 13 374,994 12 234,994 9

184,994 8

124,994 8

710,078 21 622,878 20 528,577 19 442,565 18 333,398 21 550 539 252 252 138 26,065 1

26,065 1

26,065 1

26,065 1

26,065 2

483,543 14 443,443 14 420,919 15 373,411 16 225,253 14 1,220,236 36 1,092,925 35 975,813 35 842,293 35 584,854 37

$3,415,581 100

$3,138,378 100

$2,766,962 100

$2,409,607 100

$1,597,837 100 33

Management's Discussion and Analysis of the Statement of Income The results shown in the Statement of Income in the foregoing Financial Statistics are not necessarily indicative of future earnings. Higher operating costs and carrying charges on increased investment in plant, if not offset by proportionate increases in operating revenues resulting from periodic rate relief or sales growth, will continue to adversely affect earnings. Whether the Company will experience increases in sales in the future will be affected by the extent of energy conservation practiced by the Company's customers, the rate of eco-nomic growth in the State of New Jersey, and the ability of the Company to obtain fuel for electric generation and natural gas and its supplements.

The following factors had a significant effect on the Company's results of operations for the periods indicated.

Electric Operating Revenues Increases in electric operating revenues in the periods 1971 through 1975 are primarily attributable to rate increases and the recovery of increased energy costs through the adjustment clauses contained in the Company's rates.

Although kilowatthour sales increased in 1971, 1972 and 1973, kilowatthour sales decreased 4% in 1974 and 3% in 1975 due to cooler summers, customer conservation efforts and the economic slowdown.

Gas Operating Revenues Increases in gas operating revenues in the periods 1971 through 1975 are primarily attributable to rate increases and greater recovery of increased raw material costs through the adjustment clauses contained in the Com-pany's rates. Although therm sales increased in 1971 and 1972, then~ sales decreased 5% in 1973, 4% in 1974 and 5% in 1975, as a result of warmer than usual heating seasons, curtailments to interruptible customers, cus-tomer conservation efforts, and the economic slowdown.

Fuel for Electric Generation and Interchanged Power-net Cost to the Company of coal and oil increased significantly during 1973 and 1974. Although unit costs continued to increase in 1975, total fuel cost decreased by $35,000,000 due to the greater use of lower-cost nuclear generating facilities and the increased purchase of interchanged power. Interchanged power purchased from the Pennsylvania-New Jersey-Maryland Interconnection increased by $63,000,000 in 1974 and by $57,000,000 in 1975, because it was more economical to purchase than produce the electricity with low sulfur fuels.

34 Gas Purchased and Materials for Gas Produced Although gas therm sales to the Company's customers decreased by 4% in 1974 and 5% in 1975, the cost of gas purchased and materials for gas produced increased during these periods. Increases in both periods were principalJy the result of price increases, and the increased use of naphtha for the manufacture of synthetic natural gas during 1975.

Maintenance Increases in 1972 and 1973 were attributable principally to escalating costs of labor, materials, supplies, and services.

In addition, major repairs were necessary at Hudson Generating Station in 1972. The decrease in 1975 is pri-marily attributable to reduced maintenance of gas turbine units due to a decline in their usage caused by the availability of less expensive nuclear energy and pur-chased power.

Depreciation The increase in 1975 is due to the increase in depreciable Utility Plant in Service principally as the result of Peach Bottom Generating Station and related transmission facilities and the Linden SNG plant being placed in service during 1974.

Taxes Other Than Federal Income Taxes The increases are principally due to substantial increases in gross receipts tax resulting from greater revenues derived through the adjustment clauses in electric and gas rates and rate relief, and the change in the method of accounting for gross receipts tax from the tax paid basis to the basis of accruing such tax on current revenues, effective January 1, 1973.

Federal Income Taxes The negative provision for Federal Income Taxes - Current in 1972 was primarily attributable to the decrease in pre-tax income and the increase in timing differences related to the class life asset depreciation range system.

The negative provision decreased $7,450,000 in 1973 principally because of the decreased allowable investment tax credits as explained below. Additional negative provisions of $2,280,000 for 1974 were substantially the result of the increased current deduction of fuel costs which was deferred on the books plus the deferral, for tax purposes, of increased unbilled revenue. The provision increased $11,465,000 in 1975 primarily due to the in-

crease in pre-tax income and the decrease in the current deduction of fuel costs, substantially offset by the increased utilization of gross receipts tax previously deferred for tax purposes and increased allowable in-vestment tax credits.

Deferred Increases in Federal Income Taxes - Deferred are attrib-utable to increases in differences between book and taxable income which are deferred to the extent permitted by the PUC for rate-making purposes and in addition, the increase in allowable investment tax credits in 1975. The decrease in 1973 was attributable to the decrease in the allowable investment tax credits as a result of limitations under the Internal Revenue Code and operating loss carryback provisions.

Allowance for Funds Used During Construction (ADC)

The increases in ADC through 1973 are attributable to increased construction work in progress upon which ADC is computed. The decreases since 1973 are primarily due to Peach Bottom and related transmission facilities and the Linden S G plant being placed in service during 1974 and the discontinuance in the last half of 1975 of the accrual of ADC on a portion of Construction Work in Progress as authorized in our last rate case.

Losses of Subsidiaries A significant portion of the increase in losses in 1972 was attributable to a strike at Transport of New Jersey. Losses since 1972 have been minimized principally by receipt of state subsidies.

Total Interest Charges The increases in each of the periods are principally due to issuance of additional debt and to higher interest rates on such debt.

Net Income The decrease in Net Income for the year 1972 compared to the year 1971 was principally the result of increases in operating expenses (principally due to an increase in purchased power and major repairs at Hudson Gener-ating Station) and net losses of subsidiaries, of which a significant portion was attributable to the strike in 1972 at Transport of New Jersey.

The increase in "Income before cumulative effect of a change in accounting method" for 1973 was principally the result of rate relief and the deferral of increased fuel costs.

The increase in "Income before cumulative effect of a change in accounting method" for 1974 was principally the result of rate relief and the deferral of increased fuel costs which were partially offset by increased interest charges. In addition, regulatory accounting requirements followed by the Company during the test operation of Peach Bottom 2 and 3 resulted in a non-recurring bene-fit to earnings of 17¢ per share in 1974. Under these requirements, the Company received the benefit of revenues at the prescribed rates for the test generation and continued to record ADC, while not ch,arging depreciation expense.

The increase in Net Income for 1975 was primarily due to rate relief. While revenues have increased, kilo-watthour and therm sales have decreased. The increases in revenues were partially offset by (1) increased charges for the cost of gas, (2) increased depreciation charges, (3) increased taxes, (4) a decrease in ADC, and (5) increased interest charges on long-term debt.

35

36 Changes In Organization Edward R. Eberle retired as chairman of the board and chief executive officer effective June 30.

The Board of Directors designated Robert I. Smith, president, as chief executive officer, effective July l.

The Board also elected John F. Betz, senior vice president-engineering and production, and William E.

Scott, senior vice president-finance, to the newly-created position of executive vice president, effective July l.

Edward G. Outlaw, senior vice president-planning and distribution, was redesignated senior vice president -

operations, and Carroll D. James, vice president and assistant to the senior vice president - planning and dis-tribution, was redesignated vice president and assistant to senior vice president - operations, also effective July l.

Robert W. Hodge was elected vice president-comrnercial and marketing, succeeding Donald S. Lord, who died in March.

PSE&G Seroice Territory

Board of Directors Reynold E. Burch, M.D.

Director ot Maternity & Infant Care Project, Director of Greater Newark Coordinated Family Planning Project, and Clinical Associate Professor, Department of Obstetrics and Gynecology, New Jersey Medical School, College of Medicine and Dentistry of ew Jersey, Newark, New Jersey Member of Audit Committee C. Malcolm Davis Chairman of the Board and Director of Fidelity Union Bancorporation, and Chairman of the Board and Director of Fidelity Union Trust Company, Newark, New Jersey Member of Executive and Finance Committees, and Chairman of Nominating Committee W. Robert Davis Chairman of the Board, Bancshares of New Jersey, Moorestown, New Jersey; Chairman of the Board, The Bank of New Jersey, Camden, New Jersey; and Chairman of the Board, The Bank of New Jersey, N.A.,

Moorestown, New Jersey Member of Audit Committee Edward R. Eberle Consultant to and former Chairman of the Board of the Company Chairman of Executive Committee and member of Finance and Nominating Committees Margery Somers Foster University Professor of Economics, former Dean of Douglass College, Rutgers, The State University of New Jersey, New Brunswick, New Jersey Member of Audit Committee D. Wayne Hallstein Director and former President, Ingersoll-Rand Company, Woodcliff Lake, ew Jersey (diversified manufacturer of machinery, equipment and tools)

Member of Compensation and Finance Committees Donald B. Kipp Counsel to Pitney, Hardin & Kipp, Counsellors at Law, Newark and Morristown, ew Jersey Chairman of Audit and Compensation Committees, and member of Executive Committee Kenneth C. Rogers President, Stevens Institute of Technology, Hoboken, New Jersey Member of Compensation and Nominating Committees William E. Scott Executive Vice President of the Company Member of Executive Committee and Chairman of Finance Committee Clifford D. Siverd Chairman of Finance Committee, Director and former Chairman of the Board, American Cyanamid Company, Wayne, New Jersey (pharma-ceutical, consumer and building, agricultural and chemical products)

Member of Audit, Compensation, and Nominating Committees Robert I. Smith President and Chief Executive Officer of the Company Member of Executive and Finance Committees Edwin H. Snyder Former Chairman of the Board of the Company Robert V Van Fossan President, Chief Executive Officer, and Director, The Mutual Benefit Life Insurance Company, ewark, New Jersey Member of-Finance Committee Nathan H. Wentworth Chairman of Executive Committee, Director and former Chairman of the Board, The Continental Corporation, New York, New York (property and casualty, life and accident and health, and other types of insurance, and other financial services); and The Continental Insurance Companies, New York, New York Member of Compensation and Finance Committees Officers Robert I. Smith President and Chief Executive Officer John F. Betz Executive Vice President William E. Scott Executive Vice President Everett L. Morris Senior Vice President - Corporate Development Edward G. Outlaw Senior Vice President - Operations James B. Randel, Jr.

Senior Vice President - Consultant Harold W. Sonn Senior Vice President - Administration Frederick M. Broadfoot Vice President - Law Malcolm Carrington, Jr.

Vice President and Secretary John A. Casazza Vice President - Planning and Research Robert M. Crockett Vice President - Fuel Supply Richard M. Eckert Vice President - Engineering and Construction Robert W. Hodge Vice President - Commercial and Marketing Charles H. Hoffman Vice President - Energy Pooling Carroll D. James Vice President and Assistant to Senior Vice President -

Operations Edward J. Lenihan Vice President - Public and Employee Relations Robert W. Lockwood Vice President - Corporate Services Robert C. Lydecker Vice President and Assistant to the President Wallace A. Maginn Vice President and Treasurer John F. McDonald Vice President - Governmental Affairs Parker C. Peterman Vice President and Comptroller Frederick W. Schneider Vice President - Production Robert J. Selbach Vice President - Transmission and Distribution

0 PS~G Public Service Electric and Gas Company Newark, New Jersey