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Public Svc Enterprise Group Inc 1987 Annual Rept.
	ML18093A740
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Site:	Salem, Hope Creek, 05000000
Issue date:	12/31/1987
From:	Ferland E; PUBLIC SERVICE ENTERPRISE GROUP
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ENTERPRISE PROFILE Eblic Service Enterprise Group Incorporated (Enterprise) is the par-ent holding company of Public Service Electric and Gas Company and five non-utility businesses. **As a diversified corporation, Enter-prise enters new markets when its experience and knowledge can be brought to bear and when market needs and opportunities can be pursued on a sound and profitable basis. These activities are designed to enhance the social and economic well-being of customers, em-ployees, shareholders and the communities in which Enterprise and its subsidiaries do business. **Public Service Electric and Gas Com-pany, the principal subsidiary of Enterprise, is dedicated to providing safe, dependable and competitively priced electric and gas energy to its two million customers . .. Community Energy Alternatives Incor-porated is an investor in and developer of cogeneration and small-power projects. **Public Service Resources Corporation is an CONTENTS investment subsidiary dedicated to earning a reasonable return to enhance Enterprise's overall financial strength and to provide a 1 Financial Highlights 2 Message to Shateholders source of funds for future needs. **Energy Development Corporation 6 Customer Service is involved in gas and oil exploration and production and the acqui-10 Matketing sition of gas and oil reserves. **Enterprise Group Development Cor-14 Energy Supply and Reliability 17 Efficiency and Competition poration, formed in 1987, will engage in real estate investment and 20 Community Service development ventures focusing on income-producing properties in 22 Financial 24 Diversified Operations New fersey. nPSEG Capital Corporation, also formed in 1987, is a 27 M~agement's Discussion and Analysis of Financial Condition funding subsidiary dedicated to providing financing to and raising and Results of Operations required capital for Enterprise and the other non-utility businesses.

30 Organization and Summaty of Significant Accounting Policies 31 Financial Statement Responsibility 32 Consolidated Financial Statements 36 Independent Accountants' Opinion 39 Notes to Consolidated Financial Statements 48 Consolidated Financial Statistics 50 Operating Statistics 52 Officers and Directors Corporate and Stock Information

FINANCIAL HIGHLIGHTS

%

Increase (Thousands of Dollars where applicable) 1987 1986 (Decrease)

Total Operating Revenues $ 4,211,055 $ 4,498,416 (6)

Total Operating Expenses $ 3,388,756 $ 3,821,132 (11)

Net Income $ 520,451 $ 378,463 38 Common Stock (A)

Shares Outstanding-Average (Thousands) 203,873 199, 709 2 Shares Outstanding- Year-end (Thousands) 205,350 202,324 1 Earnings Per Average Share $ 2.55 $ 1.90 34 Dividends Paid Per Share $ 1.99 $ 1.95 2 Book Value Per Share - Year-end $18.54 $17.92 3 Market Price Per Share - Year-end $23.88 $26.83 (11)

Return on Average Common Equity 13.88% 10.56%

Ratio of Earnings to Fixed Charges 3.03 2.38 Ratio of Earnings to Fixed Charges - PSE&G 3.55 2.84 Gross Additions to Utility Plant $ 658,641 $ 1,019,552 (35)

Total Utility Plant $11,998,816 $11,437,196 5 (A) Reflects 3-for-2 common stock split effective July I, 1987.

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

Earnings Per Share Annual Dividend Rate Increased 12 Consecutive Years of Common Stock

!Reflects 3-for-2 common stock split effective July 1, 1987.J

$3.00---------- 1.89 1.81 2.61 1.71 1.76 2.55 2.40 1.63 1.55 2.18 1.47 1.40 1.15 1.20

.... 1.41 1.00 R'l1---ftl!---r:t----l~l---ll'l'!l .70 83 84 85 86 87 Adjusted to reflect 3-for-2 common stock split effective July I, 1987

.-.*

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TO OUR SHAREHOLDERS Eblic Service Enterprise Group posed by the New Jersey Board of strong cash flow to provide a enjoyed a very successful 1987, Public Utilities in the electric solid foundation for the future.

despite the less-than"favorable rate decision. Our common stock divi-hand it was dealt in an electric The standard is regarded dend is secure, and we continue rate case early in the year. by utility analysts as one of the to strive for increases to the ex-Earnings exceeded expecta- most difficult to meet in tent that they do not unduly tions. The dividend paid out was the nation. It requires that, if the restrict future earnings growth.

higher for the 12th consecutive composite capacity factor- or At present, the annual indicated year. Residential and commercial combined output compared to dividend is $2.00 per share, re-sales by Public Service Electric maximum capability- of its flecting the 3-for-2 common and Gas Company (PSE&G) rose nuclear units is less than 60%, stock split that was effective on significantly. PSE&G's three nu- PSE&G should not recover 20% July 1, 198 7.

clear units provided outstanding of the cost of replacement power. In 1987, we increased our service. Our non-utility subsidi- PSE&G operates the Salem investments in three of our non-aries began making their mark on and Hope Creek generating sta- utility subsidiaries - Commu-the bottom line. And, we made tions, which had a combined nity Energy Alternatives substantial headway in our plans capacity factor of 71 % , well Incorporated, Public Service to remain strong but flexible in above the industry average of Resources Corporation, and En-an increasingly competitive mar- 60%. This excellent performance ergy Development Corporation.

ketplace. was offset, however, by extended Our five-year business plans for outages of the Peach Bottom these companies and a newly Financial Performance units in Pennsylvania, which are formed real estate company call Our earnings for 1987 were $2.55 operated by Philadelphia Electric for additional investments in per share of common stock, exceed- Company but in which PSE&G small power projects, gas and oil ing forecasted levels. This very shares ownership. properties, passive financial in-positive aspect of the financial Operation of the Peach Bot- vestments, and real estate to picture was attributable primar- tom units was stopped last March meet our goal of achieving at ily to better sales in the residen- 31 by the Nuclear Regulatory least 10% of consolidated net tial and commercial sec tors of Commission (NRC) as it dealt income from non-utility subsidi-PSE&G's electric and gas markets. with management problems at aries by 1991.

In addition, strong manage- those plants. This long-term For 1987, 3% of net income ment attention to controllable shutdown resulted in lowering came from these activities. At operating costs contributed favor- PSE&G's overall nuclear capacity year's end, we had more than ably to the final results for 1987. factor to about 54 % . We continue $500 million of assets and about Earnings for 1987 were af- to monitor closely Philadelphia $200 million of common equity fected unfavorably, however, by Electric's progress at Peach Bot- in our non-utility businesses.

the impact on PSE&G of the nu- tom and are loaning PSE&G em- While Enterprise's earnings clear performance standard im- ployees to facilitate the return to base in the years ahead will con-service of this important generat- tinue to be from PSE&G, growth ing station. in earnings will come primarily Enterprise is in sound finan- from our non-utility subsidiaries.

cial condition. We have main-tained high credit ratings, a sound capital structure and a

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TO OUR SHAREHOLDERS You can rest assured that man-agement will strive to avoid un-reasonable risks as we operate in the non-regulated arena. How-ever, you should know that we will not hesitate to pursue oppor-tunities which, while challeng-ing our ingenuity, will help Enterprise achieve satisfactory improvements in earnings.

Competition and Deregulation Deregulation of the electric and gas industries continues as an issue for utilities throughout the United States. Changes in the regulatory arena have fostered competition on several fronts.

Nationally, in the gas mar-ketplace, suppliers are dealing

directly with large industrial users, shutting out some local utilities. This can be especially attractive to New Jersey's indus-trial customers because they can avoid paying a state gross receipts and franchise tax, which utilities must collect, and save an imme-diate 13% on their bills. For its part, PSE&G has been able E. James Ferland to keep larger customers on its system by offering alternative sources of supply and transporta-tion services.

In the New Jersey electric marketplace, cogeneration and self-generation are emerging as appealing alternatives for some larger customers, and both forms of customer generation have received support from govern-ment and regulatory officials.

On a national scale, the electric industry is now faced **

3

TO OUR SHAREHOLDERS with the prospect of competitive out strategies necessary to satisfy will aggressively pursue incre-bidding for new power supplies best the needs of customers. A mental growth of both electric by independent producers. finance and diversified busi- and gas sales. The plan empha-Another issue involves the avail- nesses unit will oversee Enter- sizes efforts to clip electric and ability of high-voltage transmis- prise's financial matters and gas peaks to defer new construc-sion lines to those independent manage its non-regulated activi- tion. It also entails programs to producers who want to transmit ties. An external affairs business encourage customers to use en-the electricity they generate in unit will develop communica- ergy during off-peak hours. In one place to a buyer in another tions programs to respond to and addition, the plan promotes the location. help shape such outside influ- development of rate structures These and other develop- ences as legislative action, that will enable PSE&G to com-ments are changing the tradi- environmental protection and pete more effectively across all tional way that utilities have economic development. A corpo- customer segments. The cumula-served their customers. We are rate performance unit will plan tive estimated impact of the plan entering an environment where and monitor our day-to-day busi- is an increase of $270 million in uncertainty will abound, where ness and provide controls to as- electric and gas revenues.

changing regulation and greater sure efficiency. And, a legal unit competition will make a utility will direct corporate governance, Energy Planning such as PSE&G less able to pre- legal matters and claims. We are promoting conservation dict future requirements. Strong emphasis will be and load management activities, This is why, in 1987, we placed on the need for each busi- which, in combination with self-

began developing a strategy that ness unit to perform in a cost- generation by some customers, places a high priority on the abil- effective and accountable man- will reduce peak demand about ity of both Enterprise and PSE&G ner and to encourage and reward 1,185 megawatts by the end of the to adapt quickly and effectively personal initiative and innova- next decade. This will be aug-to evolving market, competitive tion by PSE&G employees. mented by our direct purchase of and regulatory forces. Compensation of the highest 750 megawatts of non-utility managers will hinge on the per- generation. On another front, we Strategy for the Future formance of the business units are extending the lives of existing The essence of our strategic plan- they are helping to direct. generating facilities. Together, ning for PSE&G is, actually, quite A major objective will be to these developments should enable fundamental to any successful curtail the need for future base us to meet our electric customers' business: rate relief by keeping operating requirements without new con-

Make our best effort to find out and maintenance costs well struction of base load generating

what customers want. below the rate of inflation in the facilities through the year 2000.

Provide it to them. years ahead. Another objective There is, however, a serious

Do so at the lowest cost possible. will be to meet PSE&G's future issue that we must monitor as To help accomplish this, we construction expenditures with we address our plans for the fu-have reorganized PSE&G into internally generated cash. ture. It is the nation's growing seven distinct business units. We have implemented a reliance on natural gas and for-These include electric, gas and five-year marketing plan that eign oil to produce electricity. It customer operations business is easy to understand why this is units that will develop and carry happening: Supplies are ample and the current prices of both

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TO OUR SHAREHOLDERS fuels have been fairly attractive 21 % purchased power, 12 % gas, would benefit from our manage-by recent standards. and 4% oil. ment experience and skills.

We must be wary of this In the decades ahead, we

Increase the overall efficiency of situation in light of recent his- must nurture and protect our operations to achieve better tory. The United States currently nuclear fuel and coal sources, productivity and reduce costs.

imports 40% of its oil require- which are plentiful in North This corporate strategy ments, and the figure is heading America and still relatively inex~ focuses largely on understanding higher. Since more than half of pensive. At the same time, we and responding to the needs of the world's proven reserves are in will keep a close watch on energy our customers and on providing a the Middle East, it would not be trends and be prepared to modify fair and reasonable return to our surprising to see OPEC regroup our course, if necessary. We will investors. But, these are not the in response to increasing demand keep you posted. only keys to success.

for oil. Prices would be raised and We continue to manage our supplies would be tightened. Our The Keys to Success businesses in a manner that rec-nation would then face the same As we began 1988, PSE&.G was ognizes a qualified and well-kind of energy and economic well into an activity-by-activity trained workforce as the most squeeze it experienced in the review of the work being carried important ingredient of our fu-1970s and early 1980s. out by some 6,600 management ture success. To this end, we are As a country we must be and other mostly non-union em- striving to provide our employees very careful about overdepen- ployees. In simple terms, the pro- with a safe and healthy work

dence on natural gas for electric gram's aim is to identify, through environment, competitive com-generation. We must earmark our an exhaustive evaluation process, pensation, equal career opportu -

valuable domestic supplies of gas the most efficient way to c_arry out nities, and personal satisfaction.

for heating, cooking and manu- the activities that must continue Finally, we recognize the facturing purposes. to be done and to discontinue value of and encourage good cor-It is apparent to us that those tasks no longer required. porate and individual citizenship.

solid planning for and develop- On a broader scale, Enter- When Enterprise employees take ment of a proper fuel mix is nec- prise has established four specific a strong and active interest in our essary to assure our electric goals for the immediate future: communities, we help improve customers the reliable, adequate,

Achieve sufficient growth in all the places in which we live, and economical supply of energy facets of the Enterprise Group work, and do business. In this required to accommodate their to assure that earnings and divi- way, we demonstrate our com-diverse needs of the future. dends are improved regularly to mitment to the economic, envi-Viewed from our 1988 per- provide adequate compensation ronmental, and social well-being spective, the most likely solution to investors and fair electric and of the state of New Jersey.

to meeting PSE&.G's - and the gas rates for customers.

nation's - electric requirements

Maintain a strong and flexible over the next several decades position in a business environ-appears to be nuclear- and coal- ment and energy marketplace E. James Ferland fueled generation. PSE&.G is that is likely to be highly com- Chairman of the Board, already on the right track. Its petitive and rapidly changing. President and 1987 fuel mix breakdown con- *Broaden the Enterprise Group Chief Executive Officer sisted of 36% nuclear, 27% coal, asset base by responding to business opportunities that February 12, 1988

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CUSTOMER SERVICE Every hour of every day, the peo- Elderly Receive ple of PSE&G put their technical Special Assistance skill, their pride in workmanship, In 1987, PSE&G launched a and their concern at the service Gatekeeper program designed to of customers. This tradition of ensure that senior citizens get service was demonstrated in help when they need it. **The many ways in 1987 among all Gatekeeper program represented classifications of customers. It a first for New Jersey. It was was apparent in new programs introduced in conjunction with designed to protect senior citi- the state Department of Com-zens and low-income residential munity Affairs' Division on customers. And it was evident in Aging. *

Under the Gatekeeper individual acts of kindness and program, PSE&G's customer con-caring on the part of employees. tact employees, such as meter readers and electric and gas servicepersons, have been trained to identify elderly citizens who may be in distress, and make referrals to appropriate social service agencies. The highly suc-cessful program resulted in a total of 214 referrals that averted potentially life-threatening situa-tions. Several other utilities in New Jersey have expressed inter-est in implementing similar programs.** PSE&G also insti-tuted a new campaign to help "The forthrightness with eligible needy customers obtain which Public Service energy assistance and benefits Electric and Gas Company through state and federal pro-grams such as the Home Energy has reached out to help Assistance Program (HEAP) and care for its vulnerable the Lifeline program. *

The elderly customers through customer outreach effort is de-the Gatekeeper program signed to inform needy residen-tial customers about these has been beyond our assistance programs, provide expectation." them with applications and nec-Ann Zahara essary information about their Director - Division on Aging utility bills, and put them in State of New Jersey Department of Community Affairs contact with social agencies to Trenton, New Jersey speed processing .

6 L_

CUSTOMER SERVICE

'We wish to express our appreciation for the cooperative effort we have had In dealing with your Company on the Ellls Island restoration."

Howard S. Rosenfield Senior Associate/Project Manager Syska & Hennessy New York City Doing All Jobs Well The measure of the service PSE&G provides is not only taken by how well it performs a big job for one of its major customers.

It's also taken by doing the day-to-day jobs with care and atten-tion to detail. Customers continue to commend employees for doing these jobs well, like replacing the mulch in a flower garden after installation of a new residential gas service line, or taking time and initiative to locate a hard-to-find part that will safely keep an aging gas range in service, or climbing down into a wet manhole to res-cue a frightened dog and reunite a family with its beloved pet.

Fast Action keeps GM in Production When General Motors faced po-tentially devastating delays in

'When our electric starting up the newly refurbished equipment failed and we assembly lines at its sprawling thought we were faced with a long power outage, you guys saved our necks by getting us back in operation within 90 minutes."

Ronald f. Mount Ronald J. Mount and Company Jersey City, New Jersey **7

CUSTOMER SERVICE Linden plant, PSE&G marketing and electric transmission and distribution personnel worked out a way to get production started on time. *

The plant had been retooled and modernized to build Chevrolet Corsica and Beretta models, new GM entries in the highly competitive sports sedan market. When one of the plant's 26,000-volt transformers failed, however, it looked like the plant would be idled for a consid-erable amount of time. *

PSE&G responded quickly by arranging for the lease, delivery and onsite installation of a mobile substa-tion that allowed production to start up on schedule.

Comprehensive Training Supports Employees PSE&G is providing employees with the technical and interper-sonal skills needed to keep pace with changing working and busi-ness conditions through new and upgraded training programs and facilities. In 1987, work began on a new electric transmission and distribution training center in Edison that is expected to be completed and operational in "PSE&G's fast a11ctno11"11 i1r11 1988. New training programs suppiy!!'llg aurn eme~gelnlcy have been implemented that m'llit moillli!e s11JJbs1ta!ftaon arnowed OIUI~ [pl~alJ'ilt to sitay ope1!11 al1llll'I sllJlccessfl!.ll~!y Ha!.llnclhl Chev~o!et's i'ilew Corsica am!I D11ew IBeiretta pmllll1U1cfti!1111e."

Thomas[. Noble Administrator - Engineering

- General Motors Corporation 8 Linden, New Jersey

CUSTOMER SERVICE "Our gas service contracts

- and we sold over 100,000 this year -

give our customers low stress the importance of manual cost parts Insurance and skills, leadership, flexibility, and peace of mind." individual responsibility in pro-viding the highest level of cus-Michael McCann Dispatching Assistant tomer service possible.

"Without hesitation, the entire crew came to the aid of two women trapped In the car . ..

provided first aid ... assisted In traffic control ... used their equipment to make It possible to move the Injured parties."

Thomas P. Dugan Director of Public Safety Glen Ridge, New Jersey Employees Set Record for Safety PSE&G employees demonstrated their dedication to serving cus-tomers safely by compiling their best-ever safety record. There were 16% fewer on-the-job acci-dents in 198 7 than in 1986, and the number of these accidents was the lowest in PSE&G's his-tory. **Another milestone was reached during the year when the corporate drug policy, in effect since 1983, was formally accepted by PSE&G's largest union, the International Brotherhood of Electrical Workers. The drug program is designed to ensure a safe, drug-free work environment for both employees and customers .

9

MARKETING Listening and analyzing. Asking the right questions. Innovating.

Creating. Finding solutions.

These are the hallmarks of PSE&G's aggressive, customer-or-iented program to successfully market its products and services in an environment that is becom- 'We are strengthening our ing increasingly deregulated and customer-driven culture.

competitive. **This focus on the Through Increased contact marketplace and on the needs of and expanded research, its distinct customer segments prompted the corporate reorgani- customer energy needs zation of PSE&G and the creation will be met more of the separate business units for efficiently than ever."

electric, gas, and customer opera-Fredrick R. Desanti tions. **A comprehensive mar- Senior Vice President keting program will identify the Customer Operations needs of customers in all market and the expert in the energy field.

segments, and the development .. In 1987, PSE&G introdu~ed a and delivery of products and five-year marketing plan that is services geared to meet those expected to generate at least $270 million in additional electric and "We are leveraging our opportunities by gas revenues.

utlllzlng telemarketlng, cooperative advertising and telecomputer equipment PSE&G Experts Keep and techniques."

Project on 'Irack Richard Comerford General Manager When Cali Associates, one of Marketing Services New Jersey's most respected commercial and residential de-needs. **For PSE&G, this will velopers, was considering its first mean a constant cycle of research housing rehabilitation project in and analysis to develop a fund of Newark, it faced a major hurdle knowledge and a fluency with in providing the housing at prices conditions that will result in the low- and middle-income residents recognition of PSE&G as a full-service, efficient problem-solver could afford. *

PSE&G's market-ing personnel worked closely with the developer and devised an overall plan that included all of the building's energy systems.

Providing the right mix of elec-tric and gas equipment meant

10

MARKETING "PSE&G gave us their top marketing staff and showed us how to rehabilitate old apartment units - at a profit to all concerned."

Al Spring Cali Associates Macey Bullock Partner with Cali Associates

11

_J

MARKETING "A new marketing emphasis has been put on architectural lighting - a field wide-open for expansion."

Anita L. Fleischer District Manager Marketing Services

12

MARKETING keeping costs reasonable and the ence at Liberty State Park in Jer-

"The Gallup Survey showed the vast project on track. The 67-unit sey City on October 6 kicked off

. majority of people questioned were condominium development should the Urban Initiatives campaign extremely satisfied with our service be ready for occupancy in 1988. that is calling attention to the and our employees."

potential for growth in New Jer-Charles Ttavisano Residential Programs General Manager sey's major cities, most of which Build Company Image Customer Services are in PSE&G's service territory.

PSE&G enhanced its reputation New Program Promotes The centerpiece of the campaign as the knowledgeable leader in Development in Cities is a full-color brochure that high-the residential market through PSE&G, in 1987, began an Urban lights the renewed economic builder assistance programs and Initiatives program designed to activity that's already taking by educating leading real estate encourage revenue-producing place in urban areas, and the firms on available energy sys- development and economic ac- various state, municipal, and tems. Information was brought tivity in major cities it serves private enterprise programs, in-directly to consumers through a and implemented marketing cluding PSE&G's area develop-series of home heating fairs and programs promoting safety, secu- ment rate, which are supporting expos that were attended by more rity and aesthetic lighting. *

A development.

than 6,000 persons statewide. *

highly successful news confer-Aggressive use of the latest tele-marketing and telecomputing technology helped sell 12,000 residential oil-to-gas conversions in 1987, accounting for $10 mil-lion of additional revenues. An-other 12,000 conversions are expected in 1988 which will result in $10 million of additional revenues. PSE&G also actively promoted residential gas service contracts and approximately 100,000 were sold during the year.

"New Jersey's development

- with the help of PSE&G's promotional efforts - Is beginning to center on urban areas where the potential for growth is enormous."

Mayor Melvin R. Primas, fr.

Camden

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ENERGY SUPPLY AND RELIABILITY Eviding an ample, safe, and Innovative Plan Overcomes PSE&G Capacity Plan reliable supply of electric and gas Loss of Transmission Line 1987to 2000 (Megawatts) energy is at the core of PSE&G's An incident in the Delaware service to customers. In 1987, River produced perhaps the most PSE&G maintained this commit- severe challenge. On the after-ment through the ingenuity and noon of March 1, the Seapride II, dedicated effort of employees an empty oil tanker on the way who helped meet a number of out to sea, rammed one of five extraordinary challenges. 3 79-foot transmission towers carrying the 500,000-volt Hope Creek-Keeney transmission line o~~~~~~~~~~--'

across the river. The collision 1987 2000 destroyed the vital transmission D Total Capacity-including 750 mw of non-utility link.** Within days of the acci- generation dent, however, PSE&G engineers *Estimated peak load without conservation and load had developed a plan to mitigate management the effects of the line's loss il Planned Peak Demand through a specialized relay and completed within three weeks of supplemental control system the target date.** The maxi-that protected overall system mized output from Salem and stability. The plan permitted the Hope Creek, plus performance by Salem and Hope Creek nuclear coal, oil and gas turbine generat-plants to run at 95% of capacity, ing units, helped meet the instead of a reduced output of record-setting customer demand 68%. With PSE&G employees during July's brutally hot weather.

actively supporting Delmarva Power & Light Co., in construc- Dedicated Action Restores tion management, design, and Storm Damage equipment procurement, the Transmission and distribution monumental task of rebuilding crews performed admirably in the Hope Creek-Keeney line was restoring service to storm-dam-aged areas.** In July, a prolonged cycle of blistering hot, humid "About 85,000 customers weather produced records for had their service restored peak demand for electricity on within 24 hours2.777778e-4 days 0.00667 hours 3.968254e-5 weeks 9.132e-6 months following four consecutive days, culminat-two violent storms. ing in an all-time peak demand record of 8,173 megawatts on July PSE&G also sent crews

24. Twice during the month, the to other utilities in the heatwave spawned violent northeast to help out." storms and they interrupted elec-Robert G. Dunn tric service to about 85,000 cus-Assistant Division Manager tomers. Most had power back Camden Electric Transmission within 24 hours2.777778e-4 days 0.00667 hours 3.968254e-5 weeks 9.132e-6 months , a remarkable

14 and Distribution

ENERGY SUPPLY AND RELIABILITY accomplishment considering the amount and nature of the damage.

Nuclear Plants Operated by PSE&.G Perform Well The three nuclear generating plants operated by PSE&G -

Salem 1 and 2 and Hope Creek-performed well during the year, operating at a combined capacity factor of 71 % , well above the industry average. Hope Creek followed its record fuel-loading, startup and power ascension program with a capacity factor of 77% in its first year of commer-cial operation. *

PSE&G also owns an interest in the two Peach Bottom nuclear units located in Pennsylvania and operated by Philadelphia Electric Company.

As a result of a shutdown ordered by the Nuclear Regulatory Com-mission on March 31, 198 7, the Peach Bottom units had a 16%

capacity factor for the year. This resulted in an aggregate capacity factor of 54% for the five nuclear units in which PSE&G shares ownership.

Refurbishment of Fossil Plants Continues New microprocessor-based controls and fiber-optics communications "Even under very difficult links that enhance reliability and efficiency are being installed at circumstances, we brought fossil-fuel generating stations and the Hope Creek-Keeney at switching stations and sub-line back In service within stations in the transmission and*

three weeks of schedule." distribution system. Other major equipment improvements also are foseph f. Papp, fr.

Supervising Engineer under way at two coal-burning Trenton Electric Transmission generating stations.

and Distribution **

15

ENERGY SUPPLY AND RELIABILITY New Pipeline Will Serve Cogeneration Plant PSE&G completed installation of a new 18,000-foot, 12-inch gas transmission main through the Elizabeth seaport and under Newark Bay to serve a new co-generation facility under con-struction in Bayonne. The main will provide high-pressure natu-ral gas as a primary fuel for the plant. Community Energy Alter-natives Incorporated, an Enter-prise subsidiary, is a partner in the cogeneration project.

PSE&.G Works To A~sure Ample Gas Supply PSE&G also applied its keen knowledge of the natural gas market in a program designed to provide an optimum mix of gas sources that will meet short-term and long-term customer demand at the lowest cost possible. Gas is purchased from five interstate pipeline companies, from Energy Development Corporation, a subsidiary of Enterprise, and from two refineries in New Jersey.

.. In 1987, construction of new gas transmission and distribution facilities and other system im-provements kept pace with grow-

"Our Newport Substation ing demand among residential serving the booming and commerCial customers. In Millstone Township in the Hudson River Waterfront Trenton district, for example, gas will use state-of-the-art transmission and distribution crews computer technology and installed more than 100,000 feet of highly efficient fiber-optics pipe and brought service to 500 communication."

new single-family homes. Approx-imately 700 additional homes in

...

16 Richard Vile Electric Distribution Engineer this municipality will be connected to the system in 1988.

EFFICIENCY AND COMPETITION Lere's no question that in the energy marketplace of today and the emerging, highly competitive marketplace of tomorrow, the ability to focus resources to take advantage of opportunities will be a key element of success.

PSE&G employees are incorporat-ing this quest for efficiency in everything they do, every day.

- In conjunction with the corpo-rate restructuring, PSE&G has begun implementation of a new corporate performance program designed to streamline operations and ensure that the talents of employees are applied only to those activities that are consis-tent with well-defined goals and objectives. **The quest for the competitive edge is evident in aggressive gas acquisition and power purchase programs, in fuel purchasing practices, in better utilization of labor, and in the continued application of labor-saving and cost-cutting computer

Taking advantage of equipment and systems.

wellhead price deregulation and open- "We are studying staff and support functions to more effectively allocate resources vital access transportation, to operations and to Improve the budgeting new gas purchasing process."

opportunities saved $70 fohn Anderson Performance Services Manager million In 1987."

Gas Purchase and Operating Tohn A. Gartman Assistant General Manager Costs Reduced Fuel Supply Continuation of PSE&G's highly successful spot-market gas pur-chases generated $70 million in savings in 1987, and it's expected

17

EFFICIENCY AND COMPETITION

,-- -----**""'- -

--

_ _ _ _ _

_ __._j this activity will continue in Savings Realized on Coal and Fuel Source -

1988. ** PSE&.G also took advan- Electric Generation Nuclear Fuel Purchases tage of continued deregulation in Flexibility in sources of supply the natural gas market by maxi- and the application of new coal-mizing purchases directly from 31%

Nuclear 36%

Nuclear blending processes also are reduc-producers, marketers, and other ing the costs of purchasing coal non-pipeline sources. PSE&.G to generate electricity while expects to translate the increased maintaining PSE&.G's ability to 11,,. °""

26% Coal competition among gas suppliers meet stringent environmental into future benefits for its cus- regulations. **This strategy -

tomers over the long-term. *

28%

Power i I involves a combination of short-Purchases 21%

PSE&.G continued to reduce gas Power Purchases and long-term coal supply agree-operating costs through the auto- ments that will enable PSE&.G to 6% Gas 12% Gas mation and enlargement of me- secure sources of low-sulfur coal 9%0il 4%0il tering and regulating facilities at at favorable costs. A coal-blend-the sites of former gas production 1986 1987 ing program, meanwhile, has plants. Conversion work at the been developed that will enable West End gas plant in Jersey City use of lower-cost coal along with and the Central gas plant in Edi- low-sulfur coal without compro-son was completed in 1987, and mising PSE&.G's rigid quality conversion work is expected to control standards. **On the be completed at Harrison gas nuclear fuel front, PSE&.G in plant, in Harrison, in 1988. These 1987 acquired low-cost foreign gas plant conversions and the retirement of the gas manufac- "A robot used at Salem cost $54,000.

It saved us $650,000."

turing equipment greatly reduce personnel requirements and im- Harry T. Roman Principal Engineer - Research prove PSE&.G's ability to purchase gas from the lowest-cost suppliers. uranium, and through negotia-tion and rescheduling activities with the U.S. Department of Energy, reduced its uranium en-

~7,- * ..* richment charges by $29.6 mil-

\---- -- ,0 s * ~ ,/J.

/u* . - I*

~~.*~~~,-

. -- ~ -

lion. *

PSE&.G increased

,_\_ -*----, - *ijjJ'll purchases of low-cost coal-fired

~~-~ - . r-- --} electricity from the Allegheny I

"Fewer but more powerful Power System and participated in a precedent-setting entitlement computers helped us auction for additional supplies of increase productivity and low-cost coal-fired power. Pur-even reduced our work chase of power from these sources force by 8%." resulted in additional savings in fuel and interchange expenses.

Donald A. Osbourne Shift Supervisor

18 Customer Operations

EFFICIENCY AND COMPETITION l ~- -- . ~ -

"Hope Creek and Salem had a combined capacity factor of 71% - well above the PSE&.G, Unions Agree productivity, more comprehen- national average of 60%."

on New Contracts sive employee training and in-In 1987, PSE&.G successfully creased management flexibility Randal Schmidt Senior Engineer completed negotiations for new to meet changing conditions. Hope Creek Performance two-year agreements with all unions. In addition to providing New Systems Enhance Efficiency employees with equitable wage Development and installation of increases, the new contracts a computerized Executive Infor-include provisions for improved mation System have put up-to-date operational information at the fingertips of PSE&.G executives, facilitating decision-making and improving their ability to man-age critical factors.

19

I I COMMUNITY SERVICE RE&G demonstrates its involve-ment in the communities it serves through a variety of pro-grams that demonstrate a high degree of commitment to good corporate citizenship. Employees supported this policy through their ongoing volunteer efforts and individual acts of courage

~ [>,'\\~ ?Q_~ and heroism. *

PSE&G again took a leadership role in United

?.., \),~\\, r Way fundraising, and employees pledged more than $700,000-L I

~~\-'.

'

an 11 % increase over the 1986 amount - to support the vital t

work performed by the United Way member organizations.

Employees also walked away, literally, with state honors for participation in the 1987 Team-Walk sponsored by the March of Dime's. A total of 569 PSE&G em-ployees raised more than $96,000 "PSE&G helps provide for the fight against birth defects.

leadership in management training to educational E-TEAM Reaches leaders, thereby helping Low-Income Customers the educating process." PSE&G's award-winning E-Team program, which brings energy fohn Griffith conservation information and Manager-Personnel Development materials to low-income cus-tomers through community

This PSE&G person Is a part of the community and responds as such."

Dennis f. Dalton Leonia workshops, continued in1987 with excellent results. As an outgrowth of the program, the conservation department spon-sored two summer youth pro-grams, the Summerscope 87

20

- COMMUNITY SERVICE ff EMS* Si' basketball camp in Camden and the Rory Sparrow Summer Ath-letic League in Paterson. Both activities helped project a posi-tive image for PSE&G while providing a much-needed com-munity service. **Also con-tinuing in 1987 was EPIC-Employees Participating in the Community. Under the program, employees and retired employees volunteered their time to tutor school children, worked with senior citizens and the handi-capped, and performed vital services for non-profit and community organizations. Em-ployees also served on the boards of directors and as executives of a "Our employees make "PSE&G contributes to the ~ealth and welfare of the community with numerous energy-related employees taking leadership roles In presentations to more than agency activities. n 175,000 of our customers Employee Heroism Documents fack A. Sahlman Manager- Community Affait:s - of all ages - every year!" Concern for Others Richard Dwyer The spirit of concern and a will-large number of community Staff Assistant ingness to help were ably demon-organizations. *

PSE&G became

!

Community Affairs strated by employees who came involved in efforts to improve to the aid of persons in distress.

education through MAPS - These acts included rescuing a Management Assistance Program two-year-old boy who was being to the Public Schools - in which attacked by two large dogs; pull-executives are working directly ing accident victims from a with public school systems. Em- twisted pile of auto wreckage and ployees served as volunteer in- large tree limbs while co-workers structors in the Minorities in provided traffic control around Engineering Program sponsored the scene; stopping to aid a by Union County College. woman who had been assaulted and left wandering injured and dazed on the Garden State Park-way, and coming to the assistance of motorists stranded by winter snowstorms.

21

FINANCIAL Ente'Prise maintained itB financial strength during 198 7.

The cost of capital was reduced through the economical refund-ing of more than $300 million of high-cost debt and preferred stock. With PSE&G's nuclear construction program completed, Enterprise generated 100% of utility construction expenditures internally. Enterprise continued to maintain a strong capital structure. The common equity ratio of 50.0% remained above the industry average. New com- 'We have high credit ratings, mon equity of $ 79 million was a strong capitalization, raised through the dividend rein-vestment and various stock pur- high quality earnings and chase plans during 1987. The good cash flow."

plans were revised effective sales. Gas sales, led by increases Everett L. Morris October 1, so that investor con- Senior Executive Vice President in home heating and in the com-tributions are now used to pur- and Chief Financial Officer mercial sector, were up 2.4% in chase Enterprise shares in the 198 7 over 1986 sales. *

Overall open market. PSE&G's earnings- disallowance in 1986 of costs revenues in 1987 were $4.2 bil-to-fixed charges coverage ratio for associated with construction of lion, down 6.4% from 1986 reve-1987 was 3.6 times, which helped the Hope Creek Nuclear Gener- nues of $4.5 billion. Electric to support the maintenance of ating Station. The results were operations accounted for $3.0 high credit ratings for its securi- also affected by reduced allow- billion, or 70.3% of 1987 reve-ties.** Substantial growth in ance for funds used during con- nues, compared to $3.2 billion or sales of electricity and gas by struction (AFDC), and greater 70.2 % of 1986 revenues. The PSE&G, plus successful cost depreciation, both attributable decrease reflects significantly control measures, resulted in to Hope Creek. Earnings from lower recovery of fuel costs better-than-expected earnings. non-utility subsidiaries accounted through a reduction in the leve-

- Consolidated results in 1987 for $17 million, or 3% of the lized energy adjustment clause were $520.5 million, or $2.55 per total, compared to $6 million, or implemented in the February, share of common stock, based on less than 2 % , of the 1986 total. 1987 rate case decision. Gas ac-203.9 million shares of stock counted for $1.2 billion or 29 .0%

outstanding. Earnings for 1986 New Jersey's Economy of 1987 revenues, compared to were $378.5 million, or $1.90 per Boosts Sales $1.3 billion or 29.4% of 1986 share, based on 199.7 million New Jersey's vibrant economy revenues. This decrease reflects shares outstanding. The 65 cents and strong growth in the com- the reductions in the raw mate-per share gain in earnings is prin- mercial and residential sectors rials adjustment charge which cipally attributable to electric spurred an increase in electric became effective in October, base rate relief in 1987 and to the sales in 1987 of 4.3% over 1986 1986 and October, 1987.

22

FINANCIAL Common Stock aggregate capacity factor of 54%

1987 Revenue Dividend Increased for the five nuclear units in The Board of Directors increased Where Where It which PSE&G shares ownership.

the common stock dividend It Came Went This figure was below the 60%

From $.27 payout for the 12th year in a row. Fuel, level required to be met under Purchased The annual dividend is now $2.00 Power&Gas the performance standard, which per share. This reflects the three- is one of the toughest in the na-for-two common stock split $.69 Electric tion. **As a result, PSE&G wrote Revenues .21 effective July 1, 1987. Taxes off $17 million against net income in 1987, amounting to Recovery of Higher .12 5 cents per share of Enterprise Materials&

Fuel Costs Sought Services common stock after the tax In November, PSE&G petitioned I .12 Reinvested effect. **The Peach Bottom units the New Jersey Board of Public .28 in Business remain shut down. The NRC is I

Gas I .10 Utilities (BPU) for an annual Revenues Salaries & not expected to allow their return Wages increase of $215.4 million in .02 Other to service at least until the sum-Revenues electric revenues. The overall request includes a proposed .01 Allowance funds used for I*

.IO Dividends

.08 mer of 1988. Consequently, PSE&G's nuclear capacity factor may also during . Interest

$298.6 million increase in construct10n 1

likely be below 60% in 1988.

PSE&G's levelized energy adjust- $1.00 $1.00 ment clause to be partially offset Gas Rates Reduced by an $83.2 million reduction in PSE&G's gas customers received electric base rates resulting from rate reductions totaling $78.3 lower federal income tax rates Diversified million during the year and now effective in 1988. Customer Base enjoy rates that are the lowest in New Jersey and the lowest they Nuclear Performance Standard Electric Gas Revenues Revenues have been in six years.** The Affects Earnings lower rates, in large measure, Although Salem and Hope Creek 32%

Residential reflect PSE&G's ability to achieve achieved an excellent perfor- 57% cost savings through aggressive Residential mance record in 198 7, PSE&G gas purchase policies, especially incurred a penalty under the on the spot market. * *The overall nuclear performance standard 45% reduction includes a cut of $61 Commercial imposed by the BPU. This is million in the raw materials ad-largely attributable to the ex- 30%

Commercial justment charge implemented in tended outages of two nuclear October, a further $4.0 million units at Peach Bottom that are 2.3%

Indusrrial reduction in the raw materials 13%

operated by Philadelphia Electric Industrial adjustment charge in line with a Company but partially owned by Revenues Revenues revised method of pricing gas

$3.0 Billion $1.2 Billion PSE&G. **For 1987, the two Customers Customers purchased from Energy Develop-Peach Bottom uni ts had a capac- 1.8 Million 1.4 Million ment Corporation, a subsidiary of ity factor of 16%, resulting in an Enterprise, and a $13.3 million reduction in base rates to reflect federal income tax savings. **

23

DIVERSIFIED OPERATIONS "Resources has invested In a variety of business Interests - solar being just one of them - all of which Indicate good earnings prospects."

Eileen Moran Vice President Public Service Resources Corporation

24

DIVERSIFIED OPERATIONS A t the endof 1987, Enterprise had paper mill operated by Lake ple with PSE&G on a longer-term more than $500 million of assets Superior Paper Industries in supply contract to be based on and about $200 million of com- Duluth, Minn. competitive prices for similar mon equity in non-regulated types of gas available to PSE&G.

subsidiaries. The diversified ac- Energy Development The agreement gives PSE&G a tivities are on track to exceed the Corporation (EDC) firm supply of gas while provid-original goal of producing 10% of Because of the relatively de- ing EDC with a market for its Enterprise's net income by 1991. pressed state of the oil and gas production and an additional In 1987, consolidated earnings exploration industry, EDC in source of revenue for reserve from non-regulated businesses 1987 concentrated efforts on replacement through acquisitions accounted for 3 % of Enterprise's developing opportunities that and exploratory drilling. *

Gas-total. Two new subsidiaries were will enable it to acquire proven del Pipeline System Incorporated, established during the year- reserves from other companies. a subsidiary of EDC, has received Enterprise Group Development These efforts resulted in an Federal Energy Regulatory Com-Corporation, a real estate devel- agreement to purchase gas- and mission approval to become an opment company, and PSEG Cap- oil-producing properties located "open access" pipeline. This ital Corporation, which was in the federal offshore waters of allows Gasdel to transact inter-formed to provide financing for the Gulf of Mexico from TXP state business from other compa-the other non-regulated nies in addition to transportation subsidiaries. "This year, new markets opened for Gasdel services it provides PSE&G.

- a subsidiary of EDC. We received authorization to transport gas for not only Public Service Resources Community Energy Alternatives PSE&G, but also for any company Corporation (PSRC) Incorporated (CEA) wanting to use our plpellne transportation At year's end, PSRC had $289 During its second full year of system. This wlll mean new profits In million invested in a well-diver- operation, CEA, in an equal part-the years ahead."

sified portfolio of tax benefit nership with Harbert Cogen, David W. Wohlfarth, President transfers, leveraged leases, com- Energy Development Corporation acquired GWF Power Systems mercial property and marketable Company, Inc. and Combustion Operating Company. The acqui-securities. It provided $12.million Power Company, Inc. (CPC), from sition, scheduled to be consum-of earnings to Enterprise in 1987. Allied Signal. The acquisition of mated in the first quarter of 1988,

- PSRC's portfolio included $27 GWF adds two operating projects will essentially double EDC's million invested in three operat- and eight more under develop-current reserve base. During the ing solar energy plants in Califor- ment to CEA's portfolio. These year, EDC also established a nia; leveraged leases on five projects, located in California, three-year, joint venture drilling airplanes now in service with represent a combined total poten-program with industry partners.

Delta, Continental, and North- tial capacity of 170 megawatts.

Under the program, partner com-west airlines; a leveraged lease on The acquisition of CPC brings panies will finance a portion of three transponder circuits of a CEA to the forefront of fluidized the cost of drilling EDC's explor-communications satellite - bed boiler technology for burning atory wells in exchange for part RCA's SATCOM K2; an invest- solid fuels in an environmentally ownership of the wells.* ii EDC ment in Duquesne Power & Light acceptable manner. **A 17-mega-also reached agreement in princi-Company's Beaver Valley 2 nu- watt, wood-fired plant in Bridge-clear generating plant, and a $39 water, N.H., in which CEA has a million investment in a new 50% equity interest, was com-

25

DIVERSIFIED OPERATIONS "Since October 1985, CEA has closed on six cogeneration projects totalling over 240 megawatts of capacity-ued on a 15-megawatt, $48 mil- development businesses, focus-including this wood-fired lion hydroelectric project on the ing on income-producing proper-plant in Bridgewater, New Kennebec River in Maine, in ties in the New Jersey region.

Hampshire which went in which CEA owns a 16% interest.

"In 1988, Enterprise Group Development service during 1987." CEA also purchased a 19% equity Corporation wlll be an active participant In interest in a 23-megawatt, $51 Arthur S. Nislick the lndustrlal and commercial real estate million project in Maine that President markets In the New Jersey Region."

Community Energy Alternatives uses peat as a fuel. CEA has other fohn H. Maddocks prospects totaling more than 300 Executive Vice President pleted and went into operation megawatts of potential capacity Enterprise Group Development Corporation during the year, and construction under development. * *These of a 165-megawatt combined small-power projects are primar- PSEG Capital Corporation cycle cogeneration plant in ily funded with project financing, (PSEGCC)

Bayonne, N.J., in which CEA has highly leveraged with non-re- PSEG Capital Corporation began a 35 % equity partnership inter- course debt. As a result, CEA's operations in 1987. It has author-est, was approximately 75% com- investments at the end of 1987 ity to issue up to $250 million of pleted at year's end. Construction totaled a modest $28 million. commercial paper, currently began during the year on a rated Al/pl. At year's end, it had 15-megawatt, $29 million hydro- Enterprise Group Development $135 million of commercial paper electric project on the Cone- Corporation (EGDC) outstanding. This subsidiary will maugh River in Pennsylvania, in Enterprise Group Development also issue longer-term securities, which CEA has a 50% equity Corporation was formed in the all for the purpose of financing interest, and construction contin- last quarter of 1987 and will Enterprise's non-utility operations.

begin full operations in 1988. It

26 will engage in real estate and

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Following are the significant factors affecting the financial New Jersey's economy. Average number of customers rose condition of Enterprise and its subsidiaries as reflected in their 1.5%. A record 60-minute net peak load of 8,173 megawatts consolidated results of operations. This discussion refers to the and a record day's output of 156,207 megawatthours were consolidated financial statements and related notes of Enter- established on July 24, 1987.

prise and should be read in conjunction with such statements 1986 - Electric kilowatthour sales increased 3.0%.

and significant accounting policies. Growth in Residential and Commercial sales accounted for the increase. Temperature humidity index hours during the height Earnings and Dividends of the air-conditioning season, June to August, were up 6.0%

Earnings per share of common stock were $2.55 for 198 7, an over 1985, in addition there was a 1.3% increase in average increase of 65 cents or 34.2% from 1986, reflecting the 3-for-2 number of customers. The ongoing weakness in the nation's common stock split effective July 1, 1987. The gain in earnings manufacturing sector adversc:;ly affected Industrial sales. A is principally attributable to electric base rate relief in 1987 record 60-minute net peak load of 7,735 megawatts was estab-and to the nonrecurring write-off in 1986 of costs associated lished on July 7, 1986.

with construction of the Hope Creek Generating Station that were disallowed by the New Jersey Board of Public Utilities Gas (BPU). The results were also affected by reduced allowance for Revenues declined 7.9% in 1987 and 5.9% in 1986. The reduc-funds used during construction (AFDC), and greater deprecia- tions in revenues in 1987 are attributable to a decrease in base tion, both attributable to Hope Creek. rates authorized by the BPU which became effective October In addition, 1987 reflects the write-off of approximately 31, 1986. Also, the current cost of gas and total recoveries of gas

$10.5 million, or 5 cents per share of common stock after the costs have decreased in each of the last three years.

tax effect, because the aggregate capacity factor of PSE&G's Gas fuel costs follow amounts recovered through reve-five nuclear units was 53.6%, which is below the 60% limit nues, as permitted by rate orders, and therefore have no direct required to avoid a penalty under the nuclear performance effect on earnings.

standard adopted by the BPU. Because of the current extended The components of these changes are highlighted in the outage of the Peach Bottom units, PSE&G expects that the table below:

1988 nuclear capacity factor may be below 60%. However, the Increase or (Decrease) amount of the associated penalty cannot be determined be-cause it is not known when or if the Peach Bottom units will (Millions of Dollars) 1987 vs. 1986 1986 vs. 1985 return to service in 1988 or what the operating performance of Changes in base rates $ 132) $ 18) the other three nuclear units may be. Recoveries of gas costs illl) 11011 Therm sales 30 25 Dividends paid to holders of common stock increased Other operating revenues 8

$16.2 million over 1986, reflecting the increase in number of

$1105) $ (84) shares outstanding as well as the higher dividend rate.

198 7 - Gas therm sales increased 2.4 % . Slightly colder Revenues and Sales weather during 1987 and higher usage by customers positively Electric impacted Residential and Commercial sales. Commercial Revenues declined 6.2 % in 1987 primarily due to the return to sales also benefited by the healthy commercial sector econ-customers of previously overrecovered energy costs, slightly omy. Industrial sales continue to be negatively impacted by offset by higher current energy costs. This decrease in recovery the general weakness of the economy in the manufacturing of energy costs was partially offset by an increase in base rates sector, and the purchase of gas directly from suppliers by some that became effective in February 1987, and by greater sales. In customers. Average number of customers rose 1.6%.

1986 revenues increased 5.2% primarily due to greater sales 1986 - Gas therm sales were virtually unchanged from and recoveries of energy costs.

1985. Residential sales registered significant growth, as the Electric energy costs follow amounts recovered through average number of gas heating customers rose 4.9%, despite revenues, as permitted by rate orders, and therefore have no the negative influence of the 1.4% decline in heating degree direct effect on earnings.

days. Commercial sales reflect strong growth in that sector of The components of these changes follow:

New Jersey's economy. Industrial sales reflect the ongoing Increase or !Decrease) weakness in the nation's manufacturing sector of the economy.

(Millions of Dollars) 1987 vs. 1986 1986 vs. 1985 Lower oil prices continued to negatively impact Commercial Changes in base rates $ 3I7 $

and Industrial sales.

Recoveries of energy costs 1658) 62 Kilowatthour sales 144 94 Other operating revenues 1 Ill

$(196) $155 1987 - Electric kilowatthour sales increased 4.3%.

Growth in Residential and Commercial sales, aided by a 10.l %

rise in the temperature humidity index hours, accounted for the increase. Commercial sales reflect the result of a healthy commercial sector economy. Industrial sales declined slightly reflecting the lack of growth in the manufacturing sector of **

27

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Energy Costs Access to the long-term and short-term capital and credit Electric energy costs and gas fuel costs are adjusted to match markets is necessary for obtaining funds externally.

amounts recovered through revenues and have no direct effect PSE&G's construction program is focusing primarily on on earnings. However, the carrying of underrecovered energy the upgrading of older generating stations and electric and gas costs ultimately increases financing costs. transmission and distribution systems. Therefore, excluding A record total of 3 7.5 million megawatthours was gener- refinancings and related expenditures, Enterprise expects to ated, purchased and interchanged, a 4% increase over 1986. meet nearly all of its construction expenditures in 1988 with Higher generation from nuclear energy, natural gas and coal internally generated funds.

accounted for the increase.

As a member of the Pennsylvania-New Jersey-Maryland Construction Program Interconnection (PJM) and as a party to several agreements Enterprise maintains a continuous construction program which provide for the purchase of available power from neigh- through its subsidiaries, principally PSE&G, which includes boring utilities, PSE&G is able to optimize its mix of internal payments for nuclear fuel. This program is periodically revised and external sources using the lowest cost energy available at as a result of changes in economic conditions, and depends on any given time. the ability of Enterprise and its subsidiaries to finance con-Total electric energy costs decreased 46% in 1987 primar- struction costs. Changes in plans and forecasts, price changes, ily due to the adjustment to record lower recovery of such cost escalation under construction contracts, and requirements costs. Energy costs increased 7% in 1986. Contributing factors of regulatory authorities may also result in revisions of the are shown below: construction program.

Increase or (Decrease) Construction expenditures of PSE&G for all projects (Millions of Dollars) aggregated $659 million in 198 7 and $1.0 billion in 1986 and 1987 vs. 1986 1986 vs. 1985 include AFDC of $53 million and $241 million, respectively.

Change in prices paid for fuel and power purchases $ 115) $(261)

Construction expenditures are estimated at $2.8 billion for the Kilowatthour output 28 31 five years ending in 1992 and include AFDC of about $173 Replacement energy costs for which recovery million.

was disallowed by the BPU (3) (21) These estimates are based on expected project completion Nuclear Performance Penalty 18 dates and include anticipated escalation due to inflation of Adjustment of actual costs to match recover-ies through revenues (A) (506) 318 approximately 4%. Therefore, construction delays or higher

-- inflation levels could cause significant increases in these

$(478) $ 67 amounts. Enterprise expects to generate internally nearly all of (A) Reflects over(under)recovered energy costs, which in the years 1987, 1986 and its construction expenditures over the next five years.

1985 amounted to $( 160) million, $346 million and $28 million, respectively.

Gas costs decreased 11%in1987 and 9% in 1986 primarily Financing Activities due to lower natural gas prices. Contributing factors are shown Enterprise raised more than $434 million in 198 7 through sales below: of $198.5 million of PSE&G's First and Refunding Mortgage Bonds, $79 million of its common stock, together with $60 Increase or (Decrease) million of long-term bank loans by PSRC. An additional $100

[Millions of Dollars) 198 7 vs. 1986 1986 vs. 1985 million of EDC's long-term debt replaced existing short-term Change in prices paid for gas supplies $(61) $(105) debt.

Therm sendout 15 (3) During 1987 PSE&G redeemed four First and Refunding Surcharge related to non-production gas costs (33) 24 Refunds from pipeline suppliers (11) 9 Mortgage Bond issues for $210.8 million and four preferred Adjustment of actual costs to match recover- stock issues for $160 million.

ies through revenues (A) 13 9 In November 1987, PSEGCC entered into a $250 million

$(77) $ (66) credit agreement with a group of 13 banks which expires Oc-(A) Reflects over[under)recovered gas costs which in the years 1987, 1986 and 1985 tober 31, 1990. The credit agreement will be used primarily to amounted to $14 million, $1 million and $(8) million, respectively. support the issuance of short-term debt by PSEGCC to meet the debt capital needs of Enterprise's umegulated subsidiaries (See Notes 6 and 9 of Notes to Consolidated Financial Statements.) (PSRC, EDC, CEA and EGDC). The existing credit agreements of these subsidiaries were terminated. Long-term debt of the Liquidity and Capital Resources subsidiaries of $185 million was paid off during 1987. As of Enterprise's liquidity is affected principally by the construction programs and investments of its subsidiaries and, to a lesser degree, by other capital requirements such as PSE&G's matur-ing debt, reacquisition of securities and sinking fund require-ments. The capital resources available to meet these requirements are funds from internal generation and external financing. Internally generated funds depend upon economic conditions and the adequacy of timely rate relief to PSE&G .

28

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS December 31, 198 7, PSEGCC had $135.3 million in commercial paper outstanding.

In addition to periodic sinking fund redemptions, PSE&G has a $60 million mortgage bond issue that will mature in 1988. Three mortgage bond issues aggregating $140 million and one debenture bond issue of $31 million will also mature by the end of 1992.

Also, PSE&G has received regulatory authority to redeem, prior to maturity, up to approximately $300 million First and Refunding Mortgage Bonds during 1988.

Under the terms of PSE&G's Mortgage and Restated Cer-tificate of Incorporation, at December 31, 198 7 PSE&G could issue an additional $3.064 billion of mortgage bonds at a rate of 10.13% or $2.719 billion of preferred stock at a rate of 8.75%.

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 provides PSE&G flexibility in the issuance of long-term securities. At year end PSE&G had $250 million of commercial paper outstanding.

In December 1987, PSE&G terminated its credit agree-ment with 12 domestic banks for the issuance of revolving loans up to an aggregate of $200 million to be outstanding at anytime.

In January 1988, PSE&G terminated its $75 million Euro-pean Revolving Credit Agreement and signed a new agreement for $75 million with eight foreign banks.

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.

At December 31, 1987 book value per share amounted to

$18.54 compared to $17.92 at December 31, 1986. This reflects the 3-for-2 common stock split which took place July 1, 1987.

The market value of common shares expressed as a percentage of book value was 128.8% and 149.7% at year-end 1987 and 1986, respectively.

Customer Accounts Receivable At December 31, 198 7, customer accounts receivable approxi-mated $322 million, excluding unbilled revenues of $163 mil-lion. Net write-off of uncollectible accounts in 1987 was down 16% to approximately $18 million, a decrease of $3 million from last year. Net write-off per $100 of revenues was down 4 cents to 44 cents compared to 1986, 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 electric 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.

Effect of Inflation In the past several years the impact of inflation on Enterprise has decreased due to declining inflation rates. However, the cost of replacing utility plant would be significantly higher than historical cost reflected in the financial statements. Even though historical cost is the amount permitted to be recovered under the rate regulatory process for utilities in New Jersey, based on past practices of regulatory commissions, the com-pany anticipates it will recover the increased cost of facilities when replacement actually occurs.

29

ORGANIZATION AND

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES Organization Gas and 011 Accounting In 1986 Enterprise acquired all of the issued and outstanding EDC follows the full-cost method of accounting. Under this common stock of PSE&G pursuant to a Plan and Agreement of method, all exploration and development costs for successful Merger. In addition, Enterprise is the parent company of the and unsuccessful wells are capitalized and amortized on the following subsidiaries: CEA, EDC, PSRC, EGDC and PSEGCC. units-of-production basis. (See Note 6- Deferred Items - Gas The restructuring did not result in any change in PSE&G's and Oil Exploration Plant Write-Down.)

preferred stock or debt securities.

Enterprise is entitled to an exemption from regulation by Long-Term Investments the Securities and Exchange Commission as a registered hold- Enterprise, through its investment subsidiary, PSRC, has in-ing company under the Public Utility Holding Company.Act vested in marketable securities, which are valued at the lower of 1935, except for Section 9(a)(2) thereof, and is not subject to of cost or market, as well as various leveraged leases and lim-regulation by the BPU or the Federal Energy Regulatory Com- ited partnerships.

mission (FERC).

Revenues and Fuel Costs - PSE&G Consolidation Policy Revenues are recorded based on services rendered to customers The consolidated financial statements include the accounts of during each accounting period. PSE&G records unbilled reve-Enterprise and its subsidiaries. All significant intercompany nues representing the estimated amount customers will be accounts and transactions have been eliminated in consolidation. billed for services rendered from the time meters were last read to the end of the respective accounting period.

Regulation Rates include projected fuel costs for electric generation, The accounting and rates of PSE&G are subject in certain purchased and interchanged power, gas purchased and mate-respects to the requirements of the BPU and FERC. As a result, rials used for gas production for twelve-month periods.

PSE&G maintains its accounts in accordance with their pre- Any under or overrecoveries, along with interest in the scribed Uniform Systems of Accounts, which are the same. As case of an overrecovery, are deferred and included in operations a result, the applications of generally accepted accounting in the period in which they are reflected in rates.

principles by Enterprise differ in certain respects from applica-tions of other non-regulated businesses. Income Taxes Enterprise and its subsidiaries file a consolidated Federal in-Utility Plant and Related Depreciation come tax return and income taxes are allocated, for reporting and Amortization - PSE&G purposes, to Enterprise and its subsidiaries based on taxable Additions to utility plant and replacements of units of property income or loss of. each.

are capitalized at original cost. The cost of maintenance, re- Deferred income taxes are provided for differences be-pairs and replacements of minor items of property is charged tween book and taxable income. For PSE&G the deferred in-to appropriate expense accounts. At the time units of depreci- come taxes are limited to the extent permitted for ratemaking able properties are retired or otherwise disposed of, the original purposes.

cost less net salvage value is charged to accumulated depreciation. Investment tax credits are deferred and amortized over the For financial reporting purposes, depreciation is computed useful lives of the related property including nuclear fuel.

under the straight-line method. Depreciation is based on esti- In December 1987, the Financial Accounting Standards mated average remaining lives of the several classes of depreci- Board issued Statement of Financial Accounting Standards able property. These estimates are reviewed on a regular basis No. 96 (SFAS 96), "Accounting for Income Taxes", which requires and necessary adjustments are made as approved by the BPU. the recognition of deferred tax liabilities adjusted for the effects Depreciation provisions stated in percentages of original cost of of enacted changes in tax laws or rates. The effective date of depreciable property were 3.39% in 198 7, 3.54 % in 1986 and SFAS 96 is for fiscal years beginning after December 15, 1988.

3.52% in 1985. As a result of the accounting and ratemaking requirements Depreciation applicable to nuclear plant includes esti- of the BPU and FERC with respect to PSE&G, the primary mated costs of decommissioning. The BPU in its Decision of effect of adopting SFAS 96 upon Enterprise's financial reporting February 6, 1987 provided rates for the recovery of Hope Creek will be the presentation of its financial position with minimal Generating Station costs and directed that PSE&G establish a effect on its income statement. Such effect is currently being trusteed escrow fund. PSE&G filed a request with the Internal quantified.

Revenue Service for a ruling that it may be considered a quali-fied plan, which would make payments into the fund tax deductible.

Amortization of Nuclear Fuel Nuclear energy burnup costs are charged to fuel expense on a units-of-production basis over the estimated 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 .

30

ORGANIZATION AND

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES Allowance for Funds Used During Construction amounts of CWIP through operating revenues. In the years AFDC represents the cost of debt and equity funds that finance 1986 and 1985, as a result of BPU rate orders, PSE&G had been the construction of new facilities. The amount of AFDC capi- allowed to include $550 million of CWIP in rate base, on talized is also reported in the Consolidated Statements of which a current return was permitted to be recovered through Income as a reduction of interest charges for the borrowed operating revenues. No AFDC had been accrued on the funds component and as other income for the equity funds amounts included in rate base.

component.

Since February 16, 1987 the rate used for calculating Pension Plan AFDC has been 10.33% on a compounded basis. Prior to Feb- The employees of Enterprise's subsidiaries completing one year ruary 16, 1987 the rate of 8.5% had been used for several years. of service are covered by a noncontributory trusteed pension These rates are within the limits set by FERC. plan. The policy is to fund pension costs accrued. In 1987, Based upon the BPU's Decision of February 6, 1987, Enterprise adopted Statement of Financial Accounting Stan-PSE&G is no longer allowed to recover a current return on dards No. 87 (SFAS 87), "Employers' Accounting for Pensions".

(See Note 8 of Notes to Consolidated Financial Statements.)

FINANCIAL STATEMENT RESPONSIBILITY Management of Enterprise and its subsidiaries is responsible The Internal Auditing Department conducts audits and for the preparation, integrity and objectivity of the consoli- appraisals of accounting and other operations and evaluates dated financial statements and related notes of Enterprise. The the effectiveness of cost and other controls and recommends, consolidated financial statements and related notes are pre- where appropriate, improvements thereto. Management has pared in accordance with generally accepted accounting princi- considered the internal auditors' and Deloitte Haskins & Sells' ples applied on a consistent basis. The financial statements recommendations concerning the corporation's system of reflect estimates based upon the judgement of management internal accounting controls and has taken actions that are where appropriate. Management believes that the consolidated cost-effective in the circumstances to respond appropriately to financial statements and related notes present fairly and con- these recommendations. Management believes that, as of sistently Enterprise's financial position and results of opera- December 31, 1987, the corporation's system of internal ac-tions. Information in other parts of this Annual Report is the counting controls is adequate to accomplish the objectives responsibility of management and is consistent with these discussed herein.

consolidated financial statements and related notes. The Board of Directors carries out its responsibility of i I

The firm of Deloitte Haskins & Sells, independent certi- financial overview through the Audit Committee, which as of .1 fied public accountants, is engaged to examine Enterprise's February 16, 1988 consisted of six directors who are not cur- i consolidated financial statements and related notes and issue rent employees of Enterprise. The Audit Committee meets an opinion thereon. Their examination is conducted in accor- periodically with management as well as with representatives dance with generally accepted auditing standards and includes of the internal auditors and the independent certified public a review of internal accounting controls and tests of transac- accountants. The Committee reviews the work of each to tions. Management has made available to Deloitte Haskins & ensure that their respective responsibilities are being carried Sells all the corporation's financial records and related data, as out, and discusses related matters. Both audit groups have full well as the minutes of stockholders' and directors' meetings. and free access to the Audit Committee.

Furthermore, management believes that all representations made to Deloitte Haskins & Sells during its audit were valid and appropriate.

Management has established and maintains a system of E. James Ferland internal accounting controls to provide reasonable assurance Chairman of the Board, that assets are safeguarded, and transactions are executed in President and Chief accordance with management's authorization and recorded Executive Officer properly for the prevention and detection of fraudulent finan-cial reporting so as to maintain the integrity and reliability of the financial statements. The system is designed to permit preparation of consolidated financial statements and related Everett L. Morris notes in accordance with generally accepted accounting princi-Vice President ples. The concept of reasonable assurance recognizes that the costs of a system of internal accounting controls should not exceed the related benefits. Management believes the effec-tiveness of this system is enhanced by a program of continuous and selective training of employees. In addition, management has communicated to all employees its policies on business Parker C. Peterman conduct, assets and internal control. Comptroller

31

CONSOLIDATED STATEMENTS OF INCOME (Thousands of Dollars) For the Years Ended December 31, 1987 1986 1985 Operating Revenues Electric $2,959,549 $3,156,010 $3,000,564 Gas 1,219,955 1,324,690 1,408,490 Other 31,551 17,716 19,287 Total Operating Revenues 4,211,055 4,498,416 4,428,341 Operating Expenses Operation Fuel for Electric Generation and Net Interchanged Power 555,405 1,033,371 965,966 Gas Purchased and Materials for Gas Produced 614,861 692,224 757,976 Other 634,494 607,301 567,698 Maintenance 302,362 254,256 291,940 Depreciation and Amortization 380,109 272,150 268,179 Amortization of Property Abandonments and Write-Down (note 6) 22,526 71,232 55,263 Taxes Federal Income Taxes (note 2) 292,169 270,783 273,119 New Jersey Gross Receipts Taxes 522,870 563,518 557,270 Other 63,960 56,297 53,161 Total Operating Expenses 3,388,756 3,821,132 3,790,572 Operating Income 822,299 677,284 637,769 Other Income Allowance for Funds Used During Construction - Equity 34,001 164,121 127,412 Miscellaneous - net 6,031 10,840 458 Total Other Income 40,032 174,961 127,870 Appllcatlon of SFAS 90 (note 3)

Disallowed Plant Costs and Abandonments - net 27,266 (295,244) [109,717)

Related Income Taxes (12,255) 111,418 24,799 Net Effect of SFAS 90 15,011 (183,826) (84,918)

Income Before Interest Charges and Dividends on Preferred Stock 877,342 668,419 680,721 Interest Charges (note 10)

Long-Term Debt 304,494 297,249 276,480 Short-Term Debt 10,644 6,362 5,788 Other 21,655 12,169 7,278 Total Interest Charges 336,793 315,780 289,546 Allowance for Funds Used During Construction - Debt (18,665) (77,196) (68,459)

Net Interest Charges 318,128 238,584 221,087 Preferred Stock Dividend Requirements 38,763 51,372 60,002 Net Income $ 520,451 $ 378,463 $ 399,632 Shares of Common Stock Outstanding (A)

End of Year 205,350,418 202,323,563 197,547, 776 Average for Year 203,872,592 199, 709,294 183,516,405 Earnings per Average share of Common Stock (A) $2.55 $1.90 $2.18 Dividends paid per share of Common Stock (A) $1.99 $1.95 $1.87 A. Reflects 3*for*2 common stock split effective July !, 1987.

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

32

__J

CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION (Thousands of Dollars) For the Years Ended December 31, 1987 1986 1985 Funds Provided Net Income $ 520,451 $ 378,463 $ 399,632 Add (Deduct) Items not affecting Working Capital Depreciation and Amortization 498,294 391,978 375,154 Recovery (Deferral) of Electric Energy and Gas Fuel Costs - net (127,381) 350,882 43,422 Disallowed Plant Costs and Abandonments (note 3) 350,571 151,009 Amortization of Discounts on Disallowances (note 3) (27,266) (55,327) (41,292)

Provision for Deferred Income Taxes - net (notes 2 and 6) 298,330 (17,610) 18,434 Investment Tax Credits - net (21,680) 13,205 132,398 Allowance for Funds Used During Construction (AFDC) (52,666) (241,317) (195,871)

Other (4,329) 4,417 (9,042)

Total Funds from Operations 1,083,753 1,175,262 873,844 Net Funds from Financings Common Stock 78,640 103,330 499,905 Long-Term Debt 356,018 564,894 199,118 Increase in Capital Lease Obligations 548 Total Funds from Financings 434,658 668,224 699,571 Total Funds Provided $1,518,411 $1,843,486 $1,573,415 Funds Applled Additions to Utility Plant, excluding AFDC $ 605,980 $ 778,248 $1,024,244 Additions to Gas and Oil Exploration Plant, excluding AFDC 15,852 21,781 47,392 Cash Dividends on Common Stock 406,457 390,289 346,803 Long-Term Investments 176,549 136,290 4,230 Reductions of Long-Term Debt and Capital Lease Obligations 423,005 423,129 207,355 Reductions of Preferred Stock 166,760 72,750 Property Abandonments, Write-Down and Deferrals (note 6)

Reduction in Property Values (134,452) (37,108)

Deferrals 134,452 37,108 Miscellaneous 19,596 8,479 17,848 Total Funds Applied 1,814,199 1,758,216 1,720,622 Increase (Decrease) In Working Capital Short-Term Debt (140,783) (77,769) (47,811)

Cash and Equivalents (150,230) 149,943 (86,738)

Accounts Receivable and Unbilled Revenues (24,846) (25,905) 66,261 Fuel (5,186) (20,090) (52,137)

Other Current Assets 2,807 13,664 28,320 Accounts Payable and Other Accrued Liabilities (79,251) 49,417 (27,087)

Accrued Taxes 101,701 (3,990) (28,015)

Net Increase (Decrease) in Working Capital (295,788) 85,270 (147,207)

Total Funds Applied and Increase (Decrease) in Working Capital $1,518,411 $1,843,486 $1,573,415 Sec Organization and Summary of Significant Accounting Policies and Notes to Consolidated Financial Statements.

33

CONSOLIDATED BALANCE SHEETS Assets

[Thousands of Dollars) December 31, 1987 1986 Utility Plant - Original cost Electric $ 9,564,835 $ 5,449,135 Gas 1,487,401 1,396,543 Common 299,447 281,751 Nuclear Fuel 249,650 128,906 Utility Plant in Service 11,601,333 7,256,335 Less Accumulated Depreciation and Amortization 3,028,712 2,692,759 Net Utility Plant in Service 8,572,621 4,563,576 Construction Work in Progress 370,596 4, 153,988 Plant Held for Future Use 26,887 26,873 Net Utility Plant 8,970,104 8,744,437 Other Plant and Long-Term Investments Gas and Oil Exploration Plant, net of accumulated depreciation and amortization - 198 7, $334,603; 1986, $317,739 150,425 159,040 Other Plant, net of accumulated depreciation and amortization- 1987, $2,013; 1986, $1,362 25,360 26,224 Long-Term Investments (note 4) 318,882 133,180 Total Other Plant and Long-Term Investments 494,667 318,444 Current Assets Cash and Temporary Investments [note 5) 53,380 206,008 Working Funds 24,274 21,876 Accounts Receivable, net of allowance for doubtful accounts-1987, $16,455; 1986, $33,101 389,749 407,737 Unbilled Revenues 162,723 169,581 Fuel, at average cost 198,793 203,979 Materials and Supplies, at average cost 80,720 80,197 Prepayments 33,159 30,875 Total Current Assets 942,798 1,120,253 Deferred Debits (note 6)

Property Abandonments (note 3) 229,834 227,033 Gas and Oil Exploration Plant Write-Down 112,044 112,044 Underrecovered Electric Energy and Gas Fuel Costs - net 40,538 Unamortized Debt Expense 62,007 49,102 Other 5,559 6,509 Total Deferred Debits 449,982 394,688 Total $10,857,551 $10,577,822 See Organization and Summary of Significant Accounting Policies and Notes to Consolidated Financial Statements .

34

CONSOLIDATED BALANCE SHEETS Capitalization and Liabilities (Thousands of Dollars) December 31, 1987 1986 Capitalization (see statements, pages 36-38)

Common Equity Common Stock $ 2,710,343 $ 2,632,662 Retained Earnings 1,096,933 993,836 Total Common Equity 3,807,276 3,626,498 Subsidiaries' Securities and Obligations Preferred Stock Without Mandatory Redemption 429,994 554,994 Preferred Stock With Mandatory Redemption 30,000 65,000 Long-Term Debt 3,287,039 3,336,120 Capital Lease Obligations (note 10) 55,374 56,409 Total Capitalization 7,609,683 7,639,021 Current Liabilities Long-Term Debt and Capital Lease Obligations due within one year 70,897 71,418 Commercial Paper and Bank Loans (note 7) 385,300 243,996 Accounts Payable 349,054 290,444 New Jersey Gross Receipts Taxes Accrued 507,662 544,678 Deferred Income Taxes on Unbilled Revenues (note 2) 58,506 78,007 Other Taxes Accrued 4,069 49,253 Interest Accrued 107,797 94,602 Other 91,946 84,500 Total Current Liabilities 1,575,231 1,456,898 Deferred Credits Accumulated Deferred Income Taxes (note 2)

Depreciation and Amortization 886,371 685,483 Property Abandonments (note 6) 102,496 99,846 Gas and Oil Exploration Plant Write-Down (note 6) 53,287 53,287 Deferred Electric Energy and Gas Fuel Costs - net 16,085 (39,947)

Unamortized Debt Expense 24,326 19,548 Other 28,606 (2,924)

Overrecovered Electric Energy and Gas Fuel Costs - net (note 6) 86,843 Accumulated Deferred Investment Tax Credits (note 2) 546,374 565,868 Other 15,092 13,899 Total Deferred Credits 1,672,637 1,481,903 Commitments and Contingent Liabilities (note 9)

Total $10,857,551 $10,577,822

35

CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (Thousands of Dollars) For the Years Ended December 31, 1987 1986 1985 Balance January 1 $ 993,836 $1,013,285 $ 963,573 Add Net Income 520,451 378,463 399,632 Total 1,514,287 1,391,748 1,363,205 Deduct Cash Dividends on Common Stock (A) 406,457 390,289 346,803 Capital Stock Expenses 10,897 7,623 3,117 Total Deductions 417,354 397,912 349,920 Balance December 31 $1,096,933 $ 993,836 $1,013,285 A. The ability of Enterprise to declare and pay dividends is contingent upon its receipt of dividend payments from its subsidiaries. PSE&G, Enterprise's principal subsidiary, has restrictions on the payment of dividends which arc contained in its Charter, certain of the indentures supplemental to its Mortgage, and certain debenture bond indentures. However, none of these restrictions presently limit the payment of dividends out of current earnings. The amount of PSE&G's restricted retained earnings at December 31, 198 7 was $10,000,000.

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 In our opinion, such consolidated financial statements present consolidated statements of capital stock and long-term debt of fairly the financial position of the companies at December 31, Public Service Enterprise Group Incorporated and its 1987 and 1986 and the results of their operations and the subsidiaries as of December 31, 1987 and 1986 and the related changes in their financial position for each of the three years in consolidated statements of income, retained earnings, and the period ended December 31, 1987, in conformity with changes in financial position for each of the three years in the generally accepted accounting principles applied on a period ended December 31, 1987. Our examinations were made consistent basis.

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.

February 12, 1988

36

CONSOLIDATED STATEMENTS OF CAPITAL STOCK Current Redemption Outstanding Price 1987 1986 December 31, Shares Per Share [Thousands of Dollars)

Enterprise Preferred Stock [note A)

PSE&G Nonparticipating Cumulative Preferred Stock (noteB)

With Mandatory Redemption (note C)

$100 par value - Series 12.80% $ $ $ 35,000 11.62% 300,000 111.62 30,000 30,000 PSE&G Preferred Stock with Mandatory Redemption $ 30,000 $ 65,000 PSE&G Nonparticipating Cumulative Preferred Stock Without Mandatory Redemption (note D)

$25 par value - Series 9.75% $ $ $ 40,000 8.70% 50,000

$100 par value - Series 4.08% 250,000 103.00 25,000 25,000 4.18% 249,942 103.00 24,994 24,994 4.30% 250,000 102.75 25,000 25,000 5.05% 250,000 103.00 25,000 25,000 5.28% 250,000 103.00 25,000 25,000 6.80% 250,000 102.00 25,000 25,000 9.62% 35,000 Z40% 500,000 101.00 50,000 50,000 Z52% 500,000 101.00 50,000 50,000 8.08% 150,000 101.00 15,000 15,000 Z80% 750,000 101.00 75,000 75,000 Z70% 600,000 100.79 60,000 60,000 8.16% 300,000 104.82 30,000 30,000 PSE&G Preferred Stock without Mandatory Redemption (no changes in 1986 and 1985) $ 429,994 $ 554,994 Enterprise Common Stock Common Stock [no par) - authorized 500,000,000 shares (note E); issued and outstanding at December 31, 1987, 205,350,418 shares and at December 31, 1986, 202,323,563 shares

[3,063,702 shares issued for $78,640,000 in 1987 (note F), 4,775,787 shares issued for

$103,488,000 in 1986, and 28,703,174 shares issued for $503,022,000 in 1985) reflects 3-for-2 split, effective July 1, 1987

} $ 2110,343 $ 2,632,662 Notes: All outstanding shares of the 12.80% Series were redeemed on September 30, A. At the Stockholders Annual Meeting held on April 21, 198 7, the stockholders 1987.

approved a proposal authorizing the creation of a new class of 50 million shares of At December 31, 1987, the annual dividend requirement and the embedded Preferred Stock without par value. dividend cost were $3,486,000 and 11.72%, respectively, for Preferred Stock with B. In addition, there are 2,900,058 shares of $100 par value and 10,000,000 shares mandatory redemption.

of $25 par value Cumulative Preferred Stock which are authorized and unissued, Prior to September 1, 1988 the redemption of shares of the 11.62% Series is and which upon issuance may or may not provide for mandatory sinking fund subject to certain restrictions. On September 30, 1989, the 11.62% Series will redemption. become subject to a mandatory annual sinking fund redemption of 15,000 shares If dividends upon any shares of Preferred Stock are in arrears in an amount which is cumulative, plus redemption of up to an additional 15,000 shares equal to the annual dividend thereon, voting rights for the election of a majority annually at the option of PSE&G, all at a redemption price of $100 per share.

of the Board of Directors become operative and continue until all accumulated D. At December 31, 1987, the annual dividend requirement and embedded divi-and unpaid dividends thereon have been paid, whereupon all such voting rights dend cost for Preferred Stock without mandatory redemption were $29,012,000 cease, subject to being again revived from time to time. and 6.75%, respectively.

C. PSE&G is required to purchase or redeem a specified minimum number of E. Total authorized shares includes 1,234,353 shares of Common Stock reserved shares of Cumulative Preferred Stock with mandatory redemption annually. Such for possible issuance under Enterprise's Dividend Reinvestment and Stock Pur-redemptions are cumulative. PSE&G may annually redeem, at its option, an chase Plan, and PSE&G's Employee Stock Purchase Plan, Thrift and Tax-Deferred aggregate of up to twice the number of shares shown for each such series. All Savings Piao and Payroll-Based Employee Stock Ownership Plan.

such redemptions are at a redemption price of $100 per share. A redemption of F. Includes $959,000 paid in lieu of issuing 36,847 fractional shares.

shares of any series also requires payment of all accumulated and unpaid divi-See Organization and Summary of Significant Accounting Policies and Notes dends to the date fixed for redemption.

to Consolidated Financial Statements.

'"'

37

CONSOLIDATED STATEMENTS OF LONG-TERM DEBT Notes:

PSE&G A. PSE&G's Mortgage, securing the First and Refunding Mortgage Bonds, consti*

Interest December 31, tutes a direct first mortgage lien on substantially all PSE&G property and franchises.

Rates Due 1987 1986 B. The aggregate principal amount of requirements for sinking funds and maturi-(Thousands of Dollars) ties for each of the five years following December 31, 1987 are as follows:

First and Refunding Mortgage (Thousands of Dollars)

Bonds (note A) Year Sinking Funds Maturities Total 47/s% 1987 $ $ 60,000 1988 $ 9,862 $ 60,000 $ 69,862 4%% 1988 60,000 60,000 1989 7,192 50,000 57,192 51/s'Yo 1989 50,000 50,000 1990 7,200 50,000 57,200 1991 6,000 31,200 37,200 4%% 1990 50,000 50,000 1992 6,000 40,000 46,000 4%% 1992 40,000 40,000

$36,254 $231,200 $267,454 4%%-12%% 1993-1997 810,000 660,000 7%-9 1/s% 1998-2002 520,600 522,300 For sinking fund purposes, certain First and Refunding Mortgage Bond issues 8 1/s%-12% 2003-2007 401,130 403,630 require annually the retirement of $18,950,000 principal amount of bonds or the 9%%-14%% 2008-2012 198,000 325,344 utilization of bondable property additions at 60% of cost. The portion expected 8%%-9 1/2% to be met by property additions has been excluded from the table above. Also, 2013-2017 422,000 425,000 PSE&G may, at its option, retire additional amounts up to $6,200,000 annually 5%-8% 2037 15,001 15,001 through sinking funds of certain debenture bonds. Additional bonds, if any, Pollution Control resulting from the election of this option are included in long-term debt due 6.30% 2003-2007 14,300 14,300 within one year.

6.80%-10%% 2008-2012 73,710 73,710 C. At December 31, 1987, the annual interest requirement on Long-Term Debt 8.10%-10 112% 2013-2017 519,400 494,400 was $281,831,000 of which $265,940,000 was the requirement for First and Refunding Mortgage Bonds. The embedded interest cost on Long-Term Debt was Total First and Refunding 8.70%.

Mortgage Bonds 3,174,141 3,193,685 See Organization and Summary of Significant Accounting Policies and Notes Debenture Bonds Unsecured to Consolidated Financial Statements.

5%% 1991 33,592 34,647 71/4%-9% 1993-1997 155,662 159,789 6% 1998 18,195 18,195 Total Debenture Bonds Unsecured 207,449 212,631 Amount Due Within One Year (note BJ (69,862) (69,491)

Net Unamortized Discount (24,689) (25,705)

Total Long-Term Debt of PSE&G 3,287,039 3,311,120 Bank Loans 25,000 Consolidated Long-Term Debt (note CJ $3,287,039 $3,336,120

38

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~ Rate Matters lion on an annual basis, or 41 cents per share of common stock.

These recent motions by the Public Advocate to have Peach Bottom removed from rate base follows the BPU's Order Electric dated January 27, 1988, wherein the BPU held that the recovery On February 6, 1987, the BPU issued an oral decision, followed of replacement energy costs associated with PSE&G's five by a written Order in April 1987, authorizing an increase in nuclear units are properly determined by the nuclear perfor-PSE&G's electric base rates designed to produce additional mance standard adopted by the BPU in setting PSE&G's base annual revenues of $421.5 million. In addition, the decision rates in February 1987, and that the prudence of each nuclear reduced PSE&G's electric Levelized Energy Adjustment Clause unit outage would not be examined. Hearings in the LEAC (LEAC) by $697.7 million over a compressed 10 1/2 month period matter are continuing. PSE&G cannot determine the timing commencing February 16, 1987 and reduced electric base rates or result of any decision by the BPU in this matter.

by $772 million for the recognition of the 1987 impact of the For information concerning deferred Over(Under)recov-Tax Reform Act of 1986 (TRA), resulting in an overall electric ered Electric Energy Costs, see Note 6 and for the Nuclear revenue decrease of $353.4 million. The decision allows a Performance Standard adopted by the BPU, see Note 9.

return on common equity of 13% and an overall rate of return of 10.65%. As determined by the BPU, the increase in electric Gas base rates was designed to reflect a recovery of PSE&G's rea- On October 31, 1986, the BPU approved agreements by PSE&G sonable costs of constructing Hope Creek Generating Station and the major parties in PSE&G's gas base rate case, which (Hope Creek). PSE&G's share of the cost of constructing Hope provided for an annual reduction in gas base revenues of $30 Creek through February 6, 1987 was $4.276 billion. The deci- million, effective October 31, 1986 and for the removal of sion disallowed the recovery of $431.5 million of PSE&G's EDC, at that time a wholly-owned gas and oil exploration share of Hope Creek's costs. Also, in accordance with the terms subsidiary of PSE&G, from inclusion in its gas rate base for of the Cost Containment Incentive Penalty Agreement, the ratemaking purposes. In the BPU approved agreement, PSE&G decision disallowed a return on an additional $5Z7 million was allowed to defer any loss on its investment in EDC as a resulting in a total allowed investment for Hope Creek by result of any write-down of the value of reserves as of De-PSE&G in rate base of $3.787 billion. In addition, the decision cember 31, 1986 and to seek recovery of such loss over a period continued the deferral of the $70.0 million of replacement of not less than 10 years in its next gas base rate proceeding.

energy costs of PSE&G resulting from failures of the electric On October 31, 1986, the price paid by PSE&G for natural gas generators at Salem in 1984 pending more definitive informa- from EDC was reduced as a result of a change in PSE&G's gas tion from PSE&G's litigation against the generator manufac- Raw Materials Adjustment Clause (RMAC) approved by the turer with respect to one of such outages. BPU. As a result of these regulatory actions, EDC wrote down On November 6, 1987 PSE&G also filed a motion with the the value of its reserves as of December 31, 1986 by $134.5 BPU to approve a reduction in electric base rates of $83.2 mil- million, which amounts to $70.5 million after the ta.x effect, lion on an annual basis to reflect changes in Federal income to reflect the lower net realizable value of its oil and gas re-taxes as a result of the TRA. This amount is in addition to the serves. PSE&G has deferred $58.8 million of the after-tax Joss base rate decrease of $77.2 million included in the February and will seek recovery of the entire $70.5 million in its next 1987 rates. Included within the November 6, 1987 filing was a gas base rate case. Future regulatory action with respect to EDC's motion for a $298.6 million annualized increase in revenues write-down of assets could require the amortization or imme-under the LEAC. It was proposed in the motion that the new diate write-off of the $58.8 million being deferred by PSE&G.

LEAC rate become effective for the period January 1, 1988 On July 23, 1987, PSE&G petitioned the BPU to approve a through December 31, 1988. PSE&G cannot presently deter- reduction in gas base rates of $13.3 million on an annual basis mine the outcome and effective date of these proceedings. to reflect changes in Federal income taxes as a result of the On January 28, 1988, and on February 9, 1988, the Public TRA. This reduction was approved by the BPU on December Advocate of the State of New Jersey filed motions in PSE&G's 23, 1987 and became effective January 1, 1988.

current LEAC proceeding before the BPU seeking to remove On September 24, 1987, the BPU approved a Stipulation for Peach Bottom 2 and 3 from rate base because of the current an annual reduction in the RMAC of $61 million for the period extended outages, on the basis that the units are no longer October 1, 1987 through September 30, 1988 which results "used and useful" as required by New Jersey law. The motions primarily from the return of overrecoveries and associated also seek to have the BPU immediately make interim, and interest from the prior RMAC period and is based on a projec-subject to refund, PSE&G's base rates to the extent that they tion of relatively stable gas prices. The Stipulation was exe-reflect expenses, return on rate base or any charges connected cuted by all parties to the case with the exception of the Public with Peach Bottom 2 and 3. PSE&G will oppose the Public Advocate. On November 9, 1987, PSE&G signed an agreement Advocate's motions. with the Public Advocate and the other parties to the RMAC In an oral decision on February 4, 1988, the BPU stated it proceeding which disposed of the remaining issues concerning would assume jurisdiction over the issues raised by the Public EDC. Under the agreement, the cost PSE&G is allowed to re-Advocate's motions. PSE&G is presently determining what the cover for EDC gas will be based upon an index of the weighted rate effect would be if Peach Bottom and associated expenses average cost of gas of pipelines supplying gas to New Jersey.

were to be removed from base rates. However, preliminary This agreement was approved by the BPU in December 1987 indications are that PSE&G's base rates include annual revenues and results in an additional reduction of $3.99 million in the of approximately $150 million relating to Peach Bottom and that RMAC for the period January l, 1988 through September 30, 1988.

removal of Peach Bottom from rate base and disallowance of For information concerning deferred Over(Under)recov-related expenses could reduce earnings by as much as $85 mil- ered Gas Fuel Costs, see Note 6. **

39

~ Federal Income Taxes ~ Statement of Flnanclal Accounting

.;a I Standards No. 90 A reconciliation of reported Net Income with pre-tax income In 1986, Enterprise adopted Statement of Financial Accounting and of Federal income tax expense with the amount computed Standards No. 90 (SFAS 90), "Regulated Enterprises -Ac-by multiplying pre-tax income by the statutory Federal in- counting for Abandonments and Disallowances of Plant come tax rates of 39.95%, a transitional weighted rate for 1987, Costs", and elected to restate prior periods. The following and 46% in 1986 and 1985 is as follows: table illustrates the effect of adoption of SFAS 90:

!Thousands of Dollars) 1987 1986 1985 !Thousands of Dollars)

For the Years Ended December 31, 1987 1986 1985 Net Income $520,451 $378,463 $399,632 Disallowed Costs Preferred stock dividend requirements 38,763 51,372 60,002 Hope Creek l INote 1)

Subtotal 559,214 429,835 459,634 Direct Disallowance $ $1431,532) $

Federal income taxes included in: Return Disallowance - Discount 80,961 1135,139)

Operating Income: Amortizaton of Discount 1,940 12,157 Current provision 65,214 180,132 74,987 Related Income Taxes (516) 122,818 35,961

---

Provision for deferred income taxes - Hope Creek- net 1,424 (215,596) 199,178) net IA) 248,635 42,236 63,881 Property Abandonments (Note 6)

Investment tax credits - net (21,680) 48,415 134,251 Return Disallowance - Discount 115,870)

Total included in operating income 292,169 270,783 273,119 Amortization of Discount 25,326 43,170 41,292 Miscellaneous other income: Related Income Taxes (11,739) (11,400) 111,162)

Current provision {17,084) 7,546 4,189 14,260 Property Abandonments - net 13,587 31,770 Provision for deferred income taxes IA) 17,939 --- --- ---

SFAS 90 deferred Federal income tax IA) 12,255 178,652) (24,799) Effects of application of SFAS 90 $ 15,011 $jl83,826) $ (84,918)

SFAS 90 deferred investment tax credit (32,766)

Total Federal income tax provisions 305,279 166,911 252,509 The tax effects of discounting of abandonments were Pre-tax income $864,493 $596,746 $712,143 calculated using the tax rates applicable to related deferred tax Tax expense at the statutory rate $345,365 $274,503 $327,586 balances. The tax effect of the Hope Creek 1 disallowance was calculated using a rate of 35.8%, such rate reflects rates that Adjustments to pre-tax income, computed at the statutory will be in effect when the tax basis of this plant is depreciated rate, for which deferred taxes are not provided under current (46% in 1986, 40% in 1987 and 34% thereafter) to determine ratemaking policies: the net realizable value of the tax benefit.

Tax depreciation under book depreciation $ 18,087 $ 30,470 $ 15,510 Allowance for funds used during ~ Long-Term Investments construction (21,038) (111,000) 190,089)

Overhead costs capitalized {694) (20,538) (18,083)

Other {7,720) 10,576 33,109 Long-Term Investments, primarily those of PSRC, are

--- ---

Subtotal (11,365) (90,492) (59,553) summarized as follows:

Amortization of investment tax credits (28,721) (17,100) (15,524)

(107,592) (75,077) !Millions of Dollars) 1987 1986 Subtotal {40,086)

$252,509 Lease Agreements $154 $ 34 Total Federal income tax provisions $305,279 $166,911 Partnerships 77 30 A. The provision for deferred income taxes represents the tax effects of the Marketable Securities 76 63 following items: Other 12 6

$319 $133 Current Liabilities:

Unbilled revenues Deferred Credits:

Property Abandonments Additional tax depreciation and

$ {19,501) 2,650

$ (18,784)

(7,946)

$ 20,648 364 51 Cash and Temporary Investments amortization 203,339 62,511 42,333 Deferred fuel costs - net 56,033 (161,405) (19,720) The balances at December 31, 1987 and 1986 consist primarily Gas and Oil Exploration Plant of temporary investments. The 1987 balance was invested in Write-Down 53,287 repurchase agreements and commercial paper while the 1986 Other 36,308 35,921 (4,543)

--- balance was invested primarily in U.S. Government Securities.

Subtotal 298,330 (17,632) 18,434 At December 31, 1987 and 1986, Enterprise had $227 million of

---

Total $278,829 $ (36,416) $ 39,082 lines of credit supported by compensating balances and $35 million of lines of credit which were compensated for by fees.

Deferred income taxes are provided for differences be- There are no legal restrictions placed on the withdrawal or tween book and taxable income. For PSE&G the deferred in- other use of the compensating bank balances.

come taxes are limited to the extent permitted for ratemaking purposes. At December 31, 1987 the cumulative net amount of income tax timing differences was $1.3 billion for which de-ferred income taxes have not been provided.

See Organization and Summary of Significant Accounting Policies for a discussion of the effect of SFAS 96, /1 Accounting for Income Taxes", issued in December 198Z See Note 1 for reductions in LEAC and RMAC related to the effect of the Tax Reform Act of 1986.

1111 40

~ Deferred Items Uranium Projects In September 1985, PSE&G terminated a uranium supply agreement with Sequoyah Fuels Corporation (Sequoyah), a Property Abandonments subsidiary of Kerr-McGee Corporation.

The following table reflects the application of SFAS 90 on In December 1985, Philadelphia Electric Company termi-property abandonments for which no return is earned. The nated its Lee Mine uranium supply project, in which PSE&G discount rate range used to calculate the present value of the had participated as a co-owner of Peach Bottom Generating abandoned property was between 8.545% and 14.446%. (See Station. In addition, PSE&G terminated the Homestake Min-Note3.) ing Company contract, dated February 25, 1976, for the explo-(Thousands of Dollars) Property Abandonments ration and development of uranium. The total loss of these projects when combined with the Sequoyah loss amounts to December 31, 1987 1986 Cost Discounted Cost Discounted $3 7.1 million.

Atlantic Project $185,112 $109,738 $200,172 $114,290 As a result of the abandonment and prior to regulatory Hope Creek Unit 2 109,080 74,504 109,196 64,572 approval, PSE&G's net umecovered advances of $21.7 million, LNG Project 39,635 26,757 44,208 28,640 after related tax savings, were deferred and were being amor-Uranium Projects 29,691 17,418 32,165 17,941 tized over a seven-year period commencing in 1985.

Other 1,817 1,417 2,120 1,590 On February 6, 198 7, the BPU issued a Decision adopting a

---

$365,335 $229,834 $387,861 $227,033 15-year amortization period commencing Tanuary 1, 1985. The annual amortization and recovery will be approximately $1.4 million, net of taxes. The related amortization of the discount, (Thousands of Dollars) Related Income Taxes net of taxes, will result in a credit to income of $1.0 million in Atlantic Project $ 77,813 $ 46,148 $ 84,149 $ 48,065 1988.

Hope Creek Unit 2 57,581 38,739 57,628 33,310 LNG Project 15,175 10,295 16,950 11,034 Uraniun1 Projects 12,399 7,314 16,329 7,437 Gas and Oii Exploratlon Plant Write-Down

--- ---

$162,968 $102,496 $175,056 $ 99,846 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 Atlantic Project EDC wrote down the carrying value of its assets under the full In December 1978, PSE&G cancelled the Atlantic nuclear cost method of accounting to the present value of estimated plant project. The BPU authorized PSE&G to recover a portion future net revenues. The after-tax effect of the write-down of the costs of the project over a period of 20 years commenc- made in December 1986 was $70.5 million ($134.5 million ing in April 1980. Such costs are being recovered at the rate of before tax).

$8.7 million annually, net of taxes. The related amortization of In the BPU approved agreement PSE&G was allowed to the discount, net of taxes, will result in a credit to income of defer the loss on its investment in EDC, generated by the rate

$5.8 million in 1988. base disallowance, and to seek recovery of such loss, over a period of not less than 10 years in its next gas base rate case.

, Hope Creek Unit No. 2 PSE&G has deferred $58.8 million of the after-tax loss and will In December 1981, PSE&G abandoned the construction of seek recovery of the entire $70.5 million in its next gas base Hope Creek Generating Station Unit No. 2. In March 1982, the rate case. Future regulatory action with respect to EDC's BPU authorized the recovery of all after-tax abandonment write-down of assets may require the amortization or immedi-costs for Hope Creek 2 from customers through the LEAC. ate write-off of the $58.8 million being deferred by PSE&G.

The recovery is over 15 years on an accelerated method which commenced in Tune 1982. As a result of the February 6, 1987 Over (Under) recovered Electrlc Energy and Gas Fuel Costs - net BPU rate Decision, no Hope Creek 2 costs were recovered Recoveries of electric and gas fuel costs are determine.cl by the during 1987 to reflect an adjustment of estimated close-out BPU. Earnings are not directly affected by increases or de-costs. The amortization of the discount, net of taxes, will creases in the costs of fuel or interchanged power, because result in a credit to income of $4.5 million in 1988. such costs are adjusted monthly to match amounts recovered through revenues. These clauses also provide that any over or LNG Project underrecoveries at the end of the period, along with interest in In December 1984, PSE&G abandoned its investment in cer- the case of an overrecovery, will be included in the average cost tain facilities for the storage of liquefied natural gas. As a result used to determine the rate for the succeeding levelized period.

of this abandonment and prior to regulatory approval, PSE&G's At December 31, 1987, the underrecovery under the LEAC investment of approximately $69.3 million, less tax savings of amounted to $75.8 million which includes $70 million of

$27.9 million or the net amount of $41.4 million, was deferred deferred replacement energy costs. At December 31, 1987 the and was being amortized over a seven-year period commencing overrecovery of the RMAC amounted to $35.3 million.

in 1984. For information concerning PSE&G's LEAC filing of No-On October 30, 1986, the BPU approved an agreement by vember 6, 1987 and PSE&G's RMAC filing of September 24, the major parties in the gas rate proceeding recommending the 1987, see Note 1.

recovery of $48.8 million, the unamortized balance of the LNG Project costs less tax savings of $18.7 million. This amor-tization will result in the recovery of approximately $2.8 mil-lion per year, net of taxes. The related amortization of the discount, net of taxes, will result in a credit to income of $1.5 million in 1988.

...

41

Unamortized Debt Expense The following table shows the plan's funded status:

Costs associated with the issuance of debt by PSE&G are de- December 31, December 31, ferred and amortized over the lives of the related issues. (Thousands of Dollars I 1987 1986 Amounts shown in the Consolidated Balance Sheets consist Actuarial present value of benefit obligations:

principally of costs associated with PSE&G's reacquisition of Accumulated benefit obligations, the following First and Refunding Mortgage Bonds: including vested benefits of $609,052 and $586,381 $(638,876) $(663,577) 12 % Series E due 2004 (tender offer 5/77) Effect of projected future compensation (204,199) (212,094) 12 % Series L due 2009 (redeemed 6/86) Projected benefit obligati~ns (843,075) (875,671) 12Vs% Series M due 2010 (redeemed 6/86) Plan assets at fair value, primarily listed 15%% Series N due 1991 (redeemed 8/86) equity and debt securities 783,797 741,484 14%% Series 0 due 2012 (redeemed 9/87) Projected benefit obligations in excess of 121/s% Series P due 2012 (redeemed 12/87) plan assets (59,278) (134,187)

Unrecognized net gain from past experience The redemption costs of the above debt have been deferred and and effects of changes in assumptions (66,808) are being amortized over the lives of the new securities issued Unrecognized net obligation being recognized over 16.7 years 126,086 134,187 to replace older, higher-cost securities. PSE&G expects to amortize $4.6 million of these costs in 1988. Prepaid (accrued) pension expense $ $ 71 Commercial Paper and Bank Loans The net pension cost for the year ending December 31, 1987 includes the following components:

(Thousands of Dollars J Service cost-benefits earned during 1987 $27,000 Commercial paper represents unsecured bearer promissory Interest cost on projected benefit obligation 64,200 notes sold through dealers at a discount with a term of nine Return on assets (50,084) months or less. Certain information regarding commercial Net amortization (1,116) paper follows: Total $40,000 (Thousands of Dollars J 1987 1986 1985 Pension costs of $57,671,000 in 1986 and $66,898,000 in 1985, Balance at end of year $385,300 $139,000 $107,000 including supplemental pension costs of $5,167,000 in 1986 Maximum amount outstanding at any and $10,847,000 in 1985, were computed based on generally month end $385,300 $286,000 $157,500 accepted accounting principles in effect for those periods.

Average daily outstanding $148,124 $ 98,100 $ 72,400 Supplemental pension costs in 1987 were $4,026,000.

Weighted average annual interest rate 6.88% 6.29% 7.91%

Weighted average interest rate for commercial paper outstanding at ~ Commitments and Contingent Liabilities year-end 7.65% 6.34% 8.09%

Bank loans represent unsecured promissory notes issued under Nuclear Performance Standard credit arrangements with various banks and have a term of On February 6, 1987 the BPU issued an oral decision, subse-eleven months or less. Such notes were issued in 1986 by CEA quently detailed in writing and reaffirmed on August 13, 198 7, and EDC. Certain information regarding bank loans follows: which is more fully described in Note 1, establishing perfor-mance standards for the five nuclear units in which PSE&G (Thousands of Dollars) 1987 1986 1985 has an ownership interest. (Salem 1 and Salem 2- 42.59%

Balance at end of year $ $104,996 None each; Hope Creek - 95%; and Peach Bottom 2 and 3 -

Maximum amount outstanding at any 42.49% each. PSE&G operates Salem and Hope Creek while month end $104,996 $104,996 NIA Average daily outstanding $ 42,448 $ 13,069 NIA Peach Bottom is operated by Philadelphia Electric Company Weighted average annual interest rate 6.68% 6.62% NIA (PE)). The following performance standards are premised upon Weighted average interest rate for bank a targeted 70% aggregate capacity factor for the five units, loans outstanding at year-end NIA 6.58% NIA with a deadband between 60% and 80% within which no penalty or reward would be incurred. The penalties or awards 81 Pension Plan are based on targeted capacity factors as illustrated in the following table:

Difference in Replacement Power Cost On January 1, 1987, PSE&G adopted the provisions of SFAS 87. vs. Target Capacity Factor of 70%

The discount rate, expected long-term return on assets and Capacity Factor Range Award Penalty average compensation growth used in determining the plan's Greater than 90% 25%

funded status as of December 31, 1987 and 1986 and 1987 net Greater than 80% through 90% 20%

pension cost are as follows: Equal to or greater than 60% through 80% None None Equal to or greater than 50% and less than Discount Rate Used to Determine Pension Cost 71/2% 60% 20%

Discounted Rate Used to Determine Benefit Obligations 8 1/4'l'o Equal to or greater than 40% and less than Expected Long-Term Return on Assets 8% 50% 25%

Average Compensation Growth 6% Below40% BPU Intervenes

42

Any penalties incurred would not be permitted to be recovered Peach Bottom Shutdown from customers and would reduce net income. The capacity On March 31, 1987, the NRC ordered PE to bring Peach Bottom factors of PSE&G's nuclear units were as follows: 2 and 3 to cold shutdown within 36 hours4.166667e-4 days 0.01 hours 5.952381e-5 weeks 1.3698e-5 months . At that time, Peach CAPACITY FACTORS Bottom 2 was out of service for planned refueling and mainte-Nuclear Units 1987 1986 nance. PE shut down Peach Bottom 3 in response to the order.

Salem I 63.6% 72.5% The NRC Order states that as a result of an investigation, Salem2 63.2% 54.4% which is still ongoing, it has established that at times, during Hope Creek 77.9%

Peach Bottom 2 various shifts, one or more of the Peach Bottom operations 16.6% 73.9%

Peach Bottom 3 15.6% 52.4% control room staff had, for at least the prior five-month period Aggregate total of Nuclear Units 53.6% 63.2% slept or otherwise been inattentive to licensed duties, and that the management of PE either knew or should have known of On November 6, 1987, PSE&G petitioned the BPU for a this situation and did not correct it. As a result, the NRC Staff change in its electric LEAC (see Note 1) so that the new rate determined that the continued operation of the facility was would be effective in January 1988. In accordance with the "an immediate threat to the public health and safety ... (and)

Nuclear Performance Standard, PSE&G did not request recov- that the public health, safety and interest requires that PE ery of 20% of the difference in replacement energy costs be- should proceed to place or maintain its units in a cold condi-tween the 70% target capacity factor under the Nuclear tion". The Order requires that before PE may restart either Performance Standard and the actual aggregate capacity factor Peach Bottom unit, it must provide the NRC Staff with a de-of 53.6% for the year 198Z As a result of the application of the tailed and comprehensive plan, and a schedule to accomplish Nuclear Performance Standard for the year 1987, PSE&G wrote the plan, to assure that the facility will operate and comply off $1Z6 million of replacement energy costs amounting to with all NRC and station requirements. It cannot be deter-

$10.5 million in an after-tax earnings penalty against net in- mined when the NRC will authorize Peach Bottom 2 and 3 to come, or 5 cents per share of Enterprise common stock. The be restarted.

aggregate capacity factor of PSE&G's five nuclear units during PE is conducting its own detailed investigation of the 1987 was 53.6%, which is below the 60% limit required by the matter and is cooperating with the NRC. PE has indicated standard to avoid a penalty. The nuclear units operated by Peach Bottom 2 will not be ready to return to service at least PSE&G - Salem 1, Salem 2 and Hope Creek - operated at a until the summer of 1988. Maintenance work continues on combined capacity factor of 71 % during 198Z The combined Peach Bottom 3 during the shutdown, which is expected to capacity factor for Peach Bottom 2 and 3 was 16% for the year. require the balance of 1988, regardless of any NRC authoriza-Because of the extended Peach Bottom outages, PSE&G tion, during which time piping affected by intergranular stress may again fall below the 60% aggregate capacity factor limit corrosion cracking, a generic problem with boiling water reac-for its five nuclear units in 1988 required by the Nuclear Per- tors, is being repaired and/or replaced.

formance Standard to avoid a penalty. The amount of such On April 6, 1987, PE announced a plan to investigate the penalty cannot be determined at this time because it cannot conditions which resulted in the NRC Order and instituted a be known with certainty how long the Peach Bottom units multiple-team approach to assess the situation, implement will be out of service or what the actual operating experience corrective actions and develop a recovery plan. One team of the other three units will be. includes senior management of PE. The Management Analysis In its January 27, 1988 Order the BPU also required PSE&G Company, a consulting firm, has assisted PE in its investiga-to provide information as to the replacement energy costs tion and will continue to advise PE management on the action associated with the Peach Bottom outage. This amount is plan designed to lead to restart. The PE Board of Directors has being calculated. However, the outage of one Peach Bottom also formed a special committee consisting of four outside PE unit results in additional replacement energy costs of approxi- directors to act independently to evaluate the problem and its mately $5 million to $7 million per month. solution. A past president of the Institute of Nuclear Power PE and Delmarva Power & Light Company, another co- Operations (INPO) has agreed to serve as a consultant to this owner of Peach Bottom, have publicly announced that they special PE committee. In addition, an assistance team of nu-will not seek recovery of increased replacement energy costs clear industry senior management and operating personnel has associated with the NRC ordered Peach Bottom shut down. In been formed by INPO to perform an independent analysis of addition, PSE&G understands that, on February 11, 1988, the Peach Bottom operations, evaluate PE's investigation and pro-Pennsylvania Public Utility Commission disallowed PE's right vide advice for corrective actions. INPO is an independent to earn an equity return on its investment in Peach Bottom. watchdog group composed of the 54 utilities operating nuclear Hearings in PSE&G's LEAC proceeding are continuing. plants and 60 other co-owners.

PSE&G cannot determine the timing or result of any decision On August 7, 1987, PE submitted a restart plan (Plan) to by the BPU in this matter. the NRC in response to the requirement of the NRC Order.

There have been subsequent submittals since that time in response to NRC questions. The Plan must be approved by the NRC prior to PE being permitted to restart Peach Bottom. In such Plan, PE concluded that declining performance at Peach Bottom was a result of the following causes: (1) poor leadership by plant management; (2) failure to initiate timely licensed operator replacement training programs; (3) a station culture, which had its roots in fossil and pre-Three Mile Island opera-tions, that had not adapted to changing nuclear requirements; and (4) slowness on the part of corporate management to recog-

""

43

nize the developing severity of these problems and take suffi- an opportunity for a hearing with respect to the license cient corrective action. At a meeting held on September 14, amendment application. On January 22, 1988, the Common-1987, before the NRC Commissioners, PE summarized the wealth of Pennsylvania filed with the NRC a petition to inter-contents of the Plan and the NRC staff provided critical com- vene and requested a hearing in the license amendment ments based on its review as submitted, indicating, among proceeding. The petition (i) opposes any action by the NRC other concerns, their disagreements with the Plan's emphasis "authorizing restart of Peach Bottom before a full hearing is on solutions to problems related to corporate management held on any license amendments, any organizational plans and responsibility. any event or action leading to the March 31, 1987 shutdown On September 28, 1987, PE submitted to the NRC Regional order"; (ii) "challenges that proposed amendments as inade-Administrator its responses to NRC Staff questions concerning quate to assure that the unsafe conditions at Peach Bottom the Plan. Calling certain responses "unclear and inconsistent", have been and will remain eliminated"; (iii) opposes the NRC's others as "lacking sufficient detail" and still others as "ques- proposed determination that the license amendments present tionable", the NRC Regional Administrator, in a letter dated no significant hazard considerations and (iv) states a "need to October 8, 1987, stated that the responses have "not addressed investigate corporate complicity in the failure of Peach Bot-the fundamental concern regarding the past inability of PE to tom's management." On February 8, 1988, PE filed its response self-identify problems, and implement timely and effective opposing the petition.

corrective actions", and that "there is very little in your (Plan) PSE&G is providing assistance to PE in an effort to obtain which addresses concerns about the capabilities of corporate authorization from the NRC to restart Peach Bottom 2 and 3.

management to identify problems at the nuclear facilities However, as stated above, it cannot be determined when the promptly and independently of plant line management report- NRC will grant such authorization.

ing, to analyze and address such problems quickly, and to At a press conference held on February 2, 1988, PE released assess and evaluate the results of such actions". The letter to the public a letter which it had received on January 12, 1988 further stated that the NRC staff is deferring further review of from INPO that is highly critical of PE, its Peach Bottom nu-the Plan pending receipt of a plan revision "which addresses clear operations and its corporate reorganization. At the press this fundamental concern". conference, several organization changes were also announced On October 9, 1987, PE announced a major corporate reor- by PE, including the resignation of PE's President and Chief ganization of its entire nuclear operations and support ser- Operating Officer. As a result, the Commonwealth of Pennsyl-vices. PE has reconstituted its Nuclear Review Board to include vania has renewed its request for an NRC hearing prior to membership of senior nuclear executives from outside PE, and restart.

to provide for a direct reporting relationship to the office of the It cannot be determined when PE will be permitted by the Chief Executive and to the Board of Directors. The Nuclear NRC to restart Peach Bottom 2 or 3. As a result of the outage Review Board will be responsible for reviewing and evaluating at Peach Bottom, PSE&G will incur replacement energy costs nuclear operations and management, early identification of relating to Peach Bottom amounting to approximately $5 mil-potential problems and assurance of prompt corrective actions. lion to $7 million per month, per unit.

By letter dated October 15, 1987, the Governor of Mary-land submitted comments to the NRC Regional Administrator Salem-Hope Creek Transmission Line Outage regarding the Plan, asserting various "shortcomings" including On March 1, 1987, a tanker collided with an electric transmis-failure to "properly account for the role of corporate manage- sion tower in the Delaware River near Salem and Hope Creek.

ment in the problems leading to the shutdown" and failure to The collision toppled the tower and dragged a part of the at-properly identify all tasks which should be addressed prior to tached 500,000 volt transmission line into the river causing restart and stating that the results of implementing the Plan damage to several other towers. The cost of the restoration, should be evaluated prior to restart. By letter dated October 28, which includes the damaged transmission line, is being shared 1987, the Commonwealth of Pennsylvania submitted to the by the owners (including PSE&G) of the Lower Delaware Val-NRC Regional Administrator comments on the Plan, asserting ley Transmission System (LDV) in amounts proportionate to among other things, that several Plan items should be imple- their respective percentages of ownership in the LDV system.

mented prior to, rather than after, restart, and indicating that PSE&G's share of the cost is expected to be approximately $13 most of the concerns raised by the NRC were also concerns of million. On March 4, 198 7, the LDV owners instituted a law-Pennsylvania. On November 20, 1987, the Commonwealth of suit in the United States Dist1ict Court for the Eastern District Pennsylvania filed with the NRC a petition requesting a hear- of Pennsylvania against the tanker and its owners and operators ing before permitting Peach Bottom to resume operations seeking damages resulting from the collision. On March 17, which was denied by the NRC on January 13, 1988. 1987, the owners and operators of the tanker filed a Petition for On November 25, 1987, PE submitted to the NRC a new Exoneration From and/or Limitation of Liability seeking to restart plan entitled the Corporate Action Section of its Plan limit their liability for damages to the value of the tanker, for Restart of Peach Bottom (Plan for Restart) detailing its approximately $3.5 million. On April 30, 1987, the LDV owners nuclear reorganization announced October 9, 198Z This por- filed a Claim seeking dismissal of the Petition and approval of tion of the Plan for Restart is being reviewed by the NRC. The the Claim for damages in excess of $50 million.

balance of the Plan for Restart must still be submitted by PE.

On December 23, 1987, the NRC issued a notice that its other Related Matters Staff proposed to determine that the requested Peach Bottom On March 2, 1984 the NRC issued a report with respect to an license amendment does not involve a "significant hazard inspection of Salem 1 in December 1983 and January 1984 for consideration." The notice also provided for intervention and compliance with the NRC's fire protection requirements. The report indicates that certain areas are not in compliance with such requirements and that certain additional irlformation is required. In accordance with accepted NRC practices, PSE&G has submitted exemption requests with respect to certain of

44

such requirements and has supplied the additional information United States Supreme Court held that the Atomic Energy requested. Act, the Price-Anderson limitation of liability provisions The NRC conducted a fire protection requirement audit thereunder and the extensive regulation of nuclear safety by of Salem 2 on September 14-18, 1987. The findings from this the NRC do not pre-empt claims under State law for personal, inspection indicate further exemption requests and modifica- property, or punitive damages related to radiation hazards.

tions will be necessary. PSE&G cannot determine what further action, if any, the NRC may take in this matter. PSE&G is also Construction and Fuel Supplies conducting an internal review of the NRC's fire protection Enterprise's principal subsidiary, PSE&G, has substantial com-requirements as they relate to Salem. The findings of such mitments as part of its construction program. Construction review combined with the recent inspection of Salem 2 could expenditures of $2.8 billion, including approximately $173 result in additional fire protection enhancements at Salem, the million of allowance for funds used during construction cost of which could be substantial. [AFDC), are expected to be incurred during the years 1988 through 1992. In addition, PSE&G does not anticipate any Nuclear Insurance Coverages and Assessments difficulties in obtaining sufficient sources of fuel for electric PSE&G's insurance coverages and maximum retrospective generation and adequate gas supplies.

assessments for its nuclear operations are as follows:

Gas and Oil Exploration Plant Write-Down Maximum Retrospective Maximum Assessments for a Single As described in Note 1, the after-tax loss of $58.8 million is Type and Source of Coverages Coverages Incident subject to recovery in PSE&G's next gas base rate case.

!Millions of Dollars)

Public Liability: Environmental Controls American Nuclear Insurers $ 160 $None The Comprehensive Environmental Response, Compensation Federal Government IA) 560 13.2IBI and Liability Act of 1980 and certain similar State statutes

--

$ 720(C) $ 13.2 authorize various governmental authorities to seek court Property Damage: orders compelling responsible parties to take clean-up action Nuclear Mutual Limited (DJ $ 500 $ 40.2 at disposal sites determined to present an imminent and sub-Nuclear Electric Insurance Ltd. (DJ 775 15.8 stantial danger to the public and to the environment because American Nuclear Insurers 120 None of an actual or threatened release of hazardous substances.

$1,395 $ 56.0 Because of the nature of PSE&G's business, various by-products Replacement Power: and substances are produced or handled which are classified as Nuclear Electric Insurance Ltd. (DI $ 3.S(EI $ 16.9 hazardous under these laws. PSE&G generally provides for the (A) Retrospective premium program under the Price-Anderson Liability provi- disposal of such substances through licensed independent sions of the Atomic Energy Act of 1954, as amended. Subject to retrospective contractors, but these statutory provisions generally impose assessment with respect to loss from an incident at any licensed nuclear reactor potential joint and several responsibility on the generators of in the United States.

the wastes for clean-up costs without regard to fault. PSE&G (Bl Maximum assessment would be $26.5 million in the event of more than one incident in any year.

has been notified with respect to a number of such sites, and IC) Limit of liability under the Atomic Energy Act of 1954, as amended for each the clean-up of hazardous wastes is receiving increasing atten-nuclear incident. tion from the governmental agencies involved. This trend is (DI Mutual insurance companies of which PSE&.G is a member. Subject to expected to continue. PSE&G cannot determine, at this time, retrospective assessment with respect to loss at any nuclear generating station the costs which may result from these matters, but such costs covered by such insurance. could be substantial.

(El Maximum weekly indemnity for 52 weeks which commences after the first 26 weeks of an outage. Also provides $1.75 million weekly for an additional 52 weeks. lO I Capital Lease Obligations The Atomic Energy Act provision [the Price-Anderson Act) in Notes [A), [BJ and (CJ above expired on August 1, 1987. However, The Consolidated Balance Sheets include assets and related the limitation of liability and contribution provisions continue obligations applicable to capital leases. The total amortization in effect for presently licensed plants, including all plants in of the leased assets and interest on the lease obligations equals which PSE&G has an interest, until a new bill becomes effec- the net minimum lease payments included in rent expense for tive. On July 30, 1987, by a vote of 396-17, the House of Repre- capital leases.

sentatives approved a bill which would increase the limit of Capital leases of PSE&G relate primarily to its corporate liability to $7 billion. Under the bill, after exhaustion of pri- headquarters and computer equipment. Certain of the leases vate insurance, all nuclear plants could be assessed up to $63 contain renewal and purchase options and also contain escala-million each, payable at $10 million per year, per reactor and tion clauses.

per incident. A similar bill was approved by the Senate Energy Enterprise and its other subsidiaries do not presently have and Natural Resources Committee. Another bill approved by any capitalized leases.

the Senate Environment and Public Works Nuclear Regulation Utility plant includes the following amounts for capital Subcommittee also would establish a liability limit of approxi- leases at December 31:

mately $7 billion. A vote by the full Senate is still pending.

PSE&G is unable to predict the eventual outcome of this legis- (Thousands of Dollars) 1987 1986 lation. In 1984, in a case to which PSE&G was not a party, the Common Plant $62,619 $65,872 Less Accumulated Amortization 6,210 7,535

---

Net Assets under Capital Leases $56,409 $58,337

45

Future minimum lease payments for noncancelable capital For the Year Ended December 31, 1986 and operating leases at December 31, 1987 are: (Thousands of Dollars) Electric Gas Other(AJ Total Capital Operating Operating Revenues $3,156,010 $1,324,690 $ 77,531 $ 4,558,231 (Thousands of Dollars J Leases Leases Eliminations (Inter-1988 $ 13,863 $ 4,501 segment Revenues) (59,815) (59,815) 1989 13,114 4,382 Total Operating 1990 13,110 3,863 Revenues 3,156,010 1,324,690 17,716 4,498,416 1991 13,046 3,059 1992 13,014 1,052 Depreciation and Later Years 290,684 2,809 Amortization 176,489 58,721 171,392 406,602

---

Minimum lease payments 356,831 $19,666 Eliminations (Note 6) (134,452) (134,452)

Total Depreciation Less: Amount representing estimated executory costs, and Amortization 176,489 58,721 36,940 272,150 together with any profit thereon, included in minimum lease payments 177,417 Operating Income

---

Net minimum lease payments 179,414 before Income Less Amount representing interest 123,005 Taxes 845,992 95,854 (125,990) 815,856 Eliminations (Note 6) 134,452 134,452 Present value of net minimum lease payments (Al $ 56,409 Total Operating A. Reflected in the Consolidated Balance Sheets in Capital Lease Obligations of Income before

$55,374,000 and in Long-Term Debt and Capital Lease Obligations due within Income Taxes 845,992 95,854 8,462 950,308 one year of $1,035,000.

Capital Expenditures 893,788 125,764 21,794 1,041,346 The following schedule shows the composition of rent expense December 31, included in Operating Expenses: Net Utility Plant 7,871,636 872,801 8,744,437 Gas and Oil Explora-(Thousands of Dollars I tion Plant 159,040 159,040 For the Years Ended December 31, 1987 1986 1985 Other Corporate Interest on Capital Lease Obligations $ 6,658 $ 6,966 $ 7,344 Assets 923,876 529,485 220,984 1,674,345 Amortization of Utility Plant under Capital Total Assets $8,795,512 $1,402,286 $380,024 $10,577,822 Leases 1,927 2,645 3,448 For the Year Ended December 31, 1985 Net minimum lease payments relating to Capital Leases 8,585 9,611 10,792 (Thousands of Other Lease payments 18,405 14,172 15,569 Dollars) Electric Gas Other(AJ Total

---

Total Rent Expense $26,990 $23,783 $26,361 Operating Revenues $3,000,,564 $1,408,490 $ 98,009 $ 4,507,063 Eliminations (Inter-segment Revenues) (78,722) (78,722) lll Financial Information by Business Segments Total Operating Revenues 3,000,564 1,408,490 19,287 4,428,341 Depreciation and Information related to the segments of Enterprise's business is Amortization 168,108 55,004 45,067 268,179 detailed below: Operating Income before Income For the Year Ended December 31, 1987 Taxes 779,293 117,220 16,489 913,002 Capital Expenditures l,ll6,040 104,049 47,418 1,267,507 (Thousands of December 31, Dollars) Electric Gas Other(AJ Total Net Utility Plant 7,536,326 803,262 8,339,588 Operating Revenues $2,959,549 $1,219,955 $ 77,679 $ 4,257,183 Gas and Oil Explora-Eliminations (Inter-tion Plant 308,351 308,351 segment Revenues) (46,128) (46,128)

Other Corporate Total Operating Assets 1,123,051 439,586 23,714 1,586,351 Revenues 2,959,549 1,219,955 31,551 4,211,055 Total Assets $8,659,377 $1,242,848 $ 332,065 $10,234,290 Depreciation and A. Other category primarily includes amounts that are derived from investments Amortization 292,164 63,008 24,937 380,109 and gas and oil exploration activities.

Operating Income before Income Taxes 977,467 115,622 21,779 1,114,868 Capital Expenditures 530,445 128,196 15,857 674,498 December 31, Net Utility Plant 8,029,567 940,537 8,970,104 Gas and Oil Explora-tion Plant 150,425 150,425 Other Corporate Assets 911,186 436,909 388,927 1,737,022

---

Total Assets $8,940,753 $1,377,446 $ 539,352 $10,857,551

46

1 Jointly-Owned Facllltles - Utlllty Plant 12 Enterprise's subsidiary, PSE&G, has ownership interests and is All amounts reflect the share of jointly-owned projects responsible for providing its share of the necessary financing and the corresponding direct expenses are included in Consoli-for the following jointly-owned facilities. dated Statements of Income as an operating expense.

(Thousands of Dollars) Ownership Plant Accumulated Plant Under Plant Interest In Service Depreciation Construction Coal Generating Conemaugh 22.50% $ 84,222 $ 24,392 $ 1,376 Keystone 22.84% 75,728 22,649 4,584 Nuclear Generating Peach Bottom 42.49% 526,000 194,381 46,467 Salem 42.59% 818,787 236,972 19,151 Hope Creek 95.00% 3,971,805 109,183 13,657 Nuclear Support Facilities Various 58,457 7,371 4,312 Pumped Storage Generating Yards Creek 50.00% 18,978 5,558 1,137 Transmission Facilities Various 87,875 16,806 Merrill Creek Reservoir 16.19% 31,676 Linden Synthetic Natural Gas 90.00% 66,760 57,504 1 Selected Quarterly Data (Unaudited) 13 The information shown below in the opinion of Enterprise to the seasonal nature of the utility business, quarterly includes all adjustments, consisting only of normal recurring amounts vary significantly during the year.

accruals, necessary to a fair presentation of such amounts. Due Calendar Quarter Ended March31, June30, September 30, December 31, (Thousands where applicable) 1987 1986 1987 1986 1987 1986 1987 1986 Operating Revenues $1,233,508 $1,314,667 $931,024 $1,007,304 $1,004,861 $1,057,678 $1,041,662 $1,118,767 Operating Income $ 209,007 $ 186,132 $207,173 $ 155,142 $ 242,473 $ 192,891 $ 163,646 $ 143,119 Net Income $ 157,459 $ 161,724 $126,271 $ 133,016 $ 159,296 $ 174,888 $ 77,425 $ (91,165)

Earnings Per Share of Common Stock $ 0.78 $ 0.82 $ 0.62 $ 0.67 $ 0.78 $ 0.87 $ 0.38 $ (0.45)

Average Shares of Common Stock Outstanding 202,429 197,631 203,340 199,192 204,336 200,472 205,348 201,491 Reflects 3-for-2 common stock split effective July I, 198Z

47

CONSOLIDATED FINANCIAL STATISTICS (Thousands of Dollars where applicable) 1987 1986 Condensed Consolidated Statements of Income (A) Amount % Amount %

Operating Revenues Electric $ 2,959,549 70 $ 3,156,010 70 Gas 1,219,955 29 1,324,690 30 Other 31,551 1 17,716 Total Operating Revenues 4,211,055 100 4,498,416 100 Operating Expenses Operation Fuel for Electric Generation and Interchanged Power-net 555,405 13 1,033,371 23 Gas Purchased and Materials for Gas Produced 614,861 15 692,224 15 Other 634,494 15 607,301 14 Maintenance 302,362 7 254,256 6 Depreciation and Amortization 380,109 9 272,150 6 Amortization of Property Abandonments and Write-Down 22,526 1 71,232 Taxes Federal Income Taxes 292,169 7 270,783 6 New Jersey Gross Receipts Taxes 522,870 12 563,518 13 Other 63,960 1 56,297 1 Total Operating Expenses 3,388,756 80 3,821,132 85 Total Operating Income 822,299 20 677,284 15 Allowance for Funds Used During Construction (Debt and Equity) 52,666 1 241,317 5 Other Income - net 6,031 10,840 Application of SFAS 90 Disallowed Plant Costs and Abandonments - net 27,266 (295,244) (6)

Related Income Taxes (12,255) 111,418 2 Interest Charges (336,793) (8) (315,780) (7)

Preferred Stock Dividend Requirements (38,763) (1) (51,372) (1)

Net Income $ 520,451 12 $ 378,463 8 I' Shares of Common Stock Outstanding (Thousands)

End of Year 205,350 202,324 Average for Year 203,873 199,709 Earnings per average share of Common Stock $ 2.55 $ 1.90 Dividends Paid per Share $ 1.99 $ 1.95 Payout Ratio 78% 103%

Rate of Return on Average Common Equity 13.88% 10.56%

Ratio of Earnings to Fixed Charges Before Income Taxes 3.03 2.38 Book Value per Common Share $18.54 $17.92 Utility Plant $11,998,816 $11,437,196 Accumulated Depreciation and Amortization of Utility Plant $ 3,028,712 $ 2,692,759 Total Assets $10,857,551 $10,577,822 Consolidated Capitalization (A)

Mortgage Bonds $ 3,082,073 40 $ 3,100,210 41 Debenture Bonds 204,966 3 210,910 3 Other Long-Term Debt 25,000 Total Long-Term Debt 3,287,039 43 3,336,120 44 Other Long-Term Obligations 55,374 1 56,409 Preferred Stock with Mandatory Redemption 30,000 65,000 1 Preferred Stock without Mandatory Redemption 429,994 6 554,994 7 Common Stock 2,710,343 36 2,632,662 34 Retained Earnings 1,096,933 14 993,836 13 Total Common Equity 3,807,276 50 3,626,498 47 Total Capitalization $ 7,609,683 100 $ 7,639,021 100 All years reflect the application of SFAS 90, the 3-for-2 common stock split and the consolidation of wholly-owned subsidiaries.

A. Sec Management's Discussion and Analysis of Financial Condition and Results of Operations, Organization and Summary of Significant Accounting Policies and Notes to

48 Consolidated Financial Statements.

,.

1985 1984 1983 1982 1977 Amount % Amount % Amount % Amount % Amount %

$ 3,000,564 68 $2,816,241 67 $2,570,457 65 $2,543,191 65 $1,470,118 72 1,408,490 32 1,379,883 33 1,392,475 35 1,330,785 34 562,677 28 19,287 11,248 16,316 20,191 1 4,489 4,428,341 100 4,207,372 100 3,979,248 100 3,894,167 100 2,037,284 100 965,966 22 872,805 21 868,977 22 959,382 25 538,916 27 757,976 17 758,627 18 815,996 20 774,634 20 255,297 13 567,698 13 545,737 13 518,209 13 468,001 12 252,443 12 291,940 7 270,359 6 239,017 6 220,725 6 124,946 6 268,179 6 246,715 6 228,264 6 220,465 6 150,298 7 55,263 1 58,975 49,040 1 43,345 1 1,185 273,119 6 263,270 6 197,833 5 185,588 4 121,682 6 557,270 13 529,654 13 513,760 13 514,266 13 269,973 13 53,161 1 51,930 1 45,696 1 41,325 1 24,355 1 3,790,572 86 3,598,072 85 3,476,792 87 3,427,731 88 1,739,095 85 637,769 14 609,300 15 502,456 13 466,436 12 298,189 15 195,871 4 158, 792 4 128,592 3 91,427 2 49,540 2 458 2,674 4,108 5,616 234 (109,717) (2) (5,016) 32,499 34,060 229 24,799 2,172 (13,333) (13,968)

(289,546) (6) [280,737) (7) (245,377) (6) (220,652) (6) (133,721) (7)

(60,002) (1) (60,221) (2) (58,234) (2) (53,865) (1) (45,065) (2)

I $ 399,632 9 $ 426,964 10 $ 350,711 9 $ 309,054 8 $ 169,406 8 197,548 168,845 154,287 142,267 89,709 183,516 163,370 146,201 133,850 88,865

$ 2.18 $ 2.61 $ 2.40 $ 2.31 $ 1.91

$ 1.87 $ 1.80 $ 1.75 $ 1.69 $ 1.28 86% 69% 73% 73% 67%

12.27% 15.19% 14.03% 13.88% 10.99%

2.67 2.81 2.65 2.64 2.30

$17.87 $17.64 $17.07 $16.58 $17.59

$10,842,182 $9,870,429 $9,017,951 $8,165,130 $5,654,094

$ 2,502,594 $2,320,140 $2,214,135 $2,046,372 $1,314,913

$10,234,290 $9,523,322 $8,472,538 $7,780,773 $5,141,631

$ 2,945,723 40 $2,877,518 42 $2,452,954 40 $2,341,142 41 $1,647,445 40 218,918 3 225,825 3 231,945 4 238,640 4 330,812 8 4,500 2,640 3,164,641 43 3,107,843 45 2,684,899 44 2,579,782 45 1,980,897 48 58,337 122,947 2 119,815 2 118,419 2 65,000 137,750 2 139,500 2 111,250 2 35,000 554,994 7 554,994 8 554,994 9 554,994 10 554,994 13 2,535,687 34 2,032,665 29 1,819,082 30 1,637,621 28 946,374 23 1,013,285 14 963,573 14 831,815 13 737,294 13 649,677 15 3,548,972 48 2,996,238 43 2,650,897 43 2,374,915 41 1,596,051 38

$ 7,391,944 100 $6,919, 772 100 $6,150,105 100 $5,739,360 100 $4,166,942 100

...

49

OPERATING STATISTICS PUBLIC SERVICE ELECTRIC AND GAS COMPANY

% Annual Increase (D_ecrease)--'--1987 compared with (Thousands of Dollars where applicable) 1987 1986 1986 1977 Electric Revenues from Sales of Electricity Residential $ 940,915 $ 971,236 (3.12) 6.69 Commercial 1,273,819 1,333,144 (4.45) 9.14 Industrial 672,104 782,008 (14.05) 4.96 Public Street Lighting 46,248 43,726 5.77 5.29

--

Total Revenues from Sales to Customers 2,933,086 3,130,114 (6.29) 7.19 Interdepartmental 1,896 1,927 (1.61) (.10)

Total Revenues from Sales of Electricity 2,934,982 3,132,041 (6.29) 7.18 Other Electric Revenues 24,567 23,969 2.49 23.69

--

Total Operating Reyenues $ 2,959,549 $ 3,156,010 (6.22) 7.25 Sales of Electricity- megawatthours Residential 9,299,490 8,726,769 6.56 1.81 Commercial 14,990,376 14,118,028 6.18 4.40 Industrial 10,119,614 10,134,327 (.15) (.49)

Public Street Lighting 296,377 295,639 .25 1.35

--

Total Sales to Customers 34,705,857 33,274,763 4.30 2.02 Interdepartmental 23,709 23,790 (.34) (4.69)

Total Sales of Electricity 34,729,566 33,298,553 4.30 2.02 Megawatthours Produced, Purchased and Interchanged- net 37,531,~27 36,033,414 4.16 2.01 Load Factor 52.4% 53.2%

Capacity Factor 34.1% 33.0%

Heat Rate - Btu of fuel per net kwh generated 10,634 10,716 (.77) (.04)

Net Installed Generating Capacity at December 31 - megawatts 10,032 10,032 .82 Net Peak Load- megawatts (60-minute integrated) 8,173 7,735 5.66 1.71 Temperature Humidity Index Hours . 16,441 14,934 10.09 1.00 Average Annual Use per Residential Customer - kilowatthours 5,939 5,650 5.12 .95

\

Meters in Service at December 31 - Thousands 1,838 1,812 1.43 .76 Gas Revenues from Sales of Gas Residential $ 698,518 $ 754,785 (7.45) 7.33 Commercial 360,834 390,811 (7.67) 10.10 Industrial 145,664 171,860 (15.24) 6.38 Street Lighting 363 355 2.25 7.39

--

Total Revenues from Sales to Customers 1,205,379 1,317,811 (8.53) 7.95 Interdepartmental 3;837 2,849 34.68 20.96

-- --

Total Revenues from Sales of Gas 1,209,216 1,320,660 (8.44) 7.97 Other Gas Revenues 10,739 4,030 166.48 24.52

-- --

Total Operating Revenues $ 1,219,955 $ 1,324,690 (7.91) 8.05 Sales of Gas - kilotherms Residential 1,118,609 1,065,630 4.97 1.33 Commercial 678,281 644,450 5.25 4.60 Industrial 373,947 413,072 (9.47) 1.28 Street Lighting 655 680 (3.68) 5.71 Total Sales to Customers 2,171,492 2,123,832 2.24 2.22 Interdepartmental 8,972 5,498 63.19 15.83 Total Sales of Gas 2,180,464 2,129,330 2.40 2.25 Gas Produced and Purchased - kilotherms 2,260,902 2,212,175 2.20 2.24 Effective Daily Capacity at December 31 - kilotherms 21,100 20,899 .96 1.09 Maximum 24-hour Gas Sendout - kilotherms 16,517 14,871 11.07 1.66 Heating Degree Days 4,717 4,699 .38 (.88)

Average Annual Use per Residential Customer - therms 905 876 3.31 .49 Meters in Service at December 31 - Thousands 1,472 1,448 1.66 .87

50

1985 1984 1983 1982 1977

$ 918,911 $ 883,652 $ 829,967 $ 791,279 $ 492,473 1,236,027 1,111,175 984,499 981,795 531,118 774,963 749,725 686,880 716,662 414,058 43,786 42,164 38,672 37,809 27,622 2,973,687 2,786, 716 2,540,018 2,527,545 1,465,271 1,877 1,810 1,863 1,709 1,916 2,975,564 2,788,526 2,541,881 2,529,254 1,467,187 25,000 27,715 28,576 13,937 2,931

$ 3,000,564 $ 2,816,241 $ 2,570,457 $ 2,543,191 $ 1,470,118 8,390,658 8,373,471 8,402,397 7,686,548 7,769,629 13,313,639 12,452,020 11,753,667 l l, 114,655 9,747,908 10,290,711 10,444,412 10,283,784 10,017,613 10,627,734 300,612 301, 702 302,053 301,603 259,277 32,295,620 31,571,605 30,741,901 29,120,419 28,404,548 24,888 25,796 27,800 25,154 38,331 32,320,508 31,597,401 30,769,701 29,145,573 28,442,879 34,869,192 34,178,862 33,391,011 31,563,231 30,771,719 51.6% 52.4% 52.6% 51.2% 50.9%

31.3% 32.6% 31.6% 34.7% 32.7%

10,692 10,616 10,717 10,677 10,677 9,007 8,999 8,999 8,995 9,247 7,721 7,422 7,244 7,042 6,895 15,720 16,677 17,262 12, 155 14,883 5,494 5,543 5,602 5,156 5,403 1,788 1,769 1,757 1,746 1,704

$ 751,339 $ 717,286 $ 746,200 $ 716,308 $ 344,444 407,073 393, 197 396,159 371,027 137,811 242,767 263,080 246,408 241,437 78,474 372 369 358 350 178 1,401,551 1,373,932 1,389,125 1,329,122 560,907 1,321 1,682 1,011 1,068 572 1,402,872 1,375,614 1,390,136 1,330,190 561,479 5,618 4,269 2,339 595 1,198

$ 1,408,490 $ 1,379,883 $ 1,392,475 $ 1,330,785 $ 562,677 1,019,850 1,019,025 995,686 994,647 980,570 634,059 628,855 596,868 581,739 432,810 468,489 495,719 460,601 465,835 329,211 736 339 327 331 376 2,123,134 2,143,938 2,053,482 2,042,552 1,742,967 2,540 3,377 1,857 2,090 2,064 2,125,674 2,147,315 2,055,339 2,044,642 1,745,031 2,218,818 2,249,352 2,151,417 2,148,839 1,811,019 19,990 19,856 19,129 19,139 18,933 17,994 14,927 15,612 16,201 14,006 4,764 4,743 4,677 4,820 5,155 853 863 850 853 862 1,422 1,404 1,392 1,384 1,350

51

OFFICERS AND DIRECTORS Officers PUBLIC SERVICE ENTERPRISE Marilyn M. Pfaltz GROUP INCORPORATED Partner of P and R Associates (public relations PUBLIC SERVICE and publicity specialists), Summit, New jersey.

ELECTRIC AND GAS COMPANY E. James Ferland *Chairman of Nominating Committee and Chairman of the Board, President and Chief member of Audit Committee and Diversified E. James Ferland Executive Officer Activities Committee.

Chairman of the Board, President and Chief Executive Officer Everett L. Morris James C. Pitney Vice President Partner of Pitney, Hardin, Kipp &. Szuch (law Everett L. Morris Senior Executive Vice President Frederick W. Schneider firm), Newark and Morristown, New jersey.

Vice President

Chairman of Audit Committee and member of Frederick W. Schneider Organization and Compensation Committee Executive Vice President- Electric Parker C. Peterman and Nominating Committee.

Comptroller Lawrence R. Codey Robert I. Smith Senior Vice President - Gas Francis J. Riepl Retired Chairman of the Board of Public Service Treasurer Electric and Gas Company.

Fredrick R. Desanti *Member of Finance Committee and Senior Vice President- Customer Operations R. Edwin Selover Nominating Committee.

General Counsel Robert W. Lockwood Harold W. Soon Senior Vice President - External Affairs Robert S. Smith Retired Chairman of the Board of the Corporation.

Secretary *Member of Audit Committee, Diversified Stephen A. Mallard Senior Vice President - Planning and Research Activities Committee and Finance Committee.

Directors Corbin A. McNeill, Jr. Robert V. Van Fossan T.J. Dermot Dunphy Chairman of the Board, Chief Executive Officer Senior Vice President - Nuclear President, Chief Executive Officer and director, and director, The Mutual Benefit Life Insurance R. Edwin Selover Sealed Air Corporation (manufactures protective Company, Newark, New jersey.

Senior Vice President and General Counsel packaging products and systems), Saddle Brook,

Chairman of Organization and Compensation New jersey. Committee and member of Executive Donald A. Anderson *Member of Diversified Activities Committee, Committe and Finance Committee.

Vice President - Information Systems Finance Committee and Organization and Compensation Committee. Josh S. Weston Robert J. Dougherty, Jr. Chairman of the Board, Chief Executive Officer Vice President - Marketing Robert R. Ferguson, Jr. and director, Automatic Data Processing, Inc.,

President, Chief Executive Officer and director, Roseland, New jersey.

Curtis W. Grevenitz First Fidelity Bancorporation and Chairman of the Vice President - Gas Operations *Member of Audit Committee, Diversified Board and director, First Fidelity Bank, National Activities Committee and Organization and Pierre R.H. Landrieu Association, both of Newark, New jersey. Compensation Committee.

Vice President - Engineering and Construction *Member of Diversified Activities Committee, Organization and Compensation Committee 1987: TRANSITION John H. Maddocks and Executive Committee.

Vice President- Public Affairs BOARD OF DIRECTORS-E. James Ferland Enterprise and PSE&.G Charles E. Maginn, Jr. Chairman of the Board, President and Chief Kenneth C. Rogers, a director since 1974, Vice President - Human Resources Executive Officer of the Corporation. resigned on August 7 to accept an appointment

Chairman of Executive Committee. by President Reagan as a member of the Nuclear Winthrop E. Mange, Jr.

Vice President - Corporate Services Shirley A. Jackson Regulatory Commission. n James R. Cowan, Theoretical Physicist, AT&.T Bell Laboratories, M.D., a director since 1981, retired on April 21 Steven E. Miltenberger Murray Hill, New jersey. in accordance with the retirement policy for Vice President - Nuclear Operations directors. n Dr. Shirley A. Jackson, a theoretical

Member of Audit Committee, Diversified Activ-ities Committee and Nominating Committee. physicist at AT&.T Bell Laboratories, was Parker C. Peterman elected a director effective August 1.

Vice President and Comptroller Irwin Lerner OFFICERS- PSE&.G Francis J. Riepl President, Chief Executive Officer and director, Under the reorganization of PSE&G effective Vice President and Treasurer Hoffmann-La Roche Inc. (manufactures January 1, 1988, the following officers were prescription pharmaceuticals, vitamins and fine named heads of business units: n Everett L.

Louis L. Rizzi chemicals and provides diagnostic products and Morris, senior executive vice president, finance Vice President - Customer Services services), Nutley, New jersey.

and diversified businesses business unit; Freder-

Member of Audit Committee, Executive William Saller Committee and Organization and ick W. Schneider, executive vice president-elec-Vice President - Governmental Affairs tric, electric business unit; Lawrence R. Codey, Compensation Committee.

senior vice president-gas, gas business unit; Robert S. Smith Fredrick R. DeSanti, senior vice president-cus-Vice President and Secretary William E. Marfuggi Chairman of the Board and director, Victory tomer operations, customer operations business Optical Manufacturing Company (manufactures unit; R. Edwin Selover, senior vice president and Robert F. Steinke ophthalmic frames) and Chairman of the Board general counsel, legal business unit; Robert W.

Vice President- Fuel Supply and director, Plaza Sunglasses, Inc. (manufactures Lockwood, senior vice president-external affairs, Rudolph D. Stys sunglasses), both of Newark, New jersey. external affairs business unit. n The following Vice President- Transmission and Distribution *Chairman of Diversified Activities Committee were elected officers of PSE&.G effective January and member of Finance Committee and 1, 1988: Curtis W. Grevenitz, vice president-gas Richard A. Uderitz operations, and Robert J. Dougherty Jr., vice Nominating Committee.

Vice President - Production president-marketing. u In addition, Louis L.

Everett L. Morris Rizzi was redesignated vice president-customer Vice President of the Corporation. operations. *

Charles E. Maginn Jr., vice

52

Chairman of Finance Committee and member of Executive Committee.

president-human resources, announced his retirement, effective February 16, 1988.

CORPORATE AND STOCK INFORMATION Stockholder Information - Toll Free Financial and Statistical Review New Jersey residents 1-(800) 242-0813 A comprehensive statistical supplement to this report, con-Outside New Jersey 1-(800) 526-8050 taining financial and operating data will be available this Spring. If you wish to receive a copy, please write to the Man-Security Analysts and Institutional Investors ager - Investor Relations, Public Service Electric and Gas Manager - Investor Relations (201) 430-6564 Company, P.O. Box 570, T6B, Newark, N.J. 07101 (telephone (201) 430-6503 ).

Dividend Reinvestment Plan Enterprise has a Dividend Reinvestment and Stock Purchase Transfer Agents Plan under which all common and PSE&G preferred stock- All Stocks, holders may reinvest dividends and/or make direct cash invest- Morgan Shareholder Services Trust Company ments to obtain Enterprise common stock through purchases 30 West Broadway, New York, N.Y. 10015 in the open market. All brokerage and other fees are absorbed Stockholder Services, by Enterprise. To participate call the toll free number to obtain Public Service Enterprise Group Incorporated an authorization card.

80 Park Plaza, P.O. Box 1171 Stock Trading Symbol: PEG Newark, N.J. 07101-1171 Registrars Annual Meeting All Stocks, Please note that the Annual Meeting of Stockholders of Public First Fidelity Bank, N.A., New Jersey Service Enterprise Group Incorporated will be held at the 765 Broad Street, Newark, N.J. 07101 Newark Symphony Hall, 1020 Broad Street, Newark, N.J. on Tuesday, April 19, 1988 at 2:00 PM. A summary of the meeting Morgan Shareholder Services Trust Company will be sent to all stockholders of record at a later date. 30 West Broadway, New York, N.Y. 10015 Additional Reports Available - Form 10-K Stock Exchange Listings Stockholders or other interested persons wishing to obtain a Common:

copy of Enterprise's or PSE&G's 1987 Annual Report to the New York Stock Exchange Securities and Exchange Commission, filed on Form 10-K, Philadelphia Stock Exchange

may obtain one without charge by writing to the Manager-London Stock Exchange Investor Relations, Public Service Electric and Gas Company,

,P.O. Box 570, T6B, Newark, N.J. 07101 (telephone (201) Preferred of PSE&G:

'430-6503 ). The copy so provided will be without exhibits. New York Stock Exchange Exhibits may be purchased for a specified fee.

Common Stock - Market Price 1987 High Low First Quarter $30.58 $25.83 Second Quarter $26.67 $23.42 Third Quarter $27.25 $23.50 Fourth Quarter $26.75 $20.00 Reflects 3-for-2 common stock split effective July 1, 198Z PSE&G TERRITORY Newark Trenton

.Camden

ML18093A740

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