ML20239A025

Pnc Financial Corp Rept to Shareholders Second Quarter 870630

ML20239A025
Person / Time
Site:	Beaver Valley
Issue date:	06/30/1987
From:	Obrien T PNC FINANCIAL CORP.
To:
Shared Package
ML20239A003	List: ML20239A002 ML20239A004 ML20239A006 ML20239A009 ML20239A011 ML20239A018 ML20239A025 ML20239A121 ML20239A129 ML20239A135
References
NUDOCS 8709170028
Download: ML20239A025 (136)

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i Financial Highlights __.

PNC FINANCIAL CORP AND SUBSIDIARIES Percenlage lucreau 1987 1986

( Decretue) in thousands, except per share data i

Three Months EndedJune 30 Net interest income (taxable equivalent basis)

$ 226,091

$ 214,763 5%

Net income 17,610 80,539 (78)

Earnings per common share:

Primarv'

.24 1.26 (81)

Fully diluted *

.24 1.18 (80)

Six Months EndedJune 30 Net interest income (taxable equivalent basis)

$ 448,399

$ 424.098 6%

Net income 98,495 144,798 (32)

Earnings per common share:

Pnman

• 1.43 2.27 (37)

Fully diluted' l.38 2.13 (35) cIlJune10 Total assets

$28,193,042

$24.278,927 16 %

Loans, net of uneamed income 16,048,738 13,760.686 17 Deposits 17,389,671 15.597,127 11 Shareholders' equity 1,773,417 1,527,013 16 Shareholders' equity per common share 25.35 23.06 10 Selected Ratios Return on aserage assets'

.97 5 1.24 %

Return on aserage shareholders' equit>

• 14.60 19.15 Period end primary capital ratio 7.81 7.50 Period-end total capital ratio 9.00 8.96 Nonperforming loans to period end loans 2.21 1.29 Allowance for credit losses to period end loans 2.41 1.73 Market Information-Common Stock 1987 i986 Last Sale Cash Dit'idends Last Sale Cash Dwtdends Price Range Declared Pnce Range Declared High Low High Low First quarter

$49%

$41%

$.38

$46%

$35%

$.33 Second quarter 49%

43 %

.42 45%

41 %

.38 Third quarter 50 %

42

.38 Fourth quarter 44 %

41

.38 Total

$.80

$ 1.47

• Includn the after tax r]fect u) addntwnal provuwru for c>rdnt losses and geuru recognued on the 1986 sale of a mortgage bankmg subudaars The net efect of thew ugmfuant and unsanal tramtalwru on earnung' per common shortfor the second quarter andftnt sa months of 1987 uns a decreast of $ 89 on a pnmary brua and S S1 on a fulh dduted bruu. for the wrond quarter andJmt m months of I986. rarmngs per common shart mcreturd $ 18 on a pnmary basu arui $ 16 on a fulls ddured bruu The net efnt of thne uen>ficant and unusual traratutwns on virrted ratws for the furst ux months of I987 was a decrease m return on average aurts of 22% vnd a draraw an return on average shareholder'rqants of 136% for sheftrst stx months of 1986 the return on awrage aurts snarawd b, 05%, and return on sn evage shareholder ' egmtv unorturd 78%

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B Our Shareholders arnings for the second quarter totaled $17.6 million after increasing our provision for loan loss reserves by $110 million. This increase in the provision reduced earnings by $66 million, or 92 cents per fully j

diluted share. Last year's second quarter camings were $80.5 million. For the second quarter of this

/

.. tear, earnings per common share on a fully diluted basis were 24 cents, compared with $1.18 in the j

j second quarter of 1986. The loan loss reserve was increased because of recent events regarding bank loans in the i

developing world. We expect normal earnings for the second half of the year.

J Earnings for the first six months of 1987 were $98.5 million, resuhing in fully diluted earnings per share of $1.38. That compared with $144.8 million, or fully diluted earnings per share of $2.13, in the first six months of 1986.

Return on assets for the first half of 1987 was.97 percent, compared with 1.24 percent for the first half of 1986. Return on equity for the first six months of this year was 14.60 percent, cornpared with 19.15 percent for the first six months oflast year. Excluding significant and unusual transactions in both periods, return on assets would hase been 1.19 percent in 1987, the same as in 1986, and retum on equity would have been 17.96 percent, compared with 18.37 percent a year ago.

. Dividend increased On May 21, the board approved an increase of 4 cents a share, or 10.5 percent, in j

the quarterly cash dividend on our common stock. The new dividend is 42 cents, equivalent to an annual payout j

rate of $1.68. It was paid on July 1, to shareholders of record at the close of business onJune 5.

l

. Shareholders Meeting For the first time, PNC held its annual shareholders meeting in Philadelphia on

]

Apnl 28. Shareholders elected 30 directors, approved amendments to the by-laws to limit the liability of directors

)

and to effect changes in the corporation's indemnification provisions.

1 Northeastern Bank Signs Merger Agreement OnJune 4, Northeastern Bank and the First National Bank of Avoca signed a definitive agreement for First National to be merged into Northeastern. Under the terms of the agreement, each share of First National's common stock will be exchanged for 248 shares of PNC Financial com-mon stock. Based on the closing price of our stock on the day prior to the announcement, the transaction has an indicated value of approximately $14 million.

First National has assets of approximately $49 million. It is well managed and earns a return on assets that ranks it among the most profitable banks in Pennsylvania. The merger will give Northeaster access to mar.

i kets in Northem Luzerne and Southern Lackawanna Counties which are enjoying an economic comeback.

,, Hershey Bank Opens in Harrisburg OnJune 30 The Hershey Bank stepped outside the Hershey area for the first time when it opened a branch office in downtown Harrisburg. The new office, called the Financial Ser-j vices Center, offers retail and wholesale banking services, as well as investment banking and trust senices pro-l vided by affiliates. We think it is an excellent example of the added value PNC can give its affiliate banks, and we are optimistic we will be able to extend our presence throughout South Central Pennsylvania.

. Provident Opens " Hub"Ofice As a result of market research which showed that a substantial portion of Provident's customer and prospect base has been locating in counties surrounding Philadelphia, Provident recently opened an office in the Valley Forge / King of Prussia area. The new facility will be staffed by retail, com-mercial ienders, trust officers and private bankers. This office is the first in a five year plan to expand Provident's branch office network and to move key banking areas closer to the customer.

. PNC Funds Group Fonned A major step in a long-range program to build upon our already highly rec-ognized trust funds management capabilities was taken recently with the formation of PNC Funds Group. This is a merger of the common trust funds from each of our affiliate banks.

A common trust fund provides a vehicle through which monies from many trust accounts are pooled and imested collectively. Each fund has a specife. investment objective, such as long-term principal growth or high current income. There will be three core families of funds: for Personal Trusts; for Institutional and Chantable Trusts; and for Employee Benefits. This new organization will offer PNC customers a broader product line, and the ability to take advantage of PNC's high level of professionalism in trust funds management.

. Six PNC Directors Retire Effective with the annual meeting date of April 28, James L Davis, Lester A.

Hamburg, James E. Lee,JohnJ. MacWilliams,Jr., Franklin L. Morgal and R.J. Wean,Jr. retired from PNC's board. These six directors have collectively served PNC and its predecessor organizations for 66 years. On behalf of the officers, employees and shareholders of PNC, I want to express my deepest appreciation for their respon-sise and responsible advice over the years.

l

. Tonner Director Bracken Retires Charles H. Bracken, a former vice chairman and director of PNC Finan-cial Corp. retired from the board of directors of Marine Bank on May 19. We value the many fine contnbutions he made while sening on our board.

1 Sincerely i

s na 2 Thomas H. O'Brien Prestdent and Ch ef Executwe Ofcer

g 3

Consolidated Balance Sheet

]

PNC FINANCIAL CORP AND SL'BS! DIARIES Dollan in thousands June 30, December 31, 1987 1986 Assets Cash and due from banks

$ 1,607,499

$ 2,249,855 Interest beanng deposits with banks 649,878 711,284 Federal funds sold and resale agreements 342,848 224,317 Tradmg account securities 151,303 94,907 Mortgages held for sale 6,064 10,360 investment secunties (market value of $8,447,501 in 1987 and $7.329,250 in 1986) 8,417,937 7,074.270 Loans, net of unearned income of $375,753 in 1987 and $356,083 in 1986 16,048,738 15,602,821 Allowance for credit losses (387,368)

(250,854)

Net loans 15,661,370 15,351,967 Premises, equipment and leasehold improvements 260,139 252,876 Customers' acceptance liability 491,385 474,800 Other assets 604,619 491,419 Total assets

$28,193.042

$26.936.055 Liabilities Deposits in domestic oHices:

Non-interest bearing

$ 3,632,677

$ 4,395,623 Interest bearing 13,273,776 12,712,601 Deposits in foreign offices 483,218 502,348 Total deposits 17,389,671 17,610,572 Short, term borrowings:

Fedcral funds purchased I,968,032 1,877,459 Repurchase agreements 3,893,960 2.828,811 Commercial paper 458,258 391,216 Other 866,660 919,692 Total short-term borrowings 7,186,910 6.017,178 Other borrowings 890,913 747,373 Acceptances outstanding 491,385 474,800 Accrued expenses and other liabilities 460,746 392,527 Totalliabilities 26,4I9,625 25,242,450 Shareholders' Equity Preferred stock-$1 par value Authorized: 9,699.386 shares in 1987 and 9,739,693 shares in 1986 1ssued and outstanding: 3,297,966 shares in 1987 and 3,330,158 shares in 1986 3,298 3,330 Aggregate hquidation value: $69,945 in 1987 and $70,663 in 1986 Common stock-55 par value Authorized: 100,000,000 shares issued: 67.216,869 shares in 1987 and 65,876,165 shares in 1986 336,084 329,381 Capital surplus 251,365 230,858 Retained earnings 1,183,316 1,130,262 Common stock held in treasury at cost-14,123 shares in 1987 and 55.523 shares in 1986 (646)

(226)

J Total shareholders' equity I,773,417 I 693,605 i

Total liabilities and shareholders' equity

$28,193,042

$26.936,055 i

i i

j See anompanymg Notes to Coruolutated hnannal Stairmena l

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Consolidated Statement ofIncome l

ORP AND hl BSIDIARIES kkC NANCI 1.

In thousands, cuept per share data Second Quarter brst Six Sloelu 1987 1986 1987 1986 Interest income Imans and fees on loans

$368,447

$333,511

$ 719,205

$663,156 Deposits with banks 14,720 13,482 27,330 25,852 Federal funds sold and resale agreements 5,062 6,414 10,089 14.399 Trading account securities 4,404 1,334 8,752 7,728 Mortgages held for sale 238 3.758 397 7.368 Investment securities:

' Taxable 132,243 97,369 249,488

'194,282 Tax exempt 19,315 25,212 38,356 50,908 Dividends 1,840 2,480 4,057 4,905 Other 715 612 1,146 1,234 Totalinterest income 546,984 484.172 1,058,820 969,832 Interest bpense Deposits 219,018 207,916 426,304 417,137 Short term borrowings 112,874 89.625.

207,544 190,637 Other borrowings 17,012 14.548 32,053 26,155 Totalinterest expense 348,904 312,089 665,901 633,929 Net interest income 198,080 172,083 392,919 335,903 Provision for credit losses 134,479 66.166 166,326 86,980 Net interest income after provision for credit losses 63,601 105.917 226,593 248,923 Non Interest income Trust income 37,323 33,358 72,999 63,055 l

Senice charges, fees and commissions 41,883 40,207 84,531 81,854 Mortgage servicing fees 780 6,262 1,497 13,803 Trading account profits (losses)

(4,279)

(635)

(3,234) 3,177 Net equity and other secunty gains 12,918 9,531 22,963 13,926 Net debt security gains 11,032 8.657 32,164 10,872 l

Gain on sale of mortgage banking subsidiary 9,800 58,681 9,800 58,681 Other income 6,996 5,434 12,299 9.452 Total non-interest income I16,453 161.495 233,019 254.820 Non Interest bpenses Salaries and bonuses 70,960 67,536 140,570 134,593 l

Pension, profit sharing and other employee benefas 20,622 19,443 42,195 38,159 l

Net occupancy expense 14,266 13,690 27,883 27,146 l

Equipment expense 12,428 14,743 26,527 28,516 Other expenses 61,162 55,743 115,618 108.155 Total non-interest expenses 179,438 171,155 352,793 336,569

- Income before income taxes 616 96.257 106,819 167,174 L

Applicable income taxes (benefus)

(16,994) 15.718 8,324 22,376 l

Net income

$ 17,610

$ 80.539

$ 98,495

$144,798 1

Earnings 14r Common Share:

.i Primary

$.24

$1.26

$1,43

$2.27 i

Fully diluted

.24 1.18 1,38 2,13

.4verage common shares outstanding:

Pnmary 67,134 62,736 66,748 62,409 Fully diluted 67,616 68,545 71,601 68.438 1

%rr accompanying Notn to Coruolutated hnanaal Statemeras.

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Consolidated Statement of Changes in Financial Position 1

PNC FINANCIAL CORP AND SUBSIDIARIES In thousands For the Six \\lontla EndedJune 30 1987 1986 Financial resources were provided by tapplied to1:

Operations:

Net income

$ 98,495

$ 144,798 Provision for credit losses, depreciation, amortization and other items not requiring fmancial resources 189,265 115.239 Financial resources provided by operations 287,760 260,037 Cash dividends declared (56,665)

(44,858)

Net financial resources provided by operations 231,095 215,179 Increase (decrease)in deposits and other fmancing activities:

Deposits:

Demand and other non interest bearing deposits (797,669) 239,846 Interest bearing demand (1,636) 41,851 Savings 66,585 23,469

(

Money market deposits (130,85' )

187,230 4

Negotiable certificates of deposit 541,512 443,663 Other time 17,346 (102,931)

Deposits in foreign offices (19,130)

(56,959)

Deposits acquired in mergers 102,945 187,050 Increase (decrease) in deposits (220,901) 963.219 Short-term borrowings 1,163,887 334,031 Other borrowings 152,421 (102,348)

Interest bearing liabilities acquired in mergers 5,845 4.252 Proceeds from debt issued 230,000 Comersion of preferred stock and debentures (9,117)

(16,963)

Stock issued:

Plans of merger 11,603 Other 26,359 32,427 Financial resources provided by deposits and other fmancing activities 1,130,097 1,444,618 (Increase) decrease in nonearning assets and liabilities:

Cash and due from banks 648,701 (217,281)

Premises and equipment, net (22,680)

(14,737)

Other, net (41,958) 25,679 Net nonearning assets and liabilities acquired in mergers (8,691)

(2,457)

Financial resources provided by (applied to) nonearning assets 575.372 (208,796)

Increase in fnancial resources invested in earning assets

$1,936,564

$ 1.451.00I increase idecrease) in earning assets:

Interest bearing deposits with banks 5 (61,446)

$ 114,115 Federal funds sold and resale agreements 109,956 93,086 Trading account securities 58,699 (531,673)

Mortgages held for sale (4,296)

(133,464) l Imestment secu" ties 1,309,549 708.925 l

L.oans 412,400 1,002,228 Earning assets acquired in mergers 111,702 197,784 lacrease in earning assets

$1,936,564

$1.45l.00l See anompanung uses to Ceuolulated Finannat Statements l

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C.. consolidated S..taternent of... Changes in Shareholders',E. quity PNC FINANCIAL CORP AND SUBSIDIARIES Dollars in thousands, except per share data Preferred Common

. Stock

' Stixk Capaal Retanned Treasury

$I thr iblur 5S nor Iblue Surplus Earmnes Stock Total 4

. Balance atjanuary 1,1986

$3,473 ' $308,915 $165,896 $ 917,673

$(226) $1,395,731 Net income 144,798 144,798 Cash dividends declared:

. Preferred stock '

(3,078) '

(3,078)

Common stock (PNC Financial-$.71 per share: Citizens-$.40 per share)

(41,780)

(41,780)

)

Stock issued (preferred-18.000; common-1,391,000):

- Exercise of warrants 14 129 399 542 Dividend reimestment and employee benefit plans 4

2,706 12.212 14,922 Conversion of preferred stock (109) 553.

(444) t Conversion of debentures 3,567 12,843 16,410 Net foreign currency translation adjustment (532)

(532)

Balance at June 30.1986

$3.382 $315.870 $190,906 $ 1,017,081

$(226) $ 1,527.013 Balance ntJanuary 1,1987

$3.330 $329,381 $230,858 $1,130,262

$(226) $1,693,605 Net income 98,495 98,495 Cash dividends declared:

Preferred stock (2,977)

(2,977)

Common stock-$.80 per share (53,688)

(53,688)

Stock issued (preferred-8,115; common-1,340,704):

Exercise of warrants 8

72 224 304

.l Dividend reinvestment and employee

.i benefit plans 2,394 14,025 797 17,216 l

Conversion of preferred stock (40) 226 (186)

Conversion of debentures 1,577 7,314 8,891 Plans of merger 2,712 (922) 9,813 11,603 Treasury stock:

Purchase (common-14,123)

(1,443)

(1,443)

Retirement (common-55,523)

(278) 52 226 Net foreign currency translation adjustment 1,411 1,411 Balance atJune 30,1987

$3,298 $336,084 $251,365 $1,183,316

$(646) $1,773,417 i

Ser accompanying Notn to Consolidated Funanaal Statements.

N...otes to Consolidated F. inancial Staternents PNC FINANCIAL CORP AND SUBSIDIARIES All dollar amounts presented un the tables are an thousands, ruept as otherwur noted.

Basis of Presentation certain sources of revenue are recorded on the cash basis, the results of which approximate the accrual basis.

The accounting and reporting policies of PNC Financial The Combmed Consolidated Financial Statements Corp ("PNC Financial") and its subsidiaries confonn with included in the 1986 annual report to shareholders ofi,NC i

generally accepted accounting principles. The consolidated Financial (, Annual Report ) are the restated histoncal financial statements include the accounts of PNC Financial I nanci i st tements f PNC Financial. The notes mcluded f

and its subsidiaries (substantially all cf which are herein should be read in conjunction with the notes to the wholly-owned).

Combined Consolidated Fmancial Statements included m All significant intercompany accounts and transactions the Annual Report.

hase been eliminated in the consolidated financial state-ments. The accrual basis of accounting is used except that

a 7

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Notes to Consolidated Financial Staternents (Continued) _

PNC FINANCIAL CORP AND SUBSIDIARIES Completed etcquisition The applicable income taxes related to net in estment On February E7,1987, Citizens Fidelitt Corporation securities gains were as follows:

(" Citizens"), a Kentucky bank holding compan), was mer-fs,ih, three monib endedfune 30 1987 19 %

ged with and into a wholly owned subsidian of PNC Finan.

Apphcable income taxes.

cial. L'nder the terms of the merger, each share of Citizens On equits and other secunties

$ J,752

$2.828 common stock outstanding on such date was cometted into On debt secunties 4.411 3.982

.77 share of PNC Financial common stock. PNC Financial g.otal

$ 8,16 5

$6.810 issued approximately 15.8 million shares ofits common stock and cash in lieu of fractional shares for all of the for Ihr m monts,nded /une 30 1987 los6 outstanding shares of Citizens. The transaction was AP i ablc inanne ta e accounted for on a pooling-of interests basis, and accord.

s cunties

$ 7,166

$4.058 ingly all hnancial data has been restated.

On debt secunties 12,866 5.001 Investment Securities Total

$20,012

$9.059 The carrying and approximate market values ofinvestment Lens securities atJune 30,1987 and December 31,1986 were as follows (in millions):

The loan portfolio at June 30,1987 and December 31, 1986 was as follows (in millions):

,9,7

,yg Carrying Market Canyng

.\\ladet ggg7 99gs l'alue Value iblue iblur U{

U.S. Treasurv

$ f,090. 5

$4,097.4

$3.501.3

$3.561.0 d

$ 9 0W

$ 9W U.S. Gos ernment Real estate construction 1,052.0 956 1 4

ti ris 2,770.5 2,686.7 1.966.4 2.031.5 g

n J J7

' 0 State and municipal 1,181.8 1,180.6 1.305 2 1.329.2 NIoney marLet 444.9 212.9

)

Girporate stocks-

1. case 6nancing 480.5 4M5 j

NiarLetable equities 118 0 222.5 106 6 208.7 8# 8 Other 16.9 21.5 25.0 24 7 IE"

)

nearned income WB)

WW Other 240.2 238.8 169.8 174l Lo ns, net f une rned income

$16,048. 7

$15.602.8 Total 58,417.9

$8,447.5

$7.074.3

$7.329.2 Allowancef.or Credit Losses Data related to marketable equity securities at June 30, 1987 and December 31,1986 were as follows:

Changes in the allowance for credit losses were:

I987 1986 For the threr montlu ended June 30 1987 19'16 Grou unreahied gains

$110,875

$107.011 Balance at Apnl I

$270,J 34

$188.485 Gross unrealiicd loues f 6,187)

(4,927)

Allowance acquired in mergers 554 Aggregate cost 117040 106.580 Charge-offs (20,857)

(20.193)

Aggregate market ulue

$222,528 5208.664 Recoscries J,412 2.603 Net charge ofis (17,445)

(17.590)

The following table presents the composition of net Provismn for credit losses 114,479 66.166 equity and other secunty gains:

Balanc e at June 30

$187,368

$237,615 hw the three mamth endedJune 30 1987 I986 Net gains on marketable equits secunnes

$10.082

$ 7.316 for the m morab rndedlune 30 1987 1986 Net gains on other secunnes 2,836 2.215 Balance atJanuarv i

$250,854

$178.091 Total

$12,918

$ 9.531 Allowance acquired in mergers 902 1.092 Charge offs (38,671)

(33.047) hw the m montM endedJune 30 I987 I986 Recovenes 7,957 4.499 Net gains on marketable equits secunues

$l9,218

$ 11.711 Net charge-offs f10,714)

(28.548)

Net gams on other secunnes 1,745 2.215 Prosision for credit losses 166,326 86.980 Total

$22,96 J

$ 13.926 Balan(c at June 30

$187,368

$237.615

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knaccrualand Restnictured Loans Earnings Per Common Share Nonaccrual loans are those loans on which interest income Primarv eamings per common share is calculated by divid-is recorded only when received. Restructured loans repre.

ing net income less preferred stock dividend requirements i

sent those debt transactions for which the original interest by the weighted average number of shares of common rates, repa> ment terms, or both, were restructured due to a stock outstanding during each period.

detenoration in the fmancial condition of the borrower.

Fully diluted earnings per common share is based on net

' Total nonaccrual and restructured loan balances atJune income adjusted for interest expense (net of tax) on out-30.1987 and December 31.1986 were as follows:

standing convertible debentures and dividends on nonconvertible preferred stock. The weighted average 1

1987 1986 number of shares of common stock outstanding is Nonaccrual

$ J13,392

$185,514 increased by the assumed conversion of outstanding con-Itestructured -

41,318 46,633 vertible preferred stock and convertible debentures from j

Total

~

$154,710

$232.147 the beginning of the year or date ofissuance, iflater, and

~ the assumed exercise of stock options and warrants using Quarteriv interest data related to nonaccrual and the treasury stock method. Such adjustments tn net income restructured loans was as follows:

and the weighted average number of shares of common

• 1. " E *

• Y " '"

Fn the shore months rudedJune 30 I987 I986 dilute eamings per common share.-

' intereu computed on original terms

$ 7,977

$4,759 Interest recognized 2,086 1,944 Pledged Assets Securities and loans pledged to secure public and trust for the m montlu rndedfune 30 1987 1986 deposits, repurchase agreements, borrowings from the Interest computed on onginal terms

$16,148

$9,464 Student Loan Marketing Association and for other pur.

Interest recognized 4,952 3,952 poses were $6.5 billion atJune 30,1987.

At June 30,1987, there were no significant outstanding Slandby letters of Creds'l commitments to lend additional funds with respect to AtJune 30,1987. PNC Financial had standby letters of nonaccrual and restructured loans.

credit outstanding of $2.0 billion, of which $275 million Condensed Pbrent Company Balance Sheel June 10 December 31 1987 1986 l

.hsets Cash and due from banks J

250 $

170 U. S. Treasurv secunties 160,811 139,725 Investments in:

Bank holdmg company and bank subsidianes 1,665,190 1.611,114 Non bank subsidianes 120,990 106,748 Advantes to bank subsidiaries 2,139 3.519 Goodwill 28,662 29.172 Other assets 7,284 20.597 Totalossets

$1,985,726

$ 1.911.045 Liabilities Dividends papble S.

29,710

$ 20.205 Other borrowings 173,733 173,614 Accrued expenses and other habihties 9,066 23421

' Totalliabilities.

211,909 217.440 Shareholders' Equity 1,773,4l7 1.693.605 Totalliabilities and shareholders'eguity 51.985,126

$ 1.911.045

_m.

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f Ayerage Balance Sheet and Net Interest Analysis.

PNC FINANCIAL CORP AND SUBSIDIARIES '

Balance sheet amounts in millions. interest in thousands I987 Second Quarter First Quarter Averag/

.kerge e

Yields Averate Ywids/

Average Taxable. equivalent basis Bclances interest Rates Balaries Interest Rates Assets Interest earning assets:

Loans, net of unearned income:

Domestic Commercial

$ 9,181

$214,333 9.36 %

$ 9,213

$207.149 9.12 %

Real estate construction 1,019 27,016 10,64 1,001 24,796 10.05 Real estate mortgage 1,047 27,108 10.36 1,028 26.160 10.18 Installment 2,883 87,930 11.37 2,744 78,446 11.43 474 8,248 6.98 294 4.807.

6.63.

Money market 402 8,006 7.96 393 7,408 7.53 Lease financing 831 16,984 8.19 833 17,143 8.35 Foreign Totalloans 15,837 383,625 9.71 15.506 365.909 9.53 Interest beanng deposits with bank.1 799 14,720 7.39 794 12,610 6.44 Federal funds sold and resale agreements 24J 5,062 8.38 273 5,027 7.45 Trading account secunties 234 4,788 8.21 214 4,438

'8.40 8-238 11.60 7

159 9 11 Mortgages held for sale Insestment secunties:

U.S. Treasury 3,854 71,502 7.44 3,400 65,407 7.80 U.S. Government agencies and corporations 2,568 56,985 8.88 2,091 48,916 9.36 State and municipal 1,166 30,790 10.56 1,160 30,301 10.45 133 2,436 7.33 132 3,109 9.44 Corporate stocks Other 213 4,134 7.77 184 2.998 6.51 Totalinvestment secunties 7,934 165,847 8.37 6,%7 150.731-8.71 Other interest earning assets 21 715 13.72 21 431 8.29 Total interest earning assets / interest income 25,076 574,995 9.19 23.782 539.305 9.15 Non-interest earning assets:

Allowance for credit losses (291)

(258)

Cash and due from banks I,423 1,474 Other assets 1,232 1,084 Totalassets

$27,440

$26.082 Liabilities and Shareholders' Equity Interest bearing sources:

Interest beanng deposits:

Demand

$ 1,121

$ 13,251 4.74 %

$ 1,109

$ 12.994 4.75 %

985 11,837 4.82 928 11,410 4.99 Savings Money market deposit accounts 3,496 46,496 5.33 3,536 45,857 5.26 Domestic certificates of deposit of $100,000 or more 4,333 73,814 6.87 3,974 64.973 6.63 Other time J,398 63,039 7.44 3,266 61,121 7.59 Deposits in foreign offices 516 10,581 8.22 530 10,931 8.36 Totalinterest bearing deposits 13,849 219,018 6.34 13,343 207,286 6.30 Short tenn borrowings:

Federal funds purchased 2,024 31,149 6.17 2.024 34.477 6.90 l

Repurchase agreements 3,637 64,500 7.11 2,868 41,633 5.89 Commercial paper 423 6,785 6.44 441 6,555 6.03 Other.

667 10,440 6.27 753 12,005 6.47 Total short term borrowings 6,751 112,874 6.71 6,086 94,670 6.31 837 17,012 S.15 767 15.041 7.95 Other bonowmgs Total interest bearing sources / interest expense 21,437 348,904 6.53 20,196 316.997 6.37 Non interest beanng sources:

Demand and other non interest bearing deposits 3,267 3,319 Accrued expenses and other liabilities 929 824 Shareholders' equity 1,807 1,743 Totalliabilities and shareholders' equity

$27,440

$26.082 2.66 %

2.78 %

Net interest rate spread 0.95 0.96 impact of non-interest beanng sources Net interest income /margen on earning assets

$226,091 3.6I%

$222.308 3.74 %

,e g

10 -

1986 Fsrst Sa.\\lonths

' Second Quarter i987

.I986

.hrrage Averb/

.kerka e

..kerage

. lieldit

-Average ITel

.hrrage liel /

Balanm.

Interest Rates

' Balances Interest Rates '.

Balanm Interest Rates

$ 7.884 $204.590 1041 %

' $ 9,197 $ 421,482 9.24 5

$ 7,735 $ 408,443 10.65 %

645 19.426 12.08 I,010 51,812 - 10.35 618 37.066 12.09

'l.044 26,452 10.13 1,037 53,268 10.27 1,044 55.722 10.67 2,308 73,184.

12.68-2,814 160,376 11.40 2,247 143.939 12.81 260 4.807.

7.42 385' 13,055 6.85 259 9.903 7.71 305

.'6.373 8.36 398 15,414 7.75 302 12,847 8.51 803' 21,039 10.51 832 34,127

8.27 768 41.029 10.77 13.249 355.871' 1016 15,673 749.534 9.62 12.973 708.949 11.02 735-13.482 7.36 797 27,330 6.92 660 25.852 7.90 387 6.414 -

6.65 257 10,089 7.90 413 14.399 7.03 69.

1.645 9.56 224 9,226 8.30 223 9.814 8.87 141 3,758 10.66 8

397 10.31 143 7,368 10.30 2.997 70,427 9.43 3,628 136,909 7.61 3.062 147.372 9.71

. 969 25,582 10.56 2,331 105,901 9.09 788 42,828 10.87 1,577 43,490 11.03 1,163 61,091 10.51 1,583 88.172 11.14 136

. 3.810 11.21 132 5,545 8.38 136 7,558 11.11 98 1,761 7.19 199-

'7,132 7.18 102 4.481 8.79 5.777 :145.070 10.06 7,453 316,578 8.53 5.671 290.411 10.33 28 612 8.77:

21 1,146 11.01 28 1.234 8.89 20.386 526.852 - 10.36 24,433 1,114,300

9. / 7 20.111 1.058.027 10.61 (196) 1275)

(191) 1,432 -

1,448 1.402 1.239.

1,159 1.234

$22.861 -

$26,765

$22.556

$ 864 $ 11,074 5.14%

$ 1,115 $ 26,245 4.75 5

$ 834 $ 21,913 5.30 %

844 11,049 5.25 957 23,247 4.90 832 21.680 5.25 3.112 48.517 6.25 3,516 92,353 5.30 3.057 98.596 6.50 2,913 54,391 7.49 4,1.55 138,787 6.74 2.800 106.618 7.68 3,458 73.354 8.51 3,332 124,160 7.51 3,430 148,336 8.72

' 449 9.531 8.51 523 21,512 8.29 445 19.994 9.06

-11.610 207.916 7.16 13,598 426,304 6.32 11.398 417,137 7.38 1.832 33,173 7.26 2,024 65,626 6.54 1,661 63.058 7.66 2.022 36.651 7.27 3,254 106,133 6.58 2.164 80,586 7.51 489 8,465 6.94 4J2 13.340 6.23 521 19.042 7.37

~615-11.336 7,39 710-22,445 6.38 733 27.951 7.69 4.958 89.625 7.25 6,420 207,544 6.52 5.079 190.637 7.57 677 14.548 8.62 802-32,053 8.05 618 26.155 8.53 17.275 312.089 7.25 20,820 665,901 6.45 17.095 633.929 7.48 3.171_

3,293 3.116 I

914 877 880 1,501 1,775 1.465

$22.861 526,765

$22.556 j

3.11 %

2.725 3.13 %

I 1.11 0.95 1.12

$214.763 4.22 %

$ 448,399 3.67 5

$ 424.098 4.25 %

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O II PNC FINANCIAL CORP AND SUBSIDIARIES in thousands, cuept per share data 1987 1986 First Ssx.\\lontlu Second First Fourth Third Second l

Quarter Quarter Quarter Quarter Qiarter I987 I986 Interest income

$546,984 $511,836

$491,620 $483,010 $484,172

$1,058,820 M69.832 i

Interest expense 348,904 316.997 312,509 308,632 312,089 665,901 633,929 Net interest income 198,080 194,839 179,111 174,378 172,083 392,919 335,903 i

Provision for credit losses 134,479 31,847 36,886 19,899 66,166 166,326 86,980 i

Net interest income after provisionfor credit losses 63,601 162,992 142,225 154.479 105.917 226,593 248.923 Non interest income:

{

Trust income 17,323 35.676 32,148 32,355

.33,358 72,999 63,055 Service charges, fees and commissions

. 41,883 42,648 41,668 39,187 40,207 84,531 81,854 Mortgage servicing fees 780 717 1,54 0 678 6,262 1,497 13,803 Trading account profits (losses)

(4,279) 1,045 2,766 2,425 (635)

(3,234) 3.177 Net equity and other secunty gains 12,918 10,045 15,540 1,917 9,531 22,963 13,926 Net debt secunty gains 11,032 '

21,132 1,878 8,211 8,657 32,164 10,872 Gain on sale of mortgage banking subsidiary 9,800 1,022 58,681 9,800 58,681 Other income 6,996 5.303 5.752 5.641 5,434 12,299 9.452 Total non. interest income 116,453 116.566 102,314 90.414 161,495 233,019 254.820 Non-interest expenses:

Salaries and bonuses 70,960 69,610 66,601 65.150 67,536 140,570 134.593 Pension, profa sharing and other employee benefits 20,622 21,573 16,759 16,729 19,443 42,195 38,159 Net occupancy expense 14,266 13,617 10,531 12,952 13,690 27,883 27.146 Equipment expense 12,428 14,099 15,415 14,082 14,743 26,527 28,516 k

Other expenses 61,162 54,456 55,434 49,480 55.743 115,618 108.155 Total non interest expenses 179,438 173,355 164,740 158,393 171.155 352,793 336,569 Income before income taxes 616 106,203 79,799 86,500 96,257 106,819 167,174 Applicable income taxes (benefits)

(16,994) 25,318 7,665 17,125 15,718 8,324 22,376 Net income

$ 17,610 $ 80,885

$ 72.134 $ 69,375 $ 80.539

$ 98,495 $144,798 Eannings per common share:

Pnmarv *

$.24

$ 1.20

$1.10

$1.07

$1,26

$1.43

$2.27 Fully diluted *

.24 1.14 1.04 1.02 1.18 1.38 2,13 kerage shares outstanding:

Primary 67,134 66,358 64,333 63,370 62,736 66,748 62,409 Fully diluted 67,616 71,336 69,427 68.657 68.545 71,601 68,438 l

• Includes the afirr ta.1 efect of addstumalpros usons for credst lours and gatas ruoenard on the I986 sale of a mortgage bankmg subsndm The net efut of these sngmfstant and unusual traruactums on rarmngs per common sharefor the second quarter andfirst su months of i987 was a decreast of $ 89 on a pnmary basu and $ U on afully dduled basu. For the snond quarter andfurst sa montlu of I986. rarnmgs per common share tncreased $ I8 on a pnmary basu and 516 on j

l a fully dduled basu. For the fourth quarter of 1986 rarmngs per common share nnerrased 3 06 on a pnmars basu and $ 05 on a fulls dnluted beuu

O 12 Taxable Equiyaient Adjustment PNC FINANCIAL CORP AND SUBSIDIARIES Intnnt vunma on not.m lunw tu and chimatmm of vtatn. muninpal-In ordn to makr the pre.tm uncome and roultant ytrids comparab!r

,nn and othn pnblu o ntston o not uhnt in Ininal ouome Im in to Imahir loaru and owntments. a tenble eqwtainst adpatment u added additwn, entam uitnet npen.,e un un 4 la nuparr thnt arts a not njualh to tuternt smomt and to encomt Im npene inth no efect an dedeu tthir pn jninal ~ amt im p*npmn lite stated pre !m veld on af ter.im um ome The Imahle equwalna adpotment. kved on ihr lednal rhne wet, a vnnnath lau a than renble nwn of umdar mk and mcnmr im vnte of w% m 1%7 and 169 m I4% u shmen un the natunty tahle helme In thouunds 1987 19N6 Furst Su Alontha Second Furst Fourth Third Second Quarter Quarter Qwrter Qiarter Q<arter 1987 1986 l

Interest income-book basis

$546,984 $511,836

$491,620 $483,010 $484,172

$1,058,820 $ 969,832 Add taxable equivalent adjustment 28,011 27,469 40.254 41,821 42,680 55,480 88,195 Interest income-taxable equisalent basis 574,995 539.305 531,874 524.831 526.852 1,114,300 1.058,027 Interest expense 348,904 316.997 312,509 308.632 312.089 665,901 633,929 Net interest income-taxable equivalent basis

$226,091 $222,308

$219,365 $216,199 $214,763

$ 448,399 $ 424,098 Corparate Financial Review PNC FINANCIAL CORP AND SUBSIDIARIES Thu a Managemna's Dwmuon and.inalysu of the Summary of in both 1987 and 1986, return on assets would have been Opnanoru. Refernun to, mets nnd habduin and thanen thneto 1.19% in both periods and retum on equity would hase reprnna dady average letels for the penods indscated unim noted been 17.96%, compared with 18.37% a year ago, othenmr.

Net interest income, on a taxable-equivalent basis, increased $24.3 million to $448.4 million, entirely due to first Six Months 1987 rs first Six Months 1986 earning asset growth as the net interest margin narrowed Consolidated net iScome for th'e5t si[montlN! ly

• 58 basis points to 3.67% in 1987.The placement on

' ' ~

was $98.5 million, resulting in fully diluted earnings of n naccrual status of $98 milhon ofloans m Brazil and $19

$ 1.38 per share. That compared with $144.8 million, or million ofloans m Ecuador during the first quarter of 1987

$2.13 per share, in the first six months of 1986. The results reduced interest mcome by $4.4 million for the six months of both periods include significant and unusual transactions f 1987. See Nonperformm, g Assets on page 14.

consisting of additional provisions for credit losses and Average eaming assets grew $4.3 bilhon or 21% to $24.4 bilhon due to loan growth and higher imestment security gains recognized on the 1986 sale of The Kissell Company holdings. Total loans averaged $15.7 bilh;on, $2.7 bilhon or

("Kissell"), a mongage banking subsidiarv. The additional provisions were $ 110.0 million ($66.0 mil' lion, net of 21 % higher than the first six months of 1986. Diversified income taxes) and $44.0 million ($23.8 million, net of I an gmwth was expenenced in commercial loans, real estate constmcuon loans and installment loans. U.S. Trea-income taxes) in 1987 and 1986, respectively. The gains recorded in connection with the sale of Kissell were 59.8 sury securities and U.S. Govemment agencies were utilized millioa ($6.4 million, net ofincome taxes) and $58.7 mil-t a greater extent in 1987, accounting for mcreases of lion ($35.1 million, net ofincome taxes) in 1987 and 1986,

$566 milhon and $1.5 billion, respectively. State and munic-respectiveh. On a fully diluted basis, such transactions had

' Pal securities decreased $420 milh,on as the result of such the effect of reducing 1987 earnings per share by $0.83 and secunnes matunng and the proceeds being re-in ested in taxable assets.

increasing 1986 carnings by 50.16 per share.

. The 1987 provision for credit losses was $166.3 million, Return on assets for the first half of 1987 was.97%,

mcluding the $110 million additional provision. The 1986, compared with 1.24% for the first half of 1986. Return on equity for the first six months of this sear was 14.60%,

provision was $87.0 million, including the $44 million addi-comp'ared with 19.15% for the first six months oflast tear.

tional provmon. The additional provisions were taken Excluding the effect of significant and unusual transactions

I a

o I3 Corporate Financial Review (Continued)_

PNC FINANCIAL CORP AND SUBSIDIARIES mainly to increase reserves against loans in developing

$0.24 on a fully diluted basis, compared with $1.18 eamed 1

countries which are experiencing payment problems. At during the same penod of 1986. The results of both I

june 30,1987, the portion of the allowance for credit losses periods include significant and unusual transactions con-allocated to loans in developing countries experiencing sisting of additional provisions for credit losses and gains payment problems is approximately 35% of such loans.

recognized on the sale of Kissell. The additional provisions Total foreign loans as ofJune 30,1987, equaled approxi-were $110.0 million and $44.0 million in 1987 and 1986, mately 5% of totalloans and 3% of total assets. Loans in respectively. The gains recorded in connection with the sale developing countries experiencing payment problems of Kissell were $9.8 million and $58.7 million in 1987 and amounted to approximately 3% of totalloans and less than 1986, respectively. On a fully diluted basis, such transac-2% of total assets.

tions reduced 1987 second quarter earnings per share by Net charge offs, annualized as a percentage of average

$0.83 and increased 1986 second quarter eamings per loans, were.40% for the first six months of 1987 compared share by 50.16.

with.44 % for the first half of 1986. The ratio of the allow.

Net interest income, on a taxable-equivalent basis, ance for credit losses to period-end loans increased to increased $11.3 milhon or 5% to $226.1 million, entirelv 2.41% atJune 30,1987, up from 1.73% and 1.61% atJune due to earning asset growth. The net interest margin nar-30,1986 and December 31,1986, respectively. Nonaccrual rowed 61 basis points from 4.22% in the second quarter of and restructured loans amounted to 2.21 % of total loans at 1986 to 3.61 % in 1987. The placement of $98 million of June 30,1987 compared to 1.29% atJune 30,1986 and loans in Brazil and $ 19 million of loans in Ecuador on 1.49% at December 31,1986. The increase in nonaccrual nonaccrual status during the first quarter of 1987 reduced loans was due principally to placing $98 million in medium interest income by $2.1 million.

and long term loans in Brazil and $ 19 million ofloans in Earning assets increased $4.7 billion, averaging $25.1 bil.

Ecuador on nonaccrual status during the first quarter of lion for the quarter. Total loans averaged $ 15.8 billion, $2.6 1987.

billion or 20% higher than the second quarter of 1986 Excluding gains on the sale of Kissellin both periods, loans. Loan growth was strongest in commer ial, real estate I

non-interest income increased $27.1 million or 14% to construction and consumer installment loans. Total

$223.3 million. Trust income increased 16% to $73.0 mil-investment securities increased on average $2.2 billion to j

lion primarily due to higher levels of personal trust, stock

$7.9 billion during the second quMer of 1987. U.S. Gov.

1 transfer and other fee income. Senice charges, fees and ernment agency holdings increas. $1.6 billion and U.S.

i commissions increased $2.7 million to $84.5 million.

Treasury securities increased $8'.. million.

]

Increases in senice charges on deposit accounts and fees The second quarter 1987 provision for credit losses was related to international banking services more than offset a

$134.5 million. including the $110 million additional provi-decline in mortgage origination fees of $3.7 million due to sion. The second quarter 1986 provision was $66.2 million, the sale of Kissell. Mongage servicing fees declined $12.3 including the $44 million additional provision. The addi-million, also due to the sale of Kisnti. Trading account tional provisions were taken mainly to increase reserves activity resulted in a loss of $3.2 million compared to a gain against loans in developing countries which are experi-of $3.2 million for the prior year. Net equity and other encing payment problems.

secunty gains increased $9.0 million to $23.0 million. Debt Excluding gains on the sale of Kissellin both periods, secunty gains increased $21.3 million to $32.2 million.

non-interest income increased $3.8 million or 4% to Other non interest income increased $2.8 million.

$106.7 million. Tmst income was $37.3 million in 1987, a Non-interest expenses were $352.8 million in the first 12% improvement over the second quarter of 1986 primar.

half of 1987, $16.2 million or 5% higher.han the compara-ily due to higher levels of personal trus:, stock transfer and ble period of 1986. Excluding operating expenses related other fee income. Senice charges, fees and commissions to Kissell, non interest expenses increased $35 9 million or increased $1.7 million. Increases in senice charges on 11 %. Salary and benefit expenses increased 13% due to deposit accounts and fees related to international banking merit and promotional increases, higher stafflevels, higher senices more than offset a decline in mortgage origination payroll taxes and insurance benefits. The other expenses fees of $1.9 million due to the sale of Kissell. Mortgage category, also excluding Kissell, was 15% higher due to senicing fees declined $5.5 million also due to the sale of increases in state shares tax, general business insurance and Kissell. Trading account results were $3.6 million lower.

l contracted senices.

with a $4.3 million loss in 1987 compared to a loss of $635 thousand in 1986. Equity security gains were $12.9 million Second Quarter 1987 rs. Second Quarter i986 in the current quarter compared to gains of $9.5 million in bons'olidatect nSt income for the secon[1 quarter of 1987 the same quarter oflast war. Debt security gains increased

$2.4 million to $11.0 milhon m. the current quarter. Other was $17.6 million, $62.9 milhon lower than 1986. For the second quarter of 1987, earnings per common share were l

m

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0 c

14 4

non interest income increased $1.6 million to $7.0 million.

Non-interest expenses were $6.1 million or 4% higher Non-interest expenses increased $8.3 million or 5% to than the first quarter level of $173.4 million.

$179.4 million in the second quarter of 1987. Excluding operating expenses related to Kissell, non-interest expenses Nonperforr,mg Assets increased $17.2 million or i 1%. Salarv and benefit expenses increased 11% and the other expenses category The table below presents information conceming nonper-was 17% higher due to increases m state shares tax, general forming assets including nonaccrual and restructured loans.

I busm, ess msurance and contracted services, A loan is classified as "nonaccrual" when, in the opinion of management, there are serious doubts about the future Second Quarter 1987 ts first Quarter 1987 c llectibility ofinterest and principal. At that time, the accrual of mterest is disconunued previously accrued and Consolidated net income for the second quarter of 1987 unpaid interest for the current year is charged against cur-was $17.6 million, compared with $80.9 million for the first rent income and any interest accrued and unpaid for the quarter. For the second quarter of 1987, earnings per com-prior y ear is charged against the allowance for credit losses.

mon share were $0.24 on a fully diluted basis, compared Future income is recognized only when cash is receis ed. A with $1.14 earned during the preceding quarter. Second loan is categorized as " restructured" if, for reasons related quarter results include significant and unusual transactions to the borrower's fmancial difficulties, PNC Financial grants consisting of an additional $110.0 million provision for a concession that it would not otherwise consider.

credit losses and the recognition of an additional $9.8 mil-lion gain on the 1986 sale of Kissell. Such transactions June 30 thember 31 reduced net income by $59.6 million or 50.83 per share on In thousands 1987 1986 l

a fully diluted basis.

Nonaccrual:

Net interest income, on a taxable-equivalent basis, Domestic

$164,449 5151.152 increased $3.8 million to $226.1 mulion entirely due to Fmeign H834J 34.362 j

earning asset growth as the net interest margin in the sec-Total nonaccrual loans 313.392 185.514 ond quarter declined 13 basis points to 3.61%.

Restructured:

Total average earning assets increased $1.3 billion to Domesuc 17,041 43.304

$25.1 billion in the second quarter. Total loans averrged Foreign 4,277 3.329

$331 million higher than the first quarter at $15.8 hillion Total restructured loans 41,318 46.633 wah the growth split between money market and m, stall-ment loans. Total investment securitier averaged $7.9 bil-Total nonaccrual and lion, $967 million higher as U.S. Treasurv securities memctured I ans

$3H,710

$232.lu increased $454 million and holdings of U.S. Gosernment Percent of totalloans agencies and corporations increased $477 million, at end of period 2.21fr, 1.49 %

The provision for credit losses was $134.5 million in the other real estate owned

$ 12.f 78 5 10.2n second quarter, mcluding the $ 110.0 million additional pro-sision. The additional provision was taken to further 3

i strengthen the allowance for credit losses in light of recent AtJune 30,1987. PNC Financial had aggregate loans events regarding bank loans in the developing world. The outstanding in Brazil and Ecuador of $152 million and $19 first quarter provision for credit losses was $31.8 million.

million, respectively. In 1987, $98 million of medium and Non interest income was $116.5 million in the second long term loans in Brazil and all loans in Ecuador were i

quarter, including the gain from the sale of Kissell. All placed on nonaccrual status. This action was taken as the l

other non interest income was $106.7 million $9.9 million result of the lack of a definitive program for economic lower than the first quarter. Debt security gains, which structural readjustment in Brazil, coupled with a perceived I

totaled $11.0 million in the second quarter, were $10.1 mil-unwillingness of the Brazilians to negotiate with the multi-lion lower than the first quarter. Trading account activity lateral lending institutions and foreign creditor banks. The l

resulted in a second quarter loss of $4.3 million compared Brazilian loans excluded from nonaccmal status consist pn-1 with a profit of $1.0 miP.on for the first quarter. Equity manly of short term trade outstanding. The loans in Ecua-security gains increased $2.9 million to $12.9 million and dor were placed on nonaccrual status due to an inability to trust income increased $ 1.6 million primanly due to higher service foreign debt directly related to the March 5,1987 l

levels of personal trust, stock transfer and other fee income. earthquake. The economy of Ecuador has been materially Other income increased $1.7 million to $7.0 million.

affected by the earthquake.

l I

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T o y 3,, -

a Corporate Financial Review (Continued),

PNC FINANCIAL CORP AND SUb51 DIARIES -

j h

a lhst Due Isans Nhe fo'llowing table presents infonnation concerniEg loans June 30 Durm6er 31 In thousands 1987 1956 which are contractually past due 90 days or more as to prin-nomes:ie

$39.843 -

$38.973 cipal or interest. Amounts include loans that are fully col.

Foreim 4m 4J44 j

lateralized as to principal and interest and in the process of -

collection. as well as certain installment loans which are not Total past due loans

$ 44.75 3

$43317 charged off until payments are delinquent between 120 and J

150 days.

l r

Correspondence to the principal office of PNC Financial The Transfer Agent and Registrar for PNC Financial Corp should be addressed as follows:

Corp is:

PNC Financial Corp Pittsburgh National Bank Pittsburgh, PA 15265 Stock Transfer Department 982 412/355 2666 10th Street and Fort Duquesne Boulevard PNC Financial Corp's common stock is traded in the Pittsburgh, PA 15265 national over the counter market under the symbol Indwidual shareholders should contact:

"PNCF."

Shareholder Relations 412/355-8258

. y,,,,y,, ys,ungnf y,nd yoc),9,rchasp,Q,an Analysts, institutions and others seekingfinanaal infonnation should Ds dend nt Shareholders of PNC Financial Corp's common and pre-contact; ferred stock may participate in the Dividend Reimestment Charles J.Thayer, Treasurer and Stock Purchase Plan.The plan provides that additional Senior Vice President shares of common stock may be purchased with reinvested 412/355 8728 dividends at a 5 percent discount from market value and News media representatives and others seekinggeneralinformation with voluntary cash payments at market value. A prospectus should contact-and an enrollment card may be obtained by writing to the Corporate Affairs transfer agent at the address listed at right.

412/355 2728 i

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1 16 l

.i PNC Fiqancial Corp Board Of Directors l

1 Thomas L Bolger lioward Gittis Donald I. Moritz Richard P. Mmmons i

Cha'irman and l' ice Chaunnan and -

Pressdent and Chairman and

. Chief Executuve Oper Chief Administrative Ofcer Chtef Executwe Ofcer Chief Executive ORicer Bell.4tlantic Corp.

Revlon. Inc.

Eguntable Resources, Inc.

Allegheny Ludlum corporation

.\\nthons J. A. Bnan J. Dasid Grissom T '.allard Storton.Jr.

Thomas C. Simons Chairman and l' ice Chainnan Eucutive nn Residence Chairman and Chief Executive Ofcer Schoolof Bustness Chief Executive Ofcer

' ; H'\\I

Universnty of Loutsvtlle

. Capstal Holding Corporation f

Copperweld Corporataan Robert N. Clav Thomas H. O'Brien Paul R. Stalev I

p,,,,g,g flenry L ihllman President and '

President and '

Clay Holding Company

. "'}"f',B ChiefEucutive Ofcer.

Ch Executive Ofuer The Corporanon P.ancia j. Clifford Malcolm M. Prine iblunteer Civic Leader.

Edwand P. Junker. Ill President and William E. Swales l' ice Chau, nan Chief Executive Ofcer President sa a esident W.Cr 4 MtClelland Pnttsburgh Baseball, Inc.

Marathon Oni Company President and USAir Group. Inc.

Charles R. Pullin G. J. Tankerslev I

Chief Executwe 0 er Chainnan and.

Chairman of the '

')

. Douglas D. Danlarth Hammennull thper mpany ChiefExecutwe Ofcer Executwe Committee i

Chatnnan and Quentin C. McNenna Koppers Company Inc, Consolidated Natural '

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$rporatton Gm Contpany Chainnan, President and Roderic H. Ross 11 t r gh t t

k. Chief Executwe Ofcer Chainnan and Darid L Tressler. Sr.

Y Eugene Dixon.Jr.

ennametalInc.

Chief E.xecunce Ofcer Iice Chairman Tnutu Robert C. Milsom Krystone State Life Nonrad M. Weis Merle E. Gilliand Iin Chainnan Insurance Company g,g g Chairman of the lohn L. Ryon.Jr.

Chief Executwe Ofcer Lucuta e Commttter

'Prescdent and.

Bater USA Inc.

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'l Chief Executive 0 er International Salt empany

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l Public Service Enterprise Group Incorporated j

FORM 10-K l

Annual Report i

To Securities and Exchange Commission and ANNUAL REPORT TO STOCKHOLDERS For the Year 1986 I

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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31,1986 Commission file number 19120 Public Service Enterprise Group Incorporated (Exact name of registrant as specified in its charter) i New Jersey 22 2625848 (State or other jurisdiction of (I.R.S. Employer incorporation or organization)

Identification No.)

80 Park Plaza, P. O. Box 1171, 07101 1171 Sewark, New Jersey (zip code > -

(Address of principal executive oHices)

Registrant's telephone number, including area code: 201 430-7000 1

Securities registered pursuant to Section 12(b) of the Act:

Name of Each Exchange on l

Title of Each Class Which Registered l

New York Stock Exchange Common Stock without par value Philadelphia Stock Exchange Securities registered pursuant to Section 12(g) of the Act:

None (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The aggregate market value of the Common Stock of Public Service Enterprise Group Incorporated (Enterprise) as of February 26,1987 was approximately 55,634,329,000, based upon the New York Stock Exchange Composite Transaction closing price, of which more than 99.95% was owned by non-af'iliates, i

assuming solely for the purpose of such computation that all directors and officers of Enterprise are affiliates.

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The number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date, was as follows:

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Class Outstanding at December 31.1986 Common Stock without nominal or par value 134,882.375 Documents Incorporated By Reference Part of Form 10 K Document incorporated by Reference II, Items 7 and 8 Portions of the 1986 Annual Report to Stockholders of Public Service Enterprise Group Incorporated.

111 Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders of Public Service Enterprise Group Incorporated, to be held April 21,1987, which definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after December 31,1986.

IV Portions of the 1986 Annual Report to Stockholders of Public Service Enterprise Group Incorporated.

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-me TABk.E O CONTF.NTS PART I Fjge.

Item 1-Business

. r.

1 General...

I Public Service Electric and Gas Company 3

Problems of the Industry..

3 Rate Matters..

3 implementation of SFAS 90 5

Credit Ratings.

6 i

Construction and Financing 6

I Electric Operations.

9 Electric Fuel Supply.

13 Gas Operations 16 Gas Supply 17 Employee Relations 17 Regulation 18 Enviror. mental Controls.

20 Certain Operating Statistics of PSE&G 27 Other Subsidiaries of Enterprise 28 Item 2-Properties.

28 Public Service Electric and Gas Company 28 Electric Properties.

79 Gas Properties..

29 Office Buildings......

30 Subsidiaries.

30 Other Subsidiaries of Enterprise 30 item 3-LeBal Proceedings 31 Item 4-Submission of Matters to a Vote of Security Helders 32 Item 10-Executive Officers of the Registrant (Instruction 3 to Item 401(b) of Regulation S.K) 32 PART II Item 5-Market for Registrant's Common Stock and Related Stockholder Matters....

34 Item 6-Selected Financial Data 35 Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations 35 Item 8-Financial Stat:ments and Supplementary Data.....

35 Item 9-Disagreements on Accounting and Financial Disclosure.

36 PART111 Item 10-Directors and Executive Officers of the Registrant 37 Item Il-Executive Compensation 37 Item 12-Security Ownership of Certain Beneficial Owners and Management 37 Item 13-Certain Relationships and Related Transactions..

37 PART IV Item 14-Exhibitt, Financial Statement Schedules, and Reports on Form 8-K...

38 Index to Financial Statement Schedules 39 47 Signatures....

j 48 Exhibit Index..

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,j' PART I ltem 1..

Business.

.P General Public Service Enterprise Group Incorporated (Eaterpnse), incorporated under the laws of the State of New Jersey on July 25,1985, is a holding company and neither owns nor operates any physical properties.

Enterprise is entitled to an exemption from regulation by the Securities and Exchange Commission as a registered hciding company under the Public Utility Holding Companyact of 1935 except for Section 9(a)(2) thereof, and is not generally subject to regulation by the New Jersey Bod of Public Utilities (BPU) or the Federal Energy Regulmory Commission (FERC). (See Regulation) At Drcember 31,1986 Enterprise owned all the outstanding capital stock of the four operating subsidiaries described below:

1. Public Service Electric and Gas Company (PSE&G), a New Jersey corporation, with its principal m.ecuuve offices at 80 Park Plaza, Newark, New Jersey 07101, is an operating public utility company engan',cd in the generation, transmission, distribution and sale of electric energy and in the production, transmission, and distribution of natural or manufactured gas in New Jersey, PSE&G supplies electricity and gas in areas of New Jersey in which about 5,500,000 persons, approximately three-fourths of the State's popah. tion, reside. PSEAG is 'Eme prise's principal operating subsidiary and constituted more than 95% of the total assets and net income of Enterprise at December 31, 1986 and for the year then ehded. The accounting and rates of PSE&G are subject to the requirements of the New Jersey Board of Public Utilities (BPU) and the Federal Energy Regulatory Commission (FERC).

II. Community Energy Alternatives Incorporated (CEA), a New Jersey corporation, has its principal executise o;Yices at 1200 East Ridgewood Avener Ridgewood, New Jersey 07450. CEA participates in the development of cogeneration and alternauve energy production facilities which are " qualifying facilities" under the Public Utility Regulatory Policies Act of 1978.

111. Energy Devehapment Corporation (EDC), a New Jersey corporation, has its principal executive offices at 80 Pad Plaza, Newark, New Jersey 07101. EDC is engaged in activities for the exploration and developn s of gas and oil reserves through exploration and drilling progranis and in the purchase of gr, rmd oil reserves.

IV. Public Service Resources Corporation (Resourm0, a New Jersey corporation, has its principal executive ofAes at 80 Park Plaza, Newark, New Jersey 07101. Resources' primary purpose is to make passive investments of available funds to earn a reasonable return to enhance the holding company's/nnncial strength and to provide a potential source of funds for future construction by r

PSE&G.

Effective May 1,1986, Enterprise became the owner of all of the outstanding Common Stock of PSE&G

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as a result of a cesporate restructuring of PSE&G pursuant to a Plan and Agreement of MerSer. In the merger

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and restructuring, each share of ou: standing Common Stock of PSE&G was converted on a share-for-share basis into Common Stock of Enterprise and each share of $1.40 Dividend Preference Common Stock of PSE&G was either converted into one half of a share of Common Stock of Enterprise or exchanged for $18 cash, at t'ne ortion of the holder. The restructuring d d not result in any change in PSE&G's Preferred Stock or debt secun les. As contemplated by the restructuring, on May 20, 1986, PSE&G paid a non cash dividend to Enterprise of the capital stock of two of PSE&G's subsidiarm. CEA and Resources. As a result, CEA and Resources are now wholly-owned subsidiaries of Enterprise. On October 30, 1986, the BPU approved agreements by PSE&G and the major parties in PSE&G's recent gas base rate case and gas raw materials adjustment clause proce:dmgs which provided, among other things, for the removal of EDC, then a wholly-owned gas and oil cap!o nion subsidiary of PSE&G, from rates. See Rate Matters. This regulatory

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action permitted EDC to tecome a wholly-owned subsidiary of Snterprise so as to fully separate it from the l

utility, and on Decen,ber 21,1986, PSE&G paid a non-cash evidend to Enterpnse of the capital stock of

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EDC.

The purpose of the restructuring was to create a corporate structure to provide the flexibility to effectively participate in a more competitive energy marketplace and so pursue non regulated business opportunities closely ahrned to the core business. However, the electric ard gas business of PSE&G will continue es the principal business of Enterprise, Enterprise has set a goal of uchieving 10% of total net income by 1991 from i-its non-regulated subsidiaries.

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• PSE&G's electric and gas service area is a corridor of approximately 2,600 square miles running diagonally

. across thc; State of New Jersey from Bergen County in the northeast to en area below Camden in southwestern New Jersey. The greater portion of the area is served with both electricity and gas, but small parts are served with gas only and other parts with electricity only. This heavily populated, industrialized territory encompasses most of New Jersey's largest municipalities, including the six largest cities-Newark, Jersey City, Paterson, Elizabeth. Trenton and Camden-in addition to approximately 300 suburban and rural communities. It contains a diversified mixture of commerce and industry, including major facilities of many corporations of national prominence.

Under the generallaws of New Jersey, PSE&G has the right to use the public highways, streets and alleys in New Jersey for the erection. laying and maintenance of poles, conduits and wires necessary for its electric operations. PSE&G must, howes er, first obtain the consent in writing of the owners of the soil for the purpose of erecting poles. In incorporated cities and towns, PSE&G must obtain from the municipality a designation of the streets in which the poles are to be placed and the manner of placing them. PSE&G's rights are also i

subject to regulation by municipal authorities with respect to street openings and the use of streets for erection of poles in incorporated cities or towns.

PSE&G, by virtue of a special charter granted by New Jersey to one of its predecessors, has the right to use the roads, streets, highu ays and public grounds in New Jersey for pipes and conductors for distnbuting gas.

PSE&G believes that it has all the franchises (including consents) necessary for its electric and gas operations in the territory served by it. Such franchises are non-exclusive.

PSE&G generally supplies electric and gas service within its service territory without competition from other public utilities, municipal electric or gas plants, or any other entities. However, the nature of the electric and gas utility business is changing in that it is becoming more competitive. On the electric side. PSE&G l

l is presently experiencing competition from cogeneration and small power production projects being constructed pursuant to the Public Utility Regulatory Policies Act of 1978 (PURPA). These projects supply electrical and steam energy to existing PSE&G customers and excess electricity is sold to PSE&G or other electric utilities pursuant to the purchase requirements of PURPA. PSE&G presently expects that such projects will account for approximately 750 megawatts ofinstalled generation in its service territory by the year 2000.

j PERC is currently conducting an inquiry to determine whether the current regulatory framework for the electne industry in general and the cogeneration market in particular should be deregulated or deregulated and whether it would be appropriate to initiate a rulemaking proceeding to effectuate such changes. FERC's j

inquiry is expected to examine, among other things, whether the bulk power distribution market should be deregulated and made available on an equal basis to all w ho wish to transmit electric energy. Any such decision by FERC, u hich would be implemented only after a rulemaking procedure, if ultimately upheld in the courts, would make a fundamental change in the electric business and could provide a framework for utilities to l

compete with each other for certain customers.

l The current FERC inquiry into deregulation of the electric business follows similar action on the gas side. On October 9,1985 FERC issued Order 436. Generally, this Order requires each interstate gas pipeline company to make its pipeline capacity available on an equal basis to all parties who wish to transport natural gas through the pipeline,if the pipeline company elects to provide transportation of natural gas for any party other than through a full certification procedure at FERC. The full implementation of Order 436 is awaiting fmal FERC approval of various settlements between the interstate pipeline companies and'their suppliers,

)

customers and other parties. However, the effect of Order 436 is that the pipeline companies themselves and 1

other suppliers will have enhanced access to certain PSE&G customers for the purpose of supplying gas service.

PSE&G also competes with other energy sources, principally fuel oil, within its service area. The recent relatively low les el of the price of oil has resulted in the loss of sales to gas customers with dual fuel capability.

In addition, other companies supply gas service in certain portions of PSE&G's electric territory, and others supply electricity in parts of PSE&G's gas service area.

At December 31, 1986, PSE&G provided service to approximately 1,778,000 electric customers and 1,385,000 gas customers. PSE&G is not dependent on a single customer or a few customers for its electric or gas sales. For the year ended December 31,1986, PSE&G's operating revenues aggregated 54.5 billion, 2

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Fuancid information'with respect to busists segments of Enterprise hpt forthin Note 10 of Notes-to Consolidate.d Fic.sn:ial Statements on page 44 of Enterprise's 1986 Anmial Report to Stockholders filed i (h

- as Exhibit 13 hereto,%hich information in said Mcce 10 is incorporated by refe're'nc' bdr.s by this reference.

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thereto.

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PSE&G's business is seasonal in that saledof electricity are higher during thelumner months because ; I o,' air cen#f.ionitig requirements, w. $ ales of Ess'are greater 'tn the w!r ter months due to' the use of gas for

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PUBLIC SERVICE ELECTRIC AND G COMPANY.

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PSE&G has generally experienced some of the problems presedv common to the electric and gas utility ' 4 '

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1 industries 'in general, such as the need for adequate and timely rate milef(see Rate Matters and Construction i

0-1 and Financing), increased costs of construction (see Rate Matters ar3d Construction and Financing) the efR: cts 1

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of energy conservation efforts oti electric kilowatthour and as thern salo (see Certain Operating Statistics),

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operating restrictions, increased costt and delay 5 attributable to environmemai regulations (see Environmental' Contrcis), and uncer'ainties regarding the avai!vbility of reprocessing and storage facilitim for spent nuclear fuel (see Electri6 Fuel Supply).

s Rate Matters i

On Febtuary t.1967, the BFU announced su oni cedion-in PSE&G's most tecent electric r$te cue.

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' The decisim hs.s resulted in a net decrease in electric rates of?approximately $353.4 millior.. effective February 14, lyS7, as a result of a base rate increase of $421.5 million, offset by a decrease of $77.2 millien 4

to reflect toier taxes as a result of the first year's impact of the Tax Refo"m Act of 1986 ar.d a $697.7 mflion decrease in the electric lewlized, energy idjustment charge (LEAC). The ruling disallowed th'e indusion in rate base of $431.5 millio a et FSEkG's share of Hope Creek costs, and disallowed a return on an additbnal 557.7 million of Ilope Cxer costs as a pemity for exceeding the targeted cost of Hope Creek urider 'the Cost l

Containment Incentive Agtesment for Vope Creek described below. These disaPowancenes'ulted in reduciious l

in 1986 and 1985 earnings a3 a resultof PSE&O's adopdon of Statement No 90 of the Fmancial Accounting 1

Standards Board (SFAS 90)'disctnsed below. Howevsr, the decision d d permit PSE&G to incide cur.rently in its rate base all of the alloived costs of Hcpe Creek. without a phase-in. The BPU further ordered that Hope Creek be depreciated a' r.a annual rate of 3.08% based on a 40 year service lif 3.and that decommissioning costs be provided througl ut.eenal fundmg. The BMPs decision alto requires PSS&G to file an ufjustment

-J to base rates for 1988 to reflect the further decrease ir Federal inc&me taxes for that yees b a result of the Tax Reform Act of 1986. The ruc & cision allowed a retum on common equity of 13.0% add a return on

,,N) rate base of 10.65%. PSE&G expects that the BPU's rate order will have the effect of reducing future earnings generally. See Credh Ratings.

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• decision has been confirmed by written Summary decision and Order issued February 13, 1987. This will be s;iMemented by a final Decision and Order that will more fully explain the rationale of the BPU's decism. PSE&G will await receipt of the final Decision and Order of the BPU before making l'

a determination as t3 whether to seek reconsideration and/or appea.l.

PSEAG had filed As sequest for c.n ' increase in base rates in D : ember 1985. The filing alt.o included 4

a grc>povd rMuctie in the LEAC to ofNt a portion of the base rete merease. PSE&G's final revised posjion 1 !

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. in the case requested an increise in electric base rates of $802.1 million, offset by 577.2 million for the

• recognition of the 1987 impact of the Tax Reform Act of 1986. This increase in base rates was to be offset by a proposed decrease in the LEAC of $502.9 million, which would have resulted in an overall net increase in electric rates of $222.0 millic7 The principal item relating to the proposed increase in electric base rates was the inclusior, of PSE&G's costs of constructing the Hope Creek Generating Station, which was completed in December 1986. Hope Creek is a 1,067 megawatt nuclear unit owned 95% by PSE&G. PSE&G's position on the gas base rate increase was a request for an increase of $28.5 million. However, PSE&G subsequently entered into an agreement described below for a reduction in gas base rates of $30 million. The final position r;flected a revised request for both electric and gas of a return on common equity of 15.25% and a return on rate base of 10.54%.

PSE&G's share of the cost of constructing Hope Creek through February 6,1987 was $4.276 billion, including $970 million of allowance for funds uud during construction (AFDC). Hope Creek was constructed under the terms of a Cost Containment Incentive Penalty Agreement (Cost Containment Agreement) which wIs entered into in 1982 by PSE&G, the Department of the Public Advocate of the State of New Jersey, the Department of Energy of the State of New Jersey and the other owner of Hope Creek. The Cost Containment Agreement was approved by the BPU in 1983. Under the Cost Containment Agreement, a target cost of $3.795 billion, of which PSE&G's share was 53.556 billion, and a target in-service date of December 1986 were established for Hope Creek. The cost Containment Agreement also provides for an earnings penalty for Hope Creek costs allowed by the BPU which are in excess of the target cost, under which PSE&G's revenue requirement related to rate base is based on the exclusion from rate base of 20% of costs incurred in excess of the cost cap. As mentioned above, this requirement resulted in the disallowance of a return on $5' 7 million of Hope Creek costs in excess of the cost cap. The disallowed return was written off in accordance with SFAS 90.

The LEAC reduction is for the ten and one-half month period beginning February 16,1987 through December 31,1987. The decision reflects lower projected energy costs during the balance of 1987, continues the deferral of $70 million of replacement energy costs associated with outages at Salem Generating Station resulting from the failure of electric generators during 1984, and includes a disallowance of $2.8 million of replacement energy costs associated with an outage at Peach Bottom Unit No. 2 during 1985 for the replacement of recirculation piping due to intergranular stress corrosion cracking.

I The BPU's decision also announced a performance standard based on the aggregate capacity factor for the five nuclear units ia which PSE&G owns an interest (Salem 1 and Salem 2-42.59%; Peach Bottom 2 f

and Peach Bottom 3-42.49%; and Hope Creek-95%). The standard is premised upon a targeted 70%

capacity factor, with a deadband between 60% and 80% within which no penalty or award would be incurred.

C:pacity fxtors ranging between 50% and 60% or between 80% and 90% would trigger a penalty or incentive,

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respectively, of 20% of the difference in energy costs as a result of the units' operation. Capacity factors of between 40% and 50% or between 90% and 100% would result in a 25% penalty or award. Capacity factors below 40% would generate no specific numeric penalty but would require the issue to be brought before the BPU for review to determine the appropriate disposition of the replacement power costs. Any penalties incurred would not be permitted to be recovered from customers and would reduce net income. See Electric Operations for the recent capacity factors of these units.

On October 30,1986, the BPU approved agreements by PSE&G and the major parties in PSE&G's gas i

b:se rate case, which provided for an annual reduction in gas base revenues of $30 tHilion, effective October 31, l

1986 and for the removal of EDC, at that time a wholly-owned gas and oil exploration subsidiary of PSE&G, l

from inclusion in its gas rate base for ratemaking purposes. In the BPU approved agreement, PSE&G was cllowed to defer any loss on its investment in EDC as a result of any write-down of the value of reserves as of December 31,1986 and to seek recovery of such loss over a period of not less than 10 years in its next gas rate base proceeding. On October 31,1986, the price paid by PSE&G for natural gas from EDC was reduced as a result of a change in PSE&G's gas raw materials adjustment clause approved by the BPU. As a result of these regulatory actions, EDC wrote down the value of its reserves as of December 31 1986 by

$134.5 million, which amounts to $70.5 million after the tax effect, to reflect the lower net realizable value i

ofits oil and gas reserves. PSE&G has deferred $58.8 million of the after tax loss and will seek recovery of the entire $70.5 million in its next base rate case. Future regulatory action with respect to EDC's write-down of assets may require the amortization or immediate write-off of the $56.8 million being deferreti by PSE&G.

For further information see Gas Operations and item 2. Properties-Gther Subsidiaries of Enterprise.

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Certain information about PSE&G's base rate changes approved by the BPU since 1982 is set forth in the following table, based in each case on the applicable test year:

Allowed Allowed ste E I"*"** I" ^""""' N "" ""

ate o Co on Date of Application Approved Return Equity Electric Gas (Thousands of Dollars) 2/81 2/82 10.67 %

16.00 %

$337,814

$52,061 7/83 3/84 10.91 15.50 246,774 39,668 12/85 10/86 (a)

(a)

(30,000) 12/85 2/87 10.65 13.00 421,457(b)

(a) The BPU approved an agreement of the principal parties which did not specifically address the allowed returns.

(b) Reduced to $344.3 million by the impact of the Tax Reform Act of 1986.

Additional information is set forth in Note 2 of Notes to Consolidated Financial Statements-Rate Matters on page 39 and Note 5-Deferred items-Gas and Oil Exploration Plant Write-Down, on page 41, of Enterprise's Annual Report to Stockholders filed as Exhibit 13 hereto, which information in said Notes is incorporated by reference herein by this reference thereto.

Adjustment Clauses PSE&G has levelized adjustment clauses referred to above which are designed to permit adjustments for changes in electric energy and gas raw materials costs, as approved by the BPU, when compared to levels included in base rates. Charges under the clauses are based upon energy and gas supply costs which are normally projected over twelve month periods. Under the clauses,if actual costs differ from the costs recovered, the amount of the under or overrecovery, along with interest in the case of an overrecovery,is deferred and reflected in 1he average cost used to determine the af 'stment charge for the period in which it is recovered.

Earnings are not directly affected by increases or decreases in the costs of fuel or net interchanged power, or increases or decreases in the clauses, because such costs are adjusted monthly to match amounts recovered through revenues However, the carrying of underrecovered fuel costs ultimately increases financing costs, and the BPU has introduced performance standards applicable to PSE&G's nuclear plants. At December 31, 1986 the overrecovery under the LEAC amounted to $66.0 million, which is net of $70 million of deferred I

I replacement energy costs relating to the Salem generator failures referred to above. The RMAC had an oserrecovery of $20.8 million at December 31,1986.

Electric For information about the LEAC see Rate Matters.

Gas On October 16,1986, the BPU approved a Stipulation entered into by PSE&G which will reduce revenues under the RMAC by $150 million for the period October 31,1986 through September 30,1987. This reduction reflects projected price declines and spot market savings from natural gas purchases.

l implementation of SFAS 90 The Financial Accounting Standards Board adopted SFAS 90 in December 1986. It relates to the I

accounting treatment by regulated industries of abandonments and disallowances of plant costs. Compliance with SFAS 90 is required for 1988, but earlier application is encouraged by the Financial Accounting Standards Board. PSE&G has chosen to adopt SFAS 90 in 1986.

l As a result of the application of SFAS 90, the BPU's direct disallowance of $431.5 million of Hope Creek costs resulted in a reduction of Enterprise's 1986 earnings of $283.9 million or $2.13 per share of Common Stock. In addition, the BPU's disallowance of a return on $57.7 million of Hope Creek costs under the Cost Containment incentive Agreement resulted in a reduction in earnings of an additional $30.8 million or 23 cents per share. This $30.8 million was reflected as a charge to earnings of $99.2 million in 1985, which was j

wl.en PSE&G first estimated that the cost of Hope Creek would exceed the target estimate in the Cost l

l Containment Agreement. The $99 2 million charge to earnings was reduced in 1986 by 568.3 million, or $1 l

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cents per share, to reflect the effects of the direct disallowance and the amortization of the previously discounted cmount.

The adoption of SFAS 90 also resulted in a restatement of prior years' carnings for abandonments, principally the Atlantic Generating Station in 1978 and a second unit at Hope Creek in 1981, on which no return is being earned on the unamortized balances. This had the effect ofincreasing 1986 earnings by $31.8 million or 24 cents per share due to arnortization of previous years' discounting.

The overall effect of adopting SFAS 90 resulted in a charge to earnings, after taxes, of $183.8 million, or $ 1.38 per share in 1986, and 584.9 million, or $.69 per share,in 1985. The adoption of SFAS 90 will continue to have a negative impact on twelve-month earnings through November 1987.

For further information see Note 1 of Notes to Consolidated Financial Statements--Statement of Financial Accounting Standards No. 90 (SFAS 90) on page 39 of Enterprise's 1986 Annual Report to Stockholders filed as Exhibit 13 hereto, which information in said Note is incorporated by reference herein by this reference thereto.

Credit Ratings On February 12,1987 Standard & Poor's Corporation announced that it had downgraded the rating on PSE&G's First and Refunding M,rtgage Bonds (Mortgage Bonds) to A+ from AA, the rating on unsecured Debenture Bonds and Preferred Stock to A from A+, and the rating on commercial paper to Al from Al +. On Febiuary 13,1987, Moody's Investors Service Inc. announced that it was reviewing PSE&G's debt and preferred stock ratings for a possible downgrade. On March 4,1987, Duff & Phelps Inc. announced that it had downgraded the rating of PSE&G's Mortgage Bonds to 4 (AA-) from 3 (AA), the rating on unsecured Debenture Bonds and Preferred Stock to 5 (A +) from 4 (AA-). The rating on commercial paper remained unchanged at Duff 1 +. The rating agencies indicated that the reason for their action was the BPU's February 6,1987 oral rate decision and the expected negative effects thereof, including the effects of the nuclear plant performance standards adopted by the BPU.

Moody's investors Service Inc. also indicated that it was monitoring a bill that has been introduced in the New Jersey Senate to require the DPU to set the rates for the electricity generated by Hope Creek on the basis of the market price of the electricity. In the most recent base rate case, the BPU rejected market pricing for Hope Creek and established rates based on the traditional method ofincluding the cost of Hope Creek in rate base, less the disallowances referred to above. As previously reported by Enterprise and PSE&G, the implementation of market pricing as was proposed in the rate case for Hope Creek would have imposed severe financial hardship on PSE&G, adversely affecting its ability to finance, to properly make needed improvements to its plant and to continue to pay dividends at present levels. Similar effects could result from the proposed legislation, if enacted. PSE&G will vigorously oppose the adoption of any such legislation and will challenge the validity thereof if enacted.

Construction and Financing j

PSE&G maintains a continuous construction program, which includes payments for nuclear fuel. The program is continuously reviewed and periodically revised as a resuit of changes in economic conditions, revised losd forecasts, changes in the scheduled retirement dates of existing facilities, changes in PSEaG's plans, price changes and cost escalations under construction contracts and requirements of regulatory authorities and law, as well as the timing and amount of rate relief and the ability of PSE&G to raise necessary capital. Although deferrals in construction timing may result in near-term expenditure reductions, over the long term, cost escalation and general inflationary price trends could increase costs. The present estimates of expenditures through 1991 include an average escalation adjustment of approximately 4% per year for increases in the costs oflabor and materials. PSE&G is continuing to experience increases in the cost of construction of facilities as a result of recurring rises in the costs of materials and labor, and requirements for environmental purposes.

]

(See Environmental Controls.)

' Construction expenditures are projected to decline substantially as a result of the completion of Hope Creek in December 1986. PSE&G does not presently propose to construct any new base load generating freilities for service during this century. This is based on P3E&G's current estimate of future electric peak demand, a continuing commitment to conservation and load management programs, the maintenance of l

existing capacity in good condition for an extended period of time, and an expectation of some installation i

by others of resource recovery, cogeneration, and other non-utility generating facilities from which PSE&G would purchase energy and capacity Uncertainties, however, in such factors as the future demands of 6

I

V

. customers, the effectiveness ofload management activities, the long tenn condition of some of the aging plants,

^

and the amounts of non-utility generation which may be installed all require that f he nted for new generating capacity be evaluated periodically.

Gross additions to utility plant during the three year period ended December 31,1%6 amounted to $3.2 billion, including $596 million of AFDC. Retirements of ulty plant for the same period totaled $266 million.

In 1986 construction expenditures amounted to $1.0 billion including $241.3 million of AFDC.

The following tabulation sets forth PSE&G's estimated construction expenditures, including AFDC, for the years 1987 through 1991.

1987 1988 1989 1990 1991 Total g

(Millions of Dollars:

Nuclear Generating Facilities

$136

$127 5 96 5 94 5 95

$ 848 Nuclear Fuel..........

86 94 89 78 109 t 6 Transmission and Distribution 198 192 161 155 158 h4 Other Generating Facilities....

70 109 100 91 83 453 Total Electric..

490 522 446 418 445 2.321 Gas Production Facilities......

1 I

2 2

2 8

Transmission and Distribution 125 136 101 103 108 573 Total Gas.

126 137 103 105 110 581 Miscellaneous Corporate.....

38 52 34 28 30 182 Total.

$654

$711

$583

$551

$$85

$3.084 Allowancefor Funds Used During Construction (which is included in the above figures)

$ 59

$ 41

$ 38

$ 36 5 35

$ 209 PSE&G has received regulatory approval to redeem the following securities during 1987 and 1988:

First and Refunding Sfortgage Bonds:

Date Current First Elisible Principal Redemption For Series Maturity Date Amount Price Redemption 9%%

March 1,2000

$98,000,000 104.67 %

3 175 12%% D(A)

April 1, 2012 523,500,000 102.00 %

4-1-87 12% E October 1,2004 5 8,730,000 107.04 %

10-1-84 l

9%% J November 1,2008

$99,000,000 107.69 %

11 1-83 9M% K July 1,2009

$99,000,000 107.59 %

7 1-84 14 % % O September 1,2012

$42,300,000 111.90 %

9187 12%% P December 1,2012 585,044,000 109.74 %

12187 Preferred Stock:

Date Current First Eligible Par Outstanding Redemption For Series Value Shares Amount Price Redemption 8.70c/c(A) $ 25 2,000,000

$50,000,000

$ 25.75 10-1-81 9.627c(A) $100 350,000

$35,000,000

$102.00 7 1-80 9.75?c(A) $ 25 1,600,000

$40,000,000

$ 25.75 1-181 12.80 %

$100 350,000

$35,000,000

$112.80(B) 10-1 87 (A) Called for redemption effective April 1,1987 (B) Redemption price October I, 1987 - 5109.60 PSE&G has also received regulatory approval to issue an aggregate of $650 million of First and Refunding Mortgage Bonds and $170 million aggregate par value of Preferred Stock for funding such redemptions and for issuance for general corporate purposes. PSE&G intends to redeem the above securities as market conditions and PSE&G's fmancial requirements make such redemptions economic. Such refundings will reduce PSE&G's interest requirements on long-term debt and dividend requirements on Preferred Stock thereby lowering fixed costs and improving coverage ratios to the benefit of PSE&G, its customers and its stockholders.

During 1987, Enterprise willissue and sell shares ofits Common Stock through its Dividend Reinvestment l

and Stock Purchase Plan and to various employee benefit plans of PSE&G. Proceeds from such sales are l

expected to aggregate approximately $100 million and will be used for general corporate purposes. Additional sales of Common Stock may occur.

7 1

1 i

In addition to the above redemptions. funds must be provided through 1991 for cash sinking fund payments of PSE&G bonds and preferred stock of $52 million and maturities of bonds of $251 million.

PSE&G is authorized by the BPU to have short term obligations outstanding in the aggregate, at any time, up to 5300 million. In 1986, all of PSE&G's short term debt requirements were funded through the sale of commercial paper, and at year end short-term debt outstanding was $139 million. PSE&G has available lines of credit with banks aggregating $237 million. PSE&G also has a $200 million revolving credit agreement with a group of banks in the United States and a $75 million revolving credit agreement with a group of foreign banks. At December 31,1986, PSE&G's capitalization consisted of 46Fo debt,87c preferred stock and 467o common equity.

PSE&G expects that with adequate rate relief, as to which no assurance can be given, it will be able for the next five years to generate internally nearly all of its construction expenditure requirements. PSE&G's ability to generate internally adequate funds for construction and to raise capital at reasonable rates is l

dependent upon the amount and timing of future rate relief, as well as general economic conditions and conditions in the capital markets where PSE&G must compete for investors' funds.

During 1986, $717.8 million was raised from the sale of Common Stock by Enterprise and PSE&G and First and Refunding Mortgage Bonds by PSE&G. Proceeds from those sales of securities were added to the general funds of Enterprise and PSE&G, as appropriate, and used for general corporate purposes, including the refunding of certain higher cost PSE&G securities and the payment of construction expenditures. The detail of such issuances and redemptions of securities during 1986 is as follows:

Issuances Shares Issued Proceeds Common Stock:

Dividend Reinvestment and Stock Purchase Plan 2,424,971 5 93.3 Employee Stock Purchase Plan 110,846 4.1 Thrift and Tax-Deferred Savings Plan 96,053 3.8 Payroll Based Employee Stock Ownership Plan 60,912 2.4 103.6 First and Refunding Mortgage Bonds:

94fo Series S due January 14,1996.

73.7 947o Series T due March 1,2016 99.3 7%7c Series U due April 1,1996 245.0 8%cc Series V due AprF 1,2016 196.2 614.2 Total

$717.8 Regular Redemption Redemptions Price Cost (MHHons of DoHan)

Preferred Stock (April 1,1986):

192,500 shares of 12.25?c Series

$106.00 5 20.4 500,000 shares of 13.44fo Series

$110.08 55.0 75.4 i

l First and Refunding Mortgage Bonds:

(

June 1,1986:

l

$119,750,000 principal amount.

l 127c Series L due Nosember 1,2009 109.52co 131.2 586,500,000 principal amount, 12%fo Series M due June 1,2010 109.62cc 94.8 August 1,1986:

$ 100,000.000 principal amount, J

1(M 5

{

15?nfo Series N due August 1,1991 104.549'o 330.5 Total

$405.9 8

Expenditures through 1991 for nuclear generating facilities will be for normal replacements and improvements at the operating nuclear plants in which PSE&G owns an interest. Some of such costs reflect expenditures associated with compliance with the extensive requirements of the Nuclear Regulatory Commission (NRC) relating to the operation of nuclear power plants (see Electric Operations).

The staff of the NRC has recommended to the NRC Commissioners that safety modifications be made for 24 nuclear reactors designed by General Electric Company. The modifications relate to plants constructed with a Mark I containment, which includes PSE&G's Hope Creek unit, and Peach Bottom Units 2 and 3 operated by Philadelphia Electric Company (PE). PSE&G cannot predict what action the NRC may take or what the ultimate costs of any modifications may be.

The construction program recognizes the current and planned aspects of PSE&G's comprehensive load management program which is designed to reduce the rate of growth in electric sptem peak demand and to improve the system load factor without restricting the continued economic development of PSE&G's service area. The load management program encourages conservation and shifts in patterns of consumption of energy designed to result in deferral of future construction. PSE&G's current forecast of the average annual rate of growth through 1997 of electric system peak demand is 0.9%, and indicates an estimated reduction of approximately 890 megawatts in peak demand (about 9.6%) by the summer of 1997 as compared with estimated peak demand without load management.

The present load management program includes, among other things, both seasonal and time-of-use pricing, use of interruptible rates for large electric customers, utility control of certain customer appliances and equipment, off-peak storage of energy, promotion of energy-efficient buildings and appliances, promotion of customer-owned demand control devices and a program of studies of emerging load management techniques such as coolness storage and heat pump water heaters. In 1982, the BPU directed PSE&G to institute an accelerated conservation, cogeneration and load management plan designed to make information on these subjects available to all classes of customers and to proside certain materials and services to achieve such ends. This plan, w hich now encompasses 31 different programs, was implemented in 1983. The major programs approved by the BPU are zero/ low interest loans, energy audits, insulation services, appliance rebates and a series of free programs specifically designed to help low income customers. PSE&G has budgeted $21 million durmg 1987 to provide all materials and services in the plan.

On February 4,1986, the New Jersey Department of Energy adopted final regulations which would require that all energy conservation plans of utilities, including PSE&G's plan, meet certain annuallevels of customer energy savings. On March 19,1986, the New Jersey Utilities Association and the State's seven electric and gas utilities, including PSE&G, filed a Notice of Appeal of the final regulation with the Appellate Division, New Jersey Superior Court. On April 28,1986 the same parties requested a stay of the effectiveness of these regulations from the Chancery Division, New Jersey Superior Court, which was granted after oral argument on April 29,1986. Oral argument on the appeal was held on February 25,1987.

Electric Operations The following table sets forth certain information as to PSE&G's installed generating capacity as of December 31, 1986:

Installed Source CapacitySIW)

Percentage Conventional Steam Electric Oil fired 2,330(a) 23 Coal-fired New Jersey.

1,212(b) 12 Coal fired Pennsylvania (mine mouth)(c).

770 8

j Combustion Turbine (d) 2,708 27 j

Diesel (c) 5 Nuclear (c)

New Jersey.

1,956 19 Pennsylvania 886 9

Pumped Storage (c)(d).

165

_2 Total 10.032 LOG 9

. ~ - _. _ _. -_ - _ - _

(a) Units'with. aggregate capacity'of 1,399 megawatts can also burn gas.

--(b) Can also burn gas.

-(c) PSE&G's share of jointly-owned facilities.

(d) Primarily used for peaking purposes.-

The capacity available for' operation at any time may be less than the installed capacity because of temporary outages for inspection, maintenance, repairs, legal and regulatory requirements or unforeseen circumstances.

The maximum one hour demand (peak load) w hich PSE&G has experienced was 7,735 megawatts, which occurred on July 7,1986. The previous peak load was 7,721 megawatts, which occurred on August 15,1955, up from the previous high of 7,549 megawatts which occurred on August 14, 1985.

' PSE&G owns interests in five licensed nuclear units, consisting of a 95% interest in Hope Creek Generating Station, a 42.59% interest in Salem Generating Station Units No. I and 2 and a 42.49% interest in Peach Bottom Generating Station Units No. 2 and 3. The Salem and Hope Creek Stations are operated by PSE&G and Peach Bottom is operated by PE.

]

The capacity factors of the PSE&G nuclear units for 1986 were as follows: Salem 1 -73.2%, Salem 2

-54.8%, Peach Bottom 2 74.9%, Peach Bottom 3 53.5% and Hope Creek-88.4% (December 20,1986 through February 28,1987). The BPU's oral decision of February 6,1987 announced a performance standard which would be based on the combined capacity factors of these five nuclear units. See Rate Matters.

On March 1,1987, a tanker collided with an electric transmission tower in the Delaware River near Salem and Hope Creek. The collision toppled the tower dragging a part of the attached 500,000 volt transmission line into the river. This extra high voltage transmission line runs from Salem and Hope Creek across the Delaware River and interconnects with the electric transmission grid to the West. Delmarva Power & Light l

Company, the owner of the portion of the line that crosses the river, is taking action required to repair the i

transmission line, although restoration may take up to one year. As a result of the accident, the output of l

Salem 1 and 2 and Hope Creek was initially reduced by approximately 25% to assure reliable operation in the event of the loss of another transmission line serving Salem and Hope Creek. PSE&G is presently studying interim measures designed to permit operation of the three units at higher levels of output during this transmission outage. Also as a result of the accident PSE&G's costs for electric energy could be increased due to the replacement of energy which Salem and Hope Creek would have otherwise produced with energy from more costly, alternative sources, and due to transmission limitations on the importation of economy power from west of New Jersey attributable to the outage of the damaged line. In addition, PSE&G could incur penalties as a result of the performance standards adopted by the BPU described under " Rate Matters" or l

under the Public Utility Accident Fault Determination Act described under " Regulation" On September 3,1986, during the power ascension and testing program at Hope Creek a ground fault l

was detected in the rotor for the electric generator. The fault, which registered principally at the low rotor l

speeds, has cleared when the generator is brought up to full rated speed. This condition has repeated itself on several occasions, when the unit is being shut down or started up. During periods when the unit has been on line producing power, no ground fault has appeared.

A ground detector relay system is in place which is designed to trip the unit to protect the generator from damage if the ground occurs while the unit is on line. PSE&G proposes to continue to operate the l

. generator until the first refueling outage for Hope Creek and to make any appropriate repairs to the rotor at that time. However, if the generator ground should occur during operation, the relays would trip the unit and PSE&G would take an outage to conduct repairs which, depending on the cause of the ground, could require one to three months. If a ground occurred during operation, or a failure occurred, the capital and replacement power costs associated with any such unscheduled outage could be substantial.

In August 1986, an electrical power supply problem at the Salem Generating Station caused Salem 2 to shut down. Investigation revealed that the station transformers which handle the internal electrical power needs of f ie station were unable to accommodate the electrical loads placed on them during certain transient conditions. Since the station was originally constructed, there have been many equipment additions to increase operating efficiency and to comply with mandated NRC directives. These cumulative modifications may have approached the design limits of the station's internal electrical operating system during transient conditions.

PSE&G has developed a permanent repair to this condition which will be available for implementation during the first outage of Salem 1 or 2 occurring after the beginning of March 1987. As a temporary measure, 10

PSEAG initially committed to the NRC to limit certain electrical loadings at the station, which had the etTec "flimiting the simultaneous operation of the two Salem reactors to about 85% of the power capacity of each l

nit. PSE&G has subsequently made certain modifications to the electrical configuration of the plant which E#rmit the simultaneous operation of both units at full power. However, under both of these tem

• lternathe modes of operation, certain failures at either Salem I or Salem 2 could trip both units. As a result, eration of the Pennsylvania-New Jersey-Maryland (PJM) Interconnection must be modified to retain reliability on the possible simultaneous loss of both Salem units. This modified operation causes added costs I

for PSE&G, estimated to be approximately $30,000 per day, which will apply until the permanent repairs I

are made.

On November 13,1986, the NRC notified PSE&G that an inspection relating to equipment qualification at the Salem Generating Station had revealed a number of deficiencies in certain procedures. Seven of the

)

deficiencies were classified by the NRC as potential enforcement / unresolved items and were referred to the N RC Regional Office for further action. PSE&G has submitted to the NRC explanations with respect to certain 1

of the alleged deficiencies and has instituted certain corrective actions. PSE&G cannot predict what action, l

if any, the NRC may take in this matter, j

On February 27,1987, the NRC held an enforcement conference as a result of PSE&G's notification to the NRC that Salem 2 had been operated for a short period of time with an emergency core cooling system in an inoperable condition. PSE&G cannot predict what action, if any, the NRC may take as a result.

On September 16,1986, the Annual Emergency Exercise was held for Salem 1 and 2. The NRC evaluation l

of this exercise concluded that the health and safety of the public could be adequately protected and that l

PSE&G's management has the ability to observe, critique, and correct identified deficiencies. On November j

12, 1986, the Annual Emergency Exercise for Hope Creek was conducted with the full participation of the New Jersey state and local entities. The NRC concluded that PSE&G provided adequate protection of the health and safety of the public. The Federal Emergency Management Agency (FEMA) in its evaluation of I

the offsite activities concluded that the New Jersey response also provided for the protection of the health and safety of the public.

On March 2,1984 the NRC issued a report with respect to an inspection of Salem I in December 1983 j

and January 1984 for compliance with the NRC's fire protection requirements. The report indicates that certain i

areas are not in compliance with such requirements and that certain additional information is required. In accordance with accepted NRC practices, PSE&G has submitted exemption requests with respect to certain of such requirements and has supplied the additional information requested. If all of the plant modifications a6 changes in procedures currently indicated by the NRC are ultimately required, it is estimated that

]

PSE&G's share of the cost thereof could amount to approximately $5 million. PSE&G cannot predict what l

further action, if any, the NRC may take in this matter. PSE&G is also conducting an internal review of the NRC's fire protection requirements as they relate to Salem. The results of such review could result in additional l

W fire protection enhancements at Salem, the cost of which could be substantial.

On December 14,1984, PSE&G, PE, Atlantic City Electric Company and Delmarva Power and Light Company, as the co-owners of Salem 1 and 2. jointly filed two civillawsuits in the New Jersey Superior Court, I

Law Division, against Westinghouse Electric Corporation (Westinghouse), the supplier of the nuclear steam supply system and turbine generators of the Salem Units. The lawsuits relate to failures of the Salem I reactor trip breakers in February 1983 and the failure of the Salem 2 electric generator in October 1984. They seek recosery of damages that the Salem co-owners have suffered and will suffer. The first lawsuit asserts that l

Westinghouse failed to warn the Salem co-owners that the instructions provided by Westinghouse for the maintenance of the trip breakers were incorrect, that Westinghouse learned this after such instructions were furnished, and that Westinghouse failed to warn the co-owners that the original instructions (which had been followed by the Salem co-owners) should be changed. Following the trip breaker failure Salem I was shut down for more than two months. The second lawsuit asserts that Westinghouse improperly repaired the Salem 2 electric generator in late 1983 and early 1984 and that, as a result, the maator failed in October 1984.

Discovery is proceeding in these matters and PSE&G cannot predict tne outcome of these lawsuits.

l I

As a result of a generic problem with boiling water reactors, Peach Bottom Units 2 and 3 were inspected by PE during 1983 for cracks in the piping of the residual heat removal and reactor recirculating water systems caused by intergranular stress corrosion cracking. Such inspections revealed indications of cracking in some pipe welds in the system. As a result, permanent repairs, which involved the replacement of piping, were 11 1

r-

r l

completed on Peach Bottom Unit 2 J r,ng an outage that began in April 1934 and ended in July 1985. A

• - 52 week outage for Peach Bottom Unit 3 is scheduled to start in September 1987 to make permar.ent repairs

• to the crack-sensitive piping in that reactor, in connection with the pipe cracking described above, PE, PSE&G, Atlantic City Electric Company (Atlantic) and Delmarva, co-owners (co-owners) of Peach Bottom jointly filed summonses in the Court of Common Pleas of Philadelphia County commencing legal action on April 10,1985 sgainst American Nuclear Insurers (ANI) and Mutual Atomic Energy Liability Underwriters (MAELU) the property damage insurance carriers for Peach Bottom, and on April 25,1985, against the engineer / constructor of and the supplier of the nuclear steam supply system for Peach Bottom. In addition, in January 1986, PE as operator on behalf of the co-owners filed a proof ofloss with Nuclear Electric Insurance Limited (NEIL), with which the co-owners have an insurance policy covering replaccnent power costs for Peach Bottom. NEIL has requested information from PE in connection with its consideration of the proof ofloss filed by the co-owners. ANI and MAELU had denied the claims by the co-owners under the policy prior to the filing of the summons.

PE's requests for exemptions from schedule requirements for fire protection as they relate to Peach Bottom Units 2 and 3 are still pending before the NRC. On May 2,1983 PE requested authorization for continued operation of Peach Bottom Units 2 and,3 until full compliance with the NRC requirements had been achieved.

Since May 2,1983, PE has been filing with the NRC current information, status reports and requests for exemptions, including exemptions from schedules which otherwise would have required completion of certain activities prior to April 1,1983. The NRC has approved all of PE's submissions dealing with technical exemptions to the provisions of the NRC's regulations. On April 11,1986, the NRC directed PE to complete a safe shutdown confirmeto9 program on or before September 30,1986. In addition, the NRC mandated that alternative shutdown modifications for Peach Bottom Unit 2 and common modifications for Peach Bottom Units 2 and 3 be completed and operational before restart from the next refueling outage. On September 30, 1986, PE submitted a safe shutdown confirmatory program to the NRC. The program identified additional modifications needed to conform Peach Bottom Unit 3 with the fire protection regulations. In connection with the submission, PE has requested permission from the NRC to defer the Peach Bottom Unit 3 modifications until its next refueling outage, currently scheduled for September 1987. The failure to obtain exemptions or comply with such requirements could result in the imposition of civil penalties and in the suspension of authority to operate the Peach Bottom units.

PE has advised PSE&G that by letter dated June 6,1986, PE was notified by the NRC of the results of the NRC Region I Systematic Assessment of Licensee Performance (SALP) report review and evaluation of the performance of activities associated with Peach Bottom Units 2 and 3 for the period April 1,1985 through January 31,1986. The report noted that during the assessment period performance problems continued to manifest themselves indicating a lack of adequate management involvement and effectiveness. In June 1986, the NRC conducted an in-depth team inspection of Peach Bottom and met with PE in July 1986 to discuss the results of the team inspection and the SALP Reports. On August 12, 1986 and October 20,1986, PE submitted written responses to the reports stating the actions to be taken by PE to satisfy the concerns expressed by the NRC.

PE has advised PSE&G that by letter dated June 9,1986, PE was notified by the NRC of a proposed 5200,000 fine for failure to follow Technical Specifications at Peach Bottom Unit 3. The incident occurred on March 18,1986, when a control rod was withdrawn out of sequence from the reactor core during startup.

The NRC increased the proposed fine by 100% over the base amount and indicated in its Notice of Violation that such action was taken in part because the enforcement history at Peach Bottom regarding adherence to procedures had been poor. On July 23,1986, PE responded to the Notice of Violation. PE admitted the two violations of Technical Specifications but contested the NRC's proposed increase over the base amount of the penalty and the NRC's statement of the reasons for the increase. By correspondence dated December 12,1986, the NRC rejected PE's request to mitigate the amount of the penalty. PE subsequently paid in full the assessed $200,000 fine on December 24,1986.

PE has advised PSE&G that, by letter dated February 9,1987, and accompanying Notice of Violation, PE was notified by the NRC of a proposed $50,000 fine in connection with the dismissal of an employ:e of a subcontractor at Peach Bottom. The NRC alleged that the worker was dismissed as a result of his having raised concerns regarding whether he had received in March 1985 a radiation exposure in excess of the regulatory limit and belief that he had informed the NRC of his concerns.

The outage of a Salem or Peach Bottom unit causes PSE&G to incur additional replacement energy costs

]

of approximately $5 million to $10 million per month per unit while an outage at Hope Creek causes 1

12 I

~

I "E acement energy costs of approximately $10 million to $20 million per month. Such amounts l

ding upon the availability of other units, the cost of purchased energy, and other factors including I

• od fications to maintenance schedules of other units. As discussed under Rate Matters-Adjustment C overy of replacement energy costs from customers is determined by the BPU in proceedings to set PSE&G I AC and is subject to meeting nuclear perfortnance standards established by the BPU.

/

Operation of nuclear generating units involves continuous close regulation by the NRC. Such regulation involves testing, evaluation and modification of all aspects of plant operation in light of NRC safety and environmental requirements, and continuous demonstrations to the NRC that plant operations meet applicable requirements. The NRC has the ultimatc authority to determine whether any nuclear generating unit may operate.

- PSE&G is a member of the Pennsylvania-New Jersey-Maryland Interconnection (PJM) which integrates j

the bulk power generation and transmission supply operations of eleven electric utilities in Pennsylvania, New

{

Jersey, Delaware. Maryland, Virginia and the District of Columbia, and in turn is interconnected with other j

i major electric utility companies in the northeastern part of the United States. PJM is operated as one system and provides for the purchase and sale of power among members on the basis of reliability of service and operating economy. As a result, the most economical mix of generating capability available is used to meet PJM daily load requirements, and PSE&G's output, as shown under Electric Fuel Supply, reflects purchased power because it is more economical at times for PSE&G to purchase power from PJM and others than to l

produce it. As of December 31,1986, the aggregate installed generating capacity of the PJM companies was 49,489 megawatts. The maximum one-hour demand which has been experienced by the PJM power pool was 37,527 megawatts, which occurred on July 7,1986. PSE&G's capacity obligations vary from year to year due 4

i to changes i~. system characteristics. PSE&G expects to have enough installed capacity for it to meet such obligations during the period 1987-1991.

f PSE&G also purchases electricity directly from certain other utilities (two party purchases) to reduce

/

I its overall cost of energy over that which would result from producing the electacity itself or purchasing it through the PJM.

In addition, PSE&G purchased electricity from certain non-utility generating facilities. During 1986, these non utility facilities provided 0.3% of PSE&G's total electrical energy. This percentage is expected to increase substantially in the next five years as resource recovery facilities, cogeneration, and other non-utility facilities are constructed.

PSE&G is also a pany to the Mid-Atlantic Area Coordination Agreement which provides for review and evaluation of plans for generation and transmission facilities and other matters relevant to reliability of l

the bulk electric supply systems in the Mid Atlantic area.

PSE&G expects to be able to continue to meet the demand for electricity on its system through operation i

of available equipment and by power purchases. However, if periods of unusual demand should coincide with

)

outages of equipment, PSE&G could fmd it necessary at times to reduce voltage or curtail load in order to safeguard the continued operation of its system.

l 1

Electric Fuel Supply The following table indicates PSE&G kilowatthour output by source of energy:

Actual Actual Estimated Source 1985 1986 1987 Fossil Coal New Jersey facilities 18 %

12 %

13 %

Pennsylvania facilities.

14 14 14 Natural Gas 9

6 6

Residual Oil 5

9 4

i Nuclear l

New Jersey facilities 17 17 32

{

Pennsylvania facilities.

7 14 11 j

Two-Party Purchases 11 7

7 l

Net PJM Interchange 19 21 13 Total g%

g%

g%

l 13 I

I 1

I l

a

_ PSE&G's cost of fuel used to genertta electricity in the periods shown below was as follows:

Naturti

~

Nuclear Oil

_ Coal Gas Pennsylvania i

New Jersey Facilities f-Facilities (Mine mouth)

Cents /

Cents /

Cents /

Cents /

Cents /

i.

Million

$/

Million Million Million Million year Bru Barrel Stu

$/ Ton Ben s/ Ton-Stu Bru 1984..........

86.2 31.61 514.3

56.09 214.7 33.49 136.4 435.5 1985.

82.5 29.88 493.2 55.91 212.3 35.67 145.8 404.7 19861...........

75.6 17.13 282.1 53.07 201.3 32.27.

131.6 258.0 Substantially all of PSE&G's electric sales are made under rates which are designed to permit the recovery ofincreases in energy costs over base costs on a current annual basis. (See Rate Matters-Adjustment Clauses.)

Oil PSE&G uses residual oil in its conventional fossil-fired, steam-clectric units. The supply of residual oil is furnished under four contracts with four different suppliers. Two of these contracts expire December 31, 1987, while the others are in effect until June 30,1987 and December 31,1988. PSE&G uses light oilin its combustion turbines which is acquired by spot market purchases. PSE&G does not presently anticipate any difficulties in obtaining oil supplies to replace expiring contracts.

Natural Gas PSE&G also utilizes surplus gas available from its long-term high load factor gas contracts and from various short term purchases to replace oil for electric generation when gas is the more economic fuel. Such use results in savings in fuel costs, which are reflected in PSE&G's electric Levelized Energy Adjustment Clause. As a result of the repeal in August 1981 of Section 301 of the Federal Power Plant and Industrial Fuel Use Act of 1978, there are no effective legal restrictions on the use of natural gas for electric generation

- in existing plants. However, approval by the Federal Energy Regulatory Commission is required for the interstate transportation of natural gas either by virtue of existing blanket authority or through individual proceedings.

Coal

' Approximately 30% of PSE&G's coal supply for its New Jersey facilities is obtained under contracts expiring in 1987. The balance is contracted for each year on an annual basis from various suppliers, many of whom PSE&G has dealt with on a' continuing basis for a number of years, supplemented by spot market purchases. The coal supply for PSE&&s three coal-fired New Jersey units originates primarily in West Virginia and Virginia with an average contracted sulfur content of 1.2%. PSE&G does not presently anticipate any difficulties in obtaining coal supplies to replace expiring contracts.

Since 1971, the New Jersey Air Pollution Control Code (the Code) has permitted the burning of coal with a sulfur content of up to 1% at existmg coal fired generating stations including Hudson 2 and Mercer I and 2 (Mercer). However, under a provision in the Code for existing equipment incapable of burning such low-sulfur coal, the New Jersey Department of Environmental Protection (NJDEP) has authorized Mercer and Hudson to burn up to 1.5% sulfur coal through December 31,1987. Effective June 30,1986, NJDEP imposed an additional permit limitation of a weighted monthly average of 1.2% sulfur on coal burned at Hudson 2.

PSE&G has approximately a 23% interest in the Keystone and Conemaugh coal fired mine-mouth generating stations in western Per.,sylvania. Essentially all of the fuel required by Keystone Station is supplied by one coal company under a contract which can be extended through the yehr 2011. At least 60%, optionally up to 100%, of the fuel required by Conemaugh Station is supplied by another coal company under a contract listing for the remaining life of the station or until the dedicated coal reserves are exhausted. The coal requirements of each station not provided under these contracts are, with minor exceptions, obtained from l

local suppliers.

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r Nuclear Fuel i

The supply of fuel for nuclear generating units involves the mining and milling of uranium ore to uranium concentrate, conversion of the uranium concentrate to uranium hexafluoride, enrichment of that gas, and j

fabrication of fuel assemblies. After spent fuel is removed from a nuclear reactor, it is placed in temporary storage for cooling in a spent fuel pool at the nuclear station site. Salem 1, Salem 2 and Hope Creek have j

adequate on site temporary storage capacity through 2002, 2006, and 2010, respectively. PE has advised l

PSE&G that during 1986, new spent fuel racks were installed at Peach Bottom 2 which will provide storage such that the loss of full-core discharge reserve will not occur until 1996. A similar installation planned for

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Peach Bottom 3 in 1987 will extend its storage reserve until 1998. The new storage racks have been designed

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to accommodate the storage c>f consolidated spent fuel rods. With rod consolidation, the loss of full-cos j

discharge reserve will not occur until 2011 for Peach Bottom 2 and 2012 for Peach Bottom 3. Under the Nucker Waste Policy Act of 1982, the federal government has a contractual obligation for transportation and ultimate disposal of the spent fuel.

j in 1986, PSE&G negotiated two uranium contracts which, in addition to several long-tenn contracts already in place, will ensure sufficient uranium concentrates to meet the current projected requirements for the Salem and Hope Creek units through the year 2000.

Present contracts for conversion, enrichment, and fabrication services meet the fuel cycle requirements for the Salem and Hope Creek units through the years shown in the following table:

Nuclear Unit Conversion Enrichment Fa'urication Salem 1 1990 2014 1996 Salem 2..

1990 2014 1997 Hope Creek 1990 2014 1997 New conversion contracts for requirements after 1990 will be placed after resolution of a law suit (Civil Action No. 84-C-2315, Western Nuclear, Inc., et al. vs. F. Clark Huffman) involvmg a challenge by the domestic uranium mining industry to regulations of the United States Department of Energy (DOE) permitting the DOE to enrich foreign source uranium. In this case, in June,1986, a U. S. District Court ruled in favor i

of the domestic mining industry and placed a 100% restriction effective January 1,1987 on foreign feed l

material sent to tae DOE for enrichment by domestic utilities. The DOE immediately appealed the ruling, and a stay of the injunction restricting foreign material usage was granted. At present, the United States Court of Appeals for the 10th Circuit is reviewing the case, and a ruling is expected in early 1987. The outcome of the case remains uncertain, but PSE&G believes the decision will not adversely affect its ability to obtain enriched uranium. However, any import restriction may increase the cost of uranium to domestic utilities.

PSE&G has been advised by PE that it has contracts to provide the nuclear fuel, and expects to negotiate without difficulty additional fabrication contracts, necessary to fully operate Peach Bottom 2 and 3 through

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1990. PSE&G has also been advised by PE that its contracts for uranium concentrates will be allocated to j

Peach Bottom 2 and 3, and two other nuclear generating units in which PSE&G does not have an interest, on an as needed basis.

PE has also advised PSE&G that it has contracted for the following segments of the nuclear fuel supply

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cycle for Peach Bottom 2 and 3 through the following years:

Nuclear Unit Conversion Enrichment Fabrication Peach Bottom 2........

1992 2008 1988 Peach Bottom 3...

1992 2008 1988 The federal government's present policy is that spent nuclear fuel will be accepted for long-term storage at government owned and operated repositories. At present no such repositories are in service. Although the reprocessing of spent fuel would make available to PSE&G additional nudear fuel, the federal government has not taken the necessary action to mak.e reprocessing available.

In conformity with the Nuclear Waste Policy Act of 1982 (the Act), PSE&G entered into contracts with j

the DOE on June 13,1983 for the disposal of spent nuclear fuel from the Salem units and Hope Creek. Similarly, PE contracted with the DOE m connection with Peach Bottom 2 and 3. Under these contracts, the DOE will take title to the spent fuel at the site, then transport it and provide for its permanent disposal at a cost to utilities with nuclear facilities of 1 mill per kilowatthour of nuclear generation, subject to such escalation 15

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l a's may be required to assure full cost recovery by the Federal government. Under this legislation the Federal government must commence the acceptance of these materials for permanent off-site storage no later than 1908, but PSE&G understands that such storage may be delayed for several years thereafter. The DOE has proposed that the opening of a disposal site be delayed to 2003 because of actual and expected delays in the site selection process for a permanent disposal site due to local and state opposition.

Gas Operations PSE&G supplies its gas customers principally with natural g.n PSE&G supplements natural gas with purchased refinery gas, synthetic natural gas (SNG) which is made from naphtha and other types of manufactured gas, including oil gas made from kerosene and liquekd petroleutn gas produced from propane.

The adequacy of supply of all types of gas is affected by the nationwide availability of energy. On the coldest days approximately 18% of the gas available to supply PSE&G's firm customers comes from its supplemental sources.

As of December 31,1986, the daily gas capacity of PSE&G was as follows:

T p_e of_ gas Therms per day J

Natural gas.

17,107,000 Liquefied petroleum gas 1,794,000 Oil gas.

473,000 l

Synthetic natural gas.

1,125.000 Refinery gas 400,000 l

Total 20.899,000 I

About half of the daily natural gas capacity is high load factor ges available every day of the year. The remainder comes from field storage, liquefied storage and contract peaking supply.

PSE&G's gas sendout in 1986 consisted of approximately 94% natural gas. This gas was obtained j

principally from five pipeline suppliers, Transcontinental Gas Pipe Line Corporation, Texas Eastern Transmission Corporation, Tennessee Gas Pipeline Company, National Fuel Gas Supply Corporation and Consolidated Gas Transmission Corporation, and Energy Development Corporation (EDC), as well as numerous other suppliers on a short term basis. In addition, PSE&G delivered 15.2 million therms of spot purchase gas to i.ustomers under transportation agreement tariffs, accounting for 0.7% of its annual gas sendout. PSE&G1 contracts for high load factor gas with the above pipeline suppliers expire at various times between 1988 and 1992. Although deliveries under these con' tracts had been substantially curtailed during the mid 1970's, no substantial curtailments have been made since 1980. (See Gas Supply.) Since the quantities of high load factor gas available under these contracts are more than adequate in warm months, PSE&G nominates part of such quantities for storage, to be withdrawn on selected winter days, under storage contracts with its principal suppliers. Underground storage capacity currently is 589 million therms.

To supplement high load factor natural gas, EDC is engaged in a gas exploration and development program. During 1986, PSE&G received approximately 174 million therms of natural gas or 7% ofits total natural gas supply from discovery fields of EDC through the facilities of Transcontinental, Tennessee and Texas Eastern.

On 0;tober 20,1986, the BPU approved agreements by PSE&G and the major parties in PSE&G's recent gas base rate case and gas raw materials adjustment clause proceedings which provided, among other things, for the removal of EDC, then a wholly-owned gas and oil exploration subsidiary of PSE&G, from rates. This regulatory action permitted EDC to become a wholly-owned subsidiary of PSE&G's parent, Public Service Enterprise Group Incorporated, so as to fully separate it from the utility. (See Rate Matters.)

The Company's annual average cost of natural gas sendout is shown below:

l t/Million liny gtu l

1984 374.88 1985 376.93 1986 356.41 l

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Substantially all of PSE&G's gas sales are made under rates which are designed to permit the recovery ofincreases in the cost of natural gas and gas from supplemental sources, when compared to levels inclu in base rates, on a current annual basis. (See Rate Matters-Adjustment Clauses.)

Gas Supply Due in part to the enactment of the Natural Gas Policy Act of 1978, the nationwice shortage of natural as that existed during the 1970's has abated. Since 1982 no curtailments to PSE&G by its interstate pipeline suppliers of contracted quantities have occurred. During 1986, PSE&G increased its firm annual long-term contract supply of natural gas by 47 million therms. In addition, PSE&G purchased approximately 925 million therms of low-cost gas to displace more costly gas supplies available under long-term pipeline contracts. These purchases amunted for 39% of the total gas purchased in 1986. This diversification of supply sources provides PSE&G with gre..er reliability of supply, purchasing flexibility and lower cost gas.

Since 1970, varying limitations on additional and new gas load have been imposed by PSE&G and the BPU, including limitations prohibiting any new or additional load during certain periods. Since September 1974, the BPU has been conducting a proceedmg investigating the natural gas supply situation in the State of New Jersey in order to determine whether additional gas load should be permitted and to establish nd use priorities for curnilment if such should be necessary. In this proceeding, the BPU has, since 1978, issued orders authorizing PSE&G to provide an aggregate of approximately 663 million therms of additional annual gas service to firm customers. As of December 31.1986,61I million therms cf new load had been connected and requests for additional connections totaling 62 million therms had been received. The BPU has also required each New Jersey gas distribution company to file periodic reports ofits future gas sources and market requirements and to notify the BPU immediately of any developments which might affect gas supplies. On January 28,1987, PSE&G requested approval of the BPU to add an additional 70 million annual therms of gas service.

The demand for gas by l'SE&G customers is affected by conservation, economic conditions, the weather, the price relationship between gas and alternative fuels and other factors not within PSE&G's control. The ability of gas prices to respond to market conditions is limited by the regulatory nature of the Natural Gas Act and the Natural Gas Policy Act of 1978, as well as by the contracts between PSE&G's pipeline suppliers and their producers. Gas prices resulting from these contracts and legislation or possible future legislation may affect the demand for gas. In accordance with the Natural Gas Policy Act of 1978, effective January 1, 1985 the price of a significant portion of the gas supply under contract with PSE&G pipeline suppliers was decontrolled. As of December 31,1986, decontrol has not had any adverse effect upon PSE&G's cost of natural gas. Effective November 1,1985,in accordance with FERC O'rder 436, a regulatory framework was constructed to increase competition in the gas market through pipeline participation as non-discriminatory transporters of gas. The full effects of these orders upon PSE&G cannot now be fully determined, because FERC has not yet taken final action on settlements of these issues for PSE&G's two largest suppliers, Transcontinental and Texas Eastern (for further information see General).

PSE&G was able to meet all of the demand of its firm customers during the 1985-86 winter season and expects to meet such dereands during the 1986-87 winter season. However, the sufficiency of supply could be affected by several factors not within PSE&G's control, including curtailments of natural gas by its suppliers, the severity of the winter, the extent of energy conservation by its customers and the availability of feedstocks i

I for the production of supplemmts to its natural gas supply. During the 1986-87 heating season through January 31,1987, it was necessary for PSE&G to interrupt service to "interruptible" customers as permitted by the applicable tariff for 3 days. During the 1985-86 heating season, service to such customers was interrupted for 11 days.

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Employee Relations The officers of Enterprise receive their enumeration from the holding company system companies, not from Enterprise. Enterprise has no employees. As of December 31,1986, Enterprise's subsidiaries employed 13,723 persons, of which 13,690 were employed by PSE&G,25 by EDC, and 8 by CEA. PSE&G has union 1

agreements covering approximately 7,900 or 58% of its employees. PSE&G's employees are represented by

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five unions, three of which are affiliated with national laber organizations. The current labor agreements expire Apnl 30,1987, and negotiations for new agreements are in progress.

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• In Janutry 1976 PSE&G was notified by the U.S. Equal Employment Opportunity Commission (EEOC) that a charge of employment discrimination under the Civil Rights Act of 1964, on the basis of race or color, sex and national origin, had been filed against PSE&G and all of the unions representing employees of PSE&G.

Previous to the filing of the charge PSE&G had submitted a considerable amount ofinformation requested by the EEOC's Office of Voluntary Programs, and PSE&G has continued to furnish certain personnel and employment records for review by the EEOC, so that it may determine whether reasonable cause for the charge exists. PSE&G is unable at this time to predict what action,if any, the EEOC may take as a result ofits review l

and investigation.

Regulation Enterprise is entitled to an exemption from regulation by the Securities and Exchange Commission as a registered holding company under the Public Utility Holding Company Act of 1935, except for Section 9(a)(2) thereof, which relates to the acquisition of 5% or more of the stock of an electric or gas utility company.

Enterprise is not subject to regulation by the BPU, except potentially with respect to certain transfers of control, and is not subject to regulation by FERC.

As a New Jersey public utility, PSE&G is subject to comprehensive regulation by the New Jersey Board of Public Utilities (BPU) including, among other matters, regulation of intrastate rates and service and the issuance and sale of securities. As a participant in the ownership and operation of certain generation and transmission facilities in Pennsylvania, PSE&G is subject to regulation by the Pennsylvania Public Utility Commission in limited respects in regard to such facilities.

PSE&G is subject to regulation by the Federal Energy Regulatory Commission (FERC) and by the Economic Regulatory Administration, both within the United States Department of Energy (DOE), with respect to certain matters, including regulation by FERC with respect to interstate sales and exchanges of electric energy, and accounts, records and reports. In addition, PSE&G is subject to regulation by DOE itself with respect to the disposal of spent nuclear fuel. PSE&G is also subject to regulation by the United States Department of Transportation (DOT) with respect to safety standards for pipeline facilities and the transportation of gas under the Natural Gas Pipeline Safety Act of 1968.

Construction and operation of nuclear generating facilities are regulated by the Nuclear Regulatory Commission (NRC). For additional information relating to regulation ' y the NRC, see Problems of the o

Industry, and Electric Operations. In addition, the Federal Emergency Management Agency (FEMA) is responsible for the review, in conjunction with the NRC, of certain aspects of emergency planning relating to the operation of nuclear plants.

As referred to under Note 8 of Notes to Consolidated Financial Statements--Commitments and Contingent Liabilities, Nuclear Insurance Coverages on page 43, of Enterprise's Annual Report to Stockholders filed as Exhibit 13 hereto, the Price-Anderson provisions of the Atomic Energy Act of 1954, as amended, provide a limitation of $695 million for liability claims as a result of an incident at a licensed nuclear reactor in the United States. Under the Price Anderson provisions, payment for such claims is to be made from funds generated by private insurance and by retrospective assessments against ownerc of licensed nuclear plants in the amount of up to $5 million per nuclear unit for each incident, but no more than $10 million per unit in any one year. These provisions of the Atomic Energy Act expire on A'.;;ust 1,1987, unless extended by Congress. One poposal considered by Congress to extend Price-Anderson would establish a limit ofliability of 56.5 billion per incident with the maximum assessment per reactor to be limited to $63 million, but not more than $10 million per reactor per year. Certain other proposals would eliminate any limit on liability.

PSE&G cannot predict whether the Price-Anderson provisions will be extended or what provisions will be enacted if they are extended. On January 11,1984, in a case to which PSE&G was not a party, the United States Supreme Court held that the Atomic Energy Act, the Price-Anderson limitation of liability provisions thereunder and the extensive regulation of nuclear safety by the NRC do not pre-empt claims under State law for personal, property, or punitive damages related to radiation hazards.

On March 11,1983, New Jersey enacted the Public Utility Accident Fault Determination Act which requires the BPU to make a determination of fault with regard to any past or future accident at any electric 1

generating or transmission facility, prior to granting a request by any utility for a rate increase to cover accident related costs in excess of $10 million. Fault, as defined in the law, means any negligent action or omission of any party which either contributed substantially to causing the accident, or failed to mitigate its l

severity. However, the law allows the affected utility to file for non accident related rate increases during such IR

f fault determination hearings and to recoser contributions to federally mandated or voluntary cost-sharing

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lans such as the Edison Electric Institute (EEI)-Three Mile Island Nuclear Power Plant (TMI) clean-up j

fund described below, and allows the BPU to authorize the recovery of certain fault related repair, clean-up, ower replacement and damage costs if substantiated by the evidence presented and if authorized in writing y the BPU. This law could have a material adverse effect on PSE&G's fmancial position if such an ac were to occur at a PSE&G facility and it was uhimately determined that the accident was due to the fault of PSE&G.

As a result of the TMI accident in 1979, the Governor of Pennsylvania proposed a program to provide for fmancing the clean up of the accident which would result in contributions from the federal government.

the utilities owning TM1 and all other electric utilities in the United States. In response to this plan, the Board of Directors of the EEI, the association of investor owned electric utilities in the United States, adopted a roolution which called for such utilities to contribute towards the clean-up over a period of six years by coritnbutions based upon the sales and the nuclear capacity of each member utility. Participation in the EEI program is voluntary, in 1985, PSE&G agreed to participate in the program and its contribution towards the clean up based upon the EEI formula will average approximately $2.3 million per year through 1990.

In 1982, New Jersey enacted a law requiring the BPU to order that management audits be performed j

on all or a portion of the operating procedures and any other internal workings of every gas or electric utility subject to its jurisdiction, including PSE&G. Under the law, the audits may be performed either by the BPU Staff or under the supervision of designated members of such Staff by an independent management consulting

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firm, chosen by the utility from a list provided by the BPU containing at least five such firms, two of which j

must be of nationally recognized stature. The BPU may, upon completion of the audit and after notice and hearing, order the utility to adopt such new practices and procedures that it shall find reasonable and necessary j

l to promote efficient and adequate service to meet public convenience and necessity.

On September 24,1984, the BPU ordered a management audit of PSE&G. PSE&G chose a nationally recognized management consulting firm from the list provided by the BPU. The audit commenced in the second I

quarter of 1985 and was completed and the final audit report issued in March 1986. The report summarizes the results, in part, as follows:

" Based on the findings of our audit, [we have) concluded that PSE&G is a very well-managed utility.

f (We have) audited nine other utilities and worked closely with dozens more, and PSE&G would rank among the best of the utilities with which we have had experience.

"PSE&G is a very large company, and as one might expect, its level of performance varies across functions. However, the company demonstrated a high level of performance in most areas, and performance was acceptable in all areas. We found no major management or operational deficiencies which are presently causing adverse effects on the cost et quality of service.

"As a result of our review of PSE&G's operations we identified a number of actions the company could take to improse its performance. In all, this report contains 178 recommendations for improvement, 41 of which we believe the company should begin to implement within about six months due to their potential for cost savings or service level improvement."

The auditor concluded that implementation ofits recommendations which had been quantified will result in annual savings of about $9.6 million primarily through reduced carrying and labor charges. The incremental costs ofimplementing such solutions were estimated by the auditor at approximately 55.8 million on a one-time basis. PSE&G has submitted its responses to the auditor's recommendations, and on February 17,1987, filed the final revised responses to the five remaining recommendations. The BPU Staffis currently reviewing these final responses.

Current federal energy laws are designed to decrease oil imports by increasing production of conventional sources of domestic energy, making more efficient use of all energy, and shifting the use of energy to more abundant domestic sources. Among other things, these laws are designed to (1) increase ceiling prices on newly-discovered natural gas, (2) encourage conservation of energy through certain financialincentives and require utilities to provide certain assistance to customers to help them to conserve energy,(3) require state regulatory authorities to consider certain standards on rate design and certain other utility practices such as termination of service (4) require, in some emergency situations, interconnections of power systems and w heeling of power, and (5) provide various tax credits to encourage development of additional energy sources and conservation of energy. The principal effect on PSE&G of these laws has beer to make more natural gas available.

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CEA and Resources are not subject to regulation by the BPU or FERC. EDC is also exempt from regulation, except that certain FERC approvalis required to transport gas discovered by EDC from discovery fields in Texas and Lonisiana to PSE&G in New Jersey.

Environmental Controls PSE&G, in common with most industrial enterprises, is subject to regulation with respect to the environmental effects ofits operations, including air and water quality control, limitation on land use, disposal of wastes, aesthetics and other matters, by various federal, regional, state and local authorities, including the United States Environmental Protection Agency (EPA) and NRC, the Interstate Sanitation Commission, the Hackensack Meadowlands Development Commission, the Pinelands Commission, the Delaware River Basin Commission (DRBC). New Jersey Department of Environmental Protection (NJDEP), the BPU, the United States Coast Guard, the United States Army Corps of Engineers and, with regard to its ownership interest l

in the Keystone, Conemaugh and Peach Bottom generating stations in Pennsylvania, by the Public Utility l

Commission and the Department of Environmental Resources of Pennsylvania (PDER).

Emissions and discharges from PSE&G's facilities are required to meet established criteria, and numerous permits are required to construct new facilities and to operate new and existing facilities. Additional regulations and requirements are also being developed by various government agencies. The principal laws, regulations and agencies relating to the protection of the environment which affect PSE&G's operations are described below.

The New Jersey Environmental Rights Act provides that any person may maintain a court action against any other person to enforce, or to restrain the violation of, any statute, regulation or ordinance w hich is designed to prevent or minimize pollution, impairment cr destruction of the environment, or where no such requirement exists, to protect the environment from pollution, impairment or destruction. Certain federal legislation confers similar rights on individuals.

Construction projects and operations of PSE&G are affected by the National Environmental Policy Act under which all federal agencies are required to give appropriate consideration to environmental values in major federal actions significantly affecting the quality of the environment. NRC approval of construction permits and operating licenses for nuclear generating facilities has been held to constitute such action and therefore requires a detailed environmental review in each case. Such environmental reviews have caused delays in the licensing proceedings of nuclear facilities and more may be expected.

The Federal Water Pollution Control Act, as amended (the Act), provides for the imposition of effluent limitations to regulate the discharge of pollutants, including heat, into the waters of the United States. The Act also requires that cooling water intake structures be designed to minimize adverse environmentalimpact.

Under the Act, compliance with applicable limitations is to be achieved under a National Pollutant Discharge Elimination System (NPDES) permit program. PSE&G has received NPDES permits from EPA for its generating stations and gas plants. PSE&G has applied for renewals of those permits which, by their terms, would have expired, and under applicable regulations, the existing permits continue in effect pending future agency action. These permits impose limitations with respect to chemical and heat discharges to surface waters. Having previously adopted the New Jersey Pollutant Discharge Elimination System (NJPDES),

NJ DEF assumed authority to operate the NPDES permit program in 1982. PSE&G received the final NJPDES renewal discharge to surface water permits for its Hope Creek, Salem, Burlington, Edison, Kearny and Mercer electric generating stations in 1985. Final NJPDES permits for PSE&G's Bergen, Essex. Hudson, Linden and Sewaren electric generating stations were received during the first half of 1986. PSE&G believes that certain of the effluent limitations and conditions contained in various renewed final permits are unreasonable and incompatible with PSE&G's operations and has therefore requested adjudicatory hearings to reconsider and contest those limitations and conditions. In January,1986, PSE&G and NJDEP reached settlement on the contested issues for the Burlington and Mercer permits and the modified permits for these stations reflecting said settlement became effective on August 1,1986. Although PSE&G believes that it will be able to achieve a satisfactory resolution of the outstanding issues concerning the remaining permits for which adjudicatory hearings have been requested, no assurances of such can be given. However, should full compliance at all affected stations be ultimately required without permit modifications, PSE&G would anticipate additional annual expenditures of at hast.55 million.

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l The heat dissipation guidelines contained in the original EPA permits, but stayed pending agency action on PSE&G's request for alternate thermal limit tions, if not relaxed, could result in the shutting down of certain of PSE&G's electric generating stations now in commercial operation and carmot be met by the cooling systems at Salem I and 2 without cooling towers. PSE&G has submitted studies to the EPA and NJDEP to support the request for alternative thermal limitations and to allow continued operation without the use I

of cooling towers. As provided in a Settlement Agreement with EPA and NJDEP, PSE&G may request an i

adjudicatory hearing with respect to the thermal limitations at such time as any final adverse determinations l

are made, either on PSE&G's request for the imposition of alternate thermnl limitations, or on the location.

l design, construction or capacity of cooling water intake structures. If PSE&G's request for alternate thermal l

limitations is ultimately denied, PSE&G's preliminary estimates indicate that its share of capital costs for

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installation of cooling Mwers at all of these stations could exceed $800 million. PSE&G believes that it is I

unlikely that all statbns will be required to install cooling towers and that cooling towers may not ultimately I

be required at any cf such stations. Any requirement would not become final until after hearings and possible subsequent court challenge to the requirement. As a result, no portion of the above amount is included in

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PSE&G's estimates of future construction expenditures. Any escalation of costs would make future installation 1

of cooling towers at any of the stations more costly than presently estimated. A cooling tower has been built l

for Hope Creek.

l As a result of the Act's requirements that cooling water i".take structures be designed to minimize adverse I

environmental impact, PSE&G in February 1984 submitted to NJDEP for review and determination a i

demonstration to assess the environmental impact of the c.tisting cooling water intake structure for Salem I l

and 2 and to evaluate alternative intake technologies and modes of station operation. This latter assessment includes a comparison of the costs and potential environmental benefits, if any, of implementing these j

alternatives. In January 1986 NJDEP awarded a contract to a consultant to review PSE&G's 1984 demonstration. The consultant's report concludes that the thermal effects of cooling water effluent at Salem have little or no adverse regional impact despite the failure of these thermal discharges to meet applicable surface water quality standards. However, the entrainment and, to a lesser extent, impingement of fish and 1

other aquatic organisms due to intake velocity and volume were judged by the consultant in its report to have l

a major potential adverse impact on the Delaware River Estuary.

1 In view of its conclusions concerning unacceptable impacts, the consultant has recommended two alternatives: cooling towers or fine-mesh wedgewire intake screens for both Salem units. However, the consultant deems the screens to be an unproven technology for applications of this type and size. In general, the report is supportive of the cooling tower alternative.

The report estimates that either two natural draft cooling towers or four mechanical draft cooling towers will be required. The report estimates the capital cost for two natural draft cooling towers to be Sil2 million and that for four mechanical draft cooling towers to be $60 million. The report includes an estimate of the i

cost of replacement energy during construction outages of $152 million and annual operating and maintenance costs are estimated to be $8.3 million and $18 million, respectively.

PSE&G believes that the capital costs to install either natural draft or mechanical draft cooling towers at Salem would amount to approximately $280 million or $250 million, respectively. PSE&G estimates titat installation of either type of cooling system would require each unit to undergo approximately a six-month outage, instead of the normal ten-week refueling outage. Further, PSE&G estimates that, on the basis of current fuel costs, replacement energy costs during such outages would range between $140 million and $280 million.

In addition, the station would be permanently derated by approximately 60 megawatts for natural draft cooling towers and approximately 70 megawatts for mechanical draft cooling towers, as a result of sub-optimal cooling system operation and increased auxiliary power consumption. PSE&G estimates annual operating and 1

maintenance costs to be approximately $20 million and $30 million, respectively.

PSE&G is meeting with NJDEP and the consultant regarding the conclusions and ramifications of the report. No costs thereof are included in PSE&G's capital and operating budgets. PSE&G believes that its demonstrations, as submitted, establish that neither the thermal effects of cooling water effluent at Salem nor the intake velocity and volume associated with the Salem cooling water intake structure require cooling towers to achieve satisfactory environmental results. PSE&G will vigorously oppose any requirement to construct cooling towers at Salem. Any such requirement would only become final after exhcustion of all relevant administrative and judicial remedies.

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PSE&G has been advised by Philadelphia Electric Company (PE) that it had requested EPA to establish alternate thermal limitations which, if granted, would result in requirements less costly than a closed-cycle l

cooling system for the Peach Bottom station. The PDER has issued a NPDES permit for the Peach Bottom l

station authorizing operation.ss proposed by PE and such action was approved by EPA.

Pennsylvania Electric Company (Penelec), operator of the Keystone Generating Station, a coal-fired plant in which PSE&G owns approximately a 23% interest, has advised PSE&G that Penelee has been notified of the intent of the Sierra Club and the National Resource Defense Council, acting jointly, to commence litigation under the Clean Water Act with respect to alleged environmental violations at the Keystone Station.

It is alleged that there were 74 water discharge violations occurring from May 1983 to June 1986, of which 50 were related to sewage treatment facility discharges. PSE&G cannot predict the outcome of this proceeding.

DRBC has required various electric utilities, as a condition of being permitted to withdraw water from the Delaware River for use in connection with certain electric generating stations, to provide for a means of replacing water withdrawn from the river during certain periods oflow river flow. With respect to PSE&G, such requirement presently applies to Hope Creek. As a result, PSE&G and certain other electric utilities are jointly engaged in the Merrill Creek Reservoir Project (Project) to construct a reservoir which is scheduled for completion in 1988. If Project replacement water is not available during such periods oflow river flow,

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the operation of Hope Creek could be curtailed. After obtaining the approvals of several other agencies, construction began in September 1985. PSE&G will own a 16.2% undivided interest in the Project which includes sufficient entitlement to cover water use at Hope Creek and also for Salem, if aquired. The other joint owners of these stations participate in Project construction costs to cover their shares of that water allocation. PSE&G's share of the estimated total project cost is $30.2 million, excluding allowance for funds used during construction. Construction of Merrill Creek is being managed by PSE&G. In mid-1986, work was delayed for nearly six weeks to take certain steps at the site to control soil erosion and sedimentation.

The action was in response to an order issued on August 27,1986 by the Warren County Soil Conservation Service. In September 1986, naturally-occurring asbestos was found at the site. Remediation measures were instituted to contain the veins of the mineral that were uncovered during construction. At year's end, the Project was 45% completed.

In addition, the DRBC and PSE&G had previously entered into a water use contract for Salem 1 and 2 which could, in periods of low river flow, result in the curtailment of some operations at Salem or other Delaware River generating station sites, unless supplemental water is provided to the river, which water could be provided from the Merrill Creek Project. On December 12,1984, the DRBC and PSE&G entered into a similar water use contract with respec: to Hope Creek.

NJDEP has adopted regulations and a permit program for the discharge of water to the ground. The current regulations require permits for some of PSE&G's facilities and may require the monitoring of groundwater at these locations. PSE&G has applied for such permits. PSE&G received a final discharge to groundwater (DGW) permit from NJDEP for its Bergen electric generating station on February 18, 1987, and a draft permit for its Mercer electric generating station which was issued for public notice by NJDEP j

on February 19, 1987. Draft permits for other PSE&G facilities may be issued in the coming months. DGW permits, treated by NJDEP as " major modifications" to existing or pending NJPDES discharge to surface water (DSW) permits, would impose significant groundwater monitoring requirements and could require the

{

installation of additional pollution control facilities. PSE&G has filed comments on the Bergen draft permit I

received in July 1986 and plans to file comments on the Mercer draft permit and, as appropriate, on draft l

permits for other PSE&G facilities that may be issued in the future. PSE&G may ultimately contest unresolved l

issues contained in the final Bergen permit and in final permits that may be issued for other facilities. The j

total cost to comply with all applicable requirements of DGW permits at all PSE&G facilities covered by 1

NJPDES DSW permits cannot be accurately estimated at this time but could exceed $2.5 million and annual j

groundwater monitoring costs could exceed $300,000.

l 2

Since August 1983, NJDEP has been investigating possible adverse health and environmental effects of j

former coal gasification plants. PSE&G has identified 23 of such sites and at the request of NJDEP has 1

submitted a complete inventory to it. PSE&G's legal responsibility for any of these sites has not yet been determined. Some of the sites were never owned, operated, or used by PSE&G. NJDEP has taken the position I

that PSE&G may be liable for all of these sites. NJDEP prioritized the sites considering primarily the potential i

impact on potable ground water and surface water supplies. PSE&G is developing an approach to site l

investigation.

j

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I 2'

l i

i l

The Comprehensive Environmental Response, Compensvion and Liability Act of 1980 (CERCLA), as amended by the Superfund Amendments and Reauthorization Act of 1986 (SARA), and the Federal Resource Compensation and Recovery Act of 1976 (RCRA) authorize the EPA to bring an enforcement action to compel responsible parties to take clean-up action et a disposal site that is determined to present an imminent and substantial danger to the public or to the environment because of an actual or threatened release of one or more hazardous substances from an uncontrolled hazardous waste facility. The New Jersey Spill Compensation and Control Act and the New York Environmental Conservation Law provide similar authority to NJDEP and the New York Attorney General, respectively. Because of the nature of PSE&G's business, including the production of electricity and the manufacture of gas, various by-products and substances are produced and/or handiv! which are classified as hazardous under the above laws. PSE&G generally provides for the disposal of such substances through licensed independent contractors, but these statutory provisions also impose potentialjoint and several responsibility on the generators of the wastes for certain clean up costs. The clean-up j

of such sites is receiving increasing attention from the governmental agencies involved, and PSE&G expects l

this trend to continue. PSE&G cannot estimate the costs which may result from these matters, but such costs could be substantial. Presently, such actions involving PSE&G include the following:

(1) The State of New York v. Shore Realty Corp. & Donald Leogrande-and Shore Realty Corp.

i

& Donald Leogrande v. AAR Technical Service Center, et al., Docket No. 84 Civil 0864 (CPS),

I commenced with respect to PSE&G on August 2,1984 in the Federal District Court for the Eastern District of New York, involving a disposal site in Glenwood Landing, Long Island, New York.

j (2) EPA, Region II, Order dated September 28, 1984, and EPA Supplemental Order dated October 30,1984, Docket No. II-CERCLA-40106 and EPA Order on Consent dated May 29, 1985, Docket No. II-CERCLA-50ll2 with respect to a site operated by Renora, Inc. in Edison, New Jersey. The surface cleanup, with PSE&G's participation, has been cornpleted and investigation of possible subsurface contamination is presently underway.

3) John F. Kenney, et al., v. Scientific, Inc., et al., Docket No. L-051533-84, Civil, commenced on August 29,1984 in the New Jersey Superior Court, Law Division, involving damages claimed by residents in the vicinity of the Kin-Bue Landfill site in Edison, New Jersey. A tentative settlement with the plaintiff has been reached pending resolution of certain cross-claims by other defendants. PSE&G's share of the tentative settlement would be $6,000. A proposed settlement has been submitted to the Court by the parties. To date, the Court has neither accepted nor rejected this proposed settlement. In addition, Robert Duffy v. Scientific, Inc. et al., Docket No.

L-076499-86, Civil, commenced on August 5,1986 in the New Jersey Superior Court, Law Division, asserts essentially the same claims against essentially the same defendants as in the Kenney suit, above, with respect to the Kin-Buc site. However, this complaint was never served on the defendants and it is believed that the sole plaintiff has abandoned his claim due to the high cost of pursuing the matter. Finally, by letter dated September 21,1984, the EPA has also named PSE&G as one of many alleged generators of hazardous materials in an effort to secure reimbursement for public monies alleged to have been expended at the Kin Buc site.

(4) Claim by the State of New York dated October 22,1984 under CERCLA and the New York Environmental Conservation Law with respect to Pennsylvania Avenue Municipal Landfill, Brooklyn, New York.

(5) Claim by the City of New York dated December 7,1984 under CERCLA with respect to the l

following five municipal landfills, all located within the City of New York: Pelham Bay, the l

Bronx; Edgemere, Queens; Brookfield, Staten Island; Fountain Avenue, Brooklyn; and Pennsylvania Avenue, Brooklyn. The City alleges that the costs may exceed $50 million. In i

addition, The City of New York v. Exxon Corporation, et. al., Doc.ket No. 85 Civil 1939, (EW) was commenced on March 12,1985 in the Federal District Court for the Southern District of New York with respect to these five municipal landfills. In addition to claims for cleanup costs, I

the City of New York has asserted claims for damages to and loss of natural resources and for costs oflitigation. On March 12,1985, the City notified the EPA ofits intention to file suit against the same parties under the Federal Resource Conservation and Recovery Act (RCRA) on the same sites. During 1986, thirteen of the primary defendants, including PSE&G, filed third party j

actions which, in the aggregate, brought approximately 300 additional defendants into this case.

I 23 t

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(6) Claim by the City of New York dated December 16,1984 under CERCLA with respect to a former chemical reprocessing facility located at 37 80 Review Avenue, Long Island City, Queens, New York. In addition, The City of New York v. United Technologies Corporation, et al., Docket j

No. 85 Civil 4665 was commenced on June 14,1985 in the Federal District Court for the Southern

. District of New York with respect to the Review Avenue reprocessing facility. The City of New York has asserted claims for the reimbursement of cleanup costs incurred and to be incurred by the City, for damages to and loss of natural resources, for additional investigation and cleanup activities, and for costs of litigation. On March 12,1985, the City notified EPA of its intention to file suit against the same parties under the RCRA with respect to this same site. During 1986, certain of the primary defendants filed third party actions which brought 35 additional defendants into this case.

(7) Claim by EPA, Region III, dated December 25,1984 under CERCLA with respect to a site owned and/or operated by Sealand Ltd. in Mount Pleasant Township, New Castle County, Delaware. In addition, United States of America v. Consolidated Rail Corporation, et al., Civil Docket No.85-502 was commenced on August 21,1985 in the Federal District Court for the I

District of Delaware with respect to the Sealand Ltd. site. This suit asserts claims for the reimbursement of cleanup costs incurred and to be incurred by the United States of America.

(8) Claim by United States Department of the Interior, dated March 5,1985 under CERCLA with respect to the Pennsylvania Avenue and Fountain Avenue landfills located within the Gateway National Recreational Area, Brooklyn, New York. These are two of the landfills referred to in (4) and (5) above. The claim alleges that the costs are estimated at $190 million subject to modification.

J (9) EPA, Region II, Order dated March 22,1985, Docket No. II-CERCLA-50107 with respect to a site owned and/or operated by Duane Marine Salvage Corporation in Perth Amboy, New Jersey. The surface cleanup, with PSE&G's participation, was completed during 1986.

l (10) Claim by EPA, Region II, dated March 29,1985 under CERCLA for approximately $4 million with respect to a site formerly operated by Edgewater Terminals, Inc., Quanta Resources Corporation and others in Edgewater, New Jersey. PSE&G, together with other similarly situated parties, entered into an agreement with EPA, dated September 27,1985, resolving all s

claims by EPA as to the surface cleanup at the subject site. In addition, James V. Frota and

)

Albert Van Dahin v. A. G. Becker Paribas, Inc. et al., Docket No. L-087771 85, was commenced

(

I with tespect to PSE&G on November 22,19'85 in the New Jersey Superior Court, Law Division, wherein the plaintiff owners of the property on which the Edgewater facility is located seek indemnity and defense costs from all those who allegedly contributed to the contamination of the site.

(1!) EPA Order dated December 23, 1985, Docket No. II-CERCLA-60103 with respect to a site j

owned and/or operated by Scientific Chemical Processing, Inc. (SCP) at 411 Wilson Avenue, Newark, NJ. The surface cleanup, with PSE&G's participation, was completed during 1986.

(12) Inquiry and prospective enforcement action by NJDEP with respect to a site formerly leased and operated by Coastal Services, Inc. at 632 So. Front Street. Elizabeth, NJ.

(13) Claim by NJDEP under the New Jersey Spill Compensation and Control Act with respect to the alleged subsurface contamination of water wells of the township of Essex Fells by materials j

originating at the Roseland Switching Station. While PSEAG has not yet been formally dismissed from this proceeding, hydrogeologic investigations conducted by a consultant laboratory under contract to PSE&G have established that PSE&G is not the source of any subsurface contamination that may be present in the subject water wells. The findings of these investigations i

have been confirmed and accepted by the NJDEP Division ( J'ater Resources, Enforcement i

l Element. PSE&G was so advised of the acceptance of the finding in a letter from NJDEP dated i

l May 16,1986.

)

24

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(l4) Michigan Development Corp. et al. v. Fea Associates, Inc., V. F. Bradway & Sons, et als. v. PSE&G.

Docket No. C.2341-05E, commenced with respect to PSE&G on December 2,1985 in the New Jersey Superior Court, Chancery Division, involving a fourth-party action against PSE&G a

concerning a site in Atlantic City, New Jersey which allegedly was the location of a gas manufacturing piant. A stipulation of dismissal without prejudice with respect to PSE&G was filed with the Coutt on September 29, 1986.

(15) Prospective enforcement action by NJDEP with respect to a site formerly owned by the Township of Hillsborough, New Jersey and used for a sanitary landfill and presemly owned by PSE&G. NJPDES draft permits have been issued by NJDEP > PSE&G and adjoining property owner to sink monitoring wells on these premises. The wells have been established and groundwater is being monitored.

(16) Inquiry and prospective enforcement action by EPA, Region H, with respect to a site located i

in Gloucester Township, New Jersey, and formerly owned and operated by Anthony Amadei, Anthony Amadei Sand & Gravel, Inc. and Gloucester Environmental Management Services, Inc. (GEMS).

(17) State of New Jersey, Department of Environmental Protection vs. Gloucester Environmental Management Services. Inc. (GEMS), er. al., Docket No. 84-0152 (SSB) filed in the U. S. District Court for the District of New Jersey some time ago. The Fourth Amended Complaint, filed October 28,1986, lists PSE&G and approximately forty other alleged generators of hazardous waste materials as defendants. PSE&G investigated possible involvement with the GEMS site in Gloucester Township, Camden County, in June, in response to an inquiry from the U. S.

Environmental Protection Agency under Section 104(e) of the federal Superfund law. That investigation revealed that certain waste materials originating at a PSE&G facility may have contained asbestos and may have been taken to the GEMS site by an independent contractor performing removal work for PSE&G. The potentialliability to which PSE&G may be exposed l

in this matter cannot be estimated at this time, but it could be substantial.

(18) NJDEP has requested PSE&G to enter into a consent order with Pittsburgh Plate Glass Company and the present owner of property on Garfield Avenue in Jersey City, New Jersey for evaluation and possible cleanup of the site, part of which was the former Halladay Street Gas Plant site.

(19) NJDEP has actively pursued the testing and possible cleanup of a site in Paulsboro, New Jersey, which had been a former gas manufacturing site.

(20) Inquiry and prospective enforcement action by NJDEP against the present owner of certain property located in West Paterson, New Jersey. The owner of the property has alleged that PSE&G disposed of certain hazardous material at the site from its now-closed Paterson Gas Plant. PSE&G denies the allegations and will vigorously defend any subsequent litigation.

The NJDEP is using the New Jersey Air Pollution Control Code (Code) to achieve compliance with the national ambient air quality standards adopted by EPA under the federal Clean Air Act. The Code currently provides ambient air quality standards and emission limitations, all of which have EPA tipproval, for seven pollutants, including sulfur dioxide and particulate. In November 1984, PSE&G received a Notice of Violation under Section 113 of the Clean Air Act and a Notice of Noncompliance under Section 120 of the Clean Air Act from EPA, Region H, both of which alleged violation of the stack emission opacity limitations under the Code at the Hudson Generating Station Unit No. 2 (Hudson). In addition, the NJDEP has expressed concern about dust emissions due to boiler casing leaks at Hudson. On July 24,1986, PSE&G and the NJDEP entered into an Administrative Consent Order settling all issues between them with respect to Hudson and which includes a timetable for the installation of emissions control equipment with an estimated minimum cost of $20 million. These costs are reflected in PSE&G's construction estimates. Although PSE&G believes that it has successfully corrected any stack opacity violations and believes that it will be able to achieve a satisfactory resolution with NJDEP, no assurances of such can be given.

The Clean Air Act Amendments of 1977 provide for a policy of"nonattainment" designed to achhve the national ambient air quality standards in areas currently not meeting such standards and a policy designed 25

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to prevent "significant deterioration" of air quality in certain areas now cleaner than required by such standards. In areas where the policy of nonattainment applies, the effect of these requirements is to permit construction or expansion of a facility only upon a showing that any additional emissions from the source will be more than offset by reductions in similar emissions from existing sources. In areas where the prevention of significant deterioration policy applies, construction or expansion of a facility would be permitted only if emissions from the source, together with emissions from other expected new sources, will not violate air quality increments for particulate and sulfur dioxide that are more stringent than the national ambient standards.

All these requirements will materially affect PSE&G's ability to locate, construct or expand generating facilities in the future.

In addition, the Code provides stringent requirements restricting the sulfur content in coal and oil fuels.

During the years 1984-1986, PSE&G expended approximately $164 mi!! ion representing the incremental cost oflow sulfur fuels which was included in the cost of fuel. During 1986 the incremental costs added $46 million to fuel costs and PSE&G estimates that during 1987 such costs will add an additional $ 14 million. The increased cost of purchasing low sulfur fuel is offset by rates which are designed to permit the recovery of fuel costs on a current annual basis. (See Rate Matters-Adjustment Clauses.)

Nathan Hindes v. Public Service Electric and Gas Company and Lee M. Thomas, Administrator, USEPA.

Docket No. 86-3888 (ALJ), commenced on October 6,1986, alleges New Jersey Air Pollution Control Code (Code) violations at the Edison Electric Generating Station. The plaintiffis seeking an injunction requiring USEPA to enforce the Clean Air Act and all regulations adopted thereunder with respect to the subject allegations, an injunction enjoining the emission by PSE&G of any air pollutants in violation of any applicable standards at the Edison site, and costs of suit, including reasonable attorneys' and expert witness' fees. PSE&G does not believe that any applicable provisions of the Code have been violated and is actively defending the suit.

Under the New Jersey Coastal Wetlands Act, the New Jersey Coastal Area Facility Review Act and the New Jersey Waterfront Development Laws, PSE&G must obtain pennits from NJDEP to drain, dredge, excavate or remove soil or to construct electric generating facilities in areas defined by those Acts. In addition, NJDEP has adopted a Coastal Management Program under the Federal Coastal Zone Management Act which may have an effect upon PSE&G's siting and operation of facilities within the coastal zone cf New Jersey.

Furthermore, the U.S. Army Corps of Engineers under Section 404 of the Federal Water Pollution Control Act has authority to issue permits for the discharge of dredged or fill materials into navigable waters.

Environmental controls require, in many instances, balancing the need for additional quantities of energy in future years against the need to protect the environment. The necessity to comply with environmental standards has caused PSE&G to modify, supplement and replace existing equipment and facilities and has resulted in significant delays with respect to construction of new facilities. During the years 1984-1986, PSE&G expended approximately 5344 million for capital purposes relating to improving the environment, and it is estimated that PSE&G will expend approximately $22 million,522 million,511 million,57 million, and 55 million in the years 1987 through 1991, respectively, for such purpose. Such amounts are included in PSE&G's estimates of construction expenditures.

The increasing concern over the environmental effects of acid rain has resulted in an array oflegislative proposals dealing with this subject. Generally the legislation falls into categories of either research or control.

The utility industry advocates bills recommending more research because of the significant uncertainties with resect to the cause and effects of acid rain. The more active federal contr il bills generally impose limitations on sulphur dioxide emissions on various plants including certain generating stations owned by PSE&G. Costs to New Jersey ratepayers under certain control bills which would require installation and operation of flue gas desulfurization systems (scrubbers) on the Pennsylvania and Ohio Valley Region units supplying New Jersey could amount to approximately $450 million annually for all utilities in the State. PSE&G estimates that its costs could approximate $200 million annually. Costs under many of the other bills also would be substantial. PSE&G believes that all such costs would be recovered from customers. However, the ultimate decision in this matter is solely within the discretion of the BPU and PSE&G cannot predict what the BPU would decide. Such amounts are not included in PSE&G's estimates of construction expenditures.

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Certain Operating Statistics of PSE&G ELECTRIC Ye:rs Ended DIcember 31, 1986 1985 1984 Sources of Electric Energy (1,000 Kwh):

Generation:

14,176,649 15,769,936 18,405,457 Steam 11.278,865 8,352,592 6,446,433 285,520 247,841 253,973 Nuwiear.

.....f 415.529 341,594 660,105 Pumped Storage.......

Other (pnneipally Combustion Turbmes) 125,261 62,434 57,615 Less Synchronous Condenser Operation 2,525,442 3,772,270 4,573,108 Net Two Party Purchases 7,906,807 6,817,419 4,277,158

- Net PJM Interchange,

36,463,551 35,239,218 34,558.619 Subtotal.

430,137 370,026 379,757 Less pumping energy used,

36,033,414 34,869,192 34,178,862 Total energy available.

Less Company use (electric operations) and energy lost or unaccounted 2,734,861 2,548 484 2,581,461 for 33,298.553 32,320,508 31,597,401 Total electric energy sold.

Costs of Electnc Fuel (cents per Kwh):

2.05 2.76 3.29 Steam

.82

.89

.92 Nuclear.

5.77 7.70 7.85 Other (pnneipally Combustion Turbines) 2.-68 3.12 3.44 Two Party Purchases 2.64 3.84 4.38 Net PJM Interchange.

1.90 2.62 3.10 Weighted average cost Sales (1,000 Kwh):

8,726,769 8,390,658 8,373,471 Residential.

14.118,028 13.313,639 12,452,020 Commercial 10,134,327 10,290,711 10,444,412 Industrial 319,429 325,500 327,498 Other.

33,298,553 32,320,508 31,597.401 Total

.s.

Aserage Number of Customers:

1,544,671 1,527,106 1,510,771 Residential.

209.861 204,445 200,400 Commercial 7,965 8,050 8,125 Industrial 5,300 5,330 5,294 Other.

1,767,797 1,744,931 1,724,590 Total Operating Revenues (thousands of dollars):

Residential.

5 971,236 5 918,911 5 883,652 Commercial 1,333,144 1,236,027 1,111,175 782,008 774,963 749,725 Industnal 45,653 45,663 43,974 Other sales,

Subrotal.

3,132,041 2,975,564 2,788,526 23,969 25,000 27,715 Other electne revenues.

Total electric operating revenues.

53,156,010

$3.000,94

$2.816,241 Sources of Electric Energy at time of Peak Load (1,000 Kw):

, l 7,233 6,807 5,604 Generation...............

Purchased and net Interchanged.

502 914 1,818 Peak Load 7,735 7,721 7,422 Installed Generating Capacity at time of Peak Load (1,000 Kw):

Steam 4,312 4,312 4.312 Nuclear..,

1,817 1,817 1,817 Pumped Storage.

165 165 165 l

Combustion Turbines 2,708 2,700 2,700 Other.

5 5

5 Total 9,007 8,999 8,999 Total Electne Operating Expenses per Kwh of Total Sales (cents per j

K w h),

7.70 7.59 7.24 Temperature Humidity Index Hours 14,934 15,720 16,677 Load Factor.

53.2 %

51.6 %

52.4 %

Capacity Factor.

33.0 %

31.3 %

32.6 %

27

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GAS O, err _ Ended December 31, 1986 190s 19&s Sources of Gas Supply (1,000 Therms):

Sendout:

Natural Gas.,

2,071,118 2.063,100 2,154,020 Refinery Gas 135,827 144.470 86.903 Synthetic Natural Gas,,,

2,233 3,918 2,633 Other Manufactured Gas.

2.997 7.330 5.849 Gas purchased and produced (1,000 Therms)(a) 2,212,175 2,218,818 2.249.405 Less Company use (gas operations) and gas lost or unaccounted for 82.845 93.144 102.090 Total gas sold 2.129.330 2,125.674 2,147.315 Gas Fuel Costs (cents per therm):

Natural Gas.

32.50 37.69 37.49 Refinery Gas.......

27.17 34.94 40.46 Synthetic Natural Gas.

193.42 144.10 184.20 Other Manufactured Gas..

214.45 150.38 172.05 Weighted average cost 32.58 38.07 38.12 Sales (1,000 Therms):

PMdential.

1.065.630 1,019,850 1,019,025 Cor imercial.

644.450 634,059 628.855 i'id istrial 413,072 468.489 495.719 Otter.

6.178 3.276 3,716 Total 2,129,330 2,125.674 2.147,315 Average Number of Customers:

Residential.

1,216,125 1.195,500 1,181.109 Commercial 154,480 151.117 148.172 Industrial 5,299 5,347 5.401 Other..

15 15 15 Total 1.375.919 1.351.979 1.334,697 Operating Revenues (thousands of dollars):

Residential.

S 754,785 5 751.339 5 717,286 Commercial 390,811 407,073 303,197 Industnal 171,860 242,767 263.080 Other sales,

3.204 1.693 2.051 Subtotal.

1,320,660 1,402,872(b) 1.375.614(c)

Other gas revenues..

4,030 5.618 4.269 Total gas operating revenues

$ 1.324,690

$go8.490

$ 1,379.883 Total Gas O rating Expenses per therm sold (cents 58.52 62.48 60.98 Maximum 2 hour2.314815e-5 days <br />5.555556e-4 hours <br />3.306878e-6 weeks <br />7.61e-7 months <br /> Gas Sendout (1,000 Therms)....per therm)..........

14.'71 17,994 14,927 Daily Capacity at Time of Peak Sendout (1,000 Therms) (reflects curtailments)...

21,341 20,852 20,721 Heating Degree Days 4,699 4,764 4,743 (a) Reflects changes in holder stock.

(b) Reflects a refund of $13.2 rrdllion to certain customers.

'(c) Reflects a refund of $42.9 million to certain customers.

OTHER SUBSIDIARIES OF EMERPRISE (See Item 2. Other Subsidiaries of Enterprise)

Item 2, Prope,,ies.

PUBLIC SERVICE ELECTRIC AND GAS COMPAM The statements under this Item as to ownership of properties are made without regard to leases, tax and assessment liens, judgment'

~'s, rights of way, contracts, reservations, exceptions, conditions, immaterial liens and encumoi other outstanding rights affecting such properties, none of which is considered to be significant in the s.,

as of PSE&G, except that PSE&G's First and Refunding Mortgaye, securing the bonds issued thereunder, constitutes a direct first mortgage lien on substantially all of such-property.

The electric lines and gas mains of PSE&G are located over or under public highways, streets, alleys or lands, except where they are located over or under property owned by PSE&G or occupied by it under casements or other rights. These casements and rights are deemed by PSE&G to be adequate for the purposes 28

L for which they are being used. Generally, where payments therefer are minor in amount, no examinations j

(_

'of underlying titles as to the rights of w y for transmission or di.tribution lines or mains have been made.

f Electric Properties l

As of December 31,1986, PSE&G's share of installed generating capacity was 10,032,000 kilowatts, as e

shown in the following table:

j Percentage Company's Share l

/

of of Installed Generating Station Location Ownership Capacity (KW)

Bayonne N.J.

100.00 38,000 Bayonne Ridgefield, N.J.

100.00 631,000

/

' Bergen g

I Burlington Burlington. N.J.

100.00 725,000 Conemaugh W. Wheatfield Twp., Pa.

22.50 385,000 Edison.

Edison Twp., N.J.

100.00 462.000 Essex..

Newark, N.J.

100.00 560,000 Hope Creek Lower Alloways Creek Twpd N.J.

95.00 1,014,000 Hudson.

Jersey City, N.J.

100.00 1,107,000 Kearny..

Kearny, N.J.

100.00 714,000 Keystone' Plum Creek Twp., Pa.

22.84 390,000 Linden Linden, N.J.

100.00 736,000 Mercer Hamilton, N.J.

100.00 736,000

.,; National Park, N.J.

100.00 17,000 National Park Peach Bottom.

Peach Bottom Twp., Pa.

42.49 886,000 Salem Lower Alloways Cred Twp., N.J.

42.59 958,000 Sewaren Woodbridge Townshk, N.J.

100.00 508,000 Yards Creek.

Blairstown, N.J.

50.00 165.000 Total..

10.032.000 For construction in progress see Item 1-Business-Construction and Financing.

As of December 31,1986, PSE&G owned 38 switching stations with an aggregate installed capacity of 31,025,150 kilovolt-amperes, and 233 substations with an aggregate installed capacity of 6,380.250 kilovolt. amperes. In addition,12 substations having an aggregate installed capacity of 88,500 kilovolt-amperes were operated on leased property. PSE&G alao owned undivided interests in similar jointly-owned facilities at jointly-owned generating facilities.

As of December 31,1986, PSE&G's temsmrion and distribution system included 137,039 circuit miles, of which 26,029 miles were underground, and 729,692 poles, of which 521,721 were jointly-owned.

In addition, as of December 31, 1986, PSE&G owned six electric distribution headquarters and five

)

subheadquarters and leased two subheadquarters in six operating divisions in New Jersey.

j i

Gas Properties

]

As of December 31,1986, the daily gas capscity of PSE&G's peaking facilities (the maximum daily gas delivery available during the three peak winter months) consisted of high Btu oil gas, liquid petroleum air gas liquefied natural gas (LNG) and synthetic natural gas (SNG), c.nd aggregated 4,165,000 therms as follows:

Company Share f

Daily Percentage I

Capacity of Plant Iocation m erms)

Ownership j

Burlington LNG

• Burlington, N.J.

773,000 100.00 Camden Camden, N.J.

280,000 100.00 Central Edison Twp., N.J......

554,000 100.00 Harrison Harrison, N.J.

1,433,000 100.00 Linden SNG Linden, N.J.

1,125,000 90.00 Total.

4.165.000

• Doca not manufacture gas; stores LNG an21 gasifies it as needed.

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As of D cember 31,1936, PSE&G owned and operated approximately 13,461 miles of gas mains, owned 13 gas distribution headquarters, one subherdquarters, and le: sed one other subheadquarters in four operating divisions in New Jersey and owned one meter shop serving all such divisions. In addition PSE&G operated 48 naturalgas metering or regulating stations, of which 14 were located on land owned by customers or natural gas pipeline companies supplying PSE&G with natural gas, by lease, casement or other similar arrangement.

In some instsnces portions of the metering and regulating facilities were owned by pipeline companies.

Office Buildings PSE&G leases 21 floors, portions of three other floors and the two lower levels of a 26-story office tower for its corporate headquarters at 80 Park Plaza, Newark, NJ., together with the adjoining three story Plaza Building which contains a customer service center. PSE&G also leases office space in Newark, NJ. for a district office, a power billing facility, and an office for information systems, a backup computer operation facility, a safety and security office, and a building from one ofits subsidiaries for a record storage center and a parking and maintenance center for PSE&G owned vehicles.

In addition to the above locations solely within Newark, NJ., PSE&G leases space at various locations for 40 other facilities throughout New Jersey.

Subsidiaries Mulberry Street Urban Renewal Corporation, a New Jersey corporation, operates under the New Jersey Urban Renewal Corporation and Association Law of 1961. The Corporation owns a facility leased to PSE&G for records storage and attached vehicular parking facilities used by PSE&G and by a sub-leasee for public parking.

PSE&G Research Corporation, a New Jersey corporation, was formed to more effectively direct PSE&G's research and development program, transfer technology, obtain increased outside research support and diversify its testing capability to meet industrial needs. It presently does not own any property.

Energy Pipeline Corporation (EPC), a Delaware corporation, abandoned its pipeline project which was intended to transmit gas between New Jersey and the Rossville, Staten Island. New York terminal of PSE&G's subsidiary Energy Terminal Services Corporation on Dec:mber 18, 1984. EPC has sold all of its property.

It is currently in the process of being dissolved.

Energy Terminal Services Corporation (ETSC), a Delaware corporation, abandoned its unused liquefied natural gas terminal located in Rossville, Staten Island, New York on December 18,1984. On June 14,1985, ETSC sold all of its property. It is currently in the process of being dissolved.

PSE&G Overseas Finance N.V., a Netherlands Antilles limited liability Company, established in Curacao, was formed to aid directly or indirectly PSE&G in financing future activities and to obtain funds required therefor by publicly issuing and privately placing debt obligations into the hands of foreign investors and to invest its equity and borrowed assets in the debt oMigations of PSE&G. Due to a change in Federal income tax law, the subsidiary was dissolved during 1986.

OTHER SUBSIDIARIES OF ENTERPRISE The following is a brief general description of the properties of Enterprise's other subsidiaries, which are not significant as defined in Section 210.1 02 of Regulation S-X.

Energy Development Corporation, a New Jersey corporation, is engaged in activities for the exploration and development of gas and oil. Its properties consist principally of gas and oil leases and wells in various southern states, and offshore in the Gulf of Mexico. During 1986, 89 % of EDC's total gas revenues were derived from the sale of natural gas to PSE&G. For further information see item 1.-Business-General.

Gas Operations, and Employee Relations.

Gasdel Pipeline System incorporated (Gasdel), a New Jersey corporation, which is owned by Energy Development Corporation, was formed to transport gas from Energy Development Corporation's discovery ficids to delivery points on the systems of pipeline companies transporting the gas to PSE&G. Its properties presently consist ofinterests in pipelines connecting onshore gas fields in Louisiana and Texas and offshore fields in the Gulf of Mexico. Gasdel is subject to the requirements of FERC. For further information see item 1.-Business-General and Gas Operations.

30

~

9{y"

,y -

7 37, 4

y q

g 4

+

g[.

in 1985. CEA participates in the development of cogeneration and small power product 6ri projects on an Community Energy Alternative, incorporated (CEA), a New Jersey corpndon, began formal operations 4

f M

1 unregulated basis. During 1986 CEA concluded agreements to participate in four cogeneration and small power -

p[# x

' V( pgects. Two of t%(projects were a cogeneration plant in Bayonne, New Jersey and a J

n generating plant %.Jridgewater, New Hampshire. Both projects were usade through wholly-owned CEA

[C subsidiaries; CEA Bayonne. Inc. and CEA Bridgewater, Inc. CEA pdttly does not own any property. For.

further informatic i dee item 1.-Business-General and Employee Relatior.2.

Pu'blic Service 3esources Corporation (Resources), a New Jersey corporation, was formed in 1985 as an investment subsidiary. The primary pifroie of Resources is to hvest available funds to earn a reasonable'

' return trJenhance Enterprise's fmahal strength and to provide a patentip source of funds for future - ;

constmetion b PSE&G.; l'esources tias investments in variouisecurities.Deveraged lease, and limited v

d

[

yattnefships.Jer further informat'on,r,ee item 1.-Business-Gderal. g For information concerring a cwrate restructuring effective May 1,1986 whereby interprise becarne the owner'of all of the ouytarding " common stock of PSE&G and s!w dmim 1986 hecMe the corporate parent of Commmiry Ewicy Mternatises 10corporated, Public Service Resources Corpodtion md Energy Development Cor;oratior,, Mitem 1 -Business-Generid.

p 4

6-item 3.

Legal Proce4m.

s See the following under item 1.

ddiness, at the pagezindicated:

lt l

.(

/<

(1) Page 3.

Proceeding bePire th@PU / elating to an k):lication by PU4G for increased rated, l

7y commenced December 13,1985, in DoAct No. 83125.

gi g

(2) Pages 3 and 5.

Proceedings Wfore the BPU relating to PSE&G's electtic levelized energy y

adjustment clause, commenced January 33, 1983 and January 29,198Ein Docket Nov 83) 25.

(3) Pages 3 and 5.

Proceedings !/. fore the BPU relating to PSE&G's levelized pdra materials adjustment clause, commenced July 30, i994, in Docket No. 847-670.

.\\3 l*

j t4

^(4)PagEi1, Suits filed December 14,"1984 Sy PSE&G joint:y with co-owners of Salim'Get. crating Station with respect to equipment failure at the Sale 3n Unks (Public Service Electric and G ts Campg _

Philadelphia Electric Company, Atlantic Cltg lfectric, Company and Delmarva Pokedid T.fst-

@ [,

Company v. Westinghouse Electric Corporaben, Supedor Court of New Jersey, Law Di,isica--Essex I

~

County, Dccket No. L-84838-84; United Statds DistricKourt, District of New Jersey, DocLEt Fo.85-517 (Salt:m 2)) and (Public Service Electric and Gas Comp 6y, Philadelphia Electric Company, Atlantic City e

Elmoic Company and Delmarva Power & Light Company v. Westinghouse Electric Corporation, S.wrior Court of New Jersey, Law Division, Docket No. L 84912-84; United States District Court, District of New Jersey, Docket No.85-518 (Salem 1)).

(5) P m 12. Snits filed April 10,1985 by Philadelphia Electric Company as agent for co-owners, jf including HE$G of Pmh Bottom Atomic Power Station Units 2 and 3 against ANI and MAELU with respect to;he anchar steam supply systems. (Philadelphia Electric Company et al. v. ANI et al.,

Docket Nov XJ79 and 2085, Court of Common Pleas, County of Philadelphia, Commonwealth of Pennsylvania.) "

3 A"

(6)PageII4. Extension issued by NJDEP dated Aprn p.h983 granting permission to burn up

/

to 1.2% sulfu.r eqa1 at Hudson and up to 1.5% sulfur coal at threg twough 1987 (CT 23419, CT 9455A, i

CT-2455B).

f

.['

(7) Page 17. Proceedings before the BPU, commenced in Septembbr 1974, in Docket No. 748-639, relating te tne natural gas supply and involuntary curtailmems.

(8) Pa' e !8. A charge of employment dieerimination under the Cvi,1 Rights Act of 1964, filed g

January 20. T6 wh the United States Equal Employment Opportunity Commission (Lewis v. Public j

Service Electric and Gr.s Comrsny,lDocht No. THQ.7CI'W)l).

l

~

(9) Page 20f hemtests fia)in 1974 and latic supplemented, to EPA and NJDEP to establis's l

alternate thermal lin41tations for PSE&G's electric generating stations (Burlington Generating Station,

'f ' ' '

NJ 0005002 NJ 0005690; Essex Generating Station, NJ 0000639; Sewaren Generating Station, NJ 0000680; Bergen Generating Stat;on, NJ 0000611; Hudson Generating Station, NJ 0000647; Kearny Generating Station, NJ 0000655; Mercer Ge:Er.ating Station, NJ 0004995; Salem Generating Matm.

NJ 0005622; Linden Generating Station, NJ 6000663).

g 31

(

?

1 3

}<

6 3 v

7

V (10) Page 22. Requests by NJDEP d:.ted August 22,1983 and Februrry 29,1984 asking PSE&G to provide information concerning the location, operation and disposition of til coal gasification plints ever owned or operated by PSE&G. NJDEP is investigating possible adverse health and environmental effects of former coal gasification plants.

(11) Page 23. Certain litigation, claims and requests to provide information by EPA and other government agencies with respect to the transportation and disposal of hazardous wastes.

(12) Page 25. Proceedings with NJDEP and EPA commenced November 1984 with respect to j

emissions at Hudson Generating Station EPA, Region II, Index No. 40118 and Docket 12050101.

l On February 21,1985, a fire destroyed a large warehouse in Elizabeth, New Jersey, to which PSE&G

)

supplied electricity. The Union County arson squad's official report stated that a fault occurred in the electrical W

I system of the premises which was the cause of the fire, but the report failed to specifically substantiate a prior -

allegation by the arson squad's investigators that an electrical surge caused or contributed to the fire. A total of thirty-five legal actions have been instituted as a result of the February 21,1985 fire. Discovery is proceeding l

in these matters and PSE&G cannot predict the outcome of these actions. Damage claims currently amount to approximately $145 million. PSE&G has insurance of approximately 590 million. Although PSE&G cannot predict the outcome of these lawsuits, PSE&G has substantial and viable defenses to all claims and will vigorously oppose them Such actions have been consolidated for trial by the Superior Court of New Jersey, Law Division, under the caption "In Re: Port Elizabeth Warehouse Fire Litigation, Docket No. L-8885185" See Management's Discussion and Analysis of Financial Condition arid Results of Operations on pages 27 thru 29 of Enterprise's Annual Report to Stockholders filed as Exhibit 13 hereto, which information is incorporated by reference under Item 7 hereof for a discussion of the BPU policy on termination of service during winter season (Office of Administrative Law Docket No. PUC 90-79; BPU Docket No. 792-88, commenced February 1979).

Item 4.

Submission of Matters to a l'ote of Security Holders.

Inapplicable.

Item 10. Executive ODicers of the Registrant.

The following table sets forth certain information concerning the executive officers of Enterprise.

Effective Date Age at First Elected December 31, to Present Name 13 Ofhee Position E. James Ferland 44 Chairms.a of the Board, President (chief July 1,1986 executive officer) and Director Everett L. Morris.

58 Vice President July 25,1985 Frederick W. Schneider..

63 Vice President July 25,1985 Wallace A. Maginn(l).

61 Treasurer July 25,1985 Parker C. Peterman......

59 Comptroller July 25,1985 R. Edwin Selover......

41 General Counsel July 25,1985 i

Robert S. Smith 52 Secretary July 25,1985 (1) Retired and replaced by Francis J. Riept on March 1,1987, age 50.

l L

32

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The prior business experience for the above omcers for the past five years is as follows:

i:

Name

- OfRee E. James Ferland....

Chairman of the Board, President July 1,1986 to present (chief executive omcer) and Director (PSE&G)

President and Director (PSE&G)

'une 1,1986 to June 30,-1986 President and Chief Operating OEcer May 1,1983 to May 31,1986 of Northeast Utilities Vice President and Chief Financial May.1,1980 to April 30,1983 Omcer of Northeast Utilities Everett L Morris...... Senior Executive Vice President June 1,1986 to present.

R, (PSE&G)

Executive Vice President-Finance August 1,1984 to May 31,1986 (PSE&G)

Senior Vice President-Customer July 1,1977 to July 31,1984 Operations (PSE&G) -

Frederick W. Schneider... Executive Vice President-Operations August 1,1984 to present (PSE&G)

Senior Vice President-Corporate Sept.1, ~1982 to July 31, 1984

' Planning (PSE&G)

Vice President-Production and Oc.1,1981 to Aug. 31,1982 Assistant to the Senior Vice Presi-dent-Energy Supply and Engineer-ing (PSE&G)

Wallace A. Maginn.,-..... Vice President and Treasurer February 1,1975 to present (PSE&G)

Parker C. Peterman..... Vice President and Comptroller February 1,1975 to present (PSE&G) l-R. Edwin Selover....... Vice President and General Counsel January 1,1983 to present (PSE&G)

General Counsel (PSE&G)

Nov. 6,1980 to Dec. 31,1982 Robert S. Smith.

Vice President and Secreatry (PSE&G) April 17,1984 to present Secretary (PSE&G)

June 1,1981 to Apr.16,1984 Francis J. Riept........ General Manager-Systems August 1,1980 to April 30,1986 33

. ~...

PART II

',. Item 5.

M:rketfor Registrant's Common Stock and Related Stockholder Matters.

PSE&G's Common Stock and $1.40 Dividend Preference Common Stock were listed on the New York Stock Exchange, Inc. and on the Philadelphia Stock Exchange, Inc. until May 1,1986. Effective May 1,1986, Enterprise became the owner of all the outstanding Common Stock of PSE&G as a result of a corporate

' restructuring of PSE&G pursuant to a Plan and Agreement of Merger. (See Part I-Item 1.-Business-J

- General) Effective May 1,1986, PSE&G delisted its Common Stock and $1.40 Dividend Preference Common

.j Stock and Enterprise listed its Common Stock on the New York Stock Exchange, Inc. and the Philadelphia Stock Exchange, Inc. All of PSE&G's Common Stock is owned by Enterprise, its corporate parent. As of December 31,1986 there were 216,789 holders of record of Enterprise Common Stock. Enterprise's Common Stock is also listed on the London Stock Exchange.

l The following tables indicate the high and low sale prices for PSE&G's Common Stock and PSE&G's

$1.40 Dividend Preference Common Stock through April 30.1986 and Enterprise's Common Stock through December 31,1986 as reported in The Wall Street Journal as Composite Transactions and dividends paid for the periods indicated:

Dividends Common Stock H,ilgh taw per N re 1985 First Quarter......................,......

27 %

25 %

.68 Second Quarter.....

32 %

27 %

.71 Third Quarter........................

32 %

26 %

.71 Fourth Quarter...............

33 %

26 %

.71 1986 First Quarter...........

38 %

30 %

.71 Second Quarter (through April 30)...

38 %

34 %

Second Quarter (May 1 through June 30).....

38 %

34 %

.74 Third Quarter.......

48 %

36 %

.74 Fourth Quarter.....................

43 %

39 %

.74

$1.40 Dividend Preference Common Stock 1985 First Quarter.........

13 12

.35 Second Quarter.....

14 %

12 %

.35 Third Quarter.........

15 13 %

.35 Fourth Quarter..

14 %

13 %

.35 1986 First Quarter..

18 %

14

.35 Second Quarter (through April 30)......

18 %

17 %

• Effective May.1,1986, pursuant to a corporate restructuring, Enterprise became the owner of all the outstanding common stock of PSE&G. As of that date, each share of PSE&G Common Stock was converted into one share of Enterprise Common Stock, and each share of $1.40 Dividend Preference Common Stock was converted into % of a share of Enterprise Common Stock or exchanged for $18.00 cash, at the option of the holder.

Commencing June 30,1986, subject to the availability of earnings and the needs ofits utility business, PSE&G has made regular cash paymerits to Enterprise in the form of dividends on outstanding shares of PSE&G's Common Stock in amounts which were sufficient for Enterprise to pay cash dividends on its Common Stock, for the operating expenses of Enterprise, and for such other corporate purposes as the Board of Directors of Enterprise has determined. On May 20,1986, PSE&G transferred to Enterprise through the declaration of a non-cash distribution the capital stock of Public Service Resources Corporation (PSRC) and Community Energy Alternatives (CEA). Both PSRC and CEA were wholly owned subsidiaries of PSE&G. On December 22,1986, PSE&G transferred to Enterprise through the declaration of a non-cash distribution the capital stock of Energy Development Corporation (EDC). EDC had previously b:en a wholly owned subsidiary of PSE&G.

PSE&G has paid quarterly dividends on its common stock in each year commencing in 1948, the year of the distribution of PSE&G's common stock by Public Service Corporation of New Jersey, the former parent

(-

of PSE&G.

34 1

I

While the Bo.rd of Directors of Enterprise intends to continue the practice of paying dividends quarterly, the amounts and dates of such dividends as may be declared will necessarily be dependent upon the future

+

carnings and financial requirements of Enterprise and its subsidiaries, principally PSE&G, and other factors.

The ability of Enterprise to declare and to pay dividends is contingent upon its prior receipt of dividend payments from its subsidiaries. PSE&G, Enterprise's principal subsidiary, has restrictions on the payments of dividends which are contained in its Char *er, certain of the indentures supplemental to its Mortgage, and certain debenture bond indentures. Under these restrictions, dividends on PSE&G's common stock may be paid only out of PSE&G's earned surplus and may not reduce PSE&G's earned surplus to less than $10,000,000, and PSE&G dividends on common stock would be limited to 75% of Net income Available for Common Stock if payment thereof would reduce PSE&G's Stock Equity to less than 33%% of PSE&G's Total Capitalization, and would be limited to 50% of Net income Available for Common Stock if payment thereof would reduce Stock Equity to less than 25% of PSE&G's Total Capitalization, as each of said terms is defmed in PSE&G's said debenture bond indentures. None of these restrictions presently limits the payment of dividends out of current earnings. The amount of retained earnings free of these restrictions at December 31, 1986 was $983.8 million.

Item 6.

Selected Financial Data.

Year Ended December 31, 1986 1985 19s4 1983 1982 (Thousands of Dollars, where appHesble) f Total Operating Revenues 5 4,498,416 5 4,428,341 54,207,372 53,979,248 53,894.167 Application of SFAS 90 m.

Disallowed Plant Costs e,

and Abandonments-net 5 (295,244) $ (109,717) 5 (5,016) 5 32,499 5 34,060 l

Related Income Taxes 5 111.418 5

24,799 5

2,172 5 (13.333) 5 (13,968)

Income From Continuing Operations.

5 378,463 5 399,632 5 426,964 5 350,711 5 309,054 Income Fro n Continuing Operations per share of Common Stock..

5 2.84 5

3.27 5

3.92 5

3.60 5

3.47 Dividends paid per share of Common Stock.

5 2 93 5

2.81 5

2.70 5

2.62 5

2.53 As of December 31, Total Assets.

510,577,822 510,234,290 59,523,322 58,472,538 57,780,773 Nuclear Fuel Disposal Cost Liability. 5 5

5 61,844 5 61.844 5 60,430 Capital Lease Obligations.

5 56,409 5

58,337 5 61.103 5 57,971 5 57,989 Long. Term Debt 5 3,336,120 5 3,164,641 53,107,843

$2.684.899 52,579,782 t

Preferred Stock with mandatory

$ 139.500 5 111,250 l

redemption.

5 65,000 65,000 5 137,150 I

Ratio of Earnings to Fixed Charges (A) after giving effect to application of SFAS 90 (D) 2.38 2.67 2.81 2.65 2.64

~j (A) Fixed charges include the preferred stock dividend requirements of PSE&G.

f (B) The Ratio of Earnings to Fixed Charges be' ore giving effect to the application of SFAS 90 for each of the years ended December 31, 1986 through 1982 would have been 3.13, 2.95, 2.82, 2.56, and 2.53, respectively.

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

Item 7.

.tfanagement's Dircussion and Analysis of Financial Condition and Results of Operations.

1 I

This information is contained under the caption " Management's Discussion and Analysis of Financial l

Condition and Results of Operations" on pages 27 through 29 of Enterprise's 1986 Annual Report to l

Stockholders filed as Exhibit 13 hereto, which information on said pages is incorporated by reference herein by this reference thereto.

!.j ltem 8.

Financial Statements and Supplementary Data.

l Information responding to item E ?s contained on pages 30 through 45 of Enterprise's 1986 Annual Report to Stockholders filed as Exhibit 13 heret a, which information on said pages is incorporated by reference herein

/

by this reference thereto.

35

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OPINION OF INDEPENDENT PUBLIC ACCOUNTANTS Public Service Enterprise Group Incorporated:

We have examined the consolidated balance sheets and consolidated statements of capital stock and long term debt of Public Service Enterprise Group Incorporated and its subsidiaries as of December 31,1986 and 1985 and the related consolidated statements of income, retained earnings, and changes in fmancial position for each of the three years in the period ended December 31,1986, and have issued our opinion thereon dated February 17, 1987; such consolidated financial statements and opinion are included in your 1986 Annual Report to Stockholders and are incorporated herein by reference. Our examinations also comprehended the supplemental financial statement schedules of Public Service Enterprise Group Incorporated and its subsidiaries, listed in item 14. In our opinion, such supplemental financial statement schedules, when considered in relation to the basic consolidated financial statements, present fairly in all material respects the information shown therein after restatement for the change, with which we concur,in the method of accounting for abandonments and disallowances of plant costs as described in Note I to the consolidated financial statements included in your 1986 Annual Report to Stockholders.

We have also previously examined, in accordance with generally accepted auditing standards, the balance sheets of Public Service Electric and Gas Company as of December 31,1984,1983, and 1982, and the related statements of income, retained earnings, and changes in financial position for the years ended December 31, 1983 and 1982 (none of which are presented herein); and we expressed unqualified opinions on those financial statements. In our opinion, the information set forth in the Selected Financial Data for each of the five years in the period ended December 31,1986, presented in Item 6, is fairly stat 4d in all material respects in relation to the financial statements from which it has been derived after restatement for the change, with which we concur, in the method of accounting for abandonments and disallowances of plant costs as described in Note I to the consolidated financial statements included in your 1986 Annual Report to Stockholders.

I DELOrrTE HASKINS & SELLS Newark, New Jersey February 17,1987 Item 9.

Disagreements on Accounting and Financial Disclosure.

inapplicable.

36

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1 PART III Item 10. Directors and Executive ODicers of the Registrant.

The information required by item 10 of Form 10-K with respect to present directors who are nominees for election as a director at Enterprise's Annual Meeting of Stockholders to be held on April 21,1987, is set forth under the heading " Election of Directors"in Enterprise's defmitive Proxy Statement for such Annual Meeting of Stockholders, which definitive Proxy Statement will be filed with.the Securities and Exchange Commission not later than 120 days after December 31,1986 and which information set forth under said heading is incorporated by reference herein by this reference thereto. As of December 31,1986, James R.

Cowan, a present director of Enterprise who is not standing for re-election, was 70 years of age.

The information required by Item 10 of Form 10-K with respect to executive officers is, pursuant to instruction 3 to Item 401(b) of Regulation S-K, set forth in Part I of this Form 10-K under the heading

" Executive Officers of the Registrant",

item 11. Executive Compensation.

The information required by item 11 of Form 10-K is set forth under the heading " Executive Compensation" in Enterprise's definitive Proxy Statement for the Annual Meeting of Stockholders to be held April 21,1987, which definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 1986 and such information set forth under such heading is incorporated by reference herein by'this reference thereto.

Item 12, Security ownership of Certain Benejicial Ownen and Management.

The information required by item 12 of Form 10 K with respect to directors who are nominees for election is set forth under the heading " Election for Directors"in Enterprise's definitive Proxy Statement for the Annual Meeting of Stockholders to be held April 21,1987, which definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after December 31,1986 and such information set forth under such heading is incorporated by reference herein by this reference thereto. As of December 31, 1986, James R. Cowan, present director of Enterprise who is not standing for re-election, owned beneficially 200 shares of the Common Stock of Enterprise.

Item 13. Certain Relationships and Related Transactions.

Inapplicable.

I 1

l l

I l

l 37 t

f i

N_

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PART IV Item I4 Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a) The following documents are filed as a part of the report:

(1) The following consolidated fmancial statements contained in Enterprise's 1986 Annual Report to Stockholders filed as Exhibit 13 hereto are incorporated by reference herein by this reference l

thereto.

l Organization and Summary of Significant Accounting Policies (pages 30 and 31 of said Annual Report).

Consolidated Statements ofIncome for the Years Ended December 31,1986,1985 and 1984 (page 32 of said Annual Report).

Consohdated Statements of Changes in Financial Position for the Years Ended December 31, 1986,1985 and 1984 (page 33 of said Annual Report).

Consolidated Balance Sheets as of December 31,1986 and 1985 (pages 34 and 35 of said Annual Report).

Consolidated Statements of Retained Earnings for the Years Ended December 31,1986,1985 and 1984 (page 36 of said Annual Report).

Consolidated Statements of Capital Stock as of December 31,1986 and 1985 (page 37 of said Annual Report).

Conschdated Statements of Long-Term Debt as of December 31,1986 and 1985 (page 38 of said Annual Report).

Notes to Consolidated Financial Statements (pages 39 through 45 of said Annual Report).

(2) Financial Statement Schedules. See Index to Financial Statement Schedules on page 39.

(3) Exhibits-See Exhibit Index on page 48.

(b) The following reports on Form 8-K were fited by Enterprise during the last quarter of 1986 and the 1987 period covered by this report under item 5:

(1) Dated and filed December 5,1986 relating to PSE&G's current rate case and the inclusion of Hope Creek Generating Station in rates to reflect its full cost at the time the unit is placed in commercial operation.

(2) Dated and filed December 9,1986 by Enterprise relating to requirements of Section i1(a) of the Securities.Act of 1933 and Rule 158 of the Securities Exchange Commission making available Enterprise's 12 months earnings statement to its security holders.

(3) Dated and filed December 30,1986 relating to PSE&G's current rate case and the BPU's decision not to declare the unit to be in commercial operation until conclusion of the current base rate proceeding.

(4) Dated and filed January 22, 1987 relating to PSE&G's current rate case and the decision by Enterprise to delay any release of its 1986 earnings until Furuary 1987. It is anticipated that the rate case decision will include a determination of reasonable costs associated with the construction of Hope Creek.

(5) Dated February 19, 1987, filed February 20,1987 relating to PSE&G's base rate case and the oral decision announced by the BPU on February 6, !987 concerning the ellowed investment for Hope Creek in rate base of $3.787 billion, the disallowance by the BPU of $431.5 million

)

of Hope Creek costs from rate base and the disallowance of a return on an additional 557.7 million

{

of Hope Creek costs as a penalty for exceeding the targeted cost of Hope Creek under the Cost l

Containment Incentive Agreement for Hope Creek. Also included in the decision by the BPU j

was the announcement of a performance standard based on the aggregate capacity factor of l

PSE&G's five nuclear units and the continued deferral of $70 million of replacement energy costs resulting from failures of electric generators at Salem in 1984. In addition to the above, PSE&G decided to adopt SFAS 90 and Standard & Poor's Corporation announced that it had downgraded the rating on PSE&G's First and Rt. funding Mortgage Bonds, Debenture Bonds, Preferred Stock and commercial paper.

38 1

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1

- PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED s

INDEX TO FINANCIAL STATEMENT SCHEDULES a-h Pye Schedule.V : -Public Service Enterprise Group Incorporated Property, Plant, and Equipment for each of the three years in the period ended December 31,1986....,

40

)

Schedule VI -Public Service Enterprise Group Incorporated Accumulated Depreciation, Depletion and Amortization of Property, Plant, and Equipment for each of the three years in the period ended December 31,1986..................

43-Schedule VIII-Valuation and Qualifying Accounts for each of the three years in the period ended -

December 31,1986.......................................

46 Schedules other than'those listed above are omitted for the reason that they are not required or are not J

applicable, of the required information is 'shown in the consolidated financial statements or notes thereto.

I

)

l 1

i-39

SCHEDULE V PUBLIC SERVICE ENTERPRISE GROUP IF #? ORATED SCHEDULE V-PROPERTY, PLANT, AND QUIPMENT Year Ended December 31,1986 Column A Column B Column C Column D Columa E Column F Other chansee-Balance at add (deductW Balance at beginning of Additions at describe end of Classincation period cost Retirements (A) period (Thousands of Dollars)

Utility Plant Electric Plant in Service i

Steam Production........... $ 1,201,033 $ 27,086 5 2,229 1

$ 1,225,891 Nuclear Production...

1,331,423 30,146 1,698 (53) 1,359.818

)

Pumped Storage Production...

18,090 39 18,129 1

Other Production...........

292,801 120 172 292.749 Transmission 829,041 19,569 916 71 847,765 Distribution.......,........

1,570,451 121,328 15,503 (307) 1,675,969 General.

25.274 3.820 271 (9) 28,814 Total Electric Plant in Service 5,268,113 202,108 20,789 (297) 5,449,135 Gas Plant in Service Manufactured Gas Production.

123,751 1,011 4,039 (16) 120,707 Local Storage...............

10,511 (4) 99 10,408 Transmission.............

25,566 149 25,715 1

Distribution...............

1,121,007 108,970 4,714 (1) 1,225,262 General...

9,495 5,094 146 8

14,451 Total Gas Plant in Service...

1,~290,330 115,220 8,998 (9) 1,396,543 Common Plant in Service Capital Leases...........

65,873 (1) 65,872 General........

198,233 25,675 8,046 17 215,879 Total Common Plant in Service 264,106 25,674 8,046 17 281,75i Nuclear Fuel in Service.......

120,888 48,626 40,608 128,906 Total Utility Plant in Service..

6,943,437 391,628 78,441 (289) 7,256,335-Construction Work in Progress.

3,862,633(B) 629,366(C)

(338,0ll)(D) 4,153,988 Utility Plant Held for Future Use 36,112 (1,442) 7 (7,790) 26,873 Total Utility Plant......... $10.842,182 $1.019.552

$78,448

$(346.090) $11,437,196 Gas and Oil Exploration Plant,,. $ 466,451

$ 21,794

$11,467

$(134,452)(E)$ 342.326 Other Plant...

18.079 $

2,129

$ 298

$ 7,676 27,586 NOTES:

(A) Interaccount and interdepartment transfers.

(B) Restated to reflect the application of SFAS 90.

(C) Construction Work in Progress (CWIP) includes transfers of completed construction of $72,069,000.

l (D) Reflects the application of SFAS 90 which includes the direct disallowance of $(431,532,000) t applicable to Hope Creek I and the related effect on the indirect disallowance of $80,961,000. Also, includes the amortization of the discount on the Hope Creek indirect disallowance of $12,157,000.

j i

(E) Represents the write-down of EDC's Gas and Oil Exploration Plant.

1 i

Descriptions of Utility Plant and Related Depreciation and Amortization-PSE&G and Gas and Oil j

Accounting are set forth in Organization and Summary of Significant Accounting Policies on page 30 of 1

Enterprise's 1986 Annual Report to Stockholders filed as Exhibit 13 hereto, which information on said page 30 is incorporated by reference herein by this reference thereto.

40 I

~-

tr L

i

(

SCHEDULE V L

j PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED SCHEDULE V-PROPERTY, PLANT, AND EQUIPMENT L

i Year Ended December 31,1935 j

Column A Column B Column C Column D Column E Column F Other changes-l Balance at add (deduct > -

Balance at L

beginning of Additions at describe end of

]

Classification period cost Retirements (A) period (Thousands of Dollsrs) l Utility Plant Electric Plant in Service Steam Production 51,179,441 5 19,382

$ (2,214) 5 (4) $ 1,201,033 Nuclear Production..

1,223,924

!!4,469 6.979 9

1.331,423 Pumped Storage Production 17,600 490 18,090 Other Production.

292,766 156 115 (6) 292,801 Transmission 776,238 54,599 1,433 (363) 829,041 Distribution.

1,483,692 100,541 14,659 877 1,570,451 General

,y 21.056 4.565 372 25 25,274 Total Electric Plant in Service.

4,994,717 294.202 21,344 538 5.268,113 I

Gas Plant in Service Manufactured Gas Production 145,277 1,034 22,554 (6) 123,751 Local Storage.

I1,149 40 678 10,511 i

Transmission..

24,188 124 1,054 25,566 i

Distribution.

1,033,343 93,800 6,135 (1) 1,121,007 I

8,511 1,201 213 (4) 9,495 General Total Gas Plant in Service 1,222,468 96,399 29,580 1,043 1.290.330 4

Common Plant in Service Capital Leases.....

71,534 548 6,209 65,873 i

General 178,838 27,646 8.237 (14) 198.233 j

TotalCommon Plantin Service.

250,372 28,194 14,446 (14) 264,106

]

{

Nuclear Fuel in Service.

105,140 26,006 10,258 120,888 Total Utility Plant in Service,

6,572,697 444,801 75,628 1,567 6,943,437 i

Construction Work in Progress 3,255,914 780,013(B)

(173,294)(C) 3,862,633 Utility Plant Held for Future Use.

41,818 (4,725) 22 (959) 36,112 Total Utility Plant 59,870.429 51.220.089

$75,650 5(172,686) 510,842.182 Gas and Oil Exploration Plant.

5 432,359 5 47,418 513.326 5

5 466.451 1

Other Plant 5

17,444 5

513 5 317 5

439 5 18.079 l

l Norts:

(A) Interaccount and interdepartment transfers.

(B) Construction Work in Progress (CWIP) includes transfers ofcompleted construction of $176,920.000.

(C) Includes the transfer of 5(37,108,000) from Nuclear Fuel CWIP applicable to Uranium Projects I

Abandonments and the 5(135,139,000) write-down due to the application of SFAS 90 to the Hope Creek indirect disallowance.

Descriptions of Utility Plant and Related Depreciation and Amortization-PSE&G and Gas and Oil Accounting are set forth in Summary of Organization and Significant Accounting Policies on page 30 of Enterprise's 1986 Annual Report to Stockholders filed as Exhibit 13 hereto, which information on said page 30 is incorporated by reference herein by this reference thereto.

41

~.

SCHEDULEV PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED SCHEDULE bPROPERTY, PLANT, AND EQUIPMENT

. Year Ended December 31,1984.

Column A Column B Column C Columa D Coluna E Column F Other chansee--

Balance at add (deduct)--

Balance at beginning of Additions at describe end of Classincation period cost Retirements (A) period (Thousands of Dollars)

Utility Plant Electric Plant in Service I

Intangible...................... 5 75 5

75 5

5 i

Steam Production 1,169,755 75,084 65,380 (18) 1,179,441 Nuclear Production............

1,196,887 34,490 7,453 1,223,924 Pumped Storage Production..

17,282 321 3

17,600 Other Production...

292.149 638 12 (9) 292,766 l:

l' Transmission.................

741,715 37,280 2,750 (7) 776.238 Distribution...

1,412,678 81,566 10,483 (69) 1,483,692 G eneral.....................

19,058 2,281 270 (13) 21,056 Total Electric Plant in Service..

4,849.599 231,660 86,426 (116) 4,994,717 Gas Plant in Service Intangible.................

38 38 Manufactured Gas Production...

144,801 536 108 48 145,277 Local Storage.................

10,966 183 11,149 -

Transmission...............

24,694 19 525 24,188 Distribution.....

963,744 74,673 5,067 (7) 1,033,343 Gen eral..................

7,916 780 187 2

8.511 Total Gas Plant in Service......

1,152,159 76,191 5,925 43 1,222,468 Common Plant in Service intangible........,...........

295 295 Capital Leases.........

67,475 5,910 1,851 71,534 l

General.......

154.632 28,752 4,528 (18) 178,838 Total Common Plant in Service.

222.402 34,662 6.674 (18) 250,372 Nuclear Fuel in Service............

83,590 33,798 12,248 105,140 Total Utility Plant in Service....

6,307.750 376,311 111,273 (91) 6,572,697 l

Construction Work in Progress....

2,689,082 567,068(B)

(236) 3,255,914 Utility Plant Held for Future Use..

21,119 23,986 293 (2.994) 41.818 Total Utility Plant.........

59.017,951

$967,365 5111,566 5(3,321) $9,870.429 Gas and Oil Exploration Plant...... $ 381,335 5 52,891

$ 1,867 5-S 432,359 Other Plant..

5 12.092 5 4,878

$ 2,847 5 3,321 5 17.444 i

NOTES:

l (A) Interaccount and interdepartment transfers.

(II) Construction Work in Progress (CWIP) includes transfers of completed construction of

$129,805,000.

Descriptions of Utility Plant and Related Depreciation and Amortization-PSE&G and Gas and Oil Accounting are set forth in Organization and Summary of Significant Accounting Policies on page 30 of Enterprise's 1986 Annual Report to Stockholders filed as Exhibit 13 bereto, which information on said page 30 is incorporated by reference herein by this reference thereto.

42 h

.n

l SCHEDULE VI e

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

+

SCHEDULE VI-ACCUMULATED DEPRECIATION, DEPLETION, AND AMORTIZATION OF PROPERTY, PLANT, AND EQUIPMENT Year Ended December 31,1986 Column A Column B Column C Column D Column E Column F Additions Balance at charged to Other changes-Balar ce at beginning of costs and add (deductw end of Description period expenses Retirements describe period (Thousands of Dollars)

Accumulated Depreciation and Amortization of Utility Plant I

Electric Plant in Service Steam Production

$ 506,140

$ 29,276 5 4,160

$ 531,256 Nuclear Production..........

334,797 53,643 1,921 386,519 Pumped Storage Production.

4,481 435 4,916 Other Production 157,459 12,201 172 169,488 Transmission 216,219 18,717 1,021 233.915 Distribution.

607,673 56,257 23.384 640,546 General.

4.352 805 760 4.897 Total Electric Plant in Service 1,831,121 171,334 3'M18 1,971.537 l

Gas Plant in Service

)

Manufactured Gas Production 110,872 8,571 5,893 113,550 Local Storage.

10,885 428 99 11,214 Transmission.

6,846 630 7,476 Distnbution 423,317 46,662 8,948 461,031 General.

1,872 285 146 2.011 Total Gas Plant in Service....

553.792 56,576 15.086 595.282 Common Plant in Service Capital Leases 4,891 2,644 7,535 General.......

49.170 13.522 6.846 55.846 Total Common Plant in Service 54,061 16,166 6.846 63.381 Nuclear Fuel in Service.

63.620 39,547 40,608 62.559 Total Accumulated Deprecia.

tion and Amortization 52,502.594 5283.623

$93,458

$2.692.759 Accumulated Depreciation of Gas and Oil Exploration Plant.

$ 158.100

$ 36.652 511,466 5

5 183.286 Accumulated Depreciation of Other Plant 5

943 5

436 5

17 1.362 l

l I

' l l

i l

l 43 4

l

~

SCHEDULE VI

.s PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED SCHEDULE VI-ACCUMULATED DEPRECIATION, DEPLETION, AND AMORTIZATION OF PROPERTY, PLANT, AND EQUIPMENT

'. Year Ended December 31,1985 Column A Column B Column C Column D Column E Column F Additions Other changes-Enlance et charged to add (deductW Balance at beginning of costs and describe end of Description period expenses Retirements (A) r,eriod (Thousands of Dollars)

Accumulated Depreciation and Amor-tization of Utility Plant Electric Plant in Service Steam Production 5 476,446 5 28,546 5 (1,148)

S

$ 506,140 Nuclear Production...........

290.440 50,459

- 6,102 334,797 Pumped Storage Production 4.058 425 2

4,481 Other Production............

'145,380 12,1 0 115 157,459 Transmission.

199,841-18,17i 1,799 216,219 Distribution...........

577,691 52.947

'22,954

(!!)

.607,673 G ene ral...................

4.033 688 369 4,352 Total Electric Plant in Service 1,697,889 163.436 30,193 (11) 1.831.121 Gas Plant in Service Manufactured Gas Production..

125,007 8,901 23,066 110,872 Local Storage....

11,248 442 805 10,885 Transmission..............

6,226 620 6,846 Distribution................

390,674

- 42,876 10,233 423,317 -

General.......

1.857 228 213 1,872 Total Gas Plant in Service...

535,012 53,067 34,287 553,792 Common Plant in Service Capital Leases.........

7,653 3,448 6,210 4,891' General....................

44.553 12,197 7,580 49,170 Total Common Plant in 52,206 15,645 13,790 54,061 Service..........

Nuclear Fuel in Service........

35.033 38,845 10,258 63,620 Total Accumulated D,cprecia-tion and Amortization 52,320,140

$270,993 5 88.528

$__(11)

$2,502,594 1

Accumulated Depreciation of Gas and Oil Exploration Plant............ S 126.360 5 45,067 5 13,327 5-

$ 158,100 Accumulated Depreciation of Other Plant,

S 955 5

133 156 5

11 943 NOTE:

(A) Interaccount and interdepartment transfers.

44

~

SCHEDULE VI 4

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED SCHEDULE VI-ACCUMULATED DEPRECIATION, DEPLETION. AND AMORTIZATION OF PROPERTY, PLANT, AND EQUIPMENT 1

Year Ended December 31,1984

~~

Column A Column B Column C Column D Column E Column F Additions Other changes-Balance at chcrued to add (deductH Balance at beginning of costs and describe end of Description period expenses Retirements (A) period (Thousands of Dollars)

Accumulated Depreciation and i

Amortization of Utility Plant Electric Plant in Service Steam Production S 517,685

$ 27,081 5 68,316 5 (4)

$ 476,446 Nuclear Production.

249,477 47,208 6,245 290,440 Pumped Storage Production 3,644 417 3

4,058 Other Production 133,224 12,167 11 145.380 Transmission...

185,986 17,050 3,195 199,841

)

Distribution 544,305 50,153 16,704 (63) 577.691 i

General.

3.704 600 271 4,033 I

Total Electric Plant in Service.

1.638,025 154,676 94.745 (67) 1,697.889 Gas Plant in Service l

Manufactured Gas Production.

117,379 9,168 1,544 4

125,007

{

Local Storage..

10,794 454 11,248

)

Transmission 6,107 610 491 6.226 i

Distribution.

359,477 39,741 8.544 390.674 I

General...........

1,835 208 186 1,857 l

Total Gas Plant in Service.

495.592 50,181 10,765 4

535,012 i

l Common Plant in Service Capital Leases 6.562 2.942 1,851 7,653

]

General.....

38.605 10,435 4.487 44.553 Total Common Plant in Service 45,167 13,377 6,338 52.206

)

Nuclear Fuel in Service....

35,351 11,930 12,248 35,033 Total Accumulated Depreciation and Amortization.

52,214,135 5230.164

$124,096 g)

$2.320.l40 Accumulated Depreciation of Gas and Oil Exploration Plant.

S 92.824 5 35,403 5 1.867 Q

5 126,360 Accumulated Depreciation of Other Plant 5

2.711 5

(767)

$ 1.052 SJ 955 NOTE:

(A) Interaccount and interdepartment transfers.

I 45 l

SCHEDULE VIII P

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED SCilEDULE VI!!-VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31,1986---December 31,1984 Column A Column B Column C Column D Column E Additions (2)

(1)

Charged to Balance at Charged to other Balance at I

beginning of costs and accounts-Deductione-.-

end of Description period expenses describe describe period (Thousands of Dollars)

Il8f Allowance for Doubtful Accounts.

$ 20,733

$34.109

$21,741(A) $ 33,101 Discount on Property Abandonments,

$203,998

$43,170(B) 5160,828 3185 Allowance for Doubtful Accounts,,,

5 16,470

$31,833

$27,570(A) $ 20,733 Discount on Property Abandonments.

5229,420

$ 15,870

$41,292(B) g l

!!8f 1

1 Allowance for Doubtful Accounts,

S 15,578 541,077 540,185(A) 5 16,470 Discount on Property Abandonments.

5224,404 535,346

$30,330(B) 5229,420 NOTE:

(A) Accounts Receivable written off, (B) Amorti. ion of discount to income.

I 46

y SIGNATURES Pursuant to the requirernents of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

)

PUBLIC SERVICE ENTERPRISE GROUP INCORPOR ATED Date March 10,1987 By.

E. JAMES FERLAND E. James Ferland i

Chairman of the Board and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature Title Date E. JAMES FERLAND Chairman of the '3oard and President F. James Fertand (Principal Executive Officer)

EVERETT L. MORRIS Vice President and Director Everett L. Niorris (Principal Financial Officer)

PARKER C. PETERMAN Comptroller Parker C. Peterman (Principal Accounting Officer) i JAMES R. COWAN Director James R. Cowan '

T. J. DERMOT DUNPHY Director T. J. Dermot Dunphy ROBERT R. FERGUSON, JR.

Director Robert R. Ferguson, Jr.

IRWIN LERNER Director Irwin Lerner Wit LIAM E. MARFUGG1 Director March 10,1987 William E. Starfuast M ARILYN M. PFALTz Director i

Starilyn NI. Pfaltz J AMES C. PITNEY Director James C. Pitney KENNETH C. ROGERS Director Kenneth C. Rogers ROBERT I. SMITH Director Robert 1. Smith li AROLD W. SONN Director Harold W. Sonn R. V. VAN FOSSAN Director Robert V Van Fossen J. S. WESTON Director Josh S. Weston 47

_ ~ _ _.

EXHIBIT INDEX Certain Exhibits previously filed with the Commission and the appropriate securities exchanges are indicated as set forth below. Such Exhibits are not being refiled, but are included because inclusion is desirable for conveniem reference.

(a) Filed by PSE&G with Form 8 A under the Securities Exchange Act of 1934, on the respective dates indicated, File No.1973.

(t) Filed by PSE&G with Form 8 K under the Securities Exchange Act of 1934, on the respective dates indicated, File No.1-973.

(c) Filed by PSE&G with Form 10-K under the Securities Exchange Act of 1934, on the respective dates indicated, File No.1-973.

(d) Filed by PSE&G with Form 10-Q under the Securities Exchange Act of 1934, on the respective i

dates indicated File No.1973.

(e) Filed with registration statement of PSE&G under the Securities Exchange Act of 1934, File No.1-973, etrective July 1,1935, relating to the registration of various issues of securities.

(f) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-4995, effective I

May 20,1942, relating to the issuance of $15,000,000 First and Refunding Mortgage Bonds,3% Series I

due 1972.

i (g) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-7568, effective July 1,1948, relating to the proposed issuance of 200,000 shares of Cumulative Preferred Stock.

(h) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-8381, effective April 18,1950, relating to the issuance of $26,000,000 First and Refunding Mortgage Bonds, 2%% Series due 1980.

(i) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-12906, effective December 4,1956, relating to the issuance of 1,000,000 shares of Common Stock.

(j) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-59675, effective September 1,1977, relating to the issuance of $60,000,000 First and Refunding Mortgage Bonds, 8%% Series I due 2007.

(k) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-60925, effective March 30, 1978, relating to the issuance of 750,000 shares of Common Stock through an Employee Stock Purchase Plan, (1) Tiled with registration statement of PSE&G under the Securities Act of 1933, No. 2-65521, effective October 10,1979, relating to the issuance of 3,000,000 shares of Common Stock.

(m) Filed with registration statement of PSE&G under the Securities Act of 1933, No. 2-74018, filed on June 16, 1982, relating to the Thrift Plan of PSE&G.

(n) Filed with registration statement of Public Service Enterprise Group Incorporated under the Securities Act of 1933, No. 33 2935 filed January 28,1986, relating to PSE&G's plan to form a holding company as part of a corporate restructuring.

48

~

- 3 Exhibit Number Previous Fillas -

+

g Filing -

Commission '

Exchamaes j

'2a(1)

(b) 2 (b).

2 Plan and Agreement of Merger dated Febru.

l

.2/21/86 2/27/86

. ary 19,= 1986 by and among PSE&G, PSE&G Inc., and Public Service Enterprise Group-4 incorporated 2a(2). _ (b)~

2-

-(b)-

2 Certificate of Merger of PSE&G Inc. with and 8/28/86 8/29/86 into PSE&G efective May 1,1986.

3a; (n>'

3a.

-(n).

3a -

Certificate of Inco'rporation of Public Service 1

Enterprise Group Incorporated.

I 3b Copy of By-Laws of Public Service Enterprise Group Incorporated, as in efect July 25,1985.

L; 4a(1) '

(e)

B-1" (c) 4b(1)

Indenture between PSE&G and Fidelity Union '

-h 2/18/81

-Trust Company, (now First Fidelity Bank, Na-J

~

tional Association, New Jersey), as Trustee, dated August 1,1924, securing First and Re-1 funding Mortgage Bonds.

i Indentures between PSE&G and First Fidelity 1

Bank, National Association, New Jersey, as t Trustee, supplemental to Exhibit 4a(1), dated w

as follows:

y 4a(2)

(h) ' 7(la)

(c) 4b(2)

April 1,1927 2/18/81 4a(3)

(/)

2b(3)

(c) 4b(3)

June 1,1937 2/18/81-4a(4) 0)

2b(4)

(c) 4b(4)

July 1,1937 2/18/81 4a(5) g)

2b(5)

(c) 4b(5)

December 19,1939 2/18/81 4a(6)

' (f)

B-10 (c) 4b(6)

March 1,1942 2/18/81 4a(7)

(j) 2b(7)

(c) 4b(7)

June 1,1949 2/18/81 1

4a(8) 0)

2b(8)

(c) 4b(8)

May 1,1950 2/18/81 4a(9) 0)

2b(9)

(c) 4b(9)

October 1,1953 2/18/81 4a(10) 01 2b(10)

(c) 4b(10)

May 1,1954 2/18/81 4a(ll)

(i) 4b(16)

(c) 4b(ll)

November 1,1956 2/18/81 L

4a(12) 0)

2b(12)

(c) 4b(12)

September 1,1957 2/18/81 4a(13) 0)

2b(13)

(c) 4b(13)

August 1,1958 2/18/81 4a(14) 0)

.2b(14)

(c) 4b(14)

June 1,1959 2/18/81 4a(l$)

01 2b(15)

(c) 4b(15)

September 1,1960 l.

2/18/81 l-4a(16) 0)

2b(16)

(c) 4b(16)

August 1,1962 2/18/81 4a(17) _ 0) 2b(17)

(c) 4b(17)

June 1,1963 2/18/81 b

4a(18) 01 2b(18)

(c) 4b(18)

September 1,1964 2/18/81 49

4 Exhibit N n ber Previous Filing l

. Filing Commission Exchanges 4a(19)

(j) 2b(19)

(c) 4b(19)

September 1,1965 2/18/81 4a(20)

(j) 2b(20)

(c) 4b(20)

June 1,1967 2/18/81 4a(21)

(/)

2b(21)

(c) 4b(21)

June 1,1968 2/18/81 1

4a(22)

(j) 2b(22)

(c) 4b(22)

April 1,1969 2/18/81 4a(23)

(j) 2b(23)

(c) 4b(23)

March 1,1970 2/18/81 4a(24)

(j) 2b(24)

(c) 4b(24)

May 15,1971 2/18/81 4a(25)

(j) 2b(25)

(c) 4b(25)

November 15,1971 2/18/81 4a(26)

(j) 2b(26)

(c) 4b(26)

April 1,1972 2/18/81 i

4a(27)

(a) 2 (c) 4b(27)

March 1,1974 3/20/74 2/18/81 4a(28)

(a) 2 (c) 4b(28)

October 1,1974 10/11/74 2/18/81 4a(29)

(a) 2 (c) 4b(29)

April 1,1976 4/6/76 2/18/81 4a(30)

(a)

~2 (c) 4b(30)

September 1,1976 9/16/76 2/18/81 4a(31)

(j) 2b(31)

(c) 4b(31)

October 1,1976 2/18/81 4a(32)

(a) 2 (c) 4b(32)

June 1,1977 6/29/77 2/18/81 4a(33)

(k) 2b(33)

(c) 4b(33)

September I,1977 2/18/81 4a(34)

(a) 2 (c) 4b(34)

November 1,1978 11/21/78 2/18/81 J

4a(35)

(a) 2 (c) 4b(35)

July 1,1979 7/25/79 2/18/81 4a(36)

(/)

2d(36)

(c) 4b(36)

September 1,1979 (No.1) 2/18/81

{

4a(37)

(1) 2d(37)

(c) 4b(37)

September 1,1979 (No. 2) l 2/18/81 4a(38)

(a) 2 (c) 4b(38)

November 1,1979 I

12/3/79 2/18/81 j

4a(39)

(a) 2 (c) 4b(39)

June 1,1980 1

6/10/80 2/18/81 j

4a(40)

(a) 2 (a) 2 August 1,1981 8/19/81 8/19/81 1

4a(41)

(b) 4e

(?!

4e April 1,1982 4/29/82 5/5/82 4a(42)

(a) 2 (a) 2 September 1,1982 9/17/82 9/20/82 i

4a(43)

(a) 2 (a) 2 December 1,1982 l

12/21/82 12/16/82 l

4a(44)

(d) 4(ii)

(d) 4(ii)

June 1,1983 l

7/26/83 7/27/83 I

$0

~

i+

q x.

Q*3 EmNbit Number T

Previous Filing :

Commission.

Exchanges 4a(45)- (a) -

4.

' (a) - '. 4

' August 1,1983-8/19/83 8/19/83

- Ja(46) - ' /d).' 4(ii)

(d) 4(ii)

July 1,1984 -

8/14/84 8/17/84 h

c4a(47)f (d) 4(ii) -

(d)-

4(ii)

September 1,1984 11/2/84 11/9/84 4a(48)'

(b)'

4(ii)

(b) 4(ii)

November 1,1984 -(No.1)

I/4/85 -

1/9/85 4a(49)

(b) 4(ii) ~

(b) 4(ii)

~ November 1,1984 (No. 2) 1/4/85 1/9/85

. a)-

4

-(a) 4-

' July 1,1985

(

4a(50).

8/2/85 8/2/85

'4a($1)

(c) 4a(51)

(c).

4a(51)

January 1,1986

~

2/11/86 2/11/86 4a($2)

(a) 2

. (a) 2 March I,1986 3/28/86.

3/25/86 4a(53) ' (a) 2(a)

- (a) 2(a)

> April 1,1986 (No.1)-

5/1/86

-5/1/86 4a(54)

(a) 2(b)

(a).

2(b)

April 1,1986 (No. 2) :

$/1/86 5/1/86 4b(1)

(g) 7(12)

' (c) 4c(1)

Indenture between PSE&G and Federal Trust 2/18/81

. Company, as Trustee, (The First Jersey Na.

tional Bank, Successor Trustee), dated July 1, 1948, providing for 6% Debenture Bonds due 1998.

4b(2)

(k) 2c(4)

(c) 4c(4)

Indenture between PSE&G and The Chase 2/18/81 Manhattan Bank, (National Association), as -

Trustee, dated June 1,1966, providing for SM% Debenture Bonds due 1991, 4b(3)

(k) 2c(5)

(c) 4c(5)

Indenture between PSE&G and The Chase 2/18/81 Manhattan Bank (National Association), as Trustee, dated December 1,- 1968, providing for 7%% Debenture bonds due 1993.

4b(4)

(k) 2c(6)

(c) 4c(6)

Indenture between PSE&G and The Chase 2/18/81 Manhattan Bank (National Association), as -

Trustee, dated November 1,1969, providing for 8%% Debenture Bonds due 1996.

4b(5)

(a) 2 (c) 4c(7)

Indenture between PSE&G and The Chase 12/1/70 2/18/81 Manhattan Bank (National Association), as 1

Trustee, dated November 1,1970, providing i

for 9% Debenture Bonds due 1995.

4b(6)

(k) 2c(8)

(c) 4c(8)

Indenture between PSE&G and The Chase 2/18/81 Manhattan Bank (National Associatic.n), as Trustee, dated August 15,1971, providing for 7%% Debenture Bonds due 1996.

9 Inapplicable.

10a(1)

(c) 10c(1)

(c) 10c(1)

Directors' Deferred Compensation Plan.

3/17/82 3/19/82 10a(2)

(c) 10c(2)

(c) 10c(2)

Officers' Deferred Compensation Plan.

3/17/82 3/19/82 i

10a(3)

(c) 10c(3)

(c) 10c(3)

Supplemental Death Benefits Plan for certain 3/17/82 3/19/82 officers.

10a(4)

(c) 10c(4)

(c) 10c(4)

Description of additional retirement benefits 3/17/82 3/19/82 for certain officers.

51

_ _ _ ~ - _ - _.

Exhibit Number Previous Filing g,

Filing Commission Exchanges 10a(5)

(c) 10b(5)

(c) 10b(5)

Limited Supplemental Death Benefits Plan and 3/31/83 4/8/83 Retirement Plan.

10a(6)

(c) 10b(6)

(c) 10b(6)

Description of additional retirement benefits 3/31/83 4/8/83 for certain office s.

10a(7)

Description of additional retirement benefits for certain officers.

10a(8)

(n) 10g (n) 10g Management Incentive Compensation Plea.

I1 Inapplicable.

12 Inapplicable.

13 1986 Annual Report to Stockholders. Such re-port, except for those portions thereof which are expressly incorporated by reference in this Form 10-K, is furnished for the information of the Securities and Exchange Commission and is not to be deemed " filed" as a part of this Form 10-K.

16 Inapplicable 18 Inapplicable.

19 Inapplicable.

l 22 Subsidiaries of Registrant.

23 Inapplicable.

l 24 Consent of Independent Public Accountants.

25 Inapplicable.

28 Inapplicable.

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CQNTENTS WINA 1' FinancialHighlights 1 Enterprise Profile 3 Message to Shareholders 6 The Financial Picture 9 Public Service Electric and Gas Company w

25 Energy Development Corporation ggr 26 Community Energy Alternatives incorporated CO 26 Public Service Resources Corporation 27 Management's Discussion and Analysis of i '1 Financial Condition ond Results of Operations 30 Organization and Summary s,

of Significant Accounting Policies jl 31 Financial Statement Responsibility 32 Consolidated Financial Statements Di 34 Independent Accountants' Opinion 39 Notes to Consolidated Financial Statements g

de Consolidated Financial Statistics 7:n 44 Operating Statistics 50 Officers 51 Directors 52 Corporate and Stock Information ENTER Stockholder Information - Toll Fe Pu New Jersey residents 1-(800) 242-0813 CC Outside New Jersey 1-(800) 526-8050 the hc Security Analysts and Institutional le Manager-investor Relations (201) 430-6564 0f Dividend Reinvestment Plan in Enteronse hos o Dividend Reinvestment and Stock Purchase CC i Plan under which all common and PSE&G preferred stock.

holders may reinvest dividends or make direct cash purchases CU to obtain additional Enterprise common stock. All brokeroge and other fees are obsorbed by Enterprise. Call the ton free i

number to obtain on authorization card.

yfj Stock Trading Symbol: PEG jng f Re Annual Meeting Q

Please note that the Annual Meeting of Stockholders of Puche Service Enterpnse Group incorporated will be held in Newark Symphony Hall.1020 Broad Street, Newark. N.J.

qg Tuescoy, April 21,1987 of 2:00 p m A summary of the meeting will be sent to all stockholders of record at a later WT cate.

_\\

~{

QCIAL HIGHLl8 HTS f

increase vousands of Donors where opphcoole) 1986*

1985*

(Decrease)

' c;ct oceroting i?evenues

$ 4,498,416 S 4.428.341 2

ya3 operot.ng Expenses

$ 3,821,132 s 3.790.572 1

l-s.et Income

$ 378,463

$ 399.632 (5) 1 i-

~ ~ornrnon Stocx e

}.

snores outstanding -- Average (Thousands) 133,140 122.344 9

-l

$nores outstanding - Year-end (Thousands) 134,882 131.699 2

i Ecrnings Per Average shore

$ 2.84

$ 3.27 (13)

' D,v:dends Poid Per shore

$ 2.93

$ 2.81 4

l Sock value Per shore - Year-end

$26.89

$26.81 i

\\1orket Price Per Shore - Year-end 40%

31%

27 10.56 %

12.27%

ceturn on Average Common Equity Gross Additions to Utility Plant

$ 1,019,552

$ 1.220.089 (16) l Tctol Utihty Plant

$11,437,196

$10.842.182 5

).$

UsN EMIN5[

07a s to ceso,aat.a ononco svarements j

3 ENTERPRISE PROFILE l

l i

l Public Service' Enterprise Group Incorporated (Enterprise) became the parent holding company of Public Service Electric and Gas Company (PSE&G) on May 1,1986 as I

the result of the corporate restructuring of PSE&G. It was formed with the approval of l

holders of common stock ar'd $1.40 dividend preference common stock at PSE&G's annual meeting on April 15,1986.

The new corporate structure allows Enterprise to diversify into non-regulated bus-inesses in a manner that affords the rewards and risks of non-utility ventures to the l

comrnon stockholders of Enterprise. This structure is also designed to protect PSE&G's customers from such risks.

Enterprise's principal subsidiary is PSE&G, and its primary purpose is to provide the utility's' customers safe, dependable, and competitively priced electric and gas energy.

Other subsidiaries are Community Energy Alternatives Incorporated (CEA), an investor in and developer of cogeneration and small-power projects; Public Sorvice Resources Corporation (PSRC), an investment subsidiary, and Energy Development Corporation (EDC), a gas and oil exploration and production company.

E. James Ferland was elected president of Enterprise and PSE&G, effective June 1, 1986, and chairman of the board, effective July 1,1986. He succeeded Harold W. Sonn, who had held both posts and who retired on June 30. Mr. Ferland had been president t

and chief operating officer of Northeast Utilities in Connecticut.

I 1

c ll a

s t

/

e Th3 formation of Enterpnse os a holding com-Q opR SHARE OU ERS

_ i pony gcVe the management of PSE&G rhe flexibil-A t ity to diversify into non-utility businesses when the

., f associated risks and rewards offer opportunities to i

enhance financial strength.

I Our aggressive purchasing CCtivities allowed l

a us to obtain about 40% of our total gas supply

/

from the low-cost spot market, and contnbuted j

4 to o reduction in gas rotes for PSE&G's customers g/

of $180 million.

. The redemption of high-cost secunties and the issuance of lower-interest debt will mean sovings y most measures,1986 was a very successful of more than S87 million in the years cheod.

B yect 10 Public Service Enterprise Group.

These and other achievements were especially However, the February,1987 decision in significant because they occurred dunng a year wnich the New Jerseykord of Public Utilities (BPU) in which our business environment continued to czollowed $431.5 mihion of Public Service Electric change dromotically. Cogenerators and small and Gas Company's (PSE&G) costs for the con.

power producers are creating competition for struction of the Hope Creek Generating Station electric utilities. And, the production and delivery certainly tempered our view of the year and our of natural gas have become lcrgely deregulated.

outlook for the immediate future These trends make several facts clear to us:

Tne cisollowance of Hope CleA costs was We must be innovative and ossertive in finding enorged against 1986 earnings. This had the the best ways to control our costs and market effect of significantly reducing 1986 reported our services. We must enhance the public under-earnings per shore and will Continue to suppress standing of the ChcIlenges which confront us.

twelve-month earnings per shore through And we must have the support and cooperation Noember,1987. The write-off of the disallowance of regulators, legislators, and other government and other accounting oq%5trnentS, under o new and political leaders to best meet our obligations rule of the Financial Accounting 51andorcs BocrJ, to our customers and shareholders, nod the e'fect of reduci&; earnings per shore by S1.38.

Financial performance l

In addition, because of the overo;l negotS/e Our operating revenues climbed modestly-less effect of the rote order, the Credit ratings on than 2%-in 1986, but our operating income rose l

PSE&G's debt and preferred stock were lowered more than 6%. Electric sales improved, er.pecially 9

by one rating ogency, and a second agenet in the growing commercial marke 's in New Jersey, announced it was reviewing such secJrities for and this contributed favorably to our 1986 results.

i possibe downgrading.

The earnings of $2.84 per shore of Common Despite these developments, Enterprise stock, which reflected the write-off of the Hope remains in o satisfactory financial condition.

Creek disallowance, resulted in a decrease of 13.1%

i.

Our current common stock dividend is secure from restated earnings per shore of $3.27 in 1985.

[

clthough our obility to provide future dividend We have set a goal of ochieving 10% of total l

growin will be hampered as o result of the dis-net income by 1991 from our non-regulated sub-allowance and other unfavorable elements sidiaries. Two of them, Public Service Resources i

of the February,1987 rt:te decision. We are Corporation (PSRC) and Community Energy Al-p

, 'early disappointed with th s cros; set, since ternatives Incorporated (CEA), completed 1986-VJr 1986 operating results were so good and our their first full year of operation-in good heotth.

accomplishments dunnp the year sc, meaningful.

PSRC mode investments totaling more than $130 Despite the rote c'eCision, and it! eNet on million, wh'le CEA committed up to S33 million to earnings,1986 was o very successful year four cogeneration or small power projects.

in most respects.

In December, Energy Development Corpora-

• Construction of Hope Creek was completed tion (EDC), a gas and oil exploration and pro-and the unit was declared ready for commercial duction subsidiary of PSE&G, become Enterprise's operation. occording to o schedule estaboshed fourth subsidiary. EDC was removed from the i

more than four years ago, utility's gas rate base under o settlement of the l

• Our operating income reached on unprece-gas base rote cose. As a result, PSE&G's board of

)

cented level, our divicend was bcreased for the directors declared o dividend of EDC stock to 11th consecutive year, and our common stock Enteronse, making it a subsidiary. EDC had ossets rose to on oil-time high.

of $170 million at year's end.

3

~

. ThNorgest construction project in PSE&G's 83-to provide energy of the lowest cost poss;bie, w O#,

• year history was concluded officially in December

. no more than reasonoble risk on shoreholdersj con t when the 1067 megowott Hope Creek station

. We con always count on uncertainty in the C'

. joined the Pennsylvonlo-New Jersey-Moryland futur_e given the unpredictability opegislative on.

interconnection.

regulatory actions and economic and social cor, 7_

c In completing the project, PSE&G recorded on ditions. We must be sensitive, therefore, to trenos, international fuel-tooding record of 12 days, set o and be prepared to cope with them.

notional record of 245 days for the stortup of a While we have reduced our dependence on g

' boiling water reactor, and monoged 30% fewer oil os a fuel for electric generation-down from custc test-related shutdowns than occurred of similar 38% a decade ogo to obout 9% in 1986-we ore succe plants being readied for commercial operation.

concerned about on increase notionally toward q,

These are remarkable accomplishments at a o renewed reliance on oil, particularly imported erte time when many componies have found it neces-oil. We should not be misled by the decline in oil rovi

. sory to walk away from uncompleted nuclear sto-and gas costs over the lost two years. It would tions or have rnt been able to secure the required be o mistoke to become overly dependent on oil g, gig permits or licenses to build and operate their and gas os longderm sources of fuel for our elec-Enter plants.

tric generating stations, dync With the codition of Hope Creek to our system.

With this in mind, we intend to make the best ogni; nuclear power will occount for about 43% of use of our present generating capacity by impro*

well-PSE&G's electric generation in 1987. We would ing system load factors and minimizing increases n_

need 27 mll! ion barrels of oil to produce on equiv-in peak loods.

octn, olent amount of electric energy. Our nuclear copo-We have begun a thorough examination of hft envir bility provides balance to our fuel mix and supports extension possibilities for our older generating ossur the country's pursuit of energy independence.

plants. We are upgrading oging portions of elec.

emo' PSE&G's shore of the Construction cost of Hope tric ond gas transmission and distribution systems help Creek through February 6,1987, was $4 276 billion.

and extending mocern, efficient service to grow.

g A spending cop of $3.795 billion was established ing regions of New Jersey.

et en in a 1982 cost containment agreement and We are continuing to develop and promote the s colled for certain penalties for any excess costs, cogeneration, lood monogement and conservo-to we On February 6.1987, the BPU rendered on oral.

tion programs thereby reducing the need for to ne

' decision to conclude the extremely complex, future generating capacity, which will benefit oil a rec widely publicized cose that covered several key our customers. We expect to spend at least $100 issues. the inclusion of Hope Creek costs in elec-million through 1990 on a variety of activities to tric base rates, the reasonableness of construction help customers save both energy and money.

costs for the plant and resulting penotties for over-It is crucial to stay on top of emerging sources runs, nuclear performance stondcrds and the of energy. At the moment, certain coo!-burning E. Jc revision of the energy adjustment charge in technologists appear promising for the future onc Cnc response to Power prices for oil and other fuels, could prove important if accelerated load Pres-The BPU's decision resulted in a net reduction growth prompts the need for some additional in electric rates of $3534 million. This decision generating copocity before the year 2000.

Fee reflected, of course, the disallowance of Hope Creek costs, which has resulted in reduced earn-Customer satisloction ings for 1986.

Even as we explore new opportunities, we re-We remain extremely disappointed with all main committed to the heart of our business-osoects of the decision. We found the amount of electric and gas service. This is especially impor-ond the reason for the Hope Creek disallowance tant in on environment which is increasingly particularly discouraging. During extenslve heor-cho octerized by deregulation and competition ings held in the final months of 1986, we demon-ond is providing more Choices to customers.

strated that all costs were prudently incurred. We Preserving and expanding our customer base emphasized, for example. that several indepen-depends. to o great degree, on holding the dent audits of Hope Creek's construction man-bottom line of the monthly bill. We are taking l.

ogement showed that the plant compared well aim on this in several ways We are rain-with other nuclear projects in the United States.

forcing with our employees the importance of carrying out our (.,perations efficiently. We are l

- Energy for the future setting reo;istic goals to improve productivity l

A responsible utihtys rekobihty depends ono reduce costs ond, in doing so, we ore i

on good planning, and PSE&G is developing a stressing e tuntobility.

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We Mend to reduce forced ci, tag'es at both j

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T' r nucfear and fossil genyk:tirv;jitations. We will

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.. ya e decrepsing our uncollectible customer l

bong' nts,whicYnove r&cihed nearly 50% since

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.]ccouy/e will not let up Efour leorch for the lowest.

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cost, spot [norket gas. We wiu consider innovative on.

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pricing olelectricity and gas to keep us wooeti-

..]j

",ve in.he energy marketplog c'

k -n Anteccoting and responding to the UEtds of

.f customers will remain fundomntal to OE future

re --

success. We will work c,,osely with c_onsuyriod-o i

rd escry panels to gather ideos to make gur tvice d.

gew,, answer inquiries swittly and Ckorly., nd oil

,.gios gssistonCG in cases of need or horciship.

j f.,p i

oil

. Social responsibilities

'?c-Enterprise is depg business in perhaps the most gnomic region of the United Sto'es', and we rec-4, J,

- 3st jegnize our role in contributing regularly to tt,e rov. s weil.ceing of the communities we serve.

.j f,,

.ses Through genety of ongoing programs and F

octivities, we will be aggressive in preserving the l.f life environment, promoting the benefits of our Cities,

'1 l/

e J'

cssunng affirmative action, and encouraging sc-employees to' volunteer their time and skills to -

)

c',

. Sms neio others 3 I

e Ow-Enterpre will foce many tests as the Mrn e'

of the centdy approaches. But, becausfot j

te tne steps we took in 1986, we will be Gole J

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rvo-to welcome the challenges os oppcNunities j

to help us satisfy cvr customers and provide

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oil a reasonable return to our shareholders.

10 0

",~ "&% h A cw 0 to

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rces-ig E. James Ferland

nd Ch~rinon of the Board dtm Officer l

Pes,oentand Chiet be i

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k Febrvory 17,1987

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THE FINANCIAL PICTURE Overali revenues for 1986 were $4.5 biilion. '

sura

~

1.6% from 1985 revenues of $4 4 billion. Of the iv Tt total, electric rev3nues accounted for $3.2 bilh izatic while gas revenues amounted to $1.3 billion.

Operating income for the year was $677.3 millig

1. c'" "

up $39.5 million from the 1985 omount.

g Electric sales for the year rose 3.0% when g,

compared with sales for 1985. Sales in the Corn.538 mercial market, which were up 6.0% remainec the brightest sources of revenues as New Jersey j

ond PSE&G-continued to enjoy a builoing l

in certain areas of the state ranging from the E amings in 1956 are reduced Hudson River waterfront to tne Route 1 corridor Enterprise conciuded 1986 in a satisfactory Princeton.

financial condition despite the negative Benefitting from o sharp rise in house hecti effects on earnings of adopting Statement No. 90 in the month of November because of particul of the Financial Accounting Standarc's Board cold weather, PSE&G managed to record a (SFAS 90) and the relot-modest 0.2% increase in gas sales for the year 1, Earnings and Dividends ed effects of the BPU's general, however, gas sales were adversely disallowance of $431.5 o*fected by fuel switching among large indust million of Hope Creek s customers who took advantage of the lowest og offer cost in its February 6, prices in years.

reque 1987 electric rate deci-the C

. U le M 8/NM sion. The effect of the Dividend is raised for 11th consecutive year rever

,j fppyq e

direct disallowance re-The quarterly dividend on common stock was ir, in the f'

duced 1986 earnings by creased from 71 cents to 74 cents per shore, ras

$222

{

$283.9 million or 52.13 ing the annualindicate Tr.

L per shore.

owoNurn rate from $2.84 to $2.9c base The adoption of SFAS This marked the iit cons' 90 also resulted in a re-year in a row in which PIOP' statement of prior years' the common stock dv stem and.

earnings for abandon-gd-ik$fh.. < dend was rois6d.

Overall in 1986, dg perfc

]

ments, principally Atlan-tic Generating Station r-dends paid totaled $25 DiIIIO' and a second unit at Hope Creek, on which no

~

per common shore, cor o

it return is being earned on unamortized balances.

pared with $2.81 in 19P, This had the not effect of increasing 1986 earnings becc 0

by 75 cents per shore.

Common stock price SOV8' The overall effect of adopting SFAS 90 resulted reaches a new high O' *

• in a charge to 1986 earnings, otter taxes, of S183.8 Enterprise common stot f Hc million. or $1.38 per shore. Consolidated earnings closed 1986 at 40%.

available for common stock were $378.5 million, of $2 84 per shore, based on 133.1 million average The high for the year, I

ochieved in August,w P

shores outstanding.

48%, on oll-time market price record. In January.

orge By comparison,1985's restated earnings were PSE&G's common stock had recorded the yearl

$399.6 million, or $3.27 per shore, when there were low price of 30%.

10 8 million fewer overoge shores outstanding.

Based on reinvested dividends and commort 98 l

co i

The 1986 results were also favorably offected stock price appreciation over the lost five years.

by better overall sales to PSE&G's electric and got the total return to stockholders over inoi penod that :

customers, reduced maintenance costs and great-was 30% annucIly.

plant er allowance for funds used during construction to y (AFDC) credits ossociated with the construction of Lower rates are upproved for electric customs first h the Hope Creek station. AFDC is es c ost account-As a result of the BPU's decision on February 6.

quick ing procedure required by regulatory authorities 1987 PSE&G's electric customers received a net note (

to show the cost of financing a construction pro-rate decrease of $353 4 million or nearly 12%. The a cg, iect in the capital cost of the plant. These credits monthly bill of a customer using SOC kilowatthou

$g33 for 1986 reflect the final stages of construction of declined from $54.12 to $50 41 under a winter rc' to nn Hope Creek.

schedule, and from $58.72 to $50.41 under a 6

r -~--

RI mer scnedele Another csue in the rote case involved odoo-m y}4

• fne reduct on sternmed from rne BPU's author.

tion of performance standoros for PSE&G's nu-

• gon n on annual increase of M21.5 mohon in c! eor piants-Hope Creek and the two units of f

odditonal revenues, the Salem Generating Station as well os the two pvdent*l H**'* "#"

which was offset by o Peach Bottom units operated by Philadelphia

,UCR a5"" "

$697.7 mdhon decrease Electric Company.

ce in the levehzed energy in its decision, the BPU set 70% as the forgeted adjustment clause over annual aggregate capacity factor for the units.

a 10S -month percd These performance stondords call for o financial and a reduction in base penotty when the Units operate below a 60%

b rates of $77.2 minion to capacity factor and on awcrd when they operate 3

04 IA 1 cover the first year's im-above 80%.

$ poCf of the Tox Reform

)' 5 b Act of 1986.

Natural gas rates are also reduced Initt Mon, the BP'J PSE&G's gas customers received rate reductens also allowed a return totchng $180 million as a result of lower costs for

)

on common eauity of gas supphes. particularly

""*** Rd" 13% orW on overall rate on the spot market, in of ret..n of 10.65%.

1986 and the expecto-The BPU's ruhng come tion that the downward CMer more than a year's cons:deroton of PSE&G's trend wd: continue i

reauest to increase rates. PSE&G's final position in through 1987.

The decrease in rates, tne proceed:ng sought $725 million in additional 3

revenues, to be offset by o $503 mdlion reduction d commencing October r

in the adjustment cnorge, for a net increase of St 31, come on two fronts

3in, 3222 mohon.

O S150 million reductco rois.

the mount of PSE&G's proposed increase was in the gas odjustment

o w 19[

bosed pnncipally on the reflecten of Hope Creek Charge on Customers' constructed costs in the rate base, while the Dills for on 11-month ilty croposed reducten in the adjustment charge period, and a $30 mdlion ch stemmed from considerably lower prices for oil annual decrease in gas divi.

and other fuels in the last two years and better base rates. Together, the perform nce by the utihty's nuclear units.

reductions meant that divs PSE&G's shore of Hope Creek's cost was $4 276 o residential customer, using gas for heating.

S29 Ddon,incluaing $970 mdlion of AFDC.

would see his monthly Chorge for 200 therms de-corr The treatment of Hope Creek in base rates cane from $136.11 to $116.82.

198!

cecome the centrol issue of the case before the Gas costs have dropped steaddy in recent BPU Heanngs were Conducted over C: period of years. The latest Changes in rates bnng gas Costs 3

several months to determine the reasonableness for Customers to their lowest point since 1981.

3 of expenditures incurred dunng the construction The $30 m liion reduction in gas revenues resuit-

Stoc, of Hope Creek.

ed pnmarily f'om o BPU-opproved agreement of in 1982, the cost containment agreement re-the major pc ties in the rate proceeding to re-ferred to earlier was approved by PSE&G, the mov'e Energy Development Corporation (EDC) c.

Pubbc Advocate and other parties, setting the from the gas rate base. As a result, PSE&G's board forgded cost of Hope Creek at $3.795 billion. The of directors declared o dividend of the EDC stock or's ogreement required certain penalties against earn-to Enterprise and EDC become o subsidery of the ings for expenditures in excess of the forgeted hold.ng company.

non cost. and this o!so was on issue in the rate Cose.

Dunng the heonngs PSE&G's witnesses testified Se tings roolized through redemptions od that all costs incurred for the construction of the

,i 1986, PSE&G responded to dechning interest plant were prudent, including those above the rates. It redeemed three mortgage bond issues towed cost. PSE&G oiso emphasized that the totaling $307 million principal amount with interest

>msti first pronty was to get Hope Creek operating as rates of 12% or higher and two preferred stock 3

QurCkly as possible without socnfiCing quohty They issues totaling $69 milhon in por value w:th divt-r et oted that PSE&G accomplished this by meeting dend rates of 13 44% and 12 25% Also, the com-The o Commercial operaton forget of December, pony issued $550 milhon of lower-interest dect.

hour 1M6. which was estochshed under the Cost Con-By taking advantage of favorObie eConomlC y,g3 tanment agreement opportunities PSE&G hos reonzed savings of more 7

A __

, mun m

,-,,,~,m,.

..m,m,.,,,_,._._

._ V its emcedoea cost of ong-term ceot cechned to Stockholder Seroces representatives receivec

'8 8%. from 9 2% in 1985.

69,605 telepnone inouiries in 1986, many of

(,

PSE&G may redeem additional high-cost them over two foll-free telephone numoers'(g security issues in 1987, which would result in further 242-0813 in New Jersey and (800) 526-8050 pli savings on interest and dividend costs outsice New Jersey.

While there were no in late 1986, on updated Guide to Stockhor l

construction Financing puolic offenngs of com-ers services, beanng the Enterprise impnnt, wo3' h,

$ w ow einen.a eumo mon stock in 1986. Enter-produced. It featured a desenption of the divi.

cnse ano PSE&G rolsed dend reinvestment plan, which underwent mq (j

S103 million from the fications at the stort of the year.

j sote of common stock At years end,72,366 or 33 2% of Enteronse's l

I through its dividend re-217,961 common stockholders participated in t-pu investment and stock div:dend reinvestment plan. Under the plan, c3 m

,; purchase plan and em-mon stock con be purchased without commis.

h 1 oloyee benefits plans.

sions through reinvested dividends or cash Cont g,

a l

butions. Authorization forms to join the plan car

}d Construction budget

,g be octoined by colling Enterprise on the toll-fr%

or E declines in 1986 numbers.

Construction expendi-tures, including AFDC er and payments for nu-clear fuel, totated SLO ic bmion, compared w,th $12 billion in 1985.

cc with the comoletion of Hooe Creek, PSE&G's r-construction program will now be smaller. focusing o,

pnmanly on the upgrading of other generating re stations and both emetric and gas transmission and distnbution systems. Over the next three years, the estimated onnuo' construction budget is p,

$650 mmion.

El Durng the lost several years of Hope C, reek's a

construc.Non. internot cash sources provided o

about ho " of PSE&G's total capital requirements.

c Storting in 1987 and continuing into the next Oi decade. PSE&G anticipates if should meet nearly on its cocital requirements with internally gen-8 eroted funds.

as Audit describes PSEarG as well monoged Shortiy before Enterprise was formed. o monoge-

[m ment audit conducted by the consulting firm E

Temple, Barker, and Sloon, concluded that PSE&G was a very well-monoged utility with no major def:c'encies offecting cost or Quality of services.

The audit involved on in-depth examination of octivities-financial and operational-over o 10-month penod, beginning in Apni,1985. It had been mondated by a 1982 state low which re-quires utdtres in New Jersey to undergo a review every three to s;x years. The BPU autnorized PSE&G's review in 1984.

t in its finot report. the auditing firm said. "PSE&G would rank among the best of the utilities witn

(

whicn we have hoc expenence." The firm mooe o fotot of 178 recommenactions involving man-j ogement ano coerotions. many of wnich were 1motemented by years end.

B m

~

.ed Pennsylvania-New Jersey-MorAond (PJM) power ec pool meet a recora peow cemond of 37.650 megawatts, otso set on July 7 The oreacus OA1 sf.

(. s. (8cy, g

ree'srd was 37,110 megawatts estoolisneo on August 15,1985.

1 0.

pv

. Electricity was generated during the year with

khoiq o diverse mix of fuels. In 1986, electric output cy h

fuel source was nucleor-31% coal-26% notaro:

was gas-6% oil-9% and purchased and inter-divi-h changed-28%

t moa,

. Power purchases provided sovings in 1986.

r'se's By buying advantageously priced electric:ty from

dintF, goec Service E!ectric ono Gas Company other Componies, particularly mid-western utu,! es

n, corr sESG) is the largest utility in New Jersey and w,rn coal-fired generating stations, PSE&G rechzec omis-ye of the largest combined electnc and gas util-savings of S48 million in overoll production costs

• contr..

es :n tre United States. It serves 2 million cus-for tne year. Energy purchased totoled 10.3 mduon n con emers-5.5 mahon peopie-living and working in megoworthours.

oil-free an area covenng some 2,600 sciuore miles. PSE&G

. The addition of the Hope Creek Generating

)

nos oc!e to meet the demands of customers Station gave PSE&G on ample reserve margin At mrough the dedicated efforts of more than 13.000 year's end, the installed Copacity had increaseo emoioyees to 10,032 megawatts. The table below shows PSE&G's activities in 1986, outhned on the fol-PSE&G's anticipated annual reserve for the next cwing pages, demonstrated in various ways s decade.

ccmmitment to efficient operations, financic Electric Generation Copacity Forecast r,tegnty, customer service and satisfovion, t,

, a ocnning, good communications and corporate P:anning instaced c cerr e

Year Peck Lood Copacity

%ser.e f

resocns;bdity.

1987 7830 10063 20 l

1968 7750 10147 a

l Production -

1039 8070 10347 2B Electric peak demand record is established 9 00 sito scg 7 L

,791 3i2i -~~~~

1c652 3:

1. tn temperatures scoring to 100 degrees in some areas of its service terntory. PSE&G's electric peak

~

1992 8280 10672 27 demand reached a record-breaking 7,735 mega.

19?3 8330 1u602 a

watts on July 7. The in-

__.__._ 3 80 _ __ M2 3

8 output by Source of Fuel stolled CapoCity at the 1995 8420 10732 27 s * "G" time was 9,007 mego.

' C"'

watts, giving the utility a 1996 8510 10742 20 reserve margin of slight-ly more than 16%. The

. PSE&G began work in 1986 to upgrade its mark surpos5ec the pre-energy dispatching operations. A S15 milhon reno-m

vious all-timo high of votion of the utility's electric system operations

']

7.721 megawatts set on center in Newark willinvolve installation of tne August 15,1985.

latest computer and telecommunications tech.

E The generally solid nology. The improvements, scheduled for comp;e-performance of PSE&G's tion in 1969, will expand the center's obthty to nuclear, cool, oil and monitor, forecast and respond to problems witnin gas turbine generating the utility's system, perform vonous power system units and electric trans-security-related functions, orid exchange acto mission system enabled with the PJM.

the utihty to meet Cus-tomers' demands cunng the summer of 1986.

E!ectnc output for the year, which includes energy produced. purchased, and interchanged, nos 3 3% nigher than the amount recorded during H5. encreasing to 36.03 million megoworthours 90m 34 9 m@cn megawatthours Outout from the PSE&G system hetoed the

a surprise inspection.The overcH Nuclear secunty forces received high marks NUCLEAR:

Hop 2 Crosk has a bonnst year Rigorous, record-setting site of the Salem and Hope Creek stations scorg

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testing of the Hope highly in all phases of testing during Cn unan.

Creek Generating Sto-nounced three-day evoluotion by the NRC in Me, PSE&G become o member of the National tion was completed on

)

December 20 when the Academy of Nuclear Training in 1986.This higNy

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Unit was declared ready regarded industry accomplishment stemmed frc~

I for commercial opero-opproval by the Institute of Nuclear Power Open tion. At that time. the tions (INPO) of all 10 training programs at PSE&G 1067-megawatt unit was nuctect training center. INPO is on industry organ 1

reteosed for dispatch to ization dedicated to the sofe operation of nucle;

)

the PJM power pool for plant:,.

)

continuous and relloble operation.

The completi:;,,1 of Hope Creek marked the FOSSIL:

conclusion of nearly two decades of PSE&G's in.

Life extension is set for older fossit stofions j

volvement in a nuclear construction prcgram, With the completion et 1

which also invcived the building of the two Units its nuclear construction of the Salem Generating Station. PSE&G owns 95%

program, PSC&G begar of Hope Creek and the Atlantic City Electric Com-focusing in 1986 on we7 pony owns the other 5%

to extend the operating The 245 days between the loading of fuel in lives of its fossil generat.

April and the end of testing in December was the ing stations. Collectives fostest startup period for a boiling water reactor these units, which use in the United States. A cornbination of good oil, cool, and natural g planning and execution-without saCrlfice of to produce electricity, quality-occounted for the record.

have on average agee The all-time mark for startup followed the pace 30 years.

for initial fuel loading of the unit, which took only In the immediate 12 days, on international record. The project en-years checd, the life es compassed the loading of 764 bundles of fuel tension program will be on integrCl port of ond the testing of 185 control rods that govern the PSE&G's strategy to meet customer demand reir reactor's power level ably for the balance of the century, without hav.

A major milestone in the Hope Creek project ing to engage in the more Costly construction of came on July 2', when the unit was granted a full-new generating units.

power operating license by tne Nuclear Regulo-Under the progrom in 1987, PSE&G will gather tory Commission (NRC). A low-leve; operating and onclyze complex engineering data necessca license, permitting fuel looding and testing up to to move chead with life extension activities at its 5% of reactor power, had been opproved three various fossil stations.

An aggressive program to control PSE&G's months earlier.

. $alem i's annual refueling and maintenance production costs netted savings of more than $2C outage lasted 46 days.The duration of the out-million in operating and maintenance expenses age, completed in May, represented the best The sovings were realized by reducing the service morK to date achieved by either unit at the sto-of outside contractors and using PSE&G personne tion Solem 2's annual outoge lasted 81 days.

more efficiently, and. cfter careful evaluation, by concluding in December.

scaling down some major projects.

l One project invoMng the upgrade of pumps

. Emergency drills were conducted for both the Hope Creek and Solem stations.The drills were saved PSE&G $5 million. By rebuilding the high-held to test the ability of PSE&G and state, county, speed boiler pumps at a centrol maintenance and local officials to respond to an occident of shop, PSE&G was able to avoid high outside cort either plant. The exercises-Solem's in September tractor costs.

In 1986, PSE&G opened a new production and Hope Creek's in November-were monitored by the NRC and the Federal Emergency Monoge-maintenance training center. The facility is locotet i

ment Agency.

in Sayreville, Middlesex County, and will provice l

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. Increased spot market purchases at more rrointenance and insoection of large furoine gen-favorable prices reduced cool cost by about $2.1

. erotors. A training feature of the new center is a million. The mix cf spot market and contract pur.

• I turoine generator once used at the Burkngton choses provided more flexibility in respond;ng to

• j Generating Station.

lower pnces v Sile assunng supply.

. Increased spot market buying cut fuel oil costs

}

Gas sendout holds steady

$950,000. This, together with new contract pricing The increaseo use of natural gas in PSE&G's resi-and leasing temporary off-site storage. encoled dentic! and commercial markets offset a dechne PSE&G to take maximum advantage of the sub-

n the industnol sector and kept the sendout in stantial decline in oil prices by mid-year.

1986 of nearly the some level recorded in 1985.

. Prices paid for uranium were lower than the The 1986 sendout was 2.21 billion therms, while industry overage PSE&G obtained the fuel rne 1985 sendout was 2.22 bdhon therms.

needed for its nuclear stations from sources in the Fngid temperatures on January 14 resulted in a United States and Conodo of on overage once of j

maximum daily sendout for the year of 14.871,000 S19 58 o pound. Although Conodion supplies were tnerms.

less costly, half of PSE&G's purchases in 1986 were

. The oil gas facilities of PSE&G's Centrol Gas made domestically to provide protection against Plant were retired in 1986 as natural gas supplies a potential embargo on foreign producers The i

improved. The oged facilities. located in Edison.

threat of on embargo stems from both federal

)

%dciesex County, were no longer required to court and legislative action on oehoif of domestic produce supplementary gas. An additional 1.26 producers offected by the lower-cost Conodion million therms daily of pipeline gas and firm stor-

uranium, age service economically replaced the 352,000 therms o doy of manufactured gas copocity

-- ~_._

provided by the plant.

Transmission and Distribution-New Jersey's " Gold Coast" boosts business PSE&G remained at the heart of it'e custhng Fuel Supply-development clong the Hudson River watertront-Aggressive buying reduces costs New Jersey's Gold Ccost-as work unfolced to The ever-changing provide electric and gas service to sucn highly energy marketplace of publicized, multi-million-dollar projects os Linccin the 1980s has produced Horbor, Newport City, Uberty State Park, and Port on increased supply of Uberte. Activities ranged from the instouotion of natural gas, and PSE&G gas distribution and service lines to scores of con-has token advantage dominiums, shopping malls, restaurants, and of its obundance for the office buildings, to the construction of 230.000-voit benefit of its customers.

underground transmission circuits to provide e!ec-PSE&G moved og-tricity to three new substations needed to serve gressively in 1986 to pur-the burgeoning creo.

- +

Chase lower-cost natural PSE&G's commitment to quakty electric and gas on the spot market, gas service took on o new dimension with the and take advantage of negotiated flexibility in announcement that Construction of a Customer pipehne contracts. The results were sovings of $69 operations training center wdl begir, in 1987. The mdhon in gas costs.

facility will be located on 13 acres in Edison, near PSE &G obtained approximately 90 billion cubic the New Jersey Turnpike. It will house state-of-the-feet-atmost 40% of the total gas supply-on the art equipment and provide skills, technical and spot market it possed along the benefits of these supervisory training for some 7,000 employees rooid moves in the natural gas marketplace to who work in the Electric and Gas Transmission and customers through significant rate reductions.

Distribution Departments os well as the Customer These efforts crew praise from Borboro A. Cur-and Marketing Services Department.

ran. President of the Board of Public Utdities, who Reinforcing its determination to oevelop favor-touoed the utihty for " pursuing these spot market able contact between electric and gas service curchases with such vigor...ond succeeding in personnel and residential, Commercial, and in-bnng:ng the benefits of the current gas glut to the dustnol customers. PSE&G took the cocitional step

> moll residential and commercial customer "

of establishing a program to improve employees' The benefits were rechzed without socnficing interpersonal skdis. Its importance was cnven iong term contracts that may be important in the home by the fact that gas service employees uncertain future cione handled more than 2.3 m:uion cous in G56

'3

~_

. Use of helicopters in the replacement of equg{ #

+ ELECTRIC:

PSE&G ssrvas a most famous customar ment on 500.000-volt power lines saved $200,000.

I Growth in many areas of A Florido-based company, which has perfecteo PSE&G's electric service on otrborne technique to service eculoment on i

d territory, especially resi-energized nigh-voltage overhead transmission dential sections in south-lines, was hired to reploCO spoCers along 37 miles ern communities, oc-of lines in the western section of PSE&G's service counted for o note-territory. Spacers keep power lines from hitting worthy upsurge in the each other, and the technique to reploCe them p

number of new electric saved time, manpower, and money.

customers in 1986. More

. Five obsolete substations were replaced in f

q than 24.00 ew meters 1986. The substations, each at Ieost 50 years old.

j were installs. up 32%

were taken out of service because of increased from the 1985 figure, maintenance costs and diminishing availability et which was the greatest gain since 1966.

ports.

PSE&G was particularly proud in 1986 to help A storm tracking system was exponded to the Statue of Liberty shine brightly during her cen-South Jersey. Computerized lightning-detection tennial celebration on J :'v 4. The utility directed the installation of 17.5 miles et overhead and underground power lines,496 poles, and 313 street lights to brighten Liberty Island as well as Liberty l

Stata Park in Jersey City. About S667,000 in annual revenues will be realized from service to PSE&G's most famous customer.

\\

l

luto.

and weather-rodar eouipment was instolied in the removal of oporoximately 4.700 groups of PCB-30.

' 986 of the electnc transmission and dtstr:bution containing capacitors, tneir disposal in on environ-d necdquarters in Camden This doubles the moni-mento!!y safe manner and their replacement n

tonng network to help PSE&G brace for oncoming, with environmentally acceptoble equipment. This potentially domoging storms. In 1985, similar comprehensive replacement program was com-les ecuipment had been installed in Newark, pieted almost two years cheod of the October 1, e

. Electrical capacitors containing polychlori-1988 deodline for removal established by the U S.

noted biphenyl (PCB) insulating material were Environmental Protection Agency.

removed from PSE&G's system in 1986, The pro-n gram focused on elimination of publicly located coDocitors Started in September 1981, it involved 1

A p %e l

g, t\\tSi e9\\00 l

,o s. o -,,.sscoe;l:,,e4 e

u on 500 00 '"ngineS gpoce<5*

coo"'

n gpoC

,y,ot ycold', opod %0 e 1"O c.eeoc'o,11--o,,,,,,,-e 019 990 15 l

.1 4.Md M 4,dTf['

4.'..' TW

>'44% ( K

,. y 3

(,AS:

Service is improved at a record pace There was good news, too on tne gas side of PSE h occ&G's business. The ition of new moins 4

and services occurred 4 c#,,,ge cocop#, 3,, nd,,,,.o at a record pace in 1986

',,,eieC' e,,gewas D " " gogop\\*i with the installation ggce no"#'

dW of more than 3 3 mil-o oe "$ rece iion feet of pipe Some idoi" o

440.000 feet of moins oto*

medtol isoD*

i' "'[,, ond pio**

ono 700,000 feet of ser-vices were replaced,

• • • \\ngs.1"" *.nnonc' d

and, about 30.000 new meters were installed.

,,. uic'

• i.etec

,g n c*

. Construction of a centralized gas service dis-g,io patching center opprooched completion in 1986.

When Operational in 1987, the facility in Harding Township, Morris County, wdl enable consolidation of 13 dispatch offices now scattered throughout PSE&G's service territory. As a result of a new com-puterized communications system, work orders wdl be transmitted to personnel through mini-terminals in service vons. This will reduce the time it takes PSE&G to respond to colis from customers jed oo' '

i reporting problems ranging from gas odors to f

faulty furnaces.

ngod" g !

d "'

. Replacement of two large moins was accom-3*

plished during the year. More than 1.400 feet of 42-inch main was replaced in downtown Newark in connection with the construction of the Legal od and Communications Center. In Jersey City,900 feet of pipe, otso measuring 42 inches, were re-placed near PSE&G's new West End Meter and Regulating Station These were the largest diameter pipes installed in the gas distribution system in three decades.

Engineering and Construction-Construction continues at Merrill Creek

^

Progress was made at the Merrill Creek Reser-

/j voir project in Harmony Tcwnship. Worren Coun-m x.s.x ty, despite environmen-

{

tal problems encoun-1 x

p tered during the year.

C The reservoir is a pro-Ti ject of seven utilities in y

[

d New Jersey and Pennsyh

,j g

g vanic which maintain generating stations on the Delowore River. The stations crow river water for coohng purposes. When completed the res-ervo r will he!p assure acceptab!e water flow volumes in tne over dunng low-flow penoos, The project was mancoted by tne Delaware River

Construction is ceing manageo cy PSE3G wnich is a 16 2% owner of tne toedity.,n mid 19st.

l j

work was delayed for nearly six weeks to taxe cer.

toin steps at the site to control sod erosion and sedimentation. The action was in response to on order by the Warren County Soil Conservation Ser-l vice. Later in the year, naturally occurring osbestos l

was found of the site. Remediction measures were j

instituted to contain the veins of the mineral that i

were uncovered during construction At year's end the project was 45% completed.

Work at Merrill Creek is being corried out uncer o project monogement system used successfully during the construction of the Hope Creek station.

7 The system, which emphasizes effiClent Cooro;no-y ion among participants in o project, will be ex-T tended to other construction activities in 1987.

• During 1986, fiber optic technology was intro-gi, duced in the monitoring of large electric equip-4ggotee #,gwn ment. The technology incorporates fiber optic O' 3o yen probes and video processing, to observe genero-

,e tot n ##* g, o p*N g gcggies fors and transformers. It helped overt a ccstly pe 9

• 0 o

M pi c **'* o n#, gen to'#'go wegeto generator failure in 1986 by providing on early h' gng"c #'3ne te5*"

o e

coM gn

1. g,go u#' og watei warning of on impending problem u

o\\n**',nscn eio n

,, awei ggon 9 d\\n' **

• A microcomputer-based control system was g me D' gg ee

ed e1 **

installed at the Deans Switching Station in 1986.

(*"',,e+**gcond"um og otoo0*

w@o""9 pospoS**'

Installation of the system at the facility in South d

m gomt** yo id#,gico Brunswick, Middlesex County, is on industry first. It n

1. 8* ', aw 5 * *jn will improve operating economy and power sys-e S

tem reliabdity and security.

Customer and Marketing Services-Collection challenges are met with core Using innovative pro-grams and a motivat-I ed workforce. PSE&G's l c Customer and Market-ing Services Deport-l ment substantic!!y re-duced the number of unpoid customer bills.

The net write-off of uncollectible accounts declined, os a result of the

~

effort, to $21.7 million, down 21% from the 1 SS amount of $27.6 million This improvement reflects the benefits of increased Collection oCtivities-along with a better economy-which have

~ '

f

.?

brought write-offs down from on oil-time hign cf

$40.2 million in 1984.

l The chcllenging job of encourag;ng customers to avoid late or unpoid bois was made easier, in large measure, oy the department's ciose work j

with consumer advisory panels. which o+fered o l

variety of ideos for improving customer serv ce and relations. For example. PSE &G now crov.ces soonisn-soecking interpreters at we'k-n customer 1

?7 l

,n--.

l Additional employee training empnosized the PSE8:3 cnd its cust mers team up f:r cffi:1 importance of quality service and concern for the PSE&G, with the co l

people served by PSE&G. Employee recognition operation of both lary, activities were also expanded.

and small customers '

. Customers received newly designed bills in maintained its leader.

1 1986. By modernizing its computenzed billing sys-i ship role in 1986 in fire ing innovative ways to tem, PSE&G's electric and gas customers began

=-

receiving two-poge monthly bil!$ that provide

,h save energy and cro.

duce and distribute it more detailed information about their energy usage,includ:ng a comparison of consumption

- more efficiently.

Residential Custorn.

in the most recent three months with the some ers-homeowners one penod a year earlier.

. A program was instituted to enable customers renters-took advantage of a wide variety cf cre.

to phone in their own meter readings. Under the servation progroms geared specifically to their program, customers who Connot be of Mme for needs.

regular meter readings con diol o special local A focal point for communicating information number and give the readings themselves.

obout oCtivities and programs was the Energy

. Another new program gave PSE&G the ability Conservation Center located in the PSE&G hecc to contact hard to recch customers. Using tele-quarters in Newark. The conservation experts marketing recording equipment and techniques, who staff the center responded to approximate l

customers con now be informed off-hours about 200,000 telephone inquiries lost year. The con-the need for meter readings in their homes or servation message also was token on the road te about the prompt payment of bills.

customers via the " Conservation on Wheels"

. An automatic meter reading project was also mobile exhibit.

launched during the year. In conjunction with o One of PSE&G's programs-weathenzotion local water company, PSE&G begon testing the workshoos for low-incomo customers-received feasibility of reading meters through a direct tele-the U S. Department of Energy's National Awardto phone link. The pilot project involved 100 gas cus-Energy Innovation. The workshops provided infor-tomers in Bergen County.

motion about low-cost energy-soving measures

. Efforts to curb energy theft were expanded.

and were sponsored by Community Action Pro-PSE&G opened on office in Lawrence Township gram agencies, churches. and civic groups. More to conduct investigations of energy theft Cases in than 13,000 persons participated in the workshoc the southern half of its service territory. The utilrty during the year, otso worked with the New Jersey Division of Crimi-

. PSE&G launched on incentive program for nol Justice in on investigation leading to the indict-thermol energy storage at new and existing builo ment of three men on meter tampering charges.

Ings. Financial incentives to customers will be The case involved 93 commercial establishments, based on the amount of peak demand load she and the customers have been rebilled for o total ed to off-peck through development of systems of $2 6 million.

that store " coolness" during the night for use dur-

. Gas conversions mounted despite the lowest ing daytime hours. The program's aim is to help oil prices in years. Nearly 11.000 homeowners PSE&G ovoid construction of new generating switched from oil to natural gas for heating pur-facilities.

poses in 1986. In addition, gas heating was in-

• PSE&G increased conservation ettorts in the sto!!ed in coout 20.000 new homes, nearly 3.000 commercial sector. New progroms for commer-more than in 1985.

cial customers included the commercial and

. Heat pump installations increased by nearly oportment bui! ding energy use survey. o comme 50% Units were installed in 4.246 new dwellings in ciot cash rebate program. and multiple-family 1986. shattenng the 1985 record of 2.884. Space dwelling loans for installing conservation measures heating was otso installed in more than 60% of industnot and commercici construction, for 69.747 kilowatts in new load.

. Dusk to down lighting sales continued at a brisk pace. During the year. 0,758 units of high. pressure sodium and other vapor lighting were installed in PSE&G's.terntory, down slightly from the record 10.637 units sold in 1985.

18 W

e

'OCp naltimof Collections contribute their perso wijs, Mary Ellen,offileted rvisor m Buoye,Supendhis whois trg,*

po ye ployees Marketing Services,aof twirinqoyoungs and Mory filen, auses.To ter m

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hopefully, n

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efforts of To etand I'

ill wo y Ihrough ninitiatedwhichw,

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n Energy conservation Dr dous receivestremen mo-DUila.

o supportthrough prdvertising, S

fionalliterature,astoffed by e nergy Ob/[f.

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center

ialists, Y

conservoflon pecwith"ho -to" hs o

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Planning and Research-PSE&G o!so helped launch a research effort 1:

New technologies are explored determine if the burning of cool and other fossil Planning and research fuels at generating stations is contributing to act are where the present rain in New Jersey. PSE&G is joining Jersey Centr:

=,

,. g and the future come to-Power & Light Co. and Atlantic City Electric Co. t j'f W

gether. Throughout the funding the three-year study that will focus on th 5 -p; year, PSE&G explored Pine Barrens creo of the state.

i p

9 new and emerging tech-

• In 1986, PSE&G continued its pioneering role t

- 4 bh

[

^

nologies, to chart the bringing robotics into utility operations. A mobde 4

best course to meet the submers;ble robot device was used for example.

yg Challenges of growth.

to clean Construction debris from the spent fuel

-D PSE&G'sfuel research pool at the Hope Creek Generating Station. In tb

$SA

.V loocrotory, located at future, a robot will allow PSE&G to perform work

+..+,,m..

--c the Harrison Gos Plant, in the pool without exposing workers to radiation hos ceen onolyzing cool being burned at gener-from spent fuel eventually placed in it.

of ng stations to cevelop a datooose of accept-

. PSE&G's Bottery Energy Storage Test (BEST) ocle encroctenstics This datobose is then used facility completed various studies of advanced to cent.'y lower-cost cool which meets PSE&G's systems. Results of the testing on lead ocio and stec f cat;ons cro wNch netos fcster more com-zine chlorice bottenes indicated that the system oetSecreng could ploy a ro<e in helping meet future needs c' D

~

T { g. ectr c customers Testing ts cont;ru:ng cn iecc rc'ec rea acccurt rg crocecures to meet t e

-c c car *er es Tne 'acer s :n - nsccrcugh Icr er-

' eau re em -+ e : c 7 r g cus -ess - c eg.

gr county. anc. to ac'e. mucn ct t~e acr< !nere arcre ens rc-~ert

-as ceen funded ov me U S Decartment of Erer-Me ecr* cf ? as nec :trer rew satem ay and the Electric Power Researcn inst tute Both ccmout ng ocwer. crc. Our rg tre ve r OSE 4 }

save announced. however, that cer+cin tunas um cont ruec to nstori state-ct-ine-crt r-c -"

e nc lcnger ce orovided for the facMy and PSE&G ccmouters. comc et:rg t e reciacer ent of gi scc:e occk coerotecns accorcing'y.

ecutment.n serace recr:y 20 3ecrs ire ~cc

. During the year, a customer-based fuel cell ern comcuters new cerng ccerated nc'uce t e test was conducted by PSE&G. :n tre prograr-uc-to-cate features c"erec oy ?e cicr

censcrea cv t e Scs Gesearcn institute onc tre crecess.ng ecurcment manufacturers g S Secor+rrent of Energy. pSE&G ;nstalled. oner-n the crec cf te ecor rcunicot.cns.

sE &G yeo anc rra -to nec 4.'c 40adewart fuel cens at s:gnec c 10,ect ease w th ',ew Jersev Eea *:

us*cr er ccottons le testing ;ndicated that fue!

extena f,cer-oCtic ccm un CO' crs cacOc ", -

ce s can ocerate successfully <n a custcmer ceivec from ugntNet to Art t:co 's ano.

• e 2 e e

env.ronment et Sc!e m e nc acce Cree.<

ls ihe Nuc'ect Deccc~'ent was crc / cec *e e-N cornmunications :mcroverrents -nc1.c r; e,

\\-

Information Systems-emergency resocnse concut crocecure 0 0 z High tech communications improve operoflons graded teleoncne serece Tne emerge cv c c q'

PSE&G. hke other cro-cecure incorporates e;ectron:c ceecers, o :cm gressive compan,es. is cutenzed eiectronic rrad system anc menuc e:-

becoming more cepen-emergency tetecommunicat<ons svs*e i

- 5d dent on the cbuy to enco e PSE&G to not.fy indiv cuc s anc 'ece.e i

i gather, manage. cno-ocknowiedgement of nstruct<cns Me crcceau+

a lyze. and move vast was unvedea cunng the NM emergency or, c-l Q

cmounts of information Sc'em station and ecrnec cro se +rcm tre.0C l

s cuickly reacbly and e+fi-

. Addition of personal computers improved pro-ciently. Through its Infor-ductivity. A total cf 250 cersenci cc rcuters was 3

motion Systems Depart.

installed tnrougnout PSE&G n 1;E6 Me estec +--

e ment, PSE&G n.nce productivity sav;ngs througn use cf

• e ecu cr e -

strices in 1986 to scosfy exceeds S7 million the cemands of the In-

. Also in 1986, a program wcs started to deter-formation Age for the benefit of customers, shore-mine long term needs for Computer equipment ncicers and emoloyees.

and services. The new system wm cMow tre n':r-A rew stockholder inouiry and accounting motion Systems Decertment to bet +er serse c? -er system comoieted its first full year of operation.

departments through mOrovec commurucat cr s t-e s< stem enhanced the processing of and and clonning.

" ort tc access to shareholder information. It otso incorpo-ossil D CClC

entro.

Co.in ose o S*S'* co unwo cn the sin G\\oSS mdO '

g\\on U

n dov' D dI9",poc(*

G ioC g role in

• W ""*

ed*

"obde o

$mple syd***,edu\\

U# n meWgod,* #g o90ao \\*io do1

• t fuel p otMg\\oo-o n In thf g

andt

d VO\\

work ggo y3 wui509po te0 u

ggdo gets Dation

,p EST)

[e ne 5d'*

o g,g nCed p H e* O'*

and NO@* Ctee Jcnd ystems stobo05'

?eas of

.h

Public Affairs.

• Company takes on active role in the community New Jersey is cynomic and d! verse, and no f

large company con make its way there with-out maintaining a strong and octive presence.

l PSE&G did not let up in its secrCh for ways to meet its obligations os o good corporate neigh-bor in the cities and towns whiCh it serves and in which its employees live, work, and ploy. During 1986, o program colled EPIC-Employee Participation in the Community-guided more than 60 employees into volunteer progroms ranging from scouting to tutoring. An aggressive United Way program elicited record pledges from 11.804 employees-a 20% jump over the number wno were Contributing of the stort of l

the Compaign. In addition. 367 employees portici-poted in TeamWolk, raisir.g more than S81.000 for the March of Dimes, a 16% jump from the 1985 mark.

PSE&G also supported progroms cimed at introducing minority youngsters to the utility bus-iness. Employees served os mentors for student interns selected for their ocacem;c achievements and leadership potential under o program co!!ed INROADS. Four employees honored under the no-tional Block Achievers progrom provided year-long career counseling for selected high School students.

• Shorebirds on the Delaware Boy received new protection during the year under o mitigation program. PSE&G ond tne states of New Jersey and Delowore developed the program to help preserve more than one million birds-some 20 species in all-which use on area south of Artificial Isiand for feeding and resting during annual migration. PSE&G's involvement begon with the w:dening of on access road to Artificial !sland, in issuing permits. state and federal regulators required the utility's participation in o mitigation project to reoloce seven ocres of wetionds dis-rupted by the construction.

• A news conference, featuring Governor Thomas Keon. focused on oreo development. PSE&G sponsored the conference in which New Jersey's governor unveiled on advertising progrom to pro-mote the economic development of the state.

• PSE&G's site location activities increased dur-ing the year. Areo development representatives assisted more tnan 600 clients in search of new business sites. This f;gure is twice the number of cLents assisted in 1985, on indicofion of o stronger economy in New Jersey. Direct old to 22 mapr 22 m

scuore feet of new ousiness space

. "Dreoms of Distant Shores" won five prestigious j

owards, including o 1986 Emmy. The documentary film produced by PSE&G's Advertising Department traced the struggles and triumphs of the notion's immigrants. The film was shown nationwide by the Statue of Liberty-Ellis Island Foundation and overseas through the sponsorship of the United States Information Agency.

. Another film promoted the understanding of nuclear power, William Shotner of " Star Trek" fame oppeared in the production, which featured computerized special effects. The film was moce for continuous presentation at The SeCond Sun.

PSE&G's energy information center located at the site of the Salem and Hope Creek stations.

. An energy assembly progrom reached 38,500 students. PSE&G and other electric utilities in New Jersey sponsored a theater presentation for young-sters in kindergarten through sixth grade. It pro-vided entertaining information about electricity sources, generation, and safety.

. Energy education conferences attracted 250 onea tot **

teachers. As a member of the New Jersey Energy go piodd'. goo *"

Educotion Council, PSE&G helped organize tnree n

0 gguo6 gidp

sessions fci elementary and junior high school

• i'9 teachers to outline creative ways to teach young-d tM ot$

p ee **dp Mg ste'd sters about energy, jpg it co0*

bd o0' pon joidwoi' j,po ononD",mtgioW"',.6coHuman Resources-jo 50** p PSE&G recognizes a topflight workforce to Ap00*U',pom,ndgie, no' While PSE&G hos billions m

and O

.o " *P

,,gg$

,omes of dollars invested in the c

C te d *"

cioD'jm, ttf"9m*" pc Technology and foci!i-e

,m ties necessory for doing 3900 g,poound-S business, it continued to

~

recognize that its most valuable osset is its employees.

in 1986 PSE&G em-

?

barked on a number of

' %?')

new.progroms designed to allow employees to be more productive and to improve the environ-ment in which they work.

A corporate-wide program stressed health Wo,m p o ges" P'j consciousness among employees through a stop-og

,pt, smoking promotion colorectal and oral concer co"*#o wun85#

testing. and blood pressure screening. For its ef-

,os gn po**'

, Ve*"#

forts, PSE&G earned on award from the American tee t'd emOg,6 Concer Society.

u eso0*j m ie d'"

ooo Programs were initiated to reduce levels of ns Wod "fo,c,o,me.c monogement, broaden areas of responsibility, to *

• p p m**

o,m.

ond eliminate duplication of effort in both stoff 5 "#

ond line organizations. In order to insure the coti-mum continuty in operations, o management 23

~_

O bur [ng tre vecr. So emo ovees demonstrated o t*'

d5**#

I tw t e cerettts of wcr.ong smarter win suggestions

,ogge \\*"9h.80

s n

fnct wel save PSE&G more tron $100.000 a year

,,oded g,ino*(g, et**

,3oot60 toes *gje, and g, o The suggestions resulted in tne nigrett-ever Sug-e M#j,g gest:cn P'on awarcs_ Joseph Conrey cf the Nu-e ear Deocrtrrent receved a $13 800 awcro for his cuS*

nto-oc*

o suggestien *c c Onge tre tyce of cump in Salem setv\\c8* p o*5 p

//

3ererotr 3

• r :n ; c.rcu otng wc*er system.

,qqgeS *** " goet gmng

[

i d'

gA

,d' (

W Ncrcer*o LaGuar: c.f tre Customer and Market-01**gewec,pecio "

//

ng Serv ces :ecortment rece+ved 313.000 for an 9

/

cea n c#rg c"ecx croung procedures at the jf ps*

J' 9 f#

v o*

v

ustcmer cavrrent process <ng center in Wood-1 to', p rm c-One program introduced in 1986 improved M d' c

orientation for new employees. Tne Program.

j codec DECPLE stresses the cenefits and opportuni-p.g t es avasoc'e,n PSE&G for emoloyees wno dem-cnstrate cons stently nigh ' eve's of performance and crecuC!lv;ty l

. On-site drug screening of nuclect contractor

(

employees was initiated during the year. The pro-gram succorted PSE&G's comorenensive internal crug screen ng program in the continuing effort to nsure o arug. free work environment.

. Mortgage refinancing for relocated em-ployees meant considerable savings. Employees receiving mortgage interest differential payment

)

under the corocrate relocation pohcy were en-couraged 'o refecnce their mortgages to gain cenett trrcugn 'cwer mor' gage interest pay-ments As a resutt. PSE&G will c!so rechze savings e

g, og m* gag ***p\\cP-of mere tncn 3237.000 o vecr.

ggcowggy En*Y,ggon *** g Hot

• 9,4co.

1986: Transition med and G '

dt **

C d

n aca t on to tre eiection of E. James Ferland as tow 8 poi *d ggnove cnc rman cf t*e bocrd. creudent and chief go.1*0 pot

• execut:ve :tticer of Enteronse and PSE&G. the fol.

185" e p**g eut*-

so p enned'#,,t D'*"

c & ng occurred g

. Verdell L Roundtree. c director of PSE&G since 1?S3 and o a rec +or cf Erteronse. died on August 26 Se ocard cf c: rectors and management ceet'v regret t e ross of tn:s d:stinguisned and acte a rec cr

. Everett L Morris, o vice cresident of Enterpnse.

nos etectec +o.ts coord of a' rectors effective June i 'n acc tion. ne was elected senior execu.

+ve v ce cres cent and a d; rector of PSE&G. otso etiec!*ve June 1

. Richard M. Eckert retired as senior

. Thomas J. Mortin retired as vice president-vice president-nuc!ect and engineenng eng.neenng and construction of PSE&G. and of PSE&G on October 31 Pierre R.H. Londrieu was elected h's successor.

. Wolloce A. Maginn, vice president effective Moren B and treasurer of PSE&G and treasurer of

. Robert H. Franklin ret red as v ce cresident-Enterorse. announced his retirement in cuc c e c*.crs of ;5ESG cnc John H. Moddocks Decemoer Francis J. Riepl was e'ected

• cs e ec+ec rce cresroen+-oucic c"c;rs et<ect:ve h:s successor, ef*ect:ve March 1.1937 re '

k

a

y5h N

k D

O n

niev "

600 EDb becomes Enterprise subsidlory "9

1. (#pio0*,,ncet"*',,

Energy Development Corocration (EDC) cecorre

,ge " ",,,co s

w the fourth subsidiary of Enteronse unoer acten cv ot ***

PSE&G's board of directors on Decemcer 't 7"e j/j, pom95

,3,n.

.io""9 change resulted from the removal of ccsts et EDC pe*

and its wholly owned subsidiary. Gosdel P,ceare System Incorporated. trom PSE&G's custcrrer rates, stemming from settlement of the gas cose rate cose in 1986.

EDC was created as a subsidiary of PSE&G cor-ing the noturo! gas shortages of the 1970s. ono +

successfully supplemented the utility's gas succmes over the years. In 1986 it accounted for 7% cf PSE&G's supplies.

In the agreement between the major port,es in PSE&G's gas rate proceeding. oporoved cy tre BPU on October 30,1986, the investment in EDC was removed from rate base. As a result. EDC wrote down the carrying value of its ossets unoer the full cost method of oCCounting to tre cresent value of estimated future net revenues. Tre o+ter-tax effect of the write-down made in December l

was $70 5 million.

in the BPU-opproved agreement. PSE&G was I

I onowed to defer the loss on its investment in EDC.

generated by the rate base disallowance. ord to seek recovery of such loss. over o oenod of not

• f less than 10 years in its next base rate case As a result, PSE&G hos deferred $58.8 miilion of tre i

offer-tox loss anticipated to be recovered suo-sequent to the next base rate increase.

Excluding the adjustment of the Carrying value.

EDC's earnings were $4 3 million on revenues of

$70.3 milion, down 55% and 25%. respective'y.

from 1985 results. The lower ecrnings. for the most port, were artnbutable to lower oil and natural gas pnces.

. During 1986, EDC participated in the drilling of 35 wells,51% of which were productive. The num-ber of wells anned represented a 22% reduction.

When compared to the 1985 number EDC's reduced dnlling octivity reflected a continued downturn in the oil and gas industry os o resu't cf lower onces Caused, for the most port. cy excess product:on CoooC#

2

~

$$o**h g$lM**

- [

nc t

SL Agreements are reached on four projects investment subsidiary seIhes opportunities U'

in its first full year of operation, Community Energy Public Service Resources C orporotion (PSRC) og

'[

Alternatives Incorps ated (CEA) concluded agree-completed its first full year of operation in 1986. n p,

ments to participate in four non-regulated energy reviewed o number of investment opportunities a

projects having a combined generating copoc:ty and selected only those whiCn offered the cros.

a of 227 megawatts and a total asset value of S285 pect of a favorable return with a minimum of r:sk Et million. CEA's aggregate equity investment is ex-It contributed $3 0 million to the net income of g,

pected to be about $21 million for on interest Enterprise.

tu eauci to obout 70 megowotts.

During the year, PSRC invested in the SEGS lll r

H l

CEA is otso exploring opportunities involving solar e!ectric generating project, in which CEA C

the development of 600 megawatts of non-decided to participate, and it otso invested in a regulated cogeneration and small power projects similar project col led SEGS IV. In addition, PSRC

[',

throughout the country, including New Jersey.

participated in a tax benefit transfer with the g

l At year's end, CEA's major activity involved o Metropolitan Transit Authonty of New York.

C 35% equity partnership in a $120 million cogen-

. PSRC also become o limited partner in two 1

erotion project in Bayonne New Jersey. The 165-venture capital funds. One fund invests in si megawatt gas turbine facility, scheduled for op-odvanced technology companies in the Miodle C

erotion in 1988, will provide steam to local indus-Atlantic states. including New Jersey, and the try and electricity to Jersey Centro! Power & Light other in selected real estate in major metropolitan Company under a 20-year transmission service creas.

c contract with PSE&G. More than 12 billion cubic

. Investments totaling $64 million were made in g

feet of natural gas will be provic'ed annually by mutual funds and stocks. They included invest-o PSE&G. CEA will invest $10.5 million in the project.

ments in both the Common ono preferreo stock c-h C

. During the year, CEA invosted in a wood-fired utilities and the preferred stock of banks and otne project. CEA fortred o partnership with Horcert corporations. Corporate stock owners benefit by international of A!obomo and a group of local paying lower federal taxes on dividends.

f developers to build and operate a 17-mego-c wott wood. fired electric generating plant in New Hampshire its operation is planned for 1987.

t F

. Irwestment was also mode in a hydro plant.

CEA ocouired o 16% limited partnership interest in g

a 15-megowatt hydroelectric project on the Ken-E P

nebec River in Maine.

a

. CEA become a limited partner in a solar

'8 project. It invested $5.5 mmion in the SEGS fil 30-4 megawatt solar electric generating project in the Mohove Desert in southern California.

. (

fc h

ir p o"\\' j ondgCW y aee*

e ?t

.-@,~#' ' pin 5-

~

C6'

,o en

"',,p o \\

ooO '

voti ie9

, gn

,,o

R f

CENIENTS DISCUSSION AND ANALYSIS OF[#0NANCIAL CONDITION I

gESU_LTS OF OPERATIONS._

i 1986-Electric kilowatthour sates increaseo 3 0%

ing are tne significant factors affecting the financial G**Th '" R*S'dential and Commercial sales accounted j

~

tion of Enteronse and its suosidiones os reflected in br the ocuse Temperature humidity index hours dunng

)

onsohdated resutts of operations. This discussion re-the height of the air-conditioning season, June to August, j

the consondated financial statements and rehted

^

were up 6 0% over 1985, in addition to a 13% increase in J

W5 of Enteronse and should be read in conjunction with overage customers The ongoing weakness in the Dohon,s j

'j Statements and significant accounhng pohcres.

manufactunng sector adversely affected Industnat sales. A ser o d:scussion of the Decision of the Board ot Public We M W W d 7,735 mpotu m

, es of the State of New Jersey (BPU)in PSE&G,S base estobkshed on July 7,1986

, g,

,e cose mode on February 6,1987. and the effect of 2 % Re o!se y.ernent of Financial Accounhng Standards No 90, e mew mm NW m i it hguicted Enterpnses-Accounting for Abandonments I

-c Disottowances of Plant Costs (SFAS 90), see Notes 1 c,

gones ref ect the impoCf of the overoll cooler, !ess humid l

Lc 2 of Notes to Consohdated Financial Statements i

S-summer weather experienced Compared to 1984 Tem-s nu garnings and Dividends perature humidity index hours drooped 5 7% from 1c84.

af

.erpose concluded 1986 in o sottsfactory financial posi-Sales lost in the Commercial category due to the cooler

. n. cespite the adjustment to earnings resulting from the weather conditions were more than cf' set ey tne ongoing 3g

-cementation of SFAS 90 which included the effects of growth in this service onented category The lacktuster per-4 cce Creek 1 costs a,sollowed by the BPU ond pnor plant formance of New Jersey's manufactunng sector through-

,,,andonments. The net effect of the application of out 1985 depressed sales in the Inoustnol category On

'O

((As ?O (see Notes 1 and 2 of Notes to Consohdated August 15,1985 records were set for a 60-minute net peak

'C bcncial Statements) was to reduce 1986 net income by load of 7,721 megawatts and the maximum day's output 13 8 milhon, or $138 per shore. Earnings per shore of of 149,457 megowatthours ornmon Stock were $2 84 for 1986, o decrease of 43c or

/o 11% from 1985. Excluding the effect of the opphCation of Gas FAS 90. earnings were S4 22 for 1986 and $3 96 for 1985.

Revenues declined 5 9% in 1986. The reduction in revenues g

y,ncrease of 26C or 6.6%.

is attnbutaole to decreases in base rates autnonZed by the

'he increase is pnncipotly the result of PSE&G's higher BPU which became effective Octooer 31.1786 in addition.

.rectnc so!es. explained below, greater AFDC due to the lower gas Raw Motenots Adjustment Charge (RMAC j rates MiCr

obstruction of Hope Creek, and reduced maintenance were in effect dunng 1986. Lower oil pnces adverseiy im.

Osts lhe increase was tempered by the effect of a poCted ponty pnced sales. 'n 1985. gas revenues increased 13inl 7ecter numoer of shores outstanding. PSE&G's increased 2.1% pnncipally due to the impact of the March 1;94 rate st.

cerahng expenses (exclud ng fuel costs)-pnncipolly increase This increase was negatively :mpacted oy a one-Sck cf j

~gaer icoor costs. taxes and depreciation-os we!! as in-time refund to customers of $13 2 mmion and a reduction other l : ecsed interest charges in the RMAC charge both approved by the BPU during the Common Stock dividends paid have increased for the lotter port of 1985.

.UY cst three years, nsing to $2 93 from $2.81 in 1985 and $2 70 Gas fuel costs follow omounts recovered through re-n 1994 The Current Common Stock dividend is secure venues, os permitted by rate orders. ond therefore have no c though Enteronse's obihty to provide future dividend direct effect on earnings.

70wth will be hampered as a result of the Hope Creek i The components of the coove changes are highhghted c socowance and other unfavorable elements of the in the tobie below-

ecruary 6,1987 rote decision.

.nc ease a 'sc> ease,

3 Revenues and Sales

ygy,

,%,, m j

flectnC changes m base rates s

'!)

220 1e,'enues increased 5 2% in 1986 pnmanly due to greater necueses oc gas ecs.s (4)

• m 25 nes and recovenes of energy costs. In 1985. electric rev-gg

[

]

enues increased 6 5% due to higher rates and improved 3

nes Eiectne energy costs follow amounts recovered 4 incues e e eme, o su 2 mon ow,o ess+0-s e me m r

5*""**

mrough revenues. as cermitted by rate orders, and there-fore have no direct effect on eornings.

1986-Gos therm sales were virtuolly unchanged from d

The components of the coove Chonges are highhghted 1985. Residential sales registered significant growth. Os n the table below:

the overage number of gas hecting custorners rose 4 9%.

despite the negative influence of the 14% deChne in hect-

• c' ** * **c "

ing degree days Commcrcial sales reflect strong growth

• ^^

5 95"'*

D ME __

in that sector of New Jersey's economy. Industno! sales

' m mi, ces s

te s

reflect the ongoing weakness in the nation's manufactur-M.*'N7 "

I.$

ing sector of the economy Lower oil onces continued to

- e p*vs m

negatively impact Commerciot and industnot sales e

_ _ _189 1985-Overall gas heating so es remained relatively t:ct l

l 27

~

n 1

l

. ontY '4% Since eorty 1985. switching of certain cuci-fuet.-

n,

.,n---nm.~~

non costs will be lower. fccusing onmonly on the uc.

TW b

• Commercrat and inoustrrol customers from gas to lower grading of other generating stations and electne an,.

oC q;

pricea oil has depressed sales in these categones. Indus-transmission and distnbution systems. Therefore, excig A

tnot sores have o!so ceen offected by the ongoing slow.

refinancing and related expend;tures. Enterprise erg to

cown in New Jersey's manufactunng activity-to meet nearly all of its cocital requirements in 198N Energy Costs

'nternally generated funds.

?g Electric energy costs and gas fuel costs are odjusted to Construction Program ort match amounts recovered through revenues and have no Enterprise maintains o continuous construction progro direct effect on earnings. However, the carrying of under-through its subsidiaries (pnncipolly PSE&G) wh>Ch incy Ag recoverec energy costs ultimately increases financing costs.

payments for nuclear fuel. This progrom is penodicap C

A recora terat of 36033 million megawatthours was vised as o result of changes in economic conditions.c.

e, r generated, purchased and interchanged. o 3% increase depends on the ability of Enteronse's suosidiones to fis x

I over 1985 Higner generotion due to the improved per.

construction costs and for PSE&G to obtain timeiy rote; G

formance of Peach Bottom Station, generation from Hope lief Chonges in plans and forecosts, pnce changes,cp 5

Creek Station and energy purchased from the Pennsylvania-escalation under construction contracts. and requirem

.New Jersey-Maryland interconnection (PJM) occounted of regulatory authonties may otso result in revisions of16 9'

for the increose-Construction program.

As a member of the PJM and as a party to several g.

Construct;on expenditures of $10 billion in 1986 ene, agreements which provide for the purchase of available Si.2 billion in 1985 include AFDC of $241 million and

, 1, y

?

power from neighbor:ng utilities. PSE&G is cole to optimize S196 million, respectively. Construction expenditures arg 2

its mix of internal and external sources using the lowest estimated at $3.1 billion for the five years ending in 19;-

,[

cost energy availcole of any given time.

and include AFDC of coout $209 million.

J,.

Total electne energy costs increased 7% in 1986 otter These estimates are based on Certain expected cce

[

on increose of 11% in 1985 os desenbed below' pletion dotes and include anticipated escalation due-

[

inflation of approximately 4%. Therefore, construction

.nceur ;ocars;.. - -

y delays or inordinate inflation levels could cause sig seo 4 was cesvs wea nereoses in these amounts. PSE&G expects that, witn c w eecc oac m o.4ano ccur curcnoses s(26 0 sOen eQuote rate relief, Cs to whiCh no assurance Con be gy

,y 4 c.cmour cutoi.a 31 21 if Will be cele to generate internally nearly all of its Corv

^^5'"*"'o'ocN*C"*"*" T' 7

ecever es Wour revenues ( A) 318 225 struction expenditure requirements for the next five yec-

-~-

s$

LonpM NM%

e fe-J (21) 14 w

3 J

,3 Enterpnse raised more than S668 million in 1986 princiot

^

_.__.r_.--

through sales of $103 million of Common Stock and $$

A v ec i om vaemeccuereo energy ccsts ecmn ene voors we6. was v a seaomcunrea to suo m.non s2e maco ono 3(nn reonsesoect~eiv million of PSE&G's First and Refunding Mortgage Bonct

?{

During 1986 three First and Refunding Mortgage Bonc Gas costs decreased 9% in 1986 and decreased less issues for $307.3 million and two Preferred Stock issues to '

rnon 1% in 1985. Contnbuting factors are shown below-

$69 3 million were redeemed.

In addition to periodic sinking fund rede@tior s. c5 "C'*o'* o' O*c )

million mortgage bond issue will moture in 198'/. ~nree

['

a sc3ars, nee vs was was a ws' mortgage bond issues aggregating $160 million and or

~~

we. onces co a for gai succtes

$U05) sm M.93ge recteo ?C rcn-CroovCf on debenture bond issue of $35 million will also mature br p en.s 24 9

end of 1991.

Cs w.reem c:e <e succ.+rs 0

00)

Also. PSE&G has requested or received regulatory E

N$dI$cua.ces no maten outhonty to redeem certain higher cost securities throu; U'

g es p.,93eeues 1o o

16 future financings of approximately $160 million of vanot s (oo) s 0)

First and Refunding Mortgage Bonds and $160 million o

==

="am vanous Preferred Stock senes dunng 1987 and approxi-aYoNe sIm

$m oh24 m on.

motely $296 million of vanous First and Refuncing Mort; i

o se e e'v

%e u certecoveN ce 16 m+on en 985 ref+ects gas bei cost refunos to customes Bonds dunng 1988.

n 2' S " * **

At December 31,1986 book value per snore amourt -

l (See Note 5 of Notes to Consolidated Financiot Statements.)

to $26.89 compared to $26.81 of December 31,1985. T4

{

Liquidity and Capitol Resources market value of common shares expressed as o percer' 4

I age of book value was 149 7% and 118 0% of year-end Enterpnse's liquiaity is offected poncipolly by the ConstruC-D 1986 and 1985, respectively.

tion progroms of its subsidiaries and, to o lesser degree, by Under the terms of PSE&G's Mortgoge and Restatec other Capital reoutrements such as PSE&G's matunng debt.

OC Certificate of incorporation, of December 3t 1986 PSE6 reocovisition of secuotes and sinking fund requirements.

could issue on additional $3178 billion pnncipal omour The capitol resources available to meet these require-of Mortgage Bonds of a rate of 8.63% or $3.750 billion d If ments o e funds from internal generation and external Preferred Stock at a rote of 7.25%.

~

financing Intemally generated funds depend upon eco-In February 1986. PSE&G. by on odditional amenom C",

nomic concitions and the odeQuocy of timely rote relief to extended its Creoit Agreement with 12 domestic banks PSE&G. as to whicn no ossurance con be given Access to May 1,1987 for the issuance of revolving loons up to or

[

the long-term onc snort-term eccitot and cred61 markets aggregate of $200 million 1o be outstanding at any tam s necessary for octoining funds externolfy.

2B l

m '

cerm ts PSE&G to convert tne outstanding -_

. needy customers have on impoet uoon the sevel of

. stn e';gre n

r r

+

gce at ime ero of the cenco,o rnree-year tem loons '

receivooles. uncnilect'cle accounts and net wr:te-off

na y b

SESG nos tre ngrt. utm me consent of tne conks.

tnerect Puaf

,4cend tne agreerrent On a year-to-year oasis W % In h Ws yped

~ n me foreign morxets Enteronse iists its Common Stock Long-Term Investments increased $124 milhon pnmanly as

/ wit 7'

., rne London Stock benange. London. England and the result of the oCtivity of PSRC. The increase is mode uo

-q3G's 9% Senes S First and Refunding Mortgage Boncs

• # "O*

92

.,, ated on the Luxemoourg Stock Excnonge.

'e;n Octeoer 31. 96 PSRC entered into o Credit b,, %,,

{

y.eement rnot orov: des for revciving cred;t loans up to

.g;;,g.,,,,,- - - - -

q, W

on 357C -ov 'erminate the commitment,in

. - wa >w,sna u

.", Y I 5;e 3r :n cort thcut cero:ty or premium. Under the E;"S* ^7*~5 a

.s cr,:

yreement, om oortcwings outstanding at Octooer 31

-~

=== =c=e.e

.m: - - -

CoS 9; ye conven t e at PSRC's Oct on. into three-yect term

ys PSRC ;s ' eau,reo to cov c commitment fee on any Effect of Inflation

,g

, used cortion. At Decemcer 31,.1986. 325 mdlion of bor-The ef'ect of inflation on Enterpnse, as indicated by tne

.;.ggs was outstanding unoer the agreement.-

Average Consumer Pnce inoex (CPI-U) has mocerated g

since 1G81. The ir. creases in the CPI-U in 1982.1983.1984 j

~

short Term Financing onc '

gr rtenm financ:ng 3SE&G 's outnonzed by the BPU to 1985 and 1986 were 6.1%. 3 2%. 4.3%. 3 6% and 10%.

j 1

.e uo to a total of $300 mdhon cf short term obligations respectively.

d

} ;$ ore gstond;ng of any guen time This ovadocihty of short-t. >1991

.y tnancing provtoes PSE&G l'exibdify in the issuance of

rg/erm secuntres PSE&G's overage cody short term deot

, 1 core.

yng 1c86 was 378 mdhon-526 mahon above last year's

! duete 3,eoge At year-ena PSE&G had $139 mdlion of snort-term

.on

ect outstanding

nifice.

35E&G has a $75 mohon revolving credit agreement.

(

'ith oc-

-or exorres in January 1988. w>th 16 foreign banks. under

>e geve

,.~en rne Banks have agreeo to make revolving loans for

con.

re mentn. three months or s;x months or o rate based

) Years

, con tre London interconk Offered Rote for deposits in f red States collars These agreements provice PSE&G h

.tn on erterrreciate-term source of funds.

). he on November 1.1986. EDC entered into o Credit ag'eement that provides for revolving Credit loans up to 50 mimon EDC may terminate the Commitment,in f.cc>e er n oort, etnout penalty or premium. Under the Jes for agreement. EDC hos the option. on September 30.1987.

vend !ne motunty oote of the agreement to Octo-gp

. g;ree - ce 31. M1. EDC :s required to pay a commitment fee on rkd ons wued c mon At Decemoer 31.1986. $100 m@on l

<e W t;

t octrowings was outstanding under the agreement.

i Cash Position fy

-teronse's cash position increased S13 million since

'roug-

. ear end 1985 ine components of the increase ore:

onous

~

nc'wie or (Decrese )

on of n ' : : ='s :

• oxb

• 2' ' '"N'3"< 215' Nen'**^'s W s '85 f

Aortgc:

fG., m.g,,

y i

.m xs)

'nount!

N3-"

M j

85 The

._ m.

i ercent A

.g.:.y w

,,,s.

ents cars st ormar v et L s secsury Notes

-end Customer Accounts Receivoble At Decemoer 31.10A$. customer accounts receivable toted 1

$PSE&:

acoroximateo $352 mdhon excluding unbdied revenues of l

MO manon Net wnte off of uncollectible occounts in 1986

. smoun.

s down 21% to approximately S22 makon. a decrease of 4

Won of

.t %on trom lost year Net write off per $100 of revenues 635 aown *6 cents to 48 cents compared to 1985, the endmf e

9sW d coroved col lectron procedures and continued conks

'ofovements :n tne economy -The tevel of PSE&G's rates l.

to on sytge "F3 o EDU *ecurrement cronoting tne terminot:on of elec-l

'O Ond gas service cunng winter montns to financially i

t

.n

y ys j

/JW ost (

' ' ~

c rates for the recovery of such costs and directed that Const c

fe ve oy 1,1986. Enterpnse become the owner of all fu d C'

of the outstanding Common Stock of PSE&G os o result Amortization of leasehold improvements and cap.

CU'O of a corporate restructunno of PSE&G pursuant to a Plan N

lease ossets is based on the term of the lease.

and Agreement of Merger. In the merger and restructuring, toinC each shore of outstanding Common Stock of PSE&G was Amortization of Nuclear Fuel re t '

n converted on a shore-for-shore bosis into Common Stock Nuclear energy burnup costs are charged to fuel ex3 f6V*

i of Enterprise and each shore of $140 Dividend Preference reN.)

on the basis of the number of onits of thermal energy Common Stock of PSE&G was either converted into one-roduced as they relate to toto, thermal units expecs half a shore of Common Stock of Enterprise or exchanged be produced over the hfe of the fuel. The rate calculo' for $18 cash, of the cotton of the holder. The restructuring for fuel used of all nuclear units includes o provision

- did not resuff in any change in PSE&G's Preferred Stock or mill per kilowatthour o' nuchar generation for spent tu debt secunties.

dM Enterpnse is entitled to on exemption from regulation by the Secunties and Exchange Commission as o registered i

. holding company under the Public Utility Holding Com.

Gas and Oil Accounting pony Act of 1935. except for Section 9(o)(2) thereof, and is Energy Development Corporation follows the full-cost not subject to regulation by the BPU or the Federal Energy method of occounting. Under this method, all explcrat Regulatory Commission (FERC).

and development costs. both for successful and unsuc cessful wells, ore capitchzed and amortized on the ure I

pr duction basis. (See Note 5-Deferred items-Gos -

Consolidation Policy and Accounting Principles Oil Exploration Plant Write-Down.)

The consolidated financial statements include the accounts of Enterprise and its subsidiaries. PSE&G. CEA, i

PSRC, and EDC. All significant intercompany accounts Long Term investments i

and transactions have been eliminated in consolidation.

Enteronse, through its investment subsidicry, PSRC, has -

Certain restatements have been made of previously re-vested in marketable secunties, which are valued at t%

ported unconsolidated amounts in order to conform to the lower of Cost or market, os well os vanous leveraged le:

1986 presentation. Such restatements had no effect on and pmited partnerships. In occordance with GAAP, Er

{

. net income.

pnsmecords o vo!uction loss on its investments in mas The oCCounting and rotes of Enterpnse's wholly-owned able secunties, whenever indicated.

subsidiary, PSE&G. are subject in certain respects to the requirements of the BPU ond FERC ond, as a result, main.

Revenues and Fuel Costs i

toirs its occounts with their prescnbed Uniform Systems of Revenues are recorded based on services rendered te INAN4 Accounts, which are the some As a result, the opplico-customers dunng each occounting penod. PSE&G recr ! ~

tions of generally accepted occounting principles (GAAP) unDilled revenues representing the estimated amount by Enterpnse differ in certain respects from applications of customers will be billed for services rendered from the t-other non-regulated Dusinesses.

meters were lost read to the end of tne respective occ.

Mon tion.

ing penod.

stats '

Utility Plant and Related Deprocletion PSE&G projects the Costs of fuel for electric generat<

edf and Amortization-PSHrG purchased and interchanged po*9r gas purchasec 3 in o-Aod5tions to utihty plant and replacements of units of motenols for gas produced for twelve-month pericos property are cocitchzed of cost The cost of maintenance.

Aojustment clauses in PSE&G's rate structure allowp ciph ]

bas + )

repairs and replacements of minor iterns of property is recovery of fuel costs over those imiuded in PSE&G s tx:

Chorged to coproonote expense accounts At the time rott:s through levelized monthly charges. Any uncler tn Of0C M7 units of depreciocle properties are retired or otherwise dis-recovenes, along with interest in the cose of on overrec cons posed of, the onginal cost less net salvoge value is ery, ore deferred and included in operations in the peg ops charged to Accumulated depreciation.

in which they are reflected in rotes is co For financial reporting purposes, depreciation is com-Ond puted under the straight-line method. Deprecrotion is g

based on estimated overage remaining lives of the several I

classes of depreciable property. These estimates are re-income tax return and income taxes are allocated. for

sofe, viewed on a regular oasis and necessory adjustments are reporting purposes to Enteronse and its suosidiones be cor-made os opproved by the BPU. Depreciation provisions e he @d M stated in percentages of onginal cost of depreciable prom Deferred income taxes are provioed for ditterences:

cor-J erty were 3 54% in 1986. 3 52% in 1985. and 3 53% in 1984.

tween book and taxoble income For PSE&G fne ooten

oct, Depreciation opphcoole to nuclear plant incluoes esti-ome es me hW b % em pM b c cm moted costs of decommissioning except for Hope Creek.

g N poses.

To ensure that odoquote money is avoilable to meet m

creods m ceW W MMM N,

decommissioning costs for the Hope Creek Generating the useful lives of the related property inclucing nuc!ec a <

Station, the BPU in its Decision of February 6,1987 provioed fuel 30

.~

hpwonce for Funds UUD$r ng CAnitru[ tion[

in ce base Howwet cosed upon tne BNs m i M87. PSE&G is no longer allowed to onCe for funcs used cunng Construction (AFDC) is o

, hst dCCounting procedure whereoy the coat of financing ro[ngeen o

, instruction (interest and ycui y Costs)h transferred from t

.,e income statement to c0nstruCtion work in pogress jWIP)in the bo!ance sheet Tr's eye of 85% g.w? for Col-Pension Plan j

1'

" oting AFDC was within the limits set by FEpc Enteronse's suosidiones participate in a non-Contnoutory

~j to As o result of SPU rote orders PSE&G hos eeen allowed trusteed pension plan Covenng substantially oil employees j

.pnClude o pomon of CWIP in rote base on whrCh a Cur.

Completing one year of service The policy is to fund pen-e t return is permitted to be reCove'ed through operating Sion Costs oCCrued. Contnbutions include Current service J

n f

o,cenues The amounts of CWIP inCbx;ed in rote base have Costs and amounts required to fund prior servtCe Costs over

.hnoined of 5550 mnon sinc 9 Te end of 198/1 No AFDC o 35-year penod beginning January 1,1967.

-os been oCCrued on the aqbnts of CWIP which were i

m.

e f c.,

4

)

{

t n.

e 8

1 s

I s a.

th9 30">

nts

'rks-WANCIAL STATEMENT RESPONSIBILiff o

.e it ste ogment of Enterpnse is responst!O for the preparo-is enhanced by a progrom of Continuous and selective CC; f.on, c'egr.ty and objectivity of the Consolidated financial training of employees. In addition, monogement hos g

rtatements and related notes of Enterpnse. The Consolidot-Communicated to all employees its policies on business y.

ed finanCiol statements and related notes are prepared Conduct, ossets and internal Control.

O CCCordance with generally oCCepted oCCounting pnn-The Internal Auditing Department Conducts audits and

. ;p Oto!G5 Cpphed on a Consistent basis and reflect estimates oppraisols of OCCounting and other operations and evol-30, ocsed upon the judgement of monogement where op-uotes the effectiveness of Cost and other Controls.

.t c..

orcoriate Management believes that the Consolidated The firm of Deloitte Hoskins & Sells, independent Certified 9CO f:nonCrol statements and related notes present fairly and public Accountants, is engoged to examine Enterpnse's gnc.

Onststently Enteronse's financiol position ond results of Consolidated financial statements and related notes and ODerotions. Information in other parts of this Annuoi Report issue on opinion thereon. Their examination is Conducted in i Consistent with these Consolidated fjnanClot statements oCCordonCe with generally CCCepted auditing standards

Yd related notes and includes o review of internal oCCounting Controls and Enteronse morntoins a system of internal oCCounting tests of transactions.

3rC COnkels to provide reasonable assurance that casets are The Board of Directors Cornes out its responsibility of fi-DI s3teguorded and that transoCilons are exOCuted in oC-nonCiol overview through the Audit Committee Currently I

D

. CordonCe with monogement's authonZotion and recorded Consisting of five directors who are not employees of Enter-crocerly. The system is designed to permit preparation of pr:se. The Audit Committee meets penod1 Colly with man-9s D Consolidated finoncial statements and related notes in ogement as well as with representatives of the internal Sr*

3C00rdance with generally oCCepted CCCounting princh auditors and the independent Certified public oCCount.

Dies The Concept of reasoncole ossu'onCe recognizes that onts The Committee reviews the work of eoCh to ensure he Cos?$ of a system of internal Controls should not exceed that their respective responsibilities are being Comed out, 3C' me relo'ed bersefits and discusses related matters Both audit groups have fu!!

W Management beneves the effectiveness of this system onc free oCCess to the Audit Committee l

3 JW t

a _..._ _ -

~~rm___.

yy a

e e_

-m

..-._m.

-. ~ - -.. - -

1985 3

(inousoncs of Dono's) For the veors Ences ce:emo,,,f y 1986

' Operating Revenues

. Electnc

$3,156,010 33.000.564 32.84ta Gas.

1,324,690 iA08A90 t374.

17.716 19.287 11gi Othe,rf total Operating Revenues 4A98,446 4 428.341 4.2071-Operating Emenses Operation Fuel for Electric Generation and interchanged Power-net 1,033,371 965.966 872 3 Gas Purchased and Moteno!s for Gas Produced 692,224 757.976 75%

Other 607,301 567.c98 545.7;-

Maintenance 254,256 29t940 27 3 Depreciation and Amortization 272.150 268.179 2467:

Amortization of Property Abandonments and Wnte-Down (note 5) 74,232 55.263 58 ;n Taxes FederalIncome Toxes (note 3) 270,783 273.119 2t3 2.t New Jersey Gross Receipts Toxes 563,548 557.270 529 s Other 56,297 53,161 51.'y Tetof Operating Expenses 3,821,132 3,790.572 3.5;3.0:

677,284 6 _37.769 t007.

_. _. _,. Operating income Other income Allcwonce for Funds Used Dur:ng Construction-Eouity 164,121 127A12 10460

..- Miscellaneous -net._

-. ~. _ - -- - -....

-. -.. ~.

2.N.

10,840 458 Application of SFAS 90 (note 1)

Disailowed Plant Costs and Abandonments-net 295,244 109.717 50:

Related income Taxes (111.418)

(24.799)

(2.U; Net Ettect of SFAS 90 183,826 84.918 2R Income Sofore interest Chorges 668,419 680.721 713.72:

Interest Charges (note 9)

Long Term Deot 297,249 276.480 257.it Short Term Deot 6,362 5.788 5.42 Other 12.169 7.278 18.1 H iotalinterest Chorges 315,780 289.546 280.7T Allcwonce for Funos Used Dunng Construction-Debt (77,196)

(68A59) _ _ 53.9y

( _

_6 74 22 Net interest Charges 238,584 22t087 Preferred Stock Dividend Requirements of PSE&G 51,372

-60.002 60.22-Net income

$ 378,463 S 399.632 5 426.7$

====...

= = - -

.-.-==:====-_-.-.===

Shores of Common Stock Outstanding End of Year 134,882,375 131.698.517 112.563.0$!

Average for Year 133,139,529 122.344.270 108.913.27:

m.. ; e m.r..=m Earnings per Average Shore of Common Stock

$2.84 S3 27 S3

-,.x==.=====--n

== :=w..-.=---.=.==--..-.=.-...a====:-=.-

$2.93

$2 81 S2 E t

Dividends Pold Por Shore of Common Stock

= - -

-== - =.=.:

u.,

u =r.=.:

~2 -

- ~

~ ~

.=: = - =::==:=~.=

• Or ve3'l'es'Otec to reh *:t the 0000?@ of sF A$ GC and 'ne CDeSonoction Of wnOWWNJ 1stidiof'et t

8 M Dg3Nat On and sum &c'v Of sgnticant Acc0 anting Poic es ono No?@l IC Comp 30'ed 'nonc o'sto'ements 32

~.

m

1 hNSOLIDAlhD ST TEMENTSdF CHAN6ES IN FIRMICIAL POSITION

~#

-v e

t i

e t

6 1~

e e

r,z

housoncs of Dollars) 'cr 'ne < ears Ericed Decemcef 31 1986

J 85 1984 Funds Provided j

N.

Net income

$ 378,463 S 399.632 S J2t,964 j

9.,

Add (Deduct) items et ctfecting Verking Capital j

Depreciation and Amortization 391,978 375.154 335 393 l

Recovery (Deferrat) of Electne Energy and Gcs Fuel Costs-net 350,882 43A22 (211.337) i D:sallowed Plant Costs and Acondonments (note 1) 350,571 151.009 35.346

{

Amortization of Discounts on Disoflowances (note 1)

(55,327)

(41.292)

(30.330) i provision for Jeferred income Taxes-net (note 3)

Depreciation end / (%rtrzarion 62,511.

P 42.334 79 462 O

Property ADandonrMg (note 7) 53,267.

(7,(46) 364 2.220 Gas cnd Oil Explofon 'm det;te-Down (note 5) c a

g D

Deferred Electric f Sergy and Gas Fuel Costs (161A05)

(19.'20) 4 931 s

Other 35,943 (4.544)

(14.031)

N investment Tax Credits-net 13,205 y

132.398 94 996 7

Allowance for Funds Used Dunng Construction (AFDC)

(244,317)

(195.871)

(156.792)

':Q Other 4A17 /

(9,042) 5.724

((

Total Funds from Operat!ons 1,175,262 873.844 6c2.546 7

Net Funds from Financings Common Stock 103,330 499.905 213 492 Long. Term Qebt 564,894 199.118 426.110 648 5.910 L " iZ,'

inc. rease ir'. Capital Lea..se Oblig7 hors-.- -

645.512

/

Toto funds froio Firconcings 668,224 69 1671 r

Total Funas Rovided

$1,843,486 S1.573.415 / $1.308.C58 no.;

=.

.;.====r==

.._ = -= = = = = = =

674.

Funds Applied a77 Acetions to Utahty Plant. excluding AFDC.

$ 778,248 S1.024244 S 808.573 Additions to Gas and Oil Exploration Plant, excluding AFDC 21,781 47.392 52.891 Cosn Dtvidends on Common Stock 390,28' 346.803 295.078 f

Long Term investments 136,290 4.230 l

w peductions of Lonpierm Det,t and Capital Lease Obbgotions 423,129 207.355 7.054 Reductions of Preferred Stock 72.750

~'

844 1 Anoerty Abandonments, Wnte-O$wn and Deferrals /Wie '

(134A52)

(37.108)

WJ1"3)

,33 Mction in Property Values rats j

j 134,452 37.108 f.,?J13 r

Mn,silaneous 8A79 17.848 37.341 ma TotoWMas App'ed. -... _. - -. -. - -..

w l

1,758,216 1,720,622 1.200.937 g

l Shortderm Debt

'f O

Changes in Working Capital - Incisase (Decrease)

'"5 (77,769)

(47.811) 18.885 737

' Cash and Equivalents 949,943 (86.738)

• 20.230 2!i,905) 66261 (41.691) a a;

Accounts Receivoole and Unbilled Revenue 4

+

fuel,

(20,090)

(52.137) 54 444 CM Cu: rent Assets 13,664 28.320 4.024

^

22' Jccobnts Pcyoole and Other Accrued Liabihties

49A17, (27.087)

(33.221)

(3,990)

(28.015)

(15.550) 7t; Accrued Taxes 85,270 (147.207) _

107.121 Net inc_rease..(.D_e._ crease) in Va_ king Capital Total Funds Apoked and Changes in Vbrking Capital

$1,843A86 S1.573 415 51.308.058

=, -

- - - -

= = = = =,

y

• y,wyveva'ea to re+ce' t% acocron of sr As M ana '"4 conweaav # whony. owned wova. ores

• 9*

% CWyrvic'ce yd Sumafy 9 s gnMCmt Accounting Dohc.es ya NO $ to Consonoctea hoanCO stutemenh 3

l 2 70 b

l 1

g) 6 33 j

i l 4 C

yy.,___._..

. _.a ca

--~~mm,_,,_,._.,_,,_,__

s-e

- ~.... _.... ~

1986

- (thousands Cf Dollors) DecernDet 31 1;g Utility Plant - Onginal cost

Elecinc Plant

$ 5,449,135 5 5.2ca.14 Gos Piont:.

1,396,543 1.290.2y Common Piont 281,751.

2644 Nuclear Fuel 128,9CJ 120.89

- Utihty Plant in Service l 7.256,335 6.943.4y Less Accumulated Depreciation and Amortection 2,692,759 2.502.g Net Utility Plant in Service 4.563,576 4.440 er Construction Work in Progress 4,153,980 3.862.cp Plant Held for Future Use 26,873

. 36.1a;

_ _3_39.5p.

8.

. _,et Utihty Plant 4,744,437

.N s

j Other Plant and long Term investments e

Gas and Oil Exploration Plant. net of accumulated depreciation -

1986. 5183,286; 1985, $158,100 159,040 308.35-Other Plant, net of accumulated depreciation - 1986. Si,362,1985, S943 26,224 17,1k 9

j Long Term investments 133,180

_./j, 334.99:

Total Other Plant and Long-Term investments 318,444 Current Assets Cosh and Temporary Cosh investments (note 4) 206,008-20.9Cc -

'3 Working Funds 21,876 26.59 f'ollution Control Escrow Funds 30.4cc Accounts Receivable, net of oilowance for douotful accounts -

1986. $33,101; 1985, S20.733 407,737 392.80:

Unbilled Revenues 169,584 210.41t Fuel, at overage cost 203,979 224 3

- Motenois and Supphes, at overage cost 80,197 75.55'

._' Pre _poyments 30,875 21.85;

. oto_.f Cu_.rrent Assets 1,120,253 1,002.64' T

Deferred Debits (note 5) l Property Abandonments (note 1) 227,033 269 &

j Gas and Oil Exploration Plant Write-Down 112,044

'j Underrecovered Electric Energy and Gas

)

Fuel Costs - net 264.03; Unomorteed Debt Expense 49,102 23.42t Other 6,509 Total Deferred Debits 394.688 557.0cc I

J Total

$10,577,822 510.234.2%

~..

.;:.. 2 ~

h# fedt resto+&o to eefisct the ocoDt:on af $f As 90 0n0 the Con 30Hootion of whony.ownea tub 5dofiet C

see of9740'on Of'.o sufntnofy of Segnifcont Accounting Poucies ona Notes to Consoncoteo Financiot statements j

l i

./

4 34 L k _. -- _.

.m

cop alisation and Liabilities it 1985

. hmnas or Douars) December 31, 19g ~ ~l;U

't_Copitalisation (see statements. pages 36-38) 4 113 Cornmon Eauity

[330 Common Stock

$ 2,632,662 -

S 2.535.687 1.013.285 Re,toined Earnings 993,836 total Common Equity 3,626,498 3.548.972

, 437 Subsid;ones' Secunties

^

'ASN Preferred Stock Without Mondatory Redemption 554,994 554.994

1843 Preferred Stock With Mondatory Redemption 65,000 65.000 2.633 Long. Term Deot 3,336,120 3.164.641 f 11.12 Capital Lease Obligations (ncte 9) 56,409 58.337

.,o aT t l Capitalization 7,639,021 7.391.944 4.58,3 Cuirent Llobilities l~

Preferred Stock to be redeemed within one year 72.750 3.35j

. Long-Term Debt and Capitol Leose Obhgotions due within ene year 71,418 57.895 l

7.13e Bank Loons (note 6) 104,996 l 7.508 Commercial Paper (note 6) 139,000 107.000 l- (99,#.

' Accounts Poyable 215.386 272.324 New Jersey Gross Receipts Taxes Accrued 544,678 545.802 Deferred income Taxss on Unbilled Revenues (note 3) 78,007 96.791 Other Taxes Accrued 49,253 25.355

'1909 interest Accrued 94,602 84.101 "6 566 Gos Purchases Accrued 75,058 87.669 0.466 Other 84,500 74.869

)

2.807' 0.416 4.069 Deferred Credits 5

5.551 Accumulated Deferred Income Toxes (note 3) 1.857 Depreciation and Amortization 685483 c35.868 Property Abandonments (note 6) 99,846 107,792 l

2m Gas and Oil Exploration Plant Wnte-Down (note 5) 53,287 Deferred Electnc Energy and Gas Fuel Costs - net (39,947) 121458 Unamortized Debt Expense 19,548 7.791 9.601-Other (2,924)

(27.110)

Overrecovered Electne Energy and Gas Fuel Costs - net (note 5) 86,843 Accumulated Deferred Investment Tax Credits (note 3) 565,868 551,779 LO39 Otner 13,899 20.212 1426 Total Deferred Credits 1 A81,903 1.417.790 066 Commitments and Contingent Liabilities (note 8) d 4.290

$10,577.822 S10.234.290 Total 35

~ 3; - -- -

=r3

.... -. ~ _

\\y l

~*

(Thousands of Dollars) For the Yeats Ended Decemoer 3t 1986 1985 __ _ Q Bolonce January 1, os previously reported

$ 963.h

._.._ _ Cumulative.e.ffect of retrooc_tively apolying SFAS 90 (note 1).

.__(131g.;

Balance January 1 1,013.285 963.573 8316

__ ^d930ncome _

____378A63_

_ 33632 _

42 %

Total 1,391,'48 1.363.205 1.258.{7.,

Deducf Cash Dividends on Common Stock (A) 390,289 346.803 295.07:

p Capital Stock Expenses 7,623 3.117 Total Deductions 397,912 349.920 _ _ 295 4

..._..._..._-.8_5_

_ S 963 5. -

__ $ 993.836 Bolonce December 31

$1.013.2 A. '*e oc i tv of Emeror se to cectore ono cov a+oenas (s conhngent uoan.ts or'or rece.pt of avoeno povments from its suosoor,es PSEG En'eror se s or+c coi sucsg aos reste:ct.ons on me povmen' of avoenas een ore con'a neo e ts Cnortef cer'2n of the incentures svapemento' to 3s Mortgoge ano certo n ceoerve core ncervos Neweer n:ne of taese restect ons presentty hmitswe povment of c+oenas out of current oornegs The amount of P%G restrc'eo retamed eo a rgs at i

Secerroer 31 Mo was P17JC COO Pr;or,eors restotea to re ect me occot on of SFAs 90 ano tme consoboot:en of whony.owneo suoscar es r

mmo v of 5.gNt cont Ac::ou t ng Douc'es ona Notes to Corso4ciec Ononciai statements j

5ee o gon tot on ono Su r

I 1

l INDEPENDENT ACCOUNTANTS' OPINION i

i l

Deloitte l

Haskins= Sells i

)

Certified Public Accountants t

Gateway One Newark. New Jersey 07102 To the Stockholders and Board of Directors of Public Service Enterprise Group incorporated:

We have examined the consolidated bolonce sheets and in our opinon, such Consohdoted financial statements consolidated statements of capital stock and long-term present fairly the financel positen of the companies at debt of Pubhc Service Enterprise Group Incorporated and December 31,1986 and 1985 and the results of their l

its ;ubsidiores as of Decemoer 31.1986 and 1985 and the operations and the changes in their financial position e related consohdoted statements of income, retained each of the three years in the perod ended December.

I earnings, and changes in financial positen for each of 1986, in conformity with generally accepted accounting the three years in the perod encied December 31.1986.

principles opphed on o Consistent basis. Offer restaterrf Our examinotons were made in occordonce with for the C90nge, with which we concur, in the method 3 generally oceepted auditing standards and, accordingly, accounting for abandonments and d:sollowances of --

rncluded such tests of the accounting records and such plant costs os described in Note i to the Consolidated other Guditing procedures os we considered necessary in financial statements.

the circumstances.

f:

2 flh2 February 17,1987 36 IN

~

Y

• 4NSOLIDATED STATEMENTS OF CAPITAL STOCK e

e

~~ -

~. ~. _ _,

Current Cencin 9;34 Ou*stanc,ng Redemphon Gd0ncings 33g 7 Shores Pf1Ce RnS'itiCted 6 60 T*O

1 p0, -

yeencer 31 (note A)

Per Shore Perot to phoesoncs of Cocs,

~,

' 3 'g15-gonporticipating Cumulative Preferred Stock

-l of PSE&G (note 8) j th yn Vancatofy Decemot,cn a

1 77#

1*00 car va%e - Ser es i

1225%

S 22 70' l

9 :g 50 C00

• 2 80%

350.0C0 112 80 10/1/87 35,000 3520 5.0 78 11 62%

300.000 111 62 9/1/88 30,000 3C00 125 Less amount to be redeemed witnin one veor 72.750 520e esE&G preferred Stock with Mandatory Pedmotion

$ 65,000 3 c5CCO

-.= w -

==

w====--

= = = - -.==

=.. -

'3.5 73

.s tnour vandatory Pedemotion 525 par votue - Senes 9 75 %

1.600.000

$ 25 75

$ 40,000 S C CCO S 70 %

2.000.000 26.50 50,000 50:C0

$+00 cor value - Senes 4 08%

250.000

'03 00 25,000 25.000 418%

249.942 103.00 24,994 24 Z4 4 30%

250.000 102.75 25,000 25 000 505%

250.000 103 00 25,000 2520 5 28%

250.000 103.00 25,000 25Z0 680%

250.000 102.00 25,000 25000 9 62%

350.000 102 00 35,000 35CCO 7JC%

500.000 101 00 50,000 50.0C0 752%

500.000 101.00 50,000 50.000 808%

150.000 101.00 15,000 15.000 780%

750.000 101 00 75,000 75.000 7 7C%

600,000 100 79 60,000 60.000 816%

300.000 106 86

-.30,000 -, 30.C00 PSE&G Preferred Stock without Mandatory Pedemotion

$ 554,994 5 554 994 (no changes in 1985 ond 1984)

=.. = -

====w

=.= =. =..

m-Enterprise Dividend Preference Common Stock and Common Stock 5140 Devidend Preference Common Stock (no car)(note C)

Ccmmon Stock (no porJ - autnorized 150.000.000 shares (note D), issued and outstanding

$2,632,662 S2.535.687 of Decemoer 31,1986.134 882.375 shores and at December 31.1985,131.698.517 snares (11B3 858 shores issued for $103.488.000 in 1986.19,135.449 shores issued for $503.022.000 in 1985 and 9.705.079 snores issued for $213.583.000 in 1984) hotos Ae'enec Stock witnout rnanoctory recemor,on #s suthect to recemc' ce sc e-A

• m t on mere c'e 1472'18Gno'es of st0C Dor vo!ue and 6.400.000 snores tv of the ootion of PSE&G upon oovment of the cool eco+e <-Jemor on orce

$ Lt to va ue Cumu at we Ae'e"eo Stocu which are authoritec and un-Dius accumulated onc unpoio amoenas to me oc'e f neo for recemot on upon.ssuonce mov or enov ot provice for monootory sina.

the 1095 statement ret ects the reaemot4on in W86 of on snores of me ke-n meo ano een Y,no'eaemcton tened Stock of the 12 2t% Ser,es and fne 13 44% Seres As o resu<t me annuo' I

Woend reouvemem ano t% emoecoec cecono cost were U M Z n

)

4 t owenos ucon any sno es at beterreo Stock are an orreors in on amount

D*C

• • "'O "O" "C#

ma o tw orn oi c4v.cena tre' eon, voting r>gnes for the election of o maior tv v

ents

? *e BXFo Of > rec'o's (2Come operat ye and Contsnue unN oh oCCumusot.

M o-o JTo d 3 woenos mereon nove Deen paio w e'eucon on such votrng n

1. 0" '

I

' 7" ;eose s,. dec' to te ng ogorn revvveo from t<me to time N

D3 s 'eh'90 to ou Cnose or feceem o spec f Rd minimum number of r

tion f0' ms s Cumum we N'ened Stock w'tn monootory redemot1on annuony C. n 1985 the*e were1343 000 snores ou'stancing 092152 of raese snc'es D OI"-

m'*erc no on +e e"ective cotes s%wn teow Such recemodons are were converted on a 2 for i cosis into Enteror'se Common Steck cs por' of +e ac' ve MLSG mov ann aity receem at as cot.ori on oggrego's of uo to corporate restructuring wnereov En'e'or se become he oo'ent ac.o ng com u

unhnG Vce me numoer of snores shown for each sucn seves An such recemot<ons Dony of PSE&G on May 1 1986 Tne remo ning 361 S47 snores we'e <eovc o we i

3teWe 7e ? i racempt n or ce of t100 ce< snoce A reaemotion of snares of onv of a cost of 56 513.000 W es a so teov4es payment of c" oCCumulo'ed and unpoio avoenas to the D incruces 3.650 045 snores of Common Stock resee ec for Doss,o.e sssuo ce v

.o e Neo for rmemot on unce' Enterot'se s Dvoend Reinvestment one Stoca Purencse Aan o-o IO psf &G's Emciovee Ste 'k Purcnose P'on Mr ft ono Tou-De'eneo Soegs D o-

^Gd ano poveomBoseo Emuovee Stock Ownersn.o Pton 3ted Vnmum Enectwe 3 y,

'*U

M*' C' boee' rec Durng tne veces See Orgon rot >on ono Summary et S.gn+ cont Account.ng Ponc es ono %cvs to Consondotec Enone o'statemen's k as n

C m,

1964

%8$

10BJ o

nc

% isw esi RG

~

u

.sze m sanw qu

'? tr

nu

' 1;\\

' LCC

T -4 1

37 i

L

. a _a -

m===.==

y (ThousOndt Of Donors)

(Th0ysands of DOHors)

_986_.__ __8_5 1986 1

19

_. _.D__ecembe.r 31.

Fht and Refunding Mortgage Debenture Bonds of PSE&G unsecured Sonds of PSE6G (note A) dG Motunty Date Seties Matunty Date ACC 54% June 1,1991

$ 34,647 5 3D CO 45% Neamter 1.1986

$ 50.000 7.%

December 1,1993 24.800 N

sta a5% Septemoer 1.1987 60,000 60.000 9% November 1.1995 47,607 45 prir S,%

August 1,1988 60,000 60.000 74% August 15.1996 AD,898 QS 5N% sune 1.1;89 50,000 50.000 dI Bh% November 1,1996 3C484 3e a

. 4u%. September 1; 1990 50,000 50.000 6% July 1.1998 18,195 10 PN 45% August 1.1992 40,000 40.000 C

in 8 Total Debenture Bonds 212Q _ 22C' rec 47%

June 1.1993 40,000 40.000 S,%

September 1.1994 60,000 60.000 Pnncipal amount outstanding ofi 4N% September 1,1995 60,000 60.000 (n te B) 3,406,316 3.237c 6 '.i%

June 1.1997 75,000 75.000 Amount due wnm one year tN 7% June 1.1998 75,000 75.000 (note C)

(69,491)

(5Q os Prf Net WomoM2ed D$coud (25,705) _g 7%% Apnl 1,1999 75,000 75.000 97% Moren 1. 2000 98,000 98.000 kng Tom dew of M&G 3,3H,120 _31g 8b% A May 15. 2001 69,300 69.300 Bank Loons of PSRC-7%% B Novemoer 15. 2001 80,000 80.000 74-7h% (note D) 25.000 19

~

7 ;% C April 1,2002 125,000 125.000 ConsoHdated or 8D% D March 1,2004 90,000 90,000 Long Tom dew (note E)

$3,336,120 S3.164 2 ste of

~

12 % E October 1. 2004 8,730 9.730 85% F Apnl 1. 2006 60,000 60.000 Notes:

re'

^ * * * * * * * * * * * " ' * * * " ' ' """**"8***"'*

8 45% G Sebtemoer 1* 2006 60,000 60.000 st rutes o ofreC* first mortgage hen on suDstantolv oH CrCoeny one fronC54Ms of 87%

H June 1. 2007 125,000 125.000 B At Decemoer 31. %86. PSE&G nao ur'exerc seo commaments unoer o Dec 8N%

1 Septemcer 1 2007 59,900 59.900 Agreemet utn 12 emestic nonks for asuorsce et meno com uo to =

oggregate amount of $200.000.000 of any time to Mov i %B7 PSE&G mov 9%

) November 1,2008 99,000 100.000 tem. note tne commitments. n wnoe or in port. mout oena w or orev l

94%

K July 1. 2009 99,000 100.000 unoe' ** oo'eement onv oo"oen9s outstancino a' Mov i "e 7 re ecV nc te at PSE&G s optiori into thre+ year term cons PSE&G s recu eo to em :

r 12 % L Novemoer 1. 2009 119.750 comm tment fee on any unused porton PCE&G hos the nont. mm me corv %

""* " 5' *"**O'**"'"

$5 12 1 % V June '. 2010 87.500 1$1% N August 1.1901 100.000 C. PSE &G has recuestee or receivec regutotory opprovoi to receem

$150 $74000 onc $276 000.000 pnnecos omount of kst ono Getuncing Mee-14,%

O September 1,2012 42,300 43,300 gage sonos proe to motunty in tne voors m7 ano nee respect wy use

• 0'"'"'"*"P'*****

93*O '* *""C" ' " " " ' " * ' " ' * " * " ' ' ' ' '

12%% P December 1. 2012 85,044 98.500 smacg funos one moturit.es for scen of fne fNe voors tonowng Decemoor 3' 12' & Q August 1.1993 100,000 100.000 986 are os fonows Ol% P July 1. 2015 125,000 125.000

,_, m,,,

9S% S January 14.1996 75,000 75.000 y,,,

3,nong Funos Motunees tx 9%% T March 1. 2016 100.000 1987 s 0491 s 60.000 s er -

71% U April 1.1o96 250,000 me 10.845 oo 000 m-j 84% V Apnl 1. 2016 200,000 N

,l 8% June i. 2037 7,463 7.463 1991 6300 at200 38 c =

• 5% July 1. 2037 7,538 7.538 543 436 525t200 s294 a i

I 8or sinuing tuna purposes certon Arst ano Oefunotng Mor'goge Bona was l

PChuhon Controi Senes recui e annuony me reteement of 52t550.000 onncoat amount of bonos or n

• • '**"'**"'"'C***"

"***C*

l 6 30% A Octcoer 1,2006 14,300 14.300 fo ne met by property cooitions nos Deen edCluceo from tne toDe coove rzu e 90% B September 1,2009 42,620 42.c20 Am PSE&G may. of its opton. retire cocitono omounts up to so.200.OCO an-u90% C September 1,2009 2,990 2.990

"*"v '"'o'9" **"*o 'uno$ o' c*'o'n o'o*"'u Don"5 ' '*cton of any Tl

'"C""'*"***'""**"*"" ' ' " * " ' " * " * " '

121% D Apnl 1. 2012 23,500 23.500 c

n At Decemos at me mc noo s2mm outstonoeg unow a ceca n

9'4 E June 1. 2013 64,000 64.000 Agmemen;inot provides tor emng creort cons UD t3 s25000 000 PS7c r c

'*""*"'C**d"*"'****

'*o"""

C 10%% F July 1. 2014 150,000 150.000 Unoor tne ogveement. Ony nortowegs outstonoing at o' o" *V "' o*"

ctooer 31 1080 are re 10 % G September 1. 2014 150,000 150.000 conet o# of psrec s cot on. mto m veor tem oo me peo,rea io f

10';%

H November 1. 2014 130,400 130.400 cov o comm>tment fee on onv unuieo oo't'on 10'e%

i November 1. 2012 4,600 4.o00 E. At Decernoer 311986 tre annuar.nterest reosrement on i.ong term caer was s290 253.000 of wn<cn s272.112000 was the reovirement for Mst ono 7e.

E Totof hfst ano Refunomg funcing Mongoge Bonos The enoecoea inte<est cost on Long term Geot.c Mortgage Boncs

$3,193.685 S3.018.391 esa 7

l See orgongotion ono Summary of s.gnif cant Accou tog Po4C es ono Nc'e5

, i n

to Censonooted Anonco Statements

)

38

.A

gs TO CONSOLIDATED FINANC!AL STATEMENTS j

statement of Financial Accountiny Standards Tate Mattir~s

~

3.;y No. 90 (SFAS 90)

On February 6,1987, the Board of PubkC UtAt'es of In Decemoer 1986, the Financial Accounting Ston-the State of New Jersey (BPU) issued a Decision prds Board (FASB) issued SFAS 90-Regulated Enterpnses-authorizing on increase in PSE&G's electnc base rates oe-Accounting for Abandonments and Disallowances of Plant signed to produce odditional annual revenues of $4215 ysts which amends the previously prescribed occounting milkon. Also, the Decision reduced PSE&G's electnc Lesei-

,3 4'

pandards for these two types of events that have occurred Ized Energy Adjustment Clouse (LEAC) by S697 7 manon 7'

enmanly in the eiectnc utikty industry.

over o compressed 103 month period commencing Feo-Ines new statement requires that a toss be recognized ruary 16.1987 and reduced electnc base rates by $77 2

~

f M

t tne carrying amounts of coondoned assets exceed the milhon for the recogniton of the 1987 impact of the Tax

)M pre;ent value of futurs revenues generated by those ossets Reform Act of 1986 resulting in on overall electnC revenue l

n the regulatory process Previous accounting standards decrease of S353 4 mokon. The Decison allows a return on C'a recuired that coondoned ossets De reported of the lesser common eauity of 13% and on overall rote of return of

f cost or proboole gross revenues.

10 65%. As determined by the BPU. the increase in e< ectr.c This new statement also requires any disollowonce of case rates is designed to refleCf a recovery of PSE&G's g,

ne cost of a recently completed plant to be recognized reasonable costs of constructing Hope Creek Generating as a loss (cost defined to include a return on capitol)

Staton (Hope Creek) PSE&G's shore of the cost of con-g J,;

sev ous accounting standards did not require the recog-structing Hope Creek through February 6.1987 was S4 2 7t c

n,t:en of a loss if the total cost of the plant (exclusive of a oithon. including $970 milkon of o!!cwonce for funds usec M*

return on capital ofter construction) would be recovered.

dunng construct on (AFDC) The Decison disallowed Whde SFAS 90 is not required to oe implemented until S4315 mdlion of PSE&G's shore of Hope Creek's costs in 1c88, eorher adopton is encouraged and Enteronse has addtton, in occordance witn the terms of the Ccst Con-cnosen to adopt the provisons of this new oCCounting toinment incentive Pencity Agreement explainea celor w

statement in 1986. Consistent with the recommendation the DOCison disadowed a return on on additonal $57 7 of SFAS 90. poor years' financial statements have been million resulting in o total allowed investment for Hcce restated to reflect the opphcotion of the new statement Creek by PSE&G in rate base of S3 787 bdion The following tooles dlustrate the effect of odepton PSE&G's witnesses had testified that all costs incurtec in of SFAS 90:

connection with the construction of Hope Creek were pru-dently incurred and should be recovered from customers wanas ci sc c5) through rates. PSE&G was subject to the terms of a Cost we es ecea :+cemocr at.

1964 ms ma g

g p

g 7

%*AsY "'"

~

~s 542.2s9 2ea sSc u29 8ce S'gned in 1982 by PSE&G. the New Jersey Department of 6ea ches ~~

Energy, the New Jersey Puche Advocote and the other e

-ce cw 1 me'* 2) co-owner of Hope Creek, and approved by the BPU in NIsYeNeaimne N) 1983 The Agreement estochshed the targeted cost of tas ao w

eenm en er 1 scan, o2.9s7)

Hope Creek at $3.795 bdlion, of which PSE&G's snore was

% cteo recrre 'ones 022.e1s)

(35 93s) 53 556 bilhon, and a target-in-service date of Decemoer 3

• 31 ya c<eew ei 21s.596 00 204 1986 The Agreement provided on earnings peno!ty where-weem Aconcanmen's nye s) by PSE&G's revenue requirement reioted to rate cose. as NhoYosE e determined by the BPU. wdl be based on the exclusen from (43.970)

(3

)

C'3 7e avec ecame 'omi tuoo it13o (2172) the rote base of 20% of allowed costs incurred in excess of 4

7 M ADanaon e+

- ret (3070) 04286) 2.844 the Cost Cap.

W eec.ss acctcat:n s w s 4 tas s2a 84 ot e 2eaa Also, the February 6.1987 Decison continues the defer-i "X sercre ss7s.443 saco 332 22: osa rol of the S70 0 milhon of replacement energy costs of 9

nr.M Ude snme PSE&G resulting from fodures of the electnc generators at W

no-~:nsm Sciem in 1984 pending more definitive informaton from

' $*[$** "'""

PSE&G's htigaton against the generator manuf acturer with su 33 y 33 %

n e

Poch d $co Chn d sf AS oO 08 9

C3 respOCf to one of suCh outoges C '*#

In add: ton. the BPU. in its Decison odopted perform-wncre s2 a4 s3 p s3 o2 once stondords for all of PSE&G's nuclear units The

a. =r -=

====.== - -

.=""==

The tax effects of discounting of obondonments were Col-penotties or awards are based on targeted CopoCdy culated using the tax rates oppkcoble to related deferred factors os illustrated in the following toole'

(,

tox corances. The tax effect of the Hope Creek i disallow-ance was calculated using a 35 8 percent rote Such rate D"g g e g "

n refiects rates that wdl be in effect when the tax basis of this cacac y c ce c. 3 e

plant is depreciated (46% in 1986. 40% in 1987 and 34%

cx,0cs sac,0, naye um w.

thereafter) to determine the net rechzoole value of the tax oc m n

benefit 81 a

3 Petoined earnings as of December 31.1983 have

{]

7 7l been reduced by $1318 malion to reflect tne retroactive c n a

d:scounting of the ooondonments occurring pror to that M*9

^**5 cate pnnciporty the Af tontic Project and Hope Creek Unit 2 30 A

o The opphCof 6n or These performance stonoofds Could Deferred income tCG ore orovideo for o#erenceg g

. have a significant effect on future results of operchons tween Dock and toxcoie income for PSE3G tne og On October 30.1986. the BPU opproved agreernents by income taxes are hmted to the enent permeo for i j

r the major parties in PSE&G's recent gas base roto case mak:ng purposes At Decemoer 31.1986 the cumui[

d gas levehted Row Motenots Adjustment Clause net amount of income tax timing differences for e,.

rv (RMAC) proceedings which provided, among other things.

ferred income taxes have not been proviced was a 3 -

p for on annual reduction in gas base revenues of $30 milhon hon. The related deferred income taxes. of the cut eq r1 I

effective Octooer 31,1986 c: J for the removal of Energy statutory rate of 46% would be $600 milhon. In Sect %

o Development Corporation (EDC), of that time a wholly-1986, the Financial Accounting Standards Boord tssM P

on Exposure Draft of a proposed Statement of Financ[i owned gas and oil exploration suosidiary of PSE&G. from P

inclusion in its gas rate base for rotemaking purposes The Accounting Stondoros that would. if adopted, recurr o

agreements otso estoolished a reduced once for gas sold PSE&G to record a hooihty on its balonCe sheet for th,

i Oy EDC to PSE&G dunng the twelve-month penod endmg future taxes of the opphCoble future tax rotes Howe, o

October 30,1987 As a resu!t. EDC wrote down the value of since PSE&G expects to continue to recover through3 its assets at Decemoer 31.1986 to reflect the lower net the taxes due os such timing differences reverse, on y,,

rechzooie value of its oil and gas reserves, which reduced for the some omount would also be recorded The pr>

EDC's net income by S70 5 milhon (See Note 5-Deferred posed effective date of the statement would be for ty; j

items-Gas and Oil Exploration Plant Wnte-Down )

years beginning offer Decemoer. 15.1987 g

The Tox Reform Act of 1986 enacted on Octcber a 1986 mode major changes regarding corporate tone 3

{

The major provisions which offect Enterpose are os tog s

Federalincome Taxn

. A decrease in the corporate rate from 46 to 34 peg 3A reconcihotion of reported Net income with pre-tox effective July 1,1987.

income and of Federal income tax expense with the

. The repeal of investment tax credit for property pico amount computed by multiplying pre-tax income by the in seNice offer December 31,1985 c

statutory Federal income tax rate of 46% is os follows:

. Changes in deprecicole asset lives and methoos t

. A requirement to capitchze interest ono overnecep' N"c9.' C?*5L _.__._. _ys6 n85 nBa capital projects effective January 1.1987.

^am w ecere s37s463 m o632 The lost three provisions do not apply for property Cov.

^Q"'[jy "

ered oy transition rules. Since deferred income taxes ou g 7, g

gg

""d#

Y F"U S' N ### # "'-

smor:+2 429. ass 450 $3a ae7 ies corporate tax rate could adversely impact cosn flows:r Seaera nceme Ta=es nctaea n 2

wa, ng rere future penoos cien, mov.s on 160.132 74987 15474 The February 6.1987 decision of the BPU in PSEms Y[s" Ye,#$*""

base rote cose ordered PSE&G to pass the tax cenefits:

42.236 c3esi isc c3

,1incuaFn c~cFasincb

~~ asets 13a n t 97 93 nved from the Tax Reform Act of 1986 to customers c-mu-en, to. crea ti-ee 27o.7:3 2731 9 2e3 270 mencing February 16.1987. The BPU ordered a reductc?

Y sceane%s omee.ncome-nat 7.s46 4 180 3 330 of $77 2 milhon in 1987 electnc rates pomonly artnbutz.

A w.s m ae enea ece 2 we to e)

(7s.6s2)

24700 (2172) r s

to o decrease in the corporate tax rate The BPU will

,r WS T ce'enea 4rwev+ent 'an c'est (32.766) make a further review to Consider Odottional reducticn; n Gaerai ec_cre e tai _tra_v s,or.s._

966.919 252 509 26a337 g

during the next RMAC and LEAC proceedings to retec" 74

,37 7343 57 corporate tax rote change opphcoole to 1988 and on,

= = = = = =

_ _=._. =.=======-

' * *"ca a'Z1* "u'p rote

_ _s_274. sos

$327 586 5345 746 gg gg mst-e-es to ve econe:me campeoa at me stoe tory ra<e for wn c' As a result of Internal Revenue Service (lRS) oucits u

w e"eata es we or c aa unaei cu"ent ra e-mowno conc es for toxoble years 1976 through 1980, the IRS has propcE

a. xerec at enunaer com on increase in 1oxoble income which would increase fs s m70 s 15 550 sm don, bas sa cog current tax licoihty by $72 mihion due to the inclusion ::t I

m eveten (it t.ooo)

M oec)

(73 044) unbilled revenues as taxcele income in the year estirnc owneaa costs cacmea (20.ssa) o toe 3) at x2) serwces were provided. In accordance with the Tax Pet q;6 33100 a 447 Act of 1986, the bolonCe of unbilled revenues at Dece")

31.1986. $169 6 mdhon, will be included in toxocle inc0-y an, %cwemtaxc e s 70 2

rotably over o four-year period commencing in 1987 tt E

aw (107.592)

> 75.07n

/e'309) anticipated that the IRS wid crop its proposal for the to

' n -aea nme 'ai o,ce_s o_ns_ _ 466.,9.,1 s252 509~~

s26a 437

~

cole years 1976 through 1980. Nevertheless. if the R$ ct:

[

ase va s an w seieneo,ncome to.ei recresents me tax e+tects et me posal is upheld and PSE&G is unsuccessful in its appec t

C there will be httle effect on consohooted earnings as ce C

a" t ao ' ei ferred taxes have been provided for the unbihed reveN

" ?a gnyes

_s (to.764) s 2c o48 s'to03?>

r wea cva 's MOCM afaanaOar"eF'f s (7.946)

Dd 2 220 k

ca e cna ra, aco ecsen a-a a*or' ?a?'on 62.s11 42 333 70402

[#ensa be Cos' sue' (161 Aos)

, n 20)

% G31

$cs 70 ou !sparat or' P an?

M'eCcwn s3.267 o'* ar

_ 3s.921,

_it43), f 4'23) r;'a (17.632) 9 43a SJ J 4 s 34 082 S'J8 4ti s _(36AS6).

7

-(

1 40 t

( \\1

~

hsh cnd Tcn$oorary Ccsh Ir$v5stmAnts ~ ~

miHon, was defe"ed and was being amort zed over o

~

'fe.,

. The econce at Decemoer 31,1986 Consists primarily seven~/sor pered Commencing in 1984 On Octooer 30.1986, tne BPU opproved on agreement r

t, "

&" of temporary cash investments, mainly U S Govern-k.

nt Securit es. At December 31.1985 it consisted onnci-by N moja pones in the gas rate procweng recom-moong tne recovery of $48 8 mdien, the unamortized iy of compensating colonces under informal arrange.

9,,

'U fe ts with various banks to compensate them for services colonce of the LNG Project costs less tax savings of $18 7 n

millon This omortizoton wdl result in the recovery of op-d to support knes of credrt At December 31.1986 ond L'r (85. Enterprise had $202 motion of knes of creet sup-mee R 8 Mon mec,e d het N me m dizaton of the dSCount, net of taxes, wal result in a a

' rted by compensating colonces and 535 milhon of lines Md b mee d N Mm m N 1

7 red;t wn ch were compensated for by fees. There are 3 ego! restrictens piaced on tne withdrawal or orner use Uranium Projects

,, rne compensating bank balances In September 1985. PSE&G terminated a uranium supply

~

3'.

ogreement with Seouoyon Fce!s Corporoton (Seavoyoh).

o sucsidery of Kerr-McGee Corporoton 4

In December 1985. PhuoMohia Eiectnc Company Deferred items terminated its Lee Mine uran Jm supply project, in wnich 4

l Property Abandonment.

PSE&G had participated as o co-owner of Peach Bottom 1

The fonowing toole retiects the opphcoton of SFAS 90 Generating Staten. In additon. PSE&G terminated the E

n property coondonments for which no return is earned-Homestoke Mining Company contract, dated Feoruary 25.

L See Note 1 )

1976 for the exploraton and development of uranium The total loss of inese projec's when combined with the l

O'r

% ras :gs, __. _ y pe y mna: "

• L Seouoyoh loss amounts to S3 7.1 milhon cost $ count.o As o resun of the cooNonant and pda to reguctoy l

ces icou teo n

m~

opproval. PSE&G's net unrecovered advances of $217 1

l c yec % ec' 4200.572 st14.290 52's232 siv437 l

a w et 2 909.496 u s72 574 076 105 :23 million, offer related tax sovings. were oeferred and were i

l pece n2os 2s.640

.3 823 a $83 being amortized over a seven-year penod commencing in s C' jy e Mec's 32.165 17.944 31e23

't h8 2.420

~1.590 3 8t2 3 100

~-e

~ '~ ~ssa7?a{s227As~s]iW On February 6.1987. the BPU issued a Decison coco-

_2en e ting o 15-year amortizoton penod commencing January 1,

==

1985 The annual amortizoten and recovery will be op-y proximately $14 million net of taxes. The related omortiza-

__je'a'ea.ncome To ei ay? c M ect

64.449 s da.065 s 004s i ac e11 ton of the discount, net of taxes, will result in a Credt to

.c cm um 2 57.62a ss.sto so 105 40 546 income of $10 mdlion in 1987.

j 3G %ect 16.950 11.034 M 725 10 270 2

s ce M e c' L. _ ~. J 3:32'

7. '3 7 _ __ 3 '04

• 7d5 Gas and Oil Exploration Plant Write Down m-

_ M72R56 J " 8'em_y1421

$7 n2 in the agreement between the major parties in the gas l

icr rate proceeding, opproved by the BPU on Octooer 30.

4 Atlantic Project 1986. the investment in EDC was removed from rote cose

.n December 1978. PSE&G concelled the Attontic nuclear As a result EDC wrote down the carrying value of its assets ns pont project The BPU outhonzed PSE&G to recover a por-under the fuit cost method of accounting to the present et P ton of the costs cf the project over a pered of 20 years value of estimated future net revenues. The ofter tax effect

'Y commencing in Apol 1980 Such costs are being recovered of the write-down mode in December was S70 5 milton at the rate of $8 7 minen annuouy. net of taxes. The related

($134 5 minion before tox).

amortization of the escount. net of taxes, wdl result in o in the BPU opproved agreement PSE&G was allowed to crea:t to income of $6.1 mdhon in 1987.

defer the loss on its investment in EDC generated by the r e o se es H w nce, and to swk reewey of se loss.

Hope Creek Unit No. 2 a pd d W Ms M % ps n 4 W W W saw in Decemoer 1981, PSE&G coondoned the construction of cose. As a result PSE&G has deferred $58 8 milton, net of

.th Hope Creek Generating Staten Unit No. 2. In March 1982,

1. @*D**""#"#D

brml, the BPU outhonzed the recovery of oli after-tox coondon-orr-ment costs for Hope Creek 2 from customers through the put e et o o the BPU with respect to such recovery it is eiectnc levehzed energy adjustment clouse The recovery may require odjustment to the carrying value of the ax.

is over 15 years on on accelerated method which com-deferrol and the related amortizoton, menced in June 1982. As a result of the February 6.1987 yo al BPU rate Decison no Hope Creek 2 costs wdl be recovered se.

cunng 1987 to reflect on adjustment of estimated close-nue:

out costs The amortizoton of the escount, net of taxes wdl result in a credit to income of S4 6 milton in 1987.

LNG Project in December 1984. PSE&G coondoned its investment in certain facihties for the storage of hauefied natural gas. As a result of this coondonment and pror to reguiotory op-orovat, PSE&G's investment of approximately Sc9 3 mdhon.

'ess tax sovings cf $27 9 mdlon or the net amount of $414 41 A

decovenes of electnc and ges O@l cos9s are cetermined G "'55# ##

"""'"*~""~**""""V%.T "N"

1. %sS

/

by the BPU. Earnings are not directly offected by increases or decreases in the costs of fuel or interchanged power.

and have o term of e$ven moNhs or less Such neg,'

because such costs are adjusted monthly to match issued in 1986 by CEA and EDC. Certain information,[

amounts recovered through revenues. These Clouses o!so 9

provide that any over or underrecovenes of the end of the 99a6 7D

+

noso W s, irs) penod. otong with interest in the case of on overrecovery.

$1x996 A^

%,.,nce a' em of voor wdl be incluced in the overage COST used to determine vomum amou t outstanarg n

the rote for the succeed.ng leveh2ed penod.

C' TV r"on'wa sWH6

%A At Decemoer 31,1986 the overreCovery under the LEAC

$%c"oNg' a l

".4.

a amounted to 563 2 mohon which is net of $70 mdhon of cre<est rate 6 62%

a

~ I deferred reptocement energy costs aesenbed below At

^*J"'"

'9'"*'"5" December 31.1986 the overrecovery di the RMAC

' [yY,7

1. +

a 6sn u

t fc omounted to $20 8 mdhon

'-~

-w Commercial paper represents PSE&G's unsecurea !

Electric bearer promissory notes sold through deo'ers of a dt.

On February 6.1987. the BPU Decision odjusted the LEAC ath a term of nine months or less Certain ir formaticr? '

=

rotes to reduce revenues by $697 6 milhon over o com.

regarding commercial paper tollows-pressed 107 month penod commencing February 16.1987

~

A!so the BPU continued the deferra! of the recovery of

- L~.c

't S70 mdhon cf replacement energy costs relating to the ex-

$"C', ' '$, C',mn, B

, a s

tended outages of the Solem Generating Statron Units i at any rnonm eno

$2a6m mx se P

and 2 dunng the year 1984 (See Note 2.)

• • o98 oodv wts'o'ong s 9am sm o

c We'ghtec average annual eterest rate 6 29%

7P%

s Gas we g~ea overage n'e est rate for e

On October 16,1986. the BPU opproved a Stipulation en-C{,%!oy' N'5'o**9 o

tered into oy PSE&G which wol reduce revenues under the RMAC by $150 monon for the penod October 31.1986 t

through September 30.1987. Th:S reduction reflects pro-t jected prico dechnes and spot market sovings from natural c

gas purchases.

t Unamortized Debt Expense Costs associated with the issuonCe of debt by PSE&G ore deferred and amortized over the lives of the related issues Amounts shown in the Consohde:ed Bolonce Sheets con-s:st pnncipally of costs ossociated with PSE&G's reccoutsi-tion of the following First and Refunding Mortgoge Bonds 12 %

Senes E due 2004 (tender offer 5/77) 12 %

Senes L due 2009 (redeemed 6/86) 127%

Senes M due 2010 (reaeemed 6/86) 15N%

Senes N due 1991 (redeemed 8/86)

The redemption Costs of the above debt have been de-fer ed ord are being amortized over the lives of the new secunties issued to replace older, higher-cost secunties PSE &G expects to amortire S2 5 mdkon of these costs in 1987 42

~

l 4{g gg welsor insurance Covsregas PSE&G's insurance coverages for its nuclear operations tormotion on occumuloted pion benefits and net are os follows ossets of fne penston plan of Enterprise is os follows'

-~

~ -._..

. _ -. - - ~

r.Wien5 Of co3ars)

Mammum

'9,,

wonos of Donors).

r,,e ospeer e r

w g,roet 3t

1. 86 1"5 Mommum Auessreent for bre ano sou ce of Coveroge CoveroQe o ling'e CC'oent gr o Drewnt va.ue of ocCbmuo'eo r

~ Nit' CC9D puckC L co*N

.eveo 1575,000 SMt000 Amencon Nuc: eor insurers s im Snore Mn ees'g _

92.000 MM 5667.000_ j5cCJOC

~~ s,oe,of Gcuernr-ent ( A) 535 13 2:B)

"~~

s 00$(C) s132 fa me of ev 7.5%

8tt proce% Domoge

'O

$7b.8 A7 7 l

."v va ve d av Se Asm Nuc ear Eecnic fnsurance Lmiteo (D) 575 toO 1

n = =:.=== = ;

'~~ Artencon Nuc:sor insu ers 85 None r

Mnsion Ccsts for the post three years were Chorged as

~

stioO

$ 55 6

@ lows

?eo.ocement power Nuc ear Eecmc ensurance umaea (D)

$ 3 3m 5 90

%.aanos 9 bars) 9 86 HS 1G84 Y*

pry rg eroenses

$43 844 052 155 555 204 5,ong og ene Atomic Energy Act of 1%4 as amenaea suoiect to retro-

, 3 o ont 43.827 14 743 13 200 spec,ve onegment etn respect to ess from on inc.oent at any kcersseo nuc: eor

$57.671 Sec896 96590 reactor in Ine Unrteo states 3 car ten cos's-.

!n December 1985 the Financial Accounting Standords o"""c oe"' '" 3"v v'o' C "' 0'"co,w unoer me Atom.c Energy Act of 1954 as amenoec for Board issued Statement No 87-Employer's Accounting for eacn nucieos incioent Pensions which requires future changes for the oCCounting

o. uutuoi insurance compon.es of wn.cn PSE6G is o memoer suoisce to and reporting of pension costs The Statement requires o

,e,,ospectve cueament w,m respect to iou at any n cear generot.no i*c-u standardized method for measunng pension cost, expand-ton cove'eo ov sucn esuroxe E. Moomum weemtv inoemna for 52 weeks wnien commences o er tne f.rst ed disclosure of the Components of pension plans in the n

v

"' 0*

• D* " 65 ***" *""* '*

• od '*" '

Notes to Consolidated Financial Statements. and record-P.,2 weews ing of a habihty on the Consolidated Bolonce Sheets when

,,,c gn,,gy,c,,,,,,gr,cy,p,c,,ng,,,gn,c,),go,,,(,),(3) the accumulated pension benefit obhgotion exceeds the cao (C ) coove enoire on August i 1087. unieu ertenosa ov Congren be fair market value of the pension plan o$ sets. The provisions most recent sucn prooosce cons.oereo ov Congress wouio estoonsn o umit of

" * ' * * **""*C**"'"***"""'"

"*""**' "

• C'"

of Statement No. 87 are effective for calendor year 1987 to oc nmaec to so3 mmion out no more than $10 milhon per reactor per finonClot statements, except that the hoolhty recognition gear congren wm again consioer tne motrer in 1987 certain proocsors wou o r

o provisions, if any, are not effective untd 1989. PSG&G may be

• • • '**V"*'t n actnoty esEsG wnnot vect wnerne tne nce.

Anoerson provtons wm oe ettenosa or wnot prov$ons will be enacteo if recuved to defer the d:fference cetween net periodic pen-

,*ev are etenoso in 1984 in o cose to wnich PsE&G was not o oony me son cost. os defined in Statement No. 87. ond the amount unaeo states supreme court neio tnot the Atomic Energy Act. tne pe,ce-

^"d'**d

'*" '"oo*'Y""*"'*"""'*d***"Qu~

of pension cost recovered for rote-making purposes.

toten of nucteor safeN ov the NQC co not pre emot c'O+ms uncer state #cw for personoi poner'y or punitwa comoges re ateo to rociaten nazaros Environmental Oontrols j

The Comprehensive Environmental Response. Compenso-Commitments and Contingent Llobilities tion and Ucbihty Act of 1980 and certoln similar State stot.

1 i

Construction and Fuel Supplies utes outhorize various governmental authorities to seek Enterprise's principal subsidiary. PSE&G. has subston-court orders compelling responsible porties to take cleon-l tiol commitments os port of its construction program. Con' up action at disposal sites deterrnined to present on im-struction expendeures of S31 bukon. including opproxi-minent and substantial danger to the pubhc and to the motely $209 milion of allowance for funds used dunng con-environment because of an octual or threatened release struction ( AFDC), are expoeted to be incurred during the of hozordous substances. Because of the noture of PSE&G's j

years 1987 through 1991 In addition. PSE&G hos commit-business, various by-products and substances are pro-ments to cotoin sufficient sources of fuel for electnc gen-duced or handled which are clossified as hozordous under i

j erotion and odeQuote gas supphes these laws PSESG generoily provides for the disposal of Construction expenditures for oil projects in 1986 were such substances through DCensed individual contractors.

S10 bdkon. including $241 mdhon of AFDC. whlCh is on in-but these statutory provisions generally impose potential i crease of $281 milhon. including S82 mdkon of AFDC over jo nt and several responsibikty on the generators of the j the construction expenditures estimated in PSE&G's 1985 wastes for cleon-up costs. PSE&G hos been notified with re-Annual Report to the Secunties and Exchange Commis-spect to o number of such sites, and the cleon-up of hoz-sion (SEC) on Form 10-K The increase principoily reflects addi-ordous wastes is receiving increasing attention from tne tional costs associated with the Completion of cons +ruction governmental agencies involved. This trend is expected to of Hope Creek Generating Stction.

Continue. PSE&G cannot estimate the costs which may re-Gas and Oil 1 Exploration Plant Write Doo suit from these morrers. but such costs could be substantial.

As described in Note 5. the recovery of $58 8 n ; ion, offer income taxes. is subject to recovery in PSE&G's next base rate cose.

A3

^

y s

)

h. _. _ -Financialintormation by Business Seg

~ ~ ~ ~ ~ ~

~~i _ cow h Ob!!gotions The Consolidated Bolonce Sheets include ossets and informaton rected to the segmeds of I

. related obligations coplicable to capital leases. The V

Enterprise's business es detailed ceiow.

' total amortization of the leased ossets and interest on the lease obligations equots the net minimum lease payments

.M**'1"#*M 3M-

i included in rent expense for copstol leases.

_ f*$onds oWo"o'5>

_ML 95...."*

o=,ot v even es saa56mo st324 m : 7743, a 4.sg Capitolleases of PSE&G rebte pnmonly to its corporo e cir%notons headquarters and computer equipment. Certain of the

~ toto, ocehng

'm, nr.tersegment nevenues )

(59.645) leases contoin renewol and pu Ohose optons and also 33540_to,_ g 44 47.716 _ 4 4g contain esColation Clouses.

. __ 7eenuet.

2 Enterpnse and its other subsidiones ao not presently Dooreceen ano

^"o"zo'on 1764e9 54.721 474.392 4

" hove any capitalized leases.

Lg

^

5 Utility plant includes the following omounts for Copital fo'O' DeoreC aton looses at Decemoer 31 ano Amortpon__ 179a9_--

-saf_25 _36.940 27,3

-e m o nc

_ Oncusanos of Coors) 1946 1085 Common Nnt

$65.872 s65.872 genat.ons mote 5)

" ~ '

-' - 134A52 13

,ess Accumulated Amort roten 7.535 4 800

- M Net Assets unoer Cooital Leases 154.337 soc 082

. _Before income fanes

. 645.992. - 95.854 8462

_ 95%

Cao'tal Exoenditums 893.768 125.764 21.794 1.041p Future minimum lease payments for nonconceloole Decemoer 31.

Capital and operating leases at December 31.1986 ore Net Utmtv Pont 7.671.636 472.801 4,74g,

Gas onc od

__ _... ~. _.

Cooitot operonnQ Eno oration Piont 159.040 istgi (inousanos ct Donaru Leoses Leases omerCorporo's Assets 923.876--

529.A45_. 220.964

1. 674 h.

1987 S 14 098 s 3 526

$8.795.512

$1402.266 $ 360.024 340.575g1 totai Assets 1966 13 863 3287 u.--

- - - - ~ ~ ~

= = = -

ru c.i 1080 1311J 3135

%90 13.110 2 ?Q4 1%1 13 040 2 115 For tme vect Enced Decemoer 31.1985 water veors 303 608 2$62 (T%sanosof Doaorn E'ec me Gcs omer operating Revenues s3.000.564 ' Si28 490 2 M000 bidhi un: mum +cse covments 371.820 _$17410

' Less Amount representing estimo'ed enecutory Sm nations 3ca.nea m minim m ; ease payments 163 841

~(78 722)

'9g ccsts. togemer ein any prot t meteon,

( neersegment Devenues)

'~

u Totai operanng I? 297 het minimum decse ooymtants

^iS7088

~

Qevenues

~~~~'3.000.564 1.408 470~ ~ " - ~ ~ ~ ~ ~4 da n.

.ess Amount represented enterest 120 651 DeoreC:Qtion and

'*".' ? d o'."*'* T !.".waye,co, g ts(A) s M.337 Amort.zaten 168108

% 0C4 45 2t?

M~

operat.ng income

' A. Petected e the Consonootec Botance sneers e Cap + tai Lease obogo-Before income f anes 770293 117 220 M 489 sq t ons of Mo 409000 and in tong term Dect ono Capitoi Leose cobgotons due Cooita! Encencitu es i 14C40 104 040 47.4 1 1M5 r

. t%n one veor of $1026.000 The following schedute shows the composition of rent Net utmtv kont 7.53o 32o BC3 202 s35 Go5

• O' expense incluced in Operating Expenses:

E ActorOtion Pont 308 351 Oh

...,. _ _ _ ~ _..

other Coroor3te Assets 1123051 430.586 23.714 1tkM 2 %sOnds of DOHors) 1966 1985

%B4 s8 650.377 }{2_42 W sggy;2 Total Assets Lor tne 'e_ots End_eo_De.c_e.m_oer 31 8 6,966 5 7.344 s 7 533 rte'est en Caodai tease oci'ochons Amon tot on of Ut+tv Pont unoer Cac_toj Leoses_

2445 3 448 2.042 For the voor Ervoed Decemoer 31.1084 Net em m 'eose covmants (Thousanos of Donors)

E'ectt:c Gas omer 5

u ate e4nes

$2.84241 SW883 $ M3 $UU e

et 44 0

54

,o f Stf.P hnt E_{ter se_

_ _ _ 823.763 S263o1 526080 pntersegment pevenues)

(72.125) 7*

1 Toto l operctinQ l

_ _ _ _7_ev.enues

_2.6 4_ 2_41_.__370983 99248_. 4207_3*:

9 3

Deotec.abon anc Amort 23 ten 150512 51 800 35403 240

• ooeroting r.come i

Be* ore income fones 753 600 101.275

• B oc0 9 73 :

CQoitoI Encenditufes 670456 670G7 52 601 1.Z 21 December 31.

Net UtStv Pont o.707 800 752 480 755 0 '

Gas and Oi Emotoroton Plant 305 JGQ Et W omer Comor3te Assets i2385C1 44710

' 814

't Ot? }

Totot Assets 58 C36.310 $140 500 s 317 913 3 7123 M

_ ~.=-u..,_._ a ---

- ' v.

== r n u; A

F~

Sintly Own:d Facilitiss All omounts refiect the shore of pntly-owned orcuects and

. /./

Enteronse s suosidior'es nove ownersnic 'nterests

. the corresponding direct expenses are included in Consoli-and are responsible for providing their shore of dated Statements of income os on coeroting expense

• the necesson/ financing for the fonowing pntly-owned facihtes.

,mousanos of Donors)

OwnershiD Plant Accumulated Plant Under Interest in Service Depreciation Construction b

Piont

's Cool Generating Conemougn 22 50%

S 74.121 S 22.807 S

5.564 y

2284%

74.311 21.028 1.717 Keystone Nuceot Generatino 3,

st Peach Boirom 4249%

514.907 175.769 23.202 Sciem 42 59%

797.616 208.649 20.919 50 Hoce Creex 95 00%

3.808.184 NucJeor Sucoort Focilites Vonous 67.724 6.429 76 pumoed Storage Generonng Yoros Creek 50 00 %

18.718 5.157 375 4

Transmission Facihtes Various 135.502 17.558 374 siernil Creen Reservoir 16.19%

14940 a

uncen Synthetic n

Natural Gas 90 00%

66.754 52.852 Gas and Oil Exploration Plant (Primarily jointly-owned)

Vonous 296.520 183.286 45.806

)

n

/

Selected Quarterly Data Uncudited) '

presentation of such amounts. Due to the seasonal nature The information shown below in the opinion of of the utihty business. Quarterly amounts vary significantly f

Enterpose includes all adjustments. consisting during the year.

only of normal recurnng accruots. necessary to o fair June 30.

Septemoer 30.

December 31, Ca encor Quarter Enceo

_Morch 31._ _. _

crousanos wnere capacooie) 1986

__1985 _ _1986 1985 1986 1985 1986 1985 Operating Revenues

$1,314,667 $1.286.229 $1,007,304 S 942.930 $1,057,678 Si 062.680 $1,118,767 $1.136.502 Operating income 186,432 182.286 155,142 139.195 192,891 172.020 443,119 144.268 Net income

$ 161,686 S 143.095 $ 133,050 S 118.184 $ 174,888 S 126.498 $ (91,161) $ 11.855 Earriings per shore of Common Stock

$123 S1.21

$1.00

$98

$1.31 S1 03

$(.68)

S.09 Average Shores of Common Stock Outstanding 131,754 117.889 132,795 121.038 133,648 122.329 134.327 128.010 Leo tamers restated to P ect t%e 03OOf On Of SEAS 7C and t%e conson00f on of whWy-owned suC5.diones h

l l

l 45

33;

---y~~

3

,(

e.

' di (thousand5 Of Doilors where opphCobi3) 1986 Condensed Consolidolod Statements of income (A)

Amount Amount

~ ~ ~ ' '

Arro'

^

Operating Revenues Electnc

$ 3,156,010 70 S 3.000.564

.48163 9

Gas 1,324,690 30 1A08A90 17,716 19.287 4 TF9 Other Total Operating Revenues 4,498A16 100 4A28.3AI'..

4207J

~~

Operating Expenses Operation Fuel for Electric Generation and interchanged Power-net 1,033,371 23 965.966' Gas Purchased and Motenols for Gas Produced 692,224 15 757.976 9

872<

Other 607,301 14 567.698 758.

Maintenance 254,256 6

291.940 545.

Depreciation and Amortization -

272,150 6

268.179 270.

Amomzotion of Property Abandonments and Write-Down 71,232 1

55.263 246-

-Toxes 58.

Federalincome Toxes 270,783 6

273.119 New Jersey Gross Receipts Toxes 563,518 13 557.270 263.

Other 56,297 1

53.161 52R

~ Total Operating Expenses 3,821,132 85 3.790.572 7 3M Operating ince me Electric 602,801 13 547.343 Gas 67,664 2

80A43 5';7 Other 6,819 9.983 70 Total Operating Income 677,264 15 637.769 7

-@1

. Allowance for Funds Used During Construction (Debt and Equity) 241,317 5

195.871 Other Income-net 10,840 458 t

Application of SFAS 90 1

4 Disollowed Plant Costs and Abandonments-net (295,244)

(6)

(109.717) (;i Related income Toxes ti1A18 2

24.799

(;,

interest Chorges (315,780).

(7)

(289.546) r-

- Preferred Stock Dividend Requirements of PSE&G (51,372)

(1)

(60.002) l:

(28C.

L (6C Net Income

$ 378,463 8

S 399.632 y S 42c Shores of Common Stock Outstanding (Thousands) e -

End of Year 134,882 131.699 11, Average for year 133,140 122.344 10f Earnings per overage shore of Common Stock

$2.84

$3.27 Dividends Poid per Shore

$2.93

$2 81 Poyout Rotio 103%

86%

Rote of Return on Average Common Equity 40.56 %

12,27%

Book Value per Common Shore

$26.89

$26.81 e

Utihty Plant

$11437,196 S10.842.182

1. 83 Accumulated Depreciation and Amortization of Utility Plant

$ 2,692,759 S 2.502.594 Toto! Assets

$10,577,822 S10.234.290

_ Consolidated Capitalization (A)

Mortgage Bonds of PSE&G

$ 3,100,210 di S 2.945.723 ti : S2.87.

Debenture Bonds of PSE&G 210,910 3

218.918 h

22

___Other Long-Term Debt 25,000 j

Total Long-Term Debt 3,336,120 44 3.164.641 gg 7 g ;i Other Long Term Obligations of PSE&G 56A09 1

58.337 fg j

Preferred Stock of PSE&G with Mondatory Redemption 65,000 1

65.000 i

Preferred Stock of PSE&G without Mondatory Redemption 554,994 7

554.994 Jy;.

Common Stock 2,632,662 34 2.535.687 W -!

2 Retoined Earnings 993,836 13 1.013.285 yi Toto! Common Equity 3,626A98 47 3.548.972 gg

_W..

.-.b9 _..

_ - ($6,9-

' pr or vean 'esto'ed 4 rehect tae accohon of St AS 90 ono the ennsohoo' on of whoW-owneo suoscories A see Monocemen's Otussion ono Ancos of knanco Cordton ono Desvits of operations organ,tanon ono summasy of Signtcont Accounting Poic+s ono Notes to Consoncotec Ononco Statements 46

~ - - - - - - -

N

s 1976 1%

1984 1983 1982 1;81 Amount Amount Amount Amount i

. cunt (2

.gai 67 S2.570.457 65 S2.543.191 c.5 S2.322.042 67

$1.316.077 70 i

f

.'3333 33 1,392.475 35 1.330.785 34 1,149.610 33 553.458 30 J

16.316 20.191 1

18.419 3.093 j3:48 3.979.248 1m 3.894.167 100 3.490.071 100 1.872.628 100

10r, g7372 100 22 272.305 21 868,977 22 959.382 25 1.059.539 31 484.194 26 17

4 627 18 815.996 20 774.634 20 641.796 18 260.306 14 13 dg737 13 518.209 13 468.001 12 400.468 12 226.722 12 1

}79.359 6

239.017 6

220.725 6

192.917 6

99.677 6

t 2.715 6

228.264 6

220.465 6

208.201 6

133.970 7

~53 075 1

49.040 1

43.345 1

15.362 1.996 t

33270 6

197.833 5

185.588 4

127.661 4

100.821 5

13

$p654 13 513.760 13 514.266 13 462.095 13 249.356 13 i

~51.930 1

45.696 1

41.325 1

16.346 26.210 1

86 490 E_.. 95.- -

3.476.792 87 3.427.731 88 3.124.385 90 1.583.252 64

~

12 327.625 13 421.364 11 383.213 10 288.087 8

236.359 13 2

~70.513 2

72.586 2

71.246 2

66.180 2

52.07?

3 11.162 8.506 11.977 11.419 938 29.300 15 502.456 13 466.436 12 365.686 10 289.376 16 14 158.792 4

128.592 3

91.427 2

95.679 3

43.547 2

2.674 4.108 5.616 4.362 1.716 5

(5.016) 32.499 1

34.060 1

(133.107)

(4) 235 2.172 (13.333)

(13.968) 54.200 2

g' (7)

(245.377)

(6)

(220.652)

(6)

(201.590)

(6)

(130.615)

(7) g' 280.737)

,;60J21). _ _. (2)

(58.234)

(2)

(53.865)

(1)

(51.538)

(1)

(41.257)

(2)

S 309.054 8

S 133.692 4

S 163.002 9

9 j.f._26364 _10 _ _ _ S _350 111 _ 9 1

112.563 102.858 94.845 86.089 58.976 q

108.913 97.467 89.233 80.962 58.308 S3 92 33 60 S3 46 S1.65 S2 80

$2 70 52.62 S2.53 S2.44 S1 78 69%

73%

73%

147%

64 %

15 19%

14 03%

13 88%

6.60%

11.21%

S2646 525 61 S24 86 S24.28

$25.50

B70.429

$9.017.951

$8.165.130 S7.385.315 S5.255.286 1320.140 S2.214.135

$2.046.372 S1.877.815 S1.194.467 4 523.322 S8.472.538

$7,780.773 S7.113.764 S4.742.341 40 S2.452.954 40 S2.341.142 41 S2.140.835 41

$1.549.579 39 j

2 B77.518 42 3

225.825 3

231.945 4

238.640 4

269.268 5

341.511 9

720 3.120 4.500

3107.843 45 2.684.899 44 2.579.782 45 2.410.823 46 1.894.210 48 122.947 2

119.815 2

118.419 2

60.086 1

, 137.750 2

139.500 2

111.250 2

77.913 2

35.000 i

~

~

• 554 994 8

554.994 9

554.994 10 554.994 11 524.994 13 13 2.032.665 29 1.819.082 30 1.637.621 28 1.450.439 28 926.999 23 963.573 14 831.815 13 737.204 13 656.437 12 594.308 15 48 2.996.238 43 2.650.897 43 2.374.915 41 2.106.876 40 1.521.307 38 iOO

'.h 919.772 100

] 6.150.105 ] 00 _ __

_100_ _ _ __ $5.210.692_100 _ _ _ _S3.975.511._,100

$5.739.360 47

OPkRATING STATISTICS public service Electric and Gas Company

._.---__...v s

J.

~

'~~v

~ - --

~ -. - - ~. - _

% Annd*%

i966 Z%[

1Qg3 (Thousands of D_ollars_whe's CD.DhCOOle)

Revenues from Sales of Electricir/

Residential

$ 971.236

$ 918.911 Commercial 1,333.144 1.236.027 6%

d a

1 Indus*'ial 762.006 774.963 6

l', *$

Public Street Ughting 43.726 43.786 y *a'.

Total Revenues from Sales to Customers 3,130.114 2.973.68I~

c*0 Interdepartmental 1,927 1.877

_. _ _. _ _.3,132.041 2.975.564 ~

23

,,a

~

Total Revenues from Sales of Electricity d, j' "

.,*" N l Other Electric Revenues 23.969

$ 3,156.010 __

25.000

._.'.'1

=. =, = = = = = __.

... _ S 3.00._0.564 Total Operating Revenues

- m _,_

14 s

Sales of Electricity - megawatthours I

Residential 6,726.769 8.300.658 4

4 b

- Commercial 14,116.026 13.313.639

^ C4 (Ic2('

Industrial 10,134.327 10.290.711

.t5 l

Public Street Ughting 295.639 300.612 l

. Total Sales to Customers 33,274,763 32.295.620

~ (i _,

, g3

..G5 23,790 24.888 (24q P. b3

_. Interdepartmental 32.320.50,8__.[

3 C.1

3.,;401

$ N*8-b

_ _ _. _ __. =

l

.-=

1 Megoworthours Produced. Purchased and interchanged - net 36,033 Aid 34.869.192 3 3a h4 a d *,2 Lood Factor 53 2%

51 6%

Aa 6

Capacity Factor 33 0%

31.3%

M Heat Rote - Btu of fuel per net kwh generated 10.716 10.692 22 e

Net instotled Generating Copacity at December 31 - megoworts 10.032 9.007 11 'n am Net Peak Lood - megowatts (60-minute integrated) 7,735 7.721 3

J.:22 Temperature Humidity Index Hours 14.934 15.720 (5C0)

+-/7 Average Annual Use per Residential Customer - kiloworthours 5.650 5494 2 84 t 543 Meters in Service at December 31 - Thousoncs 1.012 1,788 13a eS Gas Revenues from Sales of Gas l

• 7W Residential

$ 754.765 S 751.339 46 Commercial 390.611 407,073 (3 99) @

273.193 203 08f Industrict 171.660 242.767 (29 21) e Street Ughting 355 372 (4 57) r 3c

_ _ Total Revenues from Soles to Customers 1,317,6ii 1 A01.551 (5 97)

< ' 3 /3.9?

Interceportmental 2.649 1.321 11567 %

i $d

' 3 75 C Utai Revenues from Sales of Gas 1,320.660 1A02.872 (5 86) ;

13:

4R Other Gas Revenues 4.030 5.618 (28 27) _

$ 1,324.690 S 1A08A90 (5 95) F i 3 7 ~' W Total Operating Revenues Sales of Gas - kilotherms Residential 1,065.630 1.019,850 4 49

' M 02 Commercial 644450 634.059 1 64 n,tN5 Industrial 413,072 468489 (11 83) P! 05 II D

33 Street Ughting 660 736 (7 61)~

r Total Sales to Customers 2,123.632 2.123.134 03

% 2'4333 Interdepartmental SA96 2.540 11646 1D 337 U7

• ~

~

1. 3' Total Sales of Gas __ _

2,129,330 2.125.674 -..

2 2a u r

_ _ _. _ = _ _.. _

=

Gas Produced and Purchased - kilotherms 2,212,175 2.218.818

( 30)

,g; Effective Daily Copacity at Decemoer 31 - kilotnerms 20.699 19.990 4 55

,,n

]h Maximum 24-hout Gas Sendout - kilotherms 14.671 17.994 (1736)

't Heating Degree Doys 4 699 4.764 (1 36)

(*

~

Average Annual Use per Residential Customer - therms 676 853 2 70

.e iA48 1 A22 1 83 Meters in Service at December'3_1 - Thou._ sands _ _. _ _. _ _. _ _ _

f

7.

4 1084 1983 1982 1981 1976 33c52 3 e29567 5 701.279 S 728.642 S 443.531 h.175 084 4W 981.795 871.377 474.791 t

l '

-S.725 686 880 716.662 684.976 367470 42.164 38.672 37.809 33.249 25.863 l )

l -l 1.810 1.863 1.709 1.612 1.585 96.716 2.540.018 2.527.545 2.318.244 1.311.655 ll -

38.526 2.541.881 2.529.254 2.319.856 1.313.240

]

27,715 28.576 13.937 2.186 2.837

. 6.241 5 2.570A57 S 2.543.191 S 2.322.042 S 1 316.077 i

. i73 A 71 8 402.397 7.686 5f8 7.795.988 7.711.953 d52.020 11.753.667 11.114.655 10.940.609 9.514.574 1

44,412 10.283.784 10.017.613 10.923.042 10A72.054 4'

301.702 302.053 301.603 275A89 259,151 gi605 30.741.901 29.120A19 29.935.128 27.957.732

[

i, 25.796.. _, _ _.

._ 25.154_ _ __ 25.567 L

27.900 34.996 30.769.701 29.145.573 29.960.695 27.992.728 c-5;7,401

-.... =.

= =. = = = = = = = _ = = =.. = >... -

=

rp 7&862 33.391.011 31.563.231 32.204.191 30.376.187 52 4 %

526%

51 2%

52.3%

55.9%

32 6%

31 6%

34.7%

33.2%

32.0%

y, 10.616 10.717 10.677 10.725 10.593 3;

8.999 8.999 8.995 9.101 8.741 p,

7A22 7.244 7,042 7.034 6,190

$3 16.677 17.262 12.155 15.494 12.701 5.543 5.602 5.156 5.261 5.395 y

1.769 1.757 1.746 1.739 1.697 32 717.286 S 746.200

$ 716.308 S 604.521 S 342.524 75 3;3.197 396.159 371.027 302.281 140.809

.t 263.080 246A08 241437 240.711 68.341 369 358 350 290 159 9 ']73932 1i89.125~~

1.329.122 1.147.803 551.833 1.682 1.011 1.068 1.075 476 i

US 614 1.390.136 1.330.190 1.148.878 552.309

,7 4.269 2.339 595 732 i.149

. _ _. _.-. _._3 3_0_. 785__

S 1.149.610

$ 553458

, 99.883 S 1.

S 1.392A75 2

10 110.C25 9G5.686 994.647 993.527 1.045.627 23 029.855 596,868 581.739 555.806 468.761 ce 495.719 460.601 465.835 514.136 307.949 74 339 327 331 334 389 54

.141938 2.053.482 2.042.552 2.063.803 1.822.726 N.

3.377 1.857 2.090 2A30 1.764 56

.147.315,.

2.055.339 2.044.6_42 _ _ 2.066.233 _. _ 1.824A90 e.

.56 249.352 2.151 A17 2.148.839 2.145.325 1.895.041 72 19.856 19.129 19.139 19.010 19A49 51 14.927 15.612 16.201 14.812 12.803 20' 4.743 4,677 4.820 5.082 5.349 53' 863 850 853 857 924 37 1.404 1.392 1.384 1.378 1.354 49

/

.ERS_

PU Public Service I"

Doctric and 004 Company E. hmes Forland Winthrop f. Mange, Jr, g,

Chorrmon of the 900'3 P'escent One Ch.et g,ecuNe ort.c,,

D N oem-Coroororeseme,3 Corbin A.McNeigt,Jg, Eve y

~ h"#*U' senor becu%e ye, p,,3g,,,

P 'l C' P*fermon pg, Frederick W. $cnn,;g,,

• • • • Q*0 ComDtroner E'ecutwe y,c, p,95cenf - Opercrons Fredrick Q. De$onti Ms L Man W

c"'

l S**'O' VCe Prescem - cu3ra,,,,9W,w l

IC O 8*r p,

i Robergg,gocy,ood OSN - Goenmentoi Af.cy3

~^ '* '

ge 3#

A se no Generof Counser Sen'or %ce Prescem - p, ann,n g*W.%

bonald A. Anderson

• 'O'#

V<ce Prescent -- rntormo?cn sygetr3

• 5'* Ink

• Lawsonce y, cog,y

1. • '88*80' ~ fuet Suopjy o.e C Mce bescem one Corporare o

Plette R.H. Londrieu O' ID y

~ #UO8M'5$co one Drstr,buton Mce hescent - in Alchord A.Udertta JohtiH Modslocks Ce P'escenf - Proouchon Vice preseen, - Pubisc Affairs r

Chortes E.Mo Vice p'escent

'g n

Wolloce A.Maging

%ce p'escent one naosurer.

J nomL 1A po ** I#

m Robed a.f*59"' "'

p esc.N "*Y b*'*II LM

'N#

RoDetW

• 5 R. Co*00' I,

jo

• 5 m

50

\\%__

DIRECTORS j

i Public Service James R. Cowan, M.D.

l Enterprise Group incorporated Pmsident and Ch.ef Esecutive Officer j

unaed Hospitols Medical Center. Newarw. New Jersey I. James Forland viemoer of Finance Commmee and Nominating Commmee Cno rmon of tne Boord President and Chief E xecutwe Office' fJ. Dermot Dunphy gverett L. Morris President. Chief Executive Officer and erector.

. ce pms oent Secied Air Corporation (monutcetures protective paceog ng ces no systemst he Be w Je%y Frederick W. Schneider Mmr of min 1:ng Commmee and Organization and ya p,esicent Compensotron Commmee Wallace A.Moginn A at ert R. Ferguson, Jr.

' ecturer

% cent. Chief Executive Off cer and a rector i

Parket C. Peterman

% t Loehty Bancorporation and Chairman of tne Boora ed avector. First Ftdeit y Bank. Nohor.at Associaton Dom of 07 ctroner t

• U" N8* *'58V Robert S. Smith

/emoer of Finance Commmee and Orgon,zat.on and gg, Compensation Commmee E., tames Forland Cr airmon of the Board President and Chief ExecuSe Cet cet o' the Company

-Chairman of Executive Commmee and memoer of Finance Committee Irwin Lerner

'E i

o+_

C.

" 1 / g, President. Chief Executive Otticer ona c; rector.

9-

. ' ' 4.c,

Hoffmann-Lo Rocne inc (manutoctures prescr< phon D#

pharmaceuticots. vitomins and fine chemico!s onc provices ciognostic products and serwces). Nut:ey. New Jersey

-Memeer of Auct Commmee. Esecutive Comm "ee anc Organection and Corspensation Commmee William E. Mortuggi Choirman of the Board and director. Victory Oortcot Manufoctunng Company (manufactures opntnoimic frames) ona Cho rman of the Board and orector Pto:o Sung osses :nc (monuf actures sunglosses). ootn of Neworw. New sersey

-Memoer of Auct Committee onc Finance Comm<ttee Everett L Morris Vice President of the Company

-Choirman of the Finance Commree and memoer of Executive Committee Marilyn M. Piatt2 Portner of P ond R Assocrotes (puche retat ons and cuchc+v j

l specialists). Summit New.iersey

-Member of Auct Commmee ono Nominating Commmee 1

l James C. Pitney l

Partner in the low firm of Pitney. Hordin, Kipp & $zucn.

Newark and Morristown New Jersey l

-Chairman of Audit Commmee and me.noer of Orgon.zot on l

and Compensation Commmee Kenneth C. Rogers goto\\g,$o00 President. Stevens institute of Technology. Moooken. New Jersey

-Choirman of Nominot:ng Commmee and memoer of 4 goge'S Orgenco+ ion anc Compensation Commmee i

l te00*

Robert 1. Smith g

gDelf"og poepM IgetW Retired Chairman of the Boord of Pubhc Serwee Eiectric and Gas Company 4

joigog9

- Memoet of Finance Commmee ano Nominating Commmee

@0'gYn M Harold W. Sonn Retired Chairman of the Board of the Company

,nd

- Member of Executive Commmee and Finance Commmee Robert V. Von Fosson Chairman of the Board. Chief Executive Officer onc director.

'ne Mutuot Benefit Life insurance Company, Newark New sersey

- Chairman of Otgonection ono Compensation Commi"ee and member of Executive Committee onc Finance Commmee Josh S.Weston Cnairman of the Board. Chief Executive Off:cer one director.

Automa're Data Processing. Inc. Roseiond New sersey

. Member of Auo't Commmee ona Organizat on anc Compensation Commmee

'1 A

CORPORATE AND STOCK INFORMATION

~.h

..a Additional Reports Available - Form 10.K, -.. _.

PSE&G Territory Stockholders or otner interested persons wishing to obtain a copy of Enterortse's or PSE&G's 1986 Annual Report to the Secur: ties and Exchange Comrmssion, filed on Form 10-K.

may obtain one witncut charge by wr: ting to the Monoger-Investor Reict ons. Pubhc Service E ectnc and Gas Company.

Nework P O Box 570. Te8. Newark. N J 07101 (teieonone 201-430-6503)

The Copy so prOvided will be without exnibits. Exn! bits may be purchased for o spec:f ed fee hentm i

i Financial and Statistical Review A comprehens:ve statist l Col suppiement to th!s report.

containing financiot and operating data will be available this Spring if you wish to receive o copy. please write to the Monoger-investor pelations. Pubuc Service Electnc and Gas Company, PO Box 570. TcB, Newark. N J 07101 (teleonone 201-430-6503)

Transfer Agents All Stocks.

Morgan Shareholder Services Trust Company.

30 West Broadway New York. N Y 10015 Stockholder Services, Public Service Enterpnse Group incorporated 80 Park Plaza, P O. Box 1171 Newark. N J 07101-1171 Registrars All Stocks.

First Ficenty Bank N A.. New Jersey 765 Broad Street. Newark. N J. 07101 Morgan $horeholoer Services Irust Company, 30 West Broadway. New York. N Y 10015 Stock Exchange Listings Common:

New York Stock Exchange Phitoceiphic Stock Exchange London Stcck Exchange Preferred of PSE&G:

New York Stock Exchange j

i Common Stock High Low First Quorter 38's 30%

Second Quorter 38b 34 %

Third Quorter 48Y 36%

Fourth Quorter 43),

37'i w.me mow v ce reen L

a

6 emmMM O

2 Public Service Enterprise Group Incorporated P.O. Box 1171 Newark, New Jersey 07101 1171 Quarterly FinancialReport June 30,1987 I

l HIGHLIGHTS (smessranaa j

1 l

B Nuclear Performance Standard Update E Stock Split: 3 for 2 Basis l

l E Dividend Reinvestment Plan to Change E PSE&G New Electric Peak Record Table of Contents:

PSE&G

Contact:

( Area Code 201)

Consolidated Statements of Income...

2 James R. Ryan Consolidated Statements of Changes in Afanager-Investor Relations 430-6564 Financial Position 3

or Consolidated Balance Sheets....

. 4-5 Eserett L. Morris Tinancial Ratios.

.6 SeniorExecutive Vice President 430-5660 Construction Expenditures 6

Francis J. Riepl-Electric and Gas Operations.

.7 Vice President and Treasurer 430-6556 Public Service Enterprise Group Incorporated Subsidiaries:

Public Service Electric and Gas Company Energy Development Corporation Community Energy Alternatives Incorporated Public Service Resources Corporation Enterprise Group Development Corporation July 24,1987

i Public Servica Ent:rprisa Grcup Incerp rct d CONSOLID ATED SUMM ARY STATEMENTS OF INCOME runaudited; (Thousands ofDollars)

Three Months Ended Six Months Ended Twelve Months Ended June 30 June 30 June 30 1987 1986 1987 1986 1987 1986 Opirtting Revenues:

Electric 5 722,032 5 781,564 $1,437,268 $1,517,999 53,075,279 $3,126,813 Cas 200,947 222.147 711,807 796,230 1,240,267 1,376,377 Other 8,045 3,593 15,457 7,742 25,431 17,963 Total Operating Revenues 931,024 1,007,304 2,164,532 2,321,971 4,340,977 4,521,153 g

Operrting Expenses Before FederalIncome T:xes:

Operation:

Fuel for Electric Generation and Interchanged Power - net 110,165 250,230 303,112 500,762 835,721 1,040,148 Gas Purchased and Materials for Gas Produced 99,140 110,665 369,544 432,083 629,685 737,467 Other 143,598 146,092 291,112 291,407 607,006 575.171 Maintenance 69,885 64.655 133,447 118,202 269,501 278,982 Depreciation and Amortization 98,199 68,409 180,473 136,456 316,167 271,447 Amortization of Property Abandonments 5,633 15.313 11,265 30,625 51,872 63,999 New Jersey Gross Receipts Taxes l'14,679 125,641 270,176 293,703 539,991 567,421 Other Taxes 14,360 14,057 30,576 31.123 55,750 54,082 Totti Operating Expenses Before Federal Income Taxes 655,659 795,062 1,589,705 1,834,361 3,305,693 3,588.647 Operating income Before Federal income Taxes 275,365 212,242 574,827 487,610 1,035,284 932,506 F:d:ralincome Taxes:

Current 28,376 71,122 93.982 182,794 91,320 206,269 Deferred - net 52,643 (19,581) 81,669 (48,195) 172,100 9,689 investment Tax Credits - net (12,538) 5,559 (16,715) 11,737 19,963 59,066 Total Federal lncome Taxes 68,481 57,100 158,936 146,336 283,383 275,024 Total Operating Expenses 724,140 052,162 1,748,641 1,980,697 3,589,076 3,863,671 Op Tr-ting Income 206,884 155,142 415,891 341,274 751,901 657,482 Oth rincome:

Allowance for Funds Used During Construction - Equity 3,945 40,500 25,716 79,096 110,741 145,089 Miscellaneous - net 6,944 4,427 9,696 5,155 15,381 4,413 Total Other income 10,8E9 44,927 35,412 84,251 126,122 149,502 Ne: Effect of SFAS 90 3,674 8,132 7,617 16,302 (192,511)

(81,377)

Inc:me Bef ore Interest Charges and Dividends en Preferred Stock of PSEf,G 221,447 208,201 458,920 441,827 685,512 725,607 Intirest Charges:

Long-Term Debt 75,882 79,829 151,123 152,369 300,898 294,934 Short Term Debt 3,284 37 4,694 1,030 10,026 5,735 Other 9,381 2,184 11,156 3,852 14,578 7,531 Tot:1 Interest Charges 88,547 82,050 166,973 157,251 325,502 308.200 Allow ance for Funds Used During Construction - Debt (2,616)

(19,014)

(13,177)

(37,202)

(53,171)

(72.651)

Net Interest Charges 85,931 63,036 153,796 120,049 272,331 235,549 Dividends on Preferred Stock of PSE&G 9,245 12,149 21,394 27,038 45,728 57,008 N 5t income 5 126.271 5 133,016 5 283,730 5 294.740 5 367,453 5 433.050 Shares of Common Stock Outstanding:

End of Period 136,160,395 133,585,250 Average for Period 135,559,827 132,794,977 135,257,928 132,277,460 134,617,514 128,694.295 E:rnings per average share of Cr mmon Stock 5.93 51.00' 52.10 52.23 52.73 53.36 5.75 5.74

$ 1.49 51.45 52.97 52.87 ReflIcting the 3.for 2 Common Stock split effective July 1,1987 Shires of Common Stock Outstanding:

.204,240,593 200,377,875 End of Period Average for Period 203,339,741 199,192,466 202,886,892 198,416,190 201,926,271 193,041,443 Ecrnings per average share of Cemmon Stock 5.62 5.67 51.40

$1.49 51.82 52.24 j

Dividends paid per share of Common Stock 5.50 5.49 5.99 5.97 51.98 51.91 l

~ Years prior io 19F 3 e been restated to reflect the adoption of SFAS 90 and the consolidation of w holly-owned subsidianes

e Public S:rvica Entcrprise Group Incorporated CONSOLIDATED

SUMMARY

STATEMENTS OF CHANGES IN FINANCIAL POSITIONeunoudaede (Thousands of Dollars >

Three Months Six Months Twelve Months Ended June Ended June Ended June 1987 1987 1987 Funds Provided:

Net income

$126,271

$283,730

$ 367,453 Add (Deduct) Items not Affecting Working Capitat:

Depreciation and Amortization 133,296 246.205 449,172 Recovery of Electric Energy and Gas Fuel Costs - net (23,850) 16,914 234,098 Disallowed Plant Costs and Abandonments 350,571 Amortization of Discounts on Disallowances (6,685)

(13,753)

(43,000)

Provision for Deferred Income Taxes - net Depreciation and Amortization 50,175 99,738 89,384 Property Abandonments 601 1,256 (2,763)

Gas and Oil Exploration Plant Write-Down 53,288 Deferred Electric Energy and Gas Fuel Costs 12,445 (2,109)

(102,014)

Other (3,773) 2,071 40,540 Imestment Tax Credits - net (6,811)

(10,988)

(9.520)

Allow ance for Funds Used During Construction ( AFDC)

(6,561)

(38,893)

(163,912)

Other 6,315 5,308 8,015 Total Funds From Operations 281,423 589,479 1,271,312 Net Funds from Financings:

Common Stock 25,961 50,507 109,516 Long Term Debt 159,888 183,038 208,038 Total Funds from Financings 185,849 233,545 317,554 Total Funds Provided 5467,272 5823.024

$1,588.866 Funds Applied:

Additions to Utility Plant, excluding AFDC

$117,103

$261,197 5 648,212 Additions to Gas and Oil Exploration Plant, excluding AFDC 3,729 6,143 18,548 Cash Dividends on Common Stock 101,707 201.594 399,921 Long-Term investments 80,482 84,319 184,784 Reductions of Preferred Stock 38,400 163,400 163,400 Reductions of Long Term Debt and Capital Lease Obligations 56,627 86,571 175,671 Gas and Oil Exploration Write-Down Write Down Exploration Reserves (134,452)

Deferral 134,452 Miscellaneous 2,467 (1,703)

(9,530)

Total Funds Applied 400,515 801,521 1,581,006 Changes in Working Capital - Increase (Decrease):

Short-Term Debt (59,334)

(72,788)

(121,168)

Other 126,091 94,291 129,028 Net increase (Decrease)in Working Capital 66,757 21,503 7,860 Total Funds Applied and Chances in Working Capital 5467,272

$823.024

$1,588,866 3

• Pchlief?:rvica Enterprisa Grcup Inc:rp rcted i

CONSOLIDATED

SUMMARY

BALANCE SHEETS runoudited; (Thousands ofDollars)

ASSETS June 30,1987 June 70,1986 Electric Plant 5 9,423,519 5 5,344,558 1 ;

Gas Plant 1,435,454 1,333,384 J

Common Plant 284,947 268,590 Nuclear Fuel 253,980 120,800 i)

Utility Plant in Service i1,397,900 7,067,332

{

Less Accumulated Depreciation and Amutization 2,888.313 2,596,552 i

l Net Utility Plant in Service 8,509,587 4,470,780 Construction Work in Progress 293,910 4,214,929 Plant Held for Future Use 26,764 27,784 Net Utility Plant 8,830.261 8.713.493

)

l Other Plant and Long Term investments Gas and Oil Exploration Plant, net of accumulated i

depreciation - $193.148 and $178,132 152,898 297,709

)

Other Plant, net of accumulated depreciation - $1,844 and $1,033 25,744 26,089 Long-Term investments 208,260 45,521 Total Other P! ant and Long-Term investments 386.902 369.319 Current Assets 1

Cash and Temporary Cash Investments 423,841 381,691 j

Working Funds 20,201 27,205 Accounts Receivable, net of allowance for doubtfut accounts - $16,892 c.nd $28,752 356,935 368,071 i

Unbilled Revenues 105,043 116,225 1

Fuel, a: verage cost 158,746 151,446 1

Materm and Supplies, at average cost 80,384 84,288 l

Prepayments 21,440 17,499 j

TotalCuttent Assets 1,166,590 1,146,425

{

l D:ferred Debits Property Abandonments 228,440 259,142 i

Gas and Oil Exploration Plant Write-Down i12,044 Underrecovered Electric Energy and Gas Fuel Costs - net 130,341 Unamortized Debt Expense 49,364 44,168 Other 6,102 Total Deferred Debits 395.950 433,6f I Total 510,779,703

$10.662,888 Certain restatements have been made of previously reported amounts for 1986 to include the effects of SFAS 90 l

Public S;rvica Enterprisa Grcup inc rp:rct;d LIABILITIES June 30,1987 June 30,19r,6 I

Capitalization Common Equity Common Stock (no par value) 136.160,395 and 133,585,250 shares outstanding

• 5 2,683,169 5 2,579,966 Retained Earnings 1,073,703 1,109,922 Total Common Equity 3,756,872 3,689,888 Subsidiaries' Securities Preferred Stock uithout mandatory redemption:

($100 par value) 3,399,942 and 4,649,942 shares outstanding 339,994 464,994 (525 par value) 3,600,000 shares outstanding 90,000 90,000 Total Preferred Stock without mandatorr redemption 429,994 554,994 i

Preferred Stock with mandatory redemption:

(5100 par value) 300,000 shares and 650,000 shares outstanding excluding 350,000 shares in 1986 shown under Current Liabilities 30,000 65,000 Long-Term Debt, excluding amount due within one year 3,434,614 3,392,002 Obligations Under Capi;al Leases 55,863 57,400 Total Capitalization 7,707,343 7,759,284 Current Liabilities Preferred Stock to be redeemed within one year 35,000 Long Term Debt and Capital Lease Obligations due within one year i14,205 157,034 Bank Loans 4,997 Commercial Paper 234,000 110,000 Accounts Payable 149,221 204,057 New Jersey Gross Receipts Taxes Accrued 576,851 601,156 Deferred Income Taxes on Unbilled Revenues 68,256 53,4'.3 Other Taxes Accrued 60,390 123,647 Interest Accrued 98,447 96,440 Gas Purchases Accrued 52,809 48,245 Other 87,556 75,385 Total Current Liabilities 1,481,732 1,469,427 D:lerred Credits Accumulated Deferred Income Taxes:

Depreciation and Amortization 778,412 708.733 Property Abandonments 101,101 103,864 Gas and Oil Exploration Plant Write-Down 53,287 Deferred Electric Energy and Gas Fuel Costs - net (42,056) 59,957 Other 18,694 (21,846)

Overrecovered Electric Energy and Gas Fuel Cos:s - net 103.757 Accumulated Deferred Investment Tax Credits

$55,472 562,984 Other 21,961 20,485 Total Deferred Credits 1,590,628 1,434,177 Total 510,779,703 510,662,888

' Shares show n are prior to a 3-for 2 stock split effective 7/1/87; see Consolidated Summary Statements of income, Statements and data herein are for the purpose of supplying information about Public Service Enterprise Group incor-porated and its subsidiaries and are not a representation or prospectus with respect to the securities of these companies and are not transmitted in connection with any proposed

[

sale of, or offer to sell or buy, any securities.

5 t_____

a Pchlic Service Enterprise Group Incorporated FINANCIAL RATIOS AND STATISTICS June 30 or Twelve Months Ended June 30 1987 1986 Capitalization Ratios:

Long-Term Debt 42.4 %

43.7 %

Other Long Term Obligations 3.0%

0.7%

Preferred Stock 6.3%

8.0%

Common Equity 48.3 %

47.6%,~

'c-Return on Average Common Equity 9.87 %

12.33 %

Return on Average Capitalization 9.15 %

10.53 %

Common Stock:

Payout Ratio 108.79 %

85.42 %

Book Value per Share (Before stock split)

$27.59

$27.62 Annual Dividend Rate per Share (Before stock split)

$ 3.00

$ 2.%

Ratios for years prior to 1987 have been restated to reflect the adoption of SFAS 90 and the consolidation of wholly-owned subsidiaries Public Service Electric and Gas Company rerincipaisubsidiarf>

FINANCIAL AND OPERATING RATIOS June 30 or Twelve Months Ended June 30 1987 1986 Embedded Costs:

Long-Term Debt 8.78 %

8,87 %

Preferred Stock 7.49 %

7.W/o Ratio of Earnings to Fixed Charges (Pre tax)(SEC formula) 2.77x 3.36x,

Ratio of Earnings to Fixed Charges and Preferred Divider.nths Year Enaed 1987 June 30.1987 (Estimated)

Additions to Plant

$226

$515 l

Nuclear Fuel 35 80

}

Total (excluding AFDC) 5261 5595 l

Al-DC 5 39 5 59 Ratios for prior periods have been restated to reflect the adoption of SFAS 90 and the consolidation of uliolly owned subsidiaries I

6

p Public Service Electric and Gas Company 3 Months Ended % Change 6 Months Ended % Change 12 Months Ended % Change June 30,1987 vs.1986 June 30,1987 vs.1986 June 30,1987 vs.1986

__ ELECTREC OPERATIONS Sales Kwh(000)

Residential 2,128,421 6.3 4,337,558 4.6 8,918,878 2.9 Commercial 3,642,434 7.1 7,229,379 5.7 14,508,347 5.5 Industria!

2,589,851 (0.8) 5.019,872 (0.4) 10,116,635 (1.4)

Other 68.065 0.5 157.44Q (1.1) 317.618 (2.4)

Intgl 8.428.771 4.3 16.744.249 3.5 33.861.47P 2.6 Temperature Humidity Index Hours-Actual 4.872 11.1 15,422 (4.8)

Normal 3,342 14,413 l

Output by Source of Fuel Coal 26ro 26ro Oil 3ro 6 r, Nuclear 46eo 40ro l

Gas 95o 7Co l

Purchased and Interchanged - Net 16ro 2 i r, Total 100ro 100ro Capacity at Time of Peak - Mw 10,032 Peak 1.oad - Mw 7,826 (6/15/87)

Nk Output - Mw h 146,865 (7/7/66)

Energy Cost per Kwh Produced, )

Purchased and interchanged 1.74e 1.648 1.67C GAS OPERIilONS Sales Therms po)

R.tiier.tial 167.566 3.5 665.033 4.3 1.093.297 4.9 Commercial Firm S7,723 2.9 350,447 0.5 575,210 0.3 Interruptible 15.574 30.2 44.476 42.5 84.293 25.2 Total 103,302 6.2 394,923 4.0 659,503 2.9 Industrial Firm 26,440 (7.9) 82,261 (8.0) 147,455 (12.3)

Interruptible 50.239 (15.4) 125.654 (3.2) 254.271 (6.0)

Total

'6,679 (12.9) 207,915 (5.2) 401,726 (8.4)

Other 2.331 88.7 5.017 44.2 7.716 54.7 i

l Total 349.878 0.4 1.272.883 2.7 2.162.242 1.7 Heating Degree Days - Actual 3,013 0.2 4,706 0.7 Normal 3,216 4,%7 l

Daily Capacity at Year.End (1986)

Naturel Gas 17,107 Other Gas

_ 3.792 Total Daily Capacity - Thermu000) 20,899 Peak Day Sendout - Therms (KK))

16,517 (2/15/87)

Fuel Cost Per Therm of Gas Sent Out 30.48C 29.44C

}

)

7 l

1 i

' I (NRC) ordered the Peach Bottom be borne by ratepayers or that the

• O* S d" g d 7

units shut dow n because it determined target should be modified.

l Y8 E that at times during various shifts, one On April 21. 1987, PSE&G filed a I

o or more of the Peach Bottom control Motion for Reconsideration with the room staff had for at least the past five BPU seeking clarification of a number months periodically slept or otherwise of matters included in the BPU's April f

2 been inattentive to licensed duties. PE 6,1987 final rate order, including cer-i has made changes to Peach Bottom tain matters related to the perform-plant staff and in July initiated new ance standard. In addition, PSE&G training programs for plant operators.

has questioned the disallowance by the Such training is expected to take four BPU of certain Hope Creek costs and

' Nuclear Performance months. PE appeared before the NRC a number of other matters. The BPU Stand 1rd Update Staff on July 15 to present the plant has placed the motion on its agenda in Public Service Electric and Gas status and to describe the elements of for early August.

Company's (PSE&G) most recent rate ts corrective action plan. PE plans to decision, the New Jersey Board of submit the formal written plan to the St ckSplit: 3 for 2 Basis Public Utilities (BPU) established a NRC in August.

Pubhc Service Enterprise Group performance standard for the five if the, Hope Creek. Keeney transmi,s-Incorporated split its common stock nuclear units in which PSE&G owns sion ime and Peach Bottom remain on a 3-for-2 basis payable on July 24, an interest: Salem I and Salem 2,

out of service for the balance of 1987.

1987 for stockholders of record on 42.59eo each: Hope Creek - 95r ; and the aggregate capacity factor for 1987 July 1. Trading on the New York Stock o

Peach Bottom 2 and Peach Bottom 3, f PSE&G's five nucle.ar units will be Exchange on a "when issued" basis 42.497o each. Salem and Hope Creek approximately 600s, assuming Salem began J une 29,1987 and will continue are operated by PSE&G and Peach and Hope Creek operate without any through July 24,1987 when the addi.

Bottom is operated by Philadelphia Electric Company (PE).

y,"r dard,'a capa ity a$t[

ti nal shares will be distributed. The ance st see nd quarter disidend, paid in June The perfo. mance standard is premised of 59?o would result in an after tax at a rate of 5.7,5 per share on the pre-upon a targeted 70ro aggregate capac*

penalty of approximately $8 million or split shares, will be adjusted to 5,.5,0 ity factor for the five units, with a 6 cents per share of Enterprise Com-per share for the third quarter divi-deadband between 60ro and 80Fo mon Stock before the 3 for-2 stock dend paid in September to give effect within which no penalty or reward split effective July 1,1987. At a 50r, dend was raised $.01 m, uarterly dm-t the stock split. The q would be incurred. Capacity factors capacity factor the penalty would May to S.75 ranging between 50&o and 60ro or amo, int to approximately $15 million per share from 5.74 per share. This between 80Fo and 90ro would trigger a or 11 cents per share of Enterprise

• "s the twelfth consecutive ant'ual penalty or reward, respectively, deter-Common Stock before the stock split.

dis.idend increase.

mined fromthe70*o target,of 20ro of Whether any such penalty will occur, the difference in energy costs as a or the amount of any such penalty, result of the units' operat,on. Capac-cannot be ascertained since it is not Dividend Reinvestment Plan i

ity factors between 40Fo and 50ro or known how long the Hope Creek.

Switches To Open Market Purchases between 909o and 100ro would result Keeney transmission line or the Peach On July 21, 1987, Public Service m a 250o penalty or reward. Capacity Bottom units will be out of service, or Enterprise Group Incorporated factors below 40ro would generate nc what the actual operating experience announced that it will no longer issue specific numeric penalty but would of the other three units will be.

new shares of common stock under its require the issue to be brought,before PSE&G cxpects to file a petition with D.,idend Reinvestment and Employee the BPU for review to determme the the BPU for a change in its electric Stock Pyrchase Plan (DRSPP) effec-appropriate disposioon of the replace-Levelized Energy Adjustment Clause tive October 1,1987.

ment power costs. Any penalties n the Fall of 1987, so that the new rate incurred would not be perm,tted to be can be effective January 1,1988. This New Electnc Peak Record Set i

recovered from customers and would proceeding is expected to examine the Public Service Electne and Gas Com-reduce net income, operation of the performance stand.

pany recorded a new peak demand As previously reported, on March I' ard, and PSE&G plans to assert that record of 7,826 MW on June 15,1987.

- 1987 a tanker collided with a transmis-the Hope Creek - Keeney Ime outage Subsequently, new record peaks were sion tower in the Delaware River near should not be considered in determin.

set on July 21 (7,866 MW), July 22 Salem and Hope Creek, which will ing capacity factors for the purpose of (7.915 MW), July 23 (7,917 MW) and result in a reducuon of the output the performance standard. In the rate from those units until the related order issued April 6,1987 by the BPU July 24 (8,173 MW). The July 24th record was 5.7ro higher than 1986's Hope Creek keeney transmission establishing the performance stand.

j hne is restored. This is expected to ard, the BPU indicated that it would record peak of 7,735 MW set on July occur late m 198 <.

reevaluate the performance standard 7th of last year.

I l

As a result of the loss of the transmis-in 18 months. Tne Order also states Extremely warm weather resulted in a I

sion line, the output of the Salem I that any patty can petition the BPU 8.7 Fo electric sales increase in June and 2 and Hope Creek units was origi-for a change in the target in the event 1987 over June of last year. Electnc nally reduced by about 305. Subse-planning factors change for an indi-sales were up 4.3 *o for the quarter and o

3.5r year to date over the similar per-quently, modifications to the system vidual plant in a significant manner.

o circuitry have allowed the collective However, even if the plants fail to iods in 1986. The temperature humid-output of the units to be raised to operate at expected ievels as a result of ity index (THI) was up 12.tro over about 95e during much of the repair circumstances beyond PSE&G's con-1986 during the second quarter and l

o ll.t r year to date. Gas sales were up l

period.

trol, the Order further states that this o

As also reported, on March 31,1987, does not necessarily mean that the 2.7 Fo for the first six months of 1987 I

(

the Nuclear Regulatory Commission resultant replacement power costs will oser last year's period, t

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