ML18106A457

Public Svc Enterprise Group Inc,Annual Rept for 1997.

ML18106A457
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Site:	Salem, Hope Creek
Issue date:	12/31/1997
From:	FERLAND E J PUBLIC SERVICE ENTERPRISE GROUP
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ML18106A456	List: ML18106A455 ML18106A457 ML18106A458
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NUDOCS 9804170233
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• . c!'._: r==* Public Service Enterprise v ,.. .. , Group Incorporated 9804170233 980413 PDR ADOCK 05000272 I PDR Countdown to Choice / Summary Annual Report 1997 The countdown to choice has begun. In 1998, electric utility deregulation and restructuring will move from conjecture to reality. In New Jersey, customers may begin choosing their energy supplier by the fall of 1998, joining residents and businesses in other states that have already participated in customer choice pilot programs.

In the international energy sector and in New Jersey's natural gas marketplace, customers are already making choices. In response, Public Service Enterprise Group Incorporated (Enterprise) has expanded to bring service and quality to new markets and new customers.

Industry restructuring in the United States and abroad is bringing new and promising opportunities.

We are convinced that being the company our customers can count on is a key advantage whether we serve regions of the world where reliable energy is at a premium or where it is a necessary, but taken for granted, part of life. As the countdown continues in New Jersey, customers, while looking for reductions in their energy costs, are also demanding that they continue to receive the same quality service they've enjoyed from regulated utilities.

As New Jersey's premier electric utility , Public Service Electric and Gas Company (PSE&G) is committed to continue meeting that expectation:

providing energy services our customers can rely on. Whatever opportunities arise, the people of Enterprise will continue their customer-focused approach to providing quality energy and energy services, with an eye at all times on increasing value to our shareholders.

Financial Highlights Dollars in millions where applicable 1997 1996 Total Operating Revenues $ 6,370 $ 6,041 Total Operating Expenses $ 5,255 $ 4,984 Net Income $ 560 $ 612 Common Stock Shares Outstanding

-Average (Thousands) 231,986 242,401 Earnings per Average Share $ 2.41 $ 2.52 Dividends Paid per Share $ 2.16 $ 2.16 Book Value per Share -Year-end $22.47 $22.33 Market Price per Share -Year-end $31.81 $27.25 Ratio of Earnings to Fixed Charges -ENTERPRISE(AJ 2.61 2.68 Ratio of Earning s to Fixed Charges -PSE&G(AJ 2.70 2.62 Gross Additions to Utility Plant $ 557 $ 603 Total Gross Utility Plant $17,815 $17,327 IAJ Includes Preferred Securities Dividend Requirements.

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

% Change 5 5 (8) (4) (4) 1 17 (8) 3 <l Cover Photo: (clockwise from bottom) Jo Ann Dow, Manager -Community Affairs; Gene Hernandez , Senior Project Engineer, CEA; Bob Sutphin, Boiler Repair Mechanic, SMD; Debbie Smith , Inbound Collection

& Credit Representative

Jim Kirwin, Jr., Electric Lineman; Debra Aschenbach, Service Specialist

• *

• Chairm*an's Letter * *

Dear Shareholder,

During 1997, good progress was made on many fronts as we positioned your company to enter tomorrow's tive marketplace.

We expect, by year-end 1998, that the rules which will govern our role in this new business ment will have been largely determined.

Financially, Enterprise reported consolidated earnings of $2.41 per share in 1997, a decline of 11 cents compared to reported earnings of $2.52 per share in 1996. However, excluding certain nonrecurring items described below, Enterprise's 1997 earnings on an operating basis were $2.68 per share, an increase of 4 cents, compared with operating earnings of $2.64 per share in 1996. Operating earnings are calculated by excluding nonrecurring items and more accurately reflect Enterprise

's damental, ongoing strength.

In addition, they serve as a better basis to gauge future performance.

In 1997, these one-time events included a charge of 27 cents per share resulting from the settlement of lawsuits related to the refurbishment outage of our Salem Nuclear Generating Station. In 1996 , these one-time events included a c harge of 25 cents per share due to the resolution of regulatory i ss ue s including the used and usefulnes s of the Salem station. The good news is, of course , that the extensive bishment of the Salem units is complete.

Salem Unit 2 has performed well since being returned to service in the late summer of 1997 and Salem Unit 1 , with its new steam erators installed, is completing start-up testing and will return to service shortly. On Wall Street, Enterprise

's common stock finished 1997 on a strong note , closing on the New York Stock E xc han g e at $31.81 , the hi g h point for the year. The apprecia tion of our s tock price from $27.25 at the close of 1996, c ombi n ed w ith reinve s tment of our annual dividend of $2.16 per share , resulted in a total return of just under 2 7 per c ent. We did very well, compared to two respected benchmarks

-about half a percent above Standard & Poor's 1 index of 26 electric utilities and about three percent above the Dow Jones Utilities , an index of 15 electri c and gas panies. This performance was in the face of the regulatory uncertainty accompanying the advanced stage of industry restructuring in New Jersey -one of the nation's leaders in this transition process. Our stock price is likely , however, to remain volatile through this period of uncertainty. Industry restructuring In response to New Jersey's mandate for industry re sing, our utility business , Public Service Electric and Ga s Company (PSE&G}, filed a plan to give electric customers the opportunity to choose their own energy provider beginning in January 1999, while providing a discount of 5 to 10 percent off current rates. Also, as a result of 1997 changes in New Jersey's util i ty tax policy, an additional reduction of up to 6 percent in customers' bills will be phased in during the next several years -without an impact on Enterprise

's earnings.

Our restructuring plan also include s a number of sions that we believe will protect your interests as ers and enhance the economic well-being of the s tate of New Jersey. While much work has yet to be done , including the passage of enabling legislation , we envision an orderly process leading to the introduction of competition by the beginning of 1999 . With competition just around the corner , our focus on growth to improve the future value of our company is greater than ever. PSE&G continued in 1997 to enhance it s portfolio of activitie s , from the marketing of appliance service contra c t s to the trad-ing of electricity and natural ga s. Under the umbrella of our other major subsidiary, Enterprise Diversified ings Incorporated (EDHI}, our nonregulated businesse s concentrated on developing energy s ervices in the north-eastern United States , pur s u-ing s elected investments in generation and distr i bution Revenue per kwh 88 89 90 91 92 93 94 95 96 97 (Average revenue per kwh adjusted for inflation.

facilities on a global basis, Ba se year 1 996. Cents per kwh.J and building a portfolio of passive energy-re lated PSE&G supplies electricity at the lowest cost investments that provide a per kwh of all the major utilities in New Jersey, and intends to continue the trend. consistent earnings and cash flow. Reshaping PSE&G Hi s tori c ally , PSE&G ha s man a ged the g eneration, delivery , meterin g and billing of electri c ity for its c ustomers a s a single , bundled service. I t now appears likely that generation will be s eparated or unbundled from other activities , giving cutomers the freedom to buy electricity as a commodity from 0 U") ....; ....; Ii L:: 93 any number of providers , including utilities, independent power producers and power marketers. Due to recent technological improvements affecting the reliability and efficiency of combustion turbine-powered generating stations , many of our older power plants will not be able to compete effectively in the new marketplace.

A key concern is the legislative and regu lator y treatment of our investment in these facilities. The difference between our investment in these facilities and their value in a competitive Enterprise Annual Earnings and D1v1dend Payout per Share generation marketplace is referred to as "s tranded costs." 00 " " N ....; ....; U") ....; ..;-....; ....; ....; ....; ....; r-94 95 96 97 e E arnings pe r Sha re e Ann ual Di vidend P ayo u t Dealin g with stranded costs i s perhaps the thorniest aspect of industry turing. In past years, PSE&G invested billions of dollars in generating facilitie s to assure reliability of service to our customers and , with regulatory approval, we were allowed to recover these investments over time. We believe our restruc-turing plan deals with sded costs, among other issues, in a reasonable manner. A fair regulatory outcome is achievable through a combination of supportive legislation that will permit refinancing zation) of certain generation facilities, an acceptable tion period and an appropriate reduction of customer rates in line wi th New Jersey's Energy Master Plan and , within the co mpany itself, an ongoing s trategy to contain costs and grow revenues. While the extent of our participation in tomorrow's petitive generation markets cannot yet be fully determined, it is clear to us that the distribution of electricity and natural gas, wh ich w ill likel y r emain a regulated activity, will continue to be an attractive business segment for Enterprise. PSE&G is one of the largest electric and gas distribution compan ie s in the United States -one in which the quality of operations i s as good as any throughout the country. We expect to improve the value of this business through efficiency ga in s under rate-cap pricing following the tion period. As we reshape PSE&G , there is another element of restructuring on which we are firmly focused, and that is ronmental reform. We have strongly endorsed federal legislation that would establish uniform air pollution s tandard s for a ll electric producers in the United States as a key nent of industry restructuring.

While we have long been an advocate for opening kets to competition, we have s tre ssed that it be done only if standards are in place to ensure that the ab ility to pollute is not a competitive advantage in a restructured industry. 2 From New Jer sey's and PSE&G's perspective, we have embraced tighter air pollution limits and have reduced our emissions. These standards and the related costs should not put us at a competitive disadvantage, especially since much of New Jersey's air quality level is the result of pollution blown into our state by prevailing westerly winds. We encourage you to join us in supporting federal antipollution legislation that both addresses the fact that the electric power industry is a major contributor to air quality problems and establishes emissions rules that will support environmental comparability among all producers.

We also believe that we must look at the full range of solutions when resolving environmental issues. nistic controls may not always be the best approach.

Emission trading on the air side and habitat restoration on the water s ide may be more effective solutions to mental issues because they produce longer-lasting results and cost less. Pursuing nuclear excellence In my letter to you last year, I emphasized our commitment to an improved nuclear program. I am pleased to report to you this year that our lengthy investment of time and resources to the refurbishment of the Salem sta tion is ing off. Unit 2 has performed extremely well since its return to full service late last summer. Unit l's fuel has now been reloaded and the station is on the verge of resuming tion as I write this letter. Meanwhile, our Hope Creek Nuclear Generating Stat i on had an extraordinary operating cycle before undergoing a s uccessful refueling last September.

The unit operated 99 percent of the time from completion of its prior refueling in Mar c h 1996 to it s most recent outage. The turnaround in our nuclear operations was led by Leon Eliason, whom we recruited three years ago from a highly regarded nuclear generation program at Northern States Power. During his tenure at PSE&G , he attracted , developed and directed a strong team of proven nuclear professionals in making sweeping changes and improvements designed to enable our nuclear units to achieve safe, reliable and long-term performance.

In the process, he rebuilt our nuclear credibi l ity with regulators on state and federal levels and with investors and security analysts in the key financial markets. Leon will retire from PSE&G on April 30 and be replaced by Harold Keiser , another highly regarded nuclear leader. Leon is leaving a legacy of nuclear excellence that I am confident will be carried on by Harry. Investing for growth In striving to enhance the future value of Enterprise , we made significant s trategic moves in 1997 through the considerable international expansion of Community Energy Alternatives (CEA), our nonregulated generation and * * *

• I I I I I distribution business, and the establishment of Ener gis Re s ources to provide a wide array of energy serv i ces from Maine to Maryland.

CEA has vastly improved its developmental capability throughout the world, building a good backlog of projects intended to produce noteworthy earnings growth well into the next cent ury. In pursuing opportunities, C EA draws on Enterpri se's long history of expertise in distribution and eration. In addition, it recruits experienced personnel from various countries and cultures and seeks business partners with strong local abilities and knowledge. In 1997 , CEA was successful in expanding operations in its various targeted regions in South America , particular l y Brazil and Argentina. C E A's assets increa sed to about $1.2 billion , bringing the level of its portfolio at year end to 28 generation and dis t ribution projects around the world. Energis Resources, our new entry in the burgeoning energy services industry, is targeting industrial and comcia l cu s tomer s in the Northeast, offering program s designed to help them redu ce costs, find innovative energy sol ution s, and assure ongoing reliabi l ity.

• 16 "' I 14 12 :;; 10 a. x 8 6 *A c tu a l Reducing NOx Em1 ss1ons 1990 1992 1994 I 996 I 998 2000

• Prop os e d N O x Plan 2000 0 -0 1 0 20 30 ;; 40 ;o 50 60 70 g 80 90 100 *O n e M W H R is the amo u n t of energy r equired to ligh t 10,000 hund r ed*watt l ight bul b s for 1 hour1.157407e-5 days <br />2.777778e-4 hours <br />1.653439e-6 weeks <br />3.805e-7 months <br /> Nitrogen oxide (N Oxl emi s sions from PSE&G's fossil plants f a ll well below the 1995 Corpo rat e Target. La st October, Energis secured s ome 800 new c u s tomer s under Pennsylvania's electricity competition pilot program, bringing the total throughout the 11-state region to well over 5,000. In early 1998 , Ener g is acquired a contractor that provides a wide range of HVAC and other co ntracting and maintenance s ervice s to indu strial and commercial buildings in Pennsylvania, New Jer sey and Delaware. In addition, it announced a s trategic alliance wi th AlliedSignal Inc. to market and s ervice a new energy technolo gy cal l ed a TurboGenerator , which provides an economical power s ource option for small commercial bu s inesses, in stit ution s and light industry.

Standing as so lid sup port for these growing businesse s is Public Service Resources Corpora tion , our passive investment company, which for a dozen years has produced a s teady 3 Allocation of Assets at December 31, 1997 E nt erpr is e Total As sets -$17.9 billion 199 7 Sources of Consolidated Earnings per S hare Enterprise Earning s per twrage Share -$2.4 1 E a rn ings pe r Sha r e PSE&G 83% P S E&G P S R C 9% EDHI C E A 7% EDHI C E A *Othe r 1% EGDC Energ i s stream of earnings and predictable cash flo w. Its focus is on energy-related inve st ments. Outlook for 1998 Our cha llen ges for the new year are abundant but by no means in surmou ntable. We remain firmly committed to s uing our three key strategies

an orderly restructuring of the electric utility in New Jer sey, achievement of operationa l excellence throughout a l l segments of Enterpri se and inve sing in a manner that will foster g rowth of future earnings.

Our desire is to achieve an earnings level in 1998 that w ill again demonstrate the fundamental strength of our tion s locall y and globally. Our objective throughout this sit ion to a com petitive industry is to focus on creating additional value in our co mpany. We firmly bel i eve that the underlying s trength in all facets of our business is our excellent work force. I n particular, we see corporate attent ion to two human areas as critical to our future s ucce ss. Fir st, the health and safety of our emp l oyees is paramount, which is why we are engaged in an ongoing program to i mprove our work processes to reduce injuries and create an accident-free workplace. And , second, we are s triving to make Enterprise a company that truly values s ity and where a ll associates support each other, customers and vendors in ways that their unique c hara cteris ti cs become enablers of, rather than barriers to, corporate success and increa sed share holder value. We especia ll y appreciate your continued support in thi s time of dramatic change and profound opportunity.

Be assured that we at Enterprise are clear about our obligations to you -as well as to our customers , employees, supp lie rs and the communities and cou ntries in which we do busine ss -as we negotiate the transition to a compe titive marketplace. E. James Fe r land Chairman o f t h e Board , Pre s ident and Chief Exe c ut i ve Offi c er, Publi c Servi c e Enterpri s e Group In c orporated, Februa ry 1 3, 1998 $2.21 $ .25 $ .06 $ (.03) $ (.081 Public Service Enterprise Group Incorporated At a Glance Allo c ation of Assets at December 31, 1997 EDHI Total Assets (in billions)-

$2.91 2 P S R C 55%

• C EA 4 0%

• EGDC 3%

• En e rg is 2% Allocation of Assets at December 31 , 199 6 EDHI Total A ssets (in billions)-

$2.002 P S R C 72%

• C EA 14% E G D C 6%

• E nergis 2% *Other 6% Entity Public Service Enterprise Group Incorporated Public Service Electric and Gas Company Enterprise Diversified Holdings Incorporated 4 Group Enterprise PSE&G EDHI -"---*** *u--=un1 Energis Resources Community Energy Alternatives Public Service Resources Corporation Lead e rship E. James Ferland

• Chairman of the Board , President and Chief Executive Officer 80 Park Plaza, T 48 Newark, NJ 07101 973-430-7000 www.pseg.com Lawrence R. Codey President and Chief Operating Office r 80 Park Plaza, T 4B Newark, NJ 07101 973-430-7000 www.pseg.com Robert J. Dougherty, Jr. President an d C hi e f Ope r a t ing Of fi cer. 80 Park Plaza , T 48 Newark, NJ 07101 973-430-77 5 0 Frank Cassidy President and Chief Executive Officer 499 Th ornall Street 5th Fl oo r Edison, NJ 08837 888-3-ENERGI S www.energisresources.com Michael J. Thomson President and Chief Executive Officer 1200 E ast R idgewood Avenue Ridgewood, NJ 07450 20 1-652-2772 Eileen A. Moran President 80 Park Plaza , T22 Newark , NJ 07101 973-456-3560

• P rofile licly-traded diversified energy and y services co mpany located w Jersey wi th annual re ve nue s of more than $6 billion, consis ting of two ma in subsid iarie s: Public Service E lectric and Gas Company and Enterpr ise Di ve r s ified Holding s In corporated.

Serves more than 5.5 million New Jer sey residents in more than 300 urban, s uburban and rural munities w ith electricity, gas and energy alternatives in a mile d iago na l co rridor across the state. Operate s Enterpri s e's nonutility e sses see king to maintain and nd it s energy se r vic es in the . Consists o f three prima ry subsidiaries:

Energi s Resour c e s , Community En ergy Alternatives, and Publi c Se rvi ce Re so ur c es Corporation.

Pro vides a full menu of energy agement solutions for businesses in the Northea s t. Develop s, acquires, owns and ates independent po w er produ ction and distribution facilities in the United State s, Asia, the Pa cific Rim , the Middle Ea st, Europe and South America. Enhan ces EDHl's financial s tre ngth wi th a strong , diverse portfolio of more than 60 4 r ate investments across a wide speco f i ndu s try sec tor s and asset types, ding leveraged and direct financing es, project financing, venture capital fund s, levera ge d buyouts, real estate l im-ited partner s hip s and s ecuritie s. B usiness Scope Co lle c tiv ely, PSE&G and Community En ergy Alternative s, a subsidiary of EDHI , hav e more than 90 years of power plant operati ng experience wi th active investments in 40 power plant s fueled b y coa l , natural gas, oil, leum coke and nuclear. PSE&G provides the lowest cost, most reliable electric and gas service of any major New Jersey utility. It maintains a staff of ove r 600 highly trained service technician s on c all 24 hours2.777778e-4 days <br />0.00667 hours <br />3.968254e-5 weeks <br />9.132e-6 months <br /> a day , 365 days a year to repair a broad range of gas and electric appliances and HVAC equipment and backs up its performan ce with nine guarantees of se rvi ce. Through i t s Su nbur s t Customer Solutions product offering, PSE&G provide s meter reading, bill ing and co lle c t ion services.

EDHI build s on the nearly 100-year dition of PSE&G by s eeking out and developin g additio nal energy-related services as deregulat i on of the try progresses.

In addition to offering s everal new services, Energ is Re so urces br ings the expertise of fun c tions previousl y performed by a number of Enterpr ise subsidiaries to northeastern market s w hich it knows we ll. Nearly 300 experts in project ment and finan c ing , engineering and facility operatio n s and maintenan ce crea te effective teams that under s tand the d yn ami cs of the areas the y serve. PSRC's well-balanced portfolio provides diver s ification , earnings s t abi li ty and continued incremental earnings g r owth t o sha reholder s. 5 Pro ducts/Services *Ele c tr icity and Gas *Indu s trial and Commercial Ga s *Indu s trial , Co mmercial and Re side ntial Ele ctric *Energ y Co n s ulting and Planning *Integra te d Energy Management Services *Operations and Maintenance Support *Re s idential Ga s P roduc ts and Services *Ele c tr icity and Gas *Indu s tr i al and Commercial Electri c *Energy Consulting and Plannin g *Industr ia l and Comme rc ial Ga s *Resident ial Gas Products and Service s *Sunbur s t Customer Solution s

• Tr adelink export assistance program *Bu siness Enh ancement Program *Re si dential Ele c tr ic *Ele c tri city and Gas *Industrial and Commercial Gas *Energ y Consulting and P lanning *Integrated Energy Management Services *Operations and Maintenance Support *Ele ctricity and Gas *Energ y Cons ulting and P l annin g *Integrated Energy Management Services *Operat i on s and Maintenance Support *Financing Solutions

• Electric Generation Solutions

• Distributi o n Services *Investments in ass et s which provide funds for future growth and incremental earnings Market Outlook Success in meet ing our stra te gic objectives will be measured in term s of earnings per s hare gro wt h. The objective for the Enterpri se portf olio i s a compound growth rate of fi ve perc en t annually over the ne x t five years. While new business ven ture s will play a vital role in the long-term growth and s trength of Enterpr i se , PSE&G remains Enterpri se's core busine ss and c urrently comprises more than 90 percent of total En terprise revenues.

EDHI wi ll enter new markets in the energy arena when its experience and kno wle dge can be brought to bear and w hen market needs and opportunities c an be pursued on a sound and itable basis. Ene rgis Resources s er v es industrial and commercial customers i n the Ne w En gland and Mid-Atlanti c regi on through three product platform s: energy s upply; consulting, engineering and operations services; and f inancing so lut io n s. C EA pur s ue s investments in generation and di s tribution in strategic market s. PSR C plans to build on its expertise in risk management and mitigation, transaction analysis and closing and ment management to exploit new oppo rtuniti es that arise from energy industry deregulation.

Frank Delany -Vice President and Corporate Rate Counsel Shaping the future of our industry PSE&G has taken a strong position on electric industry restructuring in New Jersey through our July 1997 response to the Board of Public Utility's Energy Master Plan. Our proposal reflects sive customer research revealing that New Jersey energy users want deregulation to provide fair , simple rules for competition to ensure customers will continue to receive the same quality of service they have historically enjoyed. Our customers have always counted on PSE&G to provide the quality service that New Jersey's residents and businesses need, while remaining true to our obligations as a responsible corporate citizen. Under our proposal, PSE&G would offer all of its electric customers a choice to be serviced by an alternate energy commodity supplier by January 1 , 1999. This accelerates by 18 months the full choice timetable suggested by the BPU and avoids a phase-in approach that could create an unfair price advantage for some customers.

PSE&G's ability to reach the BPU-mandated 5 to 10 percent rate reduction, plus a multiyear rate cap, depends on several factors; most importantly, resolution of the stranded costs issue. "Many parties are reviewing the details of PSE&G's restructuring proposal includes the refinancing , through securitization, of approximately

$2.5 billion in stranded costs associated with our generation assets. PS E&G strongly believes that shareholders alone should not be held financially responsible for investments incurred as a result of t he company's legally mandated obligation to serve its customers.

If legislation allowing for securitization is not enacted, our restructuring proposal and the potential rate reduction will be jeopardized. our response to the Energy Master Plan. Numerous associates throughout the company are working diligently as witnesses and resource persons to support our proposal before the BPU. The company is proud of their effort. " Under the proposed rate cap, PSE&G would absorb fuel risks for the next seven years, as well as increases in costs associated with the operation and maintenance of its facilities.

PSE&G also will take the risk of mitigation and absorption of nonsecuritized generation assets. In addition to selling electric energy, PSE&G would hold capacity and reserves to meet peak demand and provide for contingencies, such as a temporary loss of an energy supply. In order to back up the generation re l iability of the system, we wi ll i n it i ally cont i nue to maintain capacity for the usage of customers who choose other pliers. Customers who choose an alternate supplier for energy w i ll receive an energy credit on their bills. Once a viable market develops that allows for capacity to be sold at market prices, we would also provide a market credit to the bills of customers who purchase capacity elsewhere. PSE&G will continue to be responsible for the reliability of the transmission and d i stribution system, the wires that deliver electricity to cus t omers' homes and bus i nesses. E lectric service would also continue to be provided by PS E&G. On the regulatory side, our proposal is being reviewed by the B PU and Office of Admin i s t rative L aw and will require the passage of legislation prior to enactment.

Enabling leg i slation for securitization and energy restructuring is expected to be considered in 1998. Deregulation will touch the lives of every New Jersey resident and affect the operations of every business. PSE&G has undertaken an active public outreach, media relations and advertising campaign to inform and educate New Jerseyans about the Energy Master Plan and our commitment to the state's people, economic development and environment.

PS E&G's represented work force is also actively advocating a responsible approach to industry restructuring before the BPU and state legislature, particularly on the issues of jobs and the environment.

• * * <l Photo on previous page: Deregulation is the topic of discussion for Ray Woodrow, left, chief of engineering for the New Jersey State Aquarium, and Ed Zazzali , Energis Resources account manager. The changing natural gas marketplace has led to substantial reductions in energy expenses for the aquarium, which has a natural gas contract with Energis. 8

• *

• Equal footing among competitors PSE&G's long-time efforts culminated this year in reform of the Gross Receipts and Franchise Tax (GRFT) paid by all customers of New Jersey utilities. Because customers of nonutility energy providers did not pay this tax, utilities would have been at a competitive disadvantage if such taxation were to continue in a competitive market. In January 1998, the GRFT was replaced by existing sales and corporate business taxes and a temporary assessment that will be phased out over 5 years. Ultimately, this arrangement will result in a reduction of up to 45 percent in energy ta xes paid by consumers. This new tax structure evens the competition for providers by ensuring that tomers pay the same tax on energy whether it is purchased from a utility or a utility generator.

It will also account for an overall customer tax reduction of up to 6 percent by January 2003. Restructuring and the environment Participating in the rules-setting process also gives Enterprise the opportunity to take a stand on issues that affect society. PSE&G firmly believes that lower-cost power should not come at the expense of c lean air or environmental quality. Nor should unevenly implemented environmental standards create a competitive advantage for some industry members at the expense of public health. Industries in the Northeast strive to comply with strict federal and state sions standards , yet the people of New Jersey and neighboring states continue to be burdened by the air pollution created by coal-burning power plants in the Midwest and South that operate under less strict environmental standards.

Their emissions are transported here by prevailing wind currents, creating a significant societal, nomic and ecological impact on New Jersey and the rest of the Northeast.

At the same time, these plants operate more cheaply. The BPU's restructuring report clearly emphasized a commitment to the environment.

PSE&G's Energy Master Plan filing calls for mental comparability, a requirement for all power generators selling energy in New Jersey to operate under the same stringent mental standards as we do. Several Northeast state governments and power companies have joined our call to help ensure the region's air quality and effectively eliminate the cost advantages of operating inefficient, dirty coal-fired power plants. Plus, Enterprise has been publicly recognized by noted environmental opinion leader s like the Natural Resources Defense Council for our leadership in the environmental arena. PSE&G serves the intensely developed corridor between New York City and Philadelphia.

Laura Manz -Principal Engineer -Inter c onn ec t ion Planning "In 199 7, we gained federal value for the electncity we provide." 9

Tom Verdecchio

-Senior Live Line Coordinator "Maintaining transmission lines while they are still -energized means a total focus on safety -watching out not only for myself , but for those I work with as well. Each of us wants to leave the job the same "way we arrived: healthy and alive." Mainta i ning a questioning attitude

• During it s most recently completed operating cycle , Hope Creek operated 99 percent of the time from March 1996 to its most recent outage, including consecutive runs of 222 and 307 days. Salem Unit 2 was successfully returned to service in August 1997 after more tha n two years of refurbish-ment and Salem Unit 1, at publication time of this report, was preparing to resume operation.

Much of this success is, in part , the result of a new attitude in operations and process. Management is stressing individual accountability and teamwork, as well as creating an environment where employees are expected to raise concerns. Nuclear Business Unit (NBU) employees are encouraged and expected to tain a questioning approacll to their work habits , constantly staying alert for potential The ratio of customers to PSE&G permanent employees, a measure of efficiency, has grown 25 percent over the past five years. problems and correcting them as they are identified , well before they have the potential to threaten plant safety and operations. Proactive thinking such as this is making our nuclear program a high-quality performer. Customer to Employee Ratio The successful restart of Salem Unit 2 has also prov i ded the NBU with a number of critical lessons learned that will not only apply to the restart of Sa l em Unit 1, but the entire nuclear program. Learning lessons from deregulation Supplier choice in the natural gas marketplace has been in effect in New Jersey for more than two years, and about 17,000 of PSE&G's 180,000 industrial and commercial customers have become transportationonly customers.

P S E&G's earnings, however, have been unaffected by whether a customer remains or converts to t ransportation service. To respo n d to the decline in load, PSE&G is undertaking a comprehens i ve review of its gas supply and capacity portfolio in an attempt to develop the most economical portfolio to meet the changing marketplace. We've also responded to market transformation by changing the way we obtain gas supplies, trading on a monthly or even daily basis and by ing off-system sales of surplus gas or capacity.

Customers get 80 percent of the margin the utility makes on such sales, while PSE&G keeps the rema i ning 20 percent. Facing the future with technology on our side Success in a competitive marketplace relies on an information technology infrastructure that enables the business to handle customer choice quickly and efficiently.

Customer information, billing and metering systems in support of customer choice are being created to function well before January 1 , 1999, the day PSE&G proposes that customer choice start in New Jersey. 93 00 00 "' 94 Internally, we are also finding ways to make the power of information w o rk for u s. Ent e r pr i se i s dep l oying SAP R/3 software, an advanced tool that will help us change the way we do business.

S AP opera t es 0 0 M 95 on a single database, surrounded by different business systems , inc l uding financ i al re p o r ti n g, su p p l y cha i n management , plant maintenance, accounting and payroll and a common work managemen t sys t em. The e ff or t is well under way , with the first stage of implementation operating in Fossil Generation. E nterpr i se has positio n ed i t se l f as an early entry in the SAP energy services market and created a strategic alliance between itself and the SAP company. <J Photo on previous page: PSE&G employees at the Bergen Generating Station go over maintenance schedules.

Investments in the station have produced improvements in efficiency, as well as reductions in nitrogen oxide emissions.

12 96 *

• Enterprise is tackling the Year 2000 challenge facing corporations and major institutions worldwide.

We have assemb l ed a team to correct existing computer systems to recognize dates beyond 1999, before the risk of malfunction or failure becomes an issue. The Enterprise-wide team is taking inventory of all affected systems and applications, assessing po t ential impact and identifying solutions.

Customer focus knows no boundaries Our union employees understand the competitive pressures faced by the electric and gas utility industries.

Several cooperative efforts from our unions have created a strong partnership that benefits labor, management and our customers.

One of the outcomes of the 1996 union contract negotiations was a letter of agreement between PSE&G and its two largest unions, the International Brotherhood of Electrical Workers and Local 855 of the United Association of Journeymen and Apprentices of the Plumbing and Pipefitting Industry, that allows gas and electric employees to work in each other's areas. Crossover work is currently being performed in parts of the state and mixed crews of gas and electric employees are now excavating, installing and backfilling in electric and gas facilities in new residential developments. This approach has helped reduce costs by limiting outside contractor costs. Susan Hogan -Supplier Development Manager (with Larry Glover and John Curtis of J. Curtis and Company, awarded the PSEG Supplier Excellence Award in the category of Supplier Diversity for 1997) "From 1996-1997, Enterprise increased the amount of expenditures with minority and women-owned firms by 26 percent by establishing aggressive goals and initiatives that support the needs of our increasingly diverse customer base." Our gas distribution business' commitment to providing quality service to customers was recognized by Quality New Jersey for outstanding results in system reliability -a strong acknowledgement of the processes and systems used to monitor and maintain the safety of the underground gas piping throughout our service territory.

Safety -the only choice Working to meet customer demands in a competitive ment offers significant challenges in reinforcing the importance of safe working practices and the well-being of our workforce and customers. PSE&G's Recordable Case Incidence Rate, which shows the number of occupational illnesses and serious injuries per 100 employees per year, has fallen 27 percent through the third quarter of 1997 compared with the year before. Although many areas of PSE&G have greatly improved their safety records, two PSE&G employees died following accidents in 1997. To emphasize our commitment to safety, a team comprising representatives from each operating division and all five unions is implementing stronger safety practices and processes, as well as establishing a philosophy of achieving an accident-free workplace through trust, commitment, improved training and communications. Employees are encouraged to look out for the safety of each other and to spend extra time to ensure that all safety precautions are met before the job starts. ---------13 CEA has power generation and distribution assets in North and South America and Asia, as well as development activities worldwide.

Eileen Moran -President-Public Service Resources Corporation "With the onset of competition, virtually every dollar we invest will have to be earned. At PSRC, we've been competing and doing transactions

-with a sharp rnnrnm'1!tmn"'!"d!!'!:ll1r1!!':'"fmmo1erlel'lr:t!

'--------**-

Smart investments Public Service Resources Corporation (PSRC) manages a portfolio of more than 60 separate investments across a wide spectrum of industries and continues to be a steady contributor through investments that leverage Enterprise's expertise in energy-related technologies. PSRC's portfolio is diverse and includes investments in domestic and international generation, a gas storage limited partnership, as well as a portfolio of securities held via limited partnership investments.

Investments in 1997 included leveraged leases of generating stations located in the Netherlands and the United Kingdom. CEA keeps pace with global demands Community Energy Alternatives Incorporated (CEA) is one of the world's fastest growing independent power companies , with a 77 percent growth in megawatt (MW) ownership over the past two years. By establishing strategic partnerships with other companies, CEA grew in scope and stature as a developer and operator of electric generation projects , as well as an operator of distribution systems. CEA's assets are now invested approximately 70 percent in South America, 8 percent in the Asia-Pacific region and 22 percent in North America. CEA is also actively pur s uing projects in Africa , Europe , India and the Middle East. In 1997 , CEA and its partner began construction of a 216 MW natural gas-fired plant in Colombia.

One of its two units began operating before year end. CEA also acquired an interest in a 180 MW cogeneration plant that provides power for nearly 20 percent of the Hawaiian island of Oahu and began commercial operation of the second of two 300 MW, coal-fired power plants in Gansu Province in China. In addition, CEA was selected as the winning bidder with two partners to develop the 471 MW Rades Project, Tunisia's first greenfield private power development project. To complement its generation successes, CEA made its first investments in power distribution in 1997 by winning, together with major international and local partners , distribution privatization bids in Argentina and Brazil. Now serving about five million people in Latin America, CEA is poised to benefit from opportunities in some of the world's fastest-growing power markets. CEA's consortium won concessions to own and operate two distribution systems , Empresa Distribuidora de Energia Norte S.A. (EDEN) and E mpresa Distribuidora de Energia Sur S.A. (EDES). privatized by the Province of Buenos Aires in Argentina.

Together, EDEN and EDES serve 1. 7 million people in an area seven time s the state of New Jer sey. C EA was part of a three-member consortium that won the concession to own and operate the Companhia Norte-Nordeste de Distribuivao de Energia Eletrica in southern Brazil, another recently privatized distribution company. The company, now called Rio Grande Energia, has a service territory of 37,000 square miles and provides service to a population of 3.2 million. Creating business solutions Launched in J anuary 1997, Energis Resources Incorporated provides business solutions to industrial and commercial energy customers.

E nergis Resources focuses on each customer's specific needs and tomizes a package of energy services -energy consulting and planning, integrated energy management services, operations and maintenance support , financial solutions , natural gas and electricity

-for more than 5,000 industrial and commercial customers in the northeast region. Under the terms of a strategic alliance with AlliedSignal Power Systems, Energis Resources has the exclusive right to sell and service AlliedSignal

's TurboGenerator throughout the Northeast, as well as parts of Canada and the country of Argentina.

The TurboGenerator is a compact , portable <J Photo on prev i ous page: Framed by the steeples of a cathedral located in San Nicolas , Argentina, Jorge Luis Mosto , a lineman for the EDEN electric distribution company, works on a concrete electric distribution pole. 16 * * *

• *

• generator that can create enough power to meet the energy needs of small businesses more efficiently and cost-effectively.

Energis Resources is benefiting from the deregulation of New Jersey's natural gas market by supplying natural gas to some of the state's largest facilities, including Newark International Airport , the New Jersey State Aquarium and the Meadowlands sports and entertainment complex. Similarly, Energis Resources is taking advantage of the deregulation of electricity.

In Pennsylvania , a pilot program marked the nation's largest retail electricity competition initiative. Five percent of the state's electricity consumers were selected to participate in the pilot and 43 energy suppliers, includ i ng Energis Resources, were licensed to participate. During the pilot, Energis Resources secured 800 business customers, more than tripling its sales projections. These new customers, all of which were formerly served by other Pennsylvania electric suppliers, translate to more than 350 million kilowatt hours in sales -equal to the energy use of more than 60,000 residential customers.

To strengthen and expand Energis Resources' energy services platform, it has acquired Philadelphia-based Fluidics, Inc., a $60 million diversified mechanical/service contractor, which provides a wide range of mechanical contracting, HVAC and maintenance services for industrial and commercial customers in the Midd l e Atlantic region. WorryFree sM Service One of the promises of deregulation is a burst of new products and services to meet the needs of consumers.

In 1997, PSE&G's appliance service business -which provides premium repair, maintenance and service for residential and business customers

-obtained regulatory approval to expand its service contract business to residential central air conditioning systems, dryers and ranges. The approval allows PSE&G to compete head-on with national companies which have targeted the $1 billion New Jersey appliance service market. Under the WorryFree sM Service brand, the appliance service business boasts a strong name awareness within its service territory and a well-trained work force of service technicians. Those factors, along with new product offerings, led to the business selling nearly twice the projected number of service contracts in 1997, while exploring opportunities to expand throughout New Jersey and in bordering regions. Buying tomorrow's power today Deregulation wil l place an even greater emphasis on lower electricity prices. Very often, even the largest utility can purchase electricity for less than it costs to generate. That market reality was a driver behind the development of Enterprise's wholesale energy market trading organization.

While the company's generation assets will continue to be a primary supplier, electricity trading gives PSE&G an extra option when it comes to acqu iring energy for sale to customers.

Currently, PSE&G is mainly focused on trading within the P JM power grid, of which PSE&G is a member. PSE&G intends to expand its trading with contiguous power pools to the north, west and south in 1998, as well as merge its electric and gas trading tions. Managing risk and increasing earnings in this area will be plished using best practice controls recommended by an organization comprising 30 central banks and major commercial financial institutions.

Using such tools as wea ther reports and advanced computer networks, electricity traders are expanding our role in ing trading strategies that reduce costs, increase profits and manage both modity and financial risks. The Kaufma n ns -Customers "Since our honeymoon days, we've been able to count on PSE&G's reliable energy. It's great to know that you can make our appliances just as worry free!" 17 This shows the value on December 31 of each year of $100 invested in Enterprise on December 31 , 1992 (assumes reinvested dividends).

Operational Highlights

• Fa Vl 0 0 0 ci 0 a-: a-:111: .... M "' .,., .... a:i (X) 0 ci Vl "". .,_, ,..; M ..... (X) ci "' ----------E-92 93 94 95 96 97 .itilllllit:OiolUI 0 0 (X) 93 Vl a-94 "' a-0 Vl ..,, " -"' -;;; .... .... (X) E E id Bl El IS s i 96 97 98' 99* oo*

• PSE&G EDHI " Projected Declining utility capital expenditures are expected to be funded through internally generated cash, while growing EDHI needs are expected to be met by additional debt and equity, and internally generated cash. 18 95 96 97 Return on Average Common Equity for 1997 was 10.8% . *'

• Con so I id ate d F i n an c i a I St at is tics IAJ .li a r s i n millions whe r e app lica b le 1997 1996 1995 1994 1993 Selected Income Information Operating Revenues Electric $ 4,188 $ 3,944 $ 4 ,02 1 $ 3,740 $ 3,696 Gas 1 ,937 1 ,88 1 1 , 686 1 ,778 1 ,595 Nonutility Activities 245 216 186 177 137 Total Operating Revenues $ 6 , 370 $ 6,041 $ 5,893 $ 5,695 $ 5 , 428 In come from Continuing Operations

$ 560 $ 588 $ 627 $ 667 $ 549 Cu mulativ e effect of cha nge in accounting for in co me taxes 6 I ncome from Di sc ontinued Operat i ons 24 35 12 46 Net Income $ 560 $ 612 $ 662 $ 679 $ 601 Earnin gs per Average Share (Basic and Di l uted) In co me from Continuing Operations

$ 2.41 $ 2.42 $ 2.57 $ 2.73 $ 2.29 In co me from Cumulative effect of change in accounting for in co me taxe s .02 In co me from Di sco ntinued Operation s .1 0 .14 .05 .19 Total E a rning s per Average Share $ 2.41 $ 2.52 $ 2.71 $ 2.78 $ 2.50 Div i dend s Paid per Share $ 2.1 6 $ 2.16 $ 2.16 $ 2.16 $ 2.1 6 Payout Ratio 90% 86% 80% 78% 86% Rate of Return on Average Common Equity lBJ 10.8% 11.3% 12.3% 1 2.9% 11.9% Rati o of Earnings to Fixed Charges lCJ 2.61 2.68 2.78 2.84 2.57 Book Value per Common Share lDJ $22.47 $22.33 $22.22 $2 1.68 $2 1.07 .a ss Utility Plant $17,815 $17 , 327 $16 , 925 $16 , 566 $15,861 cumu l ated Depreciation and Amortization of Utility Plant $ 6 , 765 $ 6 , 148 $ 5,738 $ 5, 4 68 $ 5,057 Total A sse t s $17 , 943 $16,915 $16 , 816 $16,3 1 3 $15,995 Consolidated Capitali z ation Common Stock $ 3 , 603 $ 3,627 $ 3,80 1 $ 3,801 $ 3,773 Retained Earning s 1 , 623 1 , 586 1 ,637 1 , 505 1 ,36 1 Fore ign Currency Tran sla t io n Adju s tm ent (15) Co mmon Stockholders' Equity 5,211 5 ,2 13 5,43 8 5 ,306 5 , 1 3 4 Sub s idiarie s' Preferred Securities 683 682 685 685 580 Lon g-Term Debt 4,87 3 4 , 5 80 5,190 5,110 5,100 Total Capita li zation $10,767 $10 , 475 $11,3 1 3 $11 , 101 $10,814 (AJ The detailed Consolidated Financ ial Statements and related discussion appear in Appendix A to the Proxy Statement.

!BJ Net Income for a twelve-month period divided by the thirteen-month average of Common Equity. (CJ Includes Preferred Securities Dividend Requirements. (DJ Total Common Equity divided by end-of-period Common Sha re s outstanding .

• 19 Condensed Consolidated Statements of Income In milli o ns o f dollars (exce p t per sh a re data) for th e years en d ed December 31, 1997 1996 1995 Operating Revenues Electric $4 , 188 $3,944 $4,021 Gas 1,937 1 ,88 1 1,686 Nonutility Activitie s 245 216 186 Total Operating Re v enues 6,370 6 , 041 5,893 O pe r a ting E xp e ns e s Fuel for Electric Generation and Interchanged Po w er 1, 1 79 919 892 Gas Purchased 1 , 1 0 1 1 , 118 962 Operation and Maintenance 1 ,36 4 1 ,371 1 , 321 Depreciation and Amortization 630 607 597 Taxe s 981 969 1 , 028 Total Operating E x pense s 5,255 4 , 984 4 , 800 Ope rati ng In co me 1 , 115 1,057 1 , 093 Settlement of Salem L it i gation -Net of Applicable Taxes of $29 (5 3) Other Income -Net 7 (2) 13 Interest E xpense and Preferred Dividends (50 9) (467) (479) Income from Continuing Operations 5 60 588 627 Income from Discontinued Operations

-Net of T axes 24 35 Net Income $ 56 0 $ 612 $ 662 Average Sh a re s of C ommon Sto c k Outstanding (OOO's) 23 1 , 986 242,401 244,698 Earnings per Average Share (Basi c and Diluted) Income from Continuing Operations

$2.4 1 $2.42 $2.57 Income from Discontinued Operations

.10 .14 Total Earnings per Average Share $2.41 $2.52 $2.71 Dividends Paid per Share of Common Stock $2.16 $2.16 $2.16 The detailed Consolidated F inancial Statements and relat ed discussion appear in Appendix A to the P roxy Statement.

Condensed Consolidated Statements of Cash Flows In m i llion s of dolla r s fo r the y ea r s ended December 31 , 1 997 1996 1995 Net Income $ 560 $ 612 $ 662 Adjustments to net income, pr i marily depreciation and amortization 535 858 856 Net cash provided by operati n g activities 1 , 09 5 1 , 470 1 ,5 1 8 Cash flo ws from inve s ting activities Additions to Utility Plant , excluding AFDC (5 4 2) (586) (650) Net (increase) decrease in Long-Term I nvestments and Real Estate (914) 5 (66) Other (15 8) (81) (106) Net proceeds from the sale of discontinued operations 704 Change i n net assets -discon t inued operations (51) (113) Net cash used in investing activities (1 , 6 14) (9) (935) Net cash provided by (used in) financing activ i t i es 3 2 3 (1,244) (586) Net (decrease) increase in Cash and Cash Equivalent s (1 96) 217 (3) Cash and Cash Equivalents at Beginning of Period 279 62 65 Cash and Cash Equivalents at End of Period $ 83 $ 279 $ 62 The detailed Consolidated Fin ancial Statements and related discussion appear in Appendix A to the Proxy Statement.

20 Condensed Consolidated Balance Sheets

• millions of dollars at December 31, Assets Utility Plant: Utility Plant (including Nuclear Fuel) L ess: Accum ul ated Depre ciation and Amortization Net Uti l ity Plant in Service Co n struction Work in Progre ss (inc luding Nuclear Fuel) P l ant Held for Future U se Net Utility Plant Inve stme nt s and Other Noncurrent Assets Current A sse ts Deferred Debits Total Capitalization and Liabilities Capitalization

Common Stockholders' Equit y Sub s idiarie s' Preferred Securities Long-Term Debt Tot a l Capita liz ation Other L ong-Term L iabilities Current L iabi liti es D eferred Credits Total .e detailed Consolidat e d Financial Statements and related discussion appear in Appendix A to the Proxy Statement.

1997 $17,465 6,765 10,700 326 24 11 , 050 3 , 532 1,663 1 ,698 $17,943 $ 5,211 683 4,873 10,767 168 2,827 4, 1 8 1 $1 7,943 1996 $1 6,858 6,148 10 , 710 445 24 11.179 2,352 1.744 1 ,6 40 $16 ,9 15 $ 5,213 682 4,580 10,475 185 2,272 3,983 $16 ,9 15 Consolidated Statements of Common Stockholders

' Equity In millions of dollars Balance as of January 1, 1995 Net Income Cash Dividends on Common Stock Prefer red Securi tie s Issuan ce E xp en s e s Balance as of December 31 , 1995 Net In come Cash Dividend s on Common S to ck Retirement of Common Stock Preferred Securities I ssuance E xpenses Balance as of December 31 , 1996 Net Income Cash Dividends on Common Stock Retirement of Common Stock Currency Tran s l a tion Adju s tment Preferred Securit ie s I ss u a n ce E x pen s e s Common Stock $3 , 801 3 , 801 (174) 3,627 (24) Retained Earning s $1 , 505 662 (528) (2) 1 ,637 6 1 2 (523) (133) (7) 1 ,586 560 (501) (19) (3) F oreign Curre ncy Tran s lation Adjustment

$ -(15) Total $5 ,306 662 (528) (2) 5,438 612 (523) (307) (7) 5 , 2 13 560 (501) (43) (15) (3) *alance as of December 31 , 1997 .___S3_._60_3 ______ s_1_,6_2_3 ______ S_(_l 5_l _____ S_5_,2_1_1__, e detailed Conso lidated Fin ancia l Statements and related discussion appear in App en d ix A to the Proxy Statement.

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

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

21 Financial Statement of Responsibility To the Stockholders of Public Service Enterprise Group Incorporated:

• The condensed financial statements in this Summary A nnua l Rep ort were derived from the consolidated financial statements included in the Public Service Enterprise Group Incorporated (the "Company")

Pro x y Statement for the 1998 Annual Meeting of Stockholders , which has been enclosed i n the same mailing as thi s Summary Annual Report. The integrity and objectivity of the financial information presented in the Proxy Statement and th is Summary Annual Report are the responsibility of the Company's management.

The finan-cia l statements report on management's account ab ility for corporate operations and assets. To thi s end , management maintains a highly deve l oped syst em of internal controls and procedures de s igned to provide reasonable assurance that the Company's assets are prote c ted and that all transactions are accounted for in conformity w ith generally accepted accounting principles.

The syst em inc lude s documented poli cies, gu ideline s and se lf-assess ment s, a u gmented by a comprehens i ve program of internal and indepen-dent audits conducted to monitor overall accuracy of financial information and compliance w ith established procedures.

The conso ldated finan c i a l sta tement s in c luded in the Pro xy Statement were audi ted by Deloitte & Touche LLP, independent auditors, w ho se report on the conde n se d conso lid a ted financial s tatement s appears herein. E. J ames F erland Cha irm an of the Board , President and Chief E xecu ti ve Officer February 13 , 1 998 R obe rt C. Murray Vice Pre sident a nd C hief Fin ancia l Off i cer Independent Auditors' Report Patri cia A. Rado Vice Pre s ident and Controller , Pr inc ip a l A ccou nting Officer Deloitte&

ToucheuP 0 To the Stockholders and the Board of Directors of Public Service Enterprise Group Incorporated:

• We have audi t ed the consolidated balance s heet s of Public Service Enterprise Group Incorporated and its subsidiaries (the " Company")

as of December 31 , 1997 and 1996 , a nd the related consol idated statements of income, common stockho lder s' eq uity and cas h flows for each of the three years in the period ended December 31 , 1997. Such consolidated financial s tatement s and our report thereon dated February 13, 1998, expressing an unqualified opinion (which are not pre s ented herein) are inc l uded in Appendix A of the Proxy Statement for the 1998 Annu al Meeting of Stockho lder s. The accompanying condensed consolidated cial statement s are the re spons ibility of the Company's management.

Our responsibility is to express an opinion on such co nden s ed co n sol idated financial statement s in relation to the complete consolidated financ i al stateme nts. In our opinion, the information s et forth in the accompany in g con den s ed consolidated balance s heet s as of December 31, 1997 and 1996 and the re l ated co ndensed co nsolidated s tatement s of income , co mmon s tockholders

' equity an d cas h flow s for each of the three yea r s in the period ended December 3 1 , 1 997 is fairly s tated in al l material respects in relation to the basic co n sol id a ted financial s tatement s from which it has been derived. -r f LL/' February 13, 1998 Parsippany, New J ersey

• 22 a w r en ce R. Codey .. s been a director since 1991. Has been President and Chief Opera t ing Officer of PSE&G since September 1991. Ernest H. Drew h as been a director since 1993. Was Chief Executive Officer of Industries and Technology Group, Westinghouse E l ectric Corporation, from July 1997 to December 1997. Was a member, Board of Management of Hoechst AG, Frankfurt, Germany, a manufacturer of pha r ma* ceutica l s and chemicals, from January 1995 to June 1997. Was Chairman of the Board and Chief Executive Officer of Hoechst Celanese Corporation of Somerv ill e, New Jersey from May 1 994 until Ja n uary 1 995 and was President and Chie f E xec u tive Officer from January 1988 to May 1994. T. J. Dermot Dunphy has been a d i rector s i nce 1 980. Has been Chairman of the Board and Ch i ef Executive O f ficer of Sealed A i r Corporation, a Saddle Brook, New Jersey manufactu r er of protective packaging products and systems, since November 1 996. Was President and Chief Executive Officer of Sea l ed Air Co r poration from 19 71 to .ovember 1 996. E. James Ferland Chairman of the Board, President and C h ie f E xecutive Officer; Cha ir man of the Board and Chief E xecu ti ve Officer of PS E&G; Cha i rman of the Board and Chief E xecutive Officer of EDHI. Lawren ce R. Code y *esident and Chief Operating Officer PS E&G. Frank Cassidy President and Ch i ef Executive Officer of E nergis Resources.

Board of Directors E. James Ferland ha s been a director s in ce 1986. Has been Chairman o f the Board , Pre s ident and Chief Executive Officer of Enterprise since Ju l y 1986 , Chairman of the Board and C h ief Executive Officer of PSE&G since September 1991, and Chairman of the Board and Chief Executive Officer of EDH I since June 1989. Raymond V. Gilmartin has been a director si nce 1993. Ha s been Chairman of the Board, President and Chief Executive Officer of Merck & Co., I nc. of Whitehouse, Ne w Jer sey, a global pharmaceutical firm that ers, develops, produces and markets human and animal health products , since November 1994. Was President and Chief E xecutive Officer of Merck & Co., Inc. from June 1994 to November 1994. Was Chairman of the Board, Pre sident and Ch i ef Executi ve Officer of Becton Dickinson and Company from November 1992 to June 1994. Co nr a d K. H a rp e r has been a director since May 1997. Has been a partner in the la w firm of Simpson , Thatcher and Bartlett of Ne w York City si nce October 1996 and from 1974 to May 1993. Was Legal Advisor, U.S. Department of State from May 1993 to June 1996. I r w in L e rn er has been a director s in ce 1981. Was C hairman , President and Chief Executive Officer of H off mann-La Roche Inc., of Nutley, New Jersey , a manufacturer of prescription pharmaceuticals, vi tamin s and fine chemicals, and diagnostic u cts and services, from January 1993 to September 1993 and President and Chief Executive Officer from 1980 to December 1992. Marilyn M. Pfaltz has been a director since 1980. Ha s been a partner of P and R Associates of Summit, New Jersey, a communications firm , since 1968. Forrest J. Remick has been a director since 1995. Ha s been an engineering consultant since July 1994. Was Commissioner of the United States Nuclear Regulatory Commission from December 1989 to June 1994. Was Associate Vice President

-Resear ch and Professor of Nuclear Engineering at Penn sylvan ia State University, from 1985 t o 1989. Executive Officers Robert J. Dougherty , Jr. President and Chief Operating Officer of ED HI. Leon R. Eliason Chief Nuclear Officer and Pre sident -Nuclear Business Unit of PSE&G. Harold W. Kei s er Exe c utive Vice President

-Nuc l ear Business Unit of PSE&G. Alfred C. Koeppe Senior Vice Pre s ident -Corporate Services and External Affairs of PSE&G. 23 Eileen A. Mo r an President of PSRC; President of EGDC. Robe rt C. Murray Vice President and Chief Financial Officer; Executive Vice President

-Finance of PSE&G. P at r icia A. R a d o Vice President and Controller; Vice President and Controller of PSE&G. Ri c h a rd J. Swift has been a director since 1994. H as been Chairman of the Board, President and Chief Executive Officer of Foster Wheeler Corporation, of Clinton, New Jer sey, a firm providing design , neering , construction, manufacturing , management, plant operations and ronmental services, since May 1994. Jo s h S. We st on has been a director s in ce 1 984. Ha s been Chairman of the Board o f Automatic Data Processing, Inc., of Roseland, New Jersey , since Apri l 1986 and was Chief Executive Officer of Automatic Data Processing, Inc. from January 1983 to August 1996. R. Ed wi n Se l o v e r Vice President and General Counsel; Senior Vice Pre siden t and General Counsel of PSE&G. M ichael J. T homso n President and Chief Executive Officer of CEA.

Stockholder Information Stock Exchange Listings New York (Enterprise common and PSE&G preferred)

Philadelphia (Enterprise common) Trading Symbol: PEG Annual Meeting Please note that the annual meeting of holders of Public Service Enterpri se Group Incorporated will be held at the New Jersey Performing Arts Center (NJPAC), One C enter Street, Newark, New Jersey, on Tuesday, April 21, 1998 at 2 p.m. Stockholder Services Stockholder inquiries about stock transfer, idends, dividend reinvestment, direct deposit, missing or lost certificates, change of address notification and other account mation should be directed to: Stockholder Services Department, Public Service Electric & Gas Company, P.O. Box 1171 , Newark, NJ 07101-1171.

Please include your account number or social security number. Stockholders can also phone our toll-free ber 800-242-0813 , Monday through Frida y, with questions about stock transfer and tration, Enterprise Direct transactions and our other stockholder services.

Hours are: 10 a.m. to 3:30 p.m. Eastern time. The telephone number for the hearing impaired with special equipment is TDD 800-732-3241.

Please have your account number or social security number ready whe n you call. Stockholders can reach us by Internet .e-mail at: stkserv@pseg.com Stockholders can also reach us by fax at: 973-824-7056 T ransfer Agents The transfer agents for the common and ferred stocks are: Stockholder Services Department Public Service Electric and Gas Company P. 0. Box 11 71 Newark, NJ 0 71 01-11 71 First Chicago Trust Company of New York P.O. Box 2506 Jersey City, NJ 07303-2506 Printed on recycled paper , using environmentally friendly inks. 24 Enterprise Direct -Stock Purchase and Dividend Reinvestment Plan a Enterprise offers Enterprise Direct, a Stock Purchase and Divide. Reinvestment Plan. For additional information, including a prospectus and enrollment form , contact us through Internet e-mail at stkserv@pseg.com or call 800-242-0813.

Dividends Dividends on the common stock of Enterprise, as declared by the Board of Directors, are generally payable on the last business day of March, June, September and December of each year. Regular quarterly dividends on PSE&G's preferred stock are payable on the last business day of March, June, September and December of each year. D i rect Deposit of Dividends No more dividend checks delayed in the mail. No waiting in bank lines. Your quarterly common and preferred stock dividend payments can be deposited electronically to your personal checking or savings account. To use this free service, call us at 800-242-0813. Securi t y A nalysts and Insti t utional Investors For information contact: Director -Investor Relations 973-430-6564 Availab l e Publications Form 10-K: A copy of Enterpri se's 1997 Annual Report to the Securities and Exchange Commission, filed on Form 10-K , may be obtained by ing 973-430-6503 or writing to: Director -Investor Relations Public Service Ele ctric and Gas Company

• 80 Park Plaza, T6B Newark, NJ 07101 The copy so provided wi ll be without exhibits. Exhibits may be purchased for a specified fee. Financial and Statistical Review: A comprehensive statistical report taining historical financial data may also be obtained from the Director -Investor Relations.

Common Stock -Market Pr i ce and Dividends per Share 1997 1996 High Low Di v. Hi gh Low Fir st Quarter $29 1!. $26 Ys $.54 $32 Ys $25 1!. Second Quarter 26 Y, 22 Ys .54 27 Ys 25 Ys Third Quarter 26 Yi. 24 1/i. .5 4 27 Ys 25% Fourth Quarter 31 1 Yi. 24% .54 29 26% Div. $.54 .54 .54 .54 The number of holders of record of Public Service Enterprise Group Incorpor ated common shares as of December 31, 1997 was 154,478 .*

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• Public Responsibility The power of commitment Since its earliest days, PSE&G's commitment to support the well-being of New Jersey communities has extended beyond providing energy. It remains a committed resource to the state, its people and nesses and includes support for a number of effective community-oriented programs.

PSE&G is working with community leaders, residents and other partners to revitalize parts of Newark through the South Ward Neighborhood Partnership , a broad-based community renewal endeavor.

As part of the initiative, ground was broken in 1997 for the South Ward Industrial Park, a $6.8 million, 100,000-square-foot light industrial complex expected to attract labor-intensive businesses and create more than 300 new jobs. Expected to be com-pleted in September 1998, the project received funding from several state and federal agencies.

PSE&G has committed to market the park aggressively and create a package of utility incentives to help attract business.

The White House recently awarded PSE&G honorable mention in its Ron Brown Award for Corporate Leadership program, which recognizes businesses that contribute to the areas they serve. As another part of PSE&G's urban initiatives , the company is donating more than $1 million in used computer equipment for schools in New Jersey's urban centers during the next three years. Those are two ways in which PSE&G dedicates its volunteer, in-kind and intellectual resources to fulfill its corporate citizenship obligations . PSE&G is also a sponsor of programs such as Seton Hall University's Project 2000 , which introduces urban youth to positive male role models who can influence attitudes toward school and academic achievement.

PSE&G volunteers serve as teaching assistants , allow-ing them to interact with at-risk youngsters.

PSE&G has also launched a $30 million New Millennium Economic Development Fund to help attract new businesses to New Jersey and to encourage the growth of ing businesses. While the fund is available throughout New Jersey, it targets funding for projects in the state's urban centers. For the first New Millennium project, PSE&G agreed to provide a loan guarantee that allowed Lightcom lnternational

's move to a vacant building in Camden. Lightcom, the largest African-American-owned long-distance phone company, will create 150 new jobs in Camden during the next two years .

Public Service Enterpr ise Group 80 Park Plaza Newark, NJ 07102 973-430-7000 www.pseg.com

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