ML18101A637

Public Svc Enterprise Group Inc Annual Rept 1994.

ML18101A637
Person / Time
Site:	Salem, Hope Creek
Issue date:	12/31/1994
From:	Ferland E PUBLIC SERVICE ENTERPRISE GROUP
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ML18101A636	List: ML18101A635 ML18101A637 ML18101A638 ML18101A639 ML18101A643
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NUDOCS 9504180346
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Ne t In co m e (do ll ars i n m illi ons) 74.6 60.1 60.1 (104 9) 1 26.6 90 91 92 93

• With o ut EGDC Im pairmen t World Op e ration s

• W h e r e we do b u si n ess Total A sse t s (do ll ars i n b illi ons) 2.5 2.5 2.1 24.2 9 4 2.4 90 91 92 9 3 9 4 2.4 Enterprise Di v ersified Holdin gs Incorporated EDHI Earnings for Enterprise Diversified Holdings Incorporated (EDHI), p a r e nt compan y of Enterprise

's nonutility businesses, were $60.1 million in 1994 , compared with $74.6 million in 1993 before the EGDC recorded impairment.

Communit y Ener gy Alte r n a ti ves Incorporated (C EA) CE A is an investor in and developer of cogeneration and power production facilities.

CEA has investments in 19 projects , of which 18 are in operation with one scheduled for start up during the first quarter of 1995. CEA's year-end assets totaled $232 million in 1994, compared with $211 million in 1993. At y ear-end , CEA had 4 7 8 equit y megawatts in operation or under construction.

Earnings in 1994 were $15.7 million , compared with $13.8 m il lion in 1993. Energy Development Corporation (EDC) EDC is an oil and gas exploration and production and marketing company based i n Houston , Texas. At y ear-end , EDC had assets of $729 million , compared with $679 million in 1993. At y ear-end, EDC also had proved reserves of 888 billion cub i c feet of natural gas equ i valent, an increase of 10%, compared to 1993. During 1994 , EDC earned $12.5 million , a decrease from 1993 earnings of $46.3 million, due primarily to lowe r gas prices and vo lu mes. Public Service Resources Corporation (PSRC) PSRC makes primarily passive inves t ments in leveraged leases, limited ships and securities.

Future investments will have a focus on the energy sector. PSRC 's assets totaled $1.3 4 billion in 1994 , compared with $1.32 billion in 1993. Earnings i n 1994 were $33.8 mill ion , compared with $19.7 m illi on in 1993. Enterprise Group Development Corporation (EGDC) EGDC is a diversified nonres i dentia l rea l estate deve l opment and investment business with investments in office and retail properties. EDHI has announced its intention to exit this bus i ness over time. At year-end , EGDC had interests in 10 properties in five states. EGDC's assets totaled $189 million at y ear-end 1994, compared with $203 million in 1993. EGDC recorded a loss of $1.9 million during 1994.

-' PSEG 1 994-ANNUA L REPORT Public Service Enterprise Group 1994 Operations Overview Re v enue s from El ect ri c Sa l es (billion s of dollars) 0.70 0.73 0.68 1.51 1.57 l.0 4 11 2 90 9 1 92

• Indu s tr ia l

• Commercial

• R es id en tial P S E&G Op e r at ing A r eas

• Electric Onl y

• Gas On l y

• Electric a nd Gas 1 56 l.04 0.71 1.68 1.1 7 93 R eve nu es fr o m Gas So ld an d Tra n s p o r te d (billions of do llar s) .04 .04 .2 4 3 0 . 02 .01 .1 4 .48 .46 1 3 .41 .43 .8I .78 .67 .70 90 91 92 93

• Transportation Serv i ce

• Indu st ri a l

• Co mm e rcial

• R es id e ntial 94 94 0 69 174 l.19 .04 .31 .51 89 Public Service Electric and Gas Company PSE&G Electric Business Results Favorab l e weather increased the demand for e l ectricity dur i ng 1994 , resu l ting in $3.73 billion in revenues, compared with $3.69 billion in 1993 , an increas e of 1.1 %. Earnings for 1994 were $502.3 million , compared with $493.2 million in 1993. Electric sa l es to customers increas ed 1.0%, compar ed with 1993. Residential electric sales (0.4%) Commercial electric sa l es Industrial electric sales Nuclear Business U nit Formed +2.0% +0.5% PSE&G's nucl ea r activi t ies were consolidated into a N uclear Business Uni t in 1994. The new organizat i on will focus its efforts on four fundamental areas to improve performance.

They are: high safety standards; operational excellence; cost competitiveness; and customer focus. PSE&G has ownership intere s t in five nuclear units: Hope Creek 95.00% Salem 1 42.59% Salem 2 42.59% Peach Bottom 2 42.49% Peach Bottom 3 42.49% Gas Bu s in e s s R es ult s Gas revenues totaled $178 billion in 1994 , compared w ith $1.59 billion in 1993 , an increase of 11. 6%. Earnings for 1994 were $116.6 million, compared with $83.6 million in 1993 . Gas sales were up 3.2%, compared with 1993. Residen t ial gas sales Commercia l gas sales Industrial gas sa l es +4.5% +0.3% +4.1% Gas transportation service decreased 2.3%, compared withl993.

Total gas so ld and tran sported increased 2.3%. In 1994, PSE&G installed more than 284 miles of new gas distribution mains. The additional construction brings PSE&G's total gas distribut i on system to 15,406 miles.

P SEG 1 994 ANNUAL REP O RT Enterprise Public Serv i ce Ent erpr i se Group Incorporat e d (En t erprise) is a diversified public utility holding compan y: Public Se r v i ce Electric and Gas Compan y (PSE&G), the principal subsid i ary , is a regulated utilit y providing e l ec tric and gas service t o more th an t wo mi lli on customers a nd more than five-and-a-h a lf million residents of New J e r sey. It is the s t a t e's larg es t utilit y and one of America's l arges t combined elec tri c and gas companies.

Ente r prise Diversifi ed Holdings Incorporated (EDHI), a subsid i ary of Enterpr i se , i s the p a rent co mp any of Enterprise

's non utilit y businesses.

These activities , which are focused on th e unregulated energy indu s t ry, include inv es tments in oil and gas exp l oration a nd production , indep enden t pow e r produc ti on and other in vest m e nts. Contents L e tt e r to Shareho ld e rs 2 A Dialog w ith Manag e m en t 4 Shap in g Tomorrow Today 7 Fin anc i al R e port 12 Offic e rs a nd Director s 4 0 Co rp ora t e and S tock I nformation 41 1994 Financial Highlights Dollars in thous an d s where applicable 1 994 1993 Total Operating R evenues $ 5,915,843

$ 5 ,7 05 , 559 Total Operating E x penses $ 4,751,750

$ 4,598,7 1 2 Net Incom e $ 679,033 $ 600,933 Commo n Stock Shares Outstanding -Average (Thousands) 244 , 471 240,664 Shares Outstanding

-Year-end (Thousands) 244 , 698 243 , 688 Earnings Per Average Share $ 2.78 $ 2.50 Div id ends Paid Per Share $ 2.16 $ 2.16 Book Value Per Share -Year-e nd $21.7 0 $2 1.0 7 Ma rket Price Per Share -Year-end $26.50 $32.00 R a tio of Earnings to Fixed Charges 2.76 2.59 Ratio of Earnings to Fi xe d Charges -PSE&G 3.35 3.3 0 Gross Additions to Ut ili ty Plant Total Gross Ut ilit y Plant See No t es to Conso lid a t e d Financial State m e nts. Net Income (dollars in milli ons) 90 91 92 93 94 Allocation of Assets at December 31, 1994 Enterprise Total Assets -$16.7 billion PSE&G

• E l ec tric 72% *Gas 1 3% EDHI

• PSRC 8%

• EDC 5%

• EGDC 1% CEA 1% $ 887,283 $ 890,374 $16,566, 058 $15,861,484 Annual Earnings a nd Dividend Pa yo ut per Share (in d o ll a r s) 90 91 92 93

• Earning s p e r S h are

• Annua l D i v idend Pa yo ut Source of 94 Consolidated Earnings per Share Earnings per s hare (round e d)

• El ec tri c $2.05

• EDC $.05 " "

• P SRC $ 14 EGDC ($ 01) % Change 4 3 13 2 11 3 (1 7) 4

---

-1 1---1 2 I P S E G 1994 ANN U A L REP O RT

Dear Shareholder:

For a second consecutive year , your company achieved record-setting financial performance.

Enterprise

's consolidated earnings for 1994 were $679 million , or $2.78 per share of common stock , compared with $601 million and $2.50 per share in 1993. Our 1994 performance was facilitated, in part, b y our efforts to prepare for a more competitive future by controlling and reducing costs. Earnings were also benefitted by favorab l e weather conditions for part of the year and the refinancing in 1994 of $592.3 million of debt and preferred stock to take advantage of lower interest rates. In add ition , 1993 results reflected a one-tim e charge to earnings of $50.5 million , or 21 cents per share , for impairment in the value of certain real estate properties.

While we are pleased with our recent financial performance , we rem a in hard at work preparing ourselves for tomorrow's more competitive environment.

In that regard, we are encouraged by the measures recommended by th e New Jersey Board of Public Ut ili ties (BPU) in its draft r ev ised Energy Master Plan to introduce more fle xi bilit y into New Jersey's rate-making mechanisms and to change state t ax policy to create more equity in taxes among energy suppliers.

Th ese proposed modifications repr esent an important first step tow ard bringing the present utility regulatory process in New Jersey up to date with the competitive r ea liti es of today's global energy marketplace.

Equall y important , they wou ld enable PSE&G to more comp e titi ve l y position its services to customers with other choices, such as self-generation or even relocation t o states where the costs of doing business are l ower. Competition and Deregulation Continue to Pose Challenges Through its draft revised Energy Master Plan, th e BPU has made some progress in clarif y ing the shape of the new competitive energy place in New Jer sey. Ho wever, a good d ea l of unc e rt ainty s till surrounds the fu ll future impact of competition and der eg ulation , particularl y in the areas of electric generation , gas s uppl y and gas serv ic e. In regard to our e lectric business, we are watching developments in other parts of the country-notabl y in California-while we continu e to wo rk to promote th e kind of regulator y changes we need to comp e te successfully in ew Jer sey , the M id-At l antic region and possibl y beyond. The e ffects o f competition are b e ing felt her e in New J e r sey as we have renegotiated contracts w ith PSE&G's three municipal e l ectric customers , pro vi ding mod est price di sco unts in order to r etain th eir business. And increasingl y, our lar ge r industrial customers are pressuring us for low er rates to help them reduce their costs and remain competiti ve. Most recentl y, on Januar y 1 7, 1995 , we propo sed t o th e BPU a plan that wou ld pro v ide a comp e titi ve e l ectric rate t o Co-Steel Raritan -PSE&G's second-l argest customer a t a single location -to keep the steel mill and it s 500 jobs in Perth Amboy, N J The plan hinges on a proposed new experimenta l hourly energy pricing service rate schedu l e that would result in -an approximate

$7.3 million reduction in Co-Steel Raritan's annual $26 million Jim Ferland , m ee ting w ith e mpl oyees

• t o d isc u ss th e ir co n ce r ns an d e l ici t th ei r views on corp o r a te i n i t i ati ves. e l ec tri c bill w ith no financial impact on other PSE&G custome r s. In return fo r qualifying for the new rate , Co-Steel Raritan would agree to remain in New Jerse y and invest $37 mi l lion to refurbish and upgrade its facility.

On the gas side of our business , a BPU policy which took effect on November 30 for PSE&G's large customers separated the purchase of th e commodity, natural gas , from its transportation.

As a resu lt , a ll of PSE&G's 170 , 000 industrial and commercial customers w ill be ab l e to purchase gas from virtua ll y any supp li er and pay PSE&G only the cost of delivering th e gas to them. This change is not expected to affect PSE&G's profitability since approved transportat i on service rates have been designed to maintain ade qu ate margins. We believe that over time our gas distribution business wi ll evo l ve into a common carrier activity-essentiall y " renting" our pipelines with little or no respons i bilit y for gas acq u isit i on and sa l e. . In response to this new unbundling initiative in New Jerse y and to similar action in other states , we formed a gas marketing company , U.S. Energy Par t ners (USEP), in partnership with Cincinnati Gas and E l ectr i c Company. USEP's goal in 1995 is to market its natural gas and related services to industrial and commercial customers in New Jersey and in crease its market penetration in the Midwest region. In our gas service business , we continue to enhance and e x pand our applianc e servic e offerings to bring customers a wider range of s e rvices than our comp e titor s can pro v id e.

Our Response to the Competitive Environment Our success in a more compet i tive energy marketp l ace hinges on our ability to reduce costs, prov i de better service to our customers, and recognize and develop new products and services. During 1994, we continued to focus on six key business strategies to help us compete successfu ll y in the future. These are: + cost control; + in creased asset utilization;

+ improving nuclear opera t ing performance

+ customer retention;

+ creating new products and services; and + the strategic development of Enterprise Diversified H oldings Incorporated (EDHI). We w ill cont inu e our unrelenting focus on cost red u c ti on whi l e aggress i ve l y pursuing even better serv i ce reliabilit y and imp roved customer satisfact i on. Us in g total qual it y management t oo l s, we ha ve mad e substa nti a l progress i n r ework in g major business processes , reducing handoffs , eliminating redundant efforts and improving both efficiency and effectiveness. We have been taking deliberate steps to improve the competitiveness of our exist i ng assets. Our repowering and rehabilitation projects are e quippin g us with a modern , state-of-the-art fossil generating system which meets Clean Air Act requirements , reduces energy costs and better positions PSE&G to compete against other energy producers.

While the overa ll performance of the five jointly-owned nuclear ge n erating stat i ons was so lid during 1 994 -operating at 74% capacit y -performance of individual units was uneven. Specifically, our Sa l em units continued to present challenges.

On April 7, operating and equipment problems at our Salem 1 Un it l ed to a shutdown of the plant for 58 days. A review of the incident identified six violations of Nuclear Re gu lator y Commission requirements, for which the agency levied a $5 00 , 000 fine. This event acce l erated our plans t o take aggressive steps to improve s t at i on operations.

In Sep t ember, we created a separate nuclear business unit and appointed Leon E li ason, p r ev i ous l y with Northern States Power Company, as ch i ef nuclear officer and nuclear business unit president.

Other changes i nclud ed naming a new station manager and several new sen ior staff members. With this management team in place, we expect Sa l em to make good progress toward achieving the level of operating excel l ence enjoyed b y our Hope Creek Station. Our efforts to reta in large customers concentrate on finding inno va ti ve ways to pro v id e services and satisfy customer needs. The cornerstone of this activ it y i s deplo y ment of a Superior Serv ic e Strategy t o differentiate PSE&G as a service provider. And, w h e r e possible , we will wo rk with l a r ge utilit y customers and regulators in negotiating agreements that will keep the customers on our system and in New Jerse y. We will continue to seek out new profitable business opportunities wh i ch draw on the knowledge and skills of our work force, utilize ex isting resources and complement those se r vices and pro grams we have in place. Our final strategy concent r ates on deve l op in g EDH I into a l eading ind epe nd e nt e n e r gy bu s ine ss. PSEG 1994 ANN UAL REPORT I 3 E DHI will increasin g l y focus on its core busine sses: Ener gy Development Corporation (EDC), o ur oi l an d natural gas exp l oration and production comp any, and Co mmunit y Energy Alternatives Inc o rp ora t e d (CEA), o ur independent p ower production comp a n y. During 1994 , we refocused our efforts at EDC from acquisition of reserves to exp loration to find o il and gas more cheapl y than th e competition and in sufficient quantities t o rep l ace current production.

Also du r ing 1994 , we named Ma lcolm Butler , who pre v iousl y directed EDC's U nit e d Kingdom operations , as EDC's presid e nt. U nd e r his l eaders hip , there w ill be r enewed atte ntion given to EDC's three primar y challenges:

r ep l acing reserves through exp l ora tion at low finding costs; maintaining lo w-cos t operations; and strengthening the company's marketing capability. Meanw hil e, CEA has developed a growth strategy to become a major parti c ipant in th e independent power industr y. The strategy w ill focus on pursuing d o mestic a nd int e rnational opportunities.

Public Service Resources Co r poration (PSRC), which makes primaril y passive in vestments, w ill continue t o focus o n e n e rgrelated investment opport uniti es. Wi th the sa l e of t wo properties in 199 4, we a re continuing our con t rolled ex it from Enterprise Group Development Corporation

's (EGDC) real es tate bu s in e s s. EGDC's effo rts cent e r on th e effective management of occ up ancy l eve l s an d the maintenance of ex istin g properties wh il e seek i ng a pp rop ri a t e op p o rtuniti es for dispo s ition.

Conclusion:

Shaping Tomorrow Toda y In t h e new ene rg y marketplace, customers a re dem a nding choices, hi gh quality se rvic e an d comp e titi ve pric es. As utilities adjust to the chal l enges and opportun iti es deregulation wi ll brin g, the boundar y li nes between the r eg ul ated a nd n o nr eg ul a t e d s id es of Enterprise continue to blur. Th e st r ucture of our industry is changing foreve r and we must rapidly tran sform our compan y to meet the challenges of a ve r y different futur e. B y the tim e that you r ea d this r epo rt , we will ha ve announced certain organizational changes which are part of our ongoing initiative to meet the challenges o f a d e r eg ul a ted and comp e titive marketplace.

More information wi ll be made avai l a bl e in th e n ex t quarterly r e port and at th e annual shareholders meeting in April. The vanguard of the competition for whic h we have been preparing i s arriving.

We a r e not da unt ed by its arr i va l. While it w ill require that we defend o ur ex i s tin g customer b ase, we know it presents us with significan t opportun i t i es to demonstrate th e superior qu a lity o f our se r v i ces, the s kills a nd capab iliti es of our e mplo yees and th e unp ara ll e l ed l eve l of c u stome r sa ti sfac tion we can provide. We, at E nt e rpris e, a r e confident a b ou t the futur e. We look w ith pr om i se tow a rd 1995 and b eyo nd , and we remain comm i tted to the continued success of yo ur company. +-E. James Ferland Chairman of the Bo a rd , President and Chief Executive Officer Public Se r v i ce Enterprise Group Incorpor ated February 14, 1995 4 I P S E G 1994 A NN UAL REP O RT A Di a lo g With M a n agement As 1994 drew to a close, Enterprise's senior executives engaged in a roundtable discussion on issues raised by many shareholders during the course of the year. Chief Financial Officer Bob Murray moderated the conversation, expressing shareholders

' areas of interest in the form of questions to Chairman of the Board J i m Ferla n d, PSE&G Presi d ent Larry Codey and EDHI Presiden t Pau l Way. Excerpts of their conversat i on are presen t ed here. ***** M u rray: As deregulation occurs , the electric and gas utility industry will come under increasing competitive pressure.

Uppermost in our shareholders' minds i s whe th er our principal business , PSE&G , can survive and grow in this kind of environment.

Is there real cause for concern? Ferland: Make no mistake about it: Enterprise recogni zes that our industry is going to be very different in the future. But if you listen to the message that we have been conveying and pay attention to the actions that we have been taking , yo u will find evidence that we are performing in a way that will m ake us competitive in row's business environment.

Some examples:

We a re keeping our operating and maintenance budgets fl at yea r over year. We are trimming our inventory levels to curtail costly carrying charges. We are refinanc i ng h i g h er-cost debt. We are combining or stream l ining a number of our work groups in both operat i ng and support departm e nts. And we are reducing our employee levels while encouraging those who remain to perform more efficiently.

Toda y, PSE&G has roughly 2, 000 fewer employees than it did in th e 1980s; in fact, it now has fewer emp l oyees than it did a half century ago when we had a fraction of the customers that we have toda y , and we expect further reductions of a t least 1 ,5 00 over the n ext several yea rs. Code y: We are ab l e to take these steps because of our proven ability to adapt to change. For instance , when we were building our nucle ar power p l ants back in the 1970s , we managed our capital needs and construction program very well. PSE&G was the only utility to maintain a double-A bond credit during a major nuclear tion program. More recently, we ha ve introduced total qu ality management as an import ant work ethic in PSE&G. The program provides a roadmap for employees to carry out th e ir responsibiliti es b y initi at ing process improvement activities and meeting competitive challenges as a t eam focused on achieving excellence in providing serv i ce to customers and value to shareholders.

Jim Ferland . ***** Murray: Is there also a focus on curtailing capital spending?

Ferland: In a competitive environment, it is not only important to reduce the expense side of our operations.

It is just as important to control the dollars we invest in our generation, transmission and distribution assets needed to provide service to our customers. We have removed about a billion dollars from PSE&G's five-year construction program. ***** Murray: PSE&G still has an annual construct i on program that , at the moment , exceeds the half-billion-dollar mark. Explain some of that spending. Fer l a nd: We make capital investments in the wisest fashion possible to help strengthen our competitive position.

We have one of the largest utility infrastructures in the country , and it is our responsibilit y to assure that th e system remains safe and reliable.

This requires capital each year to replace old or well-worn facilities and upgrade other facilities to make them more competitive.

Along these lines , we have repowered certain generating units, with the most ambitious effort at PSE&G's Bergen Generating Station. When it resumes operation in mid-1995 , Bergen will use state-of-the-art technolo gy to produce e l ectric it y at a heat r a te 34% lo wer than the original equipment.

Its fuel will be natural gas, h elping to reduce the unit's e n viro nm en t a l impact by about 90%. And it will r e quire half the number of employees to operate the plant. ***** M urr ay: We can cut costs for only so long in order to be more competitive and help improve earnings at the same time. Sooner or later , we have to concentrate on growing revenues.

Comments , please , on s uch efforts. Fe rl a nd: Enterprise has been pursuing new business opportunities to create growt h. We have es t ab li shed a company to generate additional income in the area of conservation services.

We have launched a natural gas marketing company to take adva ntage of deregulated opportunities in that arena. And, we are close to setting up an electric brok er ing company. Most rec ent l y, we ha ve joined forces wit h AT&T to jointly develop technology which offers new business opportunities behind the customer's meter. Co d ey: In the new energy marketplace, franchise boundari es may begin to erode, particularly if retail wheeling is ultimately permitted.

Some utility companies tend to focus on that prospect as being a threat to their existing level of sales. But we see it as an opportunity to sell . .

electricity on a competitive basis in other franchise jurisdictions. If competition unfo ld s as we be! i eve it eve ntu ally wi ll , our potential market will be much larger than the one we now have in New Jersey. ***** Murray: There seems to be a consensus that, to the extent that PSE&G's customers are open to competitive inroads, it will come first to the industrial sector. What about our vulnerability to the loss of industrial customers?

Ferland: Approximately 23% of PSE&G's electric sa l es are to industrial customers , which is about average for the industr y. We have signed up our two largest industrial customers to long-te rm contracts involving discounts and we will probably reach similar agreements with other large-volume customers.

Since retail wheeling is not currentl y permitted in ew J ersey, self-generation , tion and reloc at ion are the only alternatives now available to large* electric custome1's. But, of PSE&G's largest 300 i ndustrial customers , there are only a handful for which this makes econom ic sense. And we know that b y providing a modest discount on current rates, we can make it desirable for those customers to stay on PSE&G's system. ***** Murray: Many shareholders tell us that they have been following developments in California , which is fostering an aggressive transition toward competition.

Is New Jerse y on the same path? Codey: There is no evidence that ew Jersey will move as quickl y as California appears to be moving. Over the next year, New Jerse y's Board of Public Utilities will be conducting a study of retail wheeling and " auction pools" and th eir potential impact on the state , including PSE&G and its customers.

Indications are that the BPU will move ca,refully and cautiously.

And , keep in mind that these may not be the only models for the competitive delivery of energy. Others could emerge that will have to be considered.

• • • • • Murray: How best can our regulators and l eg islators ass ur e a level playing fi e ld for utilities, including PSE&G? Codey: New Jersey's laws governing utility regulation are 75 years old and have to be modified to provide the Board of Public U tilities with more flexibility.

Our shareholders who live in New Jersey can be of va luable assistance in this effort by communicating to their legislators how important it i s for them to protect the interests of Enterprise investors.

Larry Codey P S E G 1994 A UAL REP O RT I 5 Ferland: What we need in the near term is fle x ibilit y in es tablishing the prices we charge in delivering energy to our c u stomers. petition is already acting in a way that will make it very beneficial and even necessary for us to be able to move quickly -often on a customer-by-customer basis -in negotiating new terms and conditions for energy serv ic es to preserve the integrit y of our overall customer base. ***** Murra y: How will environmental issues affect the new competitive marketp l ace? Codey: Environmental issues need to be dealt w it h on a regional basis so that we can operate on a level playing field. Without fair standards, utilities in states with less str in gent env i ronmental rules w ill have a compe t itive advantage. W ith out the need for certain p.ollution control technolog y, these utilities wil l be ab l e to produce energy at a cheaper price and , of course , New Jerse y will pay the price in the form of polluted air. We can't allow this to happen. * **** Murra y: A few words , now, on the unbundling that has occurred in the distribution of natural gas in New Jersey. Good news or bad news? Ferland: Generally, it's good news. Previously , PSE&G had no opportunity to make a profit on gas sales, and we had to demonstrate our prudence in purchasing gas to be allowed to pass those costs on to customers.

This presents a situat i on of risk but no potential reward. In th e future , it is likel y th at PSE&G w ill increasingl y becom e a gas transportation company, at least for industrial and commercial customers. For the first time , Enterprise w ill have the opportunity to earn a profit on the sale of the commodity through our unregulated gas marketing business.

• • • • • M urr ay: Of considerable interest to our shareholders is the performance of Enterprise

's nonutilit y businesses , which were established in the 1980s as a means of increasing earnings. How about an update? Way: EDHI is currentl y producing about 9% of Enterprise

's earnings, and the growth prospects ap pear encouraging.

Our objective is to improve the earnings of our core businesses:

Community Energy Alternatives Incorporated (CEA), our.independent power production company, and Energy Development Corporation (EDC), our oil and gas company. ***** M urr ay: Specifics, please, on the future of EDC and CEA. Way: EDC has grown successfully through acquisitions.

In the future , we will place more emphasis on replacing and expanding reserves through exploration and development , which should provide greater returns , as well as a firmer foundation for future growth. We have 6 I P SEG 1 99 4 A 1 N U A L R E P OR T s ubstantial acreage to exp l o r e, using o f-th e-a rt t echno l ogy. At CEA, we have implemented a strategy to incr ease our li s t of potential projects globally.

We have opened development offices in Hong Kong , New Delhi and Buenos Aires. At both EDC a nd CEA , we are developing th e t a l e nt and the resources to compete successfully.

• • • • • M u rray: Some shareholders have wondered about the added risks in CEA's foreign activities.

Wa y: The returns we expec t s h o uld pensate us for these ri sks. Many of CEA's employees ha ve foreign expe rti se, and we intend to grow thi s business wi th partners who ha ve expertise in the international arena. Finall y , we are making in ves tments on a project-by-project ba s i s over a period o f tim e. In other wo rds , we are not putting significant dollar s at risk in any one project at any one point in tim e. * * * *

• Murra y: Any way to counter declining Paul War natural gas prices, which suppressed EDC's 1994 earnings?

Wa y: There are several ways, such as hedging prices. To a limit ed extent , we will be making use of hedging and other techniques to help dampen the effect of lower gas prices on EDC's 1995 earnings. But , when looking a t EDC , yo u s hould n ot focus on just price swings th at cau se vo l atility in earnings.

You sho uld also recognize the va lu e in our oi l and gas r ese rves , which is e nhanced through the success of our exploration a nd development efforts. ***** Murra y: A question ra i sed repeated l y by shareholders revolves around mergers of companies undergo i ng transition to a competitive environment.

How about the utility industry?

Ferland: Th e de g r ee to which consolidations occur w ill b e influenced b y the way deregulation t a k es place. Some utilities m ay be forced to find a m e rg e r partner if th ey sustain major losses from investm e nts that a r e stra nd ed o r left unn ee ded or unused , becau se of the departure of customers to other energy suppliers.

I see no evidence a t th is t i me that we eventually are going to have , say, only 10 utilities in the country. On the other hand , some of the smaller companies or companies th a t are thinl y capitalized may find themselv es in a po s ition where it is n e cess a r y to merge. As for Enterprise, we ar e m a king s ur e our balance sheet will put u s in a position to take advantage of an y opportunities that ma y develop. ***** Murra y: A summary, then , on Enterprise

's efforts to enhance shareholder value. C od ey: Our clear objective is to grow th e Ente rpri se portfolio and the profitability of its var i ous e l eme nts , espec i a ll y PSE&G's e l ec tric and gas segments.

We are sc rutini z in g mark et opportunities in a ll corners of our businesses.

We are wo rkin g toward becoming a significantly more productive and more efficient compan y that strives to provid e qu a lit y se r v ices and ga th e r more information from our customers in order to se rv e them bett e r. R emem ber , in a comp e titi ve e n vironment , unless we have a thoroughl y satisfied customer , we a r e not go in g to be able to finalize a sale. If we can't make the sa le , we won't r ea li ze the ap propri ate profit to sa tisf y our shareholders.

• • • • • Murra y: Which brings us to the subject of greatest interest to our shareholders

-the security of the dividend.

Code y: Thr ee yea rs ago, our Bo a rd of Dir e ctors agreed on a strategy to stabilize o ur di vi d end at the current l eve l of $2.16. We correctly anticipated that there would be pressure on utility company pa yo ut rat i os because of increased risks associated with the uncertainties of co mpetiti o n. Our di v id e nd policy i s to pay o ut a di v id e nd th at i s s ustain a ble ove r time . Ferland: B y holdin g the divid e nd level s tead y for the past several yea r s, we h ave reduc e d Enterprise

's dividend pa you t ratio t o 78% in 1994-repr ese nting a health y d e cline from a pa yo ut of 100% in 199 2. Given the ongoing uncert a inties in our industry , this has b ee n a prudent polic y and needs to b e continued for the near-term future to further reduce our p ay out rat i o b e low 7 0%. In so saying, it is important for shareholders to r ea li ze that , while the y may not r ece i ve di v idend increases for a period of tim e , they are getting va lu e from the earnings the compan y retain s. To the extent that we reinvest thos e fund s in th e compan y, we are s trengthening our ability to grow future ea rnings . ***** Murray: A few final words, Jim , on Enterprise's prospects. Ferland: W e are about to go through an important and challengin g time , and we are starting from a strong fin an cial posit i on. The company ea rned mor e in 199 4 than it has eve r earned. Because of the sign i ficant r e ductions in our cap i tal construction progr a m and becau se o f a generally sufficient le ve l of gene rating capacit y, we a r e in our strongest cash flow position in yea rs , able to generate more than 100% of our utility construction needs from internal sources. The company's b a lanc e sheet i s the s trongest in decades. We ha ve th e s trat eg ie s in place to d ea l wit h the various issues we will be facing. We have a m a nagem e nt team that is up to th e challenge.

And we are wo rkin g hard on the l eg islati ve a nd regulatory fronts t o make s ur e our place in the compet iti ve environment is fair and reasonable and that our stockho ld ers' int erests are well served. * ..

8 I P S E G 1994 AN U A L REP O RT Shaping Tomorrow Today: Strong West Coast Performanc e Enhancing Operational Performance CEA ended 1994 on a high note in terms of th e operational performance of its five San Francisco Bay area plants , which combine to produce 115 megawatts of electric power. The plants are own e d and operated b y GWF Power S y st e ms Company , In c., a partn e rship of CEA and Harbert International, Inc. During 1994, th e GWF plants surpassed their estimated capacity factor of 88% by op e rating at 92.4% of their theoretical capability.

This strong performanc e was favorabl y influenc ed b y reduced maintenance outage periods , low forced outage rates and no curtailments of electric production.

Leaner , Cleaner Energy Production Construction continues on the Bergen Generating Station repowering proj e ct , with compl e tion scheduled for summer 1995. The conversion of the existing units to a combined-cycle operation will add 40 megawatts to th e station's 629 megawatt capacit y, while improving efficienc y b y 50%-a significant compet iti ve advantage.

The improvements to the station will enable PSE&G to cut back on the operation of some of our o ld er , less efficient plants-further trimming energ y costs. Cap it al expenditures have been significantly reduced through the use of the existing water tr eatment plant , transmission lines , transformers, steam turbine g e nerators , roads and infrastructure. Among the project's environmental benefits , nitrogen o x ide e missions will be reduc ed by 9 6%, and th e rm a l water discharge to the Hackensack River will b e v irtuall y e limin a t e d. EDC Expands Reserves Matching Skills to a Job Our future performance wi ll hinge on a revamped organization with new kinds of work force compe t encies. I n 1994, PSE&G introduced a new process of strategic staffing into its business planning. Strategic staffing id entifies the skills , competencies and staffing l eve ls r equired to support business plans and helps pinpoint where gaps currentl y exis t. The process also helps to better position emp l oyees in jobs where their knowledge and abilities can best be utili zed. As part of the process , man y jobs have been redefined and some areas of PSE&G , including th e cus t om e r services and marketing departments , hav e been reorgani z ed. EDC will emphasize oil exploration and d e velopment in 1995 to lessen its dependence on natural gas because a decline in domestic n atura l gas prices durin g th e seco nd ha l f of 1994 r e duc e d the earning s of EDC , as well as thos e of most other gas producers in the United States. EDC a ttain ed a reserve l eve l of 888 billion cub i c feet of natural gas equiva l ent (BCFE) at year-end , an increase during the yea r of 7 9 BCFE of proved reserves. Key factors con tributin g to this success were major exp l o rat ory discoveries in so uth ern Louisiana and the Gulf of Mexico an d acquisition of six production platforms and facilities in the Gulf of Mex i co. I n addition, EDC acquired In dust ri a l Scotland Energy Limited , which ex p a nd e d its growing onsho r e/offsho r e presence in th e United Kingdom.

Shaping Tomorrow Today: Innovative Solutions for Customers Offering Power Quality Expertise Busin es s es t o d ay e mpl oy a v a ri e t y of n ew t e chnologi es and indu s tri a l proc esses which dep e nd on comp a tibilit y be t wee n th e i r equipm e nt and on-pr e mis e e l e ctrical sys t e m s and PSE&G's el e ctric distribution sy stem. D e spite P SE&G's high st a ndard s for e l ec tric se r vice qu a lit y, occasionall y problems arise. To help customer s addre s s such situ a tion s, P S E&G's Power Qualit y Se r v ic e s Group (PQSG) pro v id es c ust o m e rs w ith s ys tem-wide solutions to h e lp achi e v e c o mpatibilit y b e tw ee n th e ir e quipm e nt , s y stems a nd int e rn a l e l ec tric infr as tru c tur e and P S E&G's e l ec tri c p owe r supply. During 1994 , th e PQSG assisted 176 customers, a 60% incr ease o ve r 1993. To e nhanc e its se rvic e s , the g roup d ev el o p e d th e Pr e mium E l e ctri c P owe r Program which , p e ndin g regul a to ry a pproval, w ill off e r custom ers e nh a nc e d p owe r pr o t e cti o n produ c ts a nd d ev i ces to e n s ur e th e pr o t ec ti o n a nd imp rove the performanc e of se nsitive cu s t o m e r e quipm e nt. PSEG 1 994 A N NUA L REPORT I 9 Delivering Superior Service A n em pl oyee t eam h as d eve l oped a se r v ice s t ra t e g y t o diff e r e nti a t e P S E&G from its co mp e tit ors thr o u g h th e d e li ve r y o f s up e rior s e rvice to cu s tomer s. Durin g 1 994, P SE&G b egan i mp l eme nt ing se v e ral sup e rior se rvi ce r ec ommend a tion s includin g d e dicatin g m o r e a c count mana ge rs t o se rv e its larg e st custom e rs a nd d eve l o pin g se r v i ce g u ara nt ees t o ac hi eve 100% of th e ba s ic se r v ic e d e liv e r y r e quirm e nts , 100% o f the tim e , to a ll custom e r s. Placing Control in the Customer's Hands During a pr ess co nf e r e nce a t the S t a t e hou se , PSE&G Pr e sid e nt , L a rr y Co d ey, G ove rn o r C hristin e T o dd Whitm a n and Presid e nt o f AT&T Adv a n ce T ec hnol ogy Sys tems , Charl es McQuear y, a nnoun ce d an agre e m e nt b e tw ee n PSE&G and AT&T to d eve l o p a n int e r ac ti ve util i t y man age m e nt s y st em t o h e lp r es id e nti a l and busin ess c u s t o m ers b e tt e r co ntr o l th e ir e n e r gy u se a nd cos ts. Th e sy s te m w ill a l so e n a bl e utiliti es t o in c r ease e ffi c i e n cy , r e duc e cos ts a nd o ff er n ew s e rvi ce s. Us ing informati o n s up e rhi g hwa y t e chn o l ogy to link utiliti es to th e ir cu s t o m e r s , th e sys t e m w ill all o w for a ut o m a ti c m e t er r ead in g , r e m o t e co nt ro l and monit o ring o f e n e r gy u se, a ut o mat e d powe r o ut age d etec ti o n a nd r ea l-tim e co nt ro l o f e n e r gy c o n se r va ti on d ev i ces. B y 2 001 , P S E&G ex p ec ts t o h ave th e t e chnolog y in pl a c e at 500 , 000 c ustom e r sit e s. Discounts to Retain Municipal Customers Whil e e l e ctric utiliti e s in the e m e r g ing c o mp e titi ve m a rk e tplace w ill see k o ut n ew cust o m e rs , th ey mu s t a lso r e t a in ex isting o n es. Durin g 1 994 , P S E&G n ego ti a t e d fi ve-yea r ag r ee m e nts o ff e ring pri ce disc o unts t o t wo muni c ipaliti es , Millt ow n a nd So uth Ri ve r , t o ke ep th e m on i ts sys t e m. P SE&G , w hich h as s uppli e d Millt ow n w ith e l ec tri c p owe r fo r 7 0 yea r s , w ill con ti n u e t o do so u n de r th e t erms of an arrangeme nt th a t w ill save th e muni c ip a lity a t o t a l o f $1.5 m illi o n. Th e ag r ee m e nt w ith So uth Ri ve r w ill save th at b o rou g h appro x im a t e l y $3 milli o n. Th e t ow ns are a m o n g nine i n N ew j e r sey-a nd thr ee in P S E&G's se rvice t e rritor y-which own mu n i c ip a ll y-run e l ec tri c compan i es. In 1 993 , P a rk Rid ge a l so s ign e d a fi ve-ye ar a g re e m e nt to c ontinu e pur c hasin g pow e r from P S E&G.

10 I P S E G 1994 A , N LI A L REP O RT Shaping Tomorrow Toda y: Exploration of New Markets and Services Jump-starting the NGV Market The Board of Public Utilities (BPU) injune gave final approval to a three-part PSE&G proposal to encourage the use of natural gas vehicles ( GVs), including a vehiclerate schedule for compressed natural gas , a $1 , 000 rebate to purchasers of GVs and a plan to establish fueling stations.

An important first step in building th e necessary fueling infrastructure came in August , when PSE&G reached an agreement with the Shell Oil Company to install a compressed natural gas fueling facility at a Shell station in jersey City near the Holland Tunn e l. Making natural gas more available as a motor ve hicle fuel provides attractive transportation options for New jerse y residents and businesses and helps the s tate meet Clean Air Act mandates.

PSE&G has incorporat e d 2 73 NGVs into its corporate fle et. B y the yea r 2000 , PSE&G expects that 60% of its fleet will be powered by natural gas. 237 CEA Poised for International Sales During 1994 , CEA completed an extensive mark et res ea rch study to identif y high potential domestic and international markets. Us ing that information , CEA established a goa l to build international inv es tments to 50% of its total portfolio b y 2000. The goal will be achieved through a combination of new project developm e nt and acquisition initiatives with strategic partners in targ e t country markets. To better position itself in its target markets , CEA established an international office network. Regional offices were opened in San Francisco, Houston , Hong Kong , ew Delhi and Buenos Aires. Reducing Demand, Increasing Revenues through Conservation PSE&G's Core Conservation and Standard Offer programs are a win for both customers and PSE&G. Customers benefit from lower monthl y energy costs; PSE&G from the avoided costs of not having to build n ew electric generation facilities to satisfy demand and from making treatment that compensates for conservation initiativ es. Core Conservation programs include rebates, energy audits and conservation loans. The Standard Offer is the first utility side management (DSM) program in the U nited States to provide customers with standardized contract payments for measured e nerg y savings achieved through conservation investm e nts. Some 600 customers current l y participate.

The Standard Offer has helped c r ea te a new industr y in New jerse y by a llowing indep ende nt ene r gy service companies (ESCOs) to contract for energy savings on a customer's behalf. During 1994 , our own ESCO , Public Service Conservation Resou r ces Corporation , signed contracts for the development or financing of DSM projects repre se nting 35 megawatts of peak demand savings. Offering Services to Other Utilities In reviewing its customer services operation, PSE&G ha s recogni zed an opportunity to develop and market new services us i ng its ex i sting r eso urc es. Beginning in I995 , PSE&G will offer its meter reading , billing , payment processing, inquiry center and collections services to municipalities and select utilities. Initiall y, PSE&G will target the 88 municipal and six private water utilities with meter s which overlap a portion of its electric and/or gas franchis e territor y. A s ix-mo nth pilot project to provide pa y ment processing services was launched in Se pt e mber. Under the arrangement, PSE&G's Hobok e n customer service center is accepting payments for Hoboken Water Services.

Shaping Tomorrow Toda y: PSEG 1994 A IN LI A L R EPORT I 11 Generating Less , Recycling More I n 1992 , P SE&G es tab l ish e d two corporate goa l s: to recycle 75% of a ll nonh aza rd o us so lid waste , and to r e duc e its ge n era ti on of h azardous waste by 3 0% b y 199 5. As of yea r-en d 199 4, PSE&G has ac hi eved both objectives.

A change in our mat e r i al s mana ge m e nt philo so ph y was c riti cal t o our success. B y linkin g o ur pr ocu r e m e nt a nd waste disposal functions , PSE&G has been ab l e to more carefully control inv e ntor y and r e duce dispo sa l costs. PSE&G i s n ow using a corporate-wide waste accounting system Initiatives to Protect Our Environment to id en tif y and track waste streams. In addition , PSE&G is now processing solid waste at th e state's first a utomat e d materials r ecove r y facility in s tead of landfills.

PSE&G es t ab lish ed a corporate r eso urc e r ecove r y ce nt e r in Paulsboro , N.j., to ex t e nd the us ef ul l if e of man y products.

And , PSE&G is rec y cl i ng mor e of its was t e products , such as asphalt, sc rap w ir e and m e tal , concrete a nd coa l ash , into u se ful mat e rials. Cutting Emissions at Mercer PSE&G is pursuing multiple s trat egies for r e ducing air emiss i ons at its fossil fue l e lectr i c gene ratin g sta ti o n s. Spec ificall y , at Mercer Generating Station , P SE&G rec e ntl y compl e ted testing of an in-duct se l ective catal y tic r e duction (SC R) sys t e m at Merc er U nit 2. This was the fir st a ppli catio n o f thi s t ec hn o l ogy on a wet bottom coal-fired boiler in the world. The in-duct SCR technology d emons t ra t ed nitrog e n oxide (NOx) emission r ed uctions o f more than 80%. As a result , PSE&G is p l anning a phased-in installation of th e technolo gy at vario u s facilities b egin nin g in 1 997. Leading the Way for Cleaner Air PSE&G has emerged as a l ea d e r in the quest for a healthier e nvironm en t. In 1992, PSE&G established th e most aggressive a ir em i ss ion reducti on tar ge t set by any utility to cut e missions of NOx by 60% b y 1995 and 80% b y 2000. In March, P SE&G and No rth eas t U tiliti es Company announced an agr ee ment outlining the first interstat e O x e mission s trad e. Working with Merck and Co., Inc. and Texaco Inc., PSE&G a lso h e lped l ea d th e way for a regi ona l strategy t o cut th e Ox emissions of l a r ge s t a tion a r y so ur ces thr o ughout th e No rth eas t. To help reduce g re e nh o u se gas e mi ss ions , P SE&G was th e first utility in th e country to s ign on to th e U.S. D e partment of Energy's voluntary Global Climate Chall e ng e by pl e dgin g to stabilize carbon dio x ide e missions at 1990 lev e l s by the yea r 2000. PS E&G on February 7 , 199 5 , became the o nly e l ec tri c utilit y in the n a ti o n to e nter into a separate ag re e ment with th e Environmental Def e ns e Fund to certify ac hi eve m e nt of e mis s ion r educ ti on goa l s. Present for th e signing a t the Uni t e d Nations h ea dqu a rt e rs were P SE&G President Larry Codey a nd the E xec utiv e Dir ec tor of th e Environm e nt a l Def e n se Fund , Fred Krupp. New Water Discharge Permit for Salem Station In Jul y, th e ew j e r sey D e partm e nt of Environmental Protection i s sued a five-yea r water discharg e p er mit for P SE&G' Sa l em S t ation. That action ended nearly fou r yea rs of debate s inc e th e age n cy o utlin e d conditions of a proposed permit in 1 990 The 1990 permit wo uld ha ve required PSE&G to seve r e l y limit the w ithdraw a l of water from the D e laware Riv e r an d spend up to $2 billion to build cooling towers in an e ffort to minimi ze th e station's impact on marin e life. The permi t is based on a proposal made by PSE&G to mak e certain plant modifications and e nh a nc e th e eco l ogy of th e Delaware Estuary in a balanced way that mak es both e n v ironm e ntal and eco nomic se n se. One as p ec t of th e permit requires P SE&G t o r es t o r e or e nhanc e 10 , 000 acres of wet lands. The permit also r equires PSE&G t o conduct a biological monitoring program to d e t e rmine w h et h e r the plant's ope ration has an imp ac t on aqua ti c life.

12 I P SEG 1994 A NN UAL REP O RT Management's D iscussion and Analysis of Financial Condition and Results of Operations Enterprise 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 direct wholly owned subsidiaries , Public Service Electric and Gas Company (PSE&G) and Enterprise Diversified Holdings Incorporated (EDHI). Enterprise's principal subsidiary , PSE&G, is an operating public utility providing electric and gas service in certain areas in the State of New Jerse y. EDHI is the parent of Enterprise's nonutilit y businesses:

Energy Development Corporation (EDC), a n oil and gas exploration and production and marketing company; Community Energy Alternatives Incorporated (CEA), an investor in and developer of cogeneration and independent power production

(!PP) facilities and exempt wholesale generators (EWGs); Publ i c Service Resources Corporation (PSRC), which has made primar i ly passive investments

and Enterprise Group Development Corporation (EGDC), a diversified nonresidential real estate development and investment business.

EDHI also has two finance subsidiaries:

PSEG Capital Corporation (Capital), which provides privately placed debt financing on the basis of a minimum net worth maintenance agreement from Enterprise and Enterprise Capital Funding Corporation (Funding), which provides private l y placed debt financing guaranteed b y EDHI but without direct support from Enterpr i se. As of December 31 , 1994 and December 31, 1993 , PSE&G comprised 85% and 86%, respective l y, of Enterprise assets. For each of the years 1994, 1993 and 1992, PSE&G revenues were 93% of Enterprise's revenues and PSE&G's earnings available to Enterprise for such years were 91%, 96% and 88%, respectively, of Enterprise

's net income. The major factors wh i ch will affect Enterprise

's future results include general and regional economic conditions, PSE&G's customer retention and growth, the ability of PSE&G and EDHI to meet tive pressures and to contain costs , the adequacy and timeliness of rate relief, cost recovery and necessary reg ul atory approvals, the ability to continue to operate and maintain nuclear programs in accordance with Nuclear Regu l atory Commission (NRC) and New Jerse y Board of Public Utilities (BPU) requirements , the impact of env i ronmental regulations , continued access to the capital markets and continued favorable regulator y treatment of consolidated ta x benefits. (See Note 2 -Rate Matters, Note 10 -Federal Income Taxes and Note 12 -Commitments and Contingent Li ab ilities of Notes to Consolidated Financia l Statements

("Notes").)

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 elec tric energy and gas supply costs and certain other costs as approved by the BPU , when compared to cost recovery included in base rates. Charges under the clauses are primaril y based on energy and gas supply costs which are normally projected over twelve-month periods. The changes in the Levelized Gas Adjustment Charge (LGAC) and the electric L eve lized Energy Adjustment Clause (LEAC) do not directly affect earnings because such costs are adjusted monthly to match amounts recovered through revenues.

However, the carrying of underrecovered costs ultimately increases financing costs. PSE&G is also required to pay interest on net overrecovered costs. Under the clauses, if actua l costs differ from the costs recovered, the amount of the underrecovery or overrecovery is deferred and is reflected in the average cost used to determine the fuel and energy tariff rate adjustment for the period in which it is r ecovered or repaid. Actual costs otherwise includable in the LEAC are subject to adjustment b y the BPU in accordance with its nuclear performance standard (NPS). (See Note 2 -Rat e Matters and Note 12 -Commitments and Contingent Liabilities of otes.) Competition Ongoing initiatives affecting PSE&G's electric and gas utilit y businesses associated with the continuing transition to a competitive market environment will have an increasingly s ignificant impact on Enterprise and PSE&G. Federal legislation , including the National Energy Polic y Act (NEPA), as well as regulator y initiatives at both the federal and state levels that are designed to promote competition and lessen regulation of the energy supply industry can be expected to result in additional pressures on customer retention due to ene rg y prices , especially with respect to larger industrial and commercial customers.

Growth potential is limited in PSE&G's mature service territory.

The shift of rate regulation from traditional concepts ba sed upon rate base/rate of return to concepts based upon market competition and service is accelerating. As a result , added emphasis will be placed upon cost reduction.

Uti liti es and their regulators will need to develop flexible ratemaking strategies to minimize adve rse impacts which might otherwise occur to revenues and earnings and to maximize potential opportunities presented by deregulation.

The mann er in which regulators address evolving competitive issues will also affect utilit y credit qualit y and the carrying value of assets. The transition to a competitive market environment will cause changes from traditional utilit y ratemaking and i s like l y to affect utiliti es' ability to recover costs , resultin g in these costs being "s tranded." Stranded costs are costs and liabilities that were incurred by regulated utilities as a result of the regulator y compact among utilities, regulators and customers which are no lon ger recoverable from suc h customers due to changes in the regulatory fram ewo rk that allow such customers to change electric suppliers before paying for the costs the utilit y has incurred on their behalf. Potential stranded costs include but are not limited to: generation assets; long-term purchase power and fuel contracts; " regulatory assets" -Statement of Financial Accounting Standards No. 71 , " Accounting for the Effects of Certain Types of Regulation" (SFAS 71), which are expe nses that have been deferred pending recovery from customers; and costs which regulators have ordered utilities to incur to fulfill a variety of broad e r social purposes (including such things as energy conservation costs such as demand-side management (DSM)). More competitive e lectric wholesale markets, proposals to authorize retail wheeling or direct retail access within utility franchise areas, but not New Jersey to date, as well as the recent Federal Energy Regulatory Commission's (FERC) notice of proposed rulemaking on stranded costs have brought to the forefront the issue of potential stranded costs. If changes in rate regulation ultimately require a recognition of any such stranded costs, asset write-downs for utilities, including PSE&G, may occur. At this time, management cannot predict the level of transition costs or stranded costs resulting from industry deregulation, if any, or whether utility regulators will allow recovery of any such transition costs from customers.

In addition , PSE&G cannot presently quantify what the financial statement impact may be if depreciation expense is determined absent regulation.

However , if any such amounts are not recovered, the impact on the financial position , results of operations or net cash flows of PSE&G and Enterprise could be material. (See Note 1 -Organization and Summary of Significant Accounting Policies and Note 2 -Rate Matters of Notes.) Further , competition will force utilities , including PSE&G , to operate more cost effective and efficient plants, particularly in light of the technological advantages available to new entrants, which unlike utilities, do not operate older , less efficient units. Recovery of related costs by utilities, including PSE&G, will depend upon the decisions of the regulators, which cannot be predicted, or the ability to sell the electricity generated by s uch plants in the emerging wholesale power market. For discussion of PSE&G's renovation project at Bergen, see Note 12 -Commitments and Contingent Liabilities of Notes. The BPU has issued the first phase of a draft revised Energy Master Plan which acknowledges the need for regulatory flexibility as competition unfolds and calls for legislation that wo uld allow New Jersey utilities to propose, subject to BPU approval, alternatives to existing rate base/rate of return pricing, allow for pricing flexibility under certain standards for customers with competitive options and equa lize the impact of tax policies, such as New Jersey Gross Receipts and Franchise Tax (NJGRT), upon energ y producers. Management cannot predict the ultimate form of any l egis lati ve or regulator y changes which may be adopted as a result of this revised Energy Master Plan. Enterprise Earnings Earnings per share of Enterprise Common Stock were $2.78 in 1994 , $2.50 in 1993 and $2.17 in 1992. The changes are summarized as follows: 1994 vs. 1993 199 3 VS. 1992 In millions , e x cept per sh a r e dat a Amount P e r Shar e Amount P e r S h a re PSE&G Revenues (net of fuel costs and gross receipts taxes) $ 144 $ .60 $ 347 $1.4 9 P e ach Bottom Settlement (n e t of Federal income taxes) --(33) (.1 4) Other oper a tion expens es (77) (.3 2) (62) (.2 6) Maint e nanc e ex pense s (3) (.0 2) 3 .01 D e preciation a nd amorti za tion e x p e n se s (29) (.1 2) (1 5) (.06) F e deral incom e ta x es 1 4 .06 (11 3) (.4 9) Oth e r t aic e s (9) (.0 4) (I) -Inter e st ch a r g e s (6) (.0 2) 1 2 .0 5 Allowance for Funds used During Construction (AFDC) 11 .05 --Pr e ferr e d Securities Divid e nd R e quir e m e nts (4) (.0 2) (6) (.0 2) Oth e r income and exp e ns e s 1 Earnings Available to Enterprise 42 .17 133 58 P SEG 1 99 4 AN U A L R EPO R T I EDHI P S RC 1 4 .06 (7) (.0 4) CEA 2 .01 3 .01 EDC (34) (.1 4) 1 7 .0 7 EGDC 54 .22 (49) (.2 0) S ubt o t a l 3 6 .1 5 (3 6) (.16) N et Incom e $ 78 .32 $ 97 .42 Effect of additional shar e s of Enterpris e C o mm o n S to c k issued (.0 4) (.0 9) Total $.2 8 $.33 The average shares of Enterprise Common Stock outstanding were 244,470,794 for 1994 , 240 , 663 , 599 for 1993 and 232 , 306 , 492 for 1992 , respectively.

PSE&G In 1994 , PSE&G's earnings available to Enterprise increased by $42 million. The increase was primaril y due to higher electric commercial sa les and firm gas residential and commercial sales. Electric kilowatthour (KWH) commercial sales increased 2% and total gas therms sold and transported increased 2.3%, respectivel y, principally due to weather and a modest improvement in New Jersey's economy. Also benefitting earnings was the decrease in Federal income ta x expense resulting from the receipt of a nontaxable insurance benefit partially offset by higher pre-tax operating income. In addition , higher AFDC was a benefit to earnings due to greater construction, partially offset by a slightly reduced 1994 AFDC rate. The major factors adversely affecting earn ings were higher other operation expenses , comprised primar il y of miscellaneous nuclear production expenses , employee benefits expenses and increased accruals for uncollectible customer accounts , increased depreciation and amortization expenses due to more utility plant in service , higher interest charges due to a higher average daily balance of short-term debt outstanding at higher interest rates and higher maintenance expenses, principally at Hope Creek nuclear station due to the spring 1994 refueling outage. . In 1993, excluding the $33 million net effect of the settlement of litigation against Philadelphia Electric Company, now known as PECO Energ y, Inc. (PECO), in connection with the 1987 shutdown of P e ach Bottom Atomic Power Station , U nits 2 and 3 (Peach Bottom) by the NRC , PSE&G's earnings available to Enterprise increased by $166 million. The principal contributing factors to the increase in earnings av a ilable to Enterprise were PSE&G's higher electric and g as base rates that became effective January 1, 1993 and a substantial increase in electric KWH sa le s. (See Revenues below.) The increase in electric sales was primarily due to the abnormall y warm summer weather. Partially offsetting the increase in earnings were higher other operation expenses (comprised primaril y of l abor and employee benefits costs and miscellaneous nuclear production costs), higher depreciation and amorti z ation and higher Federal income ta x es resulting from increased pre-tax operating income and an increase in the Federal corporate income tax rat e, effectiv e Januar y 1993. (See Note 10 -Federal Income Taxes of Notes.) EDHI The net income of EDHI was $60 million in 1994. Excluding the impact of an impairment of assets of $51 million , after ta x, b y EGDC in 1993, EDHI's earnings in 1994 decreased

$15 million in compari-1 3 14 I PSEG 1994 A N UAL REPORT son to 1993. Increased income from PSRC (higher investment income, lower income taxes compared to 1993 wh ich included the effects of a Federal income tax increase and lower interest charges) and CEA (higher income from operating plants) was offset by lo wer EDC earn in gs (lower gas vo lum es and prices and higher explorat i on and development expenditures due to increased drilling activities).

To the extent that th e prices at which EDC i s ab l e to sell gas remain low , EDHI's earnings may continue to be negatively impacted.

For information concerning certain of PSRC's direct-finance a ir craft leases, see Note 12 -Comm itm e nts and Co ntingent Liabilities of Notes. The net income of EDHI was $24 million in 1993 , a decrease of $36 million from 1992. The decrease in ED HI's net income was due primarily to EGDC's recording of an impairment related to certain real estate properties, including properties upon wh ich management revised its intent from a long-term investment s tr a t egy to a s h or t-term hold for sa l e status, reflecting such properties at their net realizable va lue. This impairment reduced EDHI's ea rnin gs b y $5 1 million, af t e r ta x, or 21 ce nts per sha r e of Enterprise Common Stock. Partiall y offset t ing thi s decr ease was an increase in the ea rnings of EDC due to the higher price of natural gas. Ex clu sive of the recorded imp ai rm ent, EDHI's net income would hav e been $75 million for 1993. Dividends The ability of Enterprise to declare and p ay dividends is contingent u po n its receipt o f dividend pay m ents from its subs idi a ri es. PSE&G has made regular payme nts to E nterpri se in th e form of dividends on o utstanding s hares of its common stock since Enterprise was formed in 1986. I n addi ti on, commenc in g in 1992 , ED HI has also made payments to E nterpri se in th e form of dividends on its outstanding commo n s tock. . Dividends paid to holders of Enterprise Common Stock increas ed $6 million during 1994 compared to 1993 and increased

$18 million during 1993 compared to 1992. The in crease in di v idend payments for 1994 over 1993 a nd for 199 3 over 199 2, respectivel y, was due to th e issuance of additional s h a res of Enterprise Common Sto ck. Dividends paid to holders of PSE&G's Preferred Stock increased

$2 million du r ing 199 4 compared to 199 3 and $6 million during 199 3 compa r e d to 1992. The increase in s uch dividends was du e to the issuance of a dditional s har es of PSE&G's Preferred Stock, partially offset b y reduced di v idend requirements resulting from th e r ede mption of certain higher cost series of Preferred Stock. (Se e Liquidit y and Capital R eso urces.) Di vi dends pa ya ble to holders of Monthly Income Preferred Sec uriti es (M IPS) of Public Service Electric and Gas Capital , L.P. (Partnership), a limited partnership of w hich PSE&G is the ge ner a l partner, aggregated

$2 million for 199 4. (See Note 4 -Schedule of Conso lidat e d Capital S tock and Other Securities of No tes.) Revenues PSE&G Electric R evenues increased

$4 0 million , or 1.1%, in 1994 from 199 3; 199 3 reven u es increased

$285 million , or 8.4%, compared to 1992. The s i gn ificant components of the se changes follow: In millions Kilowatthour sales Base rate increase effective January I, 1993 Tax Reform Act of 1 986 Recovery of energy costs NJGRT Other operat i ng revenues Total Electric Revenues Increase or (Dec r ease) 1994 VS. 1993 1993 VS. 1 992 $ 69 $ 67 244 13 .. (26) (52) (4) 1 7 1 (4) $ 40 $285 Changes in kil owat th our sales b y customer categor y are described below: Residential Com mercial Industrial Total Sales of Electricity to Custome r s I ncrease o r (Dec r ease) 1994vs 1993 1 993vs 1992 (0.4)% 83% 2.0 3.7 0.5 (1.0) 1.0 3.7 1994 -The incr ease in ele ctric r evenues was primaril y due to higher kil owa tthour sales , partially offset b y l ower recovery of energ y costs. Th e increase i n kilowatthour sales is due to higher commercial and industrial sales as a result of an impro vi ng economy. Residential sales were below last ye ar's l eve l s due to the abnorma ll y wa rm summer weather experienced in 199 3. 1993 -The increase in electric rev e nue s over 1992 was primaril y due to th e base rate increa se wh ich b ecame effec ti ve J a nua ry 1, 199 3, partially offset by the larger LEAC credit also effective Januar y 1 , 199 3. Abno rmall y wa rm summer weather resulted in a significant incr ease in weather sensitive sal es during 1993. Incr ease d competition from it y ge nerators (NUGs) and an unscheduled maintenance shutdown at PSE&G's l arges t industrial cust o mer negatively imp acted industrial sales. PSE&G Gas Re ve nues increas e d $184 million , or 11.6%, during 1994 over 19 93; 1993 revenues incre ase d $8 million , or 0.5%, over 1992. The significant components of the se changes follow: In millions Therm sales Base rate increase effective Januar y 1 , 1993 Recovery of fu e l costs JGRT Othe r operating revenues Total Gas Revenue s I ncrease or (Dec r ease) 1994 VS. 1993 1993 VS. 1 992 $ 61 $(29) 121 (12) 1 4 $ 184 48 15 (5) (21) $ 8 Changes in gas revenues sold and tran spo rted b y customer c a tegory a re described below: Residential Comme rci al Industrial Transportati o n Service Total Gas So ld and Transported Incr ease or (Decrease) 1994 VS. 1 993 1993 VS. 1992 4.5% 3 4.1 (2.3) 2.3 1.2% .4 18.5 2.6 4.9 1994 -The incr ease in gas revenues was primarily due t o an increase in the recovery of fuel costs, principally due to higher fuel rates, higher sales and sign ificantl y lo we r customer refunds. Residential , commercial and industrial sales increased due to favorable weather conditions and an improving economy. Sales to cogenerators was the largest contributor to the increase in industrial sales as cogeneration average customer usage continues to increase.

Transportation sales decreased due to storm-related service interruptions in January and February.

1993 -The increase in gas revenues over 1992 was primarily attributable to the base rate increase which became effective January 1, 1993 and the higher recovery of fuel-related costs. Sales to cogenerators was the largest contributor to the increase in industri al sales as cogeneration average customer usage for electric generation continued to increase.

Transportation service sales reflect the movement of some interruptible customers to transportation service. EDHI EDHI revenues decreased

$23 million , or 5%, during 1994 from 1993; 1993 revenues increased

$30 million , or 7%, over 1992. The significant components contributing to such results were as follows: Increase or (Decrease)

In millions 1994 vs. 199 3 I993 vs. 199 2 EDC CEA PSRC EGDC Total EDHI Revenues $(46) 17 10 (4) $(23) $ 3 0 10 (11) I $ 3 0 1994 -EDC's revenues decreased due to lower natural gas volumes ($29 million) and prices ($17 million).

CEA's revenues increased as a result of greater income from operating projects.

PSRC's revenues increased due to higher income from partnerships.

1993 -EDC was the largest contributor to the EDHI revenue increase due to the higher price of natural gas. CEA revenues increased as a result of greater income from operating projects.

PSRC revenues decreased due to unrealized losses on investments and lower income from leases. Electric Energy Costs Electric energy costs decreased

$21 million, or 3.0%, in 1994 compared to 1993 and $59 million, or 7.7%, in 1993 compared to 1992. The significant components of these changes follow: Increase or (Decrease)

In millions 199 4 vs. 19 93 1 993 vs. 1 992 Change in prices paid for fuel and power purchases Kilowatthour generation Adjustment of actual costs to match recoveries through r eve nues (A) Total Electric Energy Costs $ 1 2 9 (42) $ (2 1) $ 1 8 29 (106) $ (59) (A) Reflects the change in the def e rred over( under) recovered e ner gy costs , w hi c h in th e ye ars 1994 , 1993 and 199 2 amounted to $(135) milli o n , $(93)mi lli on and $13 million , respectively. (See PSE&G En e rgy and Fuel Adjustment Clauses a nd Note 2 -Rate Matters of Notes.) 1994-The decrease in total costs was principally due to the underreco very of energy costs , partiall y offset b y a 12% increase in purchased power costs and a 1% increase in kilowatthour generation.

1993-The decrease in total costs was the result of an adjustment in the recovery of energ y costs resulting from the base rate case decision effective January 1 , 1993, partiall y offset by a 1 7% increase in nuclear kilowatthour generation and an 11% increase in purchased power costs. PSEG 1 994 A N U A L R E P O RT I 1 5 Gas Supply Costs Gas supply costs incr eased $126 million , or 14.0%, in 1994 compared to 1993 and $3 9 million , or 4.6%, in 1993 compared to 1992. The significant components of these changes follow: Incr ease o r (D ec r ease) In millio ns 199 4 vs. 1993 1 993 vs. 1 992 Change in pri ces paid for gas supp li es T h e rm sendou t R e funds from pip e line suppliers Adjustment of actual costs to mat ch r ecove ri es through r even u es (A) Tota l Ga s Sup pl y Co ts $(1 0) 31 (2 1) 126 $126 $ 11 7 4 1 33 (152) $ 39 (A) R e fl ec ts the c hange in th e def e rr e d over(under)recover e d gas supply costs , which in th e ye ar s 199 4 , 1993 and 1992 amou n ted t o $26 milli o n , $(1 00)m illion a nd $52 million , resp ect ivel y. (See PSE&G Energy and Fuel Adjus t me nt Clauses and ote 2 -R a t e M a tt e r s of No t es.) 1994-The increase in total costs was principall y due to the overrecover y of fuel costs and increased sa les to nonutilit y generators ( UGs), p artia ll y offset b y lo wer gas prices.

• 1993 -The increase in tot a l costs was principall y due to greater sales to NUGs an d other customers, higher gas costs and higher therm sendout resulting from the colder 1993 wi nter season compared to the 1992 winter seaso n. The increase in costs was reduced b y deferred und e rreco ve red 1993 gas costs resulting from the BPU approved adjustment in PSE&G's LGAC , effective Januar y 1 , 199 3 of $71 million on a n annualized basis through December 31 , 1993. The adjustment r eflects low er gas costs and the inclusion of $15.1 million of conservation program costs in LGAC. In addition , gas customers received $45 million of credits dur in g the first quarter of 1993. Liquidity and Capital Resources Enterprise

's liquidit y is affected b y maturing debt (see Note 6-Schedule of Conso lidat ed Debt of No t es), investment and acquisition activities, th e capital requir e m e nts of PSE&G's construction program , p erm itted regulatory recover y of expenses and collection of revenues.

Capital resources available to meet such requirements depend upon the factors noted a bove under O ve r v iew. (See Construction , Investments and Other Capital Requirements Forecast below.) PSE&G For 1994 , PSE&G had utilit y plant additions , including AFDC , of $88 7 lion , a decrease of $3 million ve rsus 199 3 additions of $8 90 million. tions in 199 3 increased

$63 million from 1992 additions of $827 million. AFDC for 1994 , 1993 and 199 2 amounted to $38 million , $27 million and $2 6 million , r espect ivel y. Construction e x penditures were related to improvements in PSE&G's e x isting power plants , transmission and distribution system, gas system and common facilities.

PSE&G also expended $34 million, $48 million and $40 million for t he cost of plant removal (net of salvage) in 1994 , 1993 and 1992 , respectively.

Construction expenditures from 1995 through 1999 are ex pected to ag gregate $3.2 billion. Forecasted construction expe nditur es are related to improvements in PSE&G's ex i sting power plants , transmission a nd distribution system , gas system and common facilities. (See Construction , Investments and Other Capital Requirements Forecast below.)

r 1 6 I PSEG 1994 A NUAL REPORT Decommissioning and other special funds, excluding interest , increased

$35 million, $46 million and $9 million in 1994 , 1993 and 1992 , respectively. (See ote 3-PSE&G uclear Decommissioning and Amortization of Nuclear Fuel of Notes.) PSE&G expects that it will be able to generate internally a majority of its capital requirements including construction expenditures over the next five years, assuming adequate and timely recovery of costs as to which no assurances can be given. (See Note 2 -Rate Matters and ote 12 -Commitments and Contingent Liabilities of otes.) EDHI During the next five yea rs , a majority of EDHI's capital requirements are expected to be provided from operational cash flows. (See Construction , Investments and Other Capital Requirements Forecast below.) EDHI's focus is on CEA and EDC, its energy-related core businesses.

CEA is expected to be the primary vehicle for EDHI's business growth, both domestically and internationally.

A significant portion of CEA's growth is expec ted to occur in the international arena, due to the current and anticipated growth in electric capacity required in certain regions of the world. EDC is projected to grow its reserve base , principally through exploration and drilling , in order to maintain an annual production level of 130-140 billion cubic feet equivalent (BCFE). EDC's worldwide 1994 production totaled 108 BCFE and at year end had proved reserves of 888 BCFE. EDC expended approximately

$188 million , $109 million and $56 million in 1994 , 1993 and 1992 , respectivel y, to acquire , discover or develop domestic and international reserves.

Of these expenditures, $154 million, $91 million and $36 million in 1994 , 1993 and 1992 , respectively , were capitalized.

These amounts included capitalized interest of $4 million , $3 million and $4 million, respectively.

PSRC will limit new investments to those which support EDHI's core businesses , while EGDC will exit the real estate business in a prudent manner. Over the next seve r a l years, EDHI and its s ubsidi aries will also be required to refinance a portion of their maturing debt in order to meet their capital requirements. Any inabilit y to extend or rep l ace maturing debt at current l evels and interest rates may affect future earnings and result in an increase in EDHI's cost of capital. A partnership, in which EGDC i s an 80% partner ($21 million equity investment), is currently negotiating to extend or replace a mortgage financing of $4 0.2 million which is maturing on February 28, 1995. EGDC has guaranteed

$5.3 mill i on of the financing. No assurances can be given that EGDC or the partnership will be able to extend this loan or obtain a replacement loan in the amount of the existing loan. Failure to extend or replace the existing loan at the current outstanding loan balance, or at current interest rates , may result in an increase in the amount of capital which EGDC will require. PSRC i s a limited partner in various limited partnerships and is committed to make investments from time to time , upon the request of the respective general partners.

At December 31 , 1994, $134 million remained as PSRC's unfunded commitment subject to call. EDHI and each of its subsidiaries are subject to restrictive business and financial covenants contained in existing debt agreements and are required to not exceed various debt to equity ratios which vary from 3:1 to 1.75:1. EDHI is a lso required to maintain a twelve-months earnings (before interest and taxes) to interest (EBIT) coverage ratio of at least 1.35: 1. As of December 31, 1994 and 1993, EDHI had consolidated debt to equity ratios of 1.15:1and1.34:1 and, for the yea rs ended December 31, 1994 , 1993 and 1992, EBIT coverage ratios , as defined to exclude the effects of EGDC of 1.94:1, 2.13:1and1.88:1, respectively. Compliance with applicable financial covenants will depend upon future levels of earnings, among other things , as to which no assurance can be given. (See Note 6-Schedule of Consolidated Debt and Note 16 -Property Impairment of Enterprise Group Development Corporation of Notes.) Long-Term Investments and Real Estate Long-Term Investments and Real Estate , which a re primarily those of EDHI, decreased

$58 million and $67 million in 1994 a nd 1993, respectively , and increased

$61 million in 1992. The decrease in 1994 is primarily due to a $73 million net decrease in PSE&G's in ves tm ent in an insurance contract, partially offset by an increase in Public Service Conservation Resources Corporation

's (a PSE&G subsidiary)

Long-Term Investments of $23 million. The decrease in 1993 is du e primarily to EDHI's decrease in Long-Term Investments of $63 million. The incr ease in 1992 is due primaril y to EDHI's increas e in investments in real estate of $77 million. (For more details , see No te 7 -Long-Term Investments and Note 11-Leasing Activities -As Lessor of Notes.) Construction, Investments and Other Capital Requirements Forecast The estimated construction requirements of PSE&G , including AFDC, investments and other capital requirements of PSE&G and EDHI for 1995 through 1999 are based on expected project completion date s, included anticipated escalat i on due to inflation of approximately 3% for utilit y projects and are as follows: In millions 1995 1 996 1997 1998 1999 Total PSE&G Electric uclear Produ c tion Facilities

$ 89 85 66 $ 65 $ 66 $ 371 N uclear Fuel 96 90 87 11 2 99 484 Transmission and Distribution 165 185 1 75 16 3 175 863 Other Production 166 118 42 52 58 436 Conservation and Oth e r 45 39 37 33 29 183 Total Electric 561 5 1 7 407 425 427 2 , 337 Gas Production Facilities 2 2 4 Transmission and Distribution 1 36 1 4 1 1 43 143 1 43 706 Total Gas 138 1 43 1 43 143 143 710 Misce llan eous Corporat e 46 38 35 35 35 1 89 Total Construction Requirements of PSE&G 745 698 585 603 605 3 , 236 EDHI 242 1 75 1 25 1 53 1 49 844 Mandator y Retirement of Sec uriti es: PSE&G 310 300 118 100 828 EDHI 190 9 1 125 1 96 200 802 500 9 1 425 3 1 4 300 1 , 630 Working Capital and Other-net 101 43 4 1 21 2 1 227 Total Capital Requir ements $1 ,588 $1 , 00 7 $1 , 176 $1 , 091 $1 , 075 $5 , 937 While the above forecast includes capital costs to comply With revised Federal Clean Air Act (CAA) requirements through 1999, it do es not include addit ion a l requirements being developed under th e CAA by Federal and State agencies.

Such additional costs cannot b e reasonably es timat e d a t this time. PSE&G beli eves that s uch CAA costs would be recoverable from e lectric customers.

Internal Generation of Cash from Operations Enterprise's cash provided by operating activities for 1994 increased

$200 million to $1.232 billion when c ompared to 1993. Th i s increase was primarily due to the increase in net income of $78 million , higher recovery of electric energy and gas costs through PSE&G's LEAC and LGAC of $74 million, a decrease in accounts receivable of $152 million, a decrease in accrued taxes of $35 million, a positive net change in certain other current assets and liabilities of $57 million and a positive net change in certain noncurrent assets and liabiliti es, primarily deferred amounts, of $61 mill i on. Partially offse t ting these cash inflows were a decrease in accounts payable of $181 million and the loss from property impairments in 1993 of $78 million. (For additional information see Enterprise Earnings and Revenues.)

Although net income increased in 1993 (see Enterprise Earnings and Revenues), net cash provided b y operating activities decre ased by $292 million from 1992 to $1.032 billion. This decrease was primarily due to an underrecovery of e l ectric energy and gas costs through PSE&G's LEAC and LGAC of $306 million, a decrease in accrued taxes of $332 million (primarily increased NJGRT payments), and a decrease in depreciation and amor ti zation of $42 million. Part i a ll y offsetting these cash outflows were the increase in net income of $97 million, increases in deferred income taxes of $112 million, inventory decreases in fuel and materials and supplies of $54 million, incr eases in accounts pa yab le of $57 million and a loss from property ments of $78 million. External Financings Enterprise Consolidated Cash Flows from Financing Activities In millions 199 4 1993 1992 Enterprise (Parent Company) Issuance of Common S tock (A) $ 28 $ 273 $ 237 Cash Dividends paid on Common Stock (B) (528) (522)

(503) Total Enterprise (Parent Company) (5 00) (249) (266) PSE&G (C) Net (decrease) increase in Short-Term Debt (D) (131) 275 92 Increase (decrease) in Book Overdrafts 24 (JO) 24 Issuance of Long-Term Debt (E) 850 1,973 850 Redemptions of Lon g-Term Debt (479) (1 ,7 16) (l , 032) Long-Te rm Debt Issuance and Redemption Costs (30) (68) (19) Issuance of Preferred Stock (F) 75 75 75 Redemption of Preferred Stock (120) Issuanc e of Monthly Inc ome Preferred Securities (G) 150 Other (2) (6) (6) Total PSE&G 337 523 (16) EDHI (H) Net incr ease (decrease) in Short-Term Debt 45 (90) (89) Issuance of Long-Term Debt 165 30 Redemptions of Long-Term Debt (115) (36 7) (27) Other (4) Total EDHI (7 0) (296) (86) Net cash used in financing ac tivities $(233) $ (22) $ (368) (A) During I994 , Enterprise issued l , 009,6 74 s h ares of Common S tock through its Dividend Reinvestment and Stock Purchase Plan (DRIP) and various employee benefit plans. The net proceed from such sales , aggregating approximatel y $28 million , were used b y Enterprise to make equ it y investments in its subsidiaries.

Book value per share was $21.70 a t December 31, 1994 , compa red to $2 l.07 at December 31, 1993. (See Note 4-Schedule of dated Capita l Stock and Other Secur iti es of Notes.) (B) See Dividends.

PSEG 1994 AN UAL REPORT I 17 (C) Under the t erms of PSE&G's Mortgage and Restated Certificate of Incorporation at December 31, 1994, PSE&G would qualify to issue an additional

$3.511 billion of its First and Refunding Mortgage Bonds (Bonds) at a rate of 8.875% or $3.017 billion of Preferred Stock at a rate of 8.750%. PSE&G's Restated Certificate of Incorporation current l y limi ts the i ssuance of Preferred S t ock to $1.0 billion , of which $535 million is outstanding.

ln addition , as a prerequisite to the issuance of additional Bonds, PSE&G's Mortgage requires a 2: I ratio ofearnings to fixed charges as computed thereunder.

For 1994 , such ratio was 3.62: I. The ratio of earnings to fixed charges as required b y the Securities and Exchange Commission was 3.35: I. The BPU has authorized PSE&G to issue $370 million of Bonds/Medium-Term Notes (MTNs) through 1996 for refunding purposes.

The BPU has authorized PSE&G to i ssue not more than$ l billion of its short-term obligations at any one time outstanding , consisting of commercial paper and other unsecured borrowings from banks and other lenders through January 1 , 199 7. On December 31 , 1994, PSE&G had $3 08 million of short-term debt outstanding.

PSE&G renewed and increased to $800 million a revolving credit agreement with a group of commercial banks through September 14 , 1995 On December 31 , 1994 , there were no short-term borrowings outstanding under this credit agreement.

For additional detail , see Note 4-Schedule of Consolidated Capital Stock and Other Securities and Note 6-Schedule of Conso lid ated Debt of Notes. (D) PSE&G Fuel Corporation (Fuelco) has a $150 million commercial paper program to finance a 42.49% share of Peach Bottom nuclear fuel , supported by a $150 million revolving credit facility with a group of banks , which expires on June 28, 1996 PSE&G has guaranteed repayment of Fuelco's respective obligations.

As ofDecember 31, 19 94, Fuelco had commercial paper of $93.7 million outstanding under such program. (E) Enterprise

's long-t erm debt aggregated

$5.181 billion as of December 31 , 1994, of which $4.487 billion was attributable to PSE&G and $694 million to EDH I. During 1994 , PSE&G issued a total of $850 million principal amount of its Bonds/ MTNs. The net proceeds from the sale of the Bonds were used by PSE&G to redeem or defease $474 million of its higher cost Bonds and to pa y a portion of its current construction program. For addi ti ona l detail see Note 6-Sc h edule of Consolidated Debt of Notes. (F) In February 1994, PSE&G issued and sold $75 million of its Cumulative Preferred Stock. In March 1994 , PSE&G used the funds from the above sale to redeem $45 million of its higher priced Preferred Stock. The remaining funds were added to the general funds of PSE&G and used to pay a portion of its then outstanding short-term debt obligations, which were principally incurred to fund a portion of its construction expenditures.

In December 1994 , PSE&G redeemed an additional

$75 million of its Preferred Stock. The BPU has authorized PSE&G to issue not more than $180 million of Preferred Stock through 1995 For additional detail see ote 4-Schedule of Consolidated Capital Stock and Other Securities of Notes. (G) In November 1994 , Public Service Electric a nd Gas Capital, L.P.(Partnership) issued $150 million of Month l y Income Preferred Securities (M !PS), the proceeds of which were loaned to PSE&G and used to r edeem $75 million of Preferred Stock and the payment of construction expendit ures. For additional detail see Note 4-Schedule of Consolidated Capital Stock and Other Securities of Notes. (H) Funding has a commercial paper program, supported by a commercial bank letter of cred it and credit facil i ty, throu g h November 18, 1995 in the amount of $225 million. As of December 31, 1994 , Funding had $90 million of borrowings outstanding under this program. Funding has a $225 million r evolving credit facility which terminates on ovember 18 , 1995. As ofDecember 31 , 1994 , Funding had no borrowings outstanding under this facility.

Funding is in the process of amending its letter of credit and revolving credit facility in order to adjust pricing and extend the maturity to early 1998. Capital's MTN program provides for an aggregate principal amount of up to $750 li on of MTNs provided that its total debt outstanding at any time , including MTNs , shall not excee d such amount. Effective January 31 , 1995 , Capital will not hav e more than $650 million of debt outstanding at an y time. In November 1994 , Capital repaid $50 million of its 7.40% MTNs. At December 31 , 1994 , Capital had $467 million of MTNs outstanding and total debt outstanding of $632 million. For additional detail see Note 6-Schedule of Consolidated Debt of Notes.

1 8 I p EG 1 99 4 ANN U A L R EPO R T Financial Statement Responsibility Management of Enterprise is responsible for the preparation , integrity and objectivity of the consolidated financial statements and related notes of Enterprise. The consolidated financial statements and related notes are prepared in accordance with generall y accepted accounting principles.

The financial statements reflect estimates based upon the judgment of management where appropriate.

Management believes that the consolidated financial statements and related notes present fairly Enterprise

's financial position and results of operations.

Information in other parts of this Annual Report is also the bility of management and is consistent with these consolidated financial statements and related notes. The firm of Deloitte & Touche LLP , independent auditors, is engaged to audit Enterprise

's consolidated financial s tatem ents and related notes and issue a report thereon. Deloitte & Touche's audit is conducted in accordance with generally accepted auditing standards.

Management has made available to Deloitte & Touche LLP, all the corporation's financial records and related data , as well as the minutes of directors' meetings.

Furthermore, management believes that all representations made to Deloitte & Touche LLP, during its audit were val id and appropriate.

Management has established and maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded , and that transactions are executed in accordance with management's a uthori zation 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 to 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 se lecti ve training of emp lo yees. In addition, management has communicated to all employees its policies on business conduct , safeg uarding assets and internal controls.

The Internal Auditing Department of PSE&G conducts audits and appraisals of accounting and other operations of Enterprise and its subsidiaries and evaluates the effectiveness of cost and other controls and recommends to management, where appropr iate , improvements thereto. Management has considered the internal auditors' and Deloitte & Touche's recommendations concerning the corporation

's system of internal accounting controls and has taken actions that, in its opinion , are cost-effective in the circumstances to respond appropriately to these recommendations.

Management believes that, as of December 31, 1994, the corporation

's system of internal ing controls is adequate to accomplish the ob jecti ves discussed herein. The Board of Directors of Enterprise carries out its responsibility of financial overv i ew through its Audit Committee , which presently consists of s i x directors who are not employees of Enterprise or any of its affi liat es. The Audit Commi ttee meets periodically with ment as well as with representatives of the internal auditors and Deloitte & Touche LLP. The A udit Committee reviews the work of each to ensure that its respective responsibilities are being carried out and discusses related matters. Both the internal auditors and Deloitte & Touche LLP periodically meet alone with the Aud it Committee and have free a ccess to the Audit Committee, and its individual members, at any time. E. Jam es Ferland Chairman of the Board , President and Chief Executive Officer Patricia A. Rado V ic e President and Controller Principal Accounting Officer February 14 , 1995 Vice President and Chief Financial Officer PSEG 1 994-A U A L REPORT I 19 Con s olidated Stat e ment s of Income In thousands for the years ended December 3 1 , 1994 1 993 1992 Operating Revenues Electric $ 3,733,113

$ 3,693,083

$ 3,407,819 Gas 1 ,778, 528 1 ,594,34 1 1 , 586,181 onutility Ac ti vit ie s 404,202 418,135 362,781 Total Operating Revenues 5,915,843 5,705,559 5 ,3 56 ,78 1 Operating Expenses Operation Fuel for Elec tric Generation a nd Int e rchang e d Power 695,763 717 , 136 776,571 Gas Purchased and Materials for Gas Produced 1 , 0 23 , 956 897 , 885 858 ,7 37 Other l,l16 , 263 1 , 01 2,757 924 , 942 Ma inten ance 3 0 8, 0 8 0 3 0 4 , 403 3 0 7,726 Depreciation and Amortization 629,688 6 00 , 264 642 , 548 Propert y Impairment (no t e 16) 77,637 Taxes Fed e ral Income Taxes (note 10) 3 1 2,55 1 313 , 680 221 , 469 New Jersey Gross Receipts Ta xes 583,167 597 , 898 585 , 77 0 Other 82 , 282 77, 05 2 72 , 883 Total Operating Expenses 4,751,750 4 , 598 , 712 4 , 390 , 646 Operating Income 1, 1 64 , 0 93 1 , 106 , 847 966 , 135 Other Income Allowanc e for Funds Use d During Construction

-Equit y 1 2,789 12 , 265 1 2,828 Peach B ottom Settlement-net of Federal income ta xes 1992 , $16 , 985 (no t e 2) 32,97 0 M isc ellaneous

-net 6,430 (3 , 778) 30,188 Total Other Incom e 1 9,2 1 9 8 , 487 75,986 Income Before Int e re s t C har ges a nd Di v id e nd s on Pr efe rred Securities 1 , 183,312 1 , 115 ,334 1 , 0 42,121 Interest Charges (note 6) Lon g-Te rm Debt 459,158 469,12 0 479,898 Sho rt-T erm Debt 23,962 13,86 0 14 ,858 Ot h er 12 , 805 19,554 29,269 Total Interest Charge s 495,925 502,534 5 24, 0 25 Allowance for Funds Use d During Construction

-Debt and Capitalized Inter es t (33,793) (20,833) (17 , 928) Net Int erest Charges 462,132 48 1 ,7 01 506 , 09 7 Preferred Sec uritie s Dividend R eq uirem ents (no te 4) 42, 1 47 38,114 31,907 Income before cumul a ti ve effect of accounting change 679,033 595 , 519 504 , 117 Cumulative e ffect of chang e in accounting for income ta xes (note 10) 5,414 Net Income $ 6 7 9,033 $ 6 00 , 933 $ 50 4 , 117 Shares of Common Stock Outstanding En d of Year 244 , 697,930 243,688 , 256 235,395,751 Average for Year 244 , 470,794 240 ,663, 599 232,306,492 Earnings Per Average Share of Common Stock Income before cumul a ti ve e ff ect of accountin g change $2.78 $2.48 $2.17 C umul ative effec t of change in acco unt i ng fo r incom e ta xes .02 Total Earnings Per Average Share of Common Stock 2.78 2.50 2.17 Dividends Paid Per Share of Common Stock $2.16 $2.16 $2.16 See No t es t o Conso lid a t ed F i nanc i a l Sta t ements.

20 I P SEG 1 99 4 A NN UA L REPO R T Consolidated Balance Sheets In thous a nds a t Dec e mb e r 3 1 , Assets Utilit y Pl a nt-Ori g in a l Cost (note 15) Electric Ga s Common Total Less accumulated depreciation and amorti z ation Net uclear Fuel in Service , net of accumulated amortization

-1994, $302,906; 1993, $275,638 Net Utility Plant in Service Construction Work in Progress , including Nuclear Fuel in Process -1994, $65,429; 1993 , $98,780 Plant Held for Future Use Net Utilit y Plant Investments and Other Noncurrent Assets (notes 3 , 7 , 8, 11, 12 and 16) Long-Term Investments, net of amortization

-1994, $2,365; 1993, $572, and net of valuation allowances-1994 , $17,104; 1993 , $18 , 018 , respectively Oil and Gas Property , Plant and Equipment , net of accumulated depreciation and amortization

-199 4, $7 4 8 , 2 4 5; 1993 , $695 ,7 91 Real Estate , Property and Equ ipm ent , net of accumulated depreciation

-1994 , $14 , 242; 1993 , $10 , 840 , and net of valuation allowances-1994 , $23 , 264; 1993 , $16 , 684 , respectively Other Plant, net of accumulated depreciation and amortization

-1994 , $4,653; 1993, $3,735 Nuclear Decommissioning and Other Special Funds Other Assets -net Total Investments and Other Noncurrent Assets Current Assets Cash and Cash Equivalents (note 9) Accounts Receivable:

Customer Accounts Receivable Other Accounts Receivable Less: allowance for doubtful accounts Unbilled Revenues Fuel, at average cost Materials and Supplies , net of inventory valuation reserves -1994 , $18 , 200; 1993 , $8 , 525 , respectivel y Deferred Income Taxes (note 10) Miscellaneous Current Assets Total Current Assets Deferred Debits (note 5) Property Abandonments

-net Oil and Gas Propert y Write-Down Unamortized Debt E x pense Deferred OPEB Costs (notes 1 and 13) Underrecovered Electric Energy and Gas Costs -net Unrecovered Environmental Costs (notes 2 and 12) Unrecovered Plant and Regulatory Study Costs Unrecovered SFAS 109 Deferred Income Taxes (note 10) Deferred Decontamination and Decommissioning Costs (note 3) Other Total Deferred Debits Total See No t es t o Conso li dated Fi n anc i a l S t a t e m ents. I I 199 4 199 3 I $1 2,345,9 19 $11 , 920 , 89 4 2 , 31 8, 233 2 , 1 77, 8 4 1 545 , 131 520,285 15 , 209 , 283 14,619 , 020 5 , 147 , 105 4 , 772,942 10 , 06 2, 178 9 , 846 , 078 205 , 273 205,237 10,267 , 451 10 , 051,315 806,934 735 , 356 23 , 860 17,709 11,098,245 10 , 804 , 380 1 , 625 , 952 1 , 630 , 996 577 , 913 506 , 047 115 , 210 110 , 661 36,063 28 , 327 233 , 022 189 , 282 85 , 478 103 , 538 2,673 , 638 2 , 568 , 851 67 , 866 71,372 434 , 207 446,629 211 , 779 230 , 373 40,915 27 , 932 204,056 244,497 268,927 285 , 943 148,285 172 , 438 25 , 311 12 , 934 37 , 356 49 , 860 1,356 , 872 1 , 486,114 88,269 105,536 41 , 232 46,386 134 , 599 121 , 2 7 8 116 , 476 58,593 172 , 563 62 , 034 135,499 138,531 37, 128 35 , 196 791,393 789 , 795 53 , 016 56 , 055 18 , 510 56 , 907 1,588,685 1,470,311

$16 ,7 17 , 440 $16 , 329 , 656 P SEG 19 9 4 AN UAL REP O RT I 2 1 In thousands at December 3 1 , 1994 199 3 Capitalization (notes 4, 5 and 6) Common Equ i ty Common Stock $ 3,801,157

$ 3,772 , 662 Retained Earnings 1 , 510 , 010 1,361,018 Total Common Equity 5 , 311,167 5 , 133,680 Subsidiaries

' Securities and Obligations Preferred Securities . Preferred Stock Without Mandatory Redemption 384,994 429 , 994 Preferred Stock With Mandatory Redemption 150 , 000 150,000 Monthly Income Preferred Securities 150,000 Long-Term Debt 5,180,657 5,256 , 321 Total Capitalization 11,176,818 10,969 , 995 Other Long-Term Liabilities Decontamination and Decommissioning Costs (note 3) 56,149 56,055 Environmenta l Costs (notes 2 and 12) 105,684 111,000 Capita l Lease Obligations 53 , 770 53,104 Total Other Long-Term Liabilities 215,603 220,159 Current Liabilities long-Term Debt due within one y ear 499,738 168,064 Commercial Paper and Loans (note 6) 491,586 577,636 Book Overdrafts 86,576 62 , 992 Accounts Payab l e 433,471 519 , 261 New Jersey Gross Receipts Taxes Accrued 263,357 Other Taxes Accrued 44 , 149 39,610 Interest Accrued 107 , 962 107,027 Estimated Liability for Vacation Pay 27,080 26,993 Customer Deposits 33,698 36,668 Liability for Injuries and Damages 29,814 28,338 Miscellaneous Environmental Liabilities 15 , 365 4,475 Other 87,480 61,277 Total Current Liabilities 1,856 , 919 1 ,8 95,698 Deferred Credits Accumulated Deferred Income Taxes (note 10) 2,905 , 390 2,702,386 Accumulated Deferred Investment Tax Credits 412 , 466 432,713 Deferred OPEB Costs (notes 1 and 13) 116 , 476 58 , 593 Other 33,768 50,112 Total Deferred Credits 3,468,100 3 , 243,804 Commitments and Contingent Liabilities (note 12) Total $16,717,440

$16,329,656 22 I P SEG 1 994 ANN U AL R E P O R T Consolidated Statements of Cash Flows In thous a nd s for th e yea rs ended December 31 , Cash Flows From Operating Activities:

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

Depreciation and Amortization Amortization of Nuclear Fuel (Deferral)

Recover y of Electric Energy and Gas Costs -net Loss From Propert y Imp airments Cumu lat ive Effect of Change in Accounting for Income Ta x es Amortization of Discounts on Property Abandonments and Disallowance Unrealized Gains on Investments

-net Provision for Deferred Income Ta xes -net Investment Tax Credits -net Allowance for Funds Used During Construction

-Debt and Equity and Capitalized Interest Proceeds from Leasing Activities

-net Changes in certain current assets and liabilities Net decr ease (increase) in Acco unts Receivable a nd Unb illed Revenues Ne t decrease (increase) in Inventor y -Fuel and Materials and Supplies Ne t (decreas e) increase in Accounts Payable Ne t (decrease) increase in Accrued Taxes Ne t change in Other Current Assets and Liabilities Other Ne t cash provided b y operating a cti v ities Cash Flows From Investing Activities:

Additions to U tilit y Plant , excluding AFDC A dditions to Oil and Gas Property , Plant and Equipment , excluding Capitalized Interest Net decrease (increase) in Long-Te rm Investments and Real Estate Increas e in Decommissioning and Other Special Funds , excluding interest Cost of Plant Removal -net Other Ne t cash used in investing activities Cash Flows From Financing Activities:

Net (decrease) increase in Short-Term Debt Incr ease (decrease) in Book Overdrafts Issuance of Long-Term Debt Redemption of Long-Term Debt Long-Term Debt Issuance an d Redemption Costs Issuance of Preferred Stock Redemption of Pr efe rred Stock Issuance of Monthly Income Preferred Securities Issuance of Common Stock Cash Dividends Paid on Common Stock Other Net cash used in financing activities Net (decrease) incre ase in Cash and Cash Equivalents Cash and Cash Equivalents at Beginning of Year Cash and Cash Equivalents a t End of Year Income Taxes Paid Interest Paid See No t es to Co nsolid ated Financial Statements 1994 $ 679,033 629,688 95 , 173 (110 , 529) (6,743) (26,329) 138 , 919 (20,247) (46,582) 27,682 84,440 41 , 169 (85,790) (258,818) 36,748 53 , 976 1 , 231,790 (849,174)

(149 , 523) 58,416 (35,394) (33,962) 7, 154 (1,002 , 483) (86 , 050) 23, 584 849 , 800 (593,790)

(29,811) 75, 000 (120;000) 150 , 000 28,495 (528, 0 71) (1,970) (232,813)

(3,506) 71 , 372 $ 67 , 866 $ 155,104 $ 432,873 199 3 199 2 $ 600,933 $ 504,117 600,264 642,548 102,718 91 , 903 (184,770) 121,371 77,637 (5,414) (7,8 01) (11 , 293) (8,694) (24,843) 168,406 56 , 846 (11,655) (20 , 342) (33, 098) (30 ,7 56) 14 ,78 0 30,295 (68,382) (68,525) 16 , 438 (37 , 083) 95 , 331 38,589 (293 , 919) 37,892 (19,505) 8,263 '(11 ,598) (14,538) 1,031 , 671 1,324 ,4 44 (863 , 294) (800 , 344) (87,968) (32,337) 66,659 (61 , 099) (45 , 508) (9,262) (47 , 791) (40 , 111) (14 , 938) (6 , 000) (992,84 0) (949 , 15 3) 185 , 654 2,932 (10 , 0 78) 24,009 2,137,700 880,000 (2, 083 , 453) (1,058,179)

(72 , 114) (19,753) 75, 000 75, 000 273,479 237,045 (521,572) (503,197)

(6 , 772) (5,719) (22, 156) (367,862) 16 , 675 7,429 54,697 47,268 $ 71 ,372 $ 54,69 7 $ 140 , 172 $ 143 , 211 $ 4 58 , 956 $ 486,396 P SEG 1 994 ANNUA L RE P O R T I 23 Consolidated Statements of Retained Earnings In thousands for the y ears e nded D e cember 31 , 19 94 1 9 9 3 199 2 Balance January 1 $1 , 361 , 018 $1 , 282 , 931 $1 , 282 , 029 Add Net Income 6 7 9,033 600 , 933 50 4, 11 7 Total 2,0 4 0 , 051 1,883 , 864 1,786 , 146 Deduct Dividends on Common Stock (A) 528,071 521 , 572 503 , 197 Capital Stock Expenses 1 , 970 1 ,27 4 18 Total Deductions 530 , 0 4 1 5 2 2 , 8 4 6 503 , 215 Balance December 31 $1 , 510 , 010 $1 , 361 , 018 $1 , 282,931 (A) The abilit y of Enterprise to declare and pay dividends is conting e nt its r e c e ipt of divid e nd pa y m e nts from its sub s idi a rie s. P S E&G , Enterpris e's principal s ub s idi a r y, has restrietions on the pa y m e nt of dividends which are c o ntain e d in its Restat e d Ce rtificate of Incorporati o n , a s am e nd e d , c e rt a in o f th e ind e ntur es suppl e m e nt al t o its Mortgage, and certain debenture bond and other ind e ntures. However , non e of th ese r es triction s pr ese ntl y limits the p ay m e nt o f divid e nds o ut o f c urr e nt e arnin g s. The amount of PSE&G's restricted r e t a ined ea rnings at D e c e mber 3 1 , 199 4, 19 93 and 19 92 w as $10 milli o n. See N otes t o Consolidated Financi a l S t a t e ments. Independent Au ditor s' R eport To the Stockholders and Board of Directors of Public Service Enterprise Group Incorporated

We have audited the accompanying consolidated balance sheets of Public Se r vice Enterprise Group Incorporated and its subsidiaries as of December 31, 1994 and 1993 , and the related consolidated statements of income , retained earnings , and cash flows for each of the three y ears in the period ended December 31 , 1994. Our audits also included the consolidated financial statement schedules listed in the Ind ex in Item l 4(b) (1). These consolidated financial statements and the consolidated financia l statement schedules are the responsibilit y of the Compan y's management.

Our responsibilit y is to express an op i nion on these consol id ated financial statements and consolidated financial statement schedules based on our audits. We cond u cted our aud i ts in accordance with generally accepted audi tin g standards.

Those s t andards r eq uir e that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of materia l misstatement.

An audit includes e x am in ing, on a t est basis , evidence support in g the amounts and disclosures in the financial statements.

An audit also includes assessing the accounting principles used and significant estimates made b y management , as we ll as evaluating the overall financi a l statement presentation.

We believe that our audits provid e a reasonable basis for our opinion. Deloitte & ToucheuP 0 In our opinion , such conso li dated financial statements present fairl y, in all material respects , th e financial position of Public Service Enterprise Group Incorporated and its subsidi a ries at December 31 , 1994 and 1993 , and the results of their operations and their cash flows for each of the three y ears in the period ended December 31 , 1994 in conformit y with generall y accept e d accounting principles.

Also , in our opinion , such consolidated financial statement schedu l es , when consider e d in relation to th e basic consolidat e d financial st a t e ments taken as a whole , present fairl y in all material respects the inform ation se t forth therein. We have also previousl y audited , in accordance with generall y acc e pted auditing standards , the con s olidated b a lance sh e ets as of December 31 , 1992 , 1991 , and 1990 , and the related consolidated statements of income , retained earnings , and cash flows for th e ye ar s ended December 31, 1991 and 1990 (none of which are presented h erein) and we expressed unqualified opinions on those consolidated financial statements. In our opinion , the information set forth in the Selected Financial Data for e ach of the fi v e ye ars in the period ended December 31 , 1994 for the Compan y , presented in Item 6 , is fairly stated in all material respects , in relation to the consolidated financial statements from which it has been derived.

J-?7 De l oitte & Touche LLP Februar y 14 , 1995 Parsippan y, e w Jers ey 24 I P SEG 1994 ANNUAL REPORT Notes to Consolidated Financial Statements Note 1. Organization and Summary of Significant Accounting Policies Organization Enterprise has two direct wholly owned subsidiaries, Public Service Electric and Gas Company (PSE&G) and Enterprise Diversified Holdings Incorporated (EDHI). Enterprise's principal subsidiary, PSE&G, is an operating public utility providing electric and gas service in certain areas in the State of New Jersey. Enterprise owns all of PSE&G's common stock (without nominal or par value). Of the 150,000 , 000 authorized shares of such common stock at December 31, 1994, 1993 and 1992, there were 132 ,45 0,344 shares outstanding, with an aggregate book value of $2.6 billion. PSE&G has a finance subsidiary, PSE&G Fuel Corporation (Fuelco), providing financing , unconditionally guaranteed by PSE&G, of up to $150 million aggregate principal amount at any one time of a 42.49% interest in the nuclear fuel acquired for Peach Bottom Atomic Power Station Units 2 and 3 (Peach Bottom). PSE&G also has a nonutility subsidiary, Public Service Conservation Resources Corporation (PSCRC) which offers demand side management (DSM) services to utility customers. In 1994, Public Service Electric and Gas Capital, L.P. (Partnership), a limited partnership in which PSE&G is the general partner, was formed for the purpose of issuing monthly income preferred securities (MIPS). (See Note 4 -Schedule of Consolidated Capital Stock and Other Securities.)

EDHI is the parent of Enterprise's nonutility businesses:

Energy Development Corporation (EDC), an oil and gas exploration and production and marketing company; Community Energy Alternatives Incorporated (CEA), an investor in and developer of cogeneration and independent power production facilities; Public Service Resources Corporation (PSRC), which makes primarily passive investments

and Enterprise Group Development Corporation (EGDC), a diversified nonresidential real estate development and investment business.

EDHI also has two finance subsidiaries:

PSEG Capital Corporation (Capital), and Enterprise Capital Funding Corporation (Funding). Consolidation Polic y The consolidated financial statements include the accounts of Enterprise and its subsidiaries.

All significant intercompan y accounts and transactions have been eliminated in consolidation.

Certain reclassifications 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 ew Jersey Board of Public Utilities (BPU) a nd the Federal Energy Regulatory Commission (FE RC). As a result PSE&G maintains its accounts in accordance with their prescribed

' U niform Systems of Accounts, which are the same. The applications of Generally Accepted Accounting Principles by PSE&G differ in certain respects from applications by non-regulated businesses.

PSE&G prepares its financial statements in accordance with the provisions of Statement of Financial Accounting Standards No. 71 _ "Accounting for the Effects of Certain Types of Regulation" (SFAS 71). In general, SFAS 71 recognizes that accounting for regulated enterprises should reflect the relationship of costs and revenues.

As a result, a regulated utility may defer recognition of cost (a regulatory asset) or recognize an obligation (a regulator y liability) if it is probable that, through the rate-making process, there will be a corresponding increase or decrease in revenues.

Accordingly, PSE&G has deferred certain costs, which will be amortized over various periods. To the extent that collection of such costs or payment of liabilities is no longer probable as a result of changes in regulation and/or PSE&G's competitive position , the associated regulatory asset or liability will be reversed with a charge or credit to income. (See Note 5 -Deferred Items.) Amounts charged to operations for depreciation expense refiect estimated useful lives and methods, that include estimates of cost of removal and salvage , prescribed and approved b y regulators rather than those that might otherwise apply to unregulated enterprises.

PSE&G cannot presently quantify what the financial statement impact may be if depreciation expense is determined absent regulation.

Utility Plant and Related Depreciation

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

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

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

These estimates are reviewed on a periodic basis and necessar y adjustments are made as approved b y the BPU. Depreciation provisions stated in percentages oforiginal cost of depreciable propert y were 3.51% in 1994 , 3.46% in 199 3 and 3.48% in 1992. Decontamination and Decommissioning

-PSE&G In September 1993, FERC issued Order No. 55 7 on the accounting and rate-making treatment of special assessments levied under the ational Energy Policy Act of 1992 (NEPA). Order o. 557 provides that special assessments are a necessar y and reasonable current cost of fuel and shall be fully recoverable in rates in the same manner as other fuel costs. While PSE&G expects to recover such special assessments through its electric Levelized Energy Adjustment Clause (LEAC) no assurances can be given that the BPU will authori ze such recover y from customers. (See Note 3 -PSE&G Nuclear Decommissioning a nd Amortization of Nuclear Fuel-Uranium Decontamination and Decommissioning Fund.) ' Amortization of Nuclear Fuel -PSE&G uclear 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 (KWH) of nuclear generation for spent fuel disposal costs. (See Note 3 -PSE&G uclear Decommissioning and Amortization of Nuclear Fuel.)

Revenues and Fuel Costs -PSE&G Revenues are recorded based on services rendered t o customers during each acco untin g period. PSE&G r eco rd s unbilled revenue s representing the es tim a t e d amount custom e rs will be billed for serv ic es rendered from the tim e meters were l as t read to th e end of the respective accounting period. Rates include projected fuel costs fo r e l ectr ic genera ti on , purchased a nd int e rch ange d power, gas purchased and materials used for gas production. Any under or ove rr ecover i es, tog ethe r wit h int e r es t (in the cas e of n e t e ri es), a r e deferred a nd included in operations in the period in which t h ey are reflected in rates. Long-Term Investments PSRC has in vested in secu riti es a nd limit e d partnerships investing in secu riti es , whic h are r eco rd ed at fair va lu e, and various l eases a nd other limited pa rtn erships. EGDC is a participant in the tial real esta t e markets. CEA i s an investor in a nd developer of cogeneration and power production facilities. (See ote 7 -LonTerm Investments

.) Derivatives Gains and losses on hedges of existing assets or liabilities are included in the carr y ing amounts of those assets a nd liabiliti es and are ultimatel y recognized in income as part of tho se carrying amounts. Ga in s and l osses re l ated to qualifying h e dg es of firm commitments or a nticipat e d transactions also a re deferred and recognized in income or as ad ju s tments of carrying amounts when the hedged transaction occurs. PSRC's security derivatives are re.corded at fair va lu e. Realized and unrealized changes in fa ir va lu es are recognized in revenues in the period in w hich the changes occu r. (See Note 8 -Financial I nstruments and Risk Management.)

Oil and Gas A ccounting

-EDC EDC uses the successful efforts method of account ing und er which proved l easehold costs a r e cap it alized and amo rti ze d over the pro ve d developed and und eve l oped reserves on a units-of-production b as i s. Drilling and equ ip ping costs , except explo r ato r y dry holes , are capitalized and depreciated over the proved developed reserves o n a units-of-production basis. Estimated future aba nd o nment costs of offshore proved properties are depreciated on a units-of-production basis over the proved developed reserves.

U npro ve d l ease hold costs a r e capitalized a nd not amo rti ze d , pendin g an eva lu ation of the exploration results. Unproved leasehold and producing properties costs are assessed periodicall y to determine if an impairm ent of the cost of significa nt individual properties has occ urr e d. The cost of a n impairment is charged to expe n se. Costs incurred for exp lorator y dr y holes , exp l oratory geo l og ic a l and geop h ys ical wo rk and dela y rent a ls are charged to expense as in curred. Incom e Tax es Enterprise and its subsidiaries file a conso lid ated Federal incom e t ax r e turn a nd incom e taxes are a lloc a ted t o Enterprise

's subsidiaries based on taxable in come or l oss of eac h. In vest m e nt tax credits are defe rr ed and amortized over the useful li ves of the related propert y, including nuclear fuel. PSEG 1994 A NN UAL REPORT I 25 Effective J a nuar y I , 199 3, Enterprise and its subsid i a ri es adopted Statement of Financial Accounting Standards

o. 109 " Accounting for Inc ome Ta xes" (SFAS 109). Under SFAS 109 , deferred income ta xes are provided for a ll t empora r y differences b etwee n the financial statement carr y ing amounts and the tax bases of ex i st ing assets and liabiliti es irrespective of the treatment for rate-making purposes.

For periods prior to Januar y 1 , 1993 , PSE&G provid e d deferred inc ome ta xes to th e extent permitted for rate-making purposes. (See Note 10 -Federa l Income Ta xes.) Allowance for Funds Used Durin g Construc ti on and Capi t ali z ed Int e r es t PSE&G -Allowance for Funds Use d During Construction (AFDC) r e presents the cost of debt and eq uit y funds us e d to finance th e construction of new utilit y facilities.

The amount of AFDC capitalized is reported in the Consolidated Statements of Income as a reduction of int erest charges for the borrowed funds compon en t and as other income for the equity funds component.

The rates used for calculating AFDC in 199 4, 1993 and 199 2 were 6.48%, 6.96% and 7.8 0%, respectivel

y. These rates are within th e limits set b y FERC. EDHI -The operating s ubsidiaries of EDHI capitalize interest costs allocable to construction expenditures a t th e average cost of borrowed funds. P ension Plan and Oth er P os tretir e ment Benefits The emp lo yees of PSE&G and participating affi li ates , after completing one y ear of service , are covered b y a noncontributory trusteed pens i on plan (Pension Plan). The policy is to fund pension co sts acc ru ed. PSE&G a l so pro vi des certain health care and life insurance benefits to active and retired emp l oyees. The portion of such costs pert a ining to retirees amounted to $29 million , $28 million, a nd $24 million in 199 4 , 1993 and 1992 , respectivel

y. The current cost of these benefits is charged to expense when paid a nd is currently b e ing recovered from ratepa ye rs. On January 1 , 199 3, Enterprise a nd PSE&G ado pted Statement of Financial Account ing Standards No. 106 , " Emplo ye rs Account in g for Postretirement Benefits Other Than Pensions" (SFAS 106), which requires that the expect e d cost of employees' postretirement health c a r e benefits b e charged to expe nse during th e yea rs in which e mplo yees render servic e. Prior to 199 3, Enterpr i se and PSE&G recognized postretirement health car e costs in the yea r in w hich th e b e n efits were paid. PSE&G elected to amortize over 20 yea rs its unfunded ob li ga tion at J anuary 1 , 1993. (See Note 13-Postretirement Benefits Other Than P e nsions and Note 14-Pension Plan.) Note 2. Rate Matters L eve li zed Gas Adjustmen t Charge On Jul y 1 , 199 4 , PSE&G p e titioned the BP U to incr e ase its Leveli ze d Gas Adjustment Charge (LGAC) rates to recov e r an add iti onal $23.7 million , to be effec ti ve October 1 , 1994. On A u gust 4 , 199 4 , th e matter was tran sm itt ed to th e Office of Administrative Law of th e State of New J e rse y (OAL) for adjudication.

Due to recent projections of lower gas prices, the parties reached a s tipulat ed sett l emen t on October 6 , 1994 w hich provides for th e implementation of the Gas Remediation Adjustment Charge (RAC) with an equal corresponding offsetting adjustment to the current LGAC rate. These LGAC a nd RAC rates ,

26 I P SEG 1 99 4 ANN U A L REPORT when combined , produce a charge which results in a zero increase to the firm customers for the LGAC period ending September 30, 1995. The settlement was approved by the BPU on December 21, 1994. The BPU , on Januar y 24 , 1995, approved PSE&G's proposal to credit a total of $50 million to its firm gas sales customers during February and March 1995. Specifically , PSE&G will credit approximately

$30 million in February and $20 million in March 1995. The opportunity to provide these credits was due principally to abnormally warm winter weather, lower gas prices and a lower current short-term price forecast.

Electric Levelized Energy Adjustment Clause On July 1 , 1994, PSE&G petitioned the BPU to increase its LEAC rates , effective October 1 , 199 4, to recover an additional

$130 million of energy costs. A significant part of the need for an increase is the larger percentage of power that PSE&G is obligated to purchase under prior BPU approved contracts with non-regulated power producers.

On November 1 , 1994 , the parties reached a stipu l ated settlement wh ich provides for the implementation of provisional LEAC rates , subject to refund, designed to recover an additiona l $98 million over the period November 1994 through May 1995. The stipulation provided suffic i e nt rate relief to recover current fuel costs and to begin to reduce the accumulated und errecovered balance while affording the parties the oppo rtunit y to continue liti gating unresolved issues of: a) rate tr ea tment for the Bergen repowering project (See ote 12 -Commitments and Contingent Liabilities

-Bergen S t at ion Repowering);

b) an alleged overearnings issue; c) recovery of th e costs r e lat ed to the April 7, 1994 shutdown at Salem 1 nuclear unit; and d) the appropriateness of PSE&G's gas to e l ectric transfer and pricing calculations pertaining to the 1993 agreement with PSE&G's l argest indu stria l customer (Bayway Decision and Order). This stipulation was approved by the BPU without modification and became effective on November 4, 1994. With respect to the litigated issues outlined above, an trative Law Judge (ALJ) decision was filed with the BPU on Januar y 30, 1995 recommending that (1) the issue of alleged overearnings is not a LE AC issue and PSE&G is not earning in excess of its rate of return; (2) a hearing convene regarding the Sa l em 1 shutdown to determine replacement power costs and whether any limitations impose d by the New jers ey Public Ut ilit y Fault Determination Act s hould be triggered; (3) a reduction of th e 1993 Nuclear Performance Stan dard (NPS) reward to $1.9 million from $3.9 million b e made; (4) the joint position of the parties on gas to electric pricing and the accou ntin g procedures approved by the BPU in its Bayway Decision and Order should not be revised; (5) a decrease of $700 thousand in DSM program costs; and (6) the BPU should address the RAC costs in the LEAC. PSE&G filed excep ti ons t o the AL]'s decision on February 14, 1995 addressing the 1993 NPS reward; DSM estimates; replacement power costs for the Apr il 7, 1994 Sa l em outage and the treatment of RAC charges. However , neither Enterprise nor PSE&G is ab le to predict what action , if any , the BPU may take concerning the AL]'s decision. (See Note 3 -PSE&G Nuclear Decommissioning and Amortization of Nuclear Fuel.) On July 7, 1994 , the BPU approved a stipulation which made permanent the LEAC r ates that went into effect on January 1 , 1993 on an interim basis and closed out the previous LEAC for the period ended December 31, 1992. The stipulation also provided a credit of $2.5 million to the deferred fuel balance for LEAC customers in resolution of all outstanding issues related to the November 9, 1991 Salem 2 turbine generator outage and a credit of $1.3 million to reflect an adjustment of estimated ew Jersey Gross Receipts and Franchise Tax ( JGRT) unit tax rates to actual unit tax rates. Remediation Adjustment Charge In accordance with the BPU Order dated September 15 , 1993 and the BPU approved Technical Conference Decision and Order dated November 4, 1993, PSE&G proposed to recover , effective October 1, 1994, $3.7 million from its gas custom ers and $2.4 million from its electric cus tomer s for costs incurr ed during th e period October 1 , 1992 through July 31 , 1994 with respect to PSE&G's Manufactured Gas Plant Remediation Program (Remediation Program). Pursuant to the referenced Board Order and Technical Co nferenc e Stipulation , costs are to be included in a RAC and are amortized over a rolling seven-year period, 60 percent to be recovered through the gas RAC and the remaining 40 percent to be recovered through the electric RAC. This Remediation Program has been and continues to be carried out under the direction and superv i sion of the New Jersey Department of Environmental Protection ( JDEP). On December 21, 1994 , the BPU approved a LGAC Stipu l a tion allowing PSE&G to recover $3.1 million of Remediation Program costs from gas customers. (See Note 12 -Commitments and Contingen t Liabilities of Notes.) All recovery of costs through PSE&G rates are subject to audit and ver ific ation b y the BPU. Consolidated Tax Benefits In a case a ff ec t ing a n ot h e r utility in whic h neither Enterprise nor PSE&G were parties, the BPU considered the extent to which tax savings generated b y nonutility affiliates included in the consolidated tax return of that utility's holding company should be considered in setting that utilit y's rat es. On Sept e mber 30, 1992 , the BPU approved an order in such case treating certain consolidated tax savings generated after June 30 , 1990 by that utilit y's nonutilit y affiliates as a reduction of its rate base. On December 3 1 , 1992 th e BPU i ss u ed an order approving a s tipulation in PSE&G's 1992 base rate proceeding whic h reso l ve d th e case wi thout separate quantification of the consolidated tax issue. The stipulation does not provide final resolution of the consolidated tax issue for any subsequent base rate filing. While Enterprise continues to account for these entities on a stand-alone basis, resulting in a r ea li za tion of the ta x benefits by the en tit y genera ting the b enefit, an ultimate unfavor ab le resolution of the conso lidated tax issue could r educe PSE&G's a nd Enterprise

's future revenue and net income. In addition, an unfavorable resolution may adversely impact Enterprise's nonutility inves tment strategy.

Ente rpri se believes that PSE&G's taxes s hould b e treated on a stand-a lone basi s for rate-making purposes , based on the sepa rate nature of the utilit y and nonutility businesses. Howe ver, neither Enterprise nor PSE&G i s able to predict what action , if any, the BPU may take concerning consolidation of tax benefits in future rate proceedings. (See Note 10 -Federal Income Taxes.) Peach Bottom Settlement In the first quarter of 1992 , Enterprise and PSE&G allocated 75% of the net proceeds of the Peach Bottom settlement to income attributab le to shareholders and deferred 25% attributable to ratepayers.

Pursuant to the base rate case settlement, such allocations were adjusted in December 1992 to an equal sharing of the benefits of the Peach Bottom settlement.

Note 3. PSE&G Nuclear Decommissioning and Amortization of Nuclear Fuel The BPU's decision in PSE&G's 1992 base rate case utilized studies based on the prompt removal/dismantlement method of sioning for all of PSE&G's nuclear generating stations.

This method consists of removing all fuel , source material and all other radioactive materials with activity levels above accepted release limits from the nuclear sites. PSE&G has an ownership interest in five nuclear units: Salem 1 and Salem 2 -42.59% each, Hope Creek -95% and Peach Bottom 2 and 3 -42.49% each. In accordance with rate orders received from the BPU, PSE&G has established an external master nuclear decommissioning trust for all of its nuclear units. The Internal Revenue Service (IRS) has ruled that payments to the trust are tax deductible. PSE&G's total estimated cost of decommissioning its share of these 5 nuclear units is estimated at $681 million in y ear-end 1990 dollars (the year that the site specific estimate was prepared), excluding contingencies.

The 1992 base rate decision provided that $15.6 million of such costs are to be collected through base rates and an additional annual amount of $7.0 million in 1993 and $14 million each year thereafter are to be recovered through PSE&G's LEAC. At December 31, 1994 and 1993, the accumulated provision for depreciation and amortization included reserves for nuclear decommissioning for PSE&G's units of $249 million and $211 million, respectively.

As of December 31 , 1994 and 1993, PSE&G has contributed

$190 million and $155 million, respectively, into external qualified and nonqualified nuclear decommissioning trust funds. Based on current regulatory requirements , PSE&G must file a decommissioning cost update by January 1, 1996 based on a specific study or upon the generic NRC guidelines.

The staff of the Securities and Exchange Commission (SEC) has questioned certain of the current accounting practices of the electric utility industry, including PSE&G, regarding the recognition , measurement and classification of decommissioning costs for nuclear generating stations in the financial statements of electric utilities.

In response to these questions, the Financial Accounting Standards Board (FASB) has agreed to review the accounting for removal costs , including decommissioning.

If current electric utility industry accounting practices for such decommissioning are changed: (1) annual provisions for decommissioning could increase , (2) the estimated cost for decommissioning could be recorded as a liability rather than as accumulated deprec i ation and (3) trust fund income from the external decommissioning trusts could be reported as investment income rather than as a reduction to decommissioning expense. Uranium Enrichment Decontamination and Decommissioning Fund In accordance with NEPA, domestic utilities that own nuclear generating stations are required to pay a cumulative total of $150 million each year (adjusted for inflation) into a decontamination and decommissioning fund, based on their past purchases of enrichment services from the United States Department of Energy P S E G 1 99 4 ANN U A L R E P O RT I 27 (DOE) Uranium Enrichment Enterprise (now a federal government corporation known as the United States Enrichment Corporation (USEC)). These amounts are being collected over a period of 15 y ears or until $2.25 billion (adjusted for inflation) has been collected. Under this legislation, PSE&G's obligation for the nuclear generating stations in which it has an interest is $66 million (adjusted for inflation).

To date, PSE&G has paid $13 million, resulting in a balance due of $53 million. PSE&G has deferred the expenditures incurred to date as part of deferred underrecovered electric energy costs and expects to recover its costs in the ne x t LEAC. PSE&G cannot predict the outcome, amount or timing of any recovery associated with this matter. In addition , as of December 31 , 1994 , PSE&G has recorded a liability of $3 million relating to low level radioactive waste costs incurred at its nuclear generating stations.

Spent Nuclear Fuel Disposal Costs In accordance with the Nuclear Waste Policy Act (NWPA), PSE&G has entered into contracts with the DOE for the disposal of spent nuclear fuel. Payments made to the DOE for disposal costs are based on nuclear generation and are included in Fuel for Electric Generation and Interchanged Power in the Statements of Income. These costs are recovered through the LEAC. Note 4. Schedule of Consolidated Capital Stock and Other Securities Curr e nt R e d e mption December 31, Out.standing Pric e Jn thousands S har e s P e r S har e E n terprise Common Stock (no p a r) -(n o t e A) -authori z ed 500 , 000 , 000 sh a r e s; is s u e d a nd o ut.standin g at Dec e mber 3 1 , 1994 , 24 4 , 69 7,93 0 s h a r es , a t Dec e mb e r 31 , 199 3, 2 43, 6 88,25 6 shar e s , a nd a t Decemb e r 3 1 , 1992 , 235 , 3 95 , 75 1 s h a r es. Enterprise Preferred Securities (not e B) PSE&G Cum u lative Preferred Securities (not e C) Without Mandator y Redemption (not es D and E) $100 par value seri e s 4.0 8% 250 , 000 $ 10 3.00 4.18% 249 , 942 10 3.00 430% 250 , 000 10 2.7 5 5.05% 250 , 000 10 3 00 5.28% 250 , 000 10 3 00 6.8 0% 2 5 0 , 000 10 2.00 692% 6 00 , 000 10 3.46 7.4 0% 500 , 000 101.00 7.52% 500 , 000 101.00 7.80% 7 50 , 000 7.7 0% 600 , 000 100.79 8.08% 150 , 000 8.16% 300 , 000 $25 par value series 6.7 5% 600 , 000 Total Pref e rr e d Stock without Mandator y R e d e mption With M a nd a tor y R e demption (n o t es D a nd F) $100 p a r va lu e se ri es 7.44% 75 0 , 000 $ 10 3.72 5.97% 7 5 0 , 000 10 2.99 1994 3,8 01 , 15 7 25 , 000 24 , 99 4 25 , 000 25 , 000 25 , 000 25 , 000 6 0 , 000 50 , 000 50 , 000 60 , 000 15,000 $ 38 4, 99 4 7 5 , 000 75 , 000 Total Pr efe r r ed S tock with Mand a to ry R e d e mpti o n (n o t e G) $ 1 5 0 , 000 Monthl y Income Preferred S e curiti es (not es F a nd G) 9 3 75% 6 , 000 , 000 2 5.00 $ 150 , 000 Total Monthly Income Preferr ed S e curiti e s $ 150 , 000 199 3 3 , 772 , 6 6 2 25 , 000 24 , 994 25 , 000 25 , 000 25 , 000 2 5 , 000 5 0 , 000 50 , 000 75 , 000 60 , 000 15 , 000 30 , 000 4 29 , 994 $ 75 , 000 7 5 , 000 $ 1 5 0 , 000 28 I P SEG 1 994 A I UAL REP O RT Notes to Schedule of Consolidated Capital Stock (A) Total autho ri zed and unissued sha res include 7,302,488 shares of Enterprise Common Stock reserved for issuance through Enterprise

's Dividend Reinvestment and S tock Purchase Plan and various emp loyee benefit pl a ns. In 199 4, 1 , 009 , 674 shares of Enterp ri se Common S t ock we r e issued a nd so ld for $28,495, 1 22; in 199 3, 8,292,505 s har es were issued and so ld for $273 , 479 , 342 , including a pub li c offering of 4,400,000 shares issued and sold for $142,670,000. (B) Enterpr i se has au th orized a class of 50 , 000 , 000 sha re s of Preferred Stock withou t par value , n one of wh ich is o utstandin g. (C) As of December 3 1 , 1994 , there were 2,300,058 shares of $100 par value and 9,400,000 sha re s of $25 par val u e Cumulative Preferred S tock which were authorized and unissued , and which upon issuance ma y or may not provide for mand atory sinking fund redemption.

If dividends upon any s h ares o f Preferred S t ock are in arrears in an amount equal t o the annual di vide nd th ereon, voti ng rights for the election of a majority of PSE&G's Board of Directors become ope rativ e and continue until all accum ul ated and unpaid dividends th ereon h ave been paid , whereupon all such voting ri ghts cease , s ubject to b ei ng again revived from tim e t o time. (D) At D ece mber 3 1 , 1 994, th e an nual dividend r e quirem e nt an d embedded divid en d for Pr e f e rr e d S t ock without mandator y redemption we r e $24 , 666 ,7 63 and 6.39%, respectively, an d for Pr efer r e d S t ock with mand a t o r y redemption were $10 , 05 7 , 500 and 6.75%, r espect i ve l y. At December 3 1 , 1 993 , th e an nu a l dividend requirement and e mbedd ed dividend for Preferred Stock wit hout mandator y redemption we r e $29,0 12 , 000 and 6.75%, tively and for Preferred Stock wi th mandatory redemp ti on were $10 , 05 7,5 00 and 6.71%, resp e ctivel y. (E) In F e bruar y 19 94, PSE&G so ld 600 , 000 s har es of i ts 6.92% Cumu l a ti ve Pr e f erred S tock ($100 Par) and 600 , 000 s har es of its 6.75% Cumu lati ve Preferred Stock ($25 par). P SE&G redeemed th e 150 , 000 shares of its outstanding 8.08% Cumulative Preferred S t ock ($100 par) on Ma rch I , 1 994 a t a redemption price of $101.00. In a dditi o n , P SE&G r edee med on March I , 199 4, a ll of th e 300 , 000 shares of its outstanding 8.16% C umul a ti ve Pr efe rred Stock ($100 par), a t a red e mpti o n price of $100.74. On D ece mb e r 16 , 1994, P SE&G redeemed all of th e outs tandin g 75 0 , 000 s h ares o f its 7.8 0% cumu lativ e preferr e d stock ($100 par), at a r e d e mption price of $!01.00. (F) Public Se rvic e E l ec tr ic and G as Cap it al , L.P. (Partn e rship) was formed for the purpose of issuing Mon thl y Inc ome Preferred Sec uriti es (M IPS). The proceeds of M IP S sales a r e l en t to PSE&G and ev id enced b y PSE&G's D e f e rr able Interest Subordinated Debentures. If and for as l ong as p ayme nts on PSE&G's Def e rr e d Interest Subordinated Debentur es ha ve b een d e f e rr ed , or P SE&G has defaulted on th e indentur e r e l a t e d th e reto or i ts g uar an t ee th e r eof, PSE&G ma y n o t pa y any dividends on its Capital Stoc k. On Nove mber 9 , 1994 , th e Partn e rship issued $6 , 000 , 000 o f its 9Ys% MIPS , Se ri es A , w ith a state d liquid atio n pr e f erence of $25 eac h. (G) For information conc e rning fai r va lu e of financial instruments, see Note 8-Financial In s trum ents and Risk Management.

Note 5. Deferred Items Prop er t y Abandonments The BP U has authorized PSE&G to recover after-tax propert y abandonment costs from its customers. The following table reflects the application of Statement of Financial Accounting Standards No. 90, " Regulated Ente r prises -Accounting for Abandonments and Disa ll owances of P l ant Costs ," as amended (SFAS 90), on propert y abandonments , and r e lated ta x effects , for w hich no return is earned. The n e t-of-ta x discount r ate us e d was between 4.443% and 7.8 01%. (See Note 2 -Rate Matters.)

The following table reflects p r operty abandonments:

In th ousands at December 3 1 , 1 994 1993 Discounted Di scoun t e d Prop e rt y Aba ndonm e nts Cost Taxes Cost Taxes A tlantic Project $70, 130 $29,453 $ 8 1 ,47 5 $34,229 L NG Project 7,287 2,635 11 ,362 4,227 U ranium Projects 10 ,8 52 4 , 677 12 , 699 5,442 $88,269 $36,765 $!05 , 536 $43,898 ' . Un der(Over )Reco vere d Electric Energy And Gas Costs -net Recoveries of electric energy and gas costs are determined b y the BPU under the LEAC and LGAC. PSE&G's d efer r ed fuel balanc es as of December 31 , 1994 and December 31 , 199 3, reflect underreco ve r ed costs as follows: In thousands Un d errecove r ed E lectri c Energy Costs Un d errecove r ed Gas Fuel Cos ts Total Un r ecovere d Plant and Regulatory Stud y Costs December 31 , 1994 $1720 .6 $172.6 1993 $35.2 26.8 $62.0 Amounts shown in the consolidated balance s heets consist of costs associated with developing , consolidating and documenting the specific de sig n basis of PSE&G's jointl y owned nuclear generating stations , as well as PSE&G's s hare of costs associated with the cancellation of the H ydroge n Water Chemistry S y stem Project at Peach Bottom. PSE&G has recei ve d both BPU and FERG approval to defer and amortize , over the remainin g life of the Salem and Hope Creek nuclear units , costs associated with configuration base li ne documentation projects. PSE&G has rece i ved FERG approval to defer and amortize over the remaining life of the applicable Peach Bottom units , costs associated with the configuration baseline documentation and the cancelled H y drogen Water Chemistr y System Projects. Whil e PSE&G expects the BP U to authorize recove ry of such costs from electric customers , no assurances can be given. Una morti ze d Debt F:xpense Gains and losses and the costs of issuing and redeeming long-term debt for PSE&G are deferred and amortized over th e life of the applicable d e bt. Oil and Gas Propert y Write-Down On December 31 , 1992 , the BPU approved the recovery of the EDC down through PSE&G's LGAC over a ten-y ea r period beginning January 1 , 1 993. At December 31 , 1994 and 1993 , the remaining ba l ance to be amortized was $4 1.2 million and $46.4 million , respecti ve l y. Note 6. Schedule of Consolidated Debt Long-Term In thous a nds Inter est R a tes Due PSE&G First and Refunding Mortgage Bonds (note A) 4%% 1 994 4%%-6% 1995 6Vs%-7Y s% 1997 6% 199 8 . 8%% 1999 6%-8 Vs% 2000-2 00 4 6.3 0%-9 Ys% 2005-2009 6.8 0%-l oY 2% 2 010-20 1 4 6.45%-8.10% 2015-2 019 7% -9Y4% 2020-2024 5.2%-6.55% 2 0 25-2029 5.45% -6.40% 2030-2 034 Medium-term No t es 7.15%-7.18% 8.10%-8.16%

Total First and Refunding Mortgage Bonds 2 0 23 2009 December 3 1 , 1994 1993 $ -$ 60, 000 3 10 , 000 310 , 000 300 , 000 3 00 , 000 100,000 I00 , 000 1 00 , 000 100 , 000 1 , 40 0 , 000 1 ,4 00 , 000 359,3 10 184 , 510 198 , 500 3 1 3,3 00 29,600 25, 000 1 , 244,500 1 ,368,5 00 179 , 955 87, 000 487,445 145,200 15 , 001 15 , 001 4 0 ,5 00 60,000 40,5 00 $4 , 824,811 $4,449 , 011 In thousands Int e r e st Rates Debenture Bonds Unsecured 6% Total Debenture Bonds Principa l Amount Outstanding (not e F) Amounts Due Within One Year (note B) Net U namorti ze d Discount Total Lon g-Term Debt or PSE&G (note G) EDHI Capital (no t e C) Sen ior No t es 9.875%-10.05%

Medium-Term No tes 7.40% 5.65% -9.55% 900% 5.79%-5.9 1% 9.00% 8.95%-9.93% 6.54% Principal Amount Outstanding (not e F) Amounts Due Within One Y ea r (n ote B) Ne t Unamortized Discount Total Long-Ter m Debt or Capital Fundin g (note D) 9.54% 9 55% 6.85%-9 59% 9.95% 7.58% Principal Amount Outstanding (note F) Amounts Du e Within One Year (n o t e B) Total Long-T e rm D e bt or Funding EGDC Mort gage N ote s 518%-7.736% 5.75% 10.6 25% -1 2.75% Principal Amount Outstanding (note F) Amounts Du e Within On e Year (note B) T o t a l Long-Term Debt of EGDC Total Long-T e rm Debt of EDHl Co n so lid ated L o n g-Te rm Debt (note E) Du e 1 998 1998 1 994 1995 1996 1997 1998 1 999 2000 199 5 19 96 199 7 1 998 1999 199 4 1998 20 1 2 D ecember 31 , 199 4 199 3 $ 18 , 195 18,195 18,195 18,195 4 , 843 , 006 4 , 467 , 2 0 6 (3 10 ,2 00) (61,700) (46 , 019) (4 1 ,069) $4,486,787

$4 , 364,437 165,000 2 0 7,5 00 50 , 000 112 , 000 112 , 000 20,000 2 0 , 000 27 , 000 27 , 000 75, 000 75 , 000 1 55,000 1 55,000 78, 000 78,0 00 632,000 724,5 00 (154,405)

(92,436) (1 , 278) (1,746) 476,317 630,318 3 5 , 000 35, 000 28,000 28, 000 55 , 000 55 , 000 83 , 000 83 , 000 45 , 000 45 , 000 246 , 000 246 , 000 (35,000) 211 , 000 246 , 000 13,638 9 , 0 50 6,686 6,806 6,686 29.494 (133) (13 , 928) 6,553 15 , 566 693 , 87 0 89 1 ,884 $5, 1 80 , 657 $5,256,32 1 (A) PSE&G's Mortgage, sec uring the Bonds, constitutes a dir ec t first mortga ge li en on substantially a ll PSE&G'S property a nd franchises.

(B) The aggregate principal amo unts of m an d a tor y r eq uir e m e nts for sink in g funds a nd maturiti e s for each or th e five yea rs following D ece mb e r 3 1 , 1 994 are as follows: In thousands S inkin g Funds Maturiti es Year PSE&G Capital PSE&G Capital EGDC Fundin g Total 1 995 $ 200 $ 42 , 5 00 $3 10 , 000 $11 2 , 000 $1 33 $ 35 , 000 $ 499,833 199 6 2 00 42 , 5 00 -2 0 , 000 1 49 28 , 000 90 , 8 4 9 199 7 3 00 42 , 500 3 00 , 000 27,0 00 1 66 55,000 424 , 966 1998 300 37,5 00 11 8,195 75, 000 1 84 83 , 000 3 1 4 , 179 1999 300 -100 , 000 155,000 2 05 45,0 00 300 , 505 $1,3 00 $165 , 000 $828,195 $389, 000 $837 $246, 000 $1 ,63 0 , 332 (C) Capita l has provid e d up to $750 m illi on d e bt financing for EDHl's busin esses on the basis of a et Worth Maint e nanc e agreeme nt wit h Enterprise. Effective Janu ary 3 1 , 1 995, Capita l will not hav e mor e than $65 0 million of d e bt outstanding at a ny o n e tim e. PSEG 1 994 A N UAL REPORT I 29 (D) Funding provides debt financing fo r ED HI's businesses othe r th a n EGDC on the basis of unconditional g u arantees from EDHI. (E) At December 3 1 , 1994 and 1 993 , th e annual int erest requirement on l o n g-t e rm d e bt was $422.7 million and $421.2 million , o f w hich $335.6 million a nd $327.5 million was the requirement for Bonds. The embedded int eres t cost on l o n g-t e rm debt on such date was 7.79% and 8.06%, respectively. (F) For information concerning fair va lu e of financial instruments, see ote 8-Financial In st rum e nts and Risk Ma n age m e nt. (G) At December 3 1 , 19 94 and 1 993 , PSE&G's annua l interest requirement on lterm debt was $343.3 milli on and $331.5 million , or wh i ch $335.6 million and $327.5 million , respectively , was the r eq uir eme nt for bonds. The e mb ed d e d int e r es t cost on l ong-t erm debt was 7.59% and 7.85%, r espec ti ve l y. Short-Term (Commercial Pap e r and Loan s) Commercial paper repr ese nts unsecured b ea rer promissory notes so ld through d ea lers at a discount with a term of nin e months or l ess. Bank l oans represent PSE&G's unsecur ed promissory not es is s u e d und e r informal credit arrangements w ith various banks and h ave a term of e l eve n months or l ess. PSE&G In mi lli o n s 1994' 1993 199 2 Prin c ipal a mount o utst a ndin g at e nd of yea r , primarily commercial paper $402 $533 $258 Weighted average interest r ate fo r Short-Term Debt at y ear-end 6.0 7% 3.34% 364% PSE&G ha s aut hori za tion from th e BP U to i ssue and ha ve outstanding not more than $1 billion of its s hort-t e rm obligations at an y one time , consisting of comme rcial paper a nd other unsecured borrowings from banks a nd other l enders. This authorizat i on exp ires Janu a r y 1 , 199 7. PSE&G has an $8 00 million r ev olving credit agreement with a group of banks which exp ir es September 14, 1995. As of Dec em b er 3 1 , 199 4, th e r e was no short-t e rm debt outstanding under this agree m e nt. Fuelco has a $150 million commercial paper program to finance a 42.49% share of Pe ach Bott om nuclear fuel, supported b y a $150 million revolving credit facility w ith a group of banks , wh ich exp ir es in Jun e 1996. PSE&G has g u aran t eed repa y ment of Fue l co's resp ec ti ve obligations.

As of December 31, 1994 , 1993 and 1992 , Fuelco had commercia l p a p e r of $93.7 million , $1 08.7 million and $122.5 million , respectively , o utstandin g und er such program , which amounts are included in the table above. EDHJ In millions 1 994 1 993 1992 Principal amount outstand i ng at end of y ear $90 $45 $134 Weighted average interest rate for S h ort-Term Debt at yea r-e nd 5.97% 347% 3.76% At December 31, 1994, Fund ing h ad a $225 million commercia l pap e r progr a m supported by a direct pa y commercial bank l e tt er of credit a nd revolving credit fac ilit y and a $225 million revolvin g cred it faci lit y, each of w hich ex pires in ovember 1995. Enterprise At each of December 31, 199 4, 1993 and 1992 , Enterp rise had a $25 million lin e of credit supported b y compensating balances under an informal a rrangement with a b a nk. At each of December 31, 1994 , 1993 and 1 992, Enterpr is e had no lin es of credit compensated for b y f ees.

30 I P SEG 1 994 AN UAL R E P O RT Note 7. Long-Term Investments Long-Term Investments are primarily those of EDHL A summary of Long-Term Investments is as follows: In million s 1 994 1 993 L ea s e A g r ee m e nts (s ee No t e 11 -L eas in g Ac ti v iti es): $ 78 9 L e v e ra ged L e as es $ 738 Dir ec t-Fin a n c in g L eases 7 6 85 Oth e r L eases 6 8 Total 8 71 83 1 P a rtn e r s hip s: Gen e r al P a rtn e r s hip s 15 7 15 2 Limited Partn e r s hips 437 433 T o tal 594 585 Joint Ventur es 37 3 5 Se curiti es 7 5 82 Va lu a tion All ow an ces (1 7) (18) Other Inv e stm e nts 6 6 11 6 Total L o ng-T e rm Inv es tm e n ts $1 , 626 $1 , 63 1 PSRC's leveraged leases are reported net of principal and interest on nonrecourse loans and unearned income , including deferred tax credits. Income and deferred tax credits are recogni z ed at a level rate of return from each lease during the periods in which the net investment is positive.

For information concerning PSRC's three direct-finance leases with Continental Airlines , see Note 12 -Commitment and Contingent Liabilities. Partnership investments are those of PSRC, EGDC and CEA and are undertaken with other investors.

PSRC is a limited partner in various partnerships and is committed to make investments from time to time, upon the request of the respective general partners.

As of December 31 , 1994, $134 million remained as PSRC's unfunded commitment subject to call. PSRC has invested in securities and limited partnerships investing in securities , which are recorded at fair value. Reali z ed investment gains and losses on the sale of investment securities are determined utilizing the specific cost identification method. (See Note 8 -Financial Instruments and Risk Management)

Note 8. Financial Instruments and Risk Management Enterprise

's operations give rise to exposure to market risks from changes in crude oil and natural gas prices , interest rates , foreign exchange rates and security prices of investments recorded at fair value. Enterprise

's policy is to use derivatives for the purpose of managing market risk consistent with its business plans and prudent practices. Enterprise does not hold or issue financial instruments for trading purposes.

The notional amounts of derivatives summarized below do not represent amounts exchanged by the parties and , thus, are not a measure of the exposure of Enterprise through its use of deriv a tives. The amounts exchanged , under the terms of the derivatives , are calculated on the basis of the not i onal amounts. Enterprise limits its exposure to credit-related losses in the event of nonperformance b y count e rparties b y limiting its counterparties to those with high credit ratings. ., .. Natural Ga s Hed gi n g EDC sold futures contracts outstanding at D e c e mber 3 1 , 199 4 which hedged 10 , 650 , 000 mmbtu representing approxim a tel y 1 3% of pat e d dom e stic n a tural gas production in 1995 at an av e rage sales price of $1.95 per mmbtu. The deferr e d unrealized gain at D e c e mb e r 3 1 , 199 4 r e lat e d to EDC's futur e s contracts w a s $2.6 million. EDC did not ha ve a n y outst a nding futures contracts at Decemb e r 3 1 , 1993. Int e r est R a t e Sw ap Capital entered into an interest rate swap on December 7 , 1990 to allow EDHI to borrow at floating rates and e ffectivel y swap them int o fi x ed rates. The interest differential to be received or paid under the interest rate swap agreement is accrued ov e r the life of the agreem e nt as a n adjustment to the interest e x pense of the related borrowing. The swap terminates on December 11 , 1995. I n th o u sands 1 994 1 993 Pa y-fi x ed sw ap No ti o n a l a m o unt $100 , 000 $100 , 000 P ay rat e 8.0% 8.0% Av e ra ge re c eiv e rat e 4.1% 3.5% Y ea r-e nd r e c e iv e ra t e 6.8% 34% Foreign &chan g e During 1994 , PSRC entered into a forward purchase contract for foreign currenc y to hedge an EDC firm purchase commitment denominated in pound sterling.

The EDC commitment related to the acquisition of Industrial Scotland Energy Limited (ISE) for appro xmatel y 21 million pounds. The realized gain of appro x imatel y $800 thousand on the forward purchase contract for foreign currenc y was used to reduce the net acquisition cost allocated to ISE's assets upon completion of the acquisition in June 1994. Currently, substantially all of Enterprise

's foreign revenues and expenses are denominated in U.S. dollars. Security Swap During 1994 , PSRC entered into two agreements to swap portions of its ownership interest in certain equity securities , held in a partnership , to the S&P 500 return. The purpose of the swap was to minimize PSRC's exposure to the potential price volatilit y of such equity securities. One agreement with a notional amount of $17.6 million expires in June 1995; the other agreement , with a notional amount of $12.9 million , expires in September 1995. The notional amount swapped and the y ear end gain during 1994 for these two agreements were as follows: F a ir Va lu e G a in In th o u sa nd s No ti o n a l a mount Yea r E nd $3 0 ,489 $ 3 , 8 01 Fair Value of Financial Instruments The estimated fair value was determined using the market quotations or values of securities with similar terms , credit ratings , remaining maturities and redemptions at the end of 1994 and 1993 , respectivel

y. '

I n m illi ons 1994 199 3 C a rr y i n g F a ir Ca r r y i n g Fair Amount V a lue Am o unt Va l u e Lon g-T e rm D e bt: E DHI $ 884,686 $ 9 00 , 000 $ 999.994 $1 , 2 00 , 000 P S E&G 4 , 843, 00 6 4 , 5 00 , 000 4,467 , 2 0 6 4,7 00 , 000 Pr efe rr e d Sec uri ti e s S u b j e c t to Mandator y R e d e mpti o n: P S E&G Cumu l ati ve Pr e ferr e d Se curi t i e s 150 , 000 1 45, 900 1 5 0 , 000 1 58, 000 Mo nthl y In co m e Pr e f e rr e d Sec urit ies 1 5 0 , 000 1 58 , 3 00 Note 9. Cash and Cash Equivalents T h e D e c e mb e r 3 1 , 1 994 a nd 1 993 b a l a n ces co n s i st p r im a ril y o f wo r k in g funds a nd hi g hl y liquid m a r ke t ab l e sec uri t i es (co mm e rci a l p a p e r) w ith a m a turit y of thr ee m o nths or l es s. Note 10. Federal Income Taxes A r e c o ncili a ti o n of r e p o rt e d Ne t In co me w ith pr e t ax inc o me a nd of Fe d e r a l inc o m e tax expe n se w ith t he a m o unt comput e d b y multi-pl y in g pr e t ax inc o m e b Y. the s t at ut o r y Fe d eral i nco m e t ax ra t es of 35% in 1 994 a nd 1 993 a nd 34% in 1 992 i s as foll ows: In t h o u sa nds 1 994 1 993 1 992 Ne t In come $ 6 7 9 , 0 33 $600 , 9 33 $50 4, 11 7 Pr e f e r r e d sec u r iti e s divi d e nd r e q uir e m e nts 4 0 ,4 67 38, 1 1 4 3 1 , 90 7 S FA S 10 9 C umu l ati ve Eff ec t (5,4 1 4) S u bt o t a l 7 1 9 ,5 00 6 33, 6 33 5 36, 0 24 F e d e ral in co m e t axes: Op era tin g in co m e: C u r r e nt pro v i s io n 1 6 2,52 1 1 5 1 ,2 0 8 1 5 1 ,5 0 9 P r o vi s i on fo r d e f e rr e d i ncome ta xe s -n e t (A) 1 73,327 1 86 , 256 9 1 , 595 In ves tm e nt t ax c r ed i ts -n e t (23,297) (23,784) (2 1 ,635) T o t a l includ e d in o p e ratin g in c om e 3 1 2,5 51 3 1 3 , 6 8 0 22 1 , 4 6 9 M i sce ll a n eo us o th er i nco m e: C urr e nt pro v i s i o n (8, 1 8 6) (14,34 0) 4,946 P rov i s i o n fo r def e rr e d in co m e ta xes (A) 10 ,4 22 9,8 1 5 1 9 ,2 6 1 S FA S 9 0 def e rr e d i n co m e t axes (A) 2, 5 3 0 2 , 9 48 2,6 90 T o t a l Fe d e ral in co m e t ax p r ov i s i o n s 317 ,3 1 7 3 1 2 , 1 03 248,366 Pr e t ax incom e $1 , 0 3 6 ,8 1 7 $9 45,73 6 $784,3 90 Reco n c ili at i on b etween t o t a l Fe d e r a l in come ta x prov i s i ons a nd t ax co mput ed a t the s t a tutor y t ax ra te o n pr e ta x in co m e: In th o u sa nd s 1 994 1 993 1 992 T ax co mput e d a t the s t a tut o r y rat e $362,887 $33 1 , 00 8 $266,693 I n c r ease (d e cr e a se) a ttribut a b l e to fl ow t hr o u g h o f ce rt a in t ax a dju s tm e n ts: D e pr e ciati o n (4,59 7) 3,347 1 9 , 33 0 A mo rti za ti o n of p l a n t a b a n donm e nts a n d w ri t e-d ow n s (2 , 0 46) (2,239) (18 , 867) Amo rti za ti on of i n ves t me nt t ax c r ed i ts (23,297) (23 , 784) (2 0 , 68 1) O th e r (1 5,63 0) 3,771 1 ,89 1 S ubt o t a l (45,57 0) (1 8 , 9 0 5) (1 8,327) T o t a l F e d e r a l in co m e t ax p rov i s i o n s $3 1 7,3 1 7 $3 1 2 , 10 3 $248 , 366 Eff e cti ve F e d e ral i ncom e t a x rat e 3 06% 33.0% 31.7% P SEG 1 99 4 A t N U AL R EPO RT I 3 1 (A) T h e p r o v i s ion for def e r r ed i n com e ta xe s repr ese n ts t h e t ax e ff e cts o f t h e fo ll ow in g it e m s: In th o u s and s 1 9 9 4 199 3 D e f e rr e d C r e d i ts: A dditi o n al t ax d e pr ec i a ti o n a nd am o rti z ati o n $1 09, 10 6 $11 2,8 1 4 L e as in g Ac t iv iti e s 60 , 1 2 9 34, 95 8 P ro p e r t y Aba n don m e n ts (6 , 6 0 6) (6 , 632) O il and G as Prop e r ty Wr i t e-D ow n (2,4 5 1) (2 ,4 5 l) D e f e rr ed fu e l cos ts -n e t 39,36 1 63,33 0 Ot h e r (1 3,2 60) (3, 000) T o t a l $1 86 , 279 $1 99, 01 9 199 2 $1 36, 0 73 56 , 0 87 (3 4,7 39) (6 ,3 9 3) (4 0 , 1 48) 2 , 666 $11 3,54 6 S inc e 1 987 , E nterpri se's F e d e ral alt e rn a ti ve minimum t a x (AM T) li a bil i t y h as ex c ee d e d its r eg ul ar F e d e r a l inc o m e t ax li a bilit y. Thi s e x cess c an b e ca rri ed fo r war d ind efin it e l y to o ff set r egu l ar in come t a x li a bilit y in f utur e yea r s. E nt e rpri se ex p e c ts t o utili ze th es e AMT cr e dits in th e futur e as r eg ul ar t ax li a bilit y excee d s AM T. As of D e c e mb e r 3 1 , 199 4 , 199 3 and 1992 , En te rpri se had AMT cr e dits of $2 56 milli o n , $247 mi ll ion a nd $2 1 2 mi ll ion , re s p e ctive l y. S in ce 1 986, E nt e rpri se h as fi l e d a c o n so lid a t ed F ede r a l inc o m e t a x r e turn on b e h a lf o f its e lf a nd i ts s ub s idi a ri es. P ri o r t o 1 986 , PSE&G fil e d co n so lid a t e d ta x r e turns .. On Ma r c h 2 0 , 1 9 9 2 , th e Int e rn a l R eve nu e Se r v i ce (IR S) i ss u e d a R eve nu e Age nt's R e port (RAR) foll ow in g c o mpl e tion o f o f P SE&G's co n s olid a t e d ta x r e turn for 1 985 a nd E nt e r p ri se's c o ns o lid a t ed t ax r e turn s for 1 986 a nd 1 98 7, pro p os in g var i ous adj u s tm e nts fo r s u c h yea rs w hich wo uld incr e ase E nt e rprise's con s olid a t e d Fed e r a l incom e ta x liabilit y b y a ppr ox im a t e ly $1 2 1 milli o n , ex clu s ive o f int e re s t a nd p e n a lti es , o f w hi c h a ppro x im a t e ly $11 8 milli o n is att r ibut a bl e t o P S E&G. Int e r es t a ft er t axes o n th e s e prop ose d a djustm e nts i s curr e ntly e stim a t e d to b e a p pro x i mate ly $9 7 m illi o n as of D e c embe r 3 1 , 1994 a nd w ill conti nu e t o ac c rue a t th e Fe d e r al r a t e for l a rg e co rp o r a t e und e r pay m e n ts , curr e ntl y 11% a nnu a ll y. T h e m os t sign ific an t of th ese p ro p osed ad ju s tm ents r e l a t es to th e IR S co n te nti on th at PSE&G's H ope C r ee k nucl ea r unit is a p a rtn e r s h i p w i t h a s h o r t 1986 t axa bl e y ear. In a dditi o n , t h e IR S co nt e nd s th a t th e tax i n-se r v i ce d a te o f t h at unit i s fo ur m o nth s lat e r th a n th e d a t e c l a im ed b y P S E&G. I n Jun e 19 92, E nterpri se and P S E&G fil e d a prot es t w i t h th e IRS di sag r ee i ng w ith ce r ta in o f the p ro pose d a d j u s tm ents (in cl ud in g th ose re l a t e d to H ope Cree k) co nt a in ed i n th e RAR fo r t axa bl e y ea r s 1 985 th ro u gh 1 98 7 a nd c o ntinu e t o co nt es t th ese i ss u es. An y t a x a dju s t me n ts r es ultin g from th e RAR wo ul d re duce E nt e r p r ise's a nd P SE&G's r es p e cti ve de f e rr e d c r e dits fo r ac cumul a t e d defe rr ed inc o m e ta x es. W hil e P SE&G b e li eves th a t assess m e n ts a ttribut a bl e t o i t a r e genera ll y r ecove r ab l e from its c u s t om e r s in ra t es , n o assu r ances can be g i ve n as to w h at r eg ul ato ry t r ea t me nt ma y be a ff o rd ed b y th e B P U. O n J a nu a r y 1 , 19 93 , E nt e rpri se ad op t e d S F AS 10 9 w ith o ut r es tatin g pri o r years' fi n a nc ia l s t a t e m e n ts w hi ch r es ult e d in E nt e r p ri se r e c o rding a $5.4 milli o n cumul a t ive e ff e ct incr ease in its n e t inc o m e. U nd e r SFAS 109 , defe r r e d ta x es a r e pr ov i ded a t th e e n acted stat u to r y ta x rat e for a ll te m por a r y d i ffer e nces b etw een t h e financ i al stat e ment ca rr y ing a m o unts a nd th e t a x b ase s o f ex i s tin g assets a nd li a biliti es i rr e spect i v e of th e tr ea tm e nt for r ate m a king p urp oses. S i nc e manag e m e nt b e li ev e s that it i s proba bl e that t h e eff e cts of SFAS 1 0 9 on P SE&G , prin c i pa ll y th e acc umul a t ed t ax be n e fi ts th a t pr ev i o u s l y h ave be e n treated as a fl ow-t h rough it em t o customers , w i ll be r ecovered fr om u t ili t y c u sto m e r s i n th e f u tur e , a n offse ttin g r eg ul a t ory asse t was es t a bli s h e d. As of D e c e mb e r 3 1 , 1 994 , P SE&G h ad r e c o rd ed a d e f e rr e d r 32 I PSEG 1 994 ANNUA L REP O RT tax liabilit y and an offsetting r eg ul atory asset of $79 1 million representing the future revenue expected to be recovered through r a tes based upon established regulator y p r actices which permit recover y of cu rr ent taxes pa ya ble. This amount was determin e d using the 199 4 Federal income ta x rate of 35%. SPAS 109 Th e followin g i s an a nal ys is of acc umulat ed d efe rred incom e t axes: Accumulated Deferred Income Taxes In thousands Assets: C urr ent (n et) No n-C urr e nt: Unrecove r e d Inv estmen t Ta x Cred its Nuclear D eco mmi ss ioning H ope Creek Cost Disallowanc e Construction P e ri od Int erest and Ta xes Vacation Pa y AM T Credit Real Estate Impairm e nt Oth e r Tot a l Non-Current Total Assets Li a biliti es: No n-Curr ent: Plant R e l a t e d It e m s L eas in g Ac ti v iti es Propert y Abandonments Oil an d Gas Propert y Write-D own Def e rr e d Electric Energ y & Ga s Costs U n a m ortized D eb t Expense Taxes R ecovera bl e Throu gh Future R ates (n et) Oth er Total on-Curren t Total Liabiliti es Summary-Accumu l ated Deferr e d I ncome T axes Ne t Curr e nt Assets et D eferred Liabilit y Total Note 11. Leasing Activities As Lessee 1 994 25 , 311 136 , 402 25 , 0 82 10 , 12 7 1 5 , 913 6,822 255,828 20 , 932 6,863 $ 477 , 969 $ 5 0 3,28 0 $2,268,688 58 0 ,4 15 26,971 1 4,925 59 ,884 37 , 599 27 0 , 684 124 , 19 3 $3 , 383,359 $3,383,359

$ 2 5 , 3 11 $2,905,390

$2 , 88 0 , 0 79 1993 $ 1 2,934 1 43, 1 25 25,211 20,231 9 , 8 1 1 6,721 246,862 27 , 173 1 4 , 845 $ 493,979 $ 506 , 913 $2 , 169 , 86 1 52 0 , 286 32,206 1 6,79 0 20 , 1 33 38 ,7 68 270,5 1 8 127,803 $3 , 196,365 $3, 1 96,365 $ 12 , 934 $2,702,386

$2 , 689 ,452 The Consolidated Balance Sheets include assets a nd related obligations ap plic a bl e to capital lea ses under which PSE&G is a lessee. The tot a l amortization of the leased assets and interest on the l ease obligations eq u a ls the net minimum le ase p ay m e nts included in r en t expense for capi tal lease . Capital l eases of PSE&G r e l a te primaril y to its corporate headqu a rters and other capital e quipment.

Certain of th e leases contain r e newal and purchase options a nd a l so contain esca lation clauses. Enterprise and its other subsidiaries are not le ssees in an y capitalized l e ases. U tilit y plant includes the following amounts for capital l eases a t December 31: In thousands 1994 1 993 Co mm o n Plant $58,6 10 $56 ,8 1 2 Less: Accumulated Amortization 4,84 0 3,708 e t Assets und er Ca pital L eases $53,77 0 $53, 10 4 Future minimum l ease payments for nonc ance l a bl e capital and operating leases at December 31, 19 94 were: In t housands 1 995 1996 19 97 1 998 1 999 Later Years Minimum Lease Payments Less: Amount representing estima t e d executo r y costs, togeth e r with any profit ther eo n, included in minimum l e ase pa y m e nts Net minimum l ease pa y ments L ess: Amount r e presenting interest Present va lu e of net minimum l ease payme n ts (A) Capital L eases $ 13 , 174 13 , 1 74 1 3 , 1 75 13 , 1 76 13,177 202,064 267 ,94 0 1 32,453 1 3 5 ,487 8 1 , 717 $ 53 ,77 0 Operating Leases $15 , 013 13 ,933 11 ,945 8,63 1 6,442 18 , 426 $74,390 (A) Reflected in th e Conso lid ated Balance Sheets for 199 4 and 1 993 were Ca pital L ease Ob li ga ti o ns o f $53.77 0 million and $53.10 4 million which includes Cap it a l Lease Obl i gations du e w ithin o n e yea r of $659 thousand and $574 th ousand , r es pectivel y. The following sch e dule shows the composition o f rent expense included in Operating Expenses:

For The Years End ed D ece mber 3 1 , In thousands 1994 199 3 1992 Int e rest on Capita l L ease Ob li ga ti o n s $ 6,156 $ 6,074 $ 6 , 1 2 9 Amortization of U tilit y Plant under Cap it al L eases 588 513 457 Net minimum l e ase pa y m e nts r e l ating to Capita l L ease s 6 , 744 6,587 6 , 586 Other Leas e payments 28 , 447 22 , 095 21 , 739 Total R e nt Expense $35 , 19 1 $28 , 682 $28,325 As Lessor PSRC's n e t investments in leveraged and direct financing leases are composed of the following e lements: D ece mb e r 31, 1 994 Direct L everaged Fina n cing In millions L eases L eases Tot a l L e ase r ents receivabl e $ 990 $92 $1 , 0 82 Es tim a t e d r es idu a l va lu e 622 1 3 635 1 , 612 10 5 1 ,7 1 7 Unea rn e d an d d e f e rred income (823) (29) (852) Total in ves tm ents 789 76 865 Deferred ta xes (333) (2 0) (353) Ne t in ves tm e nts $ 456 $ 56 $ 5 1 2 December 31, 199 3 Dir ec t L eve rag e d F in a ncing Leases L ease s Total 980 $11 4 $1 , 09 4 595 12 607 1 , 575 126 1 ,7 01 (837) (41) (878) 738 85 823 (267) (20) (287) $ 47 1 $ 65 $ 5 36 PSRC's other leases a re with various r eg ional , state a nd city a uthorities for transportation equipment and aggregated

$6 million a nd $8 million as of December 31, 199 4 a nd 199 3, respecti ve l y. For information concerning PSRC's three dir e ct-finance leases with Continental Airlines , see Note 12 -Commitments and Contingent Liabiliti es-Public Service Resources Corporation.

Note 12. Commitments and Contingent Liabilities Nuclear Performance Standard The BPU has established an NPS for nuclear generating stations owned by New Jersey electric utilities, including the five nuclear units in which PSE&G has an ownership interest:

Salem -42.59%; Hope Creek-95%; and Peach Bottom -42.49%. PSE&G operates Salem and Hope Creek, while Peach Bottom is operated by PECO. The penalty/reward under the NPS is a percentage of replacement power costs. (See table below.) The NPS provides that the penalties will be calculated to the edge of each capacit y factor range. For example, a 30% penalty applies to replacement power costs incurred in the 55% to 65% range and a 40% penalty applies to replacement power costs in the 45% to 55% range. 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% R e ward Penalty 30% None None 30% 40% 50% BP U Intervenes Under the NPS, the capacity factor is calculated annually using maximum dependable capability of the five nuclear units in which PSE&G owns an interest.

This method takes into account actual operating conditions of the units. While the NPS does not specifically have a gross negligence provision, the BPU has indicated that it 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 NPS. During 1994, the five nuclear units in which PSE&G has an ownership interest aggregated a 74% combined capacity factor. Nuclear Insurance Coverages and Assessments PSE&G's insurance coverages and maximum retrospective assessments for its nuclear operations are as follows: Type and Source of Coverages PSE&G Ma x imum In millions Public Liability:

American Nuclear Insurers Indemnit y (A) N uclear Worker Liabilit y: American Nucl e ar Insurers (C) Propert y Damage: Nuclear Mutual Limited Nuclear Electric Insurance Ltd. (NEIL II) Nuclear Electric Insurers Ltd. (NEIL Ill) Replacement Power: Nuclear Electric Insurance Ltd. (NEIL I) Total Site Assessments for Coverages a Single Incident $ 2 00.0 $ 8, 720.3 2 10.2 $8 ,9 2 0.3(B) $ 2 10.2 $ 200.0 8.2 $ 500.0 11.6 1 , 400 O(D) 8.2(E) 8500 6.7 $2,750.0 26 5 $ 3 5(F) 12.4 (A) Retrospectiv e pr e mium progr a m und e r th e Pric e-And e r so n li a bility p rovisions o f th e Atomic En e rg y Act of 1 954, as amend e d (Pric e-And e r so n). S ubj ec t to r e t ros p e cti ve asses s m e nt with r es p e ct to loss from an incid e nt at an y lic e n se d nucl ear r e actor in th e United States. Asse ss m e nt a djusted for inflation e ff e ctive Augu s t 2 0 , 1 9 9 3. (B) Limit of liability for each nuclear incident und e r Pric e-And e r s on. (C) Industry aggregate limit representing the pot e ntial liabilit y from work e r s claimin g exposure to the hazard of nuclear radiation.

This policy includ e s automatic reinstatments up to an aggregate of $200 million, thereby providing total coverage of $4 00 million. This polic y does not increase PSE&G's obligation under Pric e-Anderson.

P SEG 1994 A N U A L R E P O RT I 33 (D) Includ es up to $2 50 million for pr e m a tur e d ec ommi ss ionin g c osts. (E) In th e eve nt of a se cond indu s tr y lo ss tri gge ring N EIL!! -co ve ra ge, th e m ax imum r e tro s p ec ti ve pr e mium as sess m e nt can in c r ease to $1 7.5 milli o n. (F) W ee kl y ind e mnit y for 52 w e e ks w hi c h co mm e nc es a ft e r th e fir s t 2 1 wee ks o f a n out a ge. B ey ond th e fir s t 52 we eks o f cov e rag e, ind e mnit y of $2.8 million p er w ee k for 10 4 w e e ks is a fforded. Total co v era g e amounts to $473.2 million over thr e e y ear s. Price-Anderson 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 adjusted at least ever y five years based on the Consumer Price Inde x. The current "limit of liabilit y" is $8.9 billion. All utilities owning a nuclear reactor , including PSE&G, have provided for this e x posure through a combination of private insurance and mandatory participation in a fin a ncial protection pool as established by Price-Anderson. Under Price-Anderson , each party with an ship interest in a nuclear reactor can be assessed its share of $79.3 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 industr y to pa y claims. PSE&G's maximum aggregate assessment per incident is $210.2 million (based on PSE&G's ownership interests in Hope Creek , Peach Bottom and Salem) and its ma x imum aggregate annual assessment per incident is $26.5 million. PSE&G purchases property insurance , including decontamination expense coverage and premature decommissioning coverage, with respect to loss or damage to its nuclear facilities.

PECO has advised PSE&G that it maintains similar insurance coverage with respect to Peach Bottom. Under the terms of the various insurance agreements , PSE&G could be subject to a maximum retrospective assessment for a single incident of up to $26.5 million. Certain of the policies also provide that the insurer may suspend coverage with respect to all nuclear units on a site without notice if the Nuclear Regulatory Commission (NRC) suspends or revokes the operating license for an y unit on a site , issues a shutdown order with respect to such unit or issues a confirmatory order keeping such unit shut down. PSE&G is a member of an industry mutual insurance company, NEIL , which provides replacement power cost coverage in the event of a major accidental outage at a nuclear station. The policies provide for a weekly indemnit y pa y ment of $3.5 million for 52 weeks, subject to a 21-week waiting period. The policies provide for weekl y indemnit y payments of $2.8 million for a 104-week period be y ond the first y ear's indemnity.

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 $12.4 million. Construction and Fuel Supplies PSE&G has substantial commitments as part of its ongoing construction program which includes capital requirements for nuclear fuel. PSE&G's construction program is continuousl y r e viewed and periodicall y revi s ed as a result of changes in economic conditions , revised load forecasts , changes in the scheduled retirement dates of e x isting facilities , changes in business plans , site changes , cost escalations under construction contracts, 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. Pursuant to an integrated electric 34 I PSEG 1 99 4 ANN U A L REP O RT resource plan (IRP), PSE&G periodically reevaluates its forecasts of future customers , l oa d and peak growth, sources of e l ectric generati n g capacity and DSM to meet such projected growt h , inclu d in g the need to construct new e l ect ric generating capaci t y. The IRP takes into account assumptions concerning future demands of customers , effec ti veness of conservat i on and load management act i vities, the lon g-te rm condition of PSE&G's p l ants , capacity available from e l ectr i c utiliti es and othe r suppliers and the amounts of cogeneration and other nonutility capacity projected to be available.

Based on PSE&G's 1995-1999 construction program, construction expend itur es are ex pected to agg r egate approx im a tel y $3.2 billion, wh ich includes $484 million for nuclear f u e l and $78 million of AFDC during the yea rs 1995 through 1999. The estimate of c ons tructi on r equ ir ements i s based on expected project completion dates and includ es anticipated esca lation due to infl a tion of a ppro x im a tel y 3%, annually. Therefore , construction delays o r higher inflation l evels could cause significant increase in th ese amounts. PSE&G ex p ects to generate internall y the funds n e cessar y to satisfy its construction expenditures over th e next fiv e yea r s , ass uming a dequ a te and tim e l y recovery of costs, as to which no ass u ra nc es can be g i ven. In addition , PSE&G doe s not pr ese ntl y anticipate a n y difficulti es in obtaining sufficient so urces of fuel for electric ge n e r ation or ade qu ate gas supplies during the yea r s 1995 through 1999. Bergen Station Repowering PSE&G is pres e ntl y engaged in a construction project to renovat e (o r " repow e r") the Berg e n Station pursuant to an air pollution control permit issued b y the N JDEP in Ma y 199 3. The current effort would maintain the ex isting electric supply of th e station (w ith a small increase from 629 MW to 669 MW), impro ve operational reliabilit y and ef ficienc y and significantly improv e the environmental e ffects of operation of the facility.

In Jul y 1993 , an association of competitors of PSE&G , appealed th e N JD EP's issu a nce of the air p e rmit for the project to the Appellate Divi s ion of the New Jerse y Superior Court, alleging that PSE&G i s first required to obtain a Certificate of Nee d (Certificate) under the New Jerse y Nee d Assessment Act (NJNM). The N JDEP determined that the NJNM was inapplicable to this renovation proj e ct. The Appellate Division of New Jerse y Superior Court a ffirm e d this d e termination.

The New Jerse y Supreme Court has d en i e d certification of the p e tition for re v iew of this decision. As of December 3 1 , 1994 , the r e powering project was about 95% complete a nd PSE&G had s p e nt approximately

$29 1 million on this effo rt. The final co s t is estimated to b e approximately

$4 00 million. In order for PSE&G to r e cover its costs for th e proj ect , PSE&G would ne ed either BPU authorization to recov e r such costs in its rat es or b e ful in selling the station's output in the emerging wholesale market. Ha za rdous Waste Certain Federal a nd State law s authorize the EPA.and the N JDEP , amo n g other agencies , to issu e orders and bring enforcement a cti ons to compel re spo nsibl e parti es to take in ves ti gative and remedial ac tion s at any site that is d e t e rmin ed t o present an imminent and subs t antial d anger t o the publi c or the env i ronment because of an actua l or thr eatened release of one or more ha za rdous substances.

Because of the nature of PSE&G's business , including the production of electricity, the distribution of gas and, formerly, the manufacture r

• of gas , various b y-products and substances are or were produced or handled which contain constituents classified as hazardous. PSE&G genera ll y provides for the disposal or processing of such substances through lic ensed independent contractors.

H owever, these statutory provisions impose joint and several r es ponsibility without regard to fau lt on all responsible parties, including the generators of the ha za r dous substances , for certain investigative and remediation costs at sites where these substances were disposed of or processed. PSE&G has been notified w ith r espect to a number of such s it es and the remediation of these potent i a ll y hazardous si t es is r ece i ving greater attent i on from the government agencies in vo l ved. Generall y, actions directed at fund in g such site in vestigat i ons and remediation in clude a ll suspected or known responsible part i es. P SE&G does not expect its expe nditur es for an y such site to have a material effect on its financial position, r esu l ts of ope r a ti ons or n e t cash flows. PSE&G Manufactured Gas Plant Remediation Program In 1 988, N JDEP notifi e d PSE&G th at it had id en tifi e d th e need for PSE&G, pursuant to a formal arrangement , to systematically investigate and , if n ecessa r y, resolve environ m en t a l concerns ex t ant at PSE&G's former manufactured gas plant sites. To date , NJDEP and PSE&G have id ent ifi e d 38 former gas plant sites. PSE&G is currentl y wo rking w ith N JDEP und e r a program to assess, in vestiga te a nd , if n e c essa r y, remediat e environmental concerns at th ese sites (Re m e di atio n Program).

The Remediation Progr am i s periodically r ev i ewed and r ev is ed b y PSE&G b ase d on r eg ulator y requirements, ex p e ri e nc e with the Rem ed i a tion Program a nd available t ec hn o l og i es. The co s t of the Rem e diation Program cannot be reas o n a bl y estimated, but ex p er i e nc e to date indicates that costs of at l eas t $20 million per yea r could b e incurred over a period of more than 3 0 yea r s and th a t the overall cost could b e material to PSE&G's financi a l position , results of operations or n e t cash flows. Costs incurred throu g h December 3 1 , 1994 for the Remediation Program a mount e d to $5 1.4 million. In a ddition, at D e c embe r 31, 1994 , PSE&G's esti m a ted li a bilit y for es tim a ted r e mediation costs aggregated

$105.7 million through 199 7. In accordance with a Stipulation a pprov ed b y th e BPU in Janu a r y 1992 , PSE&G is r e c overing $32 million of its ac tual remediation costs to r e flect co sts incurr e d through September 3 0 , 199 2 over a six-year period. PSE&G will r ecove r $5.3 million in ea ch of its n ext two LGAC periods en din g in 1 996. The r eg ulator y tr ea tment of the r eme diation costs covered by this S tipul a tion was not changed in th e BPU's September 15 , 1993 written order , allowing continued collection und e r th e terms of th e Janu a r y 1992 S tipul a ti on. As of D ece mb er 3 1 , 199 4, PSE&G h as recovered

$22.2 million th roug h its LGAC. The September 199 3 decision concluded that PSE&G h ad met its burd e n of proof for es tablishing the reasonableness a nd prudence of rem e diation costs incurred in operating and decommissioning th ese facilities in the past. Th e r emed iation costs incurred during th e p e ri o d Jul y 1, 1992 through September 3 0 , 1992 we re s ubj ec t to a udit and ve rification in PSE&G's 1992-93 LGAC. The audit h as been completed and resulted in no disallowance of an y costs. (See Note 2 -Rate Matte r s -Remediation Adjus tm ent Charge). A final Board Order was received on November 4, 1994 , memorializing th e above September 15, 1993 Stipulation.

Also in 1988, PSE&G filed suit against certain of its insurers to recover the costs associated with addressing and resolving environmental issues of the Remediation Program. PSE&G has settled its claim with one insurer and there is a trial sc heduled for March 1995 with the remaining insurers.

Pending full recovery of Remediation Program costs through rates or under its insuranc e policies , neither of which can be assured , PSE&G will be required to finance the unreimbursed costs of its Remediation Program. Public Service Resourc es Corporation PSRC has leased three wide-body aircraft to Continental Airlin es (Co ntinental) through direct-finance leas es. The l eases for t wo A-300 aircraft expire December 2000, while the lease for one DC 10-30 aircraft expires June 2002. At D e cember 31, 1994 , PSRC had investments in the A-300 leases and the DC 10-30 lease of $43.0 million and $33.1 million, respectively.

Continental has failed to make full pa yme nt of its required lease pa y ments due February 1, 1995 and has advised PSRC of its intent to seek the termination of the A-300 leases and return the A-300 aircraft to PSRC. Continental also advised PSRC of its intention , effective February 1, 1995, to reduce its rental payments due under all three leases b y approximately 50%. Continental indicat e d that pa y ments under these l eases could includ e debt securities convertible into equity in li e u of full cash payments.

Under the leases, PSRC rents receivable and pre-tax lease income in 1995 would have been $9.4 million and $4.1 million, respectivel y for the A-300 aircraft and $5.5 million and $2.7 million , respectively for the DC 10-30 aircraft.

PSRC has inform e d Continental that it expects all of Continental

's lease obligations to be satisfied in full. Nego tiations are continuing concerning thi s matter. No assurances can be given that PSRC will be able to obtain new leases , sell or otherwise dispo se of any such a ircraft on satisfactory terms in the event of an unscheduled lease termination. Enterprise believes the ultimate r eso lution of this matter will not have a material effect on its financial position , results of operations or net cash flows. Note 13. Postretirement Benefits Other Than Pensions On Januar y 1 , 1993 , Enterpris e and PSE&G adopted SFAS 106 , which requir es that the expected cost of employees' postretirement he a lth care and insurance ben efits be charged to ex pens e during the years in which employees render service. P S E&G elected to amortize over 20 years of its unfunded obligation of $609.3 million at Januar y 1 , 1993. Prior to 1993 , Enterprise and PSE&G recognized postretirement health care and insurance costs in the yea r that the benefits were paid. The following table discloses the significant components of the net periodic postretirement benefit obligation:

Net Periodic Postretirement Benefit Obligation In million s , at December 3 1 , Service cost Interest on a ccumu l ated postr e tir e ment obligation Amorti z ation of transition ob li gation s Deferral of current e x pen s e Annua l net expense 199 4 ILi 45.4 30 5 (5 7 8) $ 292 1993 117 4 4.4 3 05 (58.6) $ 28.0 PSEG 1 994 A NN UAL REP O RT I 35 The di scou nt r a te used in determining the PSE&G net periodic tirement benefit cost was 7.25% and 7.5 0% for 1994 and 1993 , respectiv e l y. A one-percentage-point increase in the assumed health care cost trend rat e for each year would increase the aggregate of the service and inter es t cost components of n e t periodic postretirement health care cost b y approximately

$4.7 million , or 10.5%, and increase the accumulated postretirement benefit obligation as of Decemb e r 3 1 , 1994 by $54.4 million , or 11.3%. The assumed health care cost trend rates used in measuring the accumulated postretirement benefit obligation in 1994 were: medical costs for pr e-age sixty-five r et irees-13.5%, medical costs for age r e tir ees -9.5% and dental costs -7.5%; such rates are assu med to gradually decline to 5.5%, 5.0% and 5.0%, re s pectiv e l y, in 2010. The medical costs above include a provision for pr es cription drugs. In its 1992 base rate case , PSE&G requested full recovery of the costs associated with postretirement benefits other than pensions (OPEB) on an accrual basis , in accordance with SFAS 106. The BPU's Dec e mber 31 , 1992 base rate order provided that (1) PSE&G's pa y-as-yo u-go basis OPEB costs will continue to be included in cost of s e rvice and will be recoverable in base rate s on a pay-as-you-go basis; (2) prudentl y incurred OPEB costs , that are accounted for on an accrual basis in accordance with SFAS 106 , will be recoverable in futur e r ates; (3) PSE&G should account for th e differences betwe en its OPEB costs on an accrual basis and the p ay-as-yo u-go basis being recov e red in rates a s a regulator y asset; and ( 4) the issue of cash versus accrual accounting will be revisited and in the event that FASB or the SEC requires the use of accrual accounting for OPEB costs for ratemaking purpose s , the regulator y asset will be able , through rates , over an appropriate amortization period. Accordingly , PSE&G is accounting for the differ e nces between its SFAS 106 accrual cost and the cash cost currentl y recovered through rates as a regulatory asset. OPEB costs charged to expenses during 1994 were $29.2 million and acc rued OPEB costs deferred were $57.8 million. Th e amount of the unfund ed liabilit y , at December 31 , 1994 , as shown below, is $58 5.9 million and funding options a re currentl y being explored.

Th e primar y effect of adopting SFAS 106 on Enterprise's and PSE&G's financial reporting is on the present a tion of their financial positions with minimal effect on their results of operations.

Durin g J a nu a r y 199 3 and s ubsequent to the receipt of th e Order, the FASB's Emergi n g Issu es Task Force (E ITF) concluded that deferral of s uch costs is accep table, provided regulators allow SFAS 106 costs in rates within approximately five ye ars of the adoption of SFAS 106 for financial r e porting purposes , with any cost deferrals reco ve red in approximately twenty y ears. PSE&G intends to request the BP U for full SFAS 106 recover y in accordance with the EITF's v iew of such standard and believes that it is probable that any deferred costs will b e recovered from utility customers within such twenty-yea r time period. As of December 3 1 , 1994 , PSE&G has deferred $116.4 million of such costs.

36 I PSE G 1994 ANNUAL REP O RT ' In accordance with SFAS 106 disclosure requirements , a reconcili-Note 15. Financial Information By Business Segments ation of the funded status of the plan is as follows: In millions, December 31, 1994 1993 Information related to the segments of Enterprise's business i s Accumulated postretirement benefit obligation:

detailed below: Retirees $(379.2) $(406.4) For the Year Ended December 31, 1994 Fully eligible active plan participants (45.7) (35 0) Nonutility Other active plan participants (161.0) (215 6) In thousands Electric Gas Activities(A)

Total Total (585.9) (657.0) Operating Revenues $ 3,733, 113 $1,778,528 416,947 $ 5,928 , 588 Plan assets at fair va lu e Eliminations (lnterseg-Accumulated postretirement benefit ment Revenues) (12,745) (12,745) obligation in excess of plan assets (585.9) (6570) Total Operating Revenues 3,733, 113 1 ,77 8,528 404 , 202 5,915,843 U nr ecogn i zed net (gain)/loss from past experience different Depreciation and from that assumed and from changes in assumpt ion s (788) 19 6 Amortization 467 , 570 79,462 82,656 629,688 Unre cogni zed prior service cost Operating lncom e Unrecogn i zed transition obligation 548.3 5788 Before Incom e Taxes 1 , 083 , 155 226 , 196 172,800 1 ,4 82 , 151 Accrued postretirement obligation

$(116.4) $ (586) Capital Expenditures 734 , 100 153 , 183 16 8,741 1 , 056 , 024 The discount rate used in determining the accumulated post-December 31, 1994 retirement benefit obligation as of December 31 , 1994 was 8.50% and Ne t U tilit y Plant 9,642,177 1,456,068 11 , 098 ,245 7.25% for 1994 and 1993, respectivel

y. Oil and Gas Property , Plant & Equipment 577 , 913 577 , 913 Note 14. Pension Plan Other Corporate Assets 2 , 589 ,3 48 576,806 1 ,875, 128 5,041,282 Total Assets $12 , 231,525 $2, 032 ,874 $2,453 , 041 $16 , 7 1 7,440 The discount rates, expected long-term rates of return on assets and average compensation growth rates used in determining the Pension For th e Year Ended December 3 1 , 1 993 P l an's funded status and net pension cost as of December 31, 1994 Nonutility and 1993 were as follows: In thousands Electric Gas Activities(A)

Total 1994 1993 Operating Revenues $ 3 , 693 , 083 $1 , 594 , 341 440, 120 $ 5 , 727 , 544 Funded Status: Eliminations (lnterseg-Discount Rate Used to Determine Benefit Obligations 8Y 2% 7Y4% ment Revenues)

(21 , 985) (21 , 985) Average Compensation Growth Total Operating Revenues 3,693 , 083 1 , 594 , 341 418 , 1 35 5,705,559 to Determin e Benefit Obligations 45% 5.5% et Pension Cost: Depreciation and Discount Rate 7Y4% 7Y z% Amortization 439,83 1 69,375 91,058 600 , 264 Expected Long-Term Return on Assets 8% 8% Operating Income Average Compensation Growth 55% 6% Before Income Taxes 1, 117,739 173,916 135,472 1,427,127 Cap i ta l Expend i tures 738,362 1 52,012 94,014 984 ,388 The fo ll owing table shows the Pension Plan's funded status: December 3 1 , 1993 In thousands , at December 3 1 , 1994 1993 et Uti lit y Plant 9 ,4 51,581 1 ,3 52,799 10 ,8 0 4,380 Actuarial present va lu e of benefit obligat i ons: Oil and Gas Property , Accumulated benefit obligations , Plant & Equipment 506 , 047 506,047 including vested benefits of $1 , 151 , 677 Other Corporate Assets 2 , 313,394 866 , 524 1 , 839 , 3 11 5,019,229 in 199 4 and $1, 04 5, 0 35 in 19 93 $(1,235,930)

$(1,144,214)

Total Assets $11,764,975

$2,219,323

$2,345 , 358 $1 6 , 329,656 Effect of projected future compensation (261,846)

(346 , 416) Projected benefit obi ig at ions (1,497,776)

(1,490,630)

For the Year Ended December 3 1 , 1992 Plan assets at fair value, primarily li sted equ it y and Nonutility debt securities 1 , 2 7 0 , 116 1 ,3 12 , 619 In thousands Electric Gas Activ i ties(A) Total Pro j ected benefit ob l igations in excess of plan assets (227 , 660) (178,011)

Operating Revenues $ 3,407,819

$1 ,586, 1 81 $ 407,404 $ 5 , 401 , 404 U nrecogni zed net gain (loss) from past exper ienc e and Eliminations (lnterseg-effects of changes in assumptions 32,815 (20,98 1) ment Revenues)

(44,623) (44,623) Prior service cost not ye t recognized in net pension cost 119,783 113 , 397 Total Operating Revenues 3,4 0 7,8 19 1 , 586 , 181 362,781 5 , 356,781 Unrecognized net obligations being recogni ze d over 16.7 years 69,387 77,486 Depreciation and Accrued pension expense $ (5,675) (8,109) Amortization Operating Income 435 , 104 116 , 907 90 , 537 642,548 The net pension cost for the years ending December 31, 1994 , 1993 Before Income Ta xes 861 , 066 124 , 893 206 , 783 1,192 , 742 and 1992 , include the fo ll owing components:

Capital Expenditures 668 , 537 158 , 224 61 , 0 48 887,809 In thousands 199 4 1993 1992 December 3 1 , 1992 Serv i ce cost-benefits ea rn ed during yea r $ 42 , 904 $ 42,948 $ 36, 125 Net U tility Plant 9,224,543 1,246,769 10,471 ,3 12 Interest cost on.project ed benefit obligations 108 , 394 103,118 94 , 233 Oil and Gas Property , Return on assets 5,022 (166 , 916) (62 ,3 23) Plant & Equipment 506,814 506 , 814 Net amortization and deferral (90 ,7 52) 90 ,958 (14,035) Other Corporate Assets 1 , 3 15 , 564 486,981 1 ,997,061 3,799,606 Total $ 65,568 $ 7 0 , 108 $ 54 , 000 Total Assets $10 ,540,107 $1 , 733,750 $2,503,875

$14,777,732 See Note 1 -Organization and Summary of Significant (A) The Nonutility Activities include amounts applicab le to Enterprise , the parent corporation.

Accounting Policies.

o t e 15 (con tinu e d) Inform a tion related to Property , Pl a nt a nd Equipment of PSE&G i s detailed below: In thousands, December 1 994 1993 199 2 U tilit y Plant-Original Cost Electric Plant in Service S t eam Production

$ 1 ,81 0 ,674 $ 1 ,763,253 $ 1 ,668, 19 8 Nuc l ea r Production 5 , 931,049 5,873,274 5,819,755 Transmissi on 1,078,928 1 , 034,150 1,024 ,84 3 Distribution 2,877,862 2,724,2 02 2,573,226 Other 647,406 526,015 479,647 Tota l Electric Plant in Se r vice 12,345,919 11 , 920 , 894 11 ,5 65 , 669 Gas P l an t in Serv ic e Transmission 62,213 63 , 395 57,405 Distribution 2,131,816 1 , 993 , 044 1 ,87 0 ,462 Other 124,204 121,402 117 , 0 77 Total Gas Plant in Service 2 , 318,233 2 ,177, 841 2, 044 , 944 Common Plant in Service Capital Leases 58 , 610 56,812 56 ,8 12 General 486,521 463,473 423, 1 60 T ota l Common Plant in Serv ice 545 , 1 3 1 520,285 479,972 Total $15,2 09 ,283 $14,6 1 9, 0 2 0 $14, 090 ,585 Note 17. Jointly-Owned Facilities

-Utility Plant PSEG 1 994 ANNUAL REPORT I 37 Note 16. Property Impairment of Enterprise Group Development Corporation As a r es ult of a man ageme nt review of ea ch property's curr e nt value and the potential for increasing s u ch va lu e through operating an d other improvements , EGDC recorded an impairment in 199 3 r e l ate d to cert a in of its properti es, including prop ert i es upon w hich EDHI's m anageme nt re v is e d its int en t from a lonterm in ves tment strategy to a hold for sale s t a tus , reflectin g s uch properties on its books at their n e t realizable va lu e. This imp airment r e duc e d the est im ated value of EGDC's properties b y $77.6 milli o n a nd 19 93 n e t in co m e b y $50.5 million , after t ax, or 2 1 cents per s h are of Enterprise Common Stock. EG DC's real estate h e ld for sa l e of $1 3.5 million and $33.8 million at December 31, 1994 a nd 1993 are pr ese nt e d in " Oth e r Assets -net ," respecti ve l y, in th e acco mpan y in g c onso lidated bal a nc e sheets. PSE&G has ow nership int e r ests in and is respon s ible for providing its share of th e necessary fin ancing fo r th e following j o intl y owned facilities.

All amounts reflect the share of PSE&G's jointl y owned projects a nd the corresponding direct expenses a re included in Consolidated Statements of Income as operating expenses. (See Note 1 -Organi za tion a nd Summary of Significant Accounting Policies.) I n thousands Ownership Plant Accumu l a ted P l ant Un d e r Plant-December 31, 1994 Interest In Service Depreciation Construction Coal Generating Conemaugh 22.50% $1 76,463 $ 35, 04 4 $ 16,150 Keystone 22.84 111 ,3 60 3 0 , 935 2,6 15 Nu cl ear Generating Peach Bottom 42.49 729 , 317 286, 565 28,239 Sa l em 42.59 1,021 , 588 358,492 39,55 0 Hop e Creek 95.00 4,12 0 , 538 938,53 5 5 , 10 4 N uclear Support Facilities Various 158,400 28,211 6,342 Pump ed Storage Generating Yards C r eek 50.00 23,645 8,721 2,886 Transm i ss i on Facilities Vario us 120 ,274 34,720 9 Mer rill Creek Reservoir 1 3.9 1 37,184 10 ,4 92 Lind e n Gas Plant 90.00 15 ,872 18,532 Note 18. Selected Quarterly Data (Unaudited)

The information show n below , in the o pinion of Enterprise , includ es a ll adjustments , consisting only of n o rm a l recurring ac cruals , necessary to a fair presentation of s uch a mounts. Du e to th e seasonal natur e of the utilit y busin ess, quarterly a m o unts vary significantly during th e yea r. Ca l endar Qua rt e r Ended March 3 1 , J une 30, September 30 , Decemb e r 31, In thousands whe r e app licabl e 1994 1993 1994 1993 1994 1993 1994 1993 Operating Revenues $1,794,425

$1 , 594,708 $1 ,278,363 $1 ,246,337 $1 ,374,976 $1,4 0 2,037 $1 ,468, 079 $1 ,462,477 Operating Incom e $ 348,948 $ 336,5 05 $ 252,725 $ 248 , 658 $ 3 11 ,92 0 $ 3 1 8,785 $ 25 0 ,5 00 $ 202,899 Net Income $ 230,127 $ 215,4 18 $ 129 ,88 5 $ 11 9,782 $ 1 87,178 $ 19 2,231 $ 131,843 $ 73, 502 Earnings P e r Share of Commo n Stock $ 0.94 $ 0.91 $ 0.53 $ 0.49 $ 0.76 $ 0.79 $ 0.54 $ 0.3 0 Average Shares of Common S tock Outstandin g 243 ,777 236,9 19 244,698 24 0 ,92 0 244 , 698 241,889 244,698 242,848

,.., 3s I P SEG 1 994 AN U A L REP O RT 'y

• Con s olidated Fin a ncial St a ti s tic s <A) Dollars in thousands where applicabl e 199 4 1993 199 2 1991 19 9 0 Selected Income Information Operating R even u es Electric $ 3,733,113

$ 3,693,083

$ 3,407 , 819 $ 3,519,806

$ 3,380,742 Gas 1 ,778,528 1,594,341 1 , 586,181 1 ,3 0 7,849 1 ,236,747 Nonu ti lit y Activities 404,202 418,135 362,781 283,766 230,075 Total Operating R evenues $ 5,915,843

$ 5,705,559

$ 5,356 ,7 81 $ 5 , 111 , 421 $ 4 , 847 , 564 Net Income $ 679 , 033 $ 600 , 933 $ 504 , 11 7 $ 543 , 035 $ 403,663 Earnings per average share of Common Stock $2.78 $2.50 $2.17 $2.43 $1.90 Dividends Paid per Share $2.16 $2.16 $2.16 $2.13 $2.09 Payout Ratio 78% 86% 100% 88% 110% Rate o f Return on Ave r age Common Equity (B) 1 2.94% 11.91% 10.69% 12.24% 9.66% Ratio of Earnings t o Fixed C h arges 2.76 2.59 2.30 2.5 4 2.09 Book Value per Common Share (C) $21.7 0 $2 1.07 $2 0.32 $2 0.0 4 $19.44 Gross Utility Plant $16 ,566, 05 8 $15 ,8 61 , 484 $15 , 081 , 907 $14,426 , 560 $12,836 , 874 Accumulated Depr e ci a tion and Amortization of U tilit y Plant $ 5,467,813

$ 5 , 05 7, 10 4 $ 4 , 610 , 595 $ 4 , 243 , 979 $ 3,963 , 093 Total Assets $16,717,440

$16 , 329,656 $14 , 777,732 $14,8 0 4 , 354 $13 ,7 1 3,248 Consolidated Capitalization Common Stock $ 3,801 , 15 7 $ 3,772,662

$ 3,499,183

$ 3 , 262, 1 38 $ 3,043,402 Ret a in e d Earnings 1 , 5 10 , 010 1 , 361 , 018 1 , 282 ,93 1 1 , 282 , 029 1 , 203 ,77 2 Common Equit y 5 ,3 11 , 16 7 5,133 , 680 4,782,114 4,544, 16 7 4,247,174 Long-Te rm Debt 5,180 , 657 5 , 256 , 321 4 , 977 , 579 5 , 12 8 , 373 4 , 668,024 Preferred Stock without Mandatory Red e mption 384,994 429,994 429,994 429 , 994 429,994 Preferred Stock with Mandatory Red e mption 150 , 000 150 , 000 75 , 000 Month l y Income P r efer r ed Securities 150 , 000 Total Cap it a li zation $11 , 1 76,8 18 $10 , 969 , 995 $10 , 264 , 687 $10 , 102 , 534 $ 9,345 , 19 2 (A) See Management

's Discus s i o n and Ana l y sis of Financial Cond ition and Re s u l ts of Op e ration s a nd No t es to Conso l idated Financi a l Stateme n ts. (B) et Incom e for a tw e lve-month period divid ed b y the thirt ee n-month average of Common Equity. (C) Total Common Equit y di v ided b y end-of-period Common Shares outs t anding.

' . , , I 39 ,,. P SEG 1 994 ANN UAL REP O RT Operating Statistics Public Service E l ectric and Gas Company Dollars in thousands where applicable 1994 1993 1992 1991 1990 Electric Revenues from Sales of Electricit y Residential

$1, 1 87, 10 3 $1 , 1 75 , 875 $1 , 0 37, 099 $1 , 116 ,6 99 $1 , 0 38 , 906 Commerc i al 1,734,901 1 , 678 , 011 1,554,956 1 ,57 5 , 547 1 , 516 ,7 55 Industrial 693,535 710 , 2 0 6 683,75 0 728 , 4 11 697 , 571 Pub li c S tr eet Lighting 52,353 51,019 47,729 46,400 45,4 1 8 Total Revenues from Sales to Cus t omers 3,667,892 3,6 15 , 111 3 , 323 , 534 5 , 467 , 057 3,298,65 0 Interdepartmental 1 ,71 0 1 ,7 37 1 , 544 1 ,59 9 1 , 652 Non-Jurisdict i onal Sa l es 35,223 48,625 51,3 1 3 19,763 48,325 Total Revenues from Sa l es of Electricit y 3,704,825 3,665,4 7 3 3,376,391 3,488,419 3,348,627 Other Electric R even ues 28,288 27,610 3 1 ,428 3 1 ,387 32, 115 To t a l Operating Revenues $3,733, 11 3 $3;693 , 0 83 $3,4 0 7 , 8 19 $3 , 519 , 806 $3,38 0 , 742 Sales of Electricity

-megawa tth ours Reside ntial 10 ,594, 134 10 , 63 1 , 4 0 2 9,816, 0 46 10 , 5 05 , 547 9,875, 56 9 Co mm e rcial 1 8,466,863 1 8 , 096 ,3 12 1 7,454,352 1 7,59 6 , 569 17,054,495 Industrial 9 , 249 , 233 9 ,2 03 , 839 9 , 298 ,7 4 1 9 , 406, 109 9 , 457 , 985 Public S tr ee t Li g htin g 334,726 329 , 828 325,545 32 0 , 900 3 1 4,936 Total Sales to C ust omers 38,644,956 38,261,38 1 36,894,684 37,829,125 36,7 02 ,985 Int er d epa rtm e nt a l 1 7,755 1 8,514 19 , 012 19 ,719 19,822 Non-J uri s dicti ona l Sales 1 , 32 0 , 170 2 , 245 , 884 2, 116 , 049 1 , 858, 590 1 , 625 , 01 6 Tota l Sa l es of Electricit y 39,982,88 1 40 , 525 ,77 9 39, 0 29,745 39 , 7 0 7 , 434 38 ,347, 823 Gas Revenues from Sa l es of Gas Residential

$ 889 , 541 $ 78 0 ,195 $ 8 09 , 559 $ 699,696 $ 667 , 0 77 Commercial 510 , 829 460,340 481 , 960 426, 110 4 06 , 577 Industrial 312,4 05 299,762 243 , 527 138,394 13 0 ,273 Street Lighting 49 1 467 468 468 385 Tota l Revenues from Sales to Customers 1,7 1 3,266 1 , 540 , 764 1 , 535 , 514 1 , 264 , 668 1 , 204,3 1 2 Interdepartmental 3 , 976 3 , 078 2 ,572 2 , 689 2 , 15 7 Total R eve nues from Sales of Gas 1,71 7,242 1 , 543,842 1,538 , 086 1 ,267,357 1 ,2 06 ,4 69 Transporta ti on Serv i ce R evenues 35 , 05 7 37 , 0 8 1 34,739 27 , 0 36 15 , 654 Ot h er Gas Revenues 26,229 13,418 13 , 356 1 3,456 1 4 , 624 Total Operating Revenues $1,778,528

$1 , 594 , 34 1 $1,586,181

$1,307,849

$1 ,236 , 747 Sales of Gas -kilotherm s Residentia l 1,337 , 267 1,28 0 , 1 28 1 , 265,270 1 ,14 0 , 887 1 , 09 7 , 03 4 Commerc i a l 945,95 0 943,054 939, 0 2 1 893,069 837,65 0 Industrial 912 , 689 876 , 421 739,5 08 399,385 34 1 , 467 Street Lighting 668 666 668 666 657 Total Sales to Customers 3 , 196 , 574 3,1 00,269 2,944,467 2 , 434,007 2 , 276,808 Interdepartmenta l 9 , 316 7,5 09 5 , 967 6 , 1 74 5 , 1 44 To t a l Sales of Gas 3 , 2 05 , 89 0 3, 107 , 778 2,95 0 , 434 2,44 0,1 8 1 2,281,952 Transportation Service 544,539 557 , 403 543,097 381,497 182 , 05 6 Tota l Gas Sold and Transported 3,750 , 429 3,665, 1 81 3,493,53 1 2,821,678 2 ,4 64,008

• 40 I PSEG 1994 A UAL REPORT ' Officers and Directors Public Service Direc t ors E. J a m e s F e rland Irwin Lerner James C. Pitn ey Enterprise Group Chairman of the Board , President Retired Chairman, Board of Partner in the law firm of Incorporated Lawrence R. Cod ey and Ch i ef Executive Officer of Di r ecto r s and Executive Committee, Pitney, Ha r d i n, Kipp & Szuch. Pres i dent and Chief Operating the Corporation.

Hoffmann-La Roche, Inc. Chairman of Finance Committee , Officers Office r , PSE&G. Chairman of Executive (manufactures pharmaceuticals, Member of Audit Committee , Member of Executive Commiltee Committee.

vitamins and fine chemicals, and Nominating Committee and E. James F e rl a nd and Finance Committee.

Ra y mond V. Gilmartin provides home health care and Organization and Compensation Chai r man of the Board , President diagnostic products and se r vices). Committee. and Chief Executive Officer E rn es t H. Dr ew Chairman of the Board, President Chairman of Nominating Member, Board of Management, and Chief Executive Officer, Merck Committee, Member of Audit Ri c h ard J. Swift R o b er t C. Murra y H oec h st AG (manufactures

& Co., Inc. (d i scovers, deve l ops, Committee , Nuclear Committee Cha i rman o f th e Boa r d and C hi ef Vice President and Chief Financial pharmaceuticals, chemicals, fibers, produces and markets human and Organization and Executive Officer , Foster Whee l er Officer film , specialties and advanced and animal hea lt h products).

Compensation Committee. Corpora ti on (provides des i gn, Patricia A. R ado materials).

Member of Finance Committee , engineering, con truction , Member of Audit Commillee , Nuclear Committee and Maril y n M. Pfalt z manufac t uri n g, manage m ent, p l ant Vice P r esident and Cont r oller Finance Committee and Organization and Compensation Partner of P and R Associates operations and environmental R. Edwin Selover Nominating Committee.

Committee. (communicat i on spec i al i s t s). se r v i ces). V i ce P r esident and Gene r al Counsel T.J. Dermot Dunph y Shirle y A. Jackson Member of Audit Committee, Member of Audit Committee , Nominating Commiltee and Finance Committee and Nuclear Francis].

Ri ep l Pres i de n t, Chief Execu ti ve Officer P rofesso r of Physics, Ru t gers Organization and Compensation Committee.

Treasurer and director , Sealed Air University, and Theoretical Committee.

Rob ert S. Smit h Corporation (manufactures Physics Cons ult an t , AT&T Be ll Jo s h S. Weston protective packaging products L aborato r ies. C h a i rman of t he Board and Chief Secretary a n d systems).

C h air of Nuclear Committee, Execu ti ve O ffi ce r , A u tomat i c Da t a Chairman of Audit Committee , Member of Audit Committee , Processing, Inc. Member of Executive Committee Finance Committee and Chairman of Organization and and Organization and Nominating Committee.

Compensation Committee , Compensation Committee.

Member of Executive Committee and F inance Committee.

Public Service Electric Leon R. Eliaso n Francis E. Delan y, Jr. John H. Maddocks D i r e ct o r s and Gas Company C h ief Nuclea r Officer and Vice President and Corporate Ra t e V i ce Pres i dent-Pub li c Affa ir s P r es i dent -Nuclea r Bus i ness Un i t Counsel Martin P. Mellett E. Jame s Ferland Off ice r s Robert C. Murra y John A. Gartman V i ce Pr es id e nt -Hum an R eso ur ces Lawrenc e R. Co d ey E. J a me s Ferland Senior Vice Pres i dent -Finance Vice P r esident -Gas Supply and Ra y mond V. Gilmartin a n d Chief Financ i al Off i cer Pla n ning Ja gru ti Oz a Shirle y A. J ac k so n Cha i rman of the B oard a nd C h ief Vice Pres i den t -Corpora t e P lanning Irwin L e rn er Executive Officer R. Edwin Selo v er C urti s W. Gre v e nit z J a m e s C. Pitn ey Sen i o r V i ce P resident and General V i ce Pres i de nt -O r gan i zat i o n Patri c ia A. R a do L aw r e nce R. Co d e y Counse l Effectiveness Vice President and Contro ll er P r es i den t and Chief Ope r ating Officer Rudolph D. Stys Jo sep h]. Hagan Franci s]. Ri e pl Vice President and Treasurer Harold W. Borden , Jr. Senior Vice President

-Gas Vice President

-Nuclear Operations Senior Vice President

-External William].

Budn e y, J r. Stanle y LaBruna Gl e nn M. Ro ge rs Affa i rs V i ce P r es i de nt -D i str i bution V i ce P r esident -Nuclear Vice President

-I nfo r mation Thomas M. Crimmins, Jr. Sys t e m s Enginee rin g Sys t e m s a nd Co rp ora t e Se r v i ces Se ni o r V i ce Preside nt-Cus t o m er Frank Cassidy Pi e rr e R.H. Landrieu Robert S. Smith Ope r a ti ons Vice President

-Transmission Vice President

-Fossil Production Vice Pr es i dent and Secre t ary Robert]. Dou g h er t y, Jr. Systems Frederick W. Lark Senior Vice President

-Electric Vice Presiden t -Marketing Enterprise Diversified P a ul T. Brad s h aw Dir ec t o r s Presidents of P a ul H. Wa y Holdings Incorporated Vice President and General Counsel Subsidiary Companies Enterprise Group Development Michael L. Gallup Ernest H. Dr ew Corporation Offi ce r s Vice President

-Busi n ess T.J. D er mot Dunph y Arthur S. i s lick Eileen A. Moran E. James Ferland Deve l o p me nt E. Jame s Ferland Co m munity E n e r gy A lt erna ti ves Pu b li c Se r vice Resources Marilyn M. Pfalt z I ncorporated Corporation Chairman of the Board and Chief M a d e l e ine W. Ludlo w Richard J. Swift Execu ti ve Officer Vice Preside n t and Treasu r er P aul H. Wa y Malcolm Butler Paul H. Wa y J o hn W. N abial Jo s h S. W es ton Energy Development Corporation President and Vice Pres i dent and Controller Chief Operating Officer Corporate and Stock Information Stock Exchange Listings New York (Enterprise common and PSE&G preferred)

Philadelphia (Enterprise common) Trading Symbo l: PEG Annual Meeting Please note that the Annual Meeting of Stockholders of Public Service Enterprise Group Incorporated will be held at Newark Symphony Hall, 1020 Broad Street , Newark , NJ , on Tuesda y, April 18, 1995 at 2 p.m. Stockholder Services Stockholder inquiries about stock transfer , dividends, dividend r einvestmen t , direct deposit, missing or lost certificates , ch a nge of address notification and other account information should be directed to: Stockholder Services Department, Pub lic Se r v ic e Electric & Gas Compan y, P.O. Box 1171 , Newark , NJ 07101-1171.

Please include your account number or social securit y number. Stockholders can also phone our toll-free number 1-800-2 42-0813 , Monday through Friday, with questions about stock transfer and registration , shares held in the Dividend Reinvestment and Stock Purchase Plan and our other stockholder se rvic es. Hours a r e: 10 a.m. t o noon and 1:30 p.m. to 3:30 p.m. Eas t ern time. The telephone number for the hearing impaired wit h special equipment is TDD 1-800-732-3241.

Please have your account number or social securit y number read y when y ou cal I. Transfer Agents The transfer agents for the common and preferred stocks are: Stockholder Services Department , Public Service Electric and Gas Company P.O. Box 1171 ewark , NJ 07101-1171 First Chicago Trust Compan y of ew York P.O. Box 2506 Jerse y Cit y, J 0 7 303-2506 Dividend Reinvestment Plan Enterprise offers a Dividend Reinvestment and Stock Purchase Plan under which a ll common and PSE&G preferred stockholders may reinvest dividends and/or make direct cash payments to acquire Enterprise common stock. Purchases of common s t ock are made for the Plan directl y from Enterprise , at its sole discretion , and/or in the open market. All brokerage and other fees are absorbed b y Enterpris e. To participate , call 1-800-242-0813 for a prospectus and authorization form. D esign: A rn o ld Saks Associates Major P ho t ogra p hy: Michael Me l ford P SEG 1 99 4 ANN UAL R E P O RT I 4 1 Dividends Dividends on the common stock of Enterprise , as declared by the Board of Directors , are generall y pa y able on the last business da y of March, June , September and December of each year. Regular quarterly dividends on PSE&G's preferred stock are payab l e on the last business day of March , June, Sep t em b er and December of each yea r. Direct Deposit of Dividends o more dividend checks delayed in the mail. No waiting in bank lines. Your quarterly common and preferred stock dividend pa y ments can be deposited electronica ll y to your persona l checking or savings account. To use this free service , call us at 1-8 00-2 42-0813. Security Analysts and Institutional Investors For information contact: Director -Investor R ela tion s (201) 430-6564 Available Publications Form 10-K: A cop y of Enterprise

's 1994 Annual Report to the Securities and Exchange Commission , filed on Form 10-K, ma y be obtained b y contacting:

Director-Investor Relations Public Service Electric and Gas Company T6B P.O. Box 570 Newa rk , N J 07101 Te l ephone (201) 430-6 503 The copy so provided wi ll be wi th o ut exhibits. Exhibits may be purchased for a specified fee. Financial and Statistical Review: A comprehensive statistical report containing historical financial and operating data ma y also be obtained from the Director -Investor Relations.

CEA and EDC Annua l Reports: Copies may be obta in ed from the Director -Investors Relations after June 1 , 1995. Environmental Progress Report: A cop y of PSE&G's 1995 Environm e ntal Progress Report ma y be obtained b y contacting

General Manager-Env ironm ental Affairs Public Ser v ic e Electric and Ga s Compan y Tl 7 G P.O. Box 570 Newark , J 07101 Common

-Market Price and Dividends Per Share 199 4 199 3 High Low Div. High Low Div. Fir s t Quart e r 32 $.54 34!4 3 0 $.5 4 Se c o nd Qu a rt e r 25 .54 3 5 3 1% .5 4 Third Q u a r ter 28% 23 iil .54 36)( 34 .54 F o urth Qu a rt e r 27!.i 25 .54 3 5 X 3 0 .54 .. The number of ho ld ers of record of Public Service Enterprise Group Incorporated common shares as of December 31 , 1994 was 185,941.

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