ML18095A878

Public Svc Enterprise Group,Inc Annual Rept for 1990.

ML18095A878
Person / Time
Site:	Salem, Hope Creek
Issue date:	12/31/1990
From:	FERLAND E J Public Service Enterprise Group
To:
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ML18095A877	List: ML18095A876 ML18095A878 ML18095A879 ML18095A880 ML18095A881
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NUDOCS 9104190184
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ul Service Enterprise roup Incorporated nnual Report for 1990 9104190184 910415 PDR ADOCK 05000272 I PDR Public Service Enterprise Group Incorporated (Enterprise) is a diversified public utility holding company. Public Service Electric and Gas Company ( P SE&G), the principal subsidiary of Enterprise, is a regulated utility providing electric and gas service to more than two million customers and more than five and a half million residents of New Jersey. It is the state's largest utility and one of America's largest combined electric and gas companies.

Enterprise Diversified Holdings Incorporated, a subsidiary of Enterprise , is the parent company of Enterprise's nonutility nesses. These activities include investments, oil and gas exploration and production, cogeneration and small-power production, and commercial real estate investment and development.

Cover PSE&G employees are a living part of the communities they serve, sharing the same aspirations as all New Jerseyans. Their contribution of over 250 , 000 hours0 days <br />0 hours <br />0 weeks <br />0 months <br /> of unteer time extends from Scouting and Little League to volunteer fire and first aid squads , church activities , hospital aides , fund-raising efforts and appointed tions. They bring the same enthusiasm , expertise and organizational skills to their communities as they display on their jobs. Text printed on recycled paper. Contents Letter to Shareowners Our World Review of Operations Financial Statements Directors and Officers Shareowner Information 2 5 13 19 48 49

• Financial Highlights

-"-I -.. -(T hou sa nd s of D o ll a r s where app li cab l e) 1990 1 989 % Change Total Operating R eve nu es $ 4,800,135

$ 4 ,'804,852 T o t a l Operating Expe n ses $ 3,826,655

$ 3 , 865 , 042 (I) Net In co m e $ 542 , 278 $ 542 , 1 37 Common Stock Shares Out s t a ndin g -Avera ge (Th o u sa nd s) 211 , 981 206,879 2 Shares Outstanding

-Y ea r-e nd (T h o u sa nd s) 218,472 211 , 100 3 Ea rnin gs P e r Average Sh a re Divid e nd s Paid P e r Share Bo ok Value P er Share -Year-e nd Market Price Per Shar e -Y ea r-e nd R a tio of Earnings to Fix e d C h a r ges Rati o of Earnings to Fixed C h arges -PS E&G Gro ss Additions t o U til i ty P l a nt . Tot a l Utility Plant See No t es t o Co n so lid a ted Fi n a n c i a l Statements .

• Earnings P er Share of Common S t ock In Doll a r s* 85 86 87 88 89 90 *a dju s t e d to refl ec t 3 for 2 co mm o n s t ock sp lit effect i ve Jul y I , 1 987 Annual Dividend Payout Increased 15 Consecutive Years In Do llar s* $ 2.56 $ 2.09 $20.44 $26.375 2.50 3.10 $ 968 , 023 $13,836,874

$ 2.62 (2) $ 2.05 2 $19.8 5 3 $2 9.25 (10) 2.66 3.2 1 $ 674 , 214 44 $12 , 960,093 7 1.15 1.1 9 1.2 8 1.39 1.47 1.5 3 1.63 1.69 1.75 1.80 1.87 1.9 5 1.99 2.0 1 2.05 2.09 75 76 77 78 79 80 8 1 *ad ju s te d to r e fle c t 3 for 2 co mm o n s t ock s plit effective Jul y I , 1 987 1 82 83 84 8 5 86 87 88 89 90 Dear Shareowner ublic Service Enterprise Group enjoyed a s uccessful 1990 despite decline s in electric and gas sa le s due to a softe ning economy and the warmest year in New Jersey since meteorologists began keeping records in 1895. The weather particularly had an pact on the sa les and profitability of the company's ral gas distribution bu si ne ss. Earnings in 1990 were $542.3 million , mode s tly above 1989's record level of $542.1 million. Earnings per share dropped 6 cents, to $2.56 in 1990 from $2.62 per share in 1989 , due to the issuance of additional s hare s over the past 12 month s. The year was especially sa ti sing in that we were able to achieve these re s ult s while holding down the rates of both our gas and electric customers.

In fact, we have not filed a major base rate case in over five years, and our average electricity and gas prices today are below those of 1985. indicated that more than 90 percent of our customers rate PSE&G as good or excellent at s upplying electric and gas service, with especially hi g h marks for reliability and prompt response to calls for service. R eflecting its confidence in the company's financial condition , in November the Enterprise Board of Director s declared a modest increase in our common s tock dividend -from 52 to 53 cents per quarter, an increa se of imately two percent. It was the 15th consecutive annual dividend increase.

Nuclear Operations Our nuclear generating ities enjoyed their most ductive year ever. The Salem and Hope Creek units that we operate at Artificial I sland in southern New Jersey, and the Peach Botto ts in Penn sy lvania in e have an ownership in t, The talent and effort of our employees that made these result s possible will be severely tested during the coming year, since we expect the current economic downturn to continue for at least the first half of the year and we continue to experience mild winter weather. The cumulative effects of five Chai rm an£. Jam es F e rland ( c .) e xamin es Th e s Taru s of improvem e nts aT M e rcer G e neratin g Sration with Plant Mana ge r Al Ru dge (r.) and Ra y Tripodi , Manager, Environm e nt a l Affairs. Uniqu e cons tru ction of a n ew p r ecipita t or w ill e nable th e plant T o co mply with new air qualit y standards.

had an aggregate capacity factor for the year of 74.8%, compared to an industry average of 66% .. This reflects the commitment to lence that we have made at our Salem and Hope Creek nuclear operations, as well as the significant progress that has been made by phia Electric Company in the operations of Peach Bottom. As a result, during 1990 almost 47% of the electricity supplied to PSE&G tomers was produced from nuclear generation.

years of inflation on our costs acting in combination with a soft economy may make it necessary for our utility , Public Service Electric and Gas Company (PSE&G), to file for higher gas and electric rates in 1991. Despite these challenges, we were able to achieve saisfactory financial performance in 1990, without sacing the quality or reliability of our se rvices. An independent customer survey completed during 1990 2 Both regulators and industry experts have recognized the significant improvement in PSE&G's operation of its Salem nuclear facility, and the continuing excellen formance at Hope Creek. Nuclear power will continue to be a significan tributor to our electric busines s well into the next century. Not only do these plants produce low-co s t energy , they do so without adding greenhouse gases or other emissions to the atmosphere.

Especially significant is the fact that the se nuclear plant s help to maintain New Jersey's energy independence at a time when events in the Persian Gulf have generated lar ge fluctuations in the price level s of petroleum-based fuels. Nonutility Earnings Enterprise's four nonutility businesses produced earnings during 1990 of $33.7 million , up 25.8 percent from 1989. This contribution is s ignificant , amounting to 6.2 percent of the earnings of Enterprise.

While Energy Development Corporation (EDC), our oil and gas exploration and production company, corded an increase in earnings resulting in part from higher oil prices , our other major nonutility subsidiary, Public Service Resources Corporation (PSRC), which make s pa ssive inve s tments , fell short of its planned sults largely due to 1990's depre sse d securities market s and the effects of a declining economy on the s ubsidiary's oth

• estments.

nutility companies will be challenged to con-0 percent of Enterprise earnings in 1991 -a long-standing target for these companies.

The continuing weakness in natural gas prices affecting EDC, the creased competition for attractive investment s for PSRC , and the soft real estate market for Enterprise Group velopment Corporation , our real estate subsidiary, call for significant efforts on our part to reach thi s target. New Initiatives The future we envision for PSE&G includes continued improvement in supplying traditional gas and electric service, along with business expansion into closely lated areas that will allow us to use our experience and market knowledge to best advantage.

A good example of our s ucce ss in traditional markets was our aggressive campaign in 1990 to market oil-to-gas conversions to the industrial and commercial sectors of our market. Aided by sharply fluctuating oil prices and strict environmental regulations governing oil s torage tanks , our marketing efforts resulted in the conversion of over illion therms of annual consumption from oil to nat s. y related to our gas business i s our parts ment program. Under this program , gas customers in s ure themselves against the cost of parts required to repair their natural gas house heaters and water heaters. Since 3 we fir s t introduced thi s se rvice in 1983 , thi s popular fering counted almost 240,000 customers under contract by last December.

For industrial electric customers, PSE&G initiated a pilot electric substation maintenance program in 1990. Customer s ub s tation s reduce electrical voltage from transmission line voltages to levels s uitable for u se at a given location. These customer-owned s ubstation s quire periodic , expert maintenance.

Thi s PSE&G se rvice offering s upplie s the required expertise and has proved popular with customers who place reliability at the top of their priority list. We continued to focus on changing our way of thinking about our businesses and our corporate culture to help us become better attuned to the new competitive world evolving around us. Culture change is a demanding proce ss that requires commitment , patience and a clear understanding of jectives to be attained.

The management initiative s we are implementing and the programs we are developing , from new budgeting systems to new suggestion programs, involve all of our employees and are po s itive s tep s in a process that is already starting to show results. The ity to drive initiative and accountability down to lower operating levels , and to engender greater teamwork across departmental lines , were among the keys to our s ucce ss in 1990 , and will continue to be important elements for our success in the years to come. External Issues In addition to the unusual weather patterns and the nomic downturn that affected our utility sales, there were a number of other external factors affecting our business during 1990. Of vital importance i s the need to ensure that all our operations are conducted in an environmentally so und manner, meeting or exceeding all regulatory standards.

While we are committed to full compliance, we believe that environmental mea s ures s hould produce meaningful benefit s for our customers and for the State of New Jersey. For this reason, we strongly oppose a preliminary mendation by the State Department of Environmental Protection (DEP) that we construct cooling tow e r s at our Salem Nuclear Generating Station. The DEP asserts that the tower s are neces sary to inate pos s ible future harm to the aquatic life in the ware River. We are convinced, after careful study of 22 years of river data, that Salem's operations have not harmed and will not harm the estuary. Constructing the cooling towers would impose an unnecessary and s ive burden on millions of ratepayer s in New Jersey , Pennsylvania and Delaware while producing no ful improvement in the ecology of the river. PSE&G estimates indicate that the cost of constructing these towers combined with the cost of replacing the power produced by the Salem plants during the extended shutdown necessary during cooling tower construction would range upward from $1 billion for the Salem co-owners. While PSE&G and the DEP disagree on the cooling tower issue, all of our interactions are characterized by a spirit of cooperation, a determination to correct problems and a commitment to protect our environment.

With the concurrence of the DEP, for example , PSE&G made good progress in 1990 toward the cleanup of mer gas manufacturing sites. Some of these sites are more than a century old and most ceased gas manufacturing operations decades ago. A preliminary assessment of 28 sites has been completed and remedial activitie s are underway at 13 sites. In another area , PSE&G has received national tion as a leader in responding to public concerns over possible health effects associated with electric and netic fields (EMF). Company representatives have appeared at public forums to speak about EMF in various municipalities and at state and national seminars devoted to the issue. And PSE&G has kept customers informed through a series of advertorial messages in newspapers throughout its service territory.

We intend to continue our efforts in this area. Strategic Summary While making appropriate short-term adjustments to evolving economic and business conditions, Enterprise relies on strategic consistency to guide our planning for the long term. Many of our strategies were explored in last year's annual report, but a few bear repeating:

Over the balance of this decade , Enterprise will tinue to strive to be the low-cost provider of energy in the northeastern area of the country. We intend to continue to be a major factor in the generation segment of the tric business, and we intend to compete efficiently and successfully against all competitors.

4 PSE&G recognizes the important role that conservation must play in meeting New Jersey's energy needs now and in the future. We will continue to support effective s ervation efforts , with particular emphasi s on the opment of financial incentives that benefit those utilities that are successful at stimulating conservation among their customers.

Through Enterprise Diversified Holdings rated , we will continue our diversification program , which is aimed at long-term growth of shareowner value by engaging in businesses related to the energy industry , where our years of experience and know-how can be lized most efficiently.

We intend to place continuing emphasis on ing all Enterprise employees to fully utilize their ity, experience and initiative in supplying the kinds of products and services that our customers want at itive prices. We will stay close to our customers through our outreach efforts and surveys, to be sure we understand

-and, in fact, anticipate

-their changing needs Finally, we remain sharply focused on our com nt to provide our shareowners with a fair return on tli investment and to enhance the value of Enterprise. E. James Ferland Chairman of the Board , President and Chief Executive Officer February 15, 1991

Our World: Dealing With a Changing Environment ust as our company is significantly different than it was ten years ago, the world in which we operate is very different too. It is a world of tinuing change and numerous stituencies , including the public at large , customers, investors, elected government officials, regulators, competitors, environmentalists and many others. Collectively and vidually these constituencies have the ability to impact the company nificantly either directly or indirectly.

Two trends signifying marked change over the past decade are the emergence of competition with other energy suppliers and the ment of a heightened level of concern over the quality of our physical ronment. These trends developed as a result of public concern , which eventually manifested itself in lation and regulatory initiatives of considerable effect on our business. Meeting the challenges posed by a changing world ha s required us to re-examine many fundamental sumptions.

While in the past we m ay have been s ucces s ful with a more reactive approach -not taking tion until we were certain there was a problem -success today and morrow requires new and different approaches.

One such approach is our effort to work in partnership with our public and private ents to identify areas of agreement and focus on achieving results in ways that benefit all parties. Critical to success in our dealing s with the public sector i s a sensitivity to evolving or new values , ri s ing expectations and changing public perception

s. We mu st know a nd understand more about what i s going on in the world than ever before. This mean s anticipating c hange and e mergin g i ss ue s better than before and adapting ourselves and our cies to deal with them in a po s itive and effective manner. It also means developing a keener appreciation of customer needs and how those need s can be satisfied by a company whose employee s understand a changing socie ty. Knowledge of customer needs and public concerns is gained through interaction with these constituents.

Whether they are private citizens, major industrial customers , elected officials , environmental groups or charitable organizations , more than ever before , it is essential that we all work together as partners in ing common goals. Satisfying Customer Ex p ectations N ot only are we working fectively in our traditional markets , but we have tiated new services to meet customer need s. One benchmark of s ucce ss in a service business is customer faction. Ba se d on a 1990 customer s urve y, more than 90% of our tomers rate PSE&G as bein g good or excellent in s upplying electric and gas service. While we are very pleased with the re s ult s, we are not content. We understand the need to continue providing the high quality of electric and gas se rvice s that our customers want at affordable rates, and at the sa me time to antic-* and dev e lop new and improv vices to match their future nee . Safety e ducation pla ys an imp o rtant r o l e in th e utilit y's co mmuni ca ti o n s effo rt s. J oe Duh , Safety Coo rdinator , is o n e of 6 e mplo yees who r eg ularl y d e m o n s trate e l ec tri c safe t y principles t o sc h oo l c hildr e n. Lit e ratur e and ed u ca tional mat e rials o n the s af e us e of gas and e l ec tri ci ty a r e offere d t o all c u s tom e r s thr o u g h PSE&C 's bill in se rt s and advertising.

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i o n w ith Campb e ll Soup , oth e r Camden-ar ea c o rporations and th e Stat e g ov e rnm e nt , P SE&G ut e d staff tim e , e xperti se and finan c ial supp o rt t o th e C oo p e r's F e rr y pr o j ec t , part o f Camd e n's ec onomi c red eve lopm e nt. Bill F e nim o r e , (r.) Mana ge r , Publi c Affair s-S o uth , di sc uss es th e pr og r e s s o f c onstru c tion of th e n e w aquarium w ith Erni e M ill e r , a ss i s tam pr o j ec t m a na ge r fo r th e co ntra c t o r. PSE&G is pre se ntly inve s ti ga tin g new electrotechnologies to help tomer s conserve energy and u se it more efficiently.

For example, we have achieved po s itive results for commercial and industrial customers using infrared drying , laser welding, waterjet and la se r cutting , a nd tion proce sses. We have innovativ e programs for the u se of alternate fuel vehicles to provid e clean , mor e cient fleet operations to help bu s in ess and industry in New Jer sey meet the new requirement s under the Clean Air Act Amendment s of 1990. And, we have customized se r v ice s to sport the manufacturing and di seration s of indu s trial a nd co ial c u s tom ers. end to be se n si tive to a ll of our customers' need s to ensure our continuing ability to provide the be s t pos s ible se rvice s to them. Corporate Citizenship I n addition to b ei ng re s p o n s i ve to customers, it i s also essential today to be a goo d corporate citizen. This mean s working in p aner s hip with s tate , county and local authorities and many other public and pri va te organizations in ways that are beneficial to the int e r es t s of the s t a te a nd its c iti ze n s , a nd co n s itent with company interests.

We have worked for man y years to foster economic development within New Jer sey, particularly in our serv ice territory, collaborating with the s tate , lo ca l governments , th e opment co mmunity a nd others to retain business alrea d y h ere a nd t o a ttra ct n ew co mp a ni es. W e ha ve focused o n rebuilding the s tate's cities and provided le a der s hip for an urban revitalization campaign 7 that highli g ht e d development tunitie s in Newark , Jer sey City , Camden and Trenton. Our aim i s to brin g economic vitality and job s to the se older ciiies in which PSE&G ha s a large inve s tment in electric a nd gas di s tribution facilities.

Generating new revenue s here help s u s to offset increasing costs th at could force u s to see k rate relief soo ner than we might otherwi se. Si x t y t e a c h e r s fr o m f o ur co mmuniti es c urr e ntl y participat e in a pro g ram dev e loped b y S t eve ns In s titute o f T ec hn o l ogy a nd s upp o rt ed b y PSE&G to e nhan ce math e mati cs e du c ation. Stud e nt s impr ove th e ir s kill s t hr o u g h th e u se of math ei cs so ft w ar e as part o f th e pr og ram. Our effo rt s in the community a l so include working with the educational establishment to help improve th e ski ll lev e l s of the c urrent and future work forces. We a re concerned about th e ability of the work force of tom o rr ow to meet incr eas in g ployer demand for goo d sk ill s. Amo n g the many ed u ca tion al pgra m s we s upport i s th e R ea d y S c holar s pro gra m in N ewa rk , which provide s mentorin g and coun se ling Leslie Wri g ht and Sam Jon es, vo lunt ee r s from PSE&G's Nuclear D e partm e nt , as s i s t with tut or i ng pupil s at th e Salem Middl e S c h ool. Empl oyees from Salem and H o p e Creek gene ratin g sta ti o n s have annuall y been lead e rs in th e Mar c h of Dim es Walkath ons, t oo. to s elected grade school children.

The Public Service in Public tion program in Camd en i s dir ec t ed at boo s ting s tudent s' sc i e n ce a nd math sco r es. We work with s t a te a nd l oca l agencies and r ea l estate int eres t s to prom o t e affordable h o u s in g, and w ith transportation officials to e ncoura ge development of an adequate tran sportation infra s tructur e. Our involvement can a l so include direct as s i s tance in th e form of co mp a n y per so nnel serv in g a s director s on th e board s of civic organizations.

Th e company al so participates in philanthropic effo rt s that affect th e so cial a nd eco nomic h ea lth of th e s tate. W e have co n cen t rated o ur s ource s o n three s p ec ific areas: cdren's issues , where we a r e worki n g in ed u cation , drug aware n ess a nd child care -our award win ning ChildWatch a nd Y oo H oo program s a r e le ad in g examples of c hild-r e la te d ac ti vities; th e environme nt , w h e r e we are s upp orti n g orga ni zat i o n s vo lved in public ed u ca ti o n , s u c h as o u r video on th e Li vi n g Tidal Mar s h; and eco n om i c development , w h ere 8 we a r e wo rkin g on urb an r ev itali zation and affo rd a bl e h o u s in g. Finall y, goo d corpora t e ci ti ze n s hip includes corpora t e as well as indi vual inte gr ity. Mor e than ever before , it i s critical to s u ccess in o ur dealings with all co n s tituen cies. Volunteerism A n o th e r ke y to co rporate cize n s hip i s h aving employee s w ho are aware of what i s goi n g on in the world aro und us a nd committed and involved both on and off the job. The vast majority of PSE&G's employees live in New Jer sey. They too are con ce rned about this s tat e and their communities. (Ri g ht) Throu gh h e r vo lunt ee r wo rk w ithAJDSinf ec t ed babi es at St. Clar e's H o m e in J e r sey City, R osema r y J effe rs on, A cco untin g A ss i s ta nt, exe mplifi es th e vo lunt ee r s pirit of P SE&G e mpl oyees. H er exa mpl e has in s pir e d o th e r s to join h e r in dealin g w ith thi s tr agic pr o bl e m. (Ab ove) Mik e Y oung, C u s t o m er S e rvi ce Outr each R e ti ve, pr ese nt s th e Ene r gy Bin go pr og ra niors in A ll e ndal e. Man y spec ial pr og ra been d es i g n e d t o a ss ist the e ld e rl y. Th e co mp any's o utr eac h effo rt s ha ve been r ecog ni zed b y an awa r d from th e Nati o nal Council on A g in g.

They breathe the same air, drink the same water, send their children to the same schools, and share the same hopes and dreams as all New Jerseyans. They are proud of New sey and work hard to make it a better place to live. PSE&G has more than 2 , 400 ployees who are involved in a tude of volunteer activitie s. Some work in nursing homes; some coach Little League; some provide shelter to the homeless; some are volunteer firemen; and some provide recreation opportunities and tutoring for dren who might otherwise be on the street. The list of volunteer activities is lengthy. In addition to the volunteer activities that our employees perform on their own, there is also PSE&G EPIC -Employee Participation In The Community.

This program vides employees with information about the many volunteer ties available in New Jersey, and matches willing workers with needy causes. All told, PSE&G volunteers nated more than 250,000 hours0 days <br />0 hours <br />0 weeks <br />0 months <br /> to their communities in 1990. The number of employees who are gaged in volunteer activities is growing. Our employees have caught the volunteer spirit. Many of the pictures on these pages show our volunteers in action. They deserve the credit. They do it on their own with no reward except the satisfaction of helping and the heartfelt thanks of those they assist. We are proud of their accomplishments.

Governmenta l Relations Y et another area vital to sce ss in our changing world i s maintaining tions with elected and appointed officials who represent our tomers at the federal, s tate and local levels. Obviously , the facilities and ations of an electric and gas utility are critical to the welfare of the community. Problems can and do arise and , frequently, government officials are called upon to assist citizens.

When this occurs, we are anxious to work with those officials in order to resolve their concerns.

This is particularly important in the areas of locating sites for our new facilities and gaining approval for expansion when needed to meet in-creased customer demand. This has become an increasingly difficult challenge , and our goal i s to pate concerns or issues and devise fair and acceptable solutions.

In the legislative area at all levels of government, there is a steady flow of proposed legislation that can have an impact on our business.

At the end of 1990 , more than 500 such items were pending , requiring a stantial effort to track , analyze and understand potential implications.

Because of the impact many of these proposed bills would have on our customers in the form of higher costs , much of our energy is devoted to protecting our customers' interests.

Occasionally , there are times when it is desirable to propose lation that can advance comp public interests. Examples of 1 N ew J e r s e y's r o ad s and hi g h w a ys ar e am o n g th e bu s i es t in th e nati o n , co ntributin g t o a d e t e n air qualit y. V e hicl es fu e l ed b y cl e an natural g a s ma y be a so luti o n. Thi s m ess a ge w a s e m p h as i fl ee t ow n e r s thr o u g h co rp o rate s p o n so r s hi p at th e Marlb o r o Gr a n d Pri x l as t s umm e r. R esea r c h int o e l ec tri c ve hicl es is a l so s upp o rt e d. 10 tion that PSE&G advocates include the development of electric and ral ga s ve hicl e technology and form of gro s s receipt s and franchise taxe s. The Environment A final area of critical tance i s the physical ronment. With the high level of public consciousness and concern for the quality of air, water and other re so urce s, PSE&G works hard to be certain that all of it s operations are conducted in a manner that respects the environment and meet s all sdard s and regulations.

We s tri ve to ensure that environmental e factored into all our plan-m operation s. This concern is inc din our corporate goals, and every employee is expected to tribute to meeting this goal. The energy on which our modern world depends cannot be created without affecting the environment in some way. Providing the gas and electricity to power our state's dustry and to light, heat and cool our homes requires that we make ronmentally sensitive decision s every day of the year. Our commitment is , however , to make tho se decision s ba sed not only on meeting today's standards and expectations for ronmental protection , but also with the expectation that tomorrow's dard s probably will be stricter.

At the sa me time , we must balance this goal with our obligation to provide e energy services at competi-t1 to ensure a s tron g economy in . ersey. Accomplishing these dual goals will be a major challenge in the 1990s. Th e e n v ir o nm e nt i s one of PS E&G's ke y areas of co n ce rn and co mmitm e nt. M on it o rin g wa t e r qualit y and marin e lif e offs h o r e fro m o ur nu clear s t a ti o n s is a co n s tant a c ti vi t y d es igned t o ass ur e th a t plant operations d o n o t c ause adve r se e n v ir o nm e ntal impa c t. All s lat i o n s ha ve e n v i ronmen t al e n g in ee rs assi g n e d t o th em to e n s ur e that we co nt i nu e t o m ee t o r excee d N ew J e r sey's s tri c t e n v ironm e ntal s tandard s. 11 Activities aimed at meeting our environmental goa l s include: > co nvertin g a portion of our motor vehicle fleet to natural gas and installing natural gas refilling statio n s at our facilities and tho se of NJ TRANSIT (NJT) for refueling their natural gas-powered bu ses that are u sed in northern New Jer sey; > t es ting the u se of electric va n s in a pilot program de s igned to strate the va lu e of electric vehicles to gove rnmental agencies and ot h er potential c u s tomers; > purchasing cleaner fuels a nd s talling new technologies to r e du ce emissions from o ur ge n erati n g pl a nt s; > upgrading was t ewa t er treatment and discharge fac ilitie s at m a ny operat in g l oca ti o n s; > a communica ti o n and o utre ac h program on e l ectr i c and m ag n e tic fields (EMF) to inform c u s tomer s So il t est i ng at former gas p lant s it es , some of w hi c h a r e n ow u sed for r es id e ntial o r co mm e r c i al purposes, is being c o ndu c t ed as part of PSE&G's gas plant rem e diation program. Co n ce rn for the e n viron m e nt i s s har ed by e mplo yees, man y of w h om a r e voluntaril y e n gaged in proje c ts in th ei r own co mmuniti e s. Neil P atel (l eft), As soc iat e Engineer in Distribution , wo r ks with o th e rs to p r o t ect the sens iti ve eco l og y of th e wetlands at Cheesequake Park in M on m o uth C o unt y and t eac h v i s it ors about plants and wildlife found in the pa rk. and th e publi c about po ss ibl e h ea lth effec t s from e lectric tran s mi ss ion a nd di s tributi o n faci liti es as well as e lectric a ppli a nc es; > remediation program s at former manufactured gas plant s ite s; > introduction of long-ran ge s trate g ic environmental goals as a v it a l ment in all our bu si ne ss pl a nning operations

and, > re cy clin g pro grams at m a n y pany s it es to r e du ce wa s te flow s s i s tent with s t a te goa l s a nd objectives.

12 Key to Success W e believe that our future s ucce ss i s dependent on our ability to be sensitive and responsive to changing customer a nd public need s. Success can only be ac hieved when the se c ie s -the co mmunitie s we se rve a nd our c u s tomer s -also reali ze their objectives. Therefore , we realize we mu s t work in h a rmon y with tho se uencie s. That i s always a chall a but our future s ucce ss depend.

I Review of Operations 1990 Financial Results A co mbin a ti o n of effic i e nt internal operation s and dent co s t cutti n g b y PSE&G , t oge ther with ea rnin gs grow th from nonutilit y bu s ine sses , kept pri se's earnings at re co rd l eve l s. This was especially s ignific a nt becau se e lectric a nd gas sa le s b y PSE&G were adversely affected by rec ose ttin g warm weather in th e first a nd fourth quarters of th e yea r a nd by the s lackenin g of New J ersey's ecoomy, primarily in the indu s trial area. Con so lidated earnings for the year were $542.3 million , or $2.56 per s hare of common s tock , ba se d o n 212 million average shares standing.

Earning s for the previou s year were $542. J million , or $2.62 per s hare , ba se d on 206.9 million average shares outstanding.

Enterpri se continued to produc e a s trong cash flow and to maintain a sound capital s tructure , ending 1990 with a common equit y ratio of 46.4%. The year-end book value of common stock w as $20.44 per s hare , up three percent from $19.85 at the e nd of 1989 , when ther e were 7.4 million fewer s hares outstanding.

PSE&G's earnings to fixed charges coverage ratio was 3.10 time s. The utility met mo s t of it s construction expenditures, approximately

$765 million , through internall y ge nerated fund s. The nonutilit y bu s ine sses of Enterpri se Di ve r s ified Holdin gs Incorporated (Holdin gs) produced 6.2% of overall earnings, or mately 16 cents per s hare , an crease of 25.8% and three cents p e r s har e over 1989. However , thi s eain gs grow th was below ex p ec t a tion s du e l arge l y t o l owe r return o n inv esments of PSRC. Overall co n so lid a t ed revenues in 1 990 were $4.8 billion , about equal to 1989 revenue s. PSE&G's e l ectric reven u e s acco unt ed for $3.3 billi on and gas revenues acco unt ed for $1.2 billion, with the balance com ing from H o ldin gs' n o nutilit y businesses. PSE&G 's overa ll e l ec tric sa le s decreased 1.5 % from 19 89 sa l es. Electric s a l es in the residential and indu s trial markets decreased 0.8% and 5.8%, re s pe c tivel y, while m e rcial sa l es were up 0.6% from 19 89 sa l es. Ga s sa l es for 1990 were down 7.9%. R es idential , co mmercial and indu s tri a l sa le s were down 12.5%, 4.0%, and 0.4%, re s p ec tively from 19 89 , while gas tran s portation sev i ce incr ease d 21.7% from the pr e-En g ine e r s from mark e tin g and the e l ec tri c busin e s s work clos e ly w ith indu s trial c ust o m e r s, li k e Quantum La se r , to tak e ad v anta g e o f e mer g in g t ec hnol og i es. k ee pin g N ew J e rs ey's co mpani e s m o r e co mp e titi ve. Thi s is o ne o f man y mark e tin g and c u s tom e r co nta c t pr og rams s tr e n g th e nin g se r v i ce and und e rstandin g of c u s tom er n ee d s. 14 v i o u s yea r. Total ga s so ld o r p o rt e d de c r eased 6.3%. Earnings for the year were tively impacted when the Board of Public Uti liti es approved a djum e nt s in PSE&G's e l ectr ic a nd gas ba se rates to r eflec t the completion of deferred tax refund s to customers due t o the reduction of federal p ora t e inc o m e taxe s r es ultin g from the 1986 T ax Reform Act. On th e e l ec tric s id e , a nnu al b ase rate s creased by a b o ut $23 million in 1990 and will increa se another $3 0 million in 1991. On the gas s id e, annual ba se rates increa sed b y about $5 million in 1990 and wi ll increa se anot h er $6 million in 1991. In the fourth quarter , the Board of Directors increased the com s tock dividend from 52 cents cents per share, indicating a change in the annual dividend rate from $2.08 to $2.12 per share. Thi s crease of approximately 2% marked the 15th con s ecutive year in which the dividend was raised. In December , Enterprise raised approximately

$126 million of new equity capital through a public ing of five million s hare s of common stock. The proceeds from the sa l e were used by Enterprise for general corporate purposes, principally to make additional equity investments in its s ub s idiaries , Holdings and PSE&G. The subsidiaries u s ed the money to repay portion s of their short-term debt. Electric The electric bu s ine ss in 1990-* -ued it s journey toward accom ing its long-range goal of ach1 ng national recognition for PSE&G as the premier electric company in the Northea s t.

Nuclear Performance Perc e nt C a p ac it y Fa c t o r 100% 100% 100%

• PS E&G Op e r a t e d Nu clea r Pl ants *U.S. A ve r age fo r al l Nucl ear Plan ts *U.S. A ve r age i s thr o u g h Oc tob e r , 1 99 0

• 10 0% The nuclear department led the way toward that vision of excellence with improved results at both Hope Creek and Salem nuclear generating stations as evaluated by the Nuclear Regulatory Commission (NRC). The PSE&G-operated nuclear units , combined with the Peach tom units, posted their best tion year in 1990 with a 74.8% capacity factor , up from 72% in 1989. Hope Creek surpassed its previous on-line record of 175 continuous days of operation on September 19 and continued for a record run of 221 days. In the most recent Systematic Assessment of Licensee Performance (SALP) report from the NRC, Hope Creek received the highest possible marks in six of seven categories and the second highest mark in the gory of maintenance and surveillance.

E l ec tri c p r o du c ti o n a nd tr ansmiss i on dec i s i o n s, in cl udin g int eg r a t io n w ith th e PJM g rid , a r e g uid ed b y th e p owerf ul " artifi cia l int e lli ge n c e" of co mput e r s int e r co nn ec t ed b y .fi b e r o pti c ca bl e. N ew s o ft w are c apabilit y ca n pr ocess 4 3, 000 " fa c t s" o n th e p owe r sys t e m eve r y thr ee seco nd s f o r anal ys i s and r es p o n se. 1 5 With respect to Salem , the NRC concluded that Salem continued to operate in a safe manner. The NRC gave Salem the highest ratings in the area s of emergency preparedne ss and s ecurity , while all other areas received s atisfactory ratings. PSE&G is committed to further improving Salem's SALP score s and ha s in s tituted many system and personnel performance improvement s to achieve that goal. In addition , major financial commitments were made at Salem to further enhance and ize the plant. In 1990 the electric busines s: > Updated its electric systems tions center , the command center which interlace s production and tran s mission of electric energy with energy from the Pennsylvania/Jersey

/ Maryland Interconnection to insure reliable distribution of the lowest-cost power throughout our service area. > Continued pioneering work within the power industry on the tion and development of robotics for testing and maintenance work. PSE&G received its first royalty check for contributions to the opment of the CECIL Robot , which is used to in s pect and to remove s ludge and foreign materials from nuclear plant steam generators. > Demonstrated innovative thermal storage techniques for air ing systems , which shift electrical demand from daytime peak periods to evening off-peak periods and thereby reduce energy costs to our customer s. The program provide s a one-time ca s h rebate for cu s tomer s who in s tall uch storage systems. >Completed replacement of Unit #9 at PSE&G's Essex Generating Sta-tion with a 77 MW industrial gas turbine unit. This was accomplished in record time. The new unit sents state-of-the-art technology incorporating the latest tal protection features. Experience gained from this successful project will be useful in upgrading other generating facilities. > Completed construction of a 2,000-ton electrostatic precipitator at the Mercer generating station, wpich will remove fly ash from the stack emissions at the station. Using a highly innovative technique , PSE&G built the precipitator outside of the station structure and then rolled it into position using four 200-ton hydraulic jacks. This procedure resulted in savings in construction costs of $4 million, and in savings to our customers of $5 million in placement power costs by reducing outage time for the unit. > Completed an underground storage tank replacement program, with 70 tanks replaced or retrofitted.

All new tanks are equipped with sensitive electronic leak detection systems, overfill protection tubs, and vapor recovery devices on all pumps. The project was completed two years ahead of federal compliance deadlines.

Gas During 1990, PSE&G's gas business responded to the challenges and opportunities generated by the quickening pace of environmental awareness in the nation and the growing national concern regarding energy supplies.

The gas business intensively keted the advantages of natural gas heat for the home , converting from oil heat 14,319 additional residences in its service area. In addition, 2,745 business conversions were completed.

PSE&G also actively promoted the potential of natural gas vehicles as an alternative to gasoline and diesel-powered vehicles, to improve the air we breathe and to reduce America's reliance on foreign oil. In addition to converting 30 PSE&G service vans to natural gas use, the gas business designed and constructed a natural gas refueling station, which has just become ational at its New Brunswick gas district.

PSE&G service personnel use the vans in the New Brunswick area during the workday. The vans are refueled overnight.

The gas business also designed and constructed a refueling station at NJ TRANSi T's Orange , N.J., garage. The station will be used to fuel five new natural gas buses that A uniqu e co mput e r "g am e" sp ee ds training o f g a s str ee t work e rs at th e Edison Training C e nter. This co mput e rized g a s l e ak s imulator pr ov ides instant feedback on d ec i s ions , e nablin g train ee s to corr e ct th e ir mi s tak es and r e inf o r ces co rr ec t answ e rs. Oth e r utiliti e s have e xpr esse d int e r es t in th e pr og ram. 16 NJT will put into operation early in 1991. The station and buses are part of a joint PSE&G/NJT pilot project designed to test the long-term energy and environmental effects of natural gas-powered transportation vehicles.

Among other operational gas ness highlights were: > Recognizing a substantial growth market for gas sales, PSE&G has agreed to provide gas service to four large electric cogeneration facilities.

When completed, these facilities will consume , on average, mately 245 million cubic feet of natural gas per day. > PSE&G has begun work to pletely rebuild and automate

• liquefied propane air/gas plan Harrison and Edison. These struction projects will enable the company to improve reliability.

> In order to meet expanding market needs, PSE&G initiated nine new gas supply projects, such as the Texas Gas/CNG/TRANSCO expansion project, and new service from lumbia Gas Transmission tion, which will provide additional pipeline supply in southern New Jersey. The nine proposed projects represent approximately 23 percent of the peak day sendout as experienced during December, 1989. >And, during November PSE&G ceived its first firm supply of dian natural gas delivered through three U.S. pipeline systems -National Fuel, Tennessee Gas line Company and TRANSCO Allocation of Assets December 31, 1990 P erce nt Total Assets $14.0 Billion

• Electri c 72% $!0. l Billion

• Nonutility 17% $2.4 Billion *Gas 11% $1.5 Billi o n Total Assets $2.4 Billion Enteiprise Diversified Holdings Incoiporated

• PSRC4 7% $1 , 131 Milli o n *EDC 40% $950 Million

• EG DC 9% $2 15 Million *CEA4% $93 Million Enterprise Diversified Holdings Incorporated T h e nonutilit y bu si ne sses of Enterpri se Diver sifie d ing s Incorporated (Holdin gs) continued their planned program of mea s ured g rowth. They contributed

$33.7 million or 16 ce nt s per s h are to 1990 consolidated earnings, a n crease of $6.9 million or three ce nt s per s hare compared to 1989. A ss et s of the nonutilit y bu si ne sses increased from approximately

$1.8 billion at year-end 1989 to approxim a tely $2.4 billion at th e end of 1990. They repre se nted about 17% of Enterprise's overall asse t s at th e end of 1990. In Jun e, m e mb e rs o f th e B o ard of Dir ec t o r s vis i ted offshor e faciliti es o f EDC i n th e Gulf o f M ex i co. EDC in c r e a se d it s r ese r ves b y 40% in 1 990. 17 Public Service Resources Corporation Publi c Servic e Re so urce s ti o n (PSRC) makes diversified pas ive inve s tment s to provide funds for future growth as well as incremental earnings for Enterpri se. It has sive inve s tment s in diverse sec tor s s uch as l everage d lea ses, venture cap ital fund s , levera ge d buyout funds, project financing , marketable sec uritie s and real e s tate. It s leveraged lease portfolio clude s investments ranging from commercial aircraft to nuclear power plant s. One energy-r elated leveraged lease investment involved the land Cogeneration Facility in ga n , which was originally planned as a nuclear unit and was s ub sequentl y converted to a natural fired cogeneration station. During 1990 , PSRC assets creased about 41 % to $1.13 billion. Energy Development Corporation Energy Development Corporation (E DC), a n oil and gas ex ploration and production company based in Hou s ton , Tex as, continued to expand it s proven re se rve ba se in 1990 through a combination of acqui s itions and ex plorat o ry and development ing. Th e properties are located s hore a nd offshore in the Gulf of Mexico area. In 1990 , EDC acquired proven re serves in Loui s iana at a price of a bout $22 0 million , ing it s reserves by about 40%. During 1990 , EDC's assets rose a bout 34 percent to $9 50.5 million. Community Energy Alternatives Incorporated At year-e nd 1990 , Community Energy Alternatives Incorporated (C EA), a developer of cogeneration Combined Net Income of Nonutility Subsidiaries Millions $22.6 $26.8 $33.7 and small-power projects, had vested in 22 projects, of which 18 had begun operation and four were under development.

These project s are all undertaken a s joint venture s. One joint-venture project placed into s ervice during the year was the Eagle Point Cogeneration Facility in West Deptford , N.J., which is fueled by natural gas and has a capacity of 225 megawatts.

Also in 1990 , CEA, in partnership with a subsidiary of Brooklyn Union Gas Company, was selected by the Port Authority of New York and New Jersey to develop a natural gas-fired cogeneration facility to provide tric power and thermal energy to New York's John F. Kennedy national Airport. At the end of the year , CEA's assets totalled $93. l million. V e rti ca l b o ring e quipm e nt w as us e d to e xt e nd a 20-in c h g a s main in W es t D e ptford t o th e Ea g l e P o int C oge nerati o n Plant. PSE&G w ill pr ov id e 2 .2 milli o n cubi c f ee t of n a tural g a s d a il y t o thi s 2 25-m egaw att fa c ilit y. 5 0% ow n e d b y CE A. O ve r 140 m eg a w att s of p o w e r a r e n ow pr ov id ed t o PSE&G b y coge n e rat o r s. 1 8 Enterprise Group Development Corporation Enterprise Group Development poration (EGDC) i s a real estate development and investment business that inve s t s in commercial office , retail and industrial properties over a wide geographical area. In 1990 , EGDC closed on two projects with a net investment of about $17 million. It now has ests in 13 properties including office building s, warehouses and shopping centers. At year's end, EGDC's assets totalled $214.7 million. PSEG Capital Corporation; Enterprise Capital Funding Corporation PSEG Capital Corporation (Capital) and Enterprise Capi Funding Corporation (Funding) are financing subsidiaries of Enterprise Diversified Holdings Incorporated. They were created to serve the needs of Holdings' nonutility businesses through the issuance and sale of debt obligations.

At the end of the year , Capital, whose debt is supported by prise, had $750 million of long-term debt outstanding , $80 million of which was due within one year. Funding, which was created in 1989 and whose debt is guaranteed by Holdings, had $272 million of shortterm debt and $245 million of term debt obligations outstanding at year-end.

Financial Contents 19 Management's Discussion and Analysis 28 Financial Statement Responsibility 28 Report of Independent Public Accountants 29 Consolidated Statements of Income 30 Consolidated Balance Sheets 32 Consolidated Statements of Cash Flows 33 Consolidated Statements of Retained Earnings 34 Notes to Consolidated Financial Statements 46 Consolidated Financial Statistics 47 Operating Statistics 48 Officers and Directors 49 Shareholder Information 19 Management's Discussion and Analysis of Financial Condition and Results of Operations Following are the significant factors affecting the consolidated financial condition and the results of operations of Public Service Enterprise Group Incorporated (Enterprise) and its subsidiaries.

This discussion refers to the consolidated financial statements and related notes:of Enterprise and should be read in conjunction with such statements and notes. Overview Enterprise has two wholly-owned subsidiaries, Public Service tric and Gas Company (PSE&G) and Enterprise Diversified ings Incorporated (Holdings).

Enterprise's principal subsidiary, PSE&G, is an operating public utility pr:Oviding electric and gas service certain areas in the State of New Jersey. Enterprise has claimed an exemption from regulation by the Securities and change Commission (SEC) as a registered holding company under the Public Utility Holding Company Act of 1935, except for Section 9 (a)(2) which relates to the acquisition of voting securities of an electric or gas utility company. PSE&G, but not Enterprise, is subject to regulation by the New Jersey Board of Public Utilities (BPU) and the Federal Energy Regulatory Commission (FERC). Holdings was incorporated on June 20, 1989, and on July 1, 1989 it became the parent of Enterprise's nonutility businesses:

Public Service sources ,Corporation (PSRC), which makes diversified passive vestments; Energy Development Corporation (EDC), an oil and gas acquisition, exploration, development and production company; Community Energy Alternatives Incorporated (CEA), an investor in and developer of cogeneration and small power production facilities; Enterprise Group Development Corporation (EGDC), a diversified nonresidential real estate investment and development company; and PSEG Capital Corporation (Capital), which provides up to $750 million of privately placed debt financing for the nonutility aries on the basis of a support agreement from Enterprise.

Holdings' other financing subsidiary, Enterprise Capital Funding Corporation (Funding), currently provides privately placed debt financing for the nonutility subsidiaries on the basis of the consolidated financial position of Holdings without direct support from Enterprise.

Consolidated Tax Benefits The BPU does not directly regulate Enterprise's nonutility activities.

However, in a case to which Enterprise and PSE&G are not parties, the BPU is currently considering whether Federal income tax losses generated by the nonutility businesses of a holding company should be utilized by the BPU to benefit customers of the regulated utility in setting retail utility rates. The Internal Revenue Service (IRS) has issued for comment a proposed rule which effectively would provide that the tax benefits of a utility's nonregulated affiliates may be treated as a reduction of the utility's rate base for ratemaking poses. If the utility's rate base is reduced by the BPU, a utility's revenues and net income would be reduc.ed.

Although the net effect of any such loss of revenue would not be material to Enterprise in the short-term, no assurances can be given as to the effect of such losses on a long-term basis. Enterprise is monitoring the BPU and IRS proceedings to determine what action it, or any of its affiliates, should take.

Factors Affecting PSE&G's Electric and Gas Sales New Jersey recorded its warmest year in 1990 since meteorologists began keeping records in 1895. New Jersey set a record for warm weather during the first four months of 1990 and ended 1990 with its second warmest December on record. This significantly reduced 1990 gas sales. In addition, although the period from May through November 1990 was warm, there were no exceptional periods of hot or cold weather and the summer months of 1990 were cooler than 1989 and 1988. As a result, 1990 residential electric and gas sales were below 1989 sales. In addition to such adverse effect of weather, sales were negatively impacted, commencing in the third quarter of 1990, by the general economic slowdown in New Jersey, which is expected to continue at least through the second quarter of 1991. PSE&G Energy and Fuel Adjustment Clauses PSE&G has fuel and energy tariff rate adjustment clauses which are designed to permit adjustments for changes in electric energy and gas raw materials costs, as approved by the BPU, when compared to levels included in base rates. Charges under the clauses are based upon energy and gas supply costs which are normally projected over twelve-month periods. The changes in the Levelized Gas ment Clause (LGAC), formerly the gas Raw Materials Adjustment Clause (RMAC), and the electric Levelized Energy Adjustment Clause (LEAC) do not directly affect earnings because the costs of gas, fuel and net interchanged and purchased power are adjusted monthly to match amounts recovered through revenues.

However, the carrying of underrecovered fuel costs ultimately increases ing costs. Under the clauses, if actual costs differ from the costs recovered, the amount of the underrecovery or overrecovery is ferred and is reflected in the average cost used to determine the fuel and energy tariff rate adjustment for the period in which it is ered or repaid. In addition, actual costs otherwise includable in the LEAC are subject to adjustment by the BPU in accordance with its nuclear performance standard.

Competition

-Electric PSE&G is experiencing competition from cogeneration and small power production projects being constructed pursuant to the Public Utility Regulatory Policy Act of 1978 and otherwise from nonutility generation suppliers.

The projects generally supply electric and steam energy to existing or new PSE&G industrial and commercial customers and excess electricity is sold to PSE&G and others. If large volume electric customers gain access to nonutility sources, a significant decrease in PSE&G's electric revenues and earnings could result. During 1990, PSE&G did not lose any large volume customers to nonutility sources. Nonutility generation is expected to account for a substantial portion of PSE&G's planned capacity tions through 1996. It can be expected that competition will increase in the electric industry.

Competition

-Gas In 1987 FERC issued Order 500 which allows gas pipeline nies and producers enhanced access to certain PSE&G customers for the purpose of supplying gas service in competition with PSE&G. As of December 31, 1990, 204 former large scale gas customers purchased gas directly from producers and other sellers and arranged for the transportation of gas from the wellhead through PSE&G's gas mains. This procedure allows the producer or other seller of natural gas to avoid the New Jersey Gross Receipts Taxes of approximately 13%. However, such gas is transported within New Jersey by PSE&G under rates that provide PSE&G with substantially the same margin as if PSE&G had sold the gas itself. This regulatory framework has increased competition in the gas market by encouraging pipelines to act as nondiscriminatory transporters of natural gas. Transportation service gas accounted for 7.4% of PSE&G's total gas sold or ported and 1.3% of total gas revenues as of December 31, 1990. Aggressive competition in the gas supply business can be expected to continue.

New Jersey Gross Receipts Taxes PSE&G, as well as all other electric and gas utilities in New Jersey, pays Gross Receipts Taxes that, in effect, add approximately 13% to the bills of most customers.

Such taxes are not paid by vendors of other energy forms nor by nonutility suppliers of electricity and natural gas, thereby putting utilities at a competitive disadvantage.

On February 19, 1991, the New Jersey Division of Taxation adopted an amendment to a regulation which increases utility revenues ject to this tax and which could have a material adverse effect upon PSE&G's financial condition if PSE&G were not permitted by the BPU to recover such increased taxes from customers on a timely basis. PSE&G cannot predict what action the BPU might take. Earnings Earnings per share of common stock were $2.56 in 1990, $2.62 in 1989 and $2.57 in 1988. Per share earnings and the increas (decreases) in earnings are summarized as follows: 1990 vs. 1989 1989 vs. 1988 (Millions of Dollars Cents Cents except per share amounts) Amount per Share Amount per Share PSE&G Revenues (net of fuel costs and gross receipts taxes) $ 32 $ .15 $ 68 $ .33 Capacity deficiency credit '11 .05 Other operation expenses (55) (.26) (5) (.03) Maintenance expenses 30 .15 33 .16 Depreciation and Amortization expenses (17) (.08) (24) (.11) Interest charges (10) (.05) (20) (.10) Federal income taxes 4 .02 (44) (.21) Other expenses (2) (.01) 2 .01 Total (7) (.03) 10 .05 Holdings 7 .03 4 .02 Effect of issuing additional shares of Enterprise common stock (.06) (.02) Total $-$(.06) $ 14 $.05 The Average Shares of Common Stock Outstanding were 211,981,434 for 1990, 206,878,500for1989 and 205,350,418for1988.

20 PSE&G The decrease in PSE&G's net income during 1990 compared to 1989 was due primarily to lower electric kilowatthour sales of 1.5% sulting principally from the cooler summer weather, when compared to 1989, and a decrease in firm gas sales of 10.7% due tot d-setting warm weather during the winter and spring of 19 w Jersey; a deterioration of New Jersey's economy, primarily I , e industrial area; increasing competition from nonutility suppliers of electricity (which resulted in the loss of two large industrial cus-tomers in 1989); and a temporary shutdown of a major electric tomer's facility from April to July 1990. In addition, earnings were reduced in 1990 by higher labor and pension costs, uncollectible customer accounts, interest and depreciation.

Partially offsetting the decrease in net income were lower maintenance expenses at Hope Creek, Peach Bottom and Hudson generating stations, the retention of $10.5 million of revenues approved by the BPU on February 7, 1990 in the LEAC Stipulation relating to the sale of capacity to Atlantic Electric Company and Potomac Electric Company, viously recorded as a reduction in PSE&G's energy costs, and the termination as of December 31, 1989 ofrevenue credits attributable to the 1987-1989 outage of the Peach Bottom units. (See Revenues -PSE&G -Electric below and Note 2 -Rate Matters of Notes to Consolidated Financial Statements.)

PSE&G's higher depreciation expense on its investment in plant and equipment and greater operating costs, which include higher uncollectible customer accounts, may be expected to continue to adversely affect earnings to the extent that they are not recovered through timely rate relief or offset by sales growth, neither of which can be assured. PSE&G's present base rates have been in effect for four years, with only minor adjustments to reflect tax changes and LEAC and LGAC adjustments.

Further, it is anticipated that PSE&G's electric and gas sales and collection of receivables will be adversely affected by deteriorating economic conditions in New Jerse As a result, PSE&G may find it necessary to request base rate for either or both electric and gas services during 1991. idity and Capital Resources.)

December 31, 1990, PSE&G's financial statements include $41.3 million as a deferred balance remaining from a write down of $134.5 million, or $70.5 million net of taxes, of the value ofEDC's reserves when EDC was removed from PSE&G's gas rate base for ratemaking purposes.

This balance is continuing to be amortized at approximately

$7 million per year. Recovery of the full amount associated with the write-down of reserves will be considered in PSE&G's next gas base rate case. Denial of the recovery of any Electric Kilowatthour Sales Percent 88 c:J Residential Ii Commercial 89 90

• Industrial Gas Therm Sales Percent 52.3 88 -i Residential II Commercial 100% 50.8 89 100% 48.2 90

• Industrial 21 unamortized balance by the BPU would require an immediate off. (See Note 11 -Commitments and Contingent Liabilities, Oil and Gas Property Write-Down, of Notes to Consolidated Financial Statements.)

As of December 31, 1990, PSE&G comprised 82.8% of prise's assets, 95.2% of Enterprise's revenues and 93.8% of prise's net income. The increase in earnings in 1989 compared to 1988 was primarily due to higher electric kilowatthour and gas therm sales, an increase in electric and gas customers and reduced 1989 operating expenses, principally maintenance expenses and labor costs. Holdings The net income of the diversified businesses was $34 million in 1990, an increase of $7 million over 1989, representing 6.2% of Enterprise's 1990 net income. Holdings' net income increased during 1990 compared to 1989 primarily due to EDC's higher production and sales of natural gas resulting from its acquisition of Pelto Oil Company in November 1989 and the acquisition of producing natural gas wells in late 1990, partially offset by voluntary curtailments of gas production and sales by EDC due to low gas prices during mid-1990 and by lower net income of PSRC due to a lower return on investments and higher interest expense. EDC sells gas and oil at prices that are largely dependent upon prevailing market conditions.

Low gas prices during portions of 1990, and in the early part of 1991, have therefore had a direct verse impact on earnings.

In addition, low gas prices have in the past and may in the future cause EDC to voluntarily curtail gas tion and sales, further impacting earnings.

PSRC's investments are diversified among a number of market segments, including aircraft and other leases, marketable securities, including bank debt and equity, and real estate partnerships. ings of PSRC could be affected by the ability of PSRC to produce expected returns due to the financial condition of the assets ing the investment or the entity with which certain investments were made, and any additional capital contributions by PSRC that could be required. (For information regarding PSRC's $31 million ment in Second National Federal Savings Bank, see Note 11 -Commitments and Contingent Liabilities, Public Service Resources Corporation, of Notes to Consolidated Financial Statements.)

The projects in which EGDC has invested include a number of buildings in various stages of completion, some of which were undertaken without prior lease commitments from tenants for such buildings.

Deterioration of the real estate markets in which those buildings are located may result in EGDC or the joint venture which owns those buildings receiving lower net operating income than they expected, requiring EGDC or the joint venture to make additional investments in the projects.

No assurances can be given that EGDC's joint venture partners would be willing or able to contribute if tional investment is required.

Further, the deterioration of the real estate market has made lenders generally reluctant to lend on real estate projects.

No assurances can be given that EGDC or the joint venture partners will be able to extend existing loans on certain of their respective projects or to obtain replacement loans in the amount of the existing loans when existing loans mature. Any additional investments made by EGDC, and the current general deterioration of the real estate market, may reduce future prices upon any ultimate sale of properties and current cash flows and returns from such properties.

The net income of the diversified businesses was $27 million in 1989 and $23 million in 1988, representing 4.9% and 4.3% of Enterprise's net income, respectively.

The growth in Holdings' net income during 1989 was principally due to the activities of EDC and PSRC. The future earnings of Holdings will be affected by its ability to achieve continued growth of its businesses.

Earnings and/or growth of Holdings could be limited in the near term as a result of general economic conditions, availability of credit at reasonable rates ,and terms, the market price at which EDC is able to sell its gas, the availability of additional attractive investment opportunities for PSRC, operating losses of EGDC resulting from a weak real ((State market, and other factors. (For additional information, see Liquidity and Capital Resources.)

The outcome of the proceedings involving CEA's investment in the Hanford Plant discussed in Note 11 -Commitments and Contingent Liabilities, Community Energy ternatives Incorporated, of Notes to Consolidated Financial ments, may also have an adverse effect on Enterprise's earnings.

Dividends The ability of Enterprise to declare and pay dividends is contingent upon its receipt of dividend payments from its subsidiaries.

PSE&G has made regular cash payments to Enterprise in the form of dends on outstanding shares of its common stock since was formed in 1986. Dividends paid to holders of Enterprise's mon Stock increased

$18.5 million during 1990 compared to 1989 and $11 million during 1989 compared to 1988. The increase in 1990 dividend payments over 1989 was due to the fourth quarter 1989 increase in dividends per share paid in December 1989 below), the issuance of 5,750,000 shares of common stock tember 1989, the issuance of 1,673,238 shares of common stock through Enterprise's Dividend Reinvestment and Stock Purchflse Plan (DRIP) from June 1990 through November 30, 1990 and 1 the higher fourth quarter 1990 common stock dividend payment which Sources and Distribution of 1990 Revenue Per Dollar D .69 Electric Revenues * .26 Gas Revenues E .05 Diversified Revenues Source L: .28 Fuel, Purchased Power & Gi15 D .18 Taxes 11 .13 Materials

& Services * .13 Reinvested in Business * . IO Dividends

• .09 Salaries & Wages * .09 Interest Distribution rate was increased to 53 cents from 52 cents per share. On December 13, 1990, Enterprise sold 5,000,000 shares of its Common Stock through a public offering and on December 21, 1990 and December 31, 1990, issued 24,706 shares and 673,843 shares, respectively through the DRIP. The purchasers of Common Stock through the public offering and the DRIP issued in December were not entitled to the fourth quarter 1990 dividend payment, but will be entitled to 1991 common stock dividends if and when declared and paid. The increase in 1989 dividend payments over 1988 was due to the higher quarterly dividend rate which was increased to 52 cents from 51 cents per share in the fourth quarter of 1989 and the issuance and sale pf 5,750,000 shares of Enterprise Common Stock in September 1989. Revenues PSE&G -Electric Revenues increased

$53 million or 1.6% during 1990; 1989 revenues increased

$189 million or 6.1 % as compared to 1988. The cant components of these changes follow: Increase or (Decrease) (Millions of Dollars) 1990 vs. 1989 1989 vs. 1988 Kilowatthour sales $(16) $ 53 Peach Bottom revenue credits 50 (21) TRA-86 16 Changes in base rates 8 Recoyery of energy costs (4) Gross receipts taxes 5 Other revenues (6) 9 Total Electric Revenues $ 53 $189 The number of customers increased by 14,192 or 0.8% during 1990. 1990-Revenues increased in 1990 compared to 1989 as a result of completion of refunds of revenue credits to customers in 1989 in accordance with a 1989 BPU Stipulation applicable to the extended outage of the Peach Bottom generating station, the end of revenue credits attributable to the Tax Reform Act of 1986 (TRA-86) and the increase in base rates, effective September 5, 1990. (See Note 2-Rate Matters of Notes to Consolidated Financial Statements.)

1989 -Revenues increased in 1989 primarily due to the rise in kilowatthour sales and the increase in LEAC rates approved by the BPU in June 1988. Partially offsetting this increase were revenue credits attributable to the extended Peach Bottom outage which were greater in 1989 than in 1988. Changes in kilowatthour sales by customer category are described below: Residential Commercial Industrial Increase or (Decrease) 1990 vs. 1989 (0.8)% 0.6 (5.8) 1989 vs. 1988 0.1% 5.7 (1.4) 1990 -Total kilowatthour sales declined 1.5% in 1990 c. to 1989. The major factor for the decrease was the loss of sensitive sales due to warmer winter weather and cooler su weather during 1990. The temperature humidity index impacting air-cbnditioning sales was down 6.9% from 1989. 22 The industrial sector decrease reflects the slowdown of New Jersey's economy, the loss of two large customers to cogeneration competitors in July and September 1989, the temporary scheduled shutdown of a major customer's facility from April to July 1990 and the loss of one wholesale customer.

Modest increases in residential and commercial wholesale sales attributable to increased customers were reduced and/or offset by the weather conditions described above. 1989 -Electric kilowatthour sales increased 2.2%. Customer growth enhanced sales in the residential and commercial sectors and higher customer usage and the strength of the economy also bolstered sales in the commercial sector. Offsetting this positive activity was increased competition from cogeneration facilities which adversely affected industrial sales coupled with the loss of some industrial customers.

Cooler weather during the 1989 cooling season relative to 1988 also negatively impacted sales. PSE&G-Gas Revenues decreased

$126 million or 9.2% during 1990; 1989 nues increased

$159 million or 13.2% as compared to 1988. The significant components of these changes follow: Increase or (Decrease) (Millions of Dollars) 1990 vs. 1989 1989 vs. 1988 Therm sales $ (31) $ 27 TRA-86 5 Cha base rates (2) fuel costs (87) l 10 ts taxes (20) 15 12 4 Total Gas Revenues $(126) $159 The number of customers, including transportation customers, increased by 16, 130 or 1.1 % during 1990. Current forecasts indicate that the average annual compound rate of growth in customers through 1995 is expected to approximate 1 % . 1990 -Revenues declined during 1990 as a result of 6.3% lower therms sold or transported due to the record-setting warm weather in 1990. Partially offsetting this decrease in therm sales was an increase in other operating revenues primarily resulting from the sale of gas to two cogeneration plants and an increase in customers.

1989 -Revenues increased in 1989 primarily due to higher therm sales and the increased LGAC rates approved by the BPU in January 1989 and December 1989. (See Note 2 -Rate Matters of Notes to Consolidated Financial Statements.)

Changes in therm sales by customer category are described below: Residential Commercial Industrial Transportation Service Increase or (Decrease) 1990 vs. 1989 (12.5)% (4.0) (0.4) 21.7 1989 VS. 1988 5.5% 16.6 3.0 7.9 1990 -Total therm sales, including transportation service, de-cre .3%. Residential and commercial sales for 1990 were re1 om last year due to the record-setting warm winter we egree days, the lowest on record, impacting heating sales were down 20.6%. The industrial sales decrease was due to the slowdown in the manufacturing sector of New Jersey's economy and 23 the movement of some customers to transportation service. trial cogeneration sales increased

65. l % and comprised 27.6% of industrial sales in 1990. 1989-Therm sales increased 8.8%. The rise was attributable to customer growth, higher customer usage, the strength of the omy within the commercial sector, partially reduced by lower sales resulting from the warmer weather as reflected by a de<;:rease in degree days of0.8%. The record one day sendout of 18,159 therms was achieved on December 22, 1989, during the coldest December in seventy years. Nonutility Activities Revenues from the diversified businesses increased

$68.5 million in 1990 over 1989 and $62 million in 1989 over 1988. The increase in revenues during 1990 was due primarily to EDC's increased sales of natural gas resulting from its acquisition of Pelto Oil Company in November 1989 and the acquisition of producing oil and gas leases in Louisiana in October 1990, and PSRC's higher limited ship income as well as dividend and interest income. The increase in EDC's revenues was partially offset by voluntary curtailments of natural gas production and sales by EDC due to low gas prices ing mid-1990 resulting from weak market prices of natural gas. (See Liquidity and Capital Resources.)

The increase in revenues during 1989 compared to 1988 was the result of higher revenues from PSRC and EDC. PSRC realized higher revenues from increased investments.

EDC's increased nue was primarily the result of increased production from the oil and gas properties acquired in 1989. Electric Energy Costs Electric energy costs decreased

$23 million or 3% in 1990 compared to 1989 and increased

$98 million or 15% in 1989 compared to 1988. Contributing factors are shown below: (Millions of Dollars) Change in prices paid for fuel and power purchases Kilowatthour generation Nuclear Performance Penalty Adjustment of actual costs to match recoveries through revenues (A) Total Electric Energy Costs Increase or (Decrease) 1990 vs. 1989 $(55) (13) 45 $(23) 1989 vs. 1988 $ (l l) 11 (25) 123 $.98 (A) Reflects over(under)recovered energy costs, which in the years 1990, 1989 and 1988 amounted to $80 million, $35 million and $(88) million, respectively. (See PSE&G Energy and Fuel Adjustment Clauses.)

As a member of the Pennsylvania-New Jersey-Maryland nection (PJM) and through various two-party power purchase and interchange agreements with neighboring utilities, PSE&G is able to optimize its mix of internal and external energy sources using the lowest cost energy available at any given time. 1990 -The decrease in electric energy costs during 1990 compared to 1989 was primarily due to less demand for electricity by tomers due to the 1990 weather, the economic slowdown in New Jersey and the 19% decrease in usage of all fossil-fueled generation.

A total of 39.4 million megawatthours was generated, purchased and interchanged in 1990, a 2% decrease from 1989. PSE&G was able to optimize its mix of internal energy sources during 1990, further reducing costs due principally to the return to service of Peach Bottom nuclear generating station. Nuclear generation during 1990 increased by 33% over what was generated in 1989. The higher recovery of electric fuel costs during 1990 over 1989 was primarily due to an increase in LEAC rates approved by the BPU on February 7, 1990 of $24.1 million for the period ending June 30, 1991. 1989 -The increase in electric energy costs in 1989 compared to 1988 was primarily due to higher kilowatthour generation and higher LEAC rates, effective June 17, 1988, reflecting the recovery of increased energy costs. A record total of 40.l million hours were generated, purchased and interchanged during 1989, a 2% increase over 1988. The increased electric production came largely from greater nuclear and coal-fired generation.

Peach Bottom 2 started generating electricity in April 1989 and returned to service July 1, 1989. Because of the return to service of Peach Bottom 2, PSE&G decreased its reliance on more costly oil and natural gas and purchased less power from the PJM. Peach Bottom 3 began ing electricity in December 1989 and returned to service January 1, 1990. (See Note 2-Rate Matters of Notes to Consolidated cial Statements.)

Gas Fuel Costs Gas fuel costs decreased

$84 million or 12% in 1990 compared to 1989 and increased

$110 million or 18% in 1989 compared to 1988. Contributing factors are shown below: (Millions of Dollars) Change in prices paid for gas supplies Therm sendout Refunds from pipeline suppliers Adjustment of actual costs to match recoveries through revenues (A) Total Gas Fuel Costs Increase or (Decrease) 1990 VS. 1989 $(18) (69) (9) 12 $(84) 1989 VS. 1988 $ 31 51 (11) 39 $110 (A) Reflects over(under)recovered gas costs, which in the years 1990, 1989 and 1988 amounted to $26 million, $14 million and $(25) million, respectively. (See PSE&G Energy and Fuel Adjustment Clauses.)

1990 -Gas fuel costs declined during 1990 compared to 1989 as the result of a 9% decline in therm sendout due to the warmer weather during the winter and spring of 1990 and a 9% decrease in the cost of natural gas. The increase in recovered gas fuel costs is due to the BPU approved LGAC rate increases which became tive December 6, 1989, and October 31, 1990. On October 31, 1990, the BPU approved a Stipulation in PSE&G's LGAC for an increase of $46.1 million for the eleven-month period ending September 30, 1991. (See Note 2 -Rate Matters of Notes to Consolidated cial Statements.)

1989-The increase in gas fuel costs in 1989 compared to 1988 was primarily due to increased therm sendout at a higher cost. The increase in recovered gas fuel costs for 1989 is due to the BPU proved LGAC rate increases of $42.7 million effective January 11, 1989 for the nine-month period ending September 30, 1989 and $23.7 million effective December 6, 1989, for the ten-month period ending September 30, 1990. Liquidity and Capital Resources Overview Enterprise's liquidity is affected by maturing debt, Holdings' ments and acquisition activities and the capital requirements of PSE&G's construction program. Capital resources available to meet such requirements depend upon general and regional economic conditions, PSE&G's customer growth, the adequacy of timely rate relief to PSE&G and continued access to the capital markets. Capital Requirements PSE&G For 1990, PSE&G had utility plant additions, excluding allowance for funds used during construction, of $933.8 million, an increase of $289.6 million over 1989 additions of $644.2 million. 1989 tions were an increase of $107 million over 1988 additions of $537.2 million. The increase in 1990 reflects the acquisition of a 42.49% undivided interest in nuclear fuel for Peach Bottom by PSE&G's wholly-owned subsidiary, PSE&G Fuel Corporation (Fuelco), for $156.7 million on June 29, 1990. (See Note (C) of Cash Hows from Financing Activities below.) Allowance for funds used during struction for 1990 and 1989 amounted to $34.2 million and $30 million, respectively.

The remaining construction funds were used to continue to improve PSE&G's existing power plants, transmission and distribution system, gas system and common facilities. (Millions of Dollars) 1990 19 Cash Flows from PSE&G's Investing Activities:

Additions to Utility Plant, excluding AFDC $ 934 $644 $537 24 Net increase in Long-Term investments II 7 I Net increase in Decommissioning and Other Special Funds 24 58 8 Cost of Plant Removal -net 92 49 21 Other IO (50) (13) Net cash used in investing activities

$1,071 $708 $554 Based on PSE&G's current electric supply and demand forecast and changes in PSE&G's construction program, construction tures from 1991through1995 are expected to aggregate

$4.6 billion. (See Construction, Investments and Other Capital Requirements and Environment below.) PSE&G expects that it will be able to generate internally a ity of its capital requirements including construction expenditures over the next five years. External financing is expected to provide the balance of such requirements.

• Construction, Investments and Other Capital Requirements The estimated construction, investments and other capital ments of PSE&G and Holdings for 1991 through 1995 are based on expected project completion dates and include anticipated escalation due to inflation of approximately 4% for utility projects and are as follows: (Millions of Dollars) PSE&G Electric Nuclear Production Facilities Nuclear Fuel Transmission and Distribution Other Production Total Electric Gas Production Facilities Transmission and Distribution Total Gas Miscellaneous Corporate Total Construction Requirements of PSE&G (including C) (A) ts of Non-Mandatory Retirement of Securities:

PSE&G Holdings 1991 1992 1993 1994 1995 Total $ 126 $ 141 $ 126 $ 100 $ IOI $ 594 66 106 109 103 126 510 231 194 617 16 132 148 59 824 549 38 80 118 255 231 733 255 326 816 3 4 136 127 139 131 60 61 932 1,008 462 246 15 261 502 216 190 406 249 317 769 5 124 129 59 957 642 215 118 333 245 1,235 254 1,322 726 3,661 2 30 123 642 125 672 66 305 917 4,638 758 2,913 100 815 235 638 335 1,453 Working Capital and Other -net (40) (40) (200) (122) (153) (555)

Total Capital Requirements

$1,451 $1,615 $1,716 $1,810 $1,857 $8,449 (A) PSE&G's Allowance for Funds Used During Construction (included above) $ 39 $ 52 $ 73 $ 87 $ 97 $ 348 Holdings' net cash used in investing activities including property, plant and equipment were $654.0 million during 1990, compared to $750.7 million during 1989 and $507.5 million during 1988. (See Consolidated Statements of Cash Flows.) On October 31, 1990, EDC acquired interests in oil and gas leases in Louisiana for imately $220 million. Over the next several years, Holdings is expected to meet a ity of its capital requirements for its expansion plans from external sources. Further, Holdings will be required to refinance maturing debt. Holdings and each of its subsidiaries are subject to restrictive business and financial covenants contained in existing debt ments. For example, Holdings and its subsidiaries are required to not d various debt to equity ratios which vary from 3: 1 to 2: I. He s also required to maintain a twelve months earnings be erest and taxes coverage ratio (EBIT) of at least I. 35: I. As of December 31, 1990, 1989, and 1988, Holdings had debt to equity ratios of 1.98:1, 1.98:1and2.52:1 and, for the years ended on those dates, EBIT ratios of 1.42: 1, 1.41: 1 and 1.66: 1, respectively.

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25 pliance with applicable financial covenants will depend upon future levels of earnings, among other things, as to which no assurance can be given. (See Earnings -Holdings.)

Internal Generation of Cash from Operations Enterprise's net cash provided by operating activities increased

$148.9 million to $1.3 billion for 1990 from 1989. This increase was primarily due to increased collections of accounts receivable and the greater recovery of electric energy and gas costs through PSE&G's LEAC and LGAC clauses. Partially offsetting these cash inflows were increases in fuel and materials and supplies inventories, decreases in accrued taxes, and decreased proceeds from PSRC's leasing activities.

Enterprise's net cash provided by operating activities increased

$173.8 million to $1.1 billion for 1989 from 1988. This increase was primarily due to increases in accounts payable and greater recovery of electric energy and gas costs through PSE&G's LEAC and LGAC clauses. Partially offsetting these cash inflows were increases in fuel and materials and supplies inventories, decreases in deferred income taxes and increases in accounts receivable.

External Financings Cash Flows from Financing Activities (Millions of Dollars) Enterprise:

Issuance of Common Stock (A) Cash Dividends paid on Common Stock PSE&G: (B) Net increase (decrease) in Short-Term Debt Issuance of Long-Term Debt Redemption of Long-Term Debt and Other Obligations Redemption of Preferred Stock Other TotalPSE&G Holdings:

Net increase (decrease) in Short-Term Debt (F) Issuance of Long-Term Debt (G) Other Total Holdings Net cash provided by financing activities 1990 $ 185 (442) 159(C) 250(D) (57)(E) 6 358 1989 $ 148 (424) 138 JOO (59) 6 185 56 88 245(H) 286 4 301 378 $ 402 $ 287 1988 $ -(413) (60) 350 (173) (33) 2 86 (18) 464 3 449 $ 122 (A) Effective March I, 1990, the Dividend Reinvestment and Stock Purchase Plan (DRIP) of Enterprise was amended to provide for the issuance and sale, at its sole discretion, of up to 5,000,000 new issue shares of Common Stock with the proceeds to be used by Enterprise to make additional equity investments in its subsidiaries and/or for general corporate purposes.

The sale of DRIP shares commenced June 1990 and as of December 31, 1990, 2,628,213 shares remained to be issued. The net proceeds from the sales of common stock under DRIP were $59.2 million for 1990 and were used by Enterprise to make additional equity investments in Holdings.

On December 13, 1990, Enterprise sold 5,000,000 shares of Common Stock through a public offering for $126.2 million. The net proceeds from the sale were used by Enterprise to make additional equity investments in its subsidiaries, PSE&G and Holdings, which utilized such investments to repay a portion of their respective short-term debt obligations then outstanding.

At December 31, 1989, book value per share of common stock amounted to $20.44 compared to $19.85 at December 31, 1989. The market value of common shares expressed as a percentage of book value was 129% and 147.4% at year-end 1990 and 1989, respectively. (B) At December 31, 1990, PSE&G could issue an additional

$2.406 billion of gage Bonds at a rate of 9.75% or $2.446 billion of Preferred Stock at a rate of 8.5% under the terms of PSE&G's Mortgage and Restated Certificate of Incorporation.

PSE&G has received authorization from the BPU to issue and have outstanding not more than $500 million of its short-term obligations at any one time, consisting of commercial paper and other unsecured borrowings from banks and other lenders. (This authorization does not include commercial paper issued by Fuelco, described in note (C) below.) PSE&G has requested authority from the BPU to issue and sell through 1992 not more than $1 billion principal amount of its first and refunding mortgage bonds (Bonds) and through 1993, 1,700,000 shares of its Cumulative Preferred Stock (par value $100 per share) or 6,800,000 shares of Cumulative ferred Stock -$25 par value, in one or more series. The proceeds from any sale of the Bonds and Preferred Stock would be used by PSE&G for its general corporate purposes, including payment of a portion of its construction expenditures, short-term debt and funding of all or part of redemptions, refundings and purchases of its first and refunding mortgage bonds and maturing bonds. . (C) Includes commercial paper issued by Fuelco and guaranteed by PSE&G to finance the acquisition of a 42.49% undivided interest in the nuclear fuel acquired for Peach Bottom. PSE&G has a $75 million revolving credit agreement with a group of foreign banks which expires in 1992. As of December 31, 1990, there is no short-term debt ing under this agreement. (D) On July 24, 1990, PSE&G issued an aggregate principal amount of $250 million First and Refunding Mortgage Bonds. The net proceeds were used by PSE&G for the payment of its then outstanding unsecured short-term obligations, and for its general corporate purposes. (E) Includes $50 million of PSE&G's First and Refunding Mortgage Bonds, 431.% Series, retired at maturity on September 1, 1990. (F) During 1989, Funding established a $350 million commercial paper program supported by a commercial bank letter of credit and a credit facility which expires in August, 1991. Funding presently expects this credit facility to be renewed upon expiration.

As of December 31, 1990, Funding had $272 million of short-term debt outstanding under this program. (G) During 1990, Funding established a $300 million three-year revolving credit facility which currently terminates in 1993, with repayments due thereafter in four equal semiannual payments.

Funding presently expects this credit facility to be renewed upon expiration.

As of December 31, 1990, Funding had $150 million of long-term debt outstanding under this facility. (H) On February 27, 1990, Funding privately placed $60 million of its 9.43% Series A Guaranteed Senior Notes due 1993 and $35 million of its 9.54% Series B Guaranteed Senior Notes due 1995. The proceeds from the sale were used to reduce outstanding short-term debt. PSE&G's Customer Accounts Receivable At December 31, 1990 and 1989, PSE&G's customer accounts ceivable were $373 million and $402 million, excluding unbilled revenues.

These amounts represent 84% and 89% of Enterprise's customer accounts receivable, respectively, with the remainder spread over Holdings' subsidiaries.

The net write-off of PSE&G's uncollectible accounts in 1990 was $26 million, an increase of $6 million over the previous year. The net write-off per $100 of revenues was up 14 cents to 57 cents compared to 1989, primarily as a result of the deteriorating economic situation in New Jersey and lower availability of Low Income Home Energy Assistance Funds and other subsidized funding for low income customers than in previous years. The increase in PSE&G's 1990 LEAC and LGAC rates the continued economic slowdown in New Jersey and a BPU ment prohibiting the termination of electric and gas service during winter months to financially needy customers is expected to tinue to have an adverse impact upon the level of receivables, lectible accounts and net write-offs.

Environment Clean Air Act of 1990 On November 15, 1990, the revised federal Clean Air Act (CAA) was signed into law imposing more stringent emission requirements which could result in scrubbers being installed at Conemaugh tion as early as 1995 and Keystone station by the year 2000. Both plants are jointly-owned coal-fired mine-mouth generating stations, located in Pennsylvania and operated by Pennsylvania Electric Company. (See Note 14-Jointly-Owned Facilities.)

Various natives for meeting the CA}\ requirements are being studied by the Conemaugh and Keystone owners, including the construction of scrubbers by the owners themselves.

PSE&G's share of the related capital costs is preliminarily estimated at $90 million per station. PSE&G's two wholly-owned and operated coal-fired generating stations in New Jersey are not presently expected to require bers, and are expected to be able to meet CAA requirements with the expenditure of only modest amounts of capital. PSE&G expects to request the BPU to allow the recovery of all such CAA costs for all of its electric generating stations from electric customers. stantially all such amounts as may be necessary to comply with the revised CAA requirements through 1995 are included in PSE&G's estimate of construction expenditures. (See Note 11 -ments and Contingent Liabilities, Construction and Fuel Supplies, of Notes to Consolidated Financial Statements.)

In addition, the revised CAA requirements will increase the cost ofproduc*

26 tricity for the Pennsylvania and Ohio Valley Region gener its supplying electricity to New Jersey. All of PSE&G's current p -chased power costs are included in PSE&G's LEAC. (See PSE&G's Energy and Fuel Adjustment Clauses and Note 2 -Rate Matters of Notes to Consolidated Financial Statements.)

Cooling Towers at Salem Nuclear Generating Station As required by the Federal Water Pollution Control Act (FWPCA), over the past 15 years, PSE&G has submitted to the United States Environmental Protection Agency and NJDEP its Discharge to Surface Water demonstrations which concluded that structural ifications including cooling towers are not required at Salem ating Station to achieve satisfactory environmental effects. However, on October 3, 1990, the NJDEP issued a Draft Permit which porated numerous new and more stringent terms and conditions into the water discharge permit for Salem. The Draft Permit, if adopted as proposed, would require the immediate shutdown of both Salem Units pending retrofitting the Station with cooling towers. The Draft Permit does not provide a schedule allowing for a phased implementation of the recirculating cooling towers. PSE&G will seek a stay of this condition if it is included in the Final Permit. A public hearing was held on November 8, 1990, and the public ment period ended on January 14, 1991. In its written comments submitted on January 14, 1991, PSE&G and its consultants concluded that Salem's operation is not having an adverse environmental effect on the Delaware River within the meaning of the FWPCA and that, even if there is an adverse ronmental effect, cooling towers are not needed and cann. legally required.

Nevertheless, if cooling towers are ultim required, PSE&G estimates that it would take at least four y , assuming an immediate shutdown and very favorable permitting and good construction progress, to design, license and build cooling ---------------

towers at Salem. In analyzing such a scenario, PSE&G assumed construction of three mechanical draft towers for each Salem unit (for a total of six cooling towers) at a capital cost of approximately

$627 million in 1990 dollars. PSE&G's share would be 42.59% of this amount. Replacement power costs for PSE&G during such a four-year outage would amount to at least $120 million per year. Further, the loss of both Salem units for a four-year period would pose serious reliability problems for PSE&G and the PJM region, and could result in the loss of load (blackout) during such four-year period. It is estimated that brownouts would occur during such period. PSE&G also analyzed a construction period of eight years to minimize outage times and the cost of retrofitting Salem with ing towers with a design similar to those existing at the Hope Creek station. The capital cost of such towers would amount to mately $490 million in 1990 dollars, of which PSE&G's share would be 42.59%. In this scenario PSE&G estimates that a six to eight month outage would be required for each Salem unit at the end of the construction period to tie the new system into the plant, resulting in replacement energy cost of at least $60 to $80 million. PSE&G's comments conclude that under neither such scenario would the Salem station be able to coniply with the NJDEP's proposed limits. If the Salem station were backfitted with cooling towers, PSE&G estimates that there would be a permanent loss of approximately 5% of the Station's capacity (approximately 120 megawatts) and increased

• and maintenance costs during the balance of the life of the costs of constructing cooling towers at Salem generating sta not included in PSE&G's estimate of construction re-quirements described above. (See Liquidity and Capital Resources, Construction, Investments and Other Capital Requirements.)

PSE&G would request the BPU to allow the recovery in rates from electric customers of all costs associated with constructing cooling towers at Salem. PSE&G intends to vigorously defend its demonstrations, as submitted.

PSE&G also is prepared to pursue all available legal remedies, including exercising its right to seek a stay, pending further administrative and judicial review, of any conditions that may be imposed by the Final Permit. Enterprise and PSE&G cannot predict the outcome of this matter. Power Line Emissions

-Electric and Magnetic Fields (EMFs) Public concern of possible health effects due to EMFs is an emerging national issue and has resulted in some states considering setting limits on EMF. On September 19, 1990, the New Jersey Commission on Radiation Protection (CORP) decided against setting a limit on magnetic fields produced by high-voltage power lines citing the lack of convincing evidence required to determine dangerous levels. Proposed power regulations are currently under study by CORP to cover new power lines and allow existing power lines to continue to function regardless of new rule changes. As revised, the new rules would authorize the NJDEP to screen all new power line projects of 100 kilovolts or more using a principle "as low as reasonably achiev-* 27 able", to demonstrate that all steps within reason, including modest cost, were taken to reduce EMFs. The outcome of EMF study and/or regulations and the public concerns will affect PSE&G's design and location of future electric power lines and facilities and the cost thereof. Such amounts as may be necessary to comply with these new EMF rules and address public concerns cannot be determined at this time, but such amounts could be material.

PSE&G Gas Plant Sites As of December 31, 1990, PSE&G has accrued approximately

$23.7 million associated with the clean up of former manufactured gas plant sites in accordance with a BPU Order allowing such deferral.

The overall costs of this investigation and cleanup cannot be mated with certainty, but experience to date indicates that costs of approximately

$20 million per year could be incurred over a period of more than 20 years and the overall costs of the investigation and cleanup could be material.

PSE&G is seeking recovery of such costs from its insurers and will also seek recovery through rates. Absent insurance recovery, denial of the recovery of any unamortized ance of such costs by the BPU would require an immediate write-off. (For additional information see Note 11 -Commitments and tingent Liabilities, PSE&G Gas Plant Sites, of Notes to Consolidated Financial Statements.)

Effect of Inflation During the past four years the rate of increase in the Average sumer Price Index (CPI) has steadily moved from 1.9% in 1986 to 5.2% in 1990. In an inflationary period the purchasing power of the dollar declines.

As a result of this inflationary period there is a negative impact on the operations of Enterprise as the cost of ing PSE&G's utility plant would be higher than historical cost, the amount permitted to be recovered under the rate regulatory process. The historical costs reported in current financial statements sent dollars of varying purchasing power as such financial statements combine dollars spent at various times in the past with dollars rently being spent. PSE&G cannot readily increase its rates to keep pace with inflation.

The regulatory process factors in a time lag during which increased operating expenses are not fully recovered.

PSE&G anticipates recovery of the increased cost of facilities when replacement actually occurs. Other Matters For information concerning financial accounting standards that have been issued or proposed by the Financial Accounting Standards Board but not yet adopted by Enterprise, see Note 1 -tion and Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements.

Financial Statement Responsibility Management of Enterprise is responsible for the preparation, rity and objectivity of the consolidated financial statements and related notes of Enterprise.

The consolidated financial statements and related notes are prepared in accordance with generally accepted accounting principles.

The financial statements reflect estimates based upon the judgment of management where appropriate. agement believes that the consolidated financial statements and related notes present fairly and consistently Enterprise's financial position and results of operations.

Information in other parts of this Annual Report is also the responsibility of management and is sistent with these consolidated financial statements and related notes. The firm of Deloitte & Touche, independent certified public accountants, is engaged to audit Enterprise's consolidated financial statements and related notes and issue a report thereon. Deloitte & Touche's audit is conducted in accordance with generally accepted auditing standards and includes a review of internal accounting controls and tests of transactions.

Management has made available to Deloitte & Touche all the corporation's financial records and related data, as well as the minutes of directors' meetings. more, management believes that all representations made to Deloitte & Touche during their audit were valid and appropriate.

Management has established and maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded, and transactions are executed in accordance with agement's authorization and recorded properly for the prevention and detection of fraudulent financial reporting so as to maintain the integrity and reliability of the financial statements.

The system is designed fo permit preparation of consolidated financial statements and related notes in accordance with generally accepted accounting principles.

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 effectiveness of this system is enhanced by an ongoing program of continuous and tive training of employees.

In addition, management has cated to all employees its policies on business conduct, assets and internal controls.

Report of Independent Public Accountants Deloitte& -Touche Certified Public Accountants Newark, New Jersey 07102 To the Stockholders and Board of Directors of Public Service Enterprise Group Incorporated:

We have audited the accompanying consolidated balance sheets of Public Service Enterprise Group Incorporated and its subsidiaries as of December 31, 1990 and 1989, and the related consolidated ments of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1990. These dated financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The Internal Auditing Department conducts audits and appraisals of accounting and other operations and evaluates the effectiveness of cost and other controls and recommends to management, where appropriate, improvements thereto. Management has considered the internal auditors' and Deloitte & Touche's recommendations cerning the corporation's system of internal accounting controls and has taken actions that are cost-effective in the circumstances to respond appropriately to these recommendations.

Management believes that, as of December 31, 1990, the corporation's system of internal accounting controls is adequate to accomplish the objectives discussed herein. The Board of Directors carries out its responsibility of financial overview through the Audit Committee, which presently consists of six directors who are not current employees of Enterprise.

The Audit Committee meets periodically with management as well as with representatives of the internal auditors and Deloitte & Touche. The Committee reviews the work of each to ensure that their tive responsibilities are being carried out and discusses related matters. Both the internal auditors and Deloitte & Touche cally meet alone with the Audit Committee and have free access to the Audit Committee, and its individual members, at any time.

E. James Ferland Chairman of the Board, President and Chief Executive Officer Everett L. Morris Vice President

• Principal Financ er 28 Richard E. Hallett Vice President and Comptroller Principal Accounting Officer February 15, 1991 We conducted our audits in accordance with generally accepted auditing standards.

Those standards require that we plan and form the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.

An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements.

An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation.

We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Public Service Enterprise Group Incorporated and its subsidiaries at December 31, 1990 and 1989 and the results of their operations and their cash flows for each of the three years in the period December 31, 1990, in conformity with generally accepte t-ing principles.

February 15, 1991 Consolidated Statements of Income (Thousands of Dollars) For the Years Ended December 31, Operating Revenues (note 2) Electric Gas Nonutility Activities Total Operating Revenues Operating Expenses Operation Fuel for Electric Generation and Net Interchanged Power Gas Purchased and Materials for Gas Produced Other Maintenance Depreciation and Amortization (note 4) Taxes Federal Income Taxes (note 8) New Jersey Gross Receipts Taxes Other Total Operating Expenses Operating Income Other Income Allowance for Funds Used During Construction

-Equity Miscellaneous

-net (note 4) To r Income 1990 $3,332,417 1,236,747 230,971 4,800,135 717,370 626,156 802,594 285,871 561,484 208,385 558,642 66,153 3,826,655 973,480 16,987 10,519 27,506 _,._ -.. -1989 1988 $3,279,913

$3,090,609 1,362,470 1,203,435 162,469 100,648 4,804,852 4,394,692 740,665 642,811 710,549 600,643 730,707 727,709 316,200 349,931 524,514 477,426 208,261 162,144 574,145 534,789 60,001 57,235 3,865,042 3,552,688 939,810 842,004 16,664 14,926 9,490 37,565 26,154 52,491 e fore Interest Charges and Dividends on Preferred Stock Interest Charges (note 5) Long-Term Debt Short-Term Debt Other Total Interest Charges Allowance for Funds Used During Construction

-Debt and Capitalized Interest Net Interest Charges Preferred Stock Dividend Requirements Net Income Shares of Common Stock Outstanding End of Year Average for Year Earnings per Average share of Common Stock Dividends paid per share of Common Stock See Notes to Consolidated Financial Statements .

• 29 1,000,986 404,289 37,845 20,091 462,225 (32,529) 429,696 29,012 $ 542,278 218,472,205 211,981,434

$2.56 $2.09 965,964 894,495 370,643 311,970 19,598 17,194 21,565 18,464 411,806 347,628 (16,991) (13,055) 394,815 334,573 29,012 31,336 $ 542,137 $ 528,586 211,100,418 205,350,418 206,878,500 205,350,418

$2.62 $2.57 $2.05 $2.01 I Consolidated Balance Sheets (Thousands of Dollars) December 31, Assets Utility Plant -Original cost Electric Gas Common Total Less Accumulated Depreciation and Amortization Net Nuclear Fuel in Service, net of accumulated amortization

-1990, $196,098; 1989, $127,559 Net Utility Plant in Service Construction Work in Progress, including Nuclear Fuel in Process -1990, $174,975; 1989, $62,759 Plant Held for Future Use, net of accumulated depreciation

-1990, $27,322; 1989, $30,000 Net Utility Plant Investments and Other Property Long-Term Investments (note 6) Oil and Gas Property, Plant and Equipment, net of accumulated depreciation and amortization

-1990, $500,527; 1989, $416,893 Real Estate Property and Equipment, net of accumulated depreciation-1990, $4,873; 1989, $2,426 Other Plant, net of accumulated depreciation and amortization-1990, $3,701; 1989, $3,663 Nuclear Decommissioning and Other Special Funds Other Investments

-net Total Investments and Other Property Current Assets Cash and Cash Equivalents (note 7) Accounts Receivable, net of allowance for doubtful accounts -1990, $19,642; 1989, $16,202 Unbilled Revenues Fuel, at average cost Materials and Supplies, at average cost (note 4) Prepayments Total Current Assets Deferred Debits (note 4) Property Abandonments

-net Oil and Gas Property Write-Down (note II) Underrecovered Electric Energy and Gas Costs -net Unamortized Debt Expense Deferred Take-or-Pay Gas Costs (note 2) Unrecovered Environmental Costs (note 11) Unamortized Loss on Sale of Naphtha (note 2) Other Total Deferred Debits Total See Notes to Consolidated Financial Statements.

30 1990 1989 $10,609,121

$10,215,942 1,777,285 1,661,724 392,987 357,327 12,779,393 12,234,993 3,739,673 3,465,899 9,039,720 8,769,094 190,092 149,529 9,229,812 8,918,623 576,904 353,466 67,065 64,546 9,873,781 9,336,635 1,291,356 925,307 794,819 130,513 24,625 98,801 62,316 2,402,430 60,491 83,250 509,150 516,262 203,879 255,092 242,515 169,833 279,422 235,8 IO 62,012 55,162 1,357,469 1,315,409 200,704 230,741 78,431 91,876 68,481 54,206 57,541 23,939 23,729 18,883 6,300 10,405 2,321 3,390 389,630 481,317 $14,023,310

$12,919,434

(Thousands of Dollars) December 31, Capitalization and Liabilities Capitalization (notes 3 and 5) Common Equity Common Stock Retained Earnings Total Common Equity Subsidiaries' Securities and Obligations Preferred Stock Without Mandatory Redemption Long-Term Debt (note 5) Capital Lease Obligations (note 9) Total Capitalization Current Liabilities Long-Term Debt and Capital Lease Obligations due within one year Commercial Paper and Loans (note 10) Accounts Payable New Jersey Gross Receipts Taxes Accrued Deferred Income Taxes on Unbilled Revenues (note 8) Other Taxes Accrued Interest Accrued Other ent Liabilities Deferred Credits Accumulated Deferred Income Taxes (note 8) Depreciation and Amortization Leasing Activities Property Abandonments (note 4) Oil and Gas Property Write-Down (note 11) Deferred Electric Energy and Gas Costs -net Unamortized Debt Expense Other Accumulated Deferred Investment Tax Credits (note 8) Deferred Take-or-Pay Gas Costs (note 2) Overrecovered Electric Energy and Gas Costs -net Other (note 4) Total Deferred Credits Commitments and Contingent Liabilities (note 11') Total

• 31 1990 1989 $ 3,043,402

$ 2,857,974 1,421,611 1,332,739 4,465,013 4,190,713 429,994 429,994 4,668,024 4,388,578 54,073 54,513 9,617,104 9,063,798 118,741 54,599 758,859 449,324 489,380 418,095 527,575 555, 182 15,155 39,155 43,645 133,755 113,597 95,205 119,755 2,162,670 1,769,352 1,217,586 1,084,749 178,836 135,131 94,870 106,560 37,304 43,698 (13,551) 23,271 14,864 17,940 22,580 22,757 484,489 501,038 23,939 37,511 145,108 151,140 2,243,536 2,086,284

$14,023,310

$12,919,434 Consolidated Statements of Cash Flows (Thousands of Dollars) For the Years Ended December 31, Cash Flows from Operating Activities:

Net Income Adjustments to reconcile net income to net cash flows from operating activities:

Depreciation and Amortization Amortization of Nuclear Fuel Recovery (Deferral) of Electric Energy and Gas Costs -net Amortization of Discounts on Property Abandonments and Disallowance Provision for Deferred Income Taxes -net Investment Tax Credits -net Allowance for Funds Used During Construction

-Debt and Equity and Capitalized Interest Proceeds from Leasing Activities Deferred Environmental Costs Recovery (Deferral) of Loss on Sale of Naphtha Changes in certain current assets and liabilities Net decrease (increase) in Accounts Receivable and Unbilled Revenues Net increase in Inventory-Fuel and Materials and Supplies Net increase (decrease) in Accounts Payable Net (decrease) increase in Accrued Taxes Net change in Other Current Assets and Liabilities Other Net cash provided by operating activities Cash Flows from Investing Activities:

Additions to Utility Plant, excluding AFDC Additions to Oil and Gas Property, Plant and Equipment, excluding Capitalized Interest Net increase in Long-Term Investments and Real Estate Property and Equipment Increase in Decommissioning and Other Special Funds Cost of Plant Removal -net Other Net cash used in investing activities Cash Flows from Financing Activities:

Net increase (decrease) in Short-Term Debt Issuance of Long-Term Debt Redemption of Long-Term Debt and Other Obligations Issuance of Common Stock Redemption of Preferred Stock Cash Dividends Paid on Common Stock Other Net cash provided by financing activities Net increase (decrease) in Cash and Cash Equivalents Cash and Cash Equivalents at Beginning of Year Cash and Cash Equivalents at End of Year Income Taxes Paid Interest Paid See Notes to Consolidated Financial Statements.

32 1990 $ 542,278 561,484 89,031 105,992 (13,566) 74,678 (16,549) (49,516) 14,785 (4,846) 4,105 63,348 (116,294) 70,223 (47,252) (11,006) 16,064 1,282,959 (933,803)

(285,438)

(339,601)

(23,861) (91,627) (32,968) (1,707,298) 214,535 495,000 (56,852) 185,428 (442,466) 5,935 401,580 (22,759) 83,250 $ 60,491 $ 135,804 $ 397,785 1989 1988 $ 542,137 $ 528,586 524,514 477,426 63,394 72,532 60,023 (87,966) (15,443) (69,966) 70,541 140,078 (24,424) (22,478) (33,655) (27,981) 56,561 27,421 (15,424) (3,459) (10,405) (134,070)

(84,812) (53,851) (8,642) 72,543 (3,502) 33,262 10,483 3,009 687 (4,669) 11,844 1,134,043 960,251 (644,218) 208) (384,335)

8) (337,909) 003) (57,952) (8,474) (49,327) (21,360) 53,528 12,235 (1,420,213) ( 1,076, 748) 225,717 (77,770) 386,270 814,000 (59,430) (173,265) 147,631 (32,616) (423,958)

(412,767) 10,781 4,155 287,011 121,737 841 5,240 82,409 77,169 $ 83,250 $ 82,409 $ 93,783 $ 43,337 $ 370,573 $ 312,414 Con olidated Statements of Retained Earnings (Thousands of Dollars) For the Years Ended December 31, Balance January 1 Add Net Income Total Deduct Cash Dividends on Common Stock (A) Adjustments to Retained Earnings (note 6) Total Deductions Balance December 31 1990 $1,332,739 542,278 1,875,017 442,466 10,940 453,406 $1,421,611

_,._ . ., .... 1989 1988 $1,213,260

$1 ,096,933 542, 137 528,586 1,755,397 1,625,519 423,958 412,767 (1 ,300) (508) 422,658 412,259 $1,332,739

$1,213,260 (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 are contained in its Charter, certain of the indentures supplemental to its Mortgage, and certain debenture bond indentures.

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

The amount of PSE&G's restricted retained earnings at December 31, 1990 was $10 million. See Notes to Consolidated Financial Statements . *

• 33 Notes to Consolidated Financial Statements

1. Organization and Summary of Significant Accounting Policies Organization Public Service Enterprise Group Incorporated (Enterprise) has two wholly-owned subsidiaries, Public Service Electric and Gas pany and Enterprise Diversified Holdings Incorporated f'.nte1:Prise's principal subsidiary, PSE&G, is a public utility operatmg m the State of New Jersey. Holdings was rated on June 20, 1989, and on July 1, 1989 became the parent of Enterprise's nonutility subsidiaries:

Public Service Resources (PSRC), Energy Development Corporation (EDC), munity Energy Alternatives Incorporated (CEA), Enterprise Group Deve.lopment Corporation (EGDC), and PSEG Capital Corporation (Capital).

Enterprise Capital Funding Corporation (Funding), a wholly-owned subsidiary of Holdings, was also formed on June 20, 1989. PSE&G Fuel Corporation (Fuelco) was organized in June 1990, as a wholly-owned subsidiary of PSE&G. . ?nterprise has claimed an exemption from regulation by the rities and Exchange Commission as a registered holding company the Public lJ_tility Holding Company Act of 1935, except for Section 9(a)(2) which relates to the acquisition of voting securities of an or gas utility company. Also, Enterprise is not subject to regulation by the New Jersey Board of Public Utilities (BPU) or the Federal Energy Regulatory Commission (FERC). Consolidation Policy The consolidated financial statements include the accounts of prise and its subsidiaries.

All significant intercompany accounts and transactions have been eliminated in consolidation.

Certain fications of prior years' data have been made to conform with the current presentation.

Regulation

-PSE&G The accounting and rates of PSE&G are subject in certain respects to the requirements of the BPU and FERC. As a result, PSE&G maintains its accounts in accordance with their prescribed Uniform Systems of Accounts, which are the same. The applications of erally accepted accounting principles by PSE&G differ in certain respects from applications by nonregulated businesses.

Utility Plant and Related Depreciation

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

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

For financial reporting purposes, depreciation is computed under the method. Depreciation is based on estimated average hves o.f the several classes of depreciable property.

These estimates are reviewed on a regular basis and necessary adjustments are made as approved by the BPU. Depreciation provisions stated in percentages of original cost of depreciable property were 3.48% in 1990 and 3.47% in 1989 and 1988. Nuclear Decommissioning Funds -PSE&G Depreciation applicable to nuclear plant includes estimated costs of decommissioning.

At December 31, 1990 and 1989, the accumulated provision for depreciation and amortization included reserves for nuclear decommissioning of $133.0 million and $113.0 million. In accordance with orders from the BPU, PSE&G has established nal nuclear decommissioning trust funds for all its nuclear units. The Internal Revenue Service (IRS) has ruled that payments into qualified funds are tax deductible.

As of December 31, 1990 and 1989, PSE&G has contributed

$77.9 million and $59.7 million into external qualified and nonqualified nuclear decommissioning trust funds. Amortization of Nuclear Fuel -PSE&G Nuclear energy burnup costs are charged to fuel expense on a of-production basis over the estimated life of the fuel. Rates for the recovery of fuel used at all nuclear units include a provision of one mill per kilowatthour of nuclear generation for spent fuel disposal costs, which is paid quarterly to the United States Department of Energy. Revenues and Fuel Costs -PSE&G Revenues are recorded based on services rendered to customers during each accounting period. PSE&G records unbilled revenues representing the estimated amount customers will be billed services rendered from the time meters were last read to th the respective accounting period. Rates include projected fuel costs for electric generation, chased and interchanged power, gas purchased and materials used for gas production.

Any under or overrecoveries, together with interest, are deferred included in operations in the period in which they are reflected m rates. Oil and Gas Accounting

-EDC 34 EDC follows the full-cost method of accounting.

Under this method, all exploration and development costs for successful and unsuccessful wells are capitalized and amortized on the units-of-production basis. Long-Term Investments

-Holdings PSRC has invested in marketable securities, which are valued at the lower of cost or market, and various leases and limited partnerships. 6 -Long-Term Investments.)

EGDC has become a ticipant m the nonresidential real estate markets. Income Taxes Enterprise and its subsidiaries file a consolidated Federal income tax return and income taxes are allocated to Enterprise's subsidiaries based on taxable income or loss of each. Deferred income taxes are provided for differences between book taxable income. For PSE&G, deferred income taxes are vided to the extent permitted for ratemaking purposes.

Investment tax credits are deferred and amortized over tie seful lives of the related property including nuclear fuel. In 1987, the Financial Accounting Standards (FASB) issued Statement of Financial Accounting Standards 1 o. 96 (SFAS 96), "Accounting for Income Taxes',' which requires the ognition of deferred tax liabilities adjusted for the effects of enacted changes in tax laws or rates. The effective date of SFAS 96 was for fiscal years beginning after December 15, 1988. However, the effec-tive date has been deferred to fiscal years beginning after December 15, 1991. FASB is continuing its deliberations with the objective of issuing an exposure draft which could result in amending SPAS 96. As a result of the accounting and ratemaking requirements of the BPU and FERC, the primary effect of adopting SPAS 96 upon Enterprise's financial reporting will be on the presentation of its financial position with minimal effect on its income statement.

Allowance for Funds Used During Construction (AFDC) and Capitalized Interest PSE&G -AFDC represents the cost of debt and equity funds used to finance the construction of new utility facilities.

The amount of AFDC capitalized is also reported in the Consolidated Statements of Income as a reduction of interest charges for the borrowed funds component and as other income for the equity funds component.

The rates used for calculating AFDC in 1990, 1989 and 1988 were 10.17%, 10.68% and 9.91 %, respectively.

These rates are within the limits set by the FERC formula. Holdings -The operating subsidiaries of Holdings capitalize costs allocable to construction expenditures at the prevailing cost of borrowed funds. Pension Plan and Other Post-Employment Benefits The employees of PSE&G and participating affiliates completing one ' f service are covered by a noncontributory trusteed pen-sio policy is to fund pension costs accrued. PSE&G also pro' *ertain health care and life insurance benefits to active and retired employees.

The current cost of these benefits is charged to expense when paid and is currently being recovered from ratepayers. (See Note 12-Pension Plan and Other Post-Employment Benefits.)

In December 1990, FASB issued Statement of Financial ing Standards No. 106 (SFAS 106), "Employers' Accounting for Postretirement Benefits Other than Pensions" which requires ployers to change from a "cash basis" to an "accrual basis" of counting for post-employment benefits.

SPAS 106 is effective for fiscal years beginning after December 15, 1992. Because of existing accounting and ratemaking requirements of the BPU and FERC, which regulate PSE&G, the primary effect of adopting SPAS 106 on Enterprise's financial reporting is expected to be on the presentation of its financial position with minimal effect on its income statement.

2. Rate Matters Electric On February 16, 1990, the BPU approved a Stipulation providing for a $24.l million annualized increase in the electric Levelized Energy Adjustment Clause (LEAC) for the period ending June 30, 1991. Additional issues included in the Stipulation provided for the tion of $10.5 million of revenues related to the sale of capacity to , Atlantic Electric Company and Potomac Electric Company pre-1 viously recorded as a reduction in PSE&G's energy costs and an aver o reduction in street lighting customer rates. The collec-tior unts related to previously accrued interest on overcollec-tion eferred pending a decision by the BPU. On June I and July 5, 1990, the BPU issued its decisions on the interest issues previously deferred: (I) interest on the nuclear mance penalty of 1987 was deferred to the generic proceeding cerning the nuclear performance standard; (2) interest on the $70 35 million of deferred replacement energy costs associated with the outages of the electric generators at both Salem units in 1983, 1984 and 1985 was denied; and (3) the previous decision by the BPU concerning interest on overrecoveries was reversed and the BPU decided to allow PSE&G to offset intraperiod interest on monthly overrecoveries with monthly underrecoveries.

Based on these sions $2. 9 million of interest previously returned to customers was allowed to be recovered by PSE&G. On August 29, 1990, the BPU issued its Order effective ber 5, 1990 which granted PSE&G's original request of September 15, 1989 for a 1990 and 1991 increase in electric base rates reflecting the expiration of the TRA-86 amortization.

PSE&G's original request provided for an increase of $23.3 million in electric base rates to be effective January 1, 1990, with an additional increase of $29.7 lion to be effective January 1, 1991. As a result of the August 29, 1990 Order, the increase in electric base revenues plus interest for the period January 1, 1990, to September 5, 1990, will be recovered from customers in accordance with PSE&G's next LEAC rate ment which is expected to commence July 1, 1991. Gas On December 6, 1989, the BPU approved a Stipulation among the parties and granted an increase of $23.7 million, or 2% in the 1989-1990 LGAC for the period ending September 30, 1990. tional issues on which settlement was reached included recovery of all take-or-pay charges for the 1989-90 LGAC period subject to refund (see paragraph below), changes in pricing of gas delivered to the electric department, recovery of a $10.7 million loss, without interest, on sale of naphtha over a three-year period without carrying charges resulting from the retirement of the Linden SNG plant in July 1989 and a name change for the gas Raw Materials Adjustment Clause (RMAC) to Levelized Gas Adjustment Clause (LGAC). On January 17, 1990 the BPU approved a Stipulation entered into by PSE&G, the BPU staff, and the New Jersey Industrial Energy Users Association resolving all take-or-pay issues. Under the terms of the Stipulation all take-or-pay charges already collected were no longer subject to refund. The BPU permitted PSE&G to recover all take-or-pay costs. A portion of the payments will be recovered over a nine-year period which began in October 1987, without recovery of related carrying charges. PSE&G estimates that it may incur proximately

$2 million in carrying charges pertaining to the year recovery period related to certain payments, since it is required to meet its take-or-pay obligations over the next six years. On October 31, 1990, the BPU approved a Stipulation of the parties in the LGAC proceeding for an increase of $46.1 million for the eleven-month period commencing November 1, 1990, and ending September 30, 1991. In addition to the LGAC increase, the BPU also approved PSE&G's proposal to directly credit firm customers' bills during the months of November and December 1990 and uary 1991 with refunds totalling

$80 million. On January 31, 1991, the BPU approved an additional one-month refund to customers of $28 million to be returned in February 1991. These credits are the result of the receipt by PSE&G of substantial refunds from its line suppliers and an overcollection of actual gas costs. On August 29, 1990, the BPU issued an Order granting PSE&G's request, effective September 5, 1990, for a 1990 and 1991 increase in gas base rates reflecting the expiration of the TRA-86 tion. The increase in gas revenues of $4. 8 million plus interest which were originally requested by PSE&G on September 15, 1989 to be effective January 1, 1990, are being recovered from customers under the LGAC which commenced November 1, 1990, and which remains in effect through September 30, 1991. The 1991 increase in gas base rates of $6.2 million is being recovered from customers beginning January 1, 1991. 3. Schedule of Consolidated Capital Stock (Thousands of Dollars) Enterprise Common Stock Current Redemption Outstanding Price Shares Per Share Common Stock (no par) -authorized 500,000,000 shares (note A); issued and outstanding at December 31, 1990, 218,472,205 shares, at December 31, 1989, 211,100,418 shares, and at December 31, 1988, 205,350,418 shares (5,000,000 shares issued for $126,150,000 and 2,371,787 shares issued for $59,277,802 through Dividend Reinvestment and Stock Purchase Plan in 1990; 5,750,000 shares issued for December 31, 1990 1989 $147,631,250 in 1989; no shares issued in 1988.) $3,043,402

$2,857,974 Enterprise Preferred Stock (note B) PSE&G Cumulative Preferred Stock (note C) Without Mandatory Redemption (note D) $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 7.40% 500,000 101.00 50,000 50,000 7.52% 500,000 101.00 50,000 50,000 8.08% 150,000 101.00 15,000 15,000 7.80% 750,000 101.00 75,000 75,000 7.70% 600,000 100.79 60,000 60,000 8.16% 300,000 104.82 30,000 30,000 Total Preferred Stock Without Mandatory Redemption

$ 429,994 $ 429,994 Notes to Schedule of Consolidated Capital Stock (A) Total authorized and unissued shares include 3,678,503 shares of Enterprise Common Stock reserved for issuance through the Dividend Reinvestment and Stock Purchase Plan and various employee benefit plans. (B) Enterprise has authorized a class of 50 million shares of Preferred Stock without par value, none of which is outstanding. (C) There are 3,200,058 shares of $100 par value and 10,000,000 shares of $25 par value Cumulative Preferred Stock which are authorized and unissued, and which upon issuance may or may not provide for mandatory sinking fund redemption.

If dividends upon any shares of Preferred Stock are in arrears in an amount equal to the annual dividend thereon, voting rights for the election of a majority of PSE&G's Board of Directors become operative and continue until all accumulated and unpaid dividends thereon have been paid, whereupon all such voting rights cease, subject to being again revived from time to time. As of December 31, 1990 and 1989 there were no shares of Preferred Stock with mandatory redemption outstanding. (D) At December 31, 1990 the annual dividend requirement and embedded dividend cost for Preferred Stock without mandatory redemption were $29,012,000 and 6.75%, respectively.

36 4. Deferred Items Statement of Financial Accounting Standards No. 90 The Amortization of Discount on Property Abandonments and Disallowances were $7.7 million for 1990; $8.7 million for 1989 and $38.8 million for 1988 and includes the effect on income of ment of Financial Accounting Standards No. 90 (SFAS 90) lated Enterprises

-Accounting for Abandonments and Disallowances of Plant Costs',' as amended by Technical Bulletin No. 87-2 (TB). The tax effects of discounting of abandonments were calculated using the tax rates applicable to related deferred tax balances.

Property Abandonments The BPU has authorized PSE&G to recover the after-tax ment costs from its customers.

The following table reflects the cation of SFAS 90 and the TB on property abandonments for which no return is earned. The discount rate range used to calculate the present value of the abandoned property under SFAS 90 was tween 8.545% and 14.446%. The net-of-tax discount rate used in accordance with the TB was between 4.443% and 7.801 %. (Thousands of Dollars) December 31, 1990 1989 Discounted Discounted Property Abandonments Cost Taxes Cost Atlantic Project $112,382 $47,238 $121,723 Hope Creek Unit 2 47,396 31,588 63,031 LNG Project 22,389 8,534. 25,697 Uranium Projects 17,686 7,510 19,181 Other 851 1,109 $200,704 $94,870 $230,741 $106,560 Under(Over)recovered Electric Energy and Gas Costs -Net Recoveries of electric energy and gas costs are determined by the BPU. (See Note 2 -Rate Matters.)

The following table reflects the balances in PSE&G's deferred fuel recovery accounts:

Cumulative (Millions of Dollars) Under(Over)Recovery December 31, 1990 1989 LEAC Deferred Fuel Cost $(10.0) $ 56. l Deferred Replacement Power Costs -Salem 23.1 37.1 TotalLEAC 13.1 93.2 LGAC Deferred Fuel Cost (50.6) (24.7) Net Under(Over)Recovery

$(37.5) $ 68.5 Unamortized Debt Expense Costs associated with the issuance of debt by PSE&G are deferred and amortized over the lives of the related issues. Amounts shown in the Consolidated Balance Sheets consist of costs associated with PSE&G's reacquisition of First and Refunding Mortgage Bonds. The redemption costs of the tendered or redeemed debt have been ferred and are being amortized over the lives of the new securities issued to replace higher-cost securities.

PSE&G expects to amortize $5.8 million of these costs in 1991. Materials and Supplies Inventory In January 1989, PSE&G changed its method of accounting tain spare parts to the deferred (inventory) method, whereby all purchases of spare parts under inventory control are charged into the Materials and Supplies inventory account until such time that the items are used or consumed and are then charged to the appropriate expense or capital accounts.

Prior to 1989, certain purchases of spare parts were being charged directly to expense at the time of purchase, with a current deduction being taken for tax purposes.

On October 4, 1988, PSE&G filed a request with the Internal Revenue Service (IRS) for a tax ruling concerning the change in accounting for spare parts. If the request is approved as submitted, this would allow PSE&G to account for the resulting adjustment for income tax purposes over a six-year period beginning January 1989. PSE&G recorded an increase in its Materials and Supplies inven-tor)! t for the value placed on these spare parts, as of January 1, 1 e associated income statement impact has been deferred and is mg amortized over a six-year period beginning January I, 1989. As of December 31, 1990, the unamortized balance of this deferred credit was $51.7 million. 5. Schedule of Consolidated Long-Term Debt (Thousands of Dollars) December 31, Interest Rates Due 1990 1989 PSE&G First and Refunding Mortgage Bonds (note A) 4%% 1990 $ $ 50,000 43/s%-8%%

1992 240,000 240,000 43/s%-9 1/s% 1993 190,000 190,000 45/s%-8%%

1994 210,000 210,000 4%% 1995 60,000 60,000 6Y*%-9%% 1996-2000 746,000 747,000 71/2%-12%

2001-2005 492,430 368,430 6.30%-9%%

2006-2010 557,210 558,210 6.80%-101/2%

2011-2015 647,500 647,500 8.10%-9%%

2016-2020 446,000 322,000 5%-8% 2037 15,001 15,001 Total First and Refunding Mortgage Bonds 3,604,141 3,408, 141 Debenture Bonds Unsecured 5%% 1991 31,199 31,199 71/4% 1993 21,923 22,614 9% 1995 41,814 42,319 6%-8%% 1996-1998 94,704 97,154 Total Debenture Bonds 189,640 193,286 unt Outstanding 3,793,781 3,601,427 ithin One Year (note B) (38,274) (54,038) 1zed Discount (22,063) (23,179) Total Long-Term Debt of PSE&G 3,733,444 3,524,210 37 Holdings Capital (note C) 8.65%-9.12%

8.95%-9.72%

9.30%-9.55%

8.95%-10.05%

1991 1993 1995 1996-1999 Principal Amount Outstanding Amounts Due Within One Year (note B) Net Unamortized Discount Total Long-Term Debt of Capital Funding (note D) 9.375% 9.43% 9.54% Total Long Term Debt of Funding EGDC Mortgage Notes 9.75% 10.625%-12.75%

1994-1995 1993 1995 1992 2012 Principal Amount Outstanding Amounts Due Within One Year (note B) Total Long-Term Debt of EGDC EDCBankLoans-12%

1995 Amounts Due Within One Year (note B) Total Long-Term Debt of EDC Total Long-Term Debt of Holdings Consolidated Long-Term Debt (note E) Notes: 80,000 88,000 82,000 500,000 750,000 (79,940) (2,088) 667,972 150,000 60,000 35,000 245,000 14,606 7,090 21,696 (88) 21,608 934,580 $4,668,024 80,000 88,000 82,000 500,000 750,000 (2,568) 747,432 14,606 7,169 21,775 (79) 21,696 270 (30) 240 769,368 $4,293,578 (A) PSE&G's Mortgage, securing the First and Refunding Mortgage Bonds, tutes a direct first mortgage lien on substantially all PSE&G property and franchises.

(8) The aggregate principal amounts of requirements for sinking funds and maturities for each of the five years following December 31, 1990 are as follows: (Thousands of Dollars) Sinking Funds Maturities Year PSE&G Capital PSE&G Capital EGDC Funding Total 1991 $ 7,o75 $ $ 31,199 $ 79,940 $ 88 $ $ 118,302 1992 6,200 . 240,000 14,703 260,903 1993 5,400 42,500 210,323 88,000 108 60,000 406,331 1994 5,400 42,500 210,000 121 75,000 333,021 1995 3,630 42,500 95,814 82,000 134 110,000 334,078 $27,705 $127,500 $787,336 $249,940 $15,154 $245,000 $1,452,635 For sinking fund purposes, certain First and Refunding Mortgage Bond issues require annually the retirement of $17,950,000 principal amount of bonds or the utilization of bondable property additions at 60% of cost. The portion expected to be met by property additions has been excluded from the table above. Also, PSE&G may, at its option, retire additional amounts up to $5,000,000 annually through sinking funds of certain debenture bonds. Additional bonds, if any, resulting from the election of this option are included in long-term debt due within one year. (C) Capital is providing up to $750 million long-term debt financing for the nonutility businesses on the basis of a support agreement with Enterprise. (D) Funding provides long-term debt financing for the nonutility businesses on the basis of unconditional guarantees from Holdings. (E) At December 31, 1990, the annual interest requirement on Long-Term Debt was $418.5 million of which $307.2 million was the requirement for First and Refunding Mortgage Bonds. The embedded interest cost on long-term debt was 9.04%.

6. Long-Term Investments Long-Term Investments are primarily those of Enterprise's nonutility operating businesses:

PSRC (diversified passive investments), CEA (cogeneration and small power production facilities) and EGDC (diversified non-residential real estate development and ments). A summary of long-term investments is as follows: (Millions of Dollars) 1990 1989 Lease Agreements:

Leveraged Leases $ 516 $354 Direct-Financing Leases 95 98 Other Leases 17 19 Total 628 471 Partnerships:

General Partnerships 111 90 Limited Partnerships 321 208 Total 432 298 Joint Venture 11 10 Marketable Securities 200 137 Corporate-owned Life Insurance (PSE&G) 20 9 Total Long-Term Investments

$1,291 $925 Leveraged leases are those of PSRC and are reported net of principal and interest on nonrecourse loans and unearned income, including deferred investment tax credits. Unearned and deferred income is recognized at a level rate of return from each lease during the periods in which the net investment is positive.

Partnership investments are those of PSRC, CEA and EGDC and are undertaken with other investors. Marketable securities are those of PSRC and are stated at the lower of aggregate cost or market value, adjusted, where priate, for amortization of premium and discount computed using the interest method. The net unrealized loss, which is the difference between the market price and the cost of equity securities, net of applicable income taxes, is included in stockholders' equity. As of December 31, 1990 and 1989, the cost of PSRC's marketable ties was $212.l million and $137.5 million, respectively.

Realized investment gains and losses on the sale of investment securities are determined utilizing the specific cost identification method. (For additional information see Note 11 -Commitments and Contingent Liabilities.)

7. Cash and Cash Equivalents The December 31, 1990 and 1989 balances consist primarily of highly liquid marketable securities (commercial paper) with a turity of three months or less. 8. Federal Income Taxes A reconciliation of reported Net Income with pretax income and of Federal income tax expense with the amount computed by ing pretax income by the statutory Federal income tax rate of 34% is as follows: (Thousands of Dollars) 1990 1989 1988 Net Income $542,278 $542,137 $528,586 Preferred stock dividend requirements 29,012 29,012 31,336 Subtotal 571,290 571,149 559,922 Federal income taJCes: Operating Income: Current provision 141,342 112,046 90,153 Provision for deferred income taJCes -net (A) 86,461 119,606 89,744 Investment taJC credits -net (19,418) (23,391) (17,753) Total included in operating income 208,385 208,261 162,144 Miscellaneous other income: Current provision (11,480) (11,411) (14,300) Provision for deferred income taJCes (A) 10,906 10,906 13,087 SFAS 90 deferred income taJC (A) 5,850 6,773 31,205 Total Federal income taJC provisions 213,661 214,529 192,136 PretaJC income $784,951 $785,678 $752,058 Adjustments to pretax income, computed at the statutory rate, for which deferred taxes are not provided under current ratem

• policies:

TaJC expense at the statutory rate $266,883 $267,131 TaJC depreciation under book depreciation 9,534 17,821 15,282 Allowance for funds used during construction (11,635) (10,199)

(9,201) Capitalized interest 9,954 7,615 5,871 Amortization of rate differential resulting from TRA-86 (23,157) (43,203) (46,556) Other (11,821) (1,475) (22) Subtotal (27,125) (29,441) (34,626) Amortization of investment taJC credits (26,097) (23,161) (28,938) Subtotal (53,222) (52,602) (63,564) Total Federal income taJC provisions

$213,661 $214,529 $192, 136 Effective Federal income taJC rate 27.2% 27.3% 25.5% (A) The provision for deferred income taJCes represents the taJC effects of the following items: 38 Current Liabilities:

Unbilled revenues Other Subtotal Deferred Credits: $(15,155) $(19,627) $(23,724) 150 1,051 (1,704) (15,005) (18 ,576) (25 ,428) Additional taJC depreciation and amortization 133,081 109,024 110,862 Leasing Activities 43,301 85,641 19,386 Property Abandonments (11,690) (11,825) 15 ,888 Oil and Gas Property Write-Down (6,394) (6,393) (3,196)

Deferred fuel costs-net (36,822) (22,414) 29,600 Other (3,254) 1,828 (13,076) Subtotal 118,222 155,861 159,464 Total $103,217 $137,2. Deferred income taxes are provided for differences between book and taxable income. For PSE&G the deferred income taxes are ited to the extent permitted for ratemaking purposes.

At December 31, 1990 the cumulative net amount of income tax timing differences

---

for which deferred income taxes have not been provided was $1.0 billion. See Note 1 -Organization and Summary of Significant Accounting Policies for a discussion of the effect of SFAS 96, counting for Income Taxes:' and Note 2-Rate Matters for tions in LEAC and LGAC related to the effect of the TRA-86. 9. Capital Lease Obligations The Consolidated Balance Sheets include assets and related tions applicable to capital leases where PSE&G is a lessee. The total amortization of the leased assets and interest on the lease obligations equals the net minimum lease payments included in rent expense for capital leases. Capital leases of PSE&G relate primarily to its corporate quarters and other capital equipment.

Certain of the leases contain renewal and purchase options and also contain escalation clauses. Enterprise and its other subsidiaries are not lessees in any ized leases. Utility plant includes the following amounts for capital leases at December 31: (Thousands of Dollars) 1990 1989 Common Plant $57,226 $57,226 Less Accumulated Amortization 2,714 2,261 Net Assets under Capital Leases $54,512 $54,965 iimum lease payments for noncancelable capital and ases at December 31, 1990 were: (Thousands of Dollars) 1991 1992 1993 1994 1995 Later Years Minimum lease payments Less: Amount representing estimated executory costs, together with any profit thereon, included in minimum lease payments Net minimum lease payments Less Amount representing interest Present value of net minimum lease payments (A) Capital Leases $ 13,070 13,014 13,014 13,015 13,016 251,639 316,768 158,147 158,621 104,109 $ 54,512 Operating Leases $ 7,016 5,243 3,801 2,986 2,964 14,850 $36,860 (A) Reflected in the Consolidated Balance Sheets in Capital Lease Obligations of $54,073,000 and in Long-Term Debt and Capital Lease Obligations due within one year of $439,000.

The following schedule shows the composition of rent expense included in Operating Expenses: (Thousands of Dollars) For the Years Ended December 31, 1990 1989 1988 Interest on Capital Lease Obligations

$ 6,284 $ 6,322 $ 6,424 Amortization of Utility Plant under Capital Leases 452 409 1,036 Net lease payments relating to Capital 6,736 6,731 7,460 ayments 18,863 18,178 16,396 Total Rent Expense $25,599 $24,909 $23,856 39 10. Commercial Paper and Loans Commercial paper represents unsecured bearer promissory notes sold through dealers at a discount with a term of nine months or less. Certain information regarding commercial paper follows: PSE&G Consolidated (Thousands of Dollars) 1990 1989 1988 Principal amount outstanding at end of year $486,818 $328,000 $190,000 Maximum principal amount outstanding at any month end $486,818 $328,000 $213,000 Average daily outstanding

$240,000 $113,100 $ 94,900 Weighted average annual interest rate 8.22% 9.04% 7.80% Weighted average interest rate for commercial paper outstanding at year-end 8.34% 8.68% 9.43% PSE&G has received authorization from the BPU to issue and have outstanding not more than $500 million of its short-term obligations at any one time, consisting of commercial paper and other cured borrowings from banks and other lenders. At year-end PSE&G had $338 million principal amount outstanding.

PSE&G has a $75 million revolving credit agreement with a group of foreign banks which expires in 1992. As of December 31, 1990, there is no short-term debt outstanding under this agreement.

On June 28, 1990, Fuelco established a $200 million commercial paper program to finance its share of Peach Bottom nuclear fuel, supported by a $200 million revolving credit facility with a group of banks. PSE&G has guaranteed repayment ofFuelco's respective obligations.

At December 31, 1990, $148.8 million of Fuelco's mercial paper was outstanding.

Holdings (Thousands of Dollars) 1990 1989 1988 Amount outstanding at end of year: Funding $272,041 $110,939 Capital $117,530 Maximum amount outstanding at any month end: Funding $320,702 $110,939 Capital $164,700 Average daily outstanding:

Funding $229,500 $ 18,800 Capital $127,700 Weighted average annual interest rate: Funding 8.25% 8.68% Capital 7.63% Weighted average interest rate for commercial paper outstanding at year-end:

Funding 8.31% 8.61% Capital 9.50% In November 1987 Capital entered into a three-year

$250 million credit agreement with a group of banks to support the issuance of commercial paper, which was terminated in September 1989. In August 1989 Funding established a $350 million commercial paper program supported by a direct pay commercial bank letter of credit and a revolving credit facility which expires in August 1991. Enterprise presently expects that Funding will be able to renew this program upon expiration.

The December 1989 balance includes $10.4 million related to an outstanding capital note of Resources Capital Management tion, a subsidiary of PSRC, which was payable in installments through June 1990.

L At December 31, 1990 and 1989, Enterprise had $273 million and $295 million, respectively, of lines of credit supported by sating balances under informal arrangements with banks. At ber 31, 1990 and 1989, $150 million and $55 million, respectively, of these lines of credit were compensated by fees. There are no legal restrictions placed on the withdrawal or other use of the ing bank balances.

11. Commitments and Contingent Liabilities Nuclear Performance Standard In 1987, the BPU issued an Order establishing a performance dard for the five nuclear units in which PSE&G has an ownership interest:

Salem 1 and Salem 2 -42.59% each; Hope Creek-95%; and Peach Bottom 2 and 3 -42.49% each. PSE&G operates Salem and Hope Creek while Peach Bottom is operated by Philadelphia Electric Company (PE). On July 26, 1990, the BPU issued an Order confirming its June 6, 1990 oral decision which revised its nuclear performance standard applicable to New Jersey electric utilities, adopted in 1987. Under the original standard PSE&G would incur penalties if the aggregate capacity factor of its five nuclear units fell below 60% in a calendar year or receive financial benefits if the factor was 80% or higher. Such percentages were predicated upon a 70% target capacity factor. There were no penalties if the capacity factor fell between 60% and 80%, a spread previously referred to as the "dead band." Under the revised standard, based upon a 70% target capacity factor, the BPU established a new dead band called the "zone of reasonableness." The zone of reasonableness is a capacity factor equal to or greater than 65% and less than 75%. This means that PSE&G will be eligible for a reward if the aggregate capacity factor of its five nuclear units reaches 75% or higher and will sustain a penalty if it falls below 65% for each calendar year. The penalty/reward percentages have been increased under the revised standard. (See table below.) However, the BPU Order vides that the penalties will not be calculated in each instance all the way back to the target capacity factor of 70% as in the original dard, but rather to the edge of each capacity factor range. For ple, a 30% disallowance will apply to replacement power costs incurred in the 55% to 65% range and a 40% disallowance will apply to replacement power costs in the 45% to 55% range. Under the original standard, the percentage disallowed at 45% capacity factor was 25%, all the way back to the 70% target capacity factor. Capacity Factor Range Equal to or greater than 75% Equal to or greater than 65% and less than 75% Equal to or greater than 55% and less than 65% Equal to or greater than 45% and less than 55% Equal to or greater than 40% and less than 45% Below40% Reward Penalty 30% None None 30% 40% 50% BPU Intervenes Another change in the standard involves the basis for calculating the capacity factor. The design electrical rating (the theoretical rating of the plant assigned by the manufacturer) was utilized in the original standard.

The revised standard uses maximum dependable ity, which takes into account actual operating conditions.

This 40 change in the basis of calculation provides an estimated one percent increase in the capacity factor on the same level of generation.

The BPU also indicated in its July 26, 1990 Order that it was not incorporating a gross negligence standard into the nuclear mance standard, but would consider allegations of gross negligence brought upon a sufficient factual basis. A finding of gross negligence could result in penalties other than those prescribed under the clear performance standard.

PSE&G's nuclear units in which it has an ownership interest gregated a combined capacity factor of 74.8% in 1990 and 72% in 1989. In accordance with the BPU's 1989 Stipulation, the Peach Bottom Units were excluded from any nuclear performance penalty and capacity factor calculation during 1989 while revenue credits of $46 million were being provided to PSE&G's electric customers.

Nuclear Insurance Coverages and Assessments PSE&G's insurance coverages and maximum retrospective ments for its nuclear operations are as follows: Type and Source of Coverages Public Liability:

American Nuclear Insurers Indemnity (A) Nuclear Worker Liability:

American Nuclear Insurers (C) Property Damage: Nuclear Mutual Limited (D) Nuclear Electric Insurance Ltd. American Nuclear Insurers Replacement Power: Nuclear Electric Insurance Ltd. Maximum Retrospective Assessments for Coverages a Single Incident (Millions of Dollars) $ 200.0 7,607.0 $7,807 .O(B) $ 200.0 $ 500.0 1,125.0(E) 700.0 $2,325.0 $ 3.5(F) $ 8.4 $ 17.4 12.0 None $ 29.4 $ 12.9 (A) Retrospective premium program under the Price-Anderson Liability provisions of the Atomic Energy Act of 1954, as amended. Subject to retrospective assessment with respect to loss from an incident at any licensed nuclear reactor in the United States. (B) Limit of liability for each nuclear incident under the Atomic Energy Act of 1954, as amended. (C) Represents the potential liability from workers claiming exposure to the hazard of nuclear radiation.

This does not increase PSE&G's obligation under the Anderson Liability provisions of the Atomic Energy Act of 1954, as amended. (D) Mutual insurance companies of which PSE&G is a member. Subject to retrospective assessment with respect to loss at any nuclear generating station covered by such insurance. (E) Includes coverage for premature decommissioning of up to $200 million per site. (F) Weekly indemnity for 52 weeks which commences after the first 21 weeks of an outage. Also provides $2.4 million weekly for a second 52-week period, and $1.2 million weekly for a third 52-week period. The Price-Anderson Amendments Act of 1988 sets the "limit of liability" for claims that could arise from an incident involving any licensed nuclear facility in the nation.

The "limit of liability" is based on the number of licensed nuclear reactors and is ad-at least every five years based on the Consumer Price Index. rent "limit of liability" is $7.8 billion. All nuclear utilities, ing PSE&G, have provided for this exposure through a combination of private insurance and mandatory participation in a financial tion pool as established by the Price-Anderson Act. Under the Anderson Act, as amended, each party with an ownership interest in a nuclear reactor can be assessed up to $66.2 million per reactor per incident, payable at $10 million per reactor per incident per year. If the damages exceed the "limit of liability" the President is to submit to Congress a plan for providing additional compensation to the injured parties. Congress could impose further revenue raising measures on the nuclear industry to pay claims. PSE&G's maximum aggregate assessment per incident is $175 million (based on PSE&G's ownership interests in Hope Creek, Peach Bottom and Salem) as of January 16, 1991, and its maximum aggregate annual assessment per incident is $26.5 million. In 1984, in a case to which PSE&G was not a party, the Supreme Court of the United States held that the Atomic Energy Act, the Price-Anderson limitation of liability and the sive regulation of nuclear safety by the Nuclear Regulatory sion (NRC) do not pre-empt claims under state law for personal, property or punitive damages related to radiation hazards. PSE&G maintains property insurance, including decontamination expense coverage and premature decommissioning coverage, with respect to loss or damage to its nuclear facilities.

The limit of these coverages is $2.325 billion per incident, per site. PE has advised PSE&G that it maintains similar insurance coverage with respect to the Peach Bottom units operated by PE. Under the terms of the various insurance agreements, PSE&G could be subject to a mum retrospective assessment for a single incident of up to $29.4 million. Certain of the policies also provide that the insurer may suspend coverage with respect to nuclear units on a site without no he NRC suspends or revokes the operating license for any un site, the NRC issues a shutdown order with respect to sucn mt, or the NRC issues a confirmatory order keeping such unit shut down. PSE&G is a member of an industry mutual insurance company, Nuclear Electric Insurance Limited (NEIL), which provides placement power cost coverage in the event of a major accidental outage at a nuclear station. Salem and Hope Creek are covered by replacement power cost policies which provide for a weekly nity payment to the Salem and Hope Creek owners, respectively, of $3.5 million for 52 weeks, subject to a 21-week waiting period. Thereafter, the policies provide for weekly indemnity payments of $2.4 million for a second 52-week period, and $1.2 million weekly for a third 52-week period. PSE&G has been informed by PE that PE has similar replacement power cost coverage with respect to Peach Bottom. The premium for this coverage is subject to retrospective assessment for adverse loss experience.

Under the policies, PSE&G's present maximum share of any retrospective assessment in any year is $12.9 million. 41 Construction and Fuel Supplies PSE&G has substantial commitments as part of its construction program which includes the capital requirements for nuclear fuel. PSE&G's construction program is continuously reviewed and ically revised as a result of changes in economic conditions, revised load forecasts, changes in the scheduled retirement dates of existing facilities, changes in business plans, site changes and cost tions under construction contracts, and requirements of regulatory authorities and laws, the timing of and amount of electric and gas rate changes and the ability of PSE&G to raise necessary capital. PSE&G periodically reevaluates its forecasts of future customers, load and peak growth and sources of electric generating capacity to meet such projected growth, including the need to construct new electric generating capacity.

Forecasts take into account assumptions concerning future demands of customers, effectiveness of tion and load management activities, the long-term condition of PSE&G's plants, capacity available from other electric utilities, and the amounts of cogeneration and other nonutility capacity projected to be available.

PSE&G's construction expenditures of $4.6 billion, including

$330 million of allowance for funds used during construction, and capitalized interest of $18 million are expected to be incurred during the years 1991 through 1995. The estimate of construction ments is based on expected project completion dates and includes anticipated escalation due to inflation of approximately 4%, nually. Therefore, construction delays or higher inflation levels could cause significant increases in these amounts. PSE&G expects to generate internally a majority of the funds necessary to satisfy its construction expenditures over the next five years. In addition, PSE&G does not presently anticipate any difficulties in obtaining sufficient sources of fuel for electric generation and adequate gas supplies during the years 1991 through 1995. Oil and Gas Property Write-Down On October 31, 1986, the BPU approved agreements by PSE&G and the major parties in PSE&G's gas base rate case, which provided for an annual reduction in gas base revenues of $30 million, effective October 31, 1986, and for the removal of EDC, at that time a wholly-owned subsidiary of PSE&G, from inclusion in its gas rate base for ratemaking purposes.

In the BPU-approved agreement, PSE&G was allowed to defer any loss on its investment in EDC as a result of any write-down of the value of reserves as of December 31, 1986, and to seek recovery of such loss over a period of not less than 10 years in its next gas base rate proceeding.

On October 31, 1986, the price paid by PSE&G for natural gas from EDC was reduced as a result of a change in PSE&G's gas LGAC, formerly RMAC, proved by the BPU. As a result of these regulatory actions, EDC wrote down the value of its reserves as of December 31, 1986 by $134.5 million, which amounted to $70.5 million after the tax effect, to reflect the then lower net realizable value of its oil and gas serves. PSE&G deferred $58. 8 million of the after-tax loss as of December 31, 1986. On July 1, 1988, PSE&G began amortizing the $58.8 million deferred amount, absent regulatory approval, at the rate of 10% per year. As of December 31, 1990, the balance ing to be amortized was $41.3 million. PSE&G will seek recovery of the entire $70.5 million in its next gas base rate case. Denial of the recovery of any unamortized balance by the BPU would require an immediate write-off.

Environment General The federal Comprehensive Environmental Response, tion and Liability Act of 1980 and certain similar State statutes authorize various governmental authorities to issue orders ling responsible parties to take cleanup action at sites determined to present an imminent and substantial danger to the public and to the environment because of an actual or threatened release of hazardous substances.

Because of the nature of PSE&G 's business, including the production of electricity, the distribution of gas, and formerly the manufacture of gas, various by-products and substances are or were produced or handled which contain constituents classified as hazardous under the above laws. PSE&G generally provides for the disposal or processing of such substances through licensed dent contractors.

However, these statutory provisions impose joint and several responsibility without regard to fault on all allegedly responsible parties, including the generators of the hazardous stances, for certain investigative and cleanup costs at sites where these substances were disposed or processed.

PSE&G has been notified with respect to a number of such sites, and the cleanup of these potentially hazardous sites is receiving greater attention from the government agencies involved.

Generally, actions directed at funding such site investigations and cleanups include all suspected or known allegedly responsible parties. PSE&G does not expect its expenditures for any such site to be material.

PSE&G's own sites also are subject to certain of these mental laws, and the nature and duration of certain of PSE&G's past operations suggest that some remedial action may be required.

PSE&G cannot determine, at this time, the costs which may result from these matters, but such costs could be material.

PSE&G Gas Plant Sites In March 1988, the NJDEP notified PSE&G that it had identified the need for PSE&G, pursuant to a formal arrangement, to cally investigate and, if necessary, resolve environmental concerns extant at PSE&G's former manufactured gas plant sites. To date, the NJDEP and PSE&G have identified thirty-eight former gas plant sites. PSE&G has completed a preliminary assessment of eight of these sites. PSE&G is currently working with the NJDEP under a plan pursuant to which*PSE&G would undertake to gate these sites. At a minimum, some form of investigation will be required at each of these sites. Upon completion of these tions, some or all of these sites may require remedial action. PSE&G anticipates that its program to assess, investigate and, if necessary, remediate environmental

• concerns at its former gas plant sites may take more than 20 years to complete.

In furtherance of this effort, during 1990, PSE&G entered into Administrative Consent Orders (ACOs) with the NJDEP concerning eight former manufactured gas plant sites located in South Amboy, Morristown, Bordentown, Gloucester, Bayonne (Hobart Avenue), Woodbury, Riverton and Paterson.

These ACOs require PSE&G to investigate environmental conditions at these sites and, if an ronmental problem related to gas manufacturing operations exists, to clean up the sites in accordance with NJDEP requirements.

Six of the eight sites are owned by third parties. PSE&G completed a dial investigation at one site, a preliminary screening at five sites, and filed work plans with the NJDEP to investigate seven sites, also in 1990. Field work activities associated with the seven remedial investigations will be initiated as soon as PSE&G receives NJDEP approval of the work plans. The costs associated with conducting these investigations are expected to approximate

$3.5 million. Upon completion of the investigations, some or all of these sites may require remedial action. Remedial work activities have been undertaken at four additional sites, three of which are owned by third parties. Remedial work activities at one of these sites has been conducted at a cost to PSE&G of $5.6 million. In the second case, PSE&G entered into a settlement agreement with the owner for approximately

$10 million. With respect to the other two sites, PSE&G expects the investigation costs to approximate

$2 million. The nature and duration of the industrial operations conducted at these latter two sites, as well as the nary findings from these investigations, suggest that remed' n will be necessary at these sites. The cleanup of former gas plant sites will require a substant1 effort by PSE&G over a number of years. This overall cost of the investigation and cleanup cannot be reasonably estimated, but rience to date'indicates that costs of approximately

$20 million per year could be incurred over a period of more than 20 years and that the overall costs of the investigation and cleanup could be material.

The BPU issued aii order on August 8, 1989, approving PSE&G's request to permit it to defer charging to income costs incurred in connection with the investigation and remediation of its former gas plant sites, pending a determination in a gas base rate proceeding of the extent to which such costs may be recovered from customers.

PSE&G is also seeking to recover such costs from its insurers, (see below.) As of December 31, 1990, PSE&G has deferred mately $23.7 million of such costs. Absent insurance recovery, denial of recovery by the BPU of such costs would require an immediate write-off of the amount being deferred by PSE&G. In November 1988, PSE&G filed suit against certain of its insurers to recover the costs associated with addressing and resolving ronmental issues at its former gas plant sites. The litigation is rently in the discovery phase. Pending recovery of such costs through rates or under its insurance policies, neither of which can be assured, PSE&G will be required to finance the cleanup of its former gas plant sites. 42 Community Energy Alternatives Incorporated CEA, one of Enterprise's indirect nonutility subsidiaries, pates in the development of cogeneration and small power tion facilities.

GWF Power Systems, L.P. (Partnership), in which CEA has an aggregate indirect 50% ownership interest, has structed a coal-fired cogeneration plant located in Hanford, nia (Hanford).

CEA's wholly-owned subsidiary, CEA USA, Inc., and CEA USA, Inc. 's wholly-owned subsidiary, CEA GWF, Inc., are a limited partner and a general partner, respectively, in the nership. Physical construction of Hanford is complete.

Hanford was synchronized to the utility grid on October 14, 1990 and was ated for testing until December 31, 1990 when it was shut down as required by the court order discussed below. During the testing period, Hanford successfully completed its power contract capacity test. As of December 31, 1990, approximately

$72.1 million had been spent on development and construction of Hanford, and the Partnership or the contractor, a CEA affiliate, had committed an additional

$6 million, of which CEA's indirect share is 50%. Hanford continues to be the subject of a legal challenge which in 1990 resulted in a determination that the permits necessary for Hanford's operation are invalid. On June 21, 1990, the California Court of Appeal issued its determination that the Environmental Impact Report (EIR) prepared by the City of Hanford (City) for Hanford was inadequate under the California Environmental Quality Act a further, that the City's general (zoning) plan, under which the for Hanford were issued, was in violation of California la ptember 21, 1990, the California Supreme Court declined to heart e Partnership's appeal and remanded the matter to the California Superior Court to determine and implement a remedy. On October 26, 1990, following a hearing, the Superior Court after declaring the permits invalid, (i) ordered the City to make corrective amendments to its general (zoning) plan and the EIR within 120 days from November 1, 1990 and (ii) ordered that Hanford could operate for testing purposes for up to sixty days from November 1, 1990. The Court also ordered the City, after completing the tive amendments, to reconsider the project, and to decide whether in the discretion of the City it should be approved.

The Partnership is presently attempting to resolve this matter on mutually acceptable grounds with the plaintiffs in the lawsuit, and with the City, which passed an ordinance prohibiting the burning of coal within the City's limits after originally approving permits to allow the construction of Hanford.

• 43 In order to secure financing for Hanford, Enterprise had entered into a subscription agreement for the purchase of capital stock of CEA in the amount of approximately

$32 million, which tion agreement has been pledged to the project lenders. CEA's 50% partner in the Partnership has provided a support agreement of like amount which has also been pledged to the project lenders. donment of Hanford would enable the project lenders to demand repayment of the construction loan, requiring payments by prise for additional shares of CEA capital stock pursuant to the subscription agreement.

In the event that certain conditions are met, including issuance by the City of permits for Hanford to operate, the lenders have agreed that the present fully guaranteed construction loan will terminate and that they will lend the Partnership funds relative to Hanford on a nonrecourse basis. The Hanford construction loan is otherwise payable in full on September 30, 1991, with prise obligated to provide funding for 50% of such payment as cussed above. As of December 31, 1990, the Partnership had Hanford construction loans outstanding of approximately

$49.4 million. Enterprise is presently unable to predict the resolution of this matter. However, in the event that the City, after modification of the general (zoning) plan and the EIR, declines to issue the permits for Hanford or a decision were made by the Partnership to abandon Hanford, Enterprise would be required to write off its indirect equity investment in Hanford, which investment as of December 31, 1990, including its obligations under the subscription agreement, was approximately

$25.8 million, net of Federal income taxes, or proximately 12 cents per share of Enterprise Common Stock. In addition, the Partnership may have responsibility to restore the Hanford site to its pre-construction condition if Hanford is doned. The costs of any such restoration cannot be presently mated but they could be material to the Partnership.

Further, certain ofHanford's equipment may have resale or salvage value. Public Service Resources Corporation PSRC has a diversified portfolio of investments across a number of market segments.

One investment consists of $16 million of equity securities (primarily preferred stock) and $15 million of nated debt purchased from Second National Federal Savings Bank (SNFSB) of Salisbury, Maryland.

As of December 31, 1990, SNFSB failed to meet certain of the prescribed capital requirements of the Federal Office of Thrift Supervision (OTS). As a result, on January 25, 1991 SNFSB filed a Capital Plan with OTS designed to bring SNFSB back into compliance with the capital requirements of OTS by the third quarter of 1994. Enterprise cannot predict whether OTS will approve SNFSB 's Capital Plan or what other action OTS may take. If, however, OTS were to take over SNFSB, Enterprise could be required to write off its related investment, amounting to $20.5 million, after the tax effect, or nine cents per share of Enterprise Common Stock .

12. Pension Plan and Other Post-Employment Benefits The discount rate, expected long-term return on assets and average compensation growth used in determining the plan's funded status as of December 31, 1990 and 1989, and net pension costs for 1990, 1989 and 1988, were as follows: 1990 1989 Discount Rate Used to Determine Pension Cost 7V.% 7%% Discounted Rate Used to Determine Benefit Obligations 7%% 7 1/4% Expected Long-Term Return on Assets !!% 8% Average Compensation Growth 6% 6% The following table shows the plan's funded status: (Thousands of Dollars) December 31, 1990 1989 Actuarial present value of benefit obligations:

Accumulated benefit obligations, including vested benefits of $817,837 and $864,793 $ (873,745)

$ (926,031)

Effect of projected future compensation (292,658)

(246,377)

Projected benefit obligations (1,166,403) (I, 172,408) Plan assets at fair value, primarily listed equity and debt securities 970,886 1,028,585 Projected benefit obligations in excess of plan assets (195,517) (143,823)

Unrecognized net gain (loss) from past experience and effects of changes in assumptions 12,890 (52,333) Prior service cost not yet recognized in net pension cost 80,840 86,269 Unrecognized net obligations being recognized over 16.7 years 101,787 109,887 Prepaid (accrued) pension expense $ $ The net pension cost for the years ended December 31, 1990, 1989 and 1988, include the following components: (Thousands of Dollars) 1990 1989 1988 Service cost -benefits earned during year $ 34,323 $ 28,185 $ 25,811 Interest cost on projected benefit obligations 83,930 74,997 70,485 Return on assets 41,425 (159,767) (111,175)

Net amortization and deferral (109,678) 98,585 56,879 Total $ 50,000 $ 42,000 $ 42,000 Supplemental pension costs in 1990, 1989 and 1988, were$ 947,000, $1,900,000, and $2,846,000, respectively.

In addition to the pension plan, Enterprise also provides certain health care and life insurance benefits to active and retired ployees. The cost of these benefits is charged to expense when paid. (See Note 1 -Organization and Summary of Significant ing Policies.)

13. Financial Information by Business Segments Information related to the Enterprise's business is 44 detailed below: For the Year Ended December 31, 1990 Nonutility (Thousands of Dollars) Electric Gas Activities (A) Total Operating Revenues $ 3,332,417

$1,236,747

$ 281,250 $ 4,850,414 Eliminations (lnterseg-ment Revenues)

(50,279) (50,279) Total Operating Revenues 3,332,417 1,236,747 230,971 4,800,135 Depreciation and Amortization 385,567 88,864 87,053 561,484 Operating Income before Income Taxes 972,806 73,682 137,778 1,184,266 Capital Expenditures 821,242 146,781 298,366 1,266,389 December 31, 1990 Net Utility Plant 8,768,462 1,105,319 9,873,781 Oil and Gas Property, Plant & Equipment 789,819 789,819 Other Corporate Assets 1,331,729 426,919 1,601,062 3,359,710 Total Assets $10,100,191

$1,532,238

$2,390,881

$14,023,310 For the Year Ended December 31, 1989 Nonutility (Thousands of Dollars) Electric Gas Activities (A) Total Operating Revenues $3,279,913 $1,362,470

$ 207,165 Eliminations (lnterseg-ment Revenues)

(44,696) Total Operating Revenues 3,279,913 1,362,470 162,469 4,804,852 Depreciation and Amortization 374,086 86,158 64,270 524,514 Operating Income before Income Taxes 925,209 122,854 102,758 1,150,821 Capital Expenditures 552,603 121,611 414,837 l ,089,05 l December 31, 1989 Net Utility Plant 8,314,861 l ,021,774 9,336,635 Oil and Gas Property, Plant & Equipment 608,689 608,689 Other Corporate Assets 1,377,649 401,978 l ,194,483 2,974, 110 Total Assets $ 9,692,510

$1,423,752

$1,803,172

$12,919,434 For the Year Ended December 31, 1988 Nonutility (Thousands of Dollars) Electric Gas Activities (A) Total Operating Revenues $ 3,090,609

$1.203,435

$161.122 $4,455, 166 Eliminations (Interseg-ment Revenues) (60,474) (60,474)

Total Operating Revenues 3,090,609 1.203,435 100,648 4,394,692 Depreciation and Amortization 353,306 76,248 47 ,872 477,426 Operating Income before Income Taxes 843,595 109,314 52,370 1.005,279 Capital Expenditures 496, 185 68,091 182,206 746.482 December 31, 1988 Net Utility Plant 8, 128,543 960,960 9,089,503 Oil and Gas Property, Plant & Equipment 286,552 Other Corporate Assets l,204,808 370,497 739.009 Total Assets $ 9,333,35 l $1,331.457

$1.025,561 (A) The Nonutility Activities include amounts applicable to Enterprise.

the parent corporation.

14. Jointly-Owned Facilities

-Utility Plant Enterprise's subsidiary, PSE&G, has ownership interests and is responsible for providing its share of the necessary financing for the following jointly-owned facilities.

All amounts reflect the share of jointly-owned projects and the corresponding direct expenses are included in solidated Statements of Income as an operating expense. (See Note 1 -Organization and Summary of Significant Accounting Policies.) (Thousands of Dollars) December 31, 1990 Ownership Plant Accumulated Plant Under Plant Interest In Service Depreciation Construction Coal Generating Conemaugh 22.50% $ 91,302 $ 28,956 $ 2,205 Keystone 22.84 88,208 26,150 2,510 Nuclear Generating Peach Bottom 42.49 640,652 221,768 27,350 Salem 42.59 903,365 288,045 25,514 Hope Creek 95.00 4,049,133 471,300 43,157 Nuclear Support Facilities Various 84,408 14,229 12,952 Pumped Storage Generating Yards Creek 50.00 20,682 7,019 226 Transmission Facilities Various 87,882 21,636 8 Merrill Creek Reservoir 13.91 36,483 4,029 Linden SNG Plant (ceased the manufacture of SNG effective July I, 1989) 90.00 16,739 16,195 15. Selected Quarterly Data (Unaudited)

The information shown below in the opinion of Enterprise includes all adjustments, consisting only of normal recurring accruals, necessary to a fair presentation of such amounts. Due to the seasonal nature of the utility business, quarterly amounts vary significantly during the year. uarter Ended March31, June 30, September 30, December 31, where applicable) 1990 1989 1990 1989 1990 1989 1990 1989 Ope evenues $1,325,210

$1,296,140

$1,074,002

$1,047,694

$1,190,032

$1,155,033

$1,210,891

$1,305,985 Operating Income $ 248,248 $ 249,337 $ 200,229 $ 207,036 $ 291,887 $ 272,087 $ 233,116 $ 211,350 Net Income $ 144,660 $ 154,423 $ 98,292 $ 113,662 $ 181,898 $ 174,723 $ 117,428 $ 99,329 Earnings Per Share of Common Stock $ 0.69 $ 0.75 $ 0.47 $ 0.55 $ 0.86 $ 0.85 $ 0.54 $ 0.47 Average Shares of Common Stock Outstanding 211,100 205,350 211,116 205,350 211,884 205,663 213,797 211,100 45 Consolidated Financial Statistics (A) ----*-------------------*------------*-

---(Thousands of Dollars where applicable) 1990 1989 1988 1987 1986 Selected Income Information Operating Revenues Electric $ 3,332,417

$ 3,279,913

$ 3,090,609

$ 2,959,549

$ 3,156,010 Gas 1,236,747 1,362,470 1,203,435 1,219,955 1,324,690 Nonutility Activities 230,971 162,469 100,648 31,551 17,716 Total Operating Revenues $ 4,800,135

$ 4,804,852

$ 4,394,692

$ 4,211,055

$ 4,498,416 Net Income $ 542,278 $ 542,137 $ 528,586 $ 520,451 $ 378,463 Earnings per average share of Common Stock $ 2.56 $ 2.62 $ 2.57 $ 2.55 $ l .90(B) Dividends Paid per Share $ 2.09 $ 2.05 $ 2.01 $ 1.99 $ l.95(B) Payout Ratio 82% 78% 78% 78% 103%(B) Rate of Return on Average Common Equity 12.72% 13.41 % 13.60% 13.88% 10.56% Ratio of Earnings to Fixed Charges Before Income Taxes 2.50 2.66 2.81 3.03 2.38 Book Value per Common Share $20.44 $19.85 $19.11 $18.54 $17.92(B)

Utility Plant $13,836,874

$12,960,093

$12,466,690

$11,998,816

$11,437' 196 Accumulated Depreciation and Amortization of Utility Plant $ 3,963,093

$ 3,623,458

$ 3,377,187

$ 3,028,712

$ 2,692,759 Total Assets $14,023,310

$12,919,434

$11,690,369

$10,857,551

$10,577,822 Consolidated Capitalization Common Stock $ 3,043,402

$ 2,857,974

$ 2,710,343

$ 2,710,343

$ 2,632,662 Retained Earnings 1,421,611 1,332,739 1,213,260 1,096,933 993,836 Common Equity 4,465,013 4,190,713 3,923,603 3,807,276 3,626,498 Long-Term Debt 4,668,024 4,293,578 3,944,776 3,287,039 3,336 120 Capital Lease Obligations 54,073 54,513 54,966 55,374 Preferred Stock with Mandatory Redemption 30,000 Preferred Stock without Mandatory Redemption 429,994 429,994 429,994 429,994 Total Capitalization

$ 9,617,104

$ 8,968,798

$ 8,353,339

$ 7,609,683

$ 7,639,021 (A) See Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes to Consolidated Financial Statements.

(8) Reflects the July l, 1987 3-for-2 common stock split.

• 46 Operating Statistics

• "-p Service Electric and Gas Company -u-(Thousands of Dollars where applicable) 1990 1989 1988 1987 1986 Electric Revenues from Sales of Electricity Residential

$1,038,906

$1,015,065

$ 992,121 $ 940,915 $ 971,236 Commercial 1,516,755 1,464,431 1,335,158 1,273,819 1,333,144 Industrial 697,571 715,669 686,854 672,104 782,008 Public Street Lighting 45,418 46,750 45,620 46,248 43,726 Total Revenues from Sales to Customers 3,298,650 3,241,915 3,059,753 2,933,086 3, 130, 114 Interdepartmental 1,652 1,843 1,643 1,896 . 1,927 Total Revenues from Sales of Electricity 3,300,302 3,243,758 3,061 ,396 2,934,982 3,132,041 Other Electric Revenues 32,115 36,155 29,213 24,567 23,969 Total Operating Revenues $3,332,417

$3,279,913

$3,090,609

$2,959,549

$3,156,010 Sales of Electricity

-megawatthours Residential 9,875,569 9,950,773 9,941,003 9,299,490 8,726,769 Commercial 17,054,495 16,946,768 16,036,020 14,990,376 14,118,028 Industrial 9,457,985 10,039,913 10,179,340 10,119,614 10,134,327 Public Street Lighting 314,936 310,073 303,782 296,377 295,639 Total Sales to Customers 36,702,985 37,247,527 36,460,145 34,705,857 33,274,763 Interdepartmental 19,822 23,175 22,440 23,709 23,790 Total Sales of Electricity 36,722,807 37,270,702 36,482,585 34,729,566 33,298,553 Gas Re from Sales of Gas R 1 $ 667,077 $ 772,344 $ 695,918 $ 698,518 $ 754,785

• rcial 406,577 436,349 366,776 360,834 390,811 Industrial 130,273 134,272 123,434 145,664 171,860 Street Lighting 385 358 359 363 355 Total Revenues from Sales to Customers 1,204,312 1,343,323 1,186,487 1,205,379 1,317,811 Interdepartmental 2,157 3,613 3,059 3,837 2,849 Total Revenues from Sales of Gas 1,206,469 1,346,936 1,189,546 1,209,216 1,320,660 Transportation Service Gas Revenues 15,654 11 ,485 10,505 7,508 1,192 Other Gas Revenues 14,624 4,049 3,384 3,231 2,838 Total Operating Revenues $1,236,747

$1,362,470

$1,203,435

$1,219,955

$1,324,690 Sales of Gas -kilotherms Residential 1,097,034 1,253,800 1, 188,532 1,118,609 1,065,630 Commercial 837,650 872,684 748,283 678,281 644,450 Industrial 341,467 342,928 332,970 373,947 413,072 Street Lighting 657 656 657 655 680 Total Sales to Customers 2,276,808 2,470,068 2,270,442 2,171,492 2,123,832 Interdepartmental 5,144 8,705 7,640 8,972 5,498 Total Sales of Gas 2,281,952 2,478,773 2,278,082 2, 180,464 2,129,330 Transportation Service 182,056 149,586 138,665 98,121 14,926 Total Gas Sold or Transported 2,464,008 2,628,359 2,416,747 2,278,585 2,144,256 47 I Officers and Directors Public Service Enterprise Group Incorporated Officers *E. James Ferland . Chairman of the Board, President and Chief Executive Officer (Chairman of the Board and Chief Executive Officer, Holdings)

• Everett L. Morris Vice President (President and Chief Operating Officer, Holdings)

Richard E. Hallett Vice President and Comptroller

• R. Edwin Selover Vice President and General Counsel *Francis J. Riepl Treasurer

• Robert S. Smith Secretary Directors T.J. Dermot Dunphy President, Chief Executive Officer and director, Sealed Air Corporation (manufactures protective packaging products and systems).

Member of Finance Committee and Organization and Compensation Committee, and director, Holdings.

Robert R. Ferguson, Jr. Retired Chairman of the Board, and director:

First Fidelity Bancorporation; First Fidelity Bank, N.A. and First Fidelity, Inc. Member of Executive Committee, Finance Committee and Organization and Compensation Committee.

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

Chairman of Executive Committee and member of Finance Committee, and director, Holdings.

Shirley A. Jackson Theoretical Physicist, AT&T Bell Laboratories.

Member of Audit Committee and Nominating Committee, and director, Holdings.

Henry E. Kates President, Chief Executive Officer and director, The Mutual Benefit Life Insurance Company. Irwin Lerner President, Chief Executive Officer and director, La Roche Inc. (manufactures pharmaceuticals, vitamins, fine chemicals, and provides home health care and diagnostic products and services).

Member of Audit Committee, Executive Committee and Organization and Compensation Committee.

William E. Marfuggi Chairman, Tri-Maintenance

& Contractors Inc. Chairman of Organization and Compensation Committee and member of Nominating Committee, and director, Holdings.

Everett L. Morris Vice President of the Corporation.

Chairman of Finance Committee and member of Executive Committee.

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

Chairman of Nominating Committee and member of Audit Committee, and director, Holdings.

James C. Pitney Partner in the law firm of Pitney, Hardin, Kipp & Szuch. Chairman of Audit Committee and member of Nominating Committee and Organization and Compensation Committee.

Harold W. Soon Retired Chairman of the Board of the Corporation.

Member of Audit Committee and Finance Committee, and director, Holdings.

48 Josh S. Weston Chairman of the Board, Chief Executive Officer and director, Automatic Data Processing, Inc. Member of Audit Committee, Executive Committee, and Organization and Compensation Committee, and director, Holdings.

Public Service Electric and Gas Company Officers & Directors E. James Ferland Chairman of the Board, President and Chief Executive Officer Everett L. Morris Senior Executive Vice President Harold W. Borden, Jr. Senior Vice President

-External Affairs Lawrence R. Codey Senior Vice President

-Electric Robert J. Dougherty, Jr. Senior Vice President

-Customer Operations R. Edwin Selover Senior Vice President and General Counsel Rudolph D. Stys Senior Vice President

-Gas PaulH. Way Senior Vice President

-Corporate Performance Officers Donald A. Anderson Vice President

-Information Systems and Corporate Services William J. Budney, Jr .. Vice President

-Distribution Systems Frank Cassidy Vice President

-Transmission Systems Thomas M. Crimmins, Jr. Vice President

-Nuclear Engineering John A. Gartman Vice President

-Gas Supply and Planning Curtis W. Grevenitz Vice President

-Gas Operations Richard E. Hallett Vice President and Comptroller Stanley LaBruna Vice President

-Nuclear Operations Pierre R.H. Landrieu Vice President

-Fossil Production Frederick W. Lark Vice President

-Marketing John H. Maddocks Vice President

-Public Affairs Steven E. Miltenberger Vice President and Chief Nuclear Officer Francis J. Riepl Vice President and Trea Louis L. Rizzi Vice President

-Custome Services Robert S. Smith Vice President and Secretary Robert F. Steinke Vice President

-Business and Technical Support Gregory M. Thomson Vice President

-Human Resources 1990 Transition Board of Directors

-Enterprise Elected Henry E. Kates, 10/17/90 Officers -PSE&G Retired Richard A. Uderitz, 5/3/90 Vice President

-Technical Services *indicates Officer of En Diversified Holdings Incorporated (Holdings)

Corporate and Stock Information Stockholder Information

-Toll Free New Jersey re s idents 1-(800) 242-0813 Outside New Jersey 1-(800) 526-8050 Telephone Hours: 10 a.m. to 12 p.m. and 1: 30 to 3: 30 p.m. Monday-Friday (Eastern Time) Security Analysts and Institutional Investors Manager -Investor Relations (201) 430-6564 Dividend Reinvestment Plan Enterprise has a Dividend Reinvestment and Stock Purchase Plan under which all common and PSE&G preferred stockholders may reinvest dividend s and/or make direct cash investments to obtain Enterprise common stock. Purchases of common stock are made for the Plan directly from Enterprise , at its sole discretion , and/or in the open market. All brokerage and other fees to acquire shares are absorbed by Enterprise. To participate call the toll free number to obtain a prospectus and an authorization card. Stock Trading Symbol: PEG Annual Meeting Please note that the Annual Meeting of Stockholders of Public Service Enterprise Group Incorporated will be held at Newark Symp Hall, 1020 Broad Street , Newark , N.J. on Tuesday , April 16 , 2:00 PM. A summary of the meeting will be sent to all stoc s of record at a later date. Additional Reports Available

-Form 10-K Stockholders or other interested persons wishing to obtain a copy of Enterprise

's or PSE&G's 1990 Annual Report to the Securities and Exchange Commission , filed on Form 10-K , may obtain one without charge by writing to the Manager -Investor Relations, Public Service Electric and Gas Company, P.O. Box 570 , T6B , Newark , N.J. 07101 (telephone (201) 430-6503).

The copy so provided will be without exhibits.

Exhibits may be purchased for a specified fee. PSE&G Territory Newark Trenton Camden 49 Financial and Statistical Review A comprehensive statistical report containing financial and operating data will be available this spring. If you wish to receive a copy , please write to the Manager -Investor Relations , Public Service Electric and Gas Company , PO. Box 570, T6B , Newark, N.J. 07101 (telephone (201) 430-6503). Transfer Agents All Stocks: First Chicago Trust Company of New York 30 West Broadway , New York , N. Y. 10007 Stockholder Service s, Public Service Electric and Gas Company 80 Park Plaza, PO. Box 1171 Newark , N.J. 07101-1171 Registrars All Stocks: First Fidelity Bank, N.A., New Jersey 765 Broad Street, Newark, N.J. 07101 First Chicago Trust Company of New York 30 West Broadway , New York, N. Y. 10007 Stock Exchange Listings Common: New York Stock Exchange Philadelphia Stock Exchange London Stock Exchange Preferred of PSE&G: New York Stock Exchange Common Stock -Market Price and Dividends Per Share 1990 1989 High Low Div. High L o w First Quarter 29% 25 1/2 $.52 24 7/s 23 Sec o nd Qu a rter 27 1/4 24 3/s .52 27 1/2 24 1/s Third Quart e r 2 6 1/s 22 1/2 .52 28 1/2 25'/s Fourth Qu a rt e r 27 23 .5 3 29 3/s 26 Div. $.51 .51 .51 .52 The number of holders of record of Public Service Enterprise Group Incorporated common shares as of December 31, 1990 was 194,698. Des i g n: Arnold Sak s A ssoc iate s M a j o r Ph o t og raph y: Le e Y o un g bl oo d Public Service Enterprise Group Incorporated 80 Park Plaza PO. Box 1171 Newark, NJ 07101-1171