ML18092B466

Public Svc Enterprise Group 1986 Annual Rept.

ML18092B466
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Site:	Salem, Hope Creek, 05000000
Issue date:	12/31/1986
From:	Ferland E PUBLIC SERVICE ENTERPRISE GROUP
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DEADLINE RETURN DAT / If ... RECORDS FACILITY BRANCH CONTENTS 1 Financ i al High l ights 1 Enterprise P r ofi l e 3 Message to Shareholders 6 The Financia l Picture 9 Public Service E l ectric and Gas Company 25 Energy Development Corporation 26 Community Energy Alternatives Incorporated 26 Pub l ic Service Resources Corporation 27 Management's Discussion and Analysis of Financial Condition and Results of Operations 30 O r ganiza t ion and Summary of Significant Accounting Policies 31 Financia l S t atement Responsibility 32 Conso l idated Financial Statements 36 Independent Accountants' Opinion 39 Notes to Consilidated Financ i al Statements 46 Conso li dated Financia l Statist i cs 48 Operating Statistics 50 Officers 51 Directors 52 Corporate and Stock I nformation St ockholder Information

-Toll Free New Jersey residents 1-(800) 242-0813 Outside New Je r sey 1-(800) 526-8050 Security Analysts and Institutional Investors Manager-Investor Relat i ons (201) 430-6564 D i vidend Reinvestment Plan Enterprise has a Dividend Reinvestment and Stock Purchase Plan under which all common and PSE&G preferred stockholders may reinvest dividends or make direct cash purchases to obtain additional Enterprise common stock. All brokerage and other fees are absorbed by Enterprise.

Call the toll free number to obtain an authorization card. Stock Trading Symbol: PEG Annual Meeting P l ease note that the Annual Meeting of Stockholders of Public Service Enterprise Group Incorporated w i ll be held in Newark Symphony Hall , 1020 Broad Street, Newark. N.J. Tuesday , April 21. 1987 at 2: 00 p.m. A summary of the meeting will be sent to all stockholders of record at a later date.

FINANCIAL HIGHLIGHTS (Thousands of Dollars where applicable) 1986* 1985* % Increase (Decrease)

Total Operating Revenues Total Operating Expenses Net Income Common Stock Shares Outstanding

-Average (Thousands)

Shares Outstanding

-Year-end (Thousands)

Earnings Per Average Share Dividends Paid Per Share Book Value Per Share -Year-end Market Price Per Share -Year-end Return on Average Common Equity Gross Additions to Utility Plant Total Utility Plant *Reflects the adoption of SFAS 90 and the conso li dation of wholly-owned subs i d i ar i es. $ 4,498,416

$ 3,821,132

$ 378,463 133,140 134,882 $ 2.84 $ 2.93 $26.89 4014 10.56% $ 1,019,552

$11,437,196 See Organiza t ion and Summary of Signi f ican t Accounting Policies and Note 1 of Notes to Consolidated Financial Statements. ENTERPRISE PROFILE s 4,428,341 s 3,790,572 s 399,632 122,344 131 , 699 s 3.27 s 2.81 $26.81 31% 12.27% s 1,220,089

$10,842, 182 2 1 (5) 9 2 (13) 4 27 (16) 5 Public Service Enterprise Group Incorporated (Enterprise) became the parent holding company of Public Service Electric and Gas Company (PSE&G) on May 1, 1986 as the result of the corporate restructuring of PSE&G. It was formed with the approval of holders of common stock and $1.40 dividend preference common stock at PSE&G's annual meeting on April 15, 1986. The new corporate structure allows Enterprise to diversify into non-regulated inesses in a manner that affords the rewards and risks of non-utility ventures to the common stockholders of Enterprise. This structure is also designed to protect PSE&G's customers from such risks. Enterprise's principal subsidiary is PSE&G, and its primary purpose is to provide the utility's customers safe, dependable, and competitively priced electric and gas energy. Other subsidiaries are Community Energy Alternatives Incorporated (CEA), an investor in and developer of cogeneration and small-power projects; Public Service Resources Corporation (PSRC), an investment subsidiary, and Energy Development Corporation (EDC), a gas and oil exploration and production company. E. James Ferland was elected president of Enterprise and PSE&G, effective June 1, 1986, and chairman of the board, effective July 1, 1986. He succeeded Harold W. Sonn, who had held both posts and who retired on June 30. Mr. Ferland had been president and chief operating officer of Northeast Utilities in Connecticut.

Hope Creek and the rate case The largest construction project in PSE&G's 83-year history was concluded officially in December when the 106 ?-megawatt Hope Creek station joined the Pennsylvania-New Jersey-Maryland Interconnection.

In completing the project, PSE&G recorded an international fuel-loading record of 12 days, set a national record of 245 days for the startup of a boiling water reactor, and managed 30% fewer test-related shutdowns than occurred at similar plants being readied for commercial operation.

These are remarkable accomplishments at a time when many companies have found it necessary to walk away from uncompleted nuclear tions or have not been able to secure the required permits or licenses to build and operate their plants. With the addition of Hope Creek to our system, nuclear power will account for about 43% of PSE&G's electric generation in 1987. We would need 27 million barrels of oil to produce an equivalent amount of electric energy. Our nuclear capability provides balance to our fuel mix and supports the country's pursuit of energy independence. PSE&G's share of the construction cost of Hope Creek through February 6, 1987, was $4.276 billion. A spending cap of $3. 795 billion was established in a 1982 cost containment agreement and called for certain penalties for any excess costs. On February 6, 1987, the BPU rendered an oral decision to conclude the extremely complex , widely publicized case that covered several key issues: the inclus i on of Hope Creek costs in tric base rates, the reasonableness of construction costs for the plant and resulting penalties for runs , nuclear performance standards and the revision of the energy adjustment charge in response to lower prices for oil and other fuels. The BPU's decision resulted in a net reduction in electric rates of $353.4 million. This decision reflected , of course, the disallowance of Hope Creek costs, which has resulted in reduced earnings for 1986. We remain extremely disappointed with all aspects of the decision. We found the amount of and the reason for the Hope Creek disallowance particularly discouraging. During extensive ings held in the final months of 1986 , we strated that all costs were prudently incurred.

We emphasized , for example, that several independent audits of Hope Creek's construction management showed that the plant compared well with other nuclear projects in the United States. Energy for the future A responsible utility's reliability depends on good planning, and PSE&G is developing a 4 comprehensive program to meet its obligation to provide energy at the lowest cost possible, with no more than reasonable risk on shareholders. We can always count on uncertainty in the future, given the unpredictability of legislative and regulatory actions and economic and social ditions. We must be sensitive , therefore, to trends , and be prepared to cope with them. While we have reduced our dependence on oil as a fuel for electric generation-down from 38% a decade ago to about 9% in 1986-we are concerned about an increase nationally toward a renewed reliance on oil, particularly imported oil. We should not be misled by the decline in o i l and gas costs over the last two years. It would be a mistake to become overly dependent on oil and gas as long-term sources of fuel for our tric generating stations. With this in mind , we intend to make the best use of our present generating capacity by ing system load factors and minimizing increases in peak loads. We have begun a thorough examination of life extension possibilities for our older generating plants. We are upgrading aging portions of tric and gas transmission and distribution systems and extending modern, efficient service to growing regions of New Jersey. We are continuing to develop and promote cogeneration , load management and conservation programs , thereby reducing the need for future generating capac i ty, which will benefit all our customers. We expect to spend at least $100 million through 1990 on a variety of act i vities to help customers save both energy and money. It is crucial to stay on top of emerg i ng sources of energy. At the moment, certain coal-burning technologies appear promising for the future and could prove important if accelerated load growth prompts the need for some additional generating capacity before the year 2000. Customer satisfaction Even as we explore new opportun i t i es , we remain committed to the heart of our electric and gas service. This is espec i ally important in an environment which is increasingly characterized by deregulation and competition and is providing more choices to customers. Preserving and expanding our customer base depends , to a great degree , on hold i ng the bottom line of the monthly b i ll. We ar e tak i ng aim on th i s in several ways. We are rein-forcing with our employees the importance of carrying out our operations efficiently. We are setting realistic goals to improve productivity and reduce costs, and, in doing so, we are stressing accountability.

TO OUR SHARE HOLDERS B y most measures, 1986 was a very successful year for Public Service Enterprise Group. However, the February , 198 7 decision in which the New Jersey Board of Public Utilities (BPU) disallowed

$431.5 million of Public Service Electric and Gas Company's (PSE&G) costs for the struction of the Hope Creek Generating Station certainly tempered our view of the year and our outlook for the immediate future. The disallowance of Hope Creek costs was charged against 1986 earnings.

This had the effect of significantly reducing 1986 reported earnings per share and will continue to suppress twelve-month earnings per share through Nov e mber, 1987. The wr i te-off of the disallowance and o ther accounting adjustments , under a new rule of the Financial Accounting Standards Board, had the effect of reducing earnings per share by $1.38. I n addition, because of the overall negative effect of the rate order , the credit ratings on PSE&G's debt and preferred stock were lowered by one rating agency, and a second agency announced it was reviewing such securities for possible downgrading. Despite these developments, Enterprise remains in a satisfactory financial condition.

Our current common stock dividend is secure although our ability to provide future dividend growth will be hampered as a result of the allowance and other unfavorable elements of the February , 198 7 rate decision.

We are clearly disappointed with this prospect.

since our 198 6 operating results were so good and our accomplishments during the year so meaningful.

Despite the rate decision , and its effect on earnings , 1986 was a very successful year in most respects:

• Construction of Hope Creek was completed and the unit was declared ready for commercial operation, according to a schedule established more than four years ago.

• Our operating income reached an dented level , our dividend was increased for the 11th consecutive year , and our common stock rose to an all-time high.

• The formation of Enterprise as a holding pany gave the management of PSE&G the ity to diversify into non-utility businesses when the associated risks and rewards offer opportunities to enhance financial strength.

• Our aggressive purchasing activities allowed us to obtain about 40% of our total gas supply from the low-cost spot market. and contributed to a reduction in gas rates for PSE&G's customers of $180 million.

• The redemption of high-cost securities and the issuance of lower-interest debt will mean sav i ngs of more than $87 million in the years ahead. These and other achievements were especially significant because they occurred during a year in which our business environment continued to change dramat i cally. Cogenerators and small power producers are creating competition for electric utilities. And, the production and delivery of natural gas have become largely deregulated. These trends make several facts clear to us: We must be innovative and assertive in finding the best ways to control our costs and market our services. We must enhance the public standing of the challenges which confront us. And we must have the support and cooperation of regulators, legislators , and other government and political leaders to best meet our obligations to our customers and shareholders.

Financial performance. Our operating revenues climbed modestly-less than 2%-in 1986, but our operating income rose more than 6%. Electric sales improved, especially in the growing commercial markets in New Jersey , and this contributed favorably to our 1986 results. The earnings of $2.84 per share of common stock, which reflected the write-off of the Hope Creek disallowance, resulted in a dec r ease of 13.1% from restated earnings per share of $3.27 in 1985. We have set a goal of achieving 10% of total net income by 1991 from our non-regulated sidiaries. Two of them , Public Service Resources Corporation (PSRC) and Community Energy Alternatives Incorporated (CEA), completed 1986-their first full year of operation-in good health. PSRC made investments totaling more than $130 million, while CEA committed up to $33 million to four cogeneration or small power projects. In December, Energy Development tion (EDC), a gas and oil exploration and production subsidiary of PSE&G , became Enterprise's fourth subsidiary. EDC was removed from the utility's gas rate base under a settlement of the gas base rate case. As a result. PSE&G's board of directors declared a dividend of EDC stock to Enterprise , making it a subsidiary. EDC had assets of $170 million at year's end. 3 We intend to reduce forced outages at both our nuclear and fossil generating stations.

We will continue decreasing our uncollectible customer accounts, which have declined nearly 50% since 1984. We will not let up in our search for the lowestcost, spot market gas. We will consider innovative pricing of electricity and gas to keep us tive in the energy marketplace.

Anticipating and responding to the needs of customers will remain fundamental to our future success. We will work closely with consumer visory panels to gather ideas to make our seNice better , answer inquiries swiftly and clearly, and provide assistance in cases of need or hardship. Social responsibilities Enterprise is doing business in perhaps the most dynamic region of the United States, and we ognize our role in contributing regularly to the well-being of the communities we seNe. Through a variety of ongoing programs and activities , we will be aggressive in preseNing the environment, promoting the benefits of our cities , assuring affirmative action , and encouraging employees to volunteer their time and skills to help others. Enterprise will face many tests as the turn of the century approaches. But, because of the steps we took in 1986, we will be able to welcome the challenges as opportunities to help us sat i sfy our customers and provide a reasonable return to our shareholders. E. James Ferland Chairman of the Board , Pr e sident and Chief Executi v e Offi c er February 17 , 1987 5 THE FINANCIAL PICTURE 5.00 E arnings in 1986 are reduced Enterprise concluded 1986 in a satisfactory financial condition despite the negative effects on earnings of adopting Statement No. 90 of the Financial Accounting Standards Board Earnings and Dividends Per Common Share (in dollars) Prior Years Restated to Reflect the Adoption of SFAS 90

• Earnings

• Dividends (SFAS 90) and the ed effects of the BPU's disallowance of $431.5 million of Hope Creek's cost in i ts February 6 , 198 7 electric rate deci-sion. The effect of the direct disallowance reduced 1986 earnings by $283.9 million or$2.13 per share. The adoption of SFAS 90 also resulted in a statement of prior years' earnings for abandonments , pr i ncipally tic Generating Station and a second unit at Hope Creek, on which no return is being earned on unamortized balances. This had the net effect of increasing 1986 earnings by 75 cents per share. The overall effect of adopting SFAS 90 resulted in a charge to 1986 earn i ngs , after taxes , of $183.8 million, or $1.38 per share. Consolidated earnings available for common stock were $378.5 million , or $2.84 per share , based on 133.1 m i llion average shares outstanding. By comparison, 1985's restated earnings were $399.6 million, or $3.27 per share , when there were 10.8 million fewer average shares outstanding.

The 1986 results were also favorably affected by better overall sales to PSE&G's electric and gas customers , reduced maintenance costs and greater allowance for funds used during construction (AFDC) credits associated with the construction of the Hope Creek station. AFDC is a cost ing procedure required by regulatory author i ties to show the cost of financing a construction ject in the capital cost of the plant. These credits for 1986 reflect the final stages of construction of Hope Creek. 6 30% 20% Overall revenues for 1986 were $4.5 billion, up 1.6% from 1985 revenues of $4.4 billion. Of the 1986 total, electric revenues accounted for $3.2 billion , while gas revenues amounted to $1.3 billion. Operating income for the year was $677.3 million , up $39.5 million from the 1985 amount. Electric sales for the year rose 3.0%, when compared with sales for 1985. Sales in the commercial market , which were up 6.0%, remained the brightest sources of revenues as New and PSE&G-continued to enjoy a building boom in certa i n areas of the state ranging from the Hudson River waterfront to the Route 1 corridor in Princeton. Benefitting from a sharp rise in house heat i ng in the month of November because of particularly cold weather, PSE&G managed to record a modest 0.2% increase in gas sales for the year. In general , however , gas sales were adversely affected by fuel switching among large industrial customers who took advantage of the lowest oil prices in years. Dividend is raised for 11th consecutive year The quarter l y dividend on common stock was creased from 71 cents to 74 cents per share , Overall Return to Investors (For the 5 Years Ended Dec. 31) Compound Annual Return ing the annual indicated rate from $2.84 to $2.96. This marked the 11th year in a row in which the common stock dividend was raised. Overall i n 1986 , dividends paid totaled $2.93 per common share, pared with $2.81 in 1985. Common stock price reaches a new high Enterprise common stock closed 1986 at 40%. The high for the year , achieved in August, was 48%, an all-t i me market price record. In January, PSE&G's common stock had recorded the year's low pr i ce of 30 3/,i. Based on reinvested dividends and common stock price appreciation over the last five years , the total return to stockholders over that period was 30% annually. Lower rates are approved for electric customers As a result of the BPU's decision on February 6, 1987 , PSE&G's electric customers received a net rate decrease of $353.4 mill i on or nearly 12%. The monthly bill of a customer using 500 kilowatthours declined from $54.12 to $50.41 under a winter rate schedule, and from $58. 72 to $50.41 under a 15 10 summer schedule.

The reduction stemmed from the BPU's ization of an annual increase of $421.5 million in Residential Electric Rates Cen t s per Kilowotthour additional revenues , which was offset by a $697. 7 million decrease in the levelized energy adjustment clause over a 10%-month period and a reduction in base rates of $77.2 million to * -. .. . cover the first year's pact of the Tax Reform Act of 1986. In its decision, the BPU also allowed a return -. -. .. .*

• on common equity of 13% and an overall rate of return of 10.65%.

The BPU's ruling came after more than a year's consideration of PSE&G's request to increase rates. PSE&G's final position in the proceeding sought $725 million in additional revenues, to be offset by a $503 million reduction in the adjustment charge, for a net increase of $222 million. The amount of PSE&G's proposed increase was based principally on the reflection of Hope Creek construction costs in the rate base, while the proposed reduction in the adjustment charge stemmed from considerably lower prices for oil and other fuels in the last two years and better performance by the utility's nuclear units. PSE&G's share of Hope Creek's cost was $4.276 billion, including

$970 million of AFDC. The treatment of Hope Creek in base rates became the central issue of the case before the BPU. Hearings were conducted over a period of several months to determine the reasonableness of expenditures incurred during the construction of Hope Creek. In 1982, the cost containment agreement ferred to earlier was approved by PSE&G, the Public Advocate and other parties , setting the targeted cost of Hope Creek at $3. 795 billion. The agreement required certain penalties against ings for expenditures in excess of the targeted cost, and this also was an issue in the rate case. During the hearings, PSE&G's witnesses testified that all costs incurred for the construction of the plant were prudent, including those above the targeted cost. PSE&G also emphasized that the first priority was to get Hope Creek operating as quickly as possible without sacrificing quality. They noted that PSE&G accomplished this by meeting a commercial operation target of December, 1986, which was established under the cost con-tainment agreement.

100 75 Another issue in the rate case involved tion of performance standards for PSE&G's clear plants-Hope Creek and the two units of the Salem Generating Station as well as the two Peach Bottom units operated by Philadelphia Electric Company. In its decision, the BPU set 70% as the targeted annual aggregate capacity factor for the units. These performance standards call for a financial penalty when the units operate below a 60% capacity factor and an award when they operate above 80%. Natural gas rates are also reduced PSE&G's gas customers received rate reductions totaling $180 million as a result of lower costs for Residen ti al Gas Rates Cents per Therm gas supplies, particularly on the spot market. in 1986 and the expecta-tion that the downward trend will continue through 1987. The decrease in rates, commencing October 31. came on two fronts: a $150 million reduction in the gas adjustment charge on customers' bills for an 11-month period , and a $30 million annual decrease in gas base rates. Together, the reductions meant that a residential customer, using gas for heating, would see his monthly charge for 200 therms cline from $136.11 to $116.82. Gas costs have dropped steadily in recent years. The latest changes in rates bring gas costs for customers to their lowest point since 1981. The $30 million reduction in gas revenues ed primarily from a BPU-approved agreement of the major parties in the rate proceeding to move Energy Development Corporation (EDC) from the gas rate base. As a result. PSE&G's board of directors declared a dividend of the EDC stock to Enterp r ise and EDC became a subsidiary of the holding company. Savings realized through redemptions In 1986, PSE&G responded to declining interest rates. It redeemed three mortgage bond issues totaling $307 million principal amount with interest rates of 12% or higher and two preferred stock issues totaling $69 million in par value with dend rates of 13.44% and 12.25%. Also, the pany issued $550 million of lower-interest debt. By taking advantage of favorable economic opportunities, PSE&G has realized savings of more 7 than $8 7 million in future interest costs. In addition.

its embedded cost of long-term debt declined to 8.8%. from 9.2% in 1985. PSE&G may redeem additional high-cost security issues in 1987. which would result in further savings on interest and dividend costs. Construction Financing 19 8 6-1991 (m illio n s o f do ll ars) *Ac tu a l Projected

'87 '88 '89 '90

• While there were no public offerings of mon stock in 1986, prise and PSE&G raised $103 million from the sale of common stock through its dividend investment and stock purchase plan and ployee benefits plans. Construction budget declines in 1986 Construction tures. including AFDC and payments for clear fuel. totaled $1 .0 billion. compared with $1.2 billion in 1985. With the completion of Hope Creek. PSE&G's construction program will now be smaller. focusing primarily on the upgrading of other generating stations and both electric and gas transmission and distribution systems. Over the next three years. the estimated annual construction budget is $650 million. During the last several years of Hope Creek's construction. internal cash sources provided about half of PSE&G's total capital requirements.

Starting in 1987 and continuing into the next decade. PSE&G anticipates it should meet nearly all its capital requirements with internally erated funds. Audit describes PSE&G as well-managed Shortly before Enterprise was formed, a ment audit conducted by the consulting firm Temple. Barker. and Sloan, concluded that PSE&G was a very well-managed utility with no major deficiencies affecting cost or quality of services.

The audit involved an in-depth examination of activities-financial and operational-over a 10-month period. beginning in April. 1985. It had been mandated by a 1982 state law which quires utilities in New Jersey to undergo a review every three to six years. The BPU authorized PSE&G's review in 1984. In its final report. the auditing firm said. "PSE&G would rank among the best of the utilities with which we have had experience

." The firm made a total of 178 recommendations involving agement and operations.

many of which were implemented by yea(s end. 8 Stockholder communications strengthened Stockholder Services representatives received 69.605 telephone inquiries in 1986, many of them over two toll-free telephone numbers: (800) 242-0813 in New Jersey and (800) 526-8050 outside New Jersey. In late 1986, an updated Guide to ers Services, bearing the Enterprise imprint. was produced.

It featured a description of the dend reinvestment plan. which underwent fications at the start of the year. At yea(s end. 72.366 or 33.2% of Enterprise's 217,961 common stockholders participated in the dividend reinvestment plan. Under the plan. mon stock can be purchased without sions through reinvested dividends or cash butions. Authorization forms to join the plan can be obtained by calling Enterprise on the toll-free numbers.

100% Public Service Electric and Gas Company (PSE&G) i s the largest utility in New Jersey and one of the largest combined electric and gas utilities i n the United States. It serves 2 m i llion tomers-5.5 million people-living and working in an area covering some 2.600 square miles. PSE&G was able to meet the demands of customers through the dedicated efforts of more than 13.000 employees. PSE&G's activit i es in 1986 , outlined on the follow i ng pages. demonstrated in various ways its commitment to efficient operations.

financial integr i ty, customer serv i ce and satisfaction.

solid planning. good communications and corporate responsibility. Production

-Electric peak demand record is established With temperatures soaring to 100 degrees in some areas of its serv i ce terr i tory. PSE&G's electric peak demand reached a record-breaking 7.735 megaOutput by Source of Fuel

• Purchased

• Gas Nuclear *0;1 *coal watts on July 7. The stalled capacity at the time was 9.007 watts. giving the utility a reserve margin of slightly more than 16%. The mark surpassed the previous all-time high of 7. 721 megawatts set on August 15 , 1985. The generally solid performance of PSE&G's nuclear. coal, oil and gas turbine generating units and electric mission system enabled the utility to meet tomers' demands dur i ng the summer of 1986. Electric output for the year. which includes energy produced.

purchased.

and interchanged. was 3.3% higher than the amount recorded during 1985. increasing to 36.03 million megawatthours from 34.9 million megawatthours. Output from the PSE&G system helped the Pennsylvania-New Jersey-Maryland (PJM) power pool meet a record peak demand of 3 7.680 megawatts.

also set on July 7. The previous PJM record was 37.110 megawatts. established on August 15. 1985.

• Electricity was generated during the year with a diverse mix of fuels. In 1986. electric output by fuel source was nuclear-31%, coal-26%, natural gas-6%, oil-9%. and purchased and interchanged-28%.

• Power purchases provided savings in 1986. By buying advantageously priced e l ectricity from other companies.

particularly mid-western util i t i es with coal-fired generating stations.

PSE&G realized savings of $48 million in overall production costs for the year. Energy purchased totaled 10.3 million megawatthours.

• The addition of the Hope Creek Generating Station gave PSE&G an ample reserve margin. At year's end. the installed capacity had increased to 10,032 megawatts. The table below shows PSE&G's anticipated annual reserve for the next decade. Electric Generation Capacity Forecast Planni n g Installed P e r cen t Year Peak Load Capacity Re se r ve 1987 78 3 0 10063 2 9 ---1988 7950 10147 2 8 1989 8070 10 3 47 28 19 9 0 8 14 0 10 6 17 30 1991 82 2 0 10 652 30 ---19 92 82 8 0 10 6 72 29 --1 993 8330 10 692 28 1994 8380 10 7 1 2 28 1995 8420 10732 27 1996 8510 10742 2 6

• PSE&G began work in 1986 to upgrade its energy dispatching operations. A $15 m i llion renovation of the utility's electric system operations center in Newark will involve installation of the latest computer and telecommunications technology. The improvements, scheduled for completion in 1989. will expand the center's ability to monitor. forecast and respond to problems within the utility's system. perform various power system security-related functions.

and exchange data with the PJM. 9 NUCLEAR: Hope Creek has a banner year Rigorous, record-setting testing of the Hope Creek Generating tion was completed on December 20 when the unit was declared ready for commercial tion. At that time, the 1067-megawatt unit was released for dispatch to the P JM power pool for continuous and reliable operation.

The completion of Hope Creek marked the conclusion of nearly two decades of PSE&G's volvement in a nuclear construction program, which also involved the building of the two units of the Salem Generating Station. PSE&G owns 95% of Hope Creek and the Atlantic City Electric pany owns the other 5%. The 245 days between the loading of fuel in April and the end of testing in December was the fastest startup period for a boiling water reactor in the United States. A combination of good planning and execution-without sacrifice of quality-accounted for the record. The all-time mark for startup followed the pace for initial fuel loading of the unit , which took only 12 days, an international record. The project compassed the loading of 764 bundles of fuel and the testing of 185 control rods that govern the reacto(s power level. A major milestone in the Hope Creek project came on July 21 when the unit was granted a power operating license by the Nuclear tory Commission (NRC). A low-level operating license, permitting fuel loading and testing up to 5% of reactor power, had been approved three months earlier.

• Salem 1 's annual refueling and maintenance outage lasted 46 days. The duration of the age, completed in May , represented the best mark to date achieved by either unit at the tion. Salem 2's annual outage lasted 81 days, concluding in December.

• Emergency drills were conducted for both the Hope Creek and Salem stations.

The drills were held to test the ability of PSE&G and state, county, and local officials to respond to an accident at either plant. The exercises-Salem's in September and Hope Creek's in November-were monitored by the NRC and the Federal Emergency ment Agency. 10

• Nuclear security forces received high marks in a surprise inspection.

The overall security at the site of the Salem and Hope Creek stat i ons scored highly in all phases of testing during an nounced three-day evaluation by the NRC in May.

• PSE&G became a member of the National Academy of Nuclear Training in 1986. This highly regarded industry accomplishment stemmed from approval by the Institute of Nuclear Power Operations (INPO) of all 10 training programs at PSE&G's nuclear training center. INPO is an i ndustry ization dedicated to the safe operation of nuclear plants. FOSSIL: Life extension is set for older fossil stations With the completion of its nuclear construction program , PSE&G began focusing in 1986 on ways to extend the operating lives of its fossi l ing stations. Collectively , these units , which use oil, coal, and natural gas to produce electricity, have an average age of 30 years. In the immediate years ahead , the life tension program will be an integral part of PSE&G's strategy to meet customer demand reliably for the balance of the century , without having to engage in the more costly construction of new generating units. Under the program in 1987, PSE&G will gather and analyze complex engineering data necessary to move ahead with life extension activities at its various fossil stations.

• An aggressive program to control PSE&G's production costs netted savings of more than $20 million in operating and maintenance expenses.

The savings were realized by reducing the services of outside contractors and using PSE&G personnel more efficiently , and, after careful evaluation, by scaling down some major projects.

• One project involving the upgrade of pumps saved PSE&G $5 million. By rebuilding the speed boiler pumps at a central maintenance shop, PSE&G was able to avoid high outside tractor costs.

• In 1986, PSE&G opened a new production maintenance training center. The facility i s located in Sayreville, Middlesex County, and will provide 11

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\no\ tt\Pu\et \ne*ot\ co "' 0 1 con\1o\ *des o "01\e*1 p10"1 1 unc\\ons. and p10\eC\\on training to PSE&G employees involved in the maintenance and inspection of large turbine erators. A training feature of the new center is a turbine generator once used at the Burlington Generating Station. Gas sendout holds steady The increased use of natural gas in PSE&G's dential and commercial markets offset a decline in the industrial sector and kept the sendout in 1986 at nearly the same level recorded in 1985. The 1986 sendout was 2.21 billion therms, while the 1985 sendout was 2.22 billion therms. Frigid temperatures on January 14 resulted in a maximum daily sendout for the year of 14,871.000 therms.

• The oil g a s facil it ies at PSE&G's Central Gas Plant we r e re tired i n 1986 as natural gas supplies improved. The aged facilities, located in Edison. Middlesex County, were no longer required to produce supplementary gas. An additional 1.26 million therms daily of pipeline gas and firm age service economically replaced the 352,000 therms a day of manufactured gas capacity provided by the plant. Fuel Supply -Aggressive buying reduces costs The ever-changing energy marketplace of the 1980s has produced an increased supply of natural gas, and PSE&G has taken advantage of its abundance for the benefit of its customers. PSE&G moved gressively in 1986 to chase lower-cost natural gas on the spot market. and take advantage of negotiated flexibility in pipeline contracts.

The results were savings of $69 million in gas costs. PSE&G obtained approximately 90 billion cubic feet-almost 40% of the total gas supply-on the spot market. It passed along the benefits of these rapid moves in the natural gas marketplace to customers through significant rate reductions.

These efforts drew praise from Barbara A ran , President of the Board of Public Utilities.

who lauded the utility for "pursuing these spot market purchases with such vigor ... and succeeding in bringing the benefits of the current gas glut to the small residential and commercial customer." The benefits were realized without sacrificing long-term contracts that may be important in the uncertain future.

• Increased spot market purchases at more favorable prices reduced coal cost by about $2.1 million. The mix of spot market and contract chases provided more flexibility in responding to lower prices while assuring supply.

• Increased spot market buying cut fuel oil costs $950,000.

This, together with new contract pricing and leasing temporary off-site storage, enabled PSE&G to take maximum advantage of the stantial decline in oil prices by mid-year.

• Prices paid for uranium were lower than the in dustry average. PSE&G obtained the fuel needed for its nuclear stations from sources in the United States and Canada at an average price of $19.58 a pound. Although Canadian supplies were less costly, half of PSE&G's purchases in 1986 were made domestically to provide protection against a potential embargo on foreign producers. The threat of an embargo stems from both federal court and legislative action on behalf of domestic producers affected by the lower-cost Canadian uranium. Transmission and Distribution

-New Jersey's "Gold Coast" boosts business PSE&G remained at the heart of the bustling development along the Hudson New Jersey's Gold Coast-as work unfolded to provide electric and gas service to such highly publicized, multi-million-dollar projects as Lincoln Harbor, Newport City, Liberty State Park, and Port Liberte. Activities ranged from the installation of gas distribution and service lines to scores of dominiums, shopping malls, restaurants, and office buildings, to the construction of 230,000-volt underground transmission circuits to provide tricity to three new substations needed to serve the burgeoning area. PSE&G's commitment to quality electric and gas service took on a new dimension with the announcement that construction of a customer operations training center will begin in 1987. The facility will be located on 13 acres in Edison, near the New Jersey Turnpike.

It will house art equipment and provide skills. technical.

and supervisory training for some 7,000 employees who work in the Electric and Gas Transmission and Distribution Departments as well as the Customer and Marketing Services Department. Reinforcing its determination to develop able contact between electric and gas service personnel and residential.

commercial, and dustrial customers.

PSE&G took the additional step of establishing a program to improve employees' interpersonal skills. Its importance was driven home by the fact that gas service employees alone handled more than 2.3 million calls in 1986. 13 ELECTRIC:

PSE&G serves a most famous customer Growth in many areas of PSE&G's electric service territory, especially dential sections in ern communities, counted for a worthy upsurge in the number of new electric customers in 1986. More than 24,000 new meters were installed, up 32% from the 1985 figure, which was the greatest gain since 1965. PSE&G was particularly proud in 1986 to help the Statue of Liberty shine brightly during her tennial celebration on July 4. The utility directed the installation of 17.5 miles of overhead and underground power lines, 496 poles, and 313 street lights to brighten Liberty Island as well as Liberty Stat a Park in Jersey City. About $667,000 in annual revenues will be realized from service to PSE&G's most famous customer.

14

• Use of helicopters in the replacement of ment on 500 , 000-volt power lines saved $200,000.

A Florida-based company, which has perfected an airborne technique to service equipment on energized high-voltage overhead transmission lines, was hired to replace spacers along 37 miles of lines in the western section of PSE&G's service territory.

Spacers keep power lines from hitting each other, and the technique to replace them saved time, manpower, and money.

• Five obsolete substations were replaced in 1986. The substations, each at least 50 years old, were taken out of service because of increased maintenance costs and diminishing availability of parts.

• A storm-tracking system was expanded to South Jersey. Computerized lightning-detection and weather-radar equipment was installed in 1986 at the electric transmission and distribution headquarters in Camden. This doubles the toring network to help PSE&G brace for oncoming, potentially damaging storms. In 1985, similar equipment had been installed in Newark.

• Electrical capacitors containing nated biphenyl (PCB) insulating material were removed from PSE&G's system in 1986. The gram focused on elimination of publicly located capacitors.

Started in September 1981, it involved the removal of approximately 4,700 groups of containing capacitors, their disposal in an mentally safe manner and their replacement with environmentally acceptable equipment.

This comprehensive replacement program was pleted almost two years ahead of the October 1, 1988 deadline for removal established by the U.S. Environmental Protection Agency. 15 GAS: Service is improved at a record pace There was good news, too, on the gas side of PSE&G's business.

The addition of new mains and services occurred at a record pace in 1986 with the installation of more than 3.3 lion feet of pipe. Some 440,000 feet of mains and 700,000 feet of vices were replaced, and, about 30,000 new meters were installed.

• Construction of a centralized gas service patching center approached completion in 1986. When operational in 1987, the facility in Harding Township, Morris County, will enable consolidation of 13 dispatch offices now scattered throughout PSE&G's service territory. As a result of a new puterized communications system, work orders will be transmitted to personnel through terminals in service vans. This will reduce the time it takes PSE&G to respond to calls from customers reporting problems ranging from gas odors to faulty furnaces.

• Replacement of two large mains was plished during the year. More than 1,400 feet of 42-inch main was replaced in downtown Newark in connection with the construction of the Legal and Communications Center. In Jersey City, 900 feet of pipe, also measuring 42 inches, were placed near PSE&G's new West End Meter and Regulating Station. These were the largest diameter pipes installed in the gas distribution system in three decades. Engineering and Construction

-Construction continues at Merrill Creek Progress was made at the Merrill Creek voir project in Harmony Township, Warren ty, despite tal problems tered during the year. The reservoir is a ject of seven utilities in New Jersey and Pennsylvania which maintain generating stations on the Delaware River. The stations draw river water for cooling purposes. When completed, the ervoir will help assure acceptable water flow volumes in the river during low-flow periods. The project was mandated by the Delaware River 16 Basin Commission, and work was begun in 1985. Construction is being managed by PSE&G, which is a 16.2% owner of the facility.

In mid-1986, work was delayed for nearly six weeks to take tain steps at the site to control soil erosion and. sedimentation.

The action was in response to an order by the Warren County Soil Conservation vice. Later in the year, naturally occurring asbestos was found at the site. Remediation measures were instituted to contain the veins of the mineral that were uncovered during construction.

At year's end, the project was 45% completed.

Work at Merrill Creek is being carried out under a project management system used successfully during the construction of the Hope Creek station. The system, which emphasizes efficient tion among participants in a project, will be tended to other construction activities in 1987.

• During 1986, fiber optic technology was duced in the monitoring of large electric ment. The technology incorporates fiber optic probes and video processing, to observe tors and transformers.

It helped avert a costly generator failure in 1986 by providing an early warning of an impending problem.

• A microcomputer-based control system was installed at the Deans Switching Station in 1986. Installation of the system at the facility in South Brunswick, Middlesex County, is an industry first. It will improve operating economy and power tem reliability and security.

Customer and Marketing Services -Collection challenges are met with care Using innovative grams and a ed workforce, PSE&G's Customer and ing Services ment substantially duced the number of unpaid customer bills. The net write-off of uncollectible accounts declined, as a result of the effort, to $21.7 million, down 21% from the 1985 amount of $27.6 million. This improvement reflects the benefits of increased collection along with a better economy-which have brought write-offs down from an all-time high of $40.2 million in 1984. The challenging job of encouraging customers to avoid late or unpaid bills was made easier, in large measure, by the department's close work with consumer advisory panels, which offered a variety of ideas for improving customer service and relations.

For example, PSE&G now provides Spanish-speaking interpreters at walk-in customer 17 service centers. Additional employee training emphasized the importance of quality service and concern for the people served by PSE&G. Employee recognition activities were also expanded.

• Customers received newly designed bills in 1986. By modernizing its computerized billing tem, PSE&G's electric and gas customers began receiving two-page monthly bills that provide more detailed information about their energy usage, including a comparison of consumption in the most recent three months with the same period a year earlier.

• A program was instituted to enable customers to phone in their own meter readings.

Under the program, customers who cannot be at home for regular meter readings can dial a special local number and give the readings themselves.

• Another new program gave PSE&G the ability to contact hard-to-reach customers.

Using marketing recording equipment and techniques, customers can now be informed off-hours about the need for meter readings in their homes or about the prompt payment of bills.

• An automatic meter reading project was also launched during the year. In conjunction with a local water company, PSE&G began testing the feasibility of reading meters through a direct phone link. The pilot project involved 100 gas tomers in Bergen County.

• Efforts to curb energy theft were expanded. PSE&G opened an office in Lawrence Township to conduct investigations of energy theft cases in the southern half of its service territory. The utility also worked with the New Jersey Division of nal Justice in an investigation leading to the ment of three men on meter tampering charges. The case involved 93 commercial establishments , and the customers have been rebilled for a total of $2.6 million.

• Gas conversions mounted despite the lowest oil prices in years. Nearly 11,000 homeowners switched from oil to natural gas for heating poses in 1986. In addition, gas heating was stalled in about 20 , 000 new homes, nearly 3,000 more than in 1985.

• Heat pump installations increased by nearly 50%. Units were installed in 4,246 new dwellings in 1986, shattering the 1985 record of 2,884. Space heating was also installed in more than 60% of industrial and commercial construction, for 69,747 kilowatts in new load.

• Dusk-to-dawn lighting sales continued at a brisk pace. During the year, 9,758 units of high-pressure sodium and other vapor lighting were installed in PSE&G's territory, down slightly from the record 10,637 units sold in 1985. 18 Conservation and Load Management

-PSE&G and its customers team up for efficiency PSE&G, with the operation of both large and small customers, maintained its ship role in 1986 in ing innovative ways to save energy and duce and distribute it more efficiently.

Residential ers-homeowners and renters-took advantage of a wide variety of servation programs geared specifically to their needs. A focal point for communicating information about activities and programs was the Energy Conservation Center located in the PSE&G quarters in Newark. The conservation experts who staff the center responded to approximately 200 , 000 telephone inqu i ries last year. The servation message also was taken on the road to customers via the " Conservation on Wheels" mobile exhibit. One of PSE&G's programs-weatherization workshops for low-income customers-received the U.S. Department of Energy's National Award for Energy Innovation.

The workshops provided mation about low-cost energy-saving measures and were sponsored by Community Action gram agencies, churches, and civic groups. More than 13,000 persons participated in the workshops during the year.

• PSE&G launched an incentive program for thermal energy storage at new and existing ings. Financial incentives to customers will be based on the amount of peak demand load ed to off-peak through development of systems that store " coolness" during the night for use ing daytime hours. The program's aim is to he l p PSE&G avoid construction of new generating facilities.

• PSE&G increased conservation efforts in the commercial sector. New programs for cial customers included the commercial and apartment building energy use survey, a cial cash rebate program , and multiple-family dwelling loans for installing conservation measures.

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• \*\eto\ute , \\Ono\ ' d t>'I enet9'1 t s\otte o cen\e ec\o\\s\s , o\i on s9 " conset'I ., .. " no_,..\o \ -1on _,.," o 11\ot>\ e r on . 0 nset'1° ' ey.nit>\\s , c ut'f\etous ond n _,.0 ,..,_sno9 5 t oc\i>1 i\\eS* o\ne 19 Planning and Research -New technologies are explored Planning and research are where the present and the future come gether. Throughout the year, PSE&G explored new and emerging technologies, to chart the best course to meet the challenges of growth. PSE&G's fuel research laboratory, located at the Harrison Gas Plant, has been analyzing coal being burned at generating stations to develop a database of able characteristics. This database is then used to identify lower-cost coal which meets PSE&G's specifications and which helps foster more petitive pricing. 20 PSE&G also helped launch a research effort to determine if the burning of coal and other fossil fuels at generating stations is contributing to acid rain in New Jersey. PSE&G is joining Jersey Central Power & Light Co. and Atlantic City Electric Co. in funding the three-year study that will focus on the Pine Barrens area of the state.

• In 1986, PSE&G continued its pioneering role in bringing robotics into utility operations.

A mobile, submersible robot device was used, for example, to clean construction debris from the spent fuel pool at the Hope Creek Generating Station. In the future , a robot will allow PSE&G to perform work in the pool without exposing workers to radiation from spent fuel eventually placed in i t.

• PSE&G's Battery Energy Storage Test (BEST) facility completed various studies of advanced systems. Results of the testing on lead acid and zinc chloride batteries indicated that the systems could play a role in helping meet future needs of electric customers.

Testing is continuing on lead acid batteries.

The facility is in Hillsborough, set County, and, to date, much of the work there has been funded by the U.S. Department of gy and the Electric Power Research Institute.

Both have announced, however, that certain funds will no longer be provided for the facility and PSE&G will scale back operations accordingly.

• During the year, a customer-based fuel cell test was conducted by PSE&G. In the program, sponsored by the Gas Research Institute and the U.S. Department of Energy, PSE&G installed, ated and maintained two 40-kilowatt fuel cells at customer locations.

The testing indicated that fuel cells can operate successfully in a customer environment.

Information Systems -High-tech communications improve operations PSE&G, like other gressive companies, is becoming more dent on the ability to gather, manage, lyze, and move vast amounts of information quickly, reliably, and ciently. Through its mation Systems ment, PSE&G made strides in 1986 to satisfy the demands of the formation Age for the benefit of customers, holders and employees.

A new stockholder inquiry and accounting system completed its first full year of operation.

The system enhanced the processing of and access to shareholder information.

It also incorpo-rated new accounting procedures to meet the requirements of the changing business and latory environment.

The heart of this and other new systems is computing power, and, during the year, PSE&G continued to install state-of-the-art mainframe computers, completing the replacement of equipment in service nearly 20 years. The ern computers now being operated include the up-to-date features offered by the major data processing equipment manufacturers.

In the area of telecommunications, PSE&G signed a 10-year lease with New Jersey Bell to extend fiber-optic communications capacity ceived from LightNet to Artificial Island, the site of Salem and Hope Creek. The Nuclear Department was provided communications improvements, including a new emergency response callout procedure and graded telephone service. The emergency cedure incorporates electronic beepers, a puterized electronic mail system and the nuclear emergency telecommunications system that will enable PSE&G to notify individuals and receive acknowledgement of instructions.

The procedure was unveiled during the 1986 emergency drill at Salem station and earned praise from the NRC.

• Addition of personal computers improved ductivity. A total of 250 personal computers was installed throughout PSE&G in 1986. The estimated productivity savings through use of the equipment exceeds $7 million.

• Also in 1986, a program was started to mine long-term needs for computer equipment and services. The new system will allow the mation Systems Department to better serve other departments through improved communications and planning.

21 Public Affairs: Company takes an active role in the community New Jersey is dynamic and diverse, and no large company can make its way there out maintaining a strong and active presence. PSE&G did not let up in its search for ways to meet its obligations as a good corporate bor in the cities and towns which it serves and in which its employees live, work, and play. During 1986, a program called EPIC-Employee Participation in the guided more than 60 employees into volunteer programs ranging from scouting to tutoring.

An aggressive United Way program elicited record pledges from 11,804 employees-a 20% jump over the number who were contributing at the start of the campaign.

In addition, 367 employees pated in TeamWalk , raising more than $81,000 for the March of Dimes, a 16% jump from the 1985 mark. PSE&G also supported programs aimed at introducing minority youngsters to the utility business. Employees served as mentors for student interns selected for their academic achievements and leadership potential under a program called INROADS. Four employees honored under the tional Black Achievers program provided long career counseling for selected high school students.

• Shorebirds on the Delaware Bay received new protection during the year under a mitigation program. PSE&G and the states of New Jersey and Delaware developed the program to help preserve more than one million birds-some 20 species in all-which use an area south of Artificial Island for feeding and resting during annual migration.

PSE&G's involvement began with the widening of an access road to Artificial Island. In issuing permits, state and federal regulators required the utility's participation in a mitigation project to replace seven acres of wetlands rupted by the construction.

• A news conference , featuring Governor Thomas Kean , focused on area development. PSE&G sponsored the conference in which New Jersey's governor unveiled an advertising program to mote the economic development of the state.

• PSE&G's site location activities increased ing the year. Area development representatives ass i sted more than 600 clients in search of new business sites. This figure is twice the number of clients assisted in 1985, an indication of a stronger economy in New Jersey. Direct aid to 22 major 2 2 firms will account for approximately four million square feet of new business space. * "Dreams of Distant Shores" won five prestigious awards, including a 1986 Emmy. The documentary film produced by PSE&G's Advertising Department traced the struggles and triumphs of the nation's immigrants. The film was shown nationwide by the Statue of Liberty-Ellis Island Foundation and overseas through the sponsorship of the United States Information Agency.

• Another film promoted the understanding of nuclear power. William Shatner of "Star Trek" fame appeared in the production , which featured computerized special effects. The film was made for continuous presentation at The Second Sun , PSE&G's energy information center located at the site of the Salem and Hope Creek stations.

• An energy assembly program reached 38,500 students.

PSE&G and other electric utilities in New Jersey sponsored a theater presentation for sters in kindergarten through sixth grade. It vided entertaining information about electricity sources, generation, and safety.

• Energy education conferences attracted 250 teachers.

As a member of the New Jersey Energy Education Council, PSE&G helped organize three sessions for elementary and junior high school teachers to outline creative ways to teach sters about energy. Human Resources

-PSElrG recognizes a topflight workforce While PSE&G has billions of dollars invested i n the technology and ties necessary for doing business, it continued to recognize that its most valuable asset is its employees. In 1986, PSE&G barked on a number of new programs designed to allow employees to be more productive and to improve the ment in which they work. A corporate-wide program stressed health consciousness among employees through a smoking promotion, colorectal and oral cancer t e sting, and blood pressure screening. For its eff o rt s, PSE&G earn e d an award from the American C ancer Society. Programs were initiated to reduce levels of management , broaden areas of responsibility, and eliminate duplication of effort in both staff and line organizations. In order to insure the mum continuity in operations, a management 2 3 succession planning process was extended to lower levels in the organization.

During the year, two employees demonstrated the benefits of working smarter with suggestions that will save PSE&G more than $100,000 a year. The suggestions resulted in the highest-ever gestion Plan awards. Joseph Conrey of the clear Department received a $13,800 award for his suggestion to change the type of pump in Salem Generating Station's circulating water system. Norberto LaGuardia of the Customer and ing Services Department received $13,000 for an idea involving check handling procedures at the customer payment processing center in bridge.

• One program introduced in 1986 improved orientation for new employees. The Program, called PEOPLE, stresses the benefits and ties available in PSE&G for employees who onstrate consistently high levels of performance and productivity.

• On-site drug screening of nuclear contractor employees was initiated during the year. The gram supported PSE&G's comprehensive internal drug screening program in the continuing effort to insure a drug-free work environment.

• Mortgage refinancing for relocated ployees meant considerable savings. Employees receiving mortgage interest differential payment under the corporate relocation policy were couraged to refinance their mortgages to gain benefit through lower mortgage interest ments. As a result, PSE&G will also realize savings of more than $23 7,000 a year. 1986: Transition In addition to the election of E. James Ferland as chairman of the board, president and chief executive officer of Enterprise and PSE&G, the lowing occurred:

• Verdell L. Roundtree , a director of PSE&G since 1983 and a director of Enterprise, died on August 26. The board of directors and management deeply regret the loss of this distinguished and able director.

• Everett L. Morris , a vice president of Enterprise, was elected to its board of directors, effective June 1. In addition, he was elected senior tive vice president and a director of PSE&G, also effective June 1.

• Thomas J. Martin retired as vice engineering and construction of PSE&G, and Pierre R.H. Landrieu was elected his successor, effective March 8.

• Robert H. Franklin retired as vice public relations of PSE&G, and John H. Maddocks was elected vice president-public affairs, effective June 1. 24

• Richard M. Eckert retired as senior vice president-nuclear and engineering of PSE&G on October 31.

• Wallace A. Maginn, vice president and treasurer of PSE&G and treasurer of Enterprise, announced his retirement in December.

Francis J. Riepl was elected his successor , effective March 1, 1987.

EDC becomes Enterprise subsidiary Energy Development Corporation (EDC) became the fourth subsidiary of Enterprise under action by PSE&G's board of directors on December 16. The change resulted from the removal of costs of EDC and its wholly owned subsidiary, Gasdel Pipeline System Incorporated, from PSE&G's customer rates, stemming from settlement of the gas base rate case in 1986. EDC was created as a subsidiary of PSE&G ing the natural gas shortages of the 1970s, and it successfully supplemented the utility's gas supplies over the years. In 1986 it accounted for 7% of PSE&G's supplies.

In the agreement between the major parties in PSE&G's gas rate proceeding, approved by the BPU on October 30, 1986, the investment in EDC was removed from rate base. As a result, EDC wrote down the carrying value of its assets under the full cost method of accounting to the present value of estimated future net revenues.

The tax effect of the write-down made in December was $70.5 million. In the BPU-approved agreement, PSE&G was allowed to defer the loss on its investment in EDC, generated by the rate base disallowance, and to seek recovery of such loss, over a period of not less than 10 years in its next base rate case. As a result, PSE&G has deferred $58.8 million of the after-tax loss anticipated to be recovered sequent to the next base rate increase.

Excluding the adjustment of the carrying value, EDC's earnings were $4.3 million on revenues of $70.3 milion, down 55% and 25%, respectively, from 1985 results. The lower earnings, for the most part, were attributable to lower oil and natural gas prices.

• During 1986 , EDC participated in the drilling of 35 wells , 51 % of which were productive. The ber of wells drilled represented a 22% reduction, when compared to the 1985 number. EDC's reduced drilling activity reflected a continued downturn in the oil and gas industry as a result of lower prices caused, for the most part, by excess production capacity.

25 Agreements are reached on four projects In its first full year of operation, Community Energy Alternatives Incorporated (CEA) concluded ments to participate in four non-regulated energy projects having a combined generating capacity of 227 megawatts and a total asset value of $285 million. CEA's aggregate equity investment is pected to be about $21 million for an interest equal to about 70 megawatts. CEA is also exploring opportunities involving the development of 600 megawatts of regulated cogeneration and small power projects throughout the country, including New Jersey. At year's end, CEA's major activity involved a 35% equity partnership in a $120 million eration project in Bayonne, New Jersey. The 165-megawatt gas turbine facility, scheduled for eration in 1988, will provide steam to local try and electricity to Jersey Central Power & Light Company under a 20-year transmission service contract with PSE&G. More than 12 billion cubic feet of natural gas will be provided annually by PSE&G. CEA will invest $10.5 million in the project.

• During the year, CEA invested in a wood-fired project. CEA formed a partnership with Harbert International of Alabama and a group of local developers to build and operate a watt wood-fired electric generating plant in New Hampshire.

Its operation is planned for 1987.

• Investment was also made in a hydro plant. CEA acquired a 16% limited partnership interest in a 15-megawatt hydroelectric project on the nebec River in Maine.

• CEA became a limited partner in a solar project. It invested $5.5 million in the SEGS Ill 30-megawatt solar electric generating project in the Mohave Desert in southern California.

26 Investment subsidiary seizes opportunities Public Service Resources Corporation (PSRC) also completed its first full year of operation in 1986. It reviewed a number of investment opportunities and selected only those which offered the pect of a favorable return with a minimum of risk. It contributed

$3.0 million to the net income of Enterprise.

During the year, PSRC invested in the SEGS Ill solar electric generating project, in which CEA decided to participate, and it also invested in a similar project called SEGS IV. In addition, PSRC participated in a tax benefit transfer with the Metropolitan Transit Authority of New York.

• PSRC also became a limited partner in two venture capital funds. One fund invests in advanced technology companies in the Middle Atlantic states, including New Jersey. and the other in selected real estate in major metropolitan areas.

• Investments totaling $64 million were made in mutual funds and stocks. They included ments in both the common and preferred stock of utilities and the preferred stock of banks and other corporations.

Corporate stock owners benefit by paying lower federal taxes on dividends.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Following are the significant factors affecting the financial condition of Enterprise and its subsidiaries as reflected in their consolidated results of operations.

This discussion fers to the consolidated financiat statements and related notes of Enterprise and should be read in conjunction with such statements and significant accounting policies:

For a discussion of the Decision of the Board of Public Utilities of the State of New Jersey (BPU) in PSE&G's base rate case made on February 6, 1987, and the effect of Statement of Financial Accounting Standards No. 90, Regulated Enterprises-Accounting for Abandonments and Disallowances of Plant Costs (SFAS 90), see Notes 1 and 2 of Notes to Consolidated Financial Statements.

Earnings and Dividends Enterprise concluded 1986 in a satisfactory financial tion, despite the adjustment to earnings resulting from the implementation of SFAS 90 which included the effects of Hope Creek 1 costs disallowed by the BPU and prior plant abandonments.

The net effect of the application of SFAS 90 (see Notes 1 and 2 of Notes to Consolidated Financial Statements) was to reduce 1986 net income by $183.8 million, or $1 .38 per share. Earnings per share of Common Stock were $2.84for1986, a decrease of 43¢ or 13.1 % from 1985. Excluding the effect of the application of SFAS 90, earnings were $4.22 for 1986 and $3.96 for 1985, an increase of 26¢ or 6.6%. The increase is principally the result of PSE&G's higher electric sales, explained below, greater AFDC due to the construction of Hope Creek, and reduced maintenance costs. The increase was tempered by the effect of a greater number of shares outstanding, PSE&G's increased operating expenses (excluding fuel costs)-principally higher labor costs, taxes and depreciation-as well as creased interest charges.

• Common Stock dividends paid have increased for the last three years, rising to $2.93 from $2.81 in 1985 and $2.70 in 1984. The current Common Stock dividend is secure although Enterprise's ability to provide future dividend growth will be hampered as a result of the Hope Creek 1 disallowance and other unfavorable elements of the February 6, 1987 rate decision.

Revenues and Sales Electric Revenues increased 5.2% in 1986 primarily due to greater sales and recoveries of energy costs. In 1985, electric enues increased 6.5% due to higher rates and improved sales. Electric energy costs follow amounts recovered through revenues, as permitted by rate orders, and fore have no direct effect on earnings.

The components of the above changes are highlighted in the table below: (Millions of Dollars) Changes in base rates Recoveries of energy costs Kilowatthour sales Other operating revenues Increase or (Decreas!3) 1986 vs. 1985 1985 vs. 1984 s s 58 62 56 94 73 (1) (3) $155 $184 1986-Electric kilowatthour sales increased 3.0%. Growth in Residential and Commercial sales accounted for the increase.

Temperature humidity index hours during the height of the air-conditioning season, June to August, were up 6.0% over 1985, in addition to a 1.3% increase in average customers.

The ongoing weakness in the nation's manufacturing sector adversely affected Industrial sales. A record 60-minute net peak load of 7,735 megawatts was established on July 7, 1986. 1985-Electric kilowatthour sales increased 2.3%. dential sales were relatively flat, improving slightly over 1984. Both the Residential and Commercial sales gories reflect the impact of the overall cooler, less humid summer weather experienced compared to 1984. Tern--perature humidity index hours dropped 5.7% from 1984. Sales lost in the Commercial category due to the cooler weather conditions were more than offset by the ongoing growth in this service oriented category.

The lackluster formance of New Jersey's manufacturing sector out 1985 depressed sales in the Industrial category.

On August 15, 1985 records were set for a 60-minute net peak load of 7,721 megawatts and the maximum day's output of 149,457 megawatthours.

Gas Revenues declined 5.9% in 1986. The reduction in revenues is attributable to decreases in base rates authorized by the BPU which became effective October 31, 1986. In addition, lower gas Raw Materials Adjustment Charge (RMAC) rates were in effect during 1986. Lower oil prices adversely pacted parity priced sales. In 1985, gas revenues increased 2.1 % principally due to the impact of the March 1984 rate increase.

This increase was negatively impacted by a time refund to customers of $13.2 million and a reduction in the RMAC charge, both approved by the BPU during the latter part of 1985. Gas fuel costs follow amounts recovered through venues, as permitted by rate orders, and therefore have no direct effect on earnings.

The components of the above changes are highlighted in the table below: (Millions of Dollars) Changes in base rates Recoveries of gas costs (A) Therm *sales Other operating revenues Increase or (Decrease) 1986 vs. 1985 1985 vs. 1984 s (8) $20 (101) 10 25 (2) 1 s (84) $29 A. Includes the effect of $13.2 million refund to customers In 1985 and $42.9 million in 1984. 1986-Gas therm sales were virtually unchanged from 1985. Residential sales registered significant growth, as the average number of gas heating customers rose 4.9%, despite the negative influence of the 1.4% decline in ing degree days. Commercial sales reflect strong growth in that sector of New Jersey's economy. Industrial sales reflect the ongoing weakness in the nation's ing sector of the economy. Lower oil prices continued to negatively impact Commercial and Industrial sales. 1985-0verall gas heating sales remained relatively flat 27 when compared to 1984. Heating degree days increased only .4%. Since early 1985, switching of certain dual-fuel Commercial and Industrial customers from gas to lower priced oil has depressed sales in these categories. trial sales have also been affected by the ongoing down in New Jersey's manufacturing activity.

Energy Costs Electric energy costs and gas fuel costs are adjusted to match amounts recovered through revenues and have no direct effect on earnings.

However, the carrying of recovered

• energy costs ultimately increases financing costs. A record total of 36.033 million megawatthours was generated, purchased and interchanged, a 3% increase over 1985. Higher generation due to the improved formance of Peach Bottom Station, generation from Hope Creek Station and energy purchased from the New Jersey-Maryland Interconnection (PJM) accounted for the increase.

As a member of the PJM and as a party to several agreements which provide for the purchase of available power from neighboring utilities, PSE&G is able to optimize its mix of internal and external sources using the lowest cost energy available at any given time. Total electric energy costs increased 7% in 1986 after an increase of 11 % in 1985, as described below: (Millions of Dollars) Change in prices paid for fuel and power purchases Kilowatthour output Adjustment of actual costs to match recoveries through revenues (A) Replacement energy costs for which recovery was disallowed by the BPU Increase or (Decrease) 1986 VS. 1985 1985 VS. 1984 $(261) 31 318 (21) $ 67 $(167) 21 225 14 93 A. Reflects over (under) recovered energy costs, which in the years 1986, 1985 and 1984 amounted to $346 million, $28 million and $(197) million, respectively.

Gas costs decreased 9% in 1986 and decreased less than 1% in 1985. Contributing factors are shown below: (Millions of Dollars) Change in prices paid for gas supplies Surcharge related to non-production gas costs Refunds from pipeline suppliers Therm sendout Adjustment of actual costs to match recoveries through revenues (A) Increase or (Decrease) 1986 vs. 1985 1985 vs. 1984 $(105) $ (4) 24 9 9 (10) (3) (12) 9 16 $ (66) $ (1) A.Reflects over (under) recovered gas costs which in the years 1986, 1985 and 1984 amounted to $1 million, $(8) million and $(24) million, respectively.

The underrecovery of $8 million in 1985 reflects gas fuel cost refunds to customers of $11 million. (See Note 5 of Notes to Consolidated Financial Statements.)

Liquidity and Capital Resources Enterprise's liquidity is affected principally by the tion programs of its subsidiaries and, to a lesser degree, by other capital requirements such as PSE&G's maturing debt reacquisition of securities and sinking fund requirements.

The capital resources available to meet these ments are funds from internal generation and external financing.

Internally generated funds depend upon nomic conditions and the adequacy of timely rate relief to PSE&G, as to which no assurance can be given. Access to the long-term and short-term capital and credit markets is necessary for obtaining funds externally.

28 With the completion of Hope Creek, PSE&G's tion costs will be lower, focusing primarily on the grading of other generating stations and electric and gas transmission and distribution systems. Therefore, excluding refinancings and related expenditures, Enterprise expects to meet nearly all of its capital requirements in 1987 with internally generated funds. Construction Program Enterprise maintains a continuous construction program, through its subsidiaries (principally PSE&G) which includes payments for nuclear fuel. This program is periodically vised as a result of changes in economic conditions, and depends on the ability of Enterprise's subsidiaries to finance construction costs and for PSE&G to obtain timely rate lief. Changes in plans and forecasts, price changes, cost escalation under construction contracts, and requirements of regulatory authorities may also result in revisions of the construction program. Construction expenditures of $1.0 billion in 1986 and $1.2 billion in 1985 include AFDC of $241 million and $196 million, respectively.

Construction expenditures are estimated at $3.1 billion for the five years ending in 1991 and include AFDC of about $209 million. These estimates are based on certain expected pletion dates and include anticipated escalation due to inflation of approximately 4°k. Therefore, construction delays or inordinate inflation levels could cause significant increases in these amounts. PSE&G expects that, with equate rate relief, as to which no assurance can be given, it will be able to generate internally nearly all of its struction expenditure requirements for the next five years. Long-Term Financing Enterprise raised more than $668 million in 1986 principally through sales of $103 million of Common Stock and $550 million of PSE&G's First and Refunding Mortgage Bonds. During 1986 three First and Refunding Mortgage Bond issues for $307.3 million and two Preferred Stock issues for $69.3 million were redeemed.

In addition to periodic sinking fund redemptions, a $60 million mortgage bond issue will mature in 198 7. Three mortgage bond issues aggregating

$160 million and one debenture bond issue of $35 million will also mature by the end of 1991. Also, PSE&G has requested or received regulatory authority to redeem certain higher cost securities through future financings of approximately

$160 million of various First and Refunding Mortgage Bonds and $160 million of various Preferred Stock series during 1987 and mately $296 million of various First and Refunding Mortgage Bonds during 1988. At December 31, 1986 book value per share amounted to $26.89 compared to $26.81 at December 31, 1985. The market value of common shares expressed as a age of book value was 149.7% and 118.0% at year-end 1986 and 1985, respectively.

Under the terms of PSE&G's Mortgage and Restated Certificate of Incorporation, at December 31, 1986 PSE&G could issue an additional

$3.178 billion principal amount of Mortgage Bonds at a rate of 8.63% or $3. 750 billion of Preferred Stock at a rate of 7.25%. In February 1986, PSE&G, by an additional amendment, extended its Credit Agreement with 12 domestic banks to May 1, 198 7 for the issuance of revolving loans up to an aggregate of $200 million to be outstanding at any time.

The agreement permits PSE&G to convert the outstanding balance at the end of the period to three-year term loans. Also, PSE&G has the right, with the consent of the banks, to extend the agreement on a year-to-year basis. In the foreign markets Enterprise lists its Common Stock on the London Stock Exchange, London, England and PSE&G's 9%% Series S First and Refunding Mortgage Bonds are listed on the Luxembourg Stock Exchange.

On October 31, 1986 PSRC entered into a Credit Agreement that provides for revolving credit loans up to $25 million. PSRC may terminate the commitment, in whole or in part, without penalty or premium. Under the agreement, any borrowings outstanding at October 31, 1989 are convertible, at PSRC's option, into three-year term loans. PSRC is required to pay a commitment fee on any unused portion. At December 31, 1986, $25 million of rowings was outstanding under the agreement.

Short* Term Financing For interim financing PSE&G is authorized by the BPU to have up to a total of $300 million of short-term obligations outstanding at any given time. This availability of term financing provides PSE&G flexibility in the issuance of long-term securities.

PSE&G's average daily short-term debt during 1986 was $98 million-$26 million above last year's average. At year-end PSE&G had $139 million of short-term debt outstanding.

PSE&G has a $75 million revolving credit agreement, that expires in January 1988, with 16 foreign banks, under which the Banks have agreed to make revolving loans for one month, three months or six months at a rate based upon the London Interbank Offered Rate for deposits in United States dollars. These agreements provide PSE&G with an intermediate-term source of funds. On November 1, 1986, EDC entered into a Credit Agreement that provides for revolving credit loans up to $100 million. EDC may terminate the commitment, in whole or in part, without penalty or premium. Under the agreement, EDC has the option, on September 30, 1987, to extend the maturity date of the agreement to ber 31, 1991. EDC is required to pay a commitment fee on any unused portion. At December 31, 1986, $100 million of borrowings was outstanding under the agreement.

Cash Position Enterprise's cash position increased

$13 million since year-end 1985. The components of the increase are: (Millions of Dollors) Increase or (Decrease)

Cash and Temporary Cash Investments (A) Working Funds Pollution Control Escrow Funds Bank Loans Commercial Paper A. Temporary Cash Investments consist primarily of U.S. Treasury Notes. Customer Accounts Receivable

$ 185 (5) (30) (105) (32) $ 13 At December 31, 1986, customer accounts receivable approximated

$352 million, excluding unbilled revenues of $170 million. Net write-off of uncollectible accounts in 1986 was down 21% to approximately

$22 million, a decrease of $6 million from last year. Net write-off per $100 of revenues was down 16 cents to 48 cents compared to 1985, the result of improved collection procedures and continued improvements in the economy. The level of PSE&G's rates and a BPU requirement prohibiting the termination of tric and gas service during winter months to financially needy customers have an impact upon the level of receivables, uncollectible accounts and net write-off thereof. Long-Term Investments Long-Term Investments increased

$124 million primarily as the result of the activity of PSRC. The increase is made up of the following: (Millions of Dollars) Marketable Securities Limited Partnerships Lease Agreements other Effect of Inflation Increase or (Decrease)

$ 64 34 25 1 $124 The effect of inflation on Enterprise, as indicated by the Average Consumer Price Index (CPl-U), has moderated since 1981. The increases in the CPl-U in 1982, 1983, 1984, 1985 and 1986were 6.1%, 3.2%, 4.3%, 3.6% and 1.9%, respectively.

29 ORGANIZATION AND

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES Organization Effective May 1, 1986, Enterprise became the owner of all of the outstanding Common Stock of PSE&G as a result of a corporate restructuring of PSE&G pursuant to a Plan and Agreement of Merger. In the merger and restructuring, each share of outstanding Common Stock of PSE&G was converted on a share-for-share basis into Common Stock of Enterprise and each share of $1.40 Dividend Preference Common Stock of PSE&G was either converted into half a share of Common Stock of Enterprise or exchanged for $18 cash, at the option of the holder. The restructuring did not result in any change in PSE&G's Preferred Stock or debt securities.

Enterprise is entitled to an exemption from regulation by the Securities and Exchange Commission as a registered holding company under the Public Utility Holding pany Act of 1935, except for Section 9( a)(2) thereof, and is not subject to regulation by the BPU or the Federal Energy Regulatory Commission (FERC). Consolidation Policy and Accounting Principles The consolidated financial statements include the accounts of Enterprise and its subsidiaries, PSE&G, CEA PSRC, and EDC. All significant intercompany accounts and transactions have been eliminated in consolidation.

Certain restatements have been made of previously ported unconsolidated amounts in order to conform to the 1986 presentation.

Such restatements had no effect on net income. The accounting and rates of Enterprise's wholly-owned subsidiary, PSE&G, are subject in certain respects to the requirements of the BPU and FERC and. as a result, tains its accounts with their prescribed Uniform Systems of Accounts, which are the same. As a result. the tions of generally accepted accounting principles (GAAP) by Enterprise differ in certain respects from applications of other non-regulated businesses.

Utility Plant and Related Depreciation and Arnortization-PSE&G Additions to utility plant and replacements of units of property are capitalized at cost. The cost of maintenance, repairs and replacements of minor items of property is charged to appropriate expense accounts.

At the time units of depreciable properties are retired or otherwise posed of, the original cost less net salvage value is charged to accumulated depreciation.

For financial reporting purposes, depreciation is puted under the straight-line method. Depreciation is based on estimated average remaining lives of the several classes of depreciable property.

These estimates are viewed on. a regular basis and necessary adjustments are made as approved by the BPU. Depreciation provisions stated in percentages of original cost of depreciable erty were 3.54% in 1986, 3.52% in 1985. and 3.53% in 1984. Depreciation applicable to nuclear plant includes mated costs of decommissioning except for Hope Creek. To ensure that adequate money is available to meet decommissioning costs for the Hope Creek Generating Station. the BPU in its Decision of February 6. 1987 provided 30 rates for the recovery of such costs and directed that PSE&G establish an escrow fund by means of external funding. Amortization of leasehold improvements and capital lease assets is based on the term of the lease. Amortization of Nuclear Fuel Nuclear energy burnup costs are charged to fuel expense on the basis of the number of units of thermal energy produced as they relate to total thermal units expected to be produced over the life of the fuel. The rate calculated for fuel used at all nuclear units includes a provision of one mill per kilowatthour of nuclear generation for spent fuel disposal costs. Gas and Oil Accounting Energy Development Corporation follows the full-cost method of accounting.

Under this method, all exploration and development costs. both for successful and cessful wells, are capitalized and amortized on the production basis. (See Note 5-Deferred Items-Gas and Oil Exploration Plant Write-Down.)

Long-Term Investments Enterprise, through its investment subsidiary.

PSRC. has vested in marketable securities, which are valued at the lower of cost or market. as well as various leveraged leases and limited partnerships.

In accordance with GAAP. prise records a valuation loss on its investments in able securities, whenever indicated.

Revenues and Fuel Costs Revenues are recorded based on services rendered to customers during each accounting period. PSE&G records unbilled revenues representing the estimated amount customers will be billed for services rendered from the time meters were last read to the end of the respective ing period. PSE&G projects the costs of fuel for electric generation.

purchased and interchanged power, gas purchased and materials for gas produced for twelve-month periods. Adjustment clauses in PSE&G's rate structure allow the recovery of fuel costs over those included in PSE&G's base rates through levelized monthly charges. Any under or recoveries.

along with interest in the case of an ery, are deferred and included in operations in the period in which they are reflected in rates. Income Taxes Enterprise and its subsidiaries file a consolidated Federal income tax return and income taxes are allocated, for reporting purposes.

to Enterprise and its subsidiaries based on taxable income or loss of each. Deferred income taxes are provided for differences tween book and taxable income. For PSE&G the deferred income taxes are limited to the extent permitted for making purposes.

Investment tax credits are deferred and amortized over the useful lives of the related property including nuclear fuel.

Allowance for Funds Used During Construction Allowance for funds used during construction (AFDC) is a cost accounting procedure whereby the cost of financing construction (interest and equity costs) is transferred from the income statement to construction work in progress (CWIP) in the balance sheet. The rate of 8%% used for culating AFDC was within the limits set by FERC. As a result of BPU rate orders, PSE&G has been allowed to include a portion of CWIP in rate base on which a rent return is permitted to be recovered through operating revenues.

The amounts of CWIP included in rate base have remained at $550 million since the end of 1984. No AFDC has been accrued on the amounts of CWIP which were FINANCIAL STATEMENT RESPONSIBILITY Management of Enterprise is responsible for the tion, integrity and objectivity of the consolidated financial statements and related notes of Enterprise.

The ed financial statements and related notes are prepared in accordance with generally accepted accounting ciples applied on a consistent basis and reflect estimates based upon the judgement of management where propriate.

Management believes that the consolidated financial statements and related notes present fairly and consistently Enterprise's financial position and results of operations.

Information in other parts of this Annual Report is consistent with these consolidated financial statements and related notes. Enterprise maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded and that transactions are executed in cordance with management's authorization and recorded properly.

The system is designed to permit preparation of consolidated financial statements and related notes in accordance with generally accepted accounting ples. The concept of reasonable assurance recognizes that the costs of a system of internal controls should not exceed the related benefits.

Management believes the effectiveness of this system included in rate base. However, based upon the BPU's Decision of Febuary 6, 1987, PSE&G is no longer allowed to recover a current return on amounts of CWIP through operating revenues.

Pension Plan Enterprise's subsidiaries participate in a non-contributory trusteed pension plan covering substantially all employees completing one year of service. The policy is to fund sion costs accrued. Contributions include current service costs and amounts required to fund prior service costs over a 35-year period beginning January 1, 1967. is enhanced by a program of continuous and selective training of employees.

In addition, management has communicated to all employees its policies on business conduct, assets and internal control. The Internal Auditing Department conducts audits and appraisals of accounting and other operations and uates the effectiveness of cost and other controls.

The firm of Deloitte Haskins & Sells, independent certified public accountants, is engaged to examine Enterprise's consolidated financial statements and related notes and issue an opinion thereon. Their examination is conducted in accordance with generally accepted auditing standards and includes a review of internal accounting controls and tests of transactions.

The Board of Directors carries out its responsibility of nancial overview through the Audit Committee, currently consisting of five directors who are not employees of prise. The Audit Committee meets periodically with agement as well as with representatives of the internal auditors and the independent certified public ants. The Committee reviews the work of each to ensure that their respective responsibilities are being carried out, and discusses related matters. Both audit groups have full and free access to the Audit Committee.

31 CONSOLIDATED STATEMENTS OF INCOME (Thousands of Dollars) For the Years Ended December 31, 1986 1985 1984 Operating Revenues Electric $3,156,010

$3,000,564

$2,816,241 Gas 1,324,690 1,408,490 1,379,883 Other 17,716 19,287 11,248 Total Operating Revenues 4,498,416 4,428,341 4,207,372 Operating Expenses Operation Fuel for Electric Generation and Interchanged Power-net 1,033,371 965,966 872,805 Gas Purchased and Materials tor Gas Produced 692,224 757,976 758,627 Other 607,301 567,698 545,737 Maintenance 254,256 291,940 270,359 Depreciation and Amortization 272,150 268,179 246,715 Amortization of Property Abandonments and Write-Down (note 5) 71,232 55,263 58,975 Taxes Federal Income Taxes (note 3) 270,783 273,119 263,270 New Jersey Gross Receipts Taxes 563,518 557,270 529,654 Other 56,297 53,161 51,930 Total Operating Expenses 3,821,132 3,790,572 3,598,072 Operating Income 677,284 637,769 609,300 Other Income Allowance for Funds Used During Construction-Equity 164,121 127,412 104,803 Miscellaneous

-net 10,840 458 2,674 Total Other Income 174,961 127,870 107,477 Application of SFAS 90 (note 1 ) Disallowed Plant Costs and Abandonments-net 295,244 109,717 5,016 Related Income Taxes . (111,418)

(24,799) (2, 172) Net Effect of SFAS 90 183,826 84,918 2,844 Income Before Interest Charges 668,419 680,721 713,933 Interest Charges (note 9) Long-Term Debt 297,249 276,480 257,194 Short-Term Debt 6,362 5,788 5,428 Other 12,169 7,278 18,115 Total Interest Charges 315,780 289,546 280,737 Allowance for Funds Used During Construction

-Debt (77,196) (68,459) (53,989) Net Interest Charges 238,584 221,087 226,748 Preferred Stock Dividend Requirements of PSE&G 51,372 60,002 60,221 Net Income $ 378,463 $ 399,632 $ 426,964 Shares of Common Stock Outstanding End of Year 134,882,375 131,698,517 112,563,068 Average for Year 133,139,529 122,344,270 108,913,276 Earnings per Average Share of Common Stock $2.84 $3.27 $3.92 Dividends Paid Per Share of Common Stock $2.93 $2.81 $2.70 Prior years restated to reflect the adoption of SFAS 90 and the consolidation of wholly-owned subsidiaries.

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

32 CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION (Thousands of Dollars) For the Years Ended December 31. 1986 1985 1984 Funds Provided Net Income $ 378,463 $ 399,632 $ 426,964 Add (Deduct) Items not affecting Working Capital Depreciation and Amortization 391,978 375,154 335,393 Recovery (Deferral) of Electric Energy and Gas Fuel Costs-net 350,882 43,422 (211,337)

Disallowed Plant Costs and Abandonments (note 1) 350,571 151,009 35,346 Amortization of Discounts on Disallowances (note 1) (55,327) (41.292) (30,330) Provision for Deferred Income Taxes-net (note 3) Depreciation and Amortization 62,511 42,334 79,462 Property Abandonments (note 5) (7,946) 364 -2,220 Gas and Oil Exploration Plant Write-Down (note 5) 53,287 Deferred Electric Energy and Gas Fuel Costs (161,405)

(19,720) 96,931 Other 35,943 (4,544) ( 14,031) Investment Tax Credits-net 13,205 132,398 94,996 Allowance for Funds Used During Construction (AFDC) (241,317) ( 195,871) (158,792)

Other 4,417 (9,042) 5,724 Total Funds from Operations 1,175,262 873,844 662,546 Net Funds from Financings Common Stock 103,330 499,905 213,492 Long-Term Debt 564,894 199,118 426,110 Increase in Capital Lease Obligations 548 5,910 Total Funds from Financings 668,224 699,571 645,512 Total Funds Provided $1,843,486

$1,573,415

$1,308,058 Funds Applied Additions to Utility Plant, excluding AFDC $ 778,248 $1,024,244

$ 808,573 Additions to Gas and Oil Exploration Plant, excluding AFDC 21,781 47,392 52,891 Cash Dividends on Common Stock 390,289 346,803 295,078 Long-Term Investments 136,290 4,230 of Long-Term Debt and Capital Lease Obligations 423,129 207,355 7,054 of Preferred Stock 72,750 Rtoperty Abandonments, Write-Down and Deferrals (note 5)

• Reduction in Property Values (134,452)

(37,108) (69,313) Deferrals 134,452 37,108 69,313 Miscellaneous 8,479 17,848 37,341 Total Funds Applied 1,758,216 1,720,622 1.200,937 Changes in Working Capital -Increase (Decrease)

Short-Term Debt (77,769) (47.811) 18,885 Cash and Equivalents 149,943 (86,738) 120.230 Accounts Receivable and Unbilled Revenues (25,905) 66.261 (41,691) Fuel (20,090) (52,137) 54,444 Other Current Assets 13,664 28,320 4,024 Accounts Payable and Other Accrued Liabilities 49,417 (27,087) (33,221) Accrued Taxes (3,990) (28,015) (15,550) Net Increase (Decrease) in Working Capital 85,270 ( 147.207) 107,121 Total Funds Applied and Changes in Working Capital $1,843,486

$1,573,415

$1,308,058 Prior years restated to reflect the adoption of SFAS 90 and the consolidation of wholly-owned subsidiaries.

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

33 CONSOLIDATED BALANCE SHEETS Assets (Thousands of Dollars) December 31, Utility Plant -Original cost Electric Plant Gas Plant Common Plant Nuclear Fuel Utility Plant in Service Less Accumulated Depreciation and Amortization Net Utility Plant in Service Construction Work in Progress Plant Held for Future Use Net Utility Plant Other Plant and Long-Term Investments Gas and Oil Exploration Plant, net of accumulated depreciation

-1986, $183,286; 1985, $158,100 Other Plant, net of accumulated depreciation

-1986, $1,362; 1985, $943 Long-Term Investments Total Other Plant and Long-Term Investments Current Assets Cash and Temporary Cash Investments (note 4) Working Funds Pollution Control Escrow Funds Accounts Receivable, net of allowance for doubtful accounts -1986, $33, 101; 1985, $20,733 Unbilled Revenues Fuel, at average cost rylaterials and Supplies, at average cost _ Prepayments

_ ;Jotal Current Assets .-.... Deferred Debits (note 5) Property Abandonments (note 1) Gas and Oil Exploration Plant Write-Down Underrecovered Electric Energy and Gas Fuel Costs -net Unamortized Debt Expense Other Total Deferred Debits Total Prior year restated to reflect the adoption of SFAS 90 and the consolidation of wholly-owned subsidiaries.

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

34 1986 $ 5,449,135 1,396,543 281,751 128,906 7,256,335 2,692,759 4,563,576 4,153,988 26,873 8,744,437 159,040 26,224 133,180 318,444 206,008 21,876 407,737 169,581 203,979 80,197 30,875 1,120,253 227,033 112,044 49,102 6,509 394,688 $10,577,822 1985 $ 5,268, 113 1,290,330 264,106 120,888 6,943,437 2,502,594 4,440,843 3,862,633 36,112 8,339,588 308,351 17,136 9,508 334,995 20,909 26,566 30,466 392,807 210,416 224,069 75,551 21,857 1,002,641 269,601 264,039 23,426 557,066 $10,234,290 Capitalization and Liabilities (Thousands of Dollars) December 31, Capitalization (see statements, pages 36-38) Common Equity Common Stock Retained Earnings Total Common Equity Subsidiaries' Securities Preferred Stock Without Mandatory Redemption Preferred Stock With Mandatory Redemption Long-Term Debt Capital Lease Obligations (note 9) Total Capitalization Current Liabilities Preferred Stock to be redeemed within one year Long-Term Debt and Capital Lease Obligations due within one year Bank Loans (note 6) Commercial Paper (note 6) Accounts Payable New Jersey Gross Receipts Taxes Accrued Deferred Income Taxes on Unbilled Revenues (note 3) Other Taxes Accrued Interest Accrued Gas Purchases Accrued Other Total Current Liabilities Deferred Credits Ac;c:::umulated Deferred Income Taxes (note 3) .pepreciation and Amortization Abandonments (note 5) and Oil Exploration Plant Write-Down (note 5) Deferred Electric Energy and Gas Fuel Costs -net Unamortized Debt Expense Other Overrecovered Electric Energy and Gas Fuel Costs -net (note 5) Accumulated Deferred Investment Tax Credits (note 3) Other Total Deferred Credits Commitments and Contingent Liabilities (note 8) Total 1986 1985 $ 2,632,662

$ 2,535,687 993,836 1,013,285 3,626,498 3,548,972 554,994 554,994 65,000 65,000 3,336,120 3,164,641 56,409 58,337 7,639,021 7,391,944 72,750 71,418 57,895 104,996 139,000 107,000 215,386 272,324 544,678 545,802 78,007 96,791 49,253 25,355 94,602 84,101 75,058 87,669 84,500 74,869 1,456,898 1,424,556 685;483 635,868 *99,846 107,792 53,287 '(39,947) 121,458 19,548 7,791 (2,924) (27,110) 86,843 565,868 551,779 13,899 20,212 1,481,903 1,417,790

$10,577,822

$10,234,290 I 35 CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (Thousands of Dollars) For the Years Ended December 31, 1986 1985 1984 Balance January 1, as previously reported $ $ $ 963,617 Cumulative effect of retroactively applying SFAS 90 (note 1) (131,802)

Balance January 1 1,013,285 963,573 831,815 Add Net Income 378,463 399,632 426,964 Total 1,391,748 1,363,205 1,258,779 Deduct Cash Dividends on Common Stock (A) 390,289 346,803 295,078 Capital Stock Expenses 7,623 3.117 128 Total Deductions 397,912 349,920 295,206 Balance December 31 $ 993,836 $1,013,285

$ 963.573 A. The ability of Enterprise to declare and pay dividends is contingent upon its prior receipt of dividend payments from its subsidiaries.

PSE&G, Enterprise's principal subsidiary, has restrictions on the payment of dividends which are contained in its Charter, certain of the indentures supplemental to its Mortgage, and certain debenture bond indentures.

However, none of these restrictions presently limits the payment of dividends out of current earnings.

The amount of PSE&G restricted retained earnings at December 31, 1986 was $10,000,000.

Prior years restated to reflect the adoption of SFAS 90 and the consolidation of wholly-owned subsidiaries.

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

INDEPENDENT ACCOUNTANTS' OPINION *-.** Deloitte . 'Haskins+Sells Certified Public Accountants Gateway One Newark. New Jersey 07102 To the Stockholders and Board of Directors of Public Service Enterprise Group Incorporated:

We have examined the consolidated balance sheets and consolidated statements of capital stock and long-term debt of Public Service Enterprise Group Incorporated and its subsidiaries as of December 31, 1986 and 1985 and the related consolidated statements of income, retained earnings, and changes in financial position for each of the three years in the period ended December 31, 1986. Our examinations were 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.

36 In our opinion. such consolidated financial statements present fairly the financial position of the companies at December 31. 1986 and 1985 and the results of their operations and the changes in their financial position for each of the three years in the period ended December 31. 1986, in conformity with generally accepted accounting principles applied on a consistent basis, after restatement for the change. with which we concur. in the method of accou*nting for abandonments and disallowances of plant costs as described in Note 1 to the consolidated financial statements.

February 17, 1987 CONSOLIDATED STATEMENTS OF CAPITAL STOCK Current Certain Outstanding Redemption Refundings Shares Price Restricted 1986 1985 December 31. (note A) Per Share Prior to (Thousands of Dollars) Nonparticipating Cumulative Preferred Stock of PSE&G (note B) With Mandatory Redemption

$100 par value -Series 12.25% $ $ $ 22.750 13.44% 50,000 12.80% 350,000 112.80 10/1/87 35,000 35.000 11.62% 300,000 111.62 9/1/88 30,000 30,000 Less amount to be redeemed within one year 72,750 PSE&G Preferred Stock with Mandatory Redemption

$ 65,000 $ 65.000 Without Mandatory Redemption

$25 par value -Series 9.75% 1,600,000

$ 25.75 $ 40,000 $ 40,000 8.70"/o 2,000,000 26.50 50,000 50,000 $100 par value -Series 4.08% 250,000 103.00 25,000 25,000 4.18% 249,942 103.00 24,994 24,994 4.30% 250,000 102.75 25,000 25,000 5.05% 250,000 103.00 25,000 25,000 5.28"/o 250,000 103.00 25,000 25,000 6.80% 250,000 102.00 25,000 25,000 9.62% 350,000 102.00 35,000 . 35,000 7.40% 500,000 101.00 50,000 50,000 7.52% 500,000 101.00 50,000 50,000 8.08% 150,000 101.00 15,000 15,000 7.80% 750,000 101.00 75,000 75,000 7.70"/o 600,000 100.79 60,000 60,000 8,16% 300,000 106.86 30,000 30,000 PSE&G Preferred Stock without Mandatory Redemption (n9 changes in 1985 and 1984) $ 554,994 $ 554,994 Enterprise Dividend Preference Common Stock and Common Stock $1.4Q;pividend Preference Common Stock (no par) (note C) l Common Stock (no par) -authorized 150,000,000 shares (note D); issued and outstanding

$2,632,662

$2,535,687 at December 31, 1986, 134.882,375 shares and at December 31, 1985, 131,698,517 shares l (3. 183,858 shares issued for $103,488,000 in 1986; 19, 135,449 shares issued for $503,022,000 in 1985; and 9,705,079 shares issued for $213,583,000 in 1984) Notes: A. In addition, there are 1.472.558 shares of $100 par value and 6.400,000 shares of $25 par value Cumulative Preferred Stock which are authorized and issued, and which upon issuance may or may not provide for mandatory ing fund redemption.

B. If dividends upon any shares of Preferred Stock are in arrears in an amount equal to the annual dividend thereon, voting rights for the election of a majority of the Board of Directors become operative and continue until all ed and unpaid dividends thereon have been paid. whereupon all such voting rights cease, subject to being again revived from time to time. PSE&G is required to purchase or redeem a specified minimum number of shares of Cumulative Preferred Stock with mandatory redemption annually commencing on the effective dates shown below. Such redemptions are cumulative.

PSE&G may annually redeem. at its option, an aggregate of up to twice the number of shares shown for each such series. All such redemptions are at a redemption price of $100 per share. A redemption of shares of any series also requires payment of all accumulated and unpaid dividends to the date fixed for redemption.

Minimum Effective Aggregate Number of Shares Date of Shares Purchased and Redeemable Mandatory Redeemed During the Years Series Annually Redemption 1986 1985 1984 12.25% 17,500 2/1/80 227,500 17.500 17.500 13.44% 25.000 3/31/87 500,000 12.80% 17.500 9/30/88 11.62% 15,000 9/30/89 Preferred Stock without mandatory redemption Is subject to redemption ly at the option of PSE&G upon* payment of. the applicable redemption price plus accumulated and unpaid dividends to the date fixed for redemption.

The 1985 statement reflects the redemption in 1986 of all shares of the ferred Stock of the 12.25% Series and the 13.44% Series. As a result the annual dividend requirement and the embedded dividend cost were $7,966.000 and 12.37%, respectively, for Preferred Stock with mandatory redemption.

The annual dividend requirement and embedded dividend cost for Preferred Stock without mandatory redemption were $40,629,000 and 7.38%, respectively.

PSE&G has requested or received regulatory approval to redeem the 12.80%, 9. 75%, 8. 70% and 9.62% Series of Preferred Stock. C. In 1985 there were 1.343,999 shares outstanding, 982,152 of these shares were converted on a 2 for 1 basis into Enterprise Common Stock as part of the corporate restructuring whereby Enterprise became the parent holding pany of PSE&G on May 1. 1986. The remaining 361.847 shares were repurchased at a cost of $6,513.000.

D. Includes 3,659.045 shares of Common Stock reserved for possible issuance under Enterprise's Dividend Reinvestment and Stock Purchase Plan, and PSE&G's Employee Stock Purchase Plan, Thrift and Tax-Deferred Savings Plan and Payroll-Based Employee Stock Ownership Plan. See Organization and Summary of Significant Accounting Policies and Notes to Consolidated Financial Statements.

37 CONSOLIDATED STATEMENTS OF LONG-TERM DEBT (Thousands of Dollars) December 31, First and Refunding Mortgage Bonds of PSE&G (note A) Series 4%% 4Ys% 4%% 5%% 4%% 4%% 4%% 4%% 4%% 614% 7 % 7%% 9%% 8%% 7%% 7Y2% 8Y2% 12 % 8%% 8.45% 814% 8%% 9%% ,-93,!,i%

<12 %

'15Ys% 14%% 12%% 12%0 ,{, 9Y2% 9%% 9%% 7Y2% 8%% 8 % 5 % Maturity Date November 1, 1986 September 1, 1987 August 1, 1988 June 1, 1989 September 1, 1990 August 1, 1992 June 1, 1993 September 1, 1994 September 1, 1995 June 1, 1997 June 1, 1998 April 1, 1999 March 1, 2000 A May 15, 2001 B November 15, 2001 C April 1, 2002 D March 1, 2004 E October 1, 2004 F April 1, 2006 G September 1, 2006 H June 1, 2007 I September 1, 2007 J November 1, 2008 K July 1, 2009 L November 1, 2009 M June 1, 2010 N August 1, 1991 0September1, 2012 P December 1, 2012 Q August 1, 1993 R July 1, 2015 S January 14, 1996 T March 1, 2016 U April 1, 1996 V April 1, 2016 June 1, 2037 July 1, 2037 Pollution Control Series 6.30% 6.90% 6.90% 121"2% 9Ys% 101"2% 10%% 101"2% 103/a"/o A October 1, 2006 B September 1, 2009 C September 1, 2009 D April 1, 2012 E June 1, 2013 F July 1, 2014 G September 1, 2014 H November 1, 2014 I November 1, 2012 Total First and Refunding Mortgage Bonds 38 $ 1986 60,000 60,000 50,000 50,000 40,000 40,000 60,000 60,000 75,000 75,000 75,000 98,000 69,300 80,000 125,000 90,000 8,730 60,000 60,000 125,000 59,900 99,000 99,000 42,300 85,044 100,000 125,000 75,000 100,000 250,000 200,000 7,463 7,538 14,300 42,620 2,990 23,500 64,000 150,000 150,000 130,400 4,600 $3,193,685

$ 1985 50,000 60,000 60,000 50,000 50,000 40,000 40,000 60,000 60,000 75,000 75,000 75,000 98,000 69,300 80,000 125,000 90,000 9,730 60,000 60,000 125,000 59,900 100,000 100,000 119,750 87,500 100,000 43,300 98,500 100,000 125,000 75,000 7,463 7,538 14,300 42,620 2,990 23,500 64,000 150,000 150,000 130,400 4,600 $3,018,391 (Thousands of Dollars) 1986 1985 Debenture Bonds of PSE&G unsecured 5%% 714% 9 % 7%% 8%% 6 % Maturity Date June 1, 1991 December 1, 1993 November 1, 1995 August 15, 1996 November 1, 1996 July 1, 1998 Total Debenture Bonds Principal amount outstanding (note B) Amount due within one year (note C) Net Unamortized Discount Long-Term Debt of PSE&G Bank Loans of PSRC-714-71"2% (note D) Consolidated Long* Term Debt (note E) Notes: $ 34,647 24,800 47,607 50,898 36,484 18,195 212,631 3,406,316 (69,491) (25,705) $ 35,787 25,380 49,345 52,152 38,198 18,195 219,057 3,237,448 (55,250) (17,557) 3,311,120 3,164,641 25,000 $3,336,120

$3,164,641 A. PSE&G's Mortgage.

securing the First and Refunding Mortgage Bonds, stitutes a direct first mortgage lien on substantially all property and franchises.

B. At December 31. 1986, PSE&G had unexercised commitments under a Credit Agreement with 12 domestic banks for issuance of revolving loans up to an aggregate amount of $200.000,000 at any time to May 1, 1987. PSE&G may terminate the commitments, in whole or in part, without penalty or premium. Under the agreement.

any borrowings outstanding at May 1. 1987 are ible, at PSE&G's option. into three-year term loans. PSE&G is required to pay a commitment fee on any unused portion. PSE&G has the right, with the consent of the banks, to extend the agreement on a year-to-year basis. C. PSE&G has requested or received regulatory approval to redeem $159,574,000 and $296.000.000 principal amount of First and Refunding gage Bonds prior to maturity in the years 1987 and 1988, respectively. ing such redemptions, the aggregate principal amount of requirements for sinking funds and maturities for each of the five years following December 31, 1986 are as follows: (Thousands of Dollars) Vear 1987 1988 1989 1990 1991 Sinking Funds $ 9,491 10,845 8,100 8,100 6,900 $43,436 Maturities

$ 60,000 60,000 50,000 50,000 31,200 $251,200 Total $ 69,491 70,845 58,100 58,100 38,100 $294,636 For sinking fund purposes, certain First and Refunding Mortgage Bond issues require annually the retirement of $21.550,000 principal amount of bonds or the* utilization of bendable property additions at 60% of cost. The portion expected to be met by property additions has been excluded from the table above. Also, PSE&G may, at its option, retire additional amounts up to $6,200,000 nually through sinking funds of certain debenture bonds. The election of any such option is included in long-term debt due within one year. D. At December 31. 1986 PSRC had $25.000,000 outstanding under a Credit Agreement that provides for revolving credit loans up to $25.000,000.

PSRC may terminate the commitment, in whole or in part, without penalty or premium. Under the agreement, any borrowings outstanding at October 31, 1989 are convertible, at PSRC's option, into three-year term loans. PSRC is required to pay a commitment fee on any unused portion. E. At December 31. 1986 the annual interest requirement on Long-Term Debt was $290.253.000 of which $272.112.000 was the requirement for First and funding Mortgage Bonds. The embedded interest cost on Long-Term Debt was 8.80%. See Organization and Summary of Significant Accounting Policies and Notes to Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1 Statement of Financial Accounting Standards No. 90 (SFAS 90) In December 1986, the Financial Accounting dards Board (FASB) issued SFAS 90-Regulated Accounting for Abandonments and Disallowances of Plant Costs which amends the previously prescribed accounting standards for these two types of events that have occurred primarily in the electric utility industry.

This new statement requires that a loss be recognized if the carrying amounts of abandoned assets exceed the present value of future revenues generated by those assets in the regulatory process. Previous accounting standards required that abandoned assets be reported at the lesser of cost or probable gross revenues.

This new statement also requires any disallowance of the cost of a recently completed plant to be recognized as a loss (cost defined to include a return on capital).

Previous accounting standards did not require the nition of a loss if the total cost of the plant (exclusive of a return on capital after construction) would be recovered.

While SFAS 90 is not required to be implemented until 1988, earlier adoption is encouraged and Enterprise has chosen to adopt the provisions of this new accounting statement in 1986. Consistent with the recommendation of SFAS 90, prior years' financial statements have been restated to reflect the application of the new statement.

The following tables illustrate the effect of adoption of SFAS 90: (Thousands of Dollars) For the Years Ended December 31, Income b<;ifore application of SFAS 90 Disallowed.Costs Hope CrE;ek 1 (Note 2)

Return Disallowance-Discount Amortization of Discount Related Income Taxes Hope Creek-net Property Abandonments (Note 5) Return Disallowance-Discount Amortization of Discount Related Income Taxes Property Abandonments-net Effects of application of SFAS 90 Net Income Earnings per Average Share of Common Stock Income before application of SFAS 90 Effects of application of SFAS 90 Net Income 1986 $ 562,289 431,532 (80,961) (12,157) (122,818) 215,596 (43,170) 11,400 (31,770) 183,826 $ 378,463 $4.22 1.38 $2.84 1985 $484,550 135,139 (35.935) 99.204 15.870 (41.292) 11,136 (14,286) 84.918 $399,632 $3.96 .69 $3.27 1984 $429,808 35,346 (30,330) (2,172) 2.844 2.844 $426.964 $3.95 .03 $3.92 The tax effects of discounting of abandonments were culated using the tax rates applicable to related deferred tax balances.

The tax effect of the Hope Creek 1 ance was calculated using a 35.8 percent rate. Such rate reflects rates that will be in effect when the tax basis of this plant is depreciated (46% in 1986, 40% in 1987 and 34% thereafter) to determine the net realizable value of the tax benefit. Retained earnings as of December 31, 1983 have been reduced by $131.8 million to reflect the retroactive discounting of the abandonments occurring prior to that date, principally the Atlantic Project and Hope Creek Unit 2. 2 Rate Matters On February 6, 1987, the Board of Public Utilities of the State of New Jersey (BPU) issued a Decision authorizing an increase in PSE&G's electric base rates signed to produce additional annual revenues of $421.5 million. Also, the Decision reduced PSE&G's electric ized Energy Adjustment Clause (LEAC) by $697.7 million over a compressed 10112 month period commencing ruary 16, 1987 and reduced electric base rates by $77.2 million for the recognition of the 1987 impact of the Tax Reform Act of 1986, resulting in an overall electric revenue decrease of $353.4 million. The Decision allows a return on common equity of 13% and an overall rate of return of 10.65%. As determined by the BPU, the increase in electric base rates is designed to reflect a recovery of PSE&G's reasonable costs of constructing Hope Creek Generating Station (Hope Creek). PSE&G's share of the cost of structing Hope Creek through February 6, 1987 was $4.276 billion, including

$970 million of allowance for funds used during construction (AFDC). The Decision disallowed

$431.5 million of PSE&G's share of Hope Creek's costs. In addition, in accordance with the terms of the Cost tainment Incentive Penalty Agreement explained below, the Decision disallowed a return on an additional

$57.7 million resulting in a total allowed investment for Hope Creek by PSE&G in rate base of $3. 787 billion. PSE&G'switnesses had testified that all costs incurred in connection with the construction of Hope Creek were dently incurred and should be recovered from customers through rates. PSE&G was subject to the terms of a Cost Containment Incentive Penalty Agreement (Agreement) signed in 1982 by PSE&G, the New Jersey Department of Energy, the New Jersey Public Advocate and the other co-owner of Hope Creek, and approved by the BPU in 1983. The Agreement established the targeted cost of Hope Creek at $3. 795 billion, of which PSE&G's share was $3.556 billion, and a target-in-service date of December 1986. The Agreement provided an earnings penalty by PSE&G's revenue requirement related to rate base, as determined by the BPU, will be based on the exclusion from the rate base of 20% of allowed costs incurred in excess of the cost cap. Also, the February 6, 1987 Decision continues the ral of the $70.0 million of replacement energy costs of PSE&G resulting from failures of the electric generators at Salem in 1984 pending more definitive information from PSE&G's litigation against the generator manufacturer with respect to one of such outages. In addition, the BPU, in its Decision adopted ance standards for all of PSE&G's nuclear units. The penalties or awards are based on targeted capacity factors as illustrated in the following table: Capacity Factor Range 90-100% 80-90% 60-80% 50-60% 40-50% Below40% Difference in Replacement Power Costs vs. Target Capacity Factor of 70% Award 25% 20% None Penalty None 20% 25% BPU Intervenes 39 -I The application of these performance standards could have a significant effect on future results of operations.

On October 30, 1986, the BPU approved agreements by the major parties in PSE&G's recent gas base rate case and gas levelized Raw Materials Adjustment Clause (RMAC) proceedings which provided, among other things, for an annual reduction in gas base revenues of $30 million effective October 31, 1986 and for the removal of Energy Development Corporation (EDC), at that time a owned gas and oil exploration subsidiary of PSE&G, from inclusion in its gas rate base for ratemaking purposes.

The agreements also established a reduced price for gas sold by EDC to PSE&G during the twelve-month period ending October 30, 1987. As a result, EDC wrote down the value of its assets at December 31, 1986 to reflect the lower net realizable value of its oil and gas reserves, which reduced EDC's net income by $70.5 million. (See Note 5-Deferred Items-Gas and Oil Exploration Plant Write-Down.)

3 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 rcite of 46% is as follows: (Thousands of Dollars) 1986 1985 1984 Net lnconie $ 378,463 $399,632 $426,964 Preferred stock dividend require:-ments of PSE&G 51,372 60,002 60,221 Subtotal 429,835 459,634 487.185 Federal income Taxes included in: Operating income Current provision 180,132 74.987 15.474 Provision for deferred income taxes-net (A) 42,236 63,881 150,623 Investment tax credits-net 48,415 134.251 97,173 Total included in operating income 270,783 273,119 263,270 Miscellaneous other income-net 7,546 4,189 3.339 SFAS 90 deferred Federal income tax (A) (78,652) (24,799) (2,172) SFAS 90 deferred investment tax credit (32,766) Total Federal income tax provisions 166,911 252,509 264.437 Pre-tax income $ 596,746 $712,143 $751.622 Tax expense at the statutory rate $ 274,503 $327,586 $345,746 Adjustments to pre:-tax income. computed at the statutory rate. for which deferred taxes are not provided under current rate-making policies:

Tax depreciation under book depreciation

$ 30,470 $ 15,510 $ 11.454 Allowance for funds used during construction (111,000)

(90,089) (73,044) Overhead costs capitalized (20,538) (18,083) (15,992) Other 10,576 33,109 8.447 Subtotal (90,492) (59.553) (69.135) Amortization of investment tax credits (17,100) (15,524) (12,174) Subtotal (107,592)

(75,077) (81,309) Total Federal income tax provisions . $ 166,911 $252,509 $264.437 A. The provision for deferred income taxes represents the tax effects of the following items: Current Liabilities Unbilled revenues Deferred Credits Property abandonments Additional tax depreciation and amortization Deferred fuel costs-net Gas and Oil Exploration Plant Write-Down Other Subtotal Total 40 $ (18,784) $ 20,648 $(16.039)

(7,946) 62,511 (161,405) 53,287 35,921 (17,632) $ (36,416) 364 2,220 42.333 79.462 (19,720) 96,931 (4,543) (14,123) 18.434 164.490 $ 39.082 $148.451 Deferred income taxes are provided for differences tween book and taxable income. For PSE&G the deferred income taxes are limited to the extent permitted for making purposes.

At December 31, 1986 the cumulative net amount of income tax timing differences for which ferred income taxes have not been provided was $1.3 lion. The related deferred income taxes, at the current statutory rate of 46%, would be $600 million. In September 1986, the Financial Accounting Standards Board issued an Exposure Draft of a proposed Statement of Financial Accounting Standards that would, if adopted; require PSE&G to record a liability on its balance sheet for these future taxes at the applicable future tax rates. However, since PSE&G expects to continue to recover through rates the taxes due as such timing differences reverse, an asset for the same amount would also be recorded.

The posed effective date of the Statement would be for fiscal years beginning after December, 15, 1987. The Tax Reform Act of 1986 enacted on October 22, 1986 made major changes regarding corporate taxes. The major provisions which affect Enterprise are as follows:

• A decrease in the corporate rate from 46 to 34 percent effective July 1. 1987.

• The repeal of investment tax credit for property placed in service after December 31, 1985.

• Changes in depreciable asset lives and methods.

• A requirement to capitalize interest and overheads on capital projects effective January 1. 1987. The last three provisions do not apply for property ered by transition rules. Since deferred income taxes are a source of internally generated funds, the reduction in the corporate tax rate could adversely impact cash flows in future periods. The February 6, 1987 decision of the BPU in PSE&G's base rate case ordered PSE&G to pass the tax benefits rived from the Tax Reform Act of 1986 to customers mencing February 16, 1987. The BPU ordered a reduction of $77.2 million in 1987 electric rates primarily attributable to a decrease in the corporate tax rate. The BPU will make a further review to consider additional reductions during the next RMAC and LEAC proceedings to reflect the corporate tax rate change applicable to 1988 and any change as may be required to the 1987 amounts. As a result of Internal Revenue Service (IRS) audits for taxable years 1976 through 1980. the IRS has proposed an increase in taxable income which would increase the current tax liability by $72 million due to the inclusion of unbilled revenues as taxable income in the year estimated services were provided.

In accordance with the Tax Reform Act of 1986, the balance of unbilled revenues at December 31, 1986, $169.6 million, will be included in taxable income ratably over a four-year period commencing in 1987. It is anticipated that the IRS will drop its proposal for the able years 1976 through 1980. Nevertheless, if the IRS posal is upheld and PSE&G is unsuccessful in its appeal, there will be little effect on consolidated earnings as ferred taxes have been provided for the unbilled revenues.

4 Cash and Temporary Cash Investments The balance at December 31, 1986 consists primarily of temporary cash investments, mainly U.S. ment Securities.

At December 31, 1985 it consisted pally of compensating balances under informal ments with various banks to compensate them for services and to support lines of credit. At December 31, 1986 and 1985, Enterprise had $202 million of lines of credit ported by compensating balances and $35 million of lines of credit which were compensated for by fees. There are no legal restrictions placed on the withdrawal or other use of the compensc;:iting bank balances.

Property Abandonments 5 Deferred Items The following table reflects the application of SFAS 90 on property abandonments for which no return is earned. (See Note 1.) (Thousands of Dollars) Property Abandonments December 31, 1986 1985 Cost Discounted Cost Discounted Atlantic Project $200,172 $114,290 $215.232 $118.437 Hope Creek Unit 2 109,196 64,572 174.076 105,023 LNG Project 44,208 28,640 48.823 26,683 Uranium Projects 32,165 17,941 31.623 16.268 2,120 1,590 3.862 3,190 $387,861 $227,033 $473,616 $269,601 Related Income Taxes Atlantic Project $ 84,149 $ 48,065 $ 90,485 $ 49,811 Hope Creek Unit 2 57,628 33,310 69.105 40,946 LNG Project 16,950 11,034 18.725 10.290 Uranium Projects 13,329 7,437 13.106 6.745 $172,056 $ 99,846 $191.421 $107.792 ,: Atlantic Project In 1978, PSE&G cancelled the Atlantic nuclear planfproject.

The BPU authorized PSE&G to recover a tion of the costs of the project over a period of 20 years commencing in April 1980. Such costs are being recovered at the rate of $8. 7 million annually, net of taxes. The related amortization of the discount net of taxes, will result in a credit to income of $6.1 million in 198 7. Hope Creek Unit No. 2 In December 1981, PSE&G abandoned the construction of Hope Creek Generating Station Unit No. 2. In March 1982, the BPU authorized the recovery of all after-tax ment costs for Hope Creek 2 from customers through the electric levelized energy adjustment clause. The recovery is over 15 years on an accelerated method which menced in June 1982. As a result of the February 6, 1987 BPU rate Decision, no Hope Creek 2 costs will be recovered during 1987 to reflect an adjustment of estimated out costs. The amortization of the discount net of taxes, will result in a credit to income of $4.6 million in 1987. LNG Project In December 1984, PSE&G abandoned its investment in certain facilities for the storage of liquefied natural gas. As a result of this abandonment and prior to regulatory proval, PSE&G's investment of approximately

$69.3 million, less tax savings of $27.9 million or the net amount of $41.4 million, was deferred and was being amortized over a seven-year period commencing in 1984. On October 30, 1986, the BPU approved an agreement by the major parties in the gas rate proceeding mending the recovery of $48.8 million, the unamortized balance of the LNG Project costs less tax savings of $18.7. million. This amortization will result in the recovery of proximately

$2.8 million per year, net of taxes. The related amortization of the discount, net of taxes, will result in a credit to income of $1.7 million in 1987. Uranium Projects In September 1985, PSE&G terminated a uranium supply agreement with Sequoyah Fuels Corporation (Sequoyah), a subsidiary of Kerr-McGee Corporation.

In December 1985, Philadelphia Electric Company terminated its Lee Mine uranium supply project, in which PSE&G had participated as a co-owner of Peach Bottom Generating Station. In addition, PSE&G terminated the Homestake Mining Company contract, dated February 25, 1976, for the exploration and development of uranium. The total loss of these projects when combined with the Sequoyah loss amounts to $37.1 million. As a result of the abandonment and prior to regulatory approval, PSE&G's net unrecovered advances of $21. 7 million, after related tax savings, were deferred and were being amortized over a seven-year period commencing in 1985. On February 6, 1987, the BPU issued a Decision ting a 15-year amortization period commencing January 1, 1985. The annual amortization and recovery will be proximately

$1.4 million, net of taxes. The related tion of the discount, net of taxes, will result in a credit to income of $1.0 million in 1987. Gas and Oil Exploration Plant Write-Down In the agreement between the major parties in the. gas rate proceeding, approved by the BPU on October 30, 1986, the investment in EDC was removed from rate base. As a result EDC wrote down the carrying value of its assets under the full cost method of accounting to the present value of estimated future net revenues.

The after tax effect. of the write-down made in December was $70.5 million ($134.5 million before tax). In the BPU approved agreement PSE&G was allowed to defer the loss on its investment in EDC, generated by the rate base disallowance, and to seek recovery of such loss, over a period of not less than 10 years in its next base rate case. As a result PSE&G has deferred $58.8 million, net of taxes, anticipated to be recovered subsequent to the next base rate increase.

Future action of the BPU with respect to such recovery may require adjustment to the carrying value of the deferral and the related amortization.

41 Over (Under) recovered Electric Energy and Gas Fuel Costs-net Recoveries of electric and gas fuel costs are determined by the BPU. Earnings are not directly affected by increases or decreases in the costs of fuel or interchanged power, because such costs are adjusted monthly to match amounts recovered through revenues.

These clauses also provide that any over or underrecoveries at the end of the period, along with interest in the case of an overrecovery, will be included in the average cost used to determine the rate for the succeeding levelized period. At December 31, 1986, the overrecovery under the LEAC amounted to $63.2 million which is net of $70 million of deferred replacement energy costs described below. At December 31, 1986 the overrecovery of the RMAC amounted to $20.8 million. Electric On February 6, 1987, the BPU Decision adjusted the LEAC rates to reduce revenues by $697.6 million over a pressed 101h month period commencing February 16, 1987. Also, the BPU continued the deferral of the recovery of $70 million of replacement energy costs relating to the tended outages of the Salem Generating Station Units 1 and 2 during the year 1984. (See Note 2.) Gas On October 16, 1986, the BPU approved a Stipulation tered into by PSE&G which will reduce revenues under the RMAC by $150 million for the period October 31, 1986 through September 30, 1987. This reduction reflects jected price declines and spot market savings from natural gas purchases.

Unamortized Debt Expense Costs associated with the issuance of debt by PSE&G are deferred and amortized over the lives of the related issues. Amounts shown in the Consolidated Balance Sheets sist principally of costs associated with PSE&G's tion of the following First and Refunding Mortgage Bonds: 12 % Series E due 2004 (tender offer 5/77) 12 % Series L due 2009 (redeemed 6/86) 12%% Series M due 2010 (redeemed 6/86) 15Vs% Series N due 1991 (redeemed 8/86) The redemption costs of the above debt have been ferred and are being amortized over the lives of the new securities issued to replace older, higher-cost securities.

PSE&G expects to amortize $2.5 million of these costs in 1987. 42 6 Bank Loans and Commercial Paper Bank loans represent unsecured promissory notes issued under credit arrangements with various banks and have a term of eleven months or less. Such notes were issued in 1986 by CEA and EDC. Certain information garding bank loans follows: (Thousands of Dollars) 1986 1985 1984 Balance at end of year $104,996 None None Maximum amount outstanding at any month end $104,996 N/A N/A Average daily outstanding

$ 13,069 N/A N/A Weighted average annual interest rate 6.62% N/A N/A Weighted average interest rate for bank loans outstanding at year-end 6.58% N/A N/A Commercial paper represents PSE&G's unsecured bearer promissory notes sold through dealers at a discount with a term of nine months or less. Certain information regarding commercial paper follows: (Thousands of Dollars) 1986 1985 1984 Balance at end of year $139,000 $107,000 $185.000 Maximum amount outstanding at any month end $286,000 $157,500 $185.000 Average daily outstanding

$ 98,100 $ 72,400 $ 55,300 Weighted average annual interest rate 6.29% 7.91% 9.80% Weighted average interest rate for commercial paper outstanding at year-end 6.34% 8.09% 8.26%

7 Pension Plan Information on accumulated plan benefits and net assets of the pension plan of Enterprise is as follows: (Thousands of Dollars) December 31, 1986 1985 Actuarial present value of accumulated plan benefits Vested $575,000 $491.000 Nonvested 92,000 75,000 $667,000 $566.000 Assumed rate of return 7.5% 8.5% Market Value of Plan Net Assets $741,870 $647,087 Pension costs for the past three years were charged as follows: (Thousands of Dollars) 1986 1985 1984 Operating expenses $43,844 $52,155 $55,294 Utility plant 13,827 14,743 13.296 Total pension costs $57,671 $66,898 $68,590 In December 1985 the Financial Accounting Standards Board issued Statement No. 87-Employer'sAccounting for Pensions which requires future changes for the accounting and reporting of pension costs. The Statement requires a standardized method for measuring pension cost, ed disclosure of the components of pension plans in the Notes to Consolidated Financial Statements, and ing of a liability on the Consolidated Balance Sheets when the accumulated pension benefit obligation exceeds the fair market value of the pension plan assets. The provisions of Statement No. 87 are effective for calendar year 1987 financial statements, except that the liability recognition provisions, if any, are not effective until 1989. PSE&G may be required to defer the difference between net periodic sion cost, as defined in Statement No. 87, and the amount of pension cost recovered for rate-making purposes.

8 Commitments and Contingent Liabilities Construction and Fuel Supplies Enterprise's principal subsidiary, PSE&G, has tial commitments as part of its construction program. struction expenditures of $3. 1 billion, including mately $209 mil Ion of allowance for funds used during struction (AFDC), are expected to be incurred during the years 1987 through 1991. In addition, PSE&G has ments to obtain sufficient sources of fuel for electric eration and adequate gas supplies.

Construction expenditures for all projects in 1986 were $1.0 billion, including

$241 million of AFDC, which is an crease of $281 million, including

$82 million of AFDC, over the construction expenditures estimated in PSE&G's 1985 Annual Report to the Securities and Exchange sion (SEC) on Form 10-K. The increase principally reflects tional costs associated with the completion of construction of Hope Creek Generating Station. Gas and Oil Exploration Plant Write-Down As described in Note 5, the recovery of $58.8 million, after income taxes, is subject to recovery in PSE&G's next base rate case. Nuclear Insurance Coverages PSE&G's insurance coverages for its nuclear operations are as follows: (Millia.ns of dollars) Maximum Retrospective Maximum Assessment for Type and Source of Coverage Coverage a single incident Public Liability:

American Nuclear Insurers 160 $None Federal Government (A) 535 13.2(B) S 695(C) $ 13.2 Property Damage: Nuclear Mutual Limited (D) 500 $ 39.8 Nuclear Electric Insurance Limited (D) 575 16.0 American Nuclear Insurers 85 None $1,160 $ 55.8 Replacement Power: Nuclear Electric Insurance Limited (D) $ 3.3(E) $ A Retrospective premium program under the Price-Anderson Liability sions of the Atomic Energy Act of 1954, as amended. Subject to retro-9.9 spective assessment with respect to loss from an incident at any licensed nuclear reactor in the United States. B. Maximum assessment would be $26.4 million in the event of more than one incident in any year. C. Limit of liability under the Atomic Energy Act of 1954, as amended for each nuclear incident.

D. Mutual insurance companies of which PSE&G is a member. Subject to retrospective assessment with respect to loss at any nuclear generating tion covered by such insurance.

E. Maximum weekly indemnity for 52 weeks which commences after the first 26 weeks of an outage. Also provides $1.65 million weekly for an additional 52 weeks. The Atomic Energy Act provisions (the Price-Anderson Act) in Notes (A), (B) and (C) above expire on August 1, 1987, unless extended by Congress:

The most recent such proposal considered by Congress would establish a l1m1t of liability of $6.5 billion per incident with the maximum assessment per reactor to be limited to $63 million. but no more than $10 million per reactor per year. Congress will again consider the matter in 1987. Certain proposals would eliminate any limit on liability.

PSE&G cannot predict whether the Anderson provisions will be extended or what provisions will be enacted if they are extended.

In 1984, in a case to which PSE&G was not a party, the United States Supreme Court held that the Atomic Energy Act. the Anderson limitation of liability provisions thereunder and the extensive lation of nuclear safety by the NRC do not pre-empt claims under State law for personal, property, or punitive damages related to radiation hazards. Environmental Controls The Comprehensive Environmental Response, tion and Liability Act of 1980 and certain similar State utes authorize various governmental authorities to seek court orders compelling responsible parties to take up action at disposal sites determined to present an minent and substantial danger to the public and to the environment because of an actual or threatened release of hazardous substances.

Because of the nature of PSE&G's business, various by-products and substances are duced or handled which are classified as hazardous.under these laws. PSE&G generally provides for the disposal of such substances through licensed individual contractors, but these statutory provisions generally impose potential joint and several responsibility on the generators of the wastes for clean-up costs. PSE&G has been notified with spect to a number of such sites, and the clean-up of ardous wastes is receiving increasing attention from the governmental agencies involved This trend is expected to continue.

PSE&G cannot estimate the costs which may sult from these matters, but such costs could be substantial.

43 9 capital Lease Obligations 10 Financial Information by Business Segments The Consolidated Balance Sheets include assets and Information related to the segments of related obligations applicable to capital leases. The Enterprise's business is detailed below: total amortization of the leased assets and interest on the lease obligations equals the net minimum lease payments For the Year Ended December 31, 1986 included in rent expense for capital leases. (Thousands of Dollars) Electric Gas other Total Capital leases of PSE&G relate primarily to its corporate Operating Revenues $3,156,010

$1,324,690 77,531 $ 4,558,231 Eliminations headquarters and computer equipment.

Certain of the (lntersegment Revenues)

(59,815) (59,815) leases contain renewal and purchase options and also Total Operating contain escalation clauses. Revenues 3,156,010 1,324,690 17,716 4,498,416 Enterprise and its other subsidiaries do not presently Depreciation and have any capitalized leases. Amortization 176,489 58,721 171,392 406,602 Utility plant includes the following amounts for capital Eliminations (Note 5) (134,452)

(134,452)

Total Depreciation leases at December 31: and Amortization 176,489 58,721 36,940 272,150 (Thousands of Dollars) 1986 1985 Operating Income Before Income Taxes 845,992 95,854 (125,990) 815,856 Common Plant $65,872 $65.872 Eliminations (Note 5) 134,452 134,452 Less Accumulated Amortization 7,535 4,890 Total Operating Income Net Assets under Capital Leases $58,337 $60,982 Before Income Taxes 845,992 95,854 8,462 950,308 Future minimum lease payments for noncancelable Capital Expenditures 893,788 125,764 21,794 1,041,346 December 31. capital and operating leases at December 31, 1986 are: Net Utility Plant 7,871,636 872,801 8,744,437 Gas and Oil Capital Operating Exploration Plant 159,040 159,040 (Thousands of Dollars) Leases Leases other Corporate Assets 923,876 529,485 220,984 1,674,345 1987 $ 14,998 $ 3.526 1988 13,863 3,287 Total Assets $8,795,512

$1,402,286

$ 380,024 $10,577,822 1989 13,114 3,135 1990 13,110 2,694 1991 13,046 2.115 For the Year Ended December 31, 1985 Later Years 303.698 2,662 (Thousands of Dollars) Electric Gas Other Total Minimum lease payments 371,829 $17.419 Operating Revenues $3,000,564

$1.408.490 98,009 $ 4,507.063 Less: Amount representing estimated executory Eliminations costs, together with any profit thereon. (lntersegment Revenues)

(78.722) (78,722) included in minimum lease payments 183,841 Total Operating Net minimum lease payments 187,988 Revenues 3,000,564 1.408.490 19.287 4.428.341 Less: Amount representing interest 129,651 Depreciation and ;,':Present value of net minimum lease payments (A) $ 58,337 Amortization 168,108 55.004 45,067 268,179 * ,';:;-.11

.. Reflected in the Consolidated Balance Sheets in Capital Lease Obliga-Operating Income Before Income Taxes 779,293 117.220 16.489 913,002 of $56.409.000 and in Long-Term Debt and Capital Lease Obligations due Capital Expenditures 1.116,040 104.049 47.418 1.267,507 one year of $1.928,000. . ,.-: .. : ....... ** December 31, ,_ '?:ffie following schedule shows the composition of rent Net Utility Plant 7,536,326 803,262 8,339,588 expense included in Operating Expenses:

Gas and Oil Exploration Plant 308,351 308,351 other Corporate Assets 1.123,051 439,586 23.714 1.586.351 (Thousands of Dollars) Tota I Assets $8,659,377 $1,242,848

$ 332,065 $10,234.290 For the Years Ended December 31. 1986 1985 1984 Interest on Capital Lease Obligations

$ 6,966 $ 7,344 $ 7,533 Amortization of Utility Plant under Capital Leases 2,645 3,448 2,942 For the Year Ended December 31. 1984 Net minimum lease payments (Thousands of Dollars) Electric Gas Other Total relating to Capital Leases 9,611 10,792 10.475 Operating Revenues $2,816,241

$1,379,883 83,373 $ 4,279.497 Other Lease payments 14,172 15,569 16,514 Eliminations Total Rent Expense $23,783 $26,361 $26.989 (lntersegment Revenues)

(72,125) (72.125) Total Operating Revenues 2,816,241 1.379,883 11.248 4.207,372 Depreciation and Amortization 159.512 51.800 35.403 246.715 Operating Income Before Income Taxes 753,669 101.275 18,669 873,613 Capital Expenditures 879,458 87,907 52.891 1.020,256 December 31. Net Utility Plant 6,797.809 752,480 7,550,289 Gas and Oil Exploration Plant 305,999 305,999 other Corporate Assets 1.238,501 416.719 11.814 1,667,034 Total Assets $8,036,310

$1,169,199

$ 317.813 $ 9,523,322 44

,.,,_ 11 Jointly-Owned Facilities Enterprise's subsidiaries have ownership interests and are responsible for providing their share of the necessary financing for the following jointly-owned facilities. (Thousands of Dollars) Ownership Plant Interest Coal Generating Conemaugh 22.50% Keystone 22.84% Nuclear Generating Peach Bottom 42.49% Salem 42.59% Hope Creek 95.00% Nuclear Support Facilities Various Pumped Storage Generating Yards Creek 50.00% Transmission Facilities Various Merrill Creek ReseNoir 16.19% Linden Synthetic Natural Gas 90.00% Gas and Oil Exploration Plant (Primarily jointly-owned)

Various 12 Selected Quarterly Data (Unaudited)

• The information shown below in the opinion of . Enterprise includes all adjustments, consisting only of normal recurring accruals, necessary to a fair Calendar Quarter Ended March 31, (Thousands where applicable) 1986 1985 1986 Operatir;ig Revenues $1,314,667

$1,286.229

$1,007,304 Operating Income 186,132 182,286 155,142 NetJricome

$ 161,686 $ 143,095 $ 133,050 Ear11fi;lgs*per Share of Common Stock $1.23 $1.21 $1.00 Average Shares of Common Stock Outstanding 131,754 117,889 132,795 All amounts reflect the share of jointly-owned projects and the corresponding direct expenses are included in dated Statements of Income as an operating expense. Plant In SeNice s 74,121 74,311 514,907 797,616 67,724 18,718 135,502 66,754 296,520 Accumulated Depreciation s 22,807 21,028 175,769 208,649 6,429 5,157 17,558 52,852 183,286 Plant Under Construction s 5,564 1,717 23,202 20,919 3,808,184 76 375 374 14,940 45,806 presentation of such amounts. Due to the seasonal nature of the utility business, quarterly amounts vary significantly during the year. June 30, September 30, December 31, 1985 1986 1985 1986 1985 $ 942,930 $1,057,678

$1,062,680

$1,118,767

$1,136,502 139,195 192,891 172,020 143,119 144,268 $ 118,184 $ 174,888 $ 126,498 $ (91;161) $ 11,855 $.98 $1.31 $1.03 $(.68) $.09 121,038 133,648 122,329 134,327 128,010 Prior quarters restated to reflect the adoption of SFAS 90 and the consolidation of wholly-owned subsidiaries.

45 CONSOLIDATED FINANCIAL STATISTICS Public Service Enterprise Group Incorporated (Thousands of Dollars where applicable) 1986 1985 Condensed Consolidated Statements of Income (A) Amount % Amount % Operating Revenues Electric $ 3,156,010 70 $ 3,000,564 68 Gas 1,324,690 30 1,408,490 32 Other 17,716 19,287 Total Operating Revenues 4,498,416 100 4,428,341 100 Operating Expenses Operation Fuel for Electric Generation and Interchanged Power-net 1,033,371 23 965,966 22 Gas Purchased and Materials for Gas Produced 692,224 15 757,976 17 Other 607,301 14 567,698 13 Maintenance 254,256 6 291,940 7 Depreciation and Amortization 272,150 6 268,179 6 Amortization of Property Abandonments and Write-Down 71,232 1 55,263 1 Taxes Federal Income Taxes 270,783 6 273,119 6 New Jersey Gross Receipts Taxes 563,518 13 557,270 13 Other 56,297 1 53,161 1 Total Operating Expenses 3,821,132 85 3,790,572 86 Operating Income Electric 602,801 13 547,343 12 Gas 67,664 2 80,443 2 Other 6,819 9,983 Total Operating Income 677,284 15 637,769 14 Allowance for Funds Used During Construction (Debt and Equity) 241,317 5 195,871 4 Other Income-net 10,840 458 Application of SFAS 90 Disallowed Plant Costs and Abandonments-net (295,244)

(6) ( 109,717) (2) Related Income Taxes 111,418 2 24,799 l,nterest Charges (315,780)

(7) (289,546)

(6) <8referred Stock Dividend Requirements of PSE&G (51,372) (1) (60,002) ( 1) :.Net Income $ 378,463 8 $ 399,632 9 * . Shares of Common Stock Outstanding (Thousands)

End of Year 134,882 131,699 Average for Year 133,140 122,344 Earnings per average share of Common Stock $2.84 $3.27 Dividends Paid per Share $2.93 $2.81 Payout Ratio 103% 86% Rate of Return on Average Common Equity 10.56% 12.27% Book Value per Common Share $26.89 $26.81 Utility Plant $11,437,196

$10,842, 182 Accumulated Depreciation and Amortization of Utility Plant $ 2,692,759

$ 2,502,594 Total Assets $10,577,822

$10,234,290 Consolidated Capitalization (A) Mortgage Bonds of PSE&G $ 3,100,210 41 $ 2,945,723 40 Debenture Bonds of PSE&G 210,910 3 218,918 3 Other Long-Term Debt 25,000 Total Long-Term Debt 3,336,120 44 3,164,641 43 Other Long-Term Obligations of PSE&G 56,409 1 58,337 1 Preferred Stock of PSE&G with Mandatory Redemption 65,000 1 65,000 1 Preferred Stock of PSE&G without Mandatory Redemption 554,994 7 554,994 7 Common Stock 2,632,662 34 2,535,687 34 Retained Earnings 993,836 13 1,013,285 14 Total Common Equity 3,626,498 47 3,548,972 48 Total Capitalization

$ 7,639,021 100 $ 7,391,944 100 Prior years restated to reflect the adoption of SFAS 90 and the consolidation of wholly-owned subsidiaries.

A. See Management's Discussion and Analysis of Financial Condition and Results of Operations.

Organization and Summary of Significant Accounting Policies and Notes to Consolidated Financial Statements.

46

,. Amount $2,816,241 1,379,883 11,248 4,207,372 872,805 758,627 545,737 270 359 246,715 58,975 263,270 529,654 51,930 3,598,072 527,625 70,513 11,162 609,300 158,792 2,674 (5,016) 2,172 (280,737) ( 60,221) '.$ 426,964 112,563 108,913 $3,92 $2,70 69% 15.19% $26.46 $9,870,429

$2,320,140

$9,523,322

$2,877,518 225,825 4,500 3,107,843 122,947 137,750 554,994 2,032,665 963,573 2,996,238

$6,919,772 1984 % 67 33 100 21 18 13 6 6 1 6 13 1 85 13 2 15 4 (7) (2) 10 42 3 45 2 2 8 29 14 43 100 Amount $2,570,457

$ 1,392,475 16,316 3,979,248 868,977 815,996 518,209 239 017 228,264 49,040 197,833 513,760 45,696 3,476,792 421,364 72,586 8,506 502,456 128,592 4,108 32,499 (13,333) (245,377)

(58,234) 350,711 102,858 97,467 $3.60

$2.62 73% 14,03% $25.61 $9,017,951

$2,214,135

$8,472,538

$2,452,954 231,945 2,684,899 119,815 139,500 554,994 1,819,082 831,815 2,650,897

$6,150,105 1983 % 65 35 100 22 20 13 6 6 1 5 13 1 87 11 2 13 3 1 (6) (2) 9 40 4 44 2 2 9 30 13 43 100 Amount $2,543,191

$ 1,330,785 20,191 3,894,167 959,382 774,634 468,001 220 725 220,465' 43,345 185,588 514,266 41,325 3,427,731 383,213 71,246 11,977 466,436 91,427 5,616 34,060 (13,968) (220,652)

(53,865) 309,054 94,845 89,233 $3.46 $2.53 73% 13,88% $24.86 $8,165,130

$2,046,372

$7,780,773

$2,341,142 238,640 2,579,782 118,419 111,250 554,994 1,637,621 737,294 2,374,915

$5,739,360 1982 % 65 34 1 100 25 20 12 6 6 1 4 13 1 88 10 2 12 2 1 (6) (1) 8 41 4 45 2 2 10 28 13 41 100 Amount $2,322,042

$ 1,149,610 18,419 3,490,071 1,059,539 . 641,796 400,468 192 917 208,201 15,362 127,661 462,095 16,346 3,124,385 288,087 66,180 11,419 365,686 95,679 4,362 (133,107) 54,200 (201,590)

(51,538) 133,692 86,089 80,962 $1,65 $2.44 147% 6,60% $24.28 $7,385,315

$1,877,815

$7,113,764

$2,140,835 269,268 720 2,410,823 60,086 77,913 554,994 1,450,439 656,437 2,106,876

$5,210,692

--1981 % 67 33 100 31 18 12 6 6 4 13 90 8 2 10 3 (4) 2 (6) (1) 4 41 5 46 1 2 11 28 12 40 100 Amount $1,316,077

$ 553,458 3,093 1,872,628 484,194 260,306 226,722 99677 133,970 1,996 100,821 249,356 26,210 1,583,252 236,359 52,079 938 289,376 43,547 1,716 235 (130,615)

(41,257) 163,002 58,976 58,308 $2,80 $1,78 64% 11.21% $25.50 $5,255,286

$1,194,467

$4,742,341

$1,549,579 341,511 3,120 1,894,210 35,000 524,994 926,999 594,308 1,521,307

$3,975,511

---1976 % 70 30 100 26 14 12 6 7 5 13 1 84 13 3 16 2 (7 (2 9 39 9 48 1 13 23 15 38 100 ) ) 47 OPERATRNG STATISTICS Public Service Electric and Gas Company % Annual Increase (Decrease)-1986 compared with (Thousands of Dollars where applicable) 1986 1985 1985 1976 Electric Revenues from Sales of Electricity Residential

$ 971,236 $ 918,911 5.69 8.15 Commercial 1,333,144 1,236,027 7.86 10.88 Industrial 782,008 774,963 .91 7.84 Public Street Lighting 43,726 43,786 (.14) 5.39 Total Revenues from Sales to Customers 3,130,114 2,973,687 5.26 9.09 Interdepartmental 1,927 1,877 2.66 1.97 Total Revenues from Sales of Electricity 3,132,041 2,975,564 5.26 9.09 Other Electric Revenues 23,969 25,000 (4.12) 23.79 Total Operating Revenues $ 3,156,010

$ 3,000,564 5.18 9.14 Sales of Electricity

-megawatthours Residential 8,726,769 8,390,658 4.01 1.24 Commercial 14,118,028 13,313,639 6.04 4.03 Industrial 10,134,327 10,290,711 ( 1.52) (.33) Public Street Lighting 295,639 300,612 (1.65) 1.33 Total Sales to Customers 33,274,763 32,295,620 3.03 1.76 Interdepartmental 23,790 24,888 (4.41) (3.79) Total Sales of Electricity 33,298,553 32,320,508 3.03 1.75 Megawatthours Produced, Purchased and Interchanged

-net 36,033,414 34,869,192 3.34 1.72 Load Factor 53.2% 51.6% Capacity Factor 33.0% 31.3% , Heat Rate -Btu of fuel per net kwh generated 10,716 10,692 .22 11.55 Net Installed Generating Capacity at December 31 -megawatts 10,032 9,007 11.38 1.39 Net Peak Load -megawatts ( 60-minute integrated) 7,735 7,721 .18 2.25 **Temperature Humidity Index Hours 14,934 15,720 (5.00) 1.63 -*Average Annual Use per Residential Customer -kilowatthours 5,650 5,494 2.84 .46 :*Meters in Service at December 31 -Thousands 1,812 1,788 1.34 .66 :,Gas *'Revenues from Sales of Gas Residential

$ 754,785 $ 751,339 .46 8.22 Commercial 390,811 407,073 (3.99) 10.75 Industrial 171,860 242,767 (29.21) 9.66 Street Lighting 355 372 (4.57) 8.36 Total Revenues from Sales to Customers 1,317,811 1,401,551 (5.97) 9.09 Interdepartmental 2,849 1,321 115.67 19.59 Total Revenues from Sales of Gas 1,320,660 1,402,872 (5.86) 9.11 Other Gas Revenues 4,030 5,618 (28.27) 13.37 Total Operating Revenues $ 1,324,690

$ 1,408,490 (5.95) 9.12 Sales of Gas -kilotherms Residential 1,065,630 1,019,850 4.49 .19 Commercial 644,450 634,059 1.64 3.23 Industrial 413,072 468,489 (11.83) 2.98 Street Lighting 680 736 (7.61) 5.74 Total Sales to Customers 2,123,832 2,123,134

.03 1.54 Interdepartmental 5,498 2,540 116.46 12.04 Total Sales of Gas 2,129,330 2,125,674

.17 1.56 Gas Produced and Purchased

-kilotherms 2,212,175 2,218,818

(.30) 1.56 Effective Daily Capacity at December 31 -kilotherms 20,899 19,990 4.55 .72 Maximum 24-hour Gas Sendout -kilotherms 14,871 17,994 ( 17.36) 1.51 Heating Degree Days 4,699 4,764 ( 1.36) ( 1.29) Average Annual Use per Residential Customer -therms 876 853 2.70 (.53) Meters in Service at December 31 -Thousands 1,448 1,422 1.83 .67 48 1984 s 883.652 1.111,175 749,725 42.164 2 786 716 1,810 2.788.526 27.715 s 2.816.241 8.373.471 12.452.020 10.444.412 301.702 31,571.605 25,796 31.597.401 34,178,862 52.4% 32.6% 10.616 8,999 7.422 16.677 5.543 1.769 s 717.286 393, 197 263.080 369 1,373,932 1,682 1,375,614 4,269 s 1,379,883 1.019,025 628.855 495.719 339 2,143,938 3.377 2.147,315 2.249,352 19.856 14,927 4.743 863 1.404 1983 s 829.967 984.499 686,880 38,672 2 540 018 1,863 2.541,881 28.576 s 2,570.457 8.402.397 11.753.667 10.283.784 302.053 30.741,901 27.800 30.769.701 33.391.011 52.6% 31.6% 10.717 8.999 7.244 17,262 5.602 1.757 s 746.200 396,159 246.408 358 1,389.125 1,011 1.390,136 2.339 s 1.392.475 995,686 596,868 460.601 327 2.053.482 1.857 2.055.339 2.151.417 19.129 15.612 4,677 850 1,392 -1982 s 791 ,2 79 981.795 716,662 37.809 2 527 545 1,709 2.529.254 13,937 s 2.543,191 7.686.548 11.114,655 10.017,613 301.603 29,120.419 25.154 29.145.573 31.563.231 51.2% 34.7% 10.677 8,995 7,042 12.155 5.156 1,746 s 716.308 371.027 241.437 350 1.329.122 1,068 1.330.190 595 s 1.330.785 994,647 581.739 465,835 331 2.042.552 2.090 2,044,642 2,148,839 19,139 16.201 4.820 853 1,384 1981 s 728,642 871.377 684,976 33.249 2 318 244 1,612 2.319.856 2.186 s 2.322.042 7.795,988 10,940,609 10,923.042 275.489 29.935.128 25.567 29,960,695 32.204,191 52.3% 33.2% 10,725 9.101 7.034 15.494 5.261 1.739 s 604.521 302.281 240.711 290 1,147,803 1,075 1.148,878 732 s 1.149,610 993.527 555.806 514.136 334 2.063,803 2.430 2.066,233

2. 145,325 19,010 14,812 5.082 857 1,378 --1976 s 443,531 474.791 367.470 25,863 1311655 1.585 1,313.240 2.837 s 1.316.077 7.711,953 9,514,574 10.472.054 259.151 27.957.732 34,996 27,992.728 30.376,187 55.9 32.0 10,593 8.741 6.190 12.701 5.395 1.697 s 342,524 140.809 68,341 159 551.833 476 552.309 1.149 s 553.458 1 ,045,627 468.761 307.949 389 1 ,822.726 1.764 1.824.490 1.895.041 19.449 12,803 5,349 924 1,354 -% % 49 OFFICERS Public Service Electric and Gas Company E. James Ferland Chai r man of the Board, President and Chief Executive Officer Everett L. Morris Senior Executive Vice President Frederick W. Schneider Executive Vice P r esident -Operations Fredrick R. DeSanti Senior Vice President

-Customer Operations Robert W. Lockwood Senior Vice President

-Administration Stephen A. Mallard Senior Vice President

-Planning and Research Donald A. Anderson Vice P r esi d e nt -In f ormation Systems Lawrence R. Codey Vice President and Corporate Rate Counsel Pierre R.H. Landrieu Vice President

-Engineering and Construction John H. Maddocks Vice President

-Public Affairs Charles E. Maginn, Jr. Vice President

-Human Resources Wallace A. Maginn Vice President and T r easurer 50 Winthrop E. Mange, Jr. Vice President

-Corporate SeNices Corbin A. McNeill, Jr. Vice President

-Nuclear Parker C. Peterman Vice P r esident and Comptroller Louis L. Rizzi Vice President

-Customer and Marketing SeN i ces William Saller Vice President

-Governmental Affairs R. Edwin Selover Vice President and General Counsel Robert S. Smith Vice President and Secretary Robert F. Steinke Vice P r esident -Fuel Supply Rudolph D. Stys Vice President

-Transmission and Distribution Richard A. Uderitz Vice President -P r oduction "' .)t. 9 uso"' '., fet et ....

tJ,ott i S

\..

Public Service Enterprise Group Incorporated E. James Ferland Chairman of the Board. President and Chief Executive Officer Everett L. Morris Vice President Frederick W. Schneider Vice President Wallace A. Maginn Treasurer Parker C. Peterman Comptroller Robert S. Smith DIRECTORS James R. Cowan, M.D. President and Chief Executive Officer. United Hospitals Medical Center. Newark. New Jersey. -Member of Finance Committee and Nominating Committee.

T.J. Dermot Dunphy President.

Chief Executive Officer and director.

Sealed Air Corpcration (manufactures protective packaging products and systems).

Saddle Brook. New Je r sey. -Member of Nominating Committee and Organization and Compensation Committee.

Robert R. Ferguson, Jr. President.

Chief Executive Officer and director.

First Fidelity Bcncorpcration and Chairman of the Board and director.

First Fidelity Bank. National Association.

both of Newark. New Jersey. -Member of Finance Committee and Organization and Compensation Committee.

E. James Ferland Chairman of the Board. President and Chief Executive Officer of the Company. -Chai rman of Executive Committee and member of Finance Committee.

Irwin Lerner President.

Chief Executive Officer and director.

Hoffmann-La Roche Inc. (manufactures prescription pharmaceuticals.

vitamins and fine chemicals and provides diagnostic products and seNices).

Nutley, New Jersey. -Membe r of Audit Committee.

Executive Committee and Organization and Compensation Committee.

William E. Marfuggi Chairman of the Board and director.

Victory Optical Manufacturing Company (manufactures ophthalmic frames) and Chairman of the Board and director.

Plaza Sunglasses.

Inc. (manufactures sunglasses).

both of Newark. New Jersey. -Member of Audit Committee and Finance Committee.

Everett L. Morris Vice President of the Company. -Chai rman of the Finance Committee and member of Executive Committee.

Marilyn M. Pfaltz Partner of P and R Associates (public relations and publicity specialists).

Summit. New Jersey. -Membe r of Audit Committee and Nominating Committee.

James C. Pitney Partner in the law firm of Pitney. Hardin. Kipp & Szuch. Newark and Morristown.

New Jersey. -Chairman of Audit Committee and member of Organization and Compensation Committee. Kenneth C. Rogers President.

Stevens Institute of Technology.

Hoboken. New Jersey. -Chairman of Nominating Committee and member of Organization and Compensation Committee.

Robert I. Smith Retired Chairman of the Board of Public SeNice Electric and Gas Company. -Member of Finance Committee and Nominating Committee.

Harold W. Sonn Retired Chairman of the Board of the Company. -Member of Executive Committee and Finance Committee.

Robert V. Van Fossan Chairman of the Board. Chief Executive Officer and director.

The Mutual Benefit Life Insurance Company, Newark. New Jersey. -Chairman of Organization and Compensation Committee and member of Executive Committee and Finance Committee.

Josh S. Weston Chairman of the Board. Chief Executive Officer and director.

Automatic Data Processing.

Inc .. Roseland.

New Jersey. -Member of Audit Committee and Organization and Compensation Committee.

51 CORPORATE AND STOCK INFORMATION Additional Reports Available

-Form 10-K Stockholders or other interested persons wishing to obtain a copy of Enterprise's or PSE&G's 1986 Annual Report to the Securities and Exchange Commission, filed on Form 10-K. may obtain one without charge by writing to the Investor Relations, Public Service Electric and Gas Company. P.O. Box 570, T6B, Newark. N.J. 07101 (telephone 201-430-6503).

The copy so provided will be without exhibits.

Exhibits may be purchased for a specified fee. Financial and Statistical Review A comprehensive statistical supplement to this report. containing financial and operating data will be available this Spring. If you wish to receive a copy, please write to the Manager-Investor Relations, Public Service Electric and Gas Company, P.O. Box 570, T6B. Newark, N.J. 07101 (telephone 201-430-6503).

Transfer Agents All Stocks, Morgan Shareholder Services Trust Company. 30 \/\/est Broadway, New York. N.Y. 10015 Stockholder Services.

Public Service Enterprise Group Incorporated 80 Park Plaza, P.O. Box 1171 Newark. N.J. 07101-1171 Registrars All Stocks, First Fidelity Bank, N.A., New Jersey 765 Brood Street. Newark. N.J. 07101 Morgan Shareholder Services Trust Company. 30 West Brocdway.

New York. N.Y. 10015 Stock Exchange Listings Common: New York Stock Exchange Philadelphia Stock Exchange London Stock Exchange Preferred of PSE&G: New York Stock Exchange Common Stock First Quarter Second Quarter Third Quarter Fourth Quarter "All-t i me market price record 52 High 38 1/a 38 3,1,, 48%* 4 3 3/a Low 30 3/,i 34% 36% 39 1/a PSE&G Territory Newark----------------------