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================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K
                                   (Mark One)
             [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                      For the fiscal year ended December 31, 1996

                                       OR

            [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                        For the transition period from to

Commission        Registrant, State of Incorporation,          I.R.S. Employer
File Number          Address, and Telephone Number            Identification No.
-----------   ---------------------------------------------  ------------------

 1-9120        PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED        22-2625848
                          (A New Jersey Corporation)
                             80 Park Plaza
                             P.O. Box 1171
                     Newark, New Jersey 07101-1171
                             201 430-7000
                         http://www.pseg.com

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

                                        Name of Each Exchange
       Title of Each Class               on Which Registered
       -------------------               -------------------
 Common Stock without par value        New York Stock Exchange
                                       Philadelphia Stock Exchange

 1-973            PUBLIC SERVICE ELECTRIC AND GAS COMPANY          22-1212800
                          (A New Jersey Corporation)
                             80 Park Plaza
                             P.O. Box 570
                     Newark, New Jersey 07101-0570
                             201 430-7000


                       DOCUMENTS INCORPORATED BY REFERENCE

Part of Form 10-K     Documents Incorporated by Reference
-----------------     -----------------------------------
       III            Portions of the definitive Proxy Statement for
                      the Annual Meeting of Stockholders of Public
                      Service Enterprise Group Incorporated to be held
                      April 15, 1997, which definitive Proxy Statement
                      is  expected  to be filed with the Securities and
                      Exchange Commission on or about March 3, 1997, as
                      specified herein.

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

                                                         Name of Each Exchange
Title of Each Class             Title of Each Class      on Which Registered
----------------------          ---------------------    ----------------------
Cumulative Preferred            First and Refunding
Stock                           Mortgage
$100 par value Series:          Bonds Series Due:
     4.08%                      83/4%   Z     1999
     4.18%                      91/8%   BB    2005
     4.30%                      91/4%   CC    2021
     5.05%                      87/8%   DD    2003
     5.28%                      77/8%   FF    2001
     5.97%                      71/8%   GG    1997
     6.80%                      75/8%   II    2000
     7.44%                      67/8%   KK    1997
                                81/2%   LL    2022
                                67/8%   MM    2003
                                6 %     NN    1998       New York Stock Exchange
                                71/2%   OO    2023
$25 par value Series:           61/2%   PP    2004
     6.75%                      6 %     QQ    2000
                                61/8%   RR    2002
                                7 %     SS    2024
:                               73/8%   TT    2014
                                63/4%   UU    2006
                                63/4%   VV    2016
                                61/4%   WW    2007
                                8 %           2037
                                5 %           2037

     Monthly  Income  Preferred  Securities   (Guaranteed  Preferred  Beneficial
Interest in PSE&G's Subordinated  Debentures),  $25 par value at 9.375%, $25 par
value at  8.00%,  issued  by  Public  Service  Electric  and Gas  Capital,  L.P.
(Registrant) and registered on the New York Stock Exchange.

     Quarterly  Income Preferred  Securities  (Guaranteed  Preferred  Beneficial
Interest in PSE&G's Subordinated Debentures), $25 par value at 8.625%, issued by
PSE&G  Capital  Trust  I  (Registrant)  and  registered  on the New  York  Stock
Exchange.

     Quarterly  Income Preferred  Securities  (Guaranteed  Preferred  Beneficial
Interest in PSE&G's Subordinated  Debentures),$25 par value at 8.125%, issued by
PSE&G  Capital  Trust II  (Registrant)  and  registered  on the New  York  Stock
Exchange.

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

               Registrant                             Title of Class
               ----------                             --------------
Public Service Enterprise Group Incorporated               None
  Public Service Electric and Gas Company     6.92% Cumulative Preferred Stock
                                              $100 par value Medium-Term Notes,
                                                           Series A

     Indicate by check mark whether the  registrants  (1) have 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
registrants  were  required to file such  reports)  and (2) have been subject to
such filing requirements for the past 90 days. Yes X No .

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X

     The aggregate market value of the Common Stock of Public Service Enterprise
Group   Incorporated   held  by  non-affiliates  as  of  January  31,  1997  was
$6,344,796,578  based upon the New York  Stock  Exchange  Composite  Transaction
closing price.

     The  number of shares  outstanding  of  Enterprise's  sole  class of common
stock, as of the latest practicable date, was as follows:

                 Class                      Outstanding at January 31, 1997
                 -----                      -------------------------------
      Common Stock, without par value                231,957,608

     As of January 31, 1997,  Public Service Electric and Gas Company had issued
and  outstanding  132,450,344  shares of Common  Stock,  without  nominal or par
value,  all of which were privately held,  beneficially  and of record by Public
Service Enterprise Group Incorporated.


<PAGE>
                                TABLE OF CONTENTS

                                                                          Page
                                                                          ----
   Table of Contents....................................................      
   Glossary of Terms....................................................      

PART I

   Item 1.      Business................................................
                General.................................................
                Enterprise..............................................
                PSE&G...................................................
                Industry Issues.........................................
                Segment Information.....................................
                Competitive Environment.................................
                Construction and Capital Requirements...................
                Financing Activities....................................
                Federal Income Taxes....................................
                Credit Ratings..........................................
                PSE&G...................................................
                Rate Matters............................................
                Customers...............................................
                Integrated Resource Plan................................
                Pennsylvania--New Jersey--Maryland Interconnection......
                Power Purchases.........................................
                Demand Side Management..................................
                Electric Generating Capacity............................
                Nuclear Operations......................................
                Electric Fuel Supply and Disposal.......................
                Low Level Radioactive Waste.............................
                Gas Operations and Supply...............................
                Employee Relations......................................
                Environmental Controls..................................
                EDHI....................................................
   Item 2.      Properties..............................................
   Item 3.      Legal Proceedings.......................................
   Item 4.      Submission of Matters to a Vote of Security Holders.....

PART II

   Item 5.      Market for Registrant's Common Equity and Related
                  Stockholder Matters...................................
   Item 6.      Selected Financial Data.................................
   Item 7.      Management's Discussion and Analysis of Financial
                  Condition and Results of Operations...................
                Enterprise..............................................
                Corporate Structure.....................................
                Overview of 1996........................................
                Results of Operations...................................
                Liquidity and Capital Resources.........................
                Nuclear Operations......................................
                Competitive Environment.................................
                Accounting Issues.......................................
                Rate Matters............................................
                Site Restorations and Other Environmental Costs.........
                Future Outlook..........................................
                PSE&G...................................................
                Forward Looking Statements..............................


<PAGE>
                                                                          Page
                                                                          ----
Item 8.         Financial Statements and Supplementary Data..............
                Consolidated Statements of Income (Enterprise)...........
                Consolidated Balance Sheets (Enterprise).................
                Consolidated Statements of Cash Flows (Enterprise).......
                Consolidated Statements of Retained Earnings
                  (Enterprise)...........................................
                Consolidated Statements of Income (PSE&G)................
                Consolidated Balance Sheets (PSE&G)......................
                Consolidated Statements of Cash Flows (PSE&G)............
                Consolidated Statements of Retained Earnings (PSE&G).....
                Notes to Consolidated Financial Statements (Enterprise)..
                Notes to Consolidated Financial Statements (PSE&G).......
                Financial Statement Responsibility (Enterprise)..........
                Financial Statement Responsibility (PSE&G)...............
                Independent Auditors' Report (Enterprise)................
                Independent Auditors' Report (PSE&G).....................
Item 9.         Changes in and Disagreements With Accountants on
                  Accounting and Financial Disclosure....................
PART III


Item 10.        Directors and Executive Officers of the Registrants......
                Directors of the Registrants.............................
                Enterprise...............................................
                PSE&G....................................................
                Executive Officers of the Registrants....................
Item 11.        Executive Compensation...................................
                Enterprise...............................................
                PSE&G....................................................
                Summary Compensation Table...............................
                Option Grants in Last Fiscal Year (1996).................
                Aggregated Option Exercises in Last Fiscal Year and
                  Fiscal Year End Option Values (12/31/96)...............
                Employment Contracts and Arrangements....................
                Compensation Committee Interlocks and Insider
                  Participation..........................................
                Compensation of Directors and Certain Business
                  Relationships..........................................
                Compensation Pursuant to Pension Plans...................
Item 12.        Security Ownership of Certain Beneficial Owners and
                  Management.............................................
                Enterprise...............................................
                PSE&G....................................................
Item 13.        Certain Relationships and Related Transactions...........
                Enterprise...............................................
                PSE&G....................................................
PART IV

Item 14.        Exhibits, Financial Statement Schedules, and Reports on
                  Form 8-K...............................................
                Schedule II--Valuation and Qualifying Accounts
                  (Enterprise)...........................................
                Schedule II--Valuation and Qualifying Accounts (PSE&G)...
                Signatures--Public Service Enterprise Group Incorporated.
                Signatures--Public Service Electric and Gas Company......
                Exhibit Index............................................
                Enterprise...............................................
                PSE&G....................................................


<PAGE>
                                 GLOSSARY TERMS

The following is a glossary of frequently used abbreviations or acronyms that
are found in this report:

     Term                            Meaning
     ----                            -------

ACE..............................  Atlantic City Electric Company
AFDC.............................  Allowance for Funds used During Construction
AMT..............................  Alternative Minimum Tax
Bonds............................  First and Refunding Mortgage Bonds
BPU..............................  New Jersey Board of Public Utilities
BWR..............................  Boiling Water Reactor
CAA..............................  Federal Clean Air Act
Capital..........................  PSEG Capital Corporation
CEA..............................  Community Energy Alternatives Incorporated
CEA USA..........................  CEA USA, Incorporated
CEA New Jersey...................  CEA New Jersey, Incorporated
CERCLA...........................  Federal Comprehensive Environmental Response,
                                   Compensation and Liability Act of 1980
Certificate of Need..............  Certificate of Need under the NJNAA
CTC..............................  Competitive Transition Charge
DOE..............................  U.S. Department of Energy
Draft Phase II Report............  Draft Phase II Report of The New Jersey
                                   Energy Master Plan
DP&L.............................  Delmarva Power & Light Company
DRBC.............................  Delaware River Basin Commission
DSM..............................  Demand Side Management
Eagle Point......................  CEA Eagle Point, Incorporated
EBIT.............................  Earnings before interest and taxes
EDC..............................  Energy Development Corporation
EDHI.............................  Enterprise Diversified Holdings Incorporated
EGDC.............................  Enterprise Group Development Corporation
EITF.............................  FASB's Emerging Issues Task Force
Enterprise.......................  Public Service Enterprise Group Incorporated
EPA..............................  U.S. Environmental Protection Agency
EPAct............................  National Energy Policy Act of 1992
ERI..............................  Energis Resources Incorporated
EWGs.............................  Exempt Wholesale Generators
FASB.............................  Financial Accounting Standards Board
Fault Act........................  New Jersey Public Utility Accident Fault
                                   Determination Act
FERC.............................  Federal Energy Regulatory Commission
Fuelco...........................  PSE&G Fuel Corporation
Funding..........................  Enterprise Capital Funding Corporation
FWPCA............................  Federal Water Pollution Control Act
GE...............................  General Electric Company


<PAGE>
    Term                            Meaning
    ----                            -------


Hope Creek.......................  Hope Creek Nuclear Generating Station
IPP..............................  Independent Power Producers
IRP..............................  Integrated Resource Plan
IRS..............................  Internal Revenue Service
ISO..............................  Independent System Operator
KWH..............................  Kilowatt-hours
LEAC.............................  Electric Levelized Energy Adjustment Clause
LGAC.............................  Levelized Gas Adjustment Charge
LNG..............................  Liquefied Natural Gas
LTIP.............................  Long-Term Incentive Plan
MD&A.............................  Management's Discussion and Analysis of
                                   Financial Condition and Results of Operations
MICP.............................  Management Incentive Compensation Plan
MOA..............................  Memorandum of Agreement
Mortgage.........................  First and Refunding Mortgage of PSE&G
MTNs.............................  Medium-Term Notes
MW...............................  Megawatts
MWH..............................  Megawatt-hours
NAAQS............................  National Ambient Air Quality Standards
NEIL.............................  Nuclear Electric Insurance Limited
NJAPCC...........................  New Jersey Air Pollution Control Code
NJDEP............................  New Jersey Department of Environmental
                                   Protection
NJGRT............................  New Jersey Gross Receipts and Franchise Tax
NJNAA............................  New Jersey Need Assessment Act
NJPDES...........................  New Jersey Pollution Discharge Elimination
                                   System
NML..............................  Nuclear Mutual Limited
NOV..............................  Notice of Violation
NOx..............................  Nitrogen Oxides
Notes............................  Notes to Consolidated Financial Statements
NPDES............................  National Pollutant Discharge Elimination
                                   System
NPS..............................  The BPU's nuclear performance standard
                                   established for nuclear generating stations
                                   owned by New Jersey electric utilities
NRC..............................  Nuclear Regulatory Commission
NUGs.............................  Non-utility Generators
NWPA.............................  Nuclear Waste Policy Act of 1982, as amended
OPEB.............................  Other Postretirement Benefits
OTAG.............................  Ozone Transport Assessment Group
Peach Bottom.....................  Peach Bottom Atomic Power Station, Units 2
                                   and 3
PECO.............................  PECO Energy Company
PJM..............................  Pennsylvania--New Jersey--Maryland
                                   Interconnection
PPUC.............................  Pennsylvania Public Utility Commission


<PAGE>
    Term                            Meaning
    ----                            -------

Price Anderson...................  Price-Anderson liability provisions of the
                                   Atomic Energy Act of 1954, as amended
PRPs.............................  Potentially Responsible Parties
PSE&G............................  Public Service Electric and Gas Company
PSCRC............................  Public Service Conservation Resources
                                   Corporation
PSRC.............................  Public Service Resources Corporation
PUHCA............................  Public Utility Holding Company Act of 1935
PWR..............................  Pressurized Water Reactor
QFs..............................  Qualifying Facilities
RAC..............................  Remediation Adjustment Charge
RCRA.............................  Federal Resource Conservation and Recovery
                                   Act of 1976
Remediation Program..............  PSE&G Gas Plant Remediation Program
RI...............................  Remedial Investigation
RI/FS............................  Remedial Investigation and Feasibility Study
ROD..............................  Record of Decision
Salem............................  Salem Nuclear Generating Station, Units 1
                                   and 2
SALP.............................  Systematic Assessment of Licensee Performance
SEC..............................  Securities and Exchange Commission
SFAS 71..........................  Statement of Financial Accounting Standards
                                   No. 71, "Accounting for the Effects of 
                                   Certain Types of Regulation"
SFAS 106.........................  Statement of Financial Accounting Standards
                                   No. 106, "Employers' Accounting for
                                   Postretirement Benefits Other than Pensions"
SFAS 109.........................  Statement of Financial Accounting Standards
                                   No. 109, "Accounting for Income Taxes"
SFAS 121.........................  Statement of Financial Accounting Standards
                                   No. 121, "Accounting for the Impairment of
                                   Long-Lived Assets and for Long-Lived Assets
                                   to be Disposed Of"
SFAS 123.........................  Statement of Financial Accounting Standards
                                   No. 123, "Accounting for Stock Based 
                                   Compensation"
S02..............................  Sulfur Dioxide
Spill Act........................  New Jersey Spill Compensation and Control Act


<PAGE>


                                     PART I


Item 1. Business

General

     Enterprise

     Public Service  Enterprise Group  Incorporated  (Enterprise),  incorporated
under the laws of the State of New Jersey with its principal  executive  offices
located at 80 Park Plaza,  Newark, New Jersey 07101, is a public utility holding
company that neither owns nor operates any physical  properties.  Enterprise has
two direct,  wholly-owned subsidiaries,  Public Service Electric and Gas Company
(PSE&G) and Enterprise  Diversified Holdings  Incorporated (EDHI).  Enterprise's
principal  subsidiary,  PSE&G, is an operating public utility providing electric
and gas service in certain areas of the State of New Jersey.  EDHI is the parent
of  Enterprise's   non-utility   businesses:   Community   Energy   Alternatives
Incorporated  (CEA),  Public  Service  Resources  Corporation  (PSRC),   Energis
Resources Incorporated (ERI),  Enterprise Group Development  Corporation (EGDC),
PSEG Capital  Corporation  (Capital) and Enterprise Capital Funding  Corporation
(Funding).  For additional  information on EDHI and its subsidiaries,  see EDHI.
EDHI sold Energy Development Corporation (EDC) in 1996. See Note 2--Discontinued
Operations of Notes to Consolidated Financial Statements (Notes).

     PSE&G

     PSE&G, a New Jersey corporation with its principal  executive offices at 80
Park Plaza,  Newark,  New Jersey 07101,  is an operating  public utility company
engaged  principally in the generation,  transmission,  distribution and sale of
electric energy service and in the  transmission,  distribution  and sale of gas
service in New Jersey.  PSE&G supplies  electric and gas service in areas of New
Jersey in which  approximately  5.5  million  persons,  about 70% of the State's
population,  reside.  PSE&G's  electric  and gas  service  area is a corridor of
approximately  2,600  square  miles  running  diagonally  across New Jersey from
Bergen  County  in the  northeast  to an area  below  the City of  Camden in the
southwest.  The greater portion of this area is served with both electricity and
gas,  but some parts are served with  electricity  only and other parts with gas
only.  This  heavily  populated,  commercialized  and  industrialized  territory
encompasses  most of New  Jersey's  largest  municipalities,  including  its six
largest cities--Newark, Jersey City, Paterson, Elizabeth, Trenton and Camden--in
addition to  approximately  300  suburban  and rural  communities.  This service
territory  contains a diversified mix of commerce and industry,  including major
facilities of many corporations of national  prominence.  PSE&G believes that it
has all the franchises  (including  consents) necessary for its electric and gas
operations in the territory it serves. Such franchise rights are not exclusive.

     Under the general laws of New Jersey, PSE&G has the right to use the public
highways,  streets and alleys in New Jersey for erecting, laying and maintaining
poles,  conduits and wires  necessary for its electric  operations.  PSE&G must,
however,  first  obtain the consent in writing of the owners of the soil for the
purpose of erecting  poles.  PSE&G's  rights are also subject to  regulation  by
municipal authorities with respect to street openings and the use of streets for
erecting poles in incorporated  cities and towns.  Concerning gas  distribution,
PSE&G has the right to use the roads,  streets,  highways and public  grounds in
New Jersey for pipes and conduits.

     Industry Issues

     Enterprise  and PSE&G are  affected  by many  issues that are common to the
electric  and  gas  industries  such  as:  an  increasingly  competitive  energy
marketplace, sales retention and growth potential in a mature service territory;
the need to reduce costs and deregulation and the unbundling of energy supplies
and services (see Competitive  Environment);  the ability to obtain adequate and
timely rate relief, cost recovery and other necessary  regulatory approvals (see
Note 3--Rate  Matters of Notes);  the ability to  economically  operate  nuclear
facilities in accordance with regulatory  requirements (see Nuclear Operations);
increased  capital  investments  attributable to environmental  regulations (see
Construction  and Capital  Requirements  and  Environmental  Controls);  nuclear
decommissioning  and the availability of reprocessing and storage facilities for
spent nuclear fuel (see Electric  Fuel Supply and  Disposal);  and credit market
concerns associated with these issues.


<PAGE>


Segment Information

     Financial  information  with  respect  to  business  segments  of PSE&G and
Enterprise is set forth in Note  16--Financial  Information by Business Segments
of Notes.

Competitive Environment

     Overview

     The regulatory  structure which has historically  governed the electric and
gas industry is in transition.  Legislative and regulatory initiatives,  at both
the federal and state  levels,  are  designed  to promote  competition  and will
continue to impose additional  pressures on PSE&G's ability to retain customers.
In addition,  new  technology and interest in self  generation and  cogeneration
have  provided  customers  with  alternative  sources  and  supplies  of energy.
Retention of existing  customers and potential sales growth will depend upon the
ability of PSE&G to reduce  costs,  meet  customer  expectations  and respond to
changing economic conditions and energy regulation.

     Federal Regulatory Bodies

     PSE&G is subject to regulation by the Federal Energy Regulatory  Commission
(FERC) with respect to certain matters, including interstate sales and exchanges
of electric  transmission,  capacity  and energy.  Enterprise  is not subject to
regulation by the FERC.  Enterprise has claimed an exemption from  regulation by
the Securities and Exchange  Commission  (SEC) as a registered  holding  company
under the Public Utility Holding Company Act of 1935 (PUHCA), except for Section
9(a)(2)  thereof,  which relates to the  acquisition of 5% or more of the voting
securities of an electric or gas utility company.  Construction and operation of
nuclear generating facilities are regulated by the Nuclear Regulatory Commission
(NRC). For additional information relating to regulation by the NRC, see Nuclear
Operations.  In addition, the Federal Emergency Management Agency is responsible
for the review,  in  conjunction  with the NRC, of certain  aspects of emergency
planning relating to the operation of nuclear plants.

     Federal Regulation (Electric)

     The electric industry is currently undergoing  restructuring as a result of
federal legislation and regulatory  initiatives.  The National Energy Policy Act
of 1992 (EPAct) eased  restrictions  on independent  power producers (IPP) in an
effort to increase  competition in the wholesale electric  generation market. As
the barriers to entry in the power  production  business have been lowered,  the
construction  of  cogeneration   facilities  and  independent  power  production
facilities  has been  growing,  resulting in lower cost  alternatives  for large
commercial and industrial customers.

     FERC Order No. 888,  requiring all public utilities owning,  controlling or
operating  transmission lines to file nondiscriminatory open access tariffs that
offer  others  the same  wholesale  transmission  service  utilities  provide to
themselves, became  effective  on July 9,  1996.  By March 1,  1997,  intra-pool
transactions for power pools must also be under a  nondiscriminatory,  pool-wide
open  access  tariff.  Transmission  services  covered by Order No. 888  include
network and  point-to-point  services,  as well as ancillary  services and a pro
forma   tariff   setting   minimum   terms  and   conditions   of  service   for
nondiscriminatory  open  access  transmission  service.   Public  utilities  are
required  both to offer  service to others under the pro forma tariff and to use
the pro forma tariff for their own wholesale  energy sales and  purchases.  This
Order also provides public  utilities with the opportunity to seek full recovery
of prudently  incurred,  legitimate and verifiable stranded costs resulting from
the transfer of open access wholesale  transmission service customers to another
supplier.  To be eligible for recovery,  stranded costs must be associated  with
wholesale  requirement  contracts  signed before July 11, 1994. After that date,
recovery must be specifically provided for in the contract.  FERC has ruled that
stranded  costs  should  be  recovered  from  a  utility's  departing  wholesale
customers.  FERC has also stated that if costs are stranded by retail  wheeling,
utilities  should  first look to the states to recover  those  costs.  FERC will
become  involved  only if state  regulators  lack  authority  under state law to
provide for stranded cost recovery.

     As a result of open access mandated by Order No. 888, there is likely to be
increased competition from lower-cost, coal-fired plants in the Midwest that are
subject to less restrictive  pollution  control  requirements  than utilities in
Northeastern states.  These facilities,  by increasing their power production in
order to sell into higher priced markets including the Northeast, will, in turn,
increase the release of pollutants  that eventually make their way to New Jersey
and other northeastern states due to the prevailing westerly winds.

     Numerous  parties,  including PSE&G,  have filed requests seeking rehearing
and  clarification  of  various  aspects of Order No.  888.  These  filings  are
currently  pending  before  FERC.  After  exhausting   administrative  remedies,
judicial appeals of this Order may also occur. It is possible,  therefore,  that
this Order will be substantially modified.

     For discussion of the Pennsylvania,  New Jersey,  Maryland  Interconnection
(PJM)   proposal  in  response   to  Order  No.   888,   see   Pennsylvania--New
Jersey--Maryland Interconnection. For a discussion of PSE&G's actions related to
the  potential   environmental  impact  of  Order  No.  888,  see  Environmental
Controls--Air Pollution Control.

     Federal Regulation (Gas)

     Over the last decade the natural gas  industry has  experienced  a dramatic
transformation  as several  FERC  initiatives  have  subjected  the  industry to
competitive  market forces. On the interstate level, the pipeline suppliers that
serve PSE&G have unbundled gas supply and  transportation  service and now offer
transportation  services  that move gas  purchased  from  numerous  natural  gas
producers and marketers to PSE&G's service territory.

     State Regulatory Bodies

     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 of the issuance
and sale of securities.  As a participant in the ownership of certain generation
and transmission  facilities in Pennsylvania,  PSE&G is subject to regulation by
the Pennsylvania  Public Utility Commission (PPUC) in limited respects in regard
to such facilities.  Enterprise is not subject to direct  regulation by the BPU,
except  potentially  with respect to certain  transfers of control and reporting
requirements.  The BPU may also  impose  certain  requirements  with  respect to
affiliate  transactions  between and among PSE&G,  Enterprise  and  Enterprise's
non-utility subsidiaries. (See EDHI.)

     State Regulation (Electric)

     EPAct  prevents  FERC from  ordering  retail  wheeling  and  preserves  any
existing state authority to mandate retail wheeling.  New Jersey regulators have
been reviewing existing regulations in an effort to develop a revised regulatory
structure  that  would  afford  public  utilities,   such  as  PSE&G,  increased
flexibility to meet the competitive challenges of the future.

     On January 16, 1997, the BPU issued its draft report  regarding Phase II of
the New Jersey Energy Master Plan (draft Phase II report)  addressing  wholesale
and  retail  electric  competition  in New  Jersey.  The  draft  Phase II report
proposes  the  restructuring  of the  electric  power  industry  in New  Jersey.
Beginning in October  1998, 5% of retail  electric  customer load of all classes
(industrial,  commercial and  residential)  would be allowed to directly  choose
their  electric  power  supplier.  All customers  would be  phased-in,  with the
percentage  increasing to 20% in April 1999,  35% in October 1999,  50% in April
2000,  75% in October 2000 and 100% in April 2001. For a discussion of the draft
Phase II report,  see  Competitive  Environment of  Management's  Discussion and
Analysis of Financial Condition and Results of Operations (MD&A).

     Phase I of the New Jersey  Energy Master Plan,  issued in 1995,  called for
legislation  that would allow New Jersey  utilities  to propose,  subject to BPU
approval,  alternatives to rate base/rate of return  pricing,  allow for pricing
flexibility under certain  standards for customers with competitive  options and
equalize the impact of tax policies  (such as the New Jersey Gross  Receipts and
Franchise Tax (NJGRT)  currently  assessed on retail energy  utility sales) upon
all energy  producers.  Customers of PSE&G, as well as those of other New Jersey
electric and gas utilities,  pay the NJGRT which, in effect,  adds approximately
13% to their bills. The NJGRT is a unit tax based on electric  kilowatt-hour and
gas therm sales. This tax provides an incentive to large-volume electric and gas
customers to obtain their energy supplies from  non-utility  sources not subject
to NJGRT. A joint task force of the BPU and the New Jersey  Treasury  Department
has proposed  replacing  the current  NJGRT with a  combination  of the existing
corporate  business  tax,  existing  state sales and use tax and a  transitional
assessment  which  would be phased out over an  expected  seven year time frame.
After the  phase-out  is  completed,  the  proposal  is  expected to improve the
competitive  position  of  electric  and  gas  utilities  vis-a-vis  non-utility
energy providers in the New Jersey markets.   Although  proposed  legislation to
implement this tax change  has been introduced in  the state legislature,  PSE&G
cannot predict when or if this proposal will be adopted.

     Following  adoption of the  legislation  recommended by the Phase I report,
PSE&G filed a petition with the BPU for its New Jersey Partners in Power Plan in
January 1996 to provide PSE&G with the mechanisms and incentives to compete more
effectively  on several  fronts,  including the ability to develop  revenue from
non-regulated products and services, accelerate or modify depreciation schedules
to help mitigate potential stranded costs and more aggressively manage costs. On
January 31, 1997, in recognition of the fact that the mandatory rate proceedings
required by the draft Phase II report  rendered its filing moot,  PSE&G withdrew
its 1996 rate filing,  the New Jersey  Partners in Power Plan,  from further BPU
consideration.  For information on rate matters, including the recently approved
settlement  agreement that resolved three regulatory  issues before the BPU, see
Note 3--Rate Matters of Notes.

     State Regulation (Gas)

     PSE&G's  unbundled  gas  transportation  tariffs,  which have been in place
since 1994, allow any nonresidential  customer,  regardless of size, to purchase
its own gas,  transport it to PSE&G and require PSE&G to deliver such gas to the
customer's facility.  To date, over 10,000 commercial and industrial  customers,
out of a total of approximately 180,000 such customers,  have elected to utilize
this service. It is expected that this number will continue to grow as marketers
become more active in New Jersey and encourage customers to convert from PSE&G's
sales  tariff.  PSE&G has a proposal  pending  before  the BPU that would  offer
unbundled gas services to  residential  customers of four towns on a pilot basis
(see Competitive  Environment of MD&A).  Current  transportation  rate schedules
produce  the same  non-fuel  revenue  per therm as  existing  sales  tariff rate
schedules (see State Regulation (Electric) for a discussion of the NJGRT). Thus,
to date,  PSE&G's  earnings have been unaffected by whether the customers remain
on sales tariffs or convert to  transportation  service.  Enterprise's  indirect
subsidiary,  ERI, is a non-utility  gas marketing  company which operates in New
Jersey and several other states (see EDHI--ERI).

     Other State Regulatory Matters

     The New Jersey Public Utility Accident Fault  Determination Act (Fault Act)
requires the BPU to make a determination of fault with regard to any accident at
any electric 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 Fault Act,  means any  negligent  action or
omission  of any party which  either  contributed  substantially  to causing the
accident or failed to mitigate its severity. The Fault Act could have a material
adverse effect on PSE&G's  financial  position if such an accident were to occur
at a PSE&G facility,  it was ultimately  determined that the accident was due to
the fault of PSE&G and the BPU were to deny  recovery of all or a portion of the
costs related thereto.

     The Fault Act allows the affected utility to file for non-accident  related
rate  increases  during  such  fault  determination   hearings  and  to  recover
contributions to federally  mandated or voluntary  cost-sharing plans and allows
the BPU to authorize  the recovery of certain  fault-related  repair,  clean-up,
power  replacement and damage costs if substantiated  by the evidence  presented
and if authorized in writing by the BPU.

     Under New Jersey law,  the BPU is required to audit all or a portion of the
operating  procedures  and other  internal  workings  of every  gas or  electric
utility subject to its  jurisdiction,  including  PSE&G, at least once every six
years.  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 to promote  efficient  and  adequate  service to meet
public  convenience and necessity.  PSE&G cannot predict when the next BPU audit
of its operations will commence.

     As a result of a  follow-up  to  PSE&G's  last  management  audit,  the BPU
approved a plan which, among other things provides: (1) that Enterprise will not
permit EDHI's non-utility investments to exceed 20% of Enterprise's consolidated
assets  without prior notice to the BPU (such  investments  at December 31, 1996
were approximately 12% of assets); (2) that the PSE&G Board of Directors include
non-employee  Enterprise  directors,  with an annual certification by such Board
that the business and financing  plans of EDHI will not adversely  affect PSE&G;
(3) that  Enterprise  agree to (a) limit debt supported by the minimum net worth
maintenance  agreement between  Enterprise and Capital to $750 million,  and (b)
make a good-faith effort to eliminate such support over a six to ten year period
from  April  1993;  and (4) that EDHI pay PSE&G an  affiliation  fee of up to $2
million a year to be applied  by PSE&G  through  its  Levelized  Gas  Adjustment
Charge (LGAC) and Electric  Levelized Energy  Adjustment Clause (LEAC) to reduce
utility rates. Effective January 31, 1995, the debt supported by the minimum net
worth maintenance  agreement was limited to $650 million and the affiliation fee
was and will be  proportionately  reduced  as such  supported  debt is  reduced.
Enterprise  and EDHI and its  subsidiaries  continue to reimburse  PSE&G for the
costs of all services provided to them by employees of PSE&G.

     The issue of Enterprise  sharing the benefits of  consolidated  tax savings
with PSE&G or its  ratepayers was addressed by the BPU in a July 28, 1995 letter
which informed PSE&G that the issue of consolidated tax savings can be discussed
in the  context  of its next base rate case or plan for an  alternative  form of
regulation. The BPU's letter in this action served as closure of the most recent
management audit.  Enterprise believes that PSE&G's taxes should be treated on a
stand-alone basis for rate-making purposes,  based on the separate nature of the
utility and non-utility  businesses.  However,  neither  Enterprise nor PSE&G is
able to predict what action,  if any, the BPU may take concerning  consolidation
of tax benefits in future proceedings.

Construction and Capital Requirements

     For   information   concerning   investments,   construction   and  capital
requirements see Construction and Capital Requirements of MD&A, Note 7--Schedule
of Consolidated Debt, Note 8--Long-Term Investments and Note 13--Commitments and
Contingent Liabilities of Notes.

Financing Activities

     For a discussion  of issuance,  repurchase,  book value and market value of
Enterprise's Common Stock and external financing activities of Enterprise, PSE&G
and EDHI for the year 1996, see Liquidity and Capital Resources of MD&A and Item
5. Market for Registrant's Common Equity and Related Stockholder Matters.

     For  a  discussion   of  Capital  and  Funding,   see   EDHI--Capital   and
EDHI--Funding. For further discussion of long-term debt and short-term debt, see
Note 7--Schedule of Consolidated Debt of Notes.

Federal Income Taxes

     For information  regarding  Federal income taxes, see Note  1--Organization
and Summary of Significant  Accounting  Policies,  Note 3--Rate Matters and Note
11--Federal Income Taxes of Notes.

Credit Ratings

     The current  ratings of securities of Enterprise's  subsidiaries  are shown
below and  reflect the  respective  views of the rating  agencies,  from whom an
explanation of the  significance  of their ratings may be obtained.  There is no
assurance  that these ratings will continue for any given period of time or that
they will not be revised downward or withdrawn  entirely by the rating agencies,
if, in their  respective  judgments,  circumstances  so  warrant.  Any  downward
revision or  withdrawal  may adversely  effect the market price of  Enterprise's
Common Stock and PSE&G's securities and serve to increase the cost of capital of
PSE&G and EDHI.

                                                            Standard &   Duff &
                                                  Moody's     Poor's     Phelps
                                                  -------  -----------  -------
                       PSE&G
                       -----
Mortgage Bond...................................    A3         A-         A
Debenture Bond..................................    Baa1       BBB+       A-
Preferred Stock.................................    Baa1       BBB+       A-
Commercial Paper................................    P2         A2         Duff 1
Commercial Paper (PSE&G Fuel Corp)..............    P2         A2         Duff 1

     As a component of the ratings  noted above,  each rating  agency issues its
opinion of the  credit  trend or outlook  for  PSE&G.  Each of the three  rating
agencies  currently  evaluate  that outlook as negative.  Since the end of 1996,
Moody's,  Standard & Poor's and Duff & Phelps have  reviewed  and  affirmed  the
ratings noted above.

                                                            Standard &   Duff &
                                                  Moody's     Poor's     Phelps
                                                  -------  -----------  -------
                       EDHI
                       ----
                                       
Senior Debt (Capital)..........................     Baa2       BBB        BBB+

PSE&G

Rate Matters

     For information  concerning the New Jersey Energy Master Plan, PSE&G's rate
matters,   and  environmental   remediation  and  fuel  adjustment  clauses  see
Competitive  Environment-State  Regulation (Electric),  Note 1--Organization and
Summary of Significant  Accounting  Policies and Note 3--Rate  Matters of Notes.
For information  concerning  PSE&G's Under (Over) recovered  Electric Energy and
Gas Fuel Costs, see Note 6--Deferred Items of Notes.

Customers

     As of December  31,  1996,  PSE&G  provided  service to  approximately  1.9
million electric customers and 1.5 million 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,  1996,  PSE&G's  operating  revenues  aggregated  $5.8
billion,  of which  68% was from its  electric  operations  and 32% from its gas
operations. PSE&G's business is seasonal in that sales of electricity are higher
during the summer months because of air  conditioning  requirements and sales of
gas are  greater  in the winter  months due to the use of gas for  space-heating
purposes.

     1996 Revenues were derived as follows:

                                                       Revenues
                                                       --------
                                                  Electric   Gas
                                                  --------   ---
                                                  (Millions of Dollars)
                                                  ---------------------

     Residential..............................      $1,242     $ 932
     Commercial...............................       1,824       475
     Industrial...............................         652       318
     Transportation Service--Gas..............         --         88
     Other....................................         226        68
                                                    ------    ------
          Total...............................      $3,944    $1,881
                                                    ======    ======

     For  information  on the  impact of  competition  on PSE&G's  customer  and
revenue base, see  Competitive  Environment--State  Regulation  and  Competitive
Environment of MD&A.

Integrated Resource Plan (IRP)

     Pursuant to its IRP, PSE&G periodically reevaluates its forecasted customer
load and peak growth and the sources of electric  generating capacity and Demand
Side Management  (DSM) to meet such projected growth (see Demand Side Management
below).  The IRP takes  into  account  assumptions  concerning  future  customer
demand,  future cost trends,  especially fuel and purchased power expenses,  the
effectiveness  of  conservation  and load management  activities,  the long-term
condition of and projected  additions to PSE&G's  plants and capacity  available
from other electric  utilities and  non-utility  suppliers.  The IRP forecasts a
compound  annual rate of growth of 1.3% for electric system peak demand over the
period 1997-2001.

Pennsylvania--New Jersey--Maryland Interconnection (PJM)

     PSE&G is a member of the PJM which integrates the bulk power generation and
transmission  supply  operations  of 11 utilities in  Pennsylvania,  New Jersey,
Delaware,  Maryland,  Virginia and the District of  Columbia,  and, in turn,  is
interconnected  with other major electric utility  companies in the northeastern
part of the United  States.  The 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.
PSE&G's  output,  as shown under  Electric  Fuel Supply and  Disposal,  reflects
significant  amounts of purchased  power because at times it is more  economical
for PSE&G to  purchase  power  from PJM and  others  than to  produce  it. As of
December  31,  1996,  the  aggregate  installed  generating  capacity of the PJM
companies was 57,308  megawatts  (MW). The all time record peak one-hour  demand
experienced  by PJM was  48,524 MW which  occurred  on August 2,  1995.  PSE&G's
capacity  obligations to the PJM system vary from year to year due to changes in
system  characteristics.  PSE&G expects to have sufficient installed capacity to
meet its obligations during the 1997-2001 period.

     PSE&G is also a party to the Mid-Atlantic  Area Reliability  Council (MAAC)
which   provides  for  review  and   evaluation  of  plans  for  generation  and
transmission  facilities  and other matters  relevant to reliability of the bulk
electric supply systems in the Mid-Atlantic area.

     In July 1996, the member  companies of PJM,  except for PECO Energy Company
(PECO),  filed a proposal in response to Order No. 888 to reorganize PJM into an
Independent  System  Operator  (ISO)  to  administer  a  pool-wide   open-access
transmission  tariff  and to operate a  centrally  dispatched  bid-based  energy
market.  PECO filed a separate  proposal with FERC.  On November 13, 1996,  FERC
announced that it was rejecting the restructuring proposals of both PECO and the
other PJM companies due to concerns  regarding the  independence of the proposed
ISO, among other things.

     FERC's  November 13, 1996 Order  directed PJM to submit a single  consensus
pool  restructuring  proposal  after  gathering  public input.  Recognizing  the
difficulty of achieving a consensus on a comprehensive restructuring proposal by
the December 31, 1996 deadline for compliance with Order No. 888, FERC urged the
PJM companies to minimally comply by filing a pool-wide open access transmission
tariff and a reformed  pooling  agreement by year end. During December 1996, PJM
conducted five public meetings which resulted in a single  "interim"  compliance
filing at FERC on December 31, 1996.

     There  are  significant  differences  between  the PECO and the  other  PJM
companies'  approaches to the energy market and design of transmission  tariffs.
If the PECO rate  design  position  prevails,  the  result  could be an  adverse
revenue impact of up to $40 million annually to PSE&G due to transmission tariff
sensitivity.   Transmission   tariff   sensitivity  is  driven   principally  by
uncertainty with respect to the ultimate rate design  methodology FERC approves,
and the allocation of transmission costs of service of the various PJM companies
in the final FERC tariff.

     The PJM  Companies are currently  meeting among  themselves  and with other
interested stakeholders in an attempt to reach consensus on a more comprehensive
restructuring  of PJM,  including the  establishment of an ISO, with the goal of
making a consensus restructuring filing with FERC by May 31, 1997.

Power Purchases

     A component of PSE&G's IRP  consists of expected  capacity  additions  from
Non-utility  Generators (NUGs). NUG  projects  are  expected  to  comprise
approximately 6.5% of capacity resources  by 2005.  This  availability of NUG
generation reduces the need for PSE&G to build or acquire additional generation.

Demand Side Management (DSM)

     In order to  encourage  DSM,  the BPU  adopted  rules in 1991 to  encourage
utilities to offer DSM related load management and conservation services.  These
rules  were  re-adopted  in October  1996 with  minimal  changes.  The rules are
designed  to place DSM on equal  regulatory  footing  with supply side or energy
production  investments.  In its January 16, 1997 Draft Phase II report, the BPU
proposes that during the  transition to a  restructured  industry,  DSM programs
continue to be implemented by utilities and funded through rates. Initially, the
existing DSM rules would apply. For the longer term, the rules would be modified
to  reflect  increasing reliance on market forces to  drive DSM (see Competitive
Environment--State Regulation).

     PSE&G's  current DSM  Resource  Plan was approved by the BPU in 1995 and is
designed  to  encourage  investment  in  energy-saving  DSM  activities.   These
activities   involve  energy  saving  techniques  and   technologies,   such  as
high-efficiency  lighting  and  motors,  which help reduce  customer  demand for
energy.  The DSM  Resource  Plan  consists of two major  program  areas for both
electric and gas: (1) a core program which  includes many  specialized  programs
such as energy  audits,  seal-ups  and rebates for high  efficiency  heating and
cooling  equipment;  and (2) a standard offer program which is performance based
and  provides  payment  for  measurable   energy  savings   resulting  from  the
installation  of  qualified  measures  that  improve  the energy  efficiency  of
end-uses.

     PSE&G's IRP calls for PSE&G to utilize DSM to meet most of its incremental
resource needs for the next decade. PSE&G projects 417 MW of passive DSM and
397 MW of active DSM by the year 2001.

Electric Generating Capacity

     The following table sets forth certain  information as to PSE&G's installed
generating capacity as of December 31, 1996:

                                                  Installed
                                                 Capacity (a)
Source                                               (MW)          Percentage
----------------------------------------------  ---------------  --------------
Conventional Steam Electric
     Oil-fired (b).............................         1,723              17
     Coal-fired New Jersey (c).................         1,242              12
     Coal-fired Pennsylvania (mine mouth) (d)..           770               7
Combustion Turbine (e).........................         2,724              26
     Combined Cycle............................           890               9
     Diesel (d)................................             5              --
     Nuclear (d)
          New Jersey...........................         1,921              18
          Pennsylvania.........................           930               9
     Pumped Storage (d) (e)....................           200               2
                                                ---------------  --------------
               Total...........................        10,405             100
                                                ---------------  --------------

(a)    Excludes 664 MW of non-utility generation and 115 MW of capacity sales to
       Atlantic  City Electric  Company  (ACE),  Delmarva  Power & Light Company
       (DP&L) and GPU, Inc.
(b)    Units with aggregate capacity of 836 MW can also burn gas.
(c)    Can also burn gas.
(d)    PSE&G share of jointly owned facilities.
(e)    Primarily used for peaking purposes.

       For additional information, see Item 2. Properties--PSE&G--Electric
Properties.

     The capacity  available 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)  which PSE&G  experienced  in 1996 was 8,439 MW,  which  occurred on
August 23,  1996,  when the day's  output was  159,184  megawatt-hours  (MWH) of
electricity. The all time peak load record is 9,467 MW, which occurred on August
2, 1995, when the day's output was 182,404 MWH of electricity.

     PSE&G expects to be able to continue to meet the demand for  electricity on
its system  through  operation of available  equipment  and by power  purchases.
However, if periods of unusual demand should coincide with outages of equipment,
PSE&G  could find it  necessary  at times to reduce  voltage or curtail  load in
order to safeguard the continued operation of its system.

Nuclear Operations

     PSE&G  has an  ownership  interest  in five  nuclear  generating  units and
operates three of these, Salem Units 1 and 2 and Hope Creek. PECO operates Peach
Bottom Units 2 and 3. 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 ultimate authority to
determine  whether any nuclear  generating  unit may  operate.  For  information
concerning the performance of the nuclear units,  see Note  13--Commitments  and
Contingent Liabilities of Notes.


<PAGE>


     The scheduled 1997, 1998, and 1999 refueling outages,  ranging from five to
ten weeks in duration,  for PSE&G's five licensed  nuclear units are expected to
commence in the following months:

                                             Refueling Outages
                                  1997              1998            1999
------------------------       -------------    --------------   -------------
     Salem 1............           --               (a)              --
     Salem 2............           --               (a)              (a)
     Hope Creek.........        September           --             January
     Peach Bottom 2.....           --            September           --
     Peach Bottom 3.....        September           --            September

(a)    Refueling  outage will be scheduled to commence  approximately  18 months
       subsequent to Unit's return to service and 18 months thereafter.

     Salem

     Salem Generating  Station consists of two 1106 MW pressurized water nuclear
reactors (PWR) located in southern New Jersey on the Delaware River.  PSE&G owns
42.59% of the Salem units and operates  them on behalf of itself and three other
owners:  PECO--42.59%;  ACE--7.41%;  and  DP&L--7.41%.  As of December 31, 1996,
PSE&G's net book value was approximately  $214 million for Salem 1, $257 million
for Salem 2 and $155 million in common plant  between the two units.  Each Salem
unit  represents  approximately  4% of  PSE&G's  installed  electric  generating
capacity, approximately 2% of its total assets and approximately 3% to 4% of its
net utility plant in service.

     As  previously  reported,  Salem Units 1 and 2 were taken out of service by
PSE&G in the second  quarter of 1995 and remain  out of  service.  During  these
outages,  PSE&G has made  significant  changes and  improvements  related to the
people, processes and equipment at Salem to improve the long-term reliability of
the units.  During the course of these outages,  PSE&G has also been required to
address  certain generic issues  applicable to nuclear power plants,  which have
contributed to the length of the outages.

     Salem Unit 2 is in the final stage of preparation for restart.  The reactor
has been refueled and reassembled and the reactor coolant pumps have been tested
and placed in service. Over 90% of the total work activities have been completed
and  approximately  80% of the plant  systems  have been  restored.  The unit is
scheduled  to enter  Mode 4 in late  February/early  March 1997 which will allow
additional testing to be performed in preparation for start-up.

     A generic  letter  from the NRC (used to notify  the  nuclear  industry  of
issues affecting nuclear plants generally) identified an issue that has impacted
the Salem Unit 2 start-up  schedule.  This Generic Letter (96-06)  requested all
nuclear utilities,  including PSE&G, to review systems for potential waterhammer
events  (hydrodynamic  stress caused by steam  formation in a piping system) and
the impact that these events could have on the system's safety  function.  PSE&G
determined  that in order to  address  the  concerns  of Generic  Letter  96-06,
modifications  were necessary to the containment fan coil units of Salem Units 1
and 2, which provide  containment  air cooling.  As a result of  installation of
these modifications and the time required for NRC acceptance of PSE&G's proposed
resolution  of these  issues,  the  start-up  of Salem Unit 2 has been  delayed,
resulting in an expected return to service in the second quarter of 1997.

     Salem Unit 1 is  expected  to return to service in the Fall of 1997,  after
replacement of the unit's four steam generators,  which was required in order to
correct a generic problem with certain PWRs. Removal of the old steam generators
has been  completed and  installation  of the new steam  generators is underway.
Salem Unit 1 will also require  modifications similar to Salem Unit 2 to respond
to Generic  Letter  96-06,  but such  modifications  are not expected to further
delay that unit's return to service.

     At the January 1997 semi-annual NRC Senior  Management  Meeting,  the Salem
Units  were  placed on the NRC's  Watch  List and  designated  as a  Category  2
facility (i.e., a plant that is authorized to operate, but one that the NRC will
monitor  closely).  In a letter to PSE&G  advising of the action,  the NRC noted
that this action was not due to any  performance  problems or decline during its
current  evaluation  period.  The letter stated that the NRC staff was satisfied
with the  overall  approach  being  taken by PSE&G to return the Salem  Units to
service.  The letter  acknowledged  many positive  steps that have been taken at
Salem including the strong  management  team that has been  assembled,  numerous
plant components that have been refurbished or replaced,  extensive training and
requalification   programs  for  the  operations  and  maintenance   staffs  and
strengthened  engineering  support.  However,  the letter  indicated  that Salem
should have been  previously  designated as a Category 2 plant and that it would
not be  ready  to  leave  that  status  until  satisfactory  integrated  station
performance at power could be observed.

     Restart of the units is subject to  completion of the  requirements  of the
restart  plan to the  satisfaction  of PSE&G and the NRC,  which  encompasses  a
review and improvement of personnel,  process and equipment  issues.  On January
14, 1997,  Senator Joseph Biden of Delaware wrote to the NRC to request that the
full  Commission  vote on the decision to restart Salem,  rather than permit the
NRC staff to authorize  the restart  under  applicable  NRC rules.  By letter to
Senator Biden dated February 20, 1997, the NRC advised that it would not require
a full  commission vote on Salem restart.  The inability to successfully  return
these units to continuous,  safe operation could have a material  adverse effect
on the financial position, results of operations or net cash flows of Enterprise
and PSE&G.

     The outage of a Salem unit causes PSE&G to incur replacement power costs of
approximately $4 to $6 million per month. Such amounts vary, however,  depending
on the availability of other generation,  the cost of purchased energy and other
factors,  including  modifications to maintenance  schedules of other units. For
certain  litigation  relating to Salem,  see Item 3--Legal  Proceedings and Note
13--Commitments and Contingent Liabilities of Notes. For discussion of the costs
related to the Salem shutdown, see Nuclear Operations of MD&A.

     Hope Creek

     Hope Creek Generating Station consists of one 1031 MW boiling water nuclear
reactor (BWR) located in southern New Jersey on the Delaware  River  adjacent to
Salem.  PSE&G owns 95% of Hope Creek and  operates  the unit on behalf of itself
and ACE, which owns the remaining 5%. As of December 31, 1996,  PSE&G's net book
value for Hope Creek was  approximately  $2.9  billion.  Hope  Creek  represents
approximately   9%  of   PSE&G's   installed   electric   generating   capacity,
approximately  20% of its total assets and  approximately 28% of its net utility
plant in service.

     Hope Creek  successfully  completed  its sixth  refueling  and  maintenance
outage in March 1996. An outage at Hope Creek causes PSE&G to incur  replacement
energy costs of approximately  $10 to $16 million per month.  Such amounts vary,
however,  depending  upon  the  availability  of other  generation,  the cost of
purchased  energy  and other  factors  including  modifications  to  maintenance
schedules of other units.

     On  December  24,  1996,  the NRC  issued its  latest  periodic  Systematic
Assessment of Licensee  Performance  (SALP) report for Hope Creek for the period
between  April  23,  1995 and  November  9,  1996.  The NRC noted  that  overall
performance  improved  during the SALP period,  after a  significant  decline in
performance  that  occurred  early in the  period.  Further,  the NRC noted that
PSE&G's  actions  to  address  the  areas  of  concern,  once  identified,  were
comprehensive and generally effective. Three areas, Operations,  Maintenance and
Engineering,  were each rated  Category 2, as they had been in the previous SALP
rating.  Improvements  were noted in these areas with most of the improvement in
Operations and Maintenance occurring later in the period. The fourth area, Plant
Support,  was also rated Category 2, a decline from the previous SALP rating due
to problems  principally  with  security,  radiation  protection  and  emergency
preparedness   implementation.   Weaknesses  in  communication   contributed  to
performance issues across the organization.

     Peach Bottom

     Peach Bottom Atomic Power  Station  consists of two 1093 MW BWRs located in
Southeastern  Pennsylvania  on the  Susquehanna  River.  PECO owns 42.49% of the
Peach Bottom units and operates them on behalf of itself and three other owners:
PSE&G 42.49%;  ACE 7.51%;  and DP&L 7.51%. As of December 31, 1996,  PSE&G's net
book value was  approximately  $203  million for Peach Bottom 2 and $209 million
for Peach  Bottom 3. Each  Peach  Bottom  unit  represents  approximately  4% of
PSE&G's installed electric generating capacity,  approximately 1.5% of its total
assets and approximately 2% of its net utility plant in service.

     Peach Bottom 2 successfully completed a scheduled refueling and maintenance
outage in November 1996. The outage of a Peach Bottom unit causes PSE&G to incur
additional  replacement energy costs of approximately $4 to $6 million per month
per unit. Such amounts vary,  however,  depending upon the availability of other
generation,   the  cost  of  purchased   energy  and  other  factors   including
modifications to maintenance schedules of other units.

     Other Nuclear Matters

     In 1990,  General  Electric  (GE)  reported  that  crack  indications  were
discovered  near the seam welds of the core shroud  assembly in a GE BWR located
outside the United States.  As a result,  GE issued a letter requesting that the
owners of GE BWR plants take interim corrective actions.  PSE&G (Hope Creek) and
PECO (Peach  Bottom)  participated  in a GE BWR Owners'  Group to evaluate  this
issue and  develop  long-term  corrective  actions.  During  its 1994  refueling
outage,  PSE&G  inspected  the  shroud  of Hope  Creek in  accordance  with GE's
recommendations  and found no cracks. In June 1994, an industry group was formed
and subsequently  established generic inspection  guidelines which were approved
by the NRC.  Hope Creek has been  placed in the lowest  susceptibility  category
under these guidelines.  Hope Creek must do another shroud inspection during its
next  refueling  outage in 1997,  or  perform a  preemptive  repair  that  would
maintain  the  structural  integrity  of the shroud  under all normal and design
basis accident conditions for the remaining life of the plant.

     PECO has advised  PSE&G that Peach  Bottom 3 was  examined  during its 1995
refueling outage and that its examinations disclosed that the extent of cracking
identified was to be within industry-established  guidelines and that there is a
substantial  margin for each core shroud weld to allow for continued  operations
of Unit 3. PECO has also advised that Peach Bottom 2 was reinspected  during its
1996 refueling  outage.  The examinations  disclosed that while additional minor
flaw indications were discovered,  PECO concluded,  and the NRC concurred,  that
neither  repair  nor  modification  to the core  shroud was  necessary  prior to
restarting the reactor.

     In a separate matter, as a result of several BWRs experiencing  clogging of
some emergency core cooling  system suction  strainers,  which supply water from
the suppression pool for emergency  cooling of the core and related  structures,
the NRC issued a  Bulletin  in May 1996 to  operators  of BWRs  requesting  that
measures be taken to minimize the potential  for clogging.  The NRC has proposed
three resolution options, with a request that actions be completed by the end of
the unit's first  refueling  outage after January 1997.  Alternative  resolution
options  will be  subject  to NRC  approval.  PSE&G  has  responded  to the NRC,
indicating its intention to comply with the Bulletin,  and expects to submit its
planned  actions and  schedules  for Hope Creek after the NRC approves a utility
resolution guidance document. PECO has advised PSE&G that large capacity passive
strainers  will be  installed  at Peach  Bottom  Units 3 and 2 during their next
refueling  outages in September  1997 and September  1998,  respectively.  PSE&G
cannot predict what other actions, if any, the NRC may take in this matter.

     In August 1996,  the NRC conducted an  inspection of the Physical  Security
Program  for Salem and Hope  Creek.  Based on the  results  of that  inspection,
apparent  violations  were  identified.  On December 11, 1996,  PSE&G received a
$100,000  civil penalty for two severity level III violations and three severity
level IV violations were received with no civil penalty.  PSE&G will not dispute
these violations.

     In October 1996,  PSE&G and PECO, along with other nuclear plant operators,
received a request for  information  from the NRC  regarding  the  adequacy  and
availability  of each  plant's  design  bases data.  The NRC is  requiring  that
information  be  submitted  under  oath  and  affirmation  to  provide  it added
confidence  and  assurance  that all nuclear  units are operated and  maintained
within the design bases of the facilities  and that any deviations  have been or
will be reconciled in a timely manner.  PSE&G  responded to the NRC's request on
February  11, 1997 with a detailed  description  of ongoing  activities  and new
initiatives  to ensure  that Salem and Hope Creek are  operated  and  maintained
within their design bases.  Since the  information  which was submitted  will be
used  by  the  NRC to  determine  follow-up  inspection  activity  or  potential
enforcement  actions,  PSE&G  cannot at this time  predict what impact the NRC's
request will have.

     On December 11, 1996,  PSE&G  received a severity level II violation and an
$80,000 civil  penalty from the NRC for apparent  violations  which  occurred in
1993 and early 1994, involving alleged  discrimination against two employees for
their engagement in protected activities in accordance with federal regulations.
PSE&G will not dispute this violation.

     Nuclear Decommissioning

     In accordance with the Nuclear Waste Policy Act of 1982, as amended (NWPA),
utilities  owning an interest in nuclear  generating  facilities are required to
determine  the  costs  and  funding  methods   necessary  to  decommission  such
facilities upon termination of operation.  As a general  practice,  each nuclear
utility  places funds in  independent  external  trust  accounts it maintains to
provide for  decommissioning.  PSE&G  currently  recovers from its customers the
amounts  paid into the  trust  fund  over a period  of  years.  For  information
concerning   nuclear   decommissioning   costs,   see  Note   4--PSE&G   Nuclear
Decommissioning of Notes.


<PAGE>


Electric Fuel Supply and Disposal

     The following table indicates PSE&G's MWH output by source of energy:

                                                             Actual    Estimated
Source                                                        1996       1997
---------------------------------------------------------   --------   ---------
     Nuclear
        New Jersey facilities............................        15%         27%
        Pennsylvania facilities..........................        17          15
     Fossil
        Coal
          New Jersey facilities..........................         9          12
          Pennsylvania facilities........................        13          12
        Natural Gas......................................         5           5
        Residual Oil.....................................         0           0
     Net PJM Interchange and Purchases From Utilitiesd
     and NUGs............................................        41          29
                                                            --------   ---------
               Total.....................................       100%        100%

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

<TABLE>
<CAPTION>
                                                                                      NATURAL 
                NUCLEAR                           COAL                                  GAS                    OIL
                -------                           ----                               ----------     ------------------------
                                                                                       
                                    NEW JERSEY                PENNSYLVANIA
                                    FACILITIES                FACILITIES
                               ----------------------    ----------------------
                  Cents/                      Cents/                   Cents/           Cents/                      Cents/
                 Million                     Million                  Million          Million                     Million
  Year             BTU           $/Ton         BTU        $/Ton          BTU             BTU         $/Barrel        BTU
---------       ---------      ---------    ---------    --------    ----------      ----------     ----------    --------
<S>              <C>             <C>          <C>         <C>           <C>              <C>           <C>         <C>   
  1994           62.3            56.31        213.8       34.78         140.7            197.8         22.19       361.02
  1995           60.8            58.29        214.0       33.30         134.4            176.6         20.17       324.50
  1996           55.7            53.85       205.32       34.67        140.35           325.92         29.02       476.84
</TABLE>


PSE&G's  current  electric rate  structure is designed to permit the recovery of
fuel costs on a current annual basis (see Note 3--Rate Matters of Notes).

     Nuclear Fuel

     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 the uranium hexafluoride gas,
conversion  of  the  enriched  gas to  fuel  pellets  and  fabrication  of  fuel
assemblies.

     PSE&G has several long-term contracts with ore operators to process uranium
ore to uranium concentrate to meet the currently projected  requirements for the
Salem and Hope Creek units fully through the year 2001 and,  thereafter,  50% of
their requirements through the year 2003.

     The length of contracts for conversion, enrichment and fabrication services
to meet the fuel cycle  requirements for Salem and Hope Creek units are shown in
the following table:

        Nuclear Unit                Conversion   Enrichment    Fabrication
        ------------                ----------   ----------    -----------
Salem 1......................           2001         (1)            2004
Salem 2......................           2001         (1)            2005
Hope Creek...................           2001         (1)            2000

(1)    100%  coverage  through  1998;   approximately   50%  through  2002;  and
       approximately   30%  through  2004.   PSE&G  does  not   anticipate   any
       difficulties in obtaining necessary  enrichment service for its Salem and
       Hope Creek units.

     PSE&G has been  advised by PECO that it has  contracts  for the purchase of
uranium which will satisfy the fuel requirements of Peach Bottom 2 and 3 through
2002.  PECO has also  advised  PSE&G that it has  contracted  for the  following
segments of the nuclear  fuel supply  cycle for Peach Bottom 2 and 3 through the
following years:


<PAGE>


        Nuclear Unit                Conversion   Enrichment    Fabrication
        ------------                ----------   ----------    -----------
Peach Bottom 2...............           2001        2004            1999
Peach Bottom 3...............           2001        2004            2000

     Coal

     Approximately  40% of PSE&G's coal supply for its New Jersey  facilities is
obtained  under a contract  which expires in 1999.  The balance of the supply is
contracted annually from various suppliers, with many of whom PSE&G has dealt on
a continuing basis for a number of years, supplemented by spot market purchases.
PSE&G does not presently  anticipate any difficulties in obtaining adequate coal
supplies.

     PSE&G has  approximately  a 23%  interest  in the  Keystone  and  Conemaugh
coal-fired  generating stations located in Western  Pennsylvania and operated by
Pennsylvania Electric Company. At least 71% of the fuel required by the Keystone
station is supplied by one coal company under a contract which expires  December
31, 2004. At least 30% of the fuel required by Conemaugh  station is supplied by
another coal company under a contract  which  expires on December 31, 1997.  The
balance of the fuel  requirements  for each  station is  supplied  through  spot
purchases obtained from local suppliers. The Keystone Conemaugh Projects Office,
which runs project  administration  at these  plants on a day to day basis,  has
advised  PSE&G  that  it does  not  presently  anticipate  any  difficulties  in
obtaining adequate coal supplies. (See Environmental Controls).

     Natural Gas

     PSE&G  utilizes  natural gas available from various spot and short-term gas
contracts, to replace other fuels for electric generation.  Presently, there are
no legal  restrictions  on the use of natural  gas for  electric  generation  in
existing  plants.  PSE&G  does not  presently  anticipate  any  difficulties  in
obtaining natural gas supplies.

     Oil

     PSE&G uses residual oil in its  conventional  fossil-fired,  steam-electric
units. The supply of residual oil is furnished by spot market  purchases.  PSE&G
uses distillate  fuel in its combustion  turbines which is also acquired by spot
market  purchases.  PSE&G does not  presently  anticipate  any  difficulties  in
obtaining oil supplies.

     Nuclear Fuel Disposal

     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.
Under NWPA, the Federal government has entered into contracts for transportation
and ultimate disposal of the spent fuel. The Federal government's present policy
is that  spent  nuclear  fuel will be  accepted  for  storage  and  disposal  at
government-owned  and  operated  repositories.  However,  at  present,  no  such
repositories are in service or under construction. The U.S. Department of Energy
(DOE) has  announced  that it will not be able to open a  permanent,  high-level
nuclear waste storage repository until 2010, at the earliest.  However,  the DOE
has also indicated that progress on the repository  would be delayed beyond 2010
if  sufficient  funds,  though  available  in the Nuclear  Waste  Fund,  are not
appropriated by the Congress for this program.

     In conformity with the NWPA,  PSE&G entered into contracts with the DOE for
the disposal of spent  nuclear fuel from Salem and Hope Creek.  Similarly,  PECO
contracted  with the DOE in  connection  with Peach  Bottom 2 and 3. Under these
contracts, the DOE is required to take title to the spent fuel at the site, then
transport  it and provide for its  permanent  disposal at a cost of one mill per
KWH of nuclear  generation,  subject to such  escalation  as may be  required to
assure full cost  recovery by the Federal  government.  In addition,  a one-time
payment was made to the DOE for permanently  discharged  spent fuels  irradiated
prior to 1983.

     On September 7, 1995, PSE&G,  along with other utilities,  filed a petition
for review of DOE's Final  Interpretation  on nuclear waste acceptance issues in
the U.S.  District  Court of Appeals for the District of Columbia  Circuit.  The
petition was  consolidated  with a similar  petition by a group of 40 states and
state  agencies.  On July 23, 1996,  the Court of Appeals  ruled in favor of the
petitioners. The Court rejected DOE's interpretation of its statutory obligation
as contingent upon operation of a facility  constructed  under the NWPA and held
that the statutory obligation to commence spent nuclear fuel acceptance no later
than January 31, 1998 is "without qualification or condition". The Court further
held that the DOE has  admitted  an  anticipatory  breach of its  statutory  and
contractual  obligation by announcing  that DOE anticipates it will be unable to
begin  acceptance  of spent  nuclear  fuel for  disposal  or interim  storage by
January 31, 1998.  On January 31,  1997,  a coalition  of 36 electric  utilities
including  PSE&G filed a lawsuit in the U.S.  District  Court of Appeals for the
District of Columbia Circuit. This lawsuit asks the Court to order the utilities
to place  payments  to the  Nuclear  Waste Fund after  February  1, 1998 into an
escrow  account,  and not provide  these funds to the DOE until it fulfills  its
obligations.  In addition to the utilities' suit, 46 state agencies have filed a
similar combined lawsuit against the DOE.

     Pursuant to NRC rules,  spent nuclear fuel  generated in any reactor can be
stored in reactor  facility  storage pools or in independent  spent fuel storage
installations  located  at reactor  or  away-from-reactor  sites for at least 30
years beyond the licensed life for reactor operation (which may include the term
of a revised or renewed license).

     As  a  result  of  reracking  the  two  spent  fuel  pools  at  Salem,  the
availability of adequate spent fuel storage  capacity is estimated  through 2008
for Salem 1 and 2012 for  Salem 2,  prior to  losing  an  operational  full core
discharge reserve. The current shutdown of the Salem Units is expected to extend
these dates further by a few years. The Hope Creek pool is also fully racked and
it is expected to provide storage  capacity until 2006, again prior to losing an
operational  full core discharge  reserve.  The units can be safely operated for
many years beyond these dates, as pool storage  capacity is expected to continue
to be  available.  In addition,  PECO has advised PSE&G that spent fuel racks at
Peach  Bottom have storage  capacity  until 2000 for Unit 2 and 2001 for Unit 3,
prior to losing full core  reserve  capability,  and that  expansion  of storage
capacity beyond such dates is being investigated.

Low Level Radioactive Waste (LLRW)

     As a by-product of their operations,  nuclear  generating units,  including
those in which PSE&G owns an interest,  produce LLRW. Such wastes include paper,
plastics, protective clothing, water purification materials and other materials.
Such materials are  accumulated on site and disposed of at a federally  licensed
permanent disposal facility in Barnwell, South Carolina.

     In 1991,  New  Jersey  enacted  legislation  providing  for  funding of the
estimated $90 million cost of establishing a LLRW disposal facility.  New Jersey
would recover the costs through fees paid by LLRW  generators.  PSE&G's  overall
share is expected to be about 40% of the total cost and has provided  about $4.8
million  to date.  New Jersey  has  introduced  a  volunteer  siting  process to
establish a LLRW disposal  facility by the year 2000.  Public meetings have been
held across the state in an effort to provide information to and obtain feedback
from the public. To date, there have been no voluntary sites identified.

     Because of the  uncertainties  regarding  disposal,  PSE&G built an on-site
facility  which was  completed in September  1994.  This  facility provides five
years of  storage for LLRW from Hope Creek and Salem. The facility was used from
July 1994  through  June  1995,  while the  Barnwell  facility  was  temporarily
unavailable,  and emptied when  Barnwell  re-opened in 1995. It will be used for
interim storage of radioactive  materials and waste,  and if it proves necessary
in the future,  to temporarily store waste until New Jersey provides a permanent
disposal facility.

     PECO has advised  PSE&G that it has an on-site  LLRW  storage  facility for
Peach Bottom, which will provide at least 5 years of temporary storage. PECO has
also advised PSE&G that  Pennsylvania is pursuing its own LLRW site  development
via state-selected candidate sites, along with a volunteer plan option.

Gas Operations and Supply

     PSE&G  supplies its gas  customers  principally  with  natural  gas.  PSE&G
supplements  natural  gas with  purchased  refinery/landfill  gas and  liquefied
petroleum gas produced from propane.  The adequacy of supply of all types of gas
is affected by the nationwide availability of all sources for energy production.


<PAGE>


     As of December 31, 1996, the daily gas capacity of PSE&G was as follows:

Type of Gas                                    Therms Per Day
--------------------------------------      -----------------
Natural gas...........................             23,099,000
Liquefied petroleum gas...............              2,200,000
Refinery/landfill gas.................                323,000
                                            =================
        Total.........................             25,622,000
                                            =================

     About 40% of the daily gas capacity is high load factor  natural gas and is
available  every  day of the year.  The  remainder  comes  from  field  storage,
liquefied  natural gas,  seasonal sales,  contract  peaking supply,  propane and
refinery/landfill gas. PSE&G's total gas sold to and transported for its various
customer classes in 1996 was 3.9 billion therms which consisted of approximately
96% natural gas.  Included in this amount is 1.6 billion therms of gas delivered
to customers under PSE&G's  transportation  tariffs and individual  cogeneration
contracts.  During 1996, PSE&G purchased approximately 3.3 billion therms of gas
for its combined gas and electric operations directly from natural gas producers
and  marketers.  These  supplies were  transported to New Jersey by PSE&G's four
interstate pipeline suppliers.

     The majority of PSE&G's gas supply  contracts  expire at various times over
the next two to ten years. PSE&G does not presently anticipate any difficulty in
negotiating  replacement  contracts.  Since the  quantities  of gas available to
PSE&G under its supply  contracts are more than  adequate in warm months,  PSE&G
nominates part of such quantities for storage, to be withdrawn during the winter
season,  under  storage  contracts  with its  principal  suppliers.  Underground
storage capacity  currently is approximately 770 million therms.  PSE&G does not
presently  anticipate any difficulty in obtaining  adequate  supplies of natural
gas.

     PSE&G's annual average cost of natural gas sendout is shown below:

                                      Cents Per
Year                               Million BTU(a)
----------------------------       --------------
1996........................           370.00
1995........................           308.00
1994........................           318.09

(a)    Excludes  contribution  by  PSE&G's  electric  operating  units for a gas
       reservation charge and natural gas refunds from suppliers.

     Substantially  all of  PSE&G's  gas sales are made  under  rates  which are
currently designed to permit the recovery of projected  increases in the cost of
natural gas and gas from supplemental  sources, when compared to levels included
in base rates on a current annual basis. (See Note 3--Rate Matters of Notes.)

     The  demand  for  gas  by  PSE&G's   customers   is  affected  by  customer
conservation,  economic conditions,  weather, the price relationship between gas
and alternative fuels and other factors not within PSE&G's control.  Gas sold in
interstate  commerce is now  deregulated  and is subject to market forces.  FERC
actions  have  required  pipeline  customers,  such as PSE&G,  to convert  their
pipeline sales contracts to  transportation  agreements and purchase natural gas
supplies  directly  from  producers or other  sellers of natural  gas.  This has
increased competition in the gas market by encouraging pipeline companies to act
as  nondiscriminatory  transporters of natural gas. PSE&G has taken advantage of
these actions to lower its overall gas costs through the  displacement of higher
cost contract supplies with lower cost spot gas purchases and long-term producer
contract supplies (see Competitive Environment--State Regulation (Gas)).

     PSE&G was able to meet all of the demands of its firm customers  during the
1995-96  winter  season and  expects  to  continue  to meet such  energy-related
demands of its firm customers  during the 1996-97 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 for the production of supplements to its natural gas
supply.

Employee Relations

     Enterprise has no employees. As of December 31, 1996, PSE&G employed 10,621
persons. Six-year collective bargaining agreements with all of its union groups,
representing  6,420 PSE&G  employees  expire on April 30, 2002. Also at December
31, 1996,  EDHI and its  subsidiaries  employed  320  persons,  of which 36 were
represented  by unions.  PSE&G,  EDHI and their  subsidiaries  believe that they
maintain satisfactory relationships with their employees.

     For   information   concerning   the   employee   pension  plan  and  other
postretirement  benefits,  see Note  1--Organization  and Summary of Significant
Accounting Policies,  Note  14--Postretirement  Benefits Other Than Pensions and
Note 15--Pension Plan of Notes.

Environmental Controls

     PSE&G,  like most  industrial  enterprises,  is subject to regulation  with
respect to the environmental impacts of its operations,  including air and water
quality  control,  limitations on land use,  disposal of wastes,  aesthetics and
other  matters  by  various  federal,  regional,  state and  local  authorities,
including the U.S. Environmental Protection Agency (EPA), the U.S. Department of
Transportation  (USDOT),  the New Jersey Department of Environmental  Protection
(NJDEP), the New Jersey Department of Health, the BPU, the Interstate Sanitation
Commission,  the Hackensack Meadowlands  Development  Commission,  the Pinelands
Commission, the Delaware River Basin Commission (DRBC), the U.S. Coast Guard and
the U.S.  Army  Corps of  Engineers.  CEA and EGDC are also  subject  to similar
regulation with respect to operation of their facilities. (See EDHI)

     Environmental  laws generally require air emissions and water discharges to
meet specified limits.  They also impose potential joint and several  liability,
without regard to fault,  on the generators of various  hazardous  substances to
manage  these  materials  properly  and to clean  up  property  affected  by the
production  and  discharge of such  substances.  Compliance  with  environmental
requirements  has  caused  PSE&G  to  modify  the  day-to-day  operation  of its
facilities,  to participate in the cleanup of various  properties that have been
contaminated  and to modify,  supplement  and  replace  existing  equipment  and
facilities.  During 1996, PSE&G expended  approximately  $32 million for capital
related  expenditures  to  improve  the  environment  and comply  with  changing
regulations.  It is estimated that PSE&G will expend  approximately $24 million,
$22 million and $28 million in the years 1997 through  1999,  respectively,  for
such purposes.  Such amounts are included in PSE&G's  estimates of  construction
expenditures. (See MD&A--Liquidity and Capital Resources.)

     Preconstruction  analyses and projections of the  environmental  impacts of
contemplated activities, discharges and emissions are frequently required by the
permitting  agency.  Before  licensing  approvals  and permits are granted,  the
agency usually requests a modeling analysis of the effects of a specific action,
and of its effect in combination  with other existing and permitted  activities,
and may request the applicant to address  emerging  environmental  issues.  Such
environmental  reviews  have  caused  delays in the  proceedings  for  licensing
facilities and similar delays can be expected in the future.

     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  which is designed to prevent
or minimize pollution, impairment or destruction of the environment, or where no
such violation exists, to protect the environment from pollution,  impairment or
destruction.  Certain Federal legislation confers similar rights on individuals.
The principal laws and regulations relating to the protection of the environment
which affect PSE&G's operations are described below.

     Air Pollution Control

     The Federal  Clean Air Act (CAA)  imposes  emission  control  requirements,
including  requirements related to the emissions of sulfur dioxide (SO2) and NOx
and requires  attainment of National Ambient Air Quality Standards (NAAQS).  The
CAA also requires that each major facility apply for and receive a facility wide
operating  permit.  The facility wide operating  permit terms and conditions are
enforceable by both the EPA and NJDEP.  PSE&G filed permit  applications for its
major  facilities  in New Jersey in 1995.  The  operating  permit  program  will
require  some PSE&G  facilities  to assess  emissions,  which could  require the
installation of emission monitoring equipment and changes to facility operations
of technology.

     PSE&G also has  approximately  a 23%  interest in Conemaugh  and  Keystone,
coal-fired generating stations located in western Pennsylvania.  With respect to
Conemaugh, in order to comply with the CAA SO2 requirements, scrubbers (flue gas
desulfurization systems) have been installed.  Keystone is presently expected to
comply with the SO2  requirements by utilizing  excess emission  allowances from
the over-scrubbing of the fuel supply of the Conemaugh units.

     In New Jersey,  NJDEP is using the New Jersey Air  Pollution  Control  Code
(NJAPCC) to achieve  compliance  with, and maintenance of, the NAAQS. The NJAPCC
provides stringent  requirements  restricting the sulfur content in coal and oil
fuels.

     To the  extent  estimates  of the  capital  costs  of  complying  with  CAA
requirements  through  the year  2001 are  quantifiable,  they are  included  in
PSE&G's construction  expenditures (see Construction and Capital  Requirements).
In addition,  the revised CAA  requirements  will increase the cost of producing
electricity  for the  Pennsylvania  and  Ohio  Valley  Region  generating  units
supplying electricity to the PJM and New Jersey.

     In  non-attainment  areas,  one  of the  effects  of  the  CAA is to  allow
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 prevention of  significant  deterioration
areas, new construction or major expansion of a facility would be permitted only
if emissions  from the source,  together with  emissions from other expected new
sources,  would not violate air quality  increments for  particulates and sulfur
dioxide that are more stringent than NAAQS. All of these requirements may affect
PSE&G's  ability to locate,  construct or expand  generating  facilities  in the
future.

     PSE&G has been working  collaboratively  with  environmentalists,  a select
number of other electric  utilities in the Northeast,  NJDEP and other Northeast
environmental  regulators,  EPA and a number of large manufacturing companies to
achieve significant  emission  reductions from power plants in the Midwest.  The
achievement  of  significant  emission  reductions  from Midwest power plants is
expected to improve the Northeast's air quality,  thereby lessening the need for
additional New Jersey emission controls over and beyond those already in effect.

     These collaborative efforts,  coupled with growing environmental  regulator
and industry concerns for cost-effective compliance with CAA requirements,  have
resulted in the creation of a thirty-seven  state environment forum called Ozone
Transport Assessment Group (OTAG). This includes Midwest, Northeast and Southern
states east of the  Mississippi  River.  OTAG's charter is to produce  consensus
recommendations  concerning  the need for  additional  emission  controls and to
identify the level and sources to which those controls  should be applied.  OTAG
is expected to conclude its work by the Spring of 1997.

     The issue of  transported  air pollution  from the Midwest power plants and
their negative  impact on air quality in the Northeast has become the subject of
concern  before  the  FERC.  The FERC  performed  a draft  environmental  impact
statement to assess the environmental  impact of developing its Order No. 888 by
which  electric  utilities  will be required to provide  full  nondiscriminatory
transmission  access to all  wholesale  power  providers.  PSE&G and a number of
other utilities,  environmental groups and regulators submitted comments seeking
FERC's  mitigation of expected  additional power plant emissions  resulting from
the  implementation  of  Order  No.  888 (see  Competitive  Environment--Federal
Regulation (Electric)). The results of such studies and its effect on New Jersey
are currently being assessed within the draft Phase II report.

     CEA Eagle Point, Inc. (Eagle Point), an indirect  subsidiary of CEA, is one
partner in a partnership which owns the Eagle Point Cogeneration Facility (EPC),
located in West Deptford,  New Jersey.  EPC is operated by an affiliate of Eagle
Point's  partner and provides  electricity  and steam for an adjacent  petroleum
refinery (owned and operated by another  affiliate of Eagle Point's partner) and
sells excess  electricity  to PSE&G.  In 1995,  Eagle Point received a Notice of
Violation  (NOV)  from  Region II of EPA  alleging  violations  of  certain  CAA
requirements  and limitations  related to the air permit at EPC and the adjacent
refinery and  demanding  that such  violations be  corrected.  Eagle Point,  its
partner and the operator of the refinery are contesting the EPA conclusion  that
violations  have  occurred  and have met with  staff of EPA and NJDEP to discuss
issues  related to the NOV. As a result of discussions  with NJDEP,  Eagle Point
received a modified air permit from NJDEP during January 1997. No further action
was taken by EPA during 1996. Applicable  regulations provide EPA with the power
to seek to collect  criminal and civil penalties for continued  violation of the
provisions of air permits.

     Water Pollution Control

     The Federal Water Pollution  Control Act (FWPCA)  authorizes the imposition
of technology  and  water-quality  based  effluent  limitations  to regulate the
discharge of pollutants into the surface waters of the United States through the
issuance of National Pollutant Discharge Elimination System (NPDES) permits. The
New Jersey Water Pollution Control Act (NJWPCA) authorizes the NJDEP to regulate
discharges  to surface  waters and ground  waters of the State  through  the New
Jersey  Pollutant  Discharge  Elimination  System (NJPDES)  permits.  NJDEP also
administers  the  NPDES/NJPDES  permit  program.  Certain PSE&G  facilities  are
directly regulated by NJPDES permits issued pursuant to FWPCA and the NJWPCA.

     The FWPCA also  authorizes the imposition of less stringent  thermal limits
pursuant  to a  variance  procedure  set  forth in its  Section  316(a)  and the
regulation of cooling water intake  structures  pursuant to its Section  316(b).
PSE&G has filed information with the NJDEP in support of Section 316(a) variance
requests and Section 316(b) best technology available determinations for several
of its electric generating stations which are pending before the NJDEP presently
and may be required to submit  information for other stations as a result of the
permit  renewals.  With respect to Section  316(b)  requirements,  pursuant to a
court order,  the EPA must propose draft  regulations on or before July 1999 and
promulgate  final  regulations  by August  2001.  While the content and scope of
these regulations cannot be predicted at this time, they may have a considerable
effect on agency  review of  section  316(b)  determinations  pending in 1999 or
after.

     A brief  discussion on pending permit  proceedings at the Hudson and Mercer
Stations  which  have the  potential  to impose new or more  stringent  terms or
conditions which could require changes to operations or significant expenditures
follows:

     Hudson  Station's  NJPDES  permit is in the process of being renewed by the
NJDEP. As part of that renewal,  the NJDEP has requested updated  information in
connection  with PSE&G's 316(a) and 316(b)  demonstrations,  in part, to address
issues  identified by a consultant  hired by NJDEP.  The consultant  recommended
that  Hudson be  retrofitted  to operate  with closed  cycle  cooling to address
alleged  adverse  impacts  associated  with the  thermal  discharge  and  intake
structure.  PSE&G is in the process of collecting  additional data which will be
used in the updated demonstrations. PSE&G anticipates submitting these documents
to NJDEP in the second  quarter of 1998.  While it is  impossible to predict the
NJDEP's  determinations on these demonstrations,  PSE&G presently estimates that
the cost of retrofitting Hudson to operate with closed cycle cooling could be in
excess of $60 million in 1998 dollars.

     NJDEP has advised  PSE&G that it is  preparing a renewal  permit for Mercer
Station and, in connection with that renewal,  will also be reexamining Mercer's
compliance  with  Section  316(a) and 316(b).  This may result in PSE&G's  being
required to submit updated 316(a) and 316(b) demonstrations for NJDEP review. It
is impossible to predict at this time the outcome of such review.

     PSE&G is implementing the 1994 NJPDES permit issued for Salem Station which
requires,  among other things,  water intake screen  modifications  and wetlands
restoration.  In addition, PSE&G is seeking the final permits and approvals from
various agencies needed to fully implement the special conditions of the permit.
No  assurances  can be  given  as to  receipt  of  such  additional  permits  or
approvals.  The estimated  capital cost of  compliance  with the final permit is
approximately  $100 million,  of which  approximately  $40 million remains to be
spent.  PSE&G's  share is 42.59% and is included in its  1997-2001  construction
program.  PSE&G  must  apply to renew  the Salem  permit in March  1999 and must
provide updated Section 316(a) and 316(b)  demonstrations for the NJDEP's review
(see the  discussion  above  regarding  EPA's Section 316(b)  rulemaking).  (See
MD&A--Liquidity  and  Capital  Resources--Construction,  Investments  and  Other
Capital Requirements Forecast.)

     In 1995, the DRBC approved  PSE&G's  application  seeking a modification to
the heat dissipation area previously established based upon the NJDEP's grant of
a Section 316(a)  variance for Salem Station.  PSE&G must reapply to the DRBC in
1999 for a continuation of this heat dissipation area.

     NJDEP is expected to issue a draft renewal permit for Hope Creek Station in
1997.

Control of Hazardous Substances

     PSE&G Manufactured Gas Plant Remediation Program

     For  information  regarding  PSE&G's  Manufactured  Gas  Plant  Remediation
Program, see Note 13--Commitments and Contingent Liabilities of Notes.


<PAGE>


     Other Sites

     A  preliminary  review of  possible  mercury  contamination  at the  Kearny
Station concluded that an additional study and investigations  are required.  In
1995,  PSE&G  entered  into a Memorandum  of Agreement  (MOA) with NJDEP for the
Kearny  Generating  Station  pursuant  to which  PSE&G  will  conduct a Remedial
Investigation  (RI) of the site.  A  Remedial  Investigation  Work Plan has been
approved by the NJDEP and field work activities associated with the RI commenced
in December 1996. It is  anticipated  that an RI Report will be submitted to the
NJDEP in August 1997.

     Hazardous Substances

     The  Federal  Comprehensive   Environmental   Response,   Compensation  and
Liability  Act of 1980  (CERCLA),  as amended by the  Superfund  Amendments  and
Reauthorization  Act of 1986 and the Federal Resource  Conservation and Recovery
Act of 1976 (RCRA), authorize EPA to issue orders and/or to bring an enforcement
action  to compel  responsible  parties  to take  investigative  and/or  cleanup
actions at any 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.  The New Jersey Spill Compensation
and Control Act (Spill Act) provides similar authority to NJDEP.  Because of the
nature of  PSE&G's  business,  including  the  production  of  electricity,  the
distribution of gas and, formerly,  the manufacture of gas, various  by-products
and  substances  are or were  produced  or handled  which  contain  constituents
classified as hazardous under one or more of the above laws.

     PSE&G generally  provides for the disposal or processing of such substances
through  licensed  independent  contractors.  However,  the foregoing  statutory
provisions  impose joint and several  liability  without  regard to fault on all
allegedly  responsible  parties,  including  the  generators  of  the  hazardous
substances,  for certain  investigative  and cleanup  costs at sites where these
substances  were disposed or processed.  These statutes also  authorize  private
rights of action for recovery of these costs.

     PSE&G has been  notified  with  respect  to a number of such  sites and the
cleanup of these potentially hazardous sites is receiving greater attention from
the government  agencies involved.  Generally,  actions directed at funding such
site   investigations   and  cleanups  include   suspected  or  known  allegedly
responsible  parties.  PSE&G's past operations suggest that some remedial action
may be  required.  PSE&G does not expect its  expenditures  for any such site to
have a material effect on its financial  position,  results of operations or net
cash flows.

     EPA has determined  that a portion of the Passaic River from a point at its
confluence with  the Hackensack  River to a point six miles up-river (Site) is a
"facility" within the meaning of that term as defined under CERCLA. EPA has also
determined that five  corporations  are persons within the meaning of CERCLA for
purposes of liability under CERCLA with respect to remedial actions at the Site.
EPA has publicly  indicated  that it is  continuing  an  assessment of available
information with respect to the identification of other responsible parties. One
of these  corporations  has entered  into a consent  order with EPA  pursuant to
which it is obligated to conduct a remedial investigation,  human and ecological
risk  assessment  and  feasibility  study  relating  to  the  Site.  Field  work
activities associated with these actions were initiated in the spring of 1995. A
report presenting the results of the remedial  investigation and risk assessment
is scheduled to be filed in the fall of 1997.

     In April 1996, EPA directed that PSE&G provide  information  concerning the
nature and quantity of hazardous  substances  and/or  wastes which may have been
generated,  treated,  stored  or  disposed  of at two PSE&G  facilities  located
adjacent  to the Passaic  River  Site.  The two  facilities  are PSE&G's  former
Harrison Gas Plant and Essex  Generating  Station.  CERCLA  provides that EPA is
authorized  to  direct  any  person  to submit  such  information  if there is a
reasonable basis to believe that a release of a hazardous  substance occurred at
a subject facility.  PSE&G submitted its response to the EPA's request for these
facilities in August 1996.

     PSE&G and certain of its  predecessors  conducted  operations at properties
along the Passaic  River both  within and  outside  the Site.  EPA has not named
PSE&G as a responsible  party.  PSE&G cannot predict what, if any, action EPA or
others may take against  PSE&G with respect to the Site or, in such event,  what
contributions PSE&G may be required to make to the costs of these initiatives.

     Presently,  other  CERCLA/Spill  Act actions  involving  PSE&G  include the
following:

     (1)  Claim made in 1985 by U. S.  Department  of the Interior  under CERCLA
          with respect to the Pennsylvania  Avenue and Fountain Avenue municipal
          landfills in Brooklyn, New York for damages to natural resources.  The
          U.S.  Government  alleges damages of  approximately  $200 million.  To
          PSE&G's knowledge, there has been no action on this matter since 1988.

     (2)  Claim by EPA, Region III, under CERCLA with respect to a site operated
          by  Sealand  Ltd.  in Mount  Pleasant  Township,  New  Castle  County,
          Delaware.  In 1996, EPA issued a five-year review report  recommending
          that  deletion  of the site  from the  superfund  list.  The  State of
          Delaware has initiated a separate  action against PSE&G and other PRPs
          under the Delaware Hazardous  Substance Cleanup Act, alleging on-going
          threats to human  health and the  environment  due to the  presence of
          soil and groundwater  contamination  at the Sealand Site.  Delaware is
          presently  contemplating  requiring  the  PRPs to  conduct  additional
          monitoring at the Sealand Site and to reimburse  Delaware for past and
          future oversight costs.

     (3)  Duane Marine  Salvage  Corporation  Superfund  Site is in Perth Amboy,
          Middlesex  County,  New  Jersey.   Based  upon  the  claims  made  and
          activities taken to date, PSE&G  anticipates that its obligations with
          respect to this site will be de minimis.

     (4)  Various Spill Act directives  were issued by NJDEP to PRPs,  including
          PSE&G, with respect to the PJP Landfill in Jersey City, Hudson County,
          New Jersey  ordering  payment of costs  associated  with operating and
          maintenance  expenses,  interim  remedial  measures  and on a Remedial
          Investigation  and Feasibility Study (RI/FS) in excess of $25 million.
          The directives  also sought  reimbursement  of NJDEP's past and future
          oversight  costs and the costs of any future  remedial  action.  Based
          upon the claims made and actions taken to date, PSE&G anticipates that
          its obligations with respect to this site will be de minimis.

     (5)  Claim by EPA,  Region III,  under  CERCLA with  respect to a Superfund
          Site in  Philadelphia,  Pennsylvania,  owned and formerly  operated by
          Metal Bank, Inc., as a non-ferrous scrap reclamation facility.  PSE&G,
          together with several other utilities,  is alleged to be liable either
          to conduct an RI/FS and undertake the necessary cleanup, if any, or to
          reimburse EPA for the cost of  performing  these  functions..  In July
          1995, the EPA issued its Proposed  Remedial Action Plan (PRAP) for the
          site.  The PRAP  details the EPA's  intention  to select a remedy that
          will cost between $17 and $30 million. It is anticipated that EPA will
          assert a claim  against  PSE&G and the other  utility  companies,  and
          perhaps others as well, for the performance or funding of the selected
          remedy.  PSE&G's share of the costs of the proposed  remedy is between
          $4 and $8 million. 

     (6)  The Klockner Road site is located in Hamilton Township, Mercer County,
          New Jersey and  occupies  approximately  two acres on PSE&G's  Trenton
          Switching  Station  property.  PSE&G has entered into a Memorandum  of
          Agreement  (MOA) with the NJDEP for the Klockner Road site pursuant to
          which PSE&G will conduct an RI/FS and remedial  action,  if warranted,
          of  the  site.  Preliminary  investigations  indicated  the  potential
          presence of soil and groundwater  contamination  at the site.  PSE&G's
          preliminary  estimate  is  that  the  RI/FS  will  cost  approximately
          $800,000.  The cost of any remediation of potential site contamination
          is not presently estimable.

     (7)  In U.S. v. CDMG Realty Co., et al.,  Civil  Action No.  89-4246  (NHP)
          (RJH),  pending in the U.S.  District  Court for the  District  of New
          Jersey,  PSE&G and over 60 other  entities were joined in January 1995
          as  additional  third-party  defendants.  Third-party  plaintiffs,  an
          association  of 44  entities,  are  essentially  seeking  contribution
          and/or  indemnification  for the expenses  they have incurred and will
          incur as a result of having settled the direct claims of the NJDEP and
          EPA  related  to  the   investigation  and  remediation  of  Sharkey's
          Landfill, located in Parsippany-Troy Hills, Morris County, New Jersey.
          The claims are all alleged to be brought  pursuant to CERCLA and PSE&G
          is alleged to have arranged for the disposal of  industrial  wastes at
          Sharkey's  Landfill.  The  claims  with  respect  to this  matter  are
          presently the subject of an alternative dispute resolution proceeding.
          Based upon the claims made and  activities  to date,  PSE&G  estimates
          that its  obligations  for this site will be de minimis. 

     (8)  In 1991, the NJDEP issued  Directive and Notice to Insurers Number Two
          (Directive Two) to 24 Insurers and 52 Respondents,  including PSE&G in
          connection  with  an  investigation  and  remediation  of  the  Global
          Landfill Site in Old Bridge  Township,  Middlesex  County,  New Jersey
          (Global Site).  Directive Two seeks  recovery of past and  anticipated
          future NJDEP response costs ($37.4 million). PSE&G's alleged liability
          is based on assertions that it generated asbestos-containing materials
          which were disposed of at the Global Site. In 1991, PSE&G entered into
          an agreement  with the NJDEP and 29 other  Directive  Two  Respondents
          effecting a partial  settlement  of the  foregoing  costs subject to a
          subsequent reallocation based upon the parties' further development of
          information   concerning   their   respective    proportionate   waste
          contributions to the Global Site.  Negotiations are ongoing  regarding
          resolution  of the balance of the response  costs  sought  pursuant to
          Directive  Two.  In 1993,  the NJDEP and various  participating  PRPs,
          including PSE&G,  executed a Consent Decree whereby the  participating
          PRPs agreed to perform the remedial design and remedial action for the
          operable unit one remedy as specified in a 1991 ROD (approximate total
          cost $30 million).  The Consent Decree was executed and entered by the
          U.S. District Court for the District of New Jersey in 1993. Subject to
          a subsequent  reallocation,  the various parties to the Consent Decree
          have  agreed  that  PSE&G's  contribution  under  the  Consent  Decree
          settlement will be $300,000  (approximately  1% of the total cost). In
          October  1996,  NJDEP issued a superfund  proposed plan for the Global
          Landfill Site Operable Unit #2.

     (9)  In 1991, the New Jersey Department of Law and Public Safety,  Division
          of Law, issued  Directive and Notice To Insurers Number One (Directive
          One) to 50 insurers and 20 respondents,  including PSE&G, seeking from
          the respondents  payment of $5.5 million of NJDEP's  anticipated costs
          of remedial action and of  administrative  oversight at the Combe Fill
          South Sanitary  Landfill in Washington and Chester  Townships,  Morris
          County,  New Jersey  (Combe  Site).  The $5.5 million  represents  the
          NJDEP's 10% share of such anticipated  costs pursuant to a cooperative
          agreement  with the United  States  regarding  the  selected  remedial
          action.  Therefore,  total  site  remediation  costs  approximate  $50
          million.  Further,  the  Directive  One  respondents  are  directed to
          perform the operation and maintenance of the remedial action including
          all remedial  facilities on the Combe Site.  PSE&G's alleged liability
          is based on the assertion  that  PSE&G-generated  waste oil and water,
          containing hazardous substances, was transported to the Combe Site and
          applied to Combe Site  roads for dust  control.  Based upon the claims
          made in Directive One and PSE&G's  investigation and response to same,
          PSE&G  anticipates that its obligations,  if any, with respect to this
          site will be de minimis.  In December 1996, the NJDEP issued Directive
          Number Two (Directive  No. Two) to 37  respondents,  including  PSE&G,
          directing the  respondents to arrange for the  operation,  maintenance
          and monitoring of the implemented remedial action described therein or
          pay the Department's future costs of these activities, estimated to be
          $39  million.   In  addition,   the  Directive  No.  Two  directs  the
          respondents   to  prepare  a   workplan   for  the   development   and
          implementation  of a Natural  Resource  Damage  Restoration  Plan that
          addresses the natural resource damages resulting from the discharge of
          hazardous  substances at the site.  Since the bases of the claims made
          against  PSE&G in  Directive  No.  Two are the  same as those  made in
          Directive One, PSE&G continues to anticipate that its obligations,  if
          any, with respect to this site will be de minimis.

     (10) In United States of America v. Superior Tube Company,  et al.,  Docket
          No.  89-7421 in the U.S.  District  Court for the Eastern  District of
          Pennsylvania,  PSE&G was served in 1990 with a Third-Party  Complaint.
          Pursuant to CERCLA, the United States filed suit against Superior Tube
          Company  (Superior)  and others  seeking  recovery  of past and future
          costs  incurred or to be incurred in the cleanup of the Moyer Landfill
          located in  Collegeville,  Pennsylvania.  Superior filed a Third-Party
          Complaint naming approximately 150 third-party  defendants,  including
          PSE&G.  Superior alleges that PSE&G generated,  transported,  arranged
          for the disposal of and/or  caused to be deposited  certain  hazardous
          substances at the Moyer Landfill.  On the basis of those  allegations,
          Superior   seeks   contribution   and/or   indemnification   from  the
          third-party defendants,  including PSE&G, on the United States' action
          against  it.  PSE&G  has   participated  in  negotiations   concerning
          resolution of the United States' and Superior Tube's claims.  Pursuant
          to settlement  negotiations among certain direct  defendants,  certain
          third party  defendants  and the  plaintiffs,  the  defending  parties
          participating  in  said   negotiations  are  currently   pursuing  the
          possibility of resolving all potential liability  concerning the above
          referenced matter (excluding any potential liability associated with a
          future  claim,  if any,  for  natural  resource  damages) on behalf of
          certain de minimis defending parties,  including PSE&G. Based upon the
          claims made and the above referenced  negotiations,  PSE&G anticipates
          that its obligations with respect to this site will be de minimis.

     (11) Spill  Act  Multi-Site  Directive  (Directive)  issued by the NJDEP to
          PRPs,  including  PSE&G,  listing four separate  sites,  including the
          former bulking and transfer  facility called the Marvin Jonas Transfer
          Station (Sewell Site) in Deptford  Township,  Gloucester  County,  New
          Jersey.  With  regard  to the  Sewell  Site,  this  Directive  ordered
          approximately  350 PRPs,  including  PSE&G,  to enter into an ACO with
          NJDEP,  requiring  them to remediate  the Sewell Site.  Certain  PRPs,
          including  PSE&G,  have completed the interim actions directed at both
          site  security  and  off-site  disposal of  containers,  trailers  and
          contaminated  surface  soils.  PRPs,  including  PSE&G,  are currently
          fulfilling  the  terms of a MOA  entered  into  with  NJDEP in 1993 to
          conduct an RI/FS and, if necessary,  take remedial action.  Based upon
          the claims made and activities taken to date,  PSE&G  anticipates that
          its obligations with respect to this site will be de minimis.

     (12) In Transtech Industries, Inc. et al v. A&Z Septic Clean et al., Docket
          No.  2-90-2578(HAA),  filed in August 1990, in the U.S. District Court
          for the District of New Jersey,  PSE&G has been named a defendant in a
          Complaint  which has been filed  pursuant to CERCLA,  against  several
          hundred  parties  seeking  recovery of past and future  response costs
          incurred or to be incurred in the investigation  and/or remediation of
          the Kin-Buc  Landfill,  located in Edison Township,  Middlesex County,
          New Jersey.  Plaintiffs  allege that all named  defendants,  including
          PSE&G, are PRPs as generators and/or transporters of various hazardous
          substances  ultimately  deposited at the Kin-Buc Landfill.  Based upon
          the claims made and activities taken to date,  PSE&G  anticipates that
          its obligations with respect to this site will be de minimis.

     (13) In  1993,  PSE&G  acknowledged  service  of  Plaintiff's  Summons  and
          Complaint in a matter entitled The Fishbein Family  Partnership v. PPG
          Industries, Inc. and Public Service Electric and Gas Company. Pursuant
          to CERCLA, the Spill Act and various common law theories of liability,
          the Plaintiff  filed an action seeking  declaratory  relief  regarding
          responsibility for and recovery of damages and response costs incurred
          and/or to be incurred as a result of the release or threatened release
          of hazardous  substances  at property  located in Jersey City,  Hudson
          County,  New Jersey.  Plaintiff named PPG  Industries,  Inc. (PPG) and
          PSE&G as  defendants  in the  above-referenced  action.  The Plaintiff
          alleges that  defendants  are liable for the damages and relief sought
          based on their past conduct of industrial  operations at the site. The
          industrial  operations  referenced in  Plaintiff's  Complaint  include
          chromium ore processing operations (PPG and its predecessors) and coal
          gasification operations (PSE&G and its predecessors).  PSE&G filed its
          response  to the  Plaintiff's  Complaint  including  cross-claims  for
          indemnity and contribution  against co-defendant PPG. PSE&G also filed
          a Third Party  Complaint  against UGI  Utilities,  Inc.  (UGI) seeking
          indemnification  and  contribution  as to any  liability  imposed upon
          PSE&G attributable to UGI's past conduct of industrial operations on a
          portion of the site. In March 1995, PSE&G filed an Amended Third Party
          Complaint extending the time period of PSE&G's allegations  concerning
          UGI's past conduct of industrial  operations at the site. In May 1995,
          an  Administrative  Stay of this matter was entered  pending either an
          agreement  between the NJDEP and PPG as to a cleanup plan for the site
          or a  determination  of certain  cross-motions  for summary  judgement
          filed by Plaintiff  and PPG.  Following the court's  determination  of
          Plaintiff's and PPG's  cross-motions for summary judgement,  the Court
          in   December   1996,   entered  an  Order   amending   the  Order  of
          Administrative  Stay whereby  Plaintiff's  claims against  PSE&G,  all
          cross-claims  of PPG and  PSE&G,  and all  claims in the  third  party
          action were administratively  stayed until further order of the court.
          Based  upon the  claims  made and  activities  taken to date,  PSE&G's
          potential   liability  in  this  matter,  if  any,  is  not  currently
          estimable.

     (14) Morton International,  Inc. and the Velsicol Chemical Corporation have
          instituted separate suits (Morton  International,  Inc. v. A.E. Staley
          Manufacturing  Co., et al. Civil Action No. 96-3609 (NHP) and Velsicol
          Chemical Corporation,  et al. v. A.E. Staley Manufacturing Co., et al.
          Civil Action No. 96-3610 (NHP)) in the U.S.  District Court in Newark,
          New Jersey against one hundred and seven (107)  defendants,  including
          PSE&G. The suits are  contribution  actions pursuant to CERCLA and the
          Spill Act seeking contribution for an equitable share of all liability
          for response costs and damages that  plaintiffs  anticipate  they will
          incur in connection with the RI/FS and remedial action of a forty (40)
          acre  parcel of land in  WoodRidge,  Bergen  County,  New  Jersey  and
          adjoining  water  body  known as Berry's  Creek.  Plaintiffs  have not
          initiated  any  remedial  actions  to date  either  at the site or the
          adjacent  Creek.  While  plaintiffs  anticipate  that the costs of the
          RI/FS and past and future NJDEP  oversight  costs will  approximate $6
          million, they have no current estimate of the costs for remediation of
          the site  and/or  the  RI/FS and  remediation  of the  Creek.  PSE&G's
          alleged  nexus  to the site is based on  shipments  of  quantities  of
          mercury  from  its  Kearny   Generating   Station  and  other  unnamed
          facilities.  Based on the claims made and the information available to
          date, PSE&G's potential liability, if any, is not currently estimable.

     (15) The USEPA  issued a Notice of  Potential  Liability  to  approximately
          twenty  entities  including  PSE&G in 1996 with  respect  to a site in
          Perth  Amboy,  New Jersey,  formerly  operated as a waste oil recovery
          facility.  Available  information suggests that PSE&G may have shipped
          waste oil to the facility for  recycling.  USEPA's notice advises that
          is has completed a removal action at the site at a cost of slightly in
          excess of $2 million  and  intends to seek to recover  said costs from
          those  entities  including  PSE&G that received a Notice.  Prospective
          remedial actions,  if any, have not been performed and/or  identified.
          PSE&G's  liability,  if any, for past and future response costs is not
          currently estimable.

     (16) The NJDEP assumed control of a former petroleum  products blinding and
          mixing  operation and waste oil recycling  facility in Elizabeth,  New
          Jersey and issued various directives to a number of entities including
          PSE&G requiring  performance of various  remedial  actions  including:
          establishment of security at the site;  removal and off-site  disposal
          of  containerized  wastes  at the  site;  and  conduct  of a  remedial
          investigation of the site. PSE&G's nexus to the site is based upon the
          shipment of certain  waste oils to the site for  recycling.  PSE&G and
          certain of the other entities named in NJDEP directives are members of
          a  Potentially  Responsible  Party  Group (PRP  Group)  that have been
          working together to satisfy NJDEP requirements  including:  funding of
          the site security  program;  containerized  waste removal;  and a site
          remedial  investigation  program.  Based on the  nature  and extent of
          PSE&G's nexus to the site,  PSE&G's  liabilities  to date have been de
          minimis.  While  the  cost of  prospective  remedial  actions  are not
          currently  estimable,  PSE&G does not anticipate  that its prospective
          liabilities will be other than de minimis in nature.

     Other Potential Liability

     In addition to the sites  individually  listed above, PSE&G has received 14
claims and/or inquiries  concerning  prospective  enforcement actions by the EPA
and/or NJDEP. Such claims/inquiries relate to alleged  properties/sites where it
has been alleged that an imminent and substantial danger to the public or to the
environment exists as a result of an actual or threatened release of one or more
hazardous substances. PSE&G's investigation and initial response concerning each
such claim and/or inquiry suggests that PSE&G's potential liability,  if any, is
de minimis.


<PAGE>


EDHI

     EDHI, a wholly owned,  direct  subsidiary of  Enterprise,  is  incorporated
under the laws of New Jersey and is the parent company of CEA, PSRC,  ERI, EGDC,
Capital  and  Funding.  EDHI's  principal  executive  offices are located at One
Riverfront  Plaza,  Newark,  New Jersey  07102.  EDHI's  focus is on  investment
opportunities in the non-utility energy market. For a discussion of Enterprise's
agreement with the BPU regarding  utility/non-utility  activities and its impact
on EDHI, see Competitive Environment--Other State Regulatory Matters.

CEA

     CEA, a New Jersey corporation,  has its principal executive offices at 1200
East Ridgewood Avenue, Ridgewood, New Jersey 07450. CEA invests and participates
in the development and operation of  cogeneration,  thermal and power production
facilities,  which include  domestic  Qualifying  Facilities  (QFs), two foreign
Exempt  Wholesale  Generators  (EWGs) and one foreign  utility  company.  CEA is
expected to be a primary  vehicle for EDHI's business growth for the foreseeable
future,  with  emphasis  on  international   projects  due  to  expected  growth
opportunities.  CEA's two direct  subsidiaries,  CEA New Jersey,  Inc.  (CEA New
Jersey) and CEA USA, Inc. (CEA USA),  hold certain of its  investments.  CEA New
Jersey's  subsidiaries  invest in projects in New Jersey selling power to PSE&G.
CEA USA's  subsidiaries  invest in projects  selling power to other domestic and
foreign entities. CEA and/or its subsidiaries and affiliates have investments in
22  commercially  operating  cogeneration  or independent  power  projects,  one
anthracite  coal  mine and one  project  under  construction.  CEA  continuously
evaluates the status of project  development  and  construction  in light of the
realities of timely completion and the costs incurred.

     CEA's   investments  in  QF  projects  have  been   undertaken  with  other
participants because CEA, together with any other utility affiliate, may not own
more than 50% of a QF under  applicable law  subsequent to the in-service  date.
Projects involving EWGs are not restricted to a 50% investment limitation. CEA's
projects are diversified  internationally  and technologically and are generally
financed  through  nonrecourse  debt.  CEA is an  investor in  partnerships  and
corporate joint ventures which own these projects and the  electricity  produced
by the facilities is not part of PSE&G's installed  capacity.  However,  some of
such power is being purchased by PSE&G pursuant to long-term  contracts with the
applicable partnerships and corporate joint ventures.

     As of December 31, 1996 and 1995, CEA's consolidated  assets aggregated 
$286 million and $271 million,  respectively (see Note 8--Long-Term Investments
of Notes).

PSRC

     PSRC, a New Jersey corporation,  has its principal executive offices at One
Riverfront  Plaza,  Newark,  New  Jersey  07102.  PSRC makes  primarily  passive
investments  in  assets  that can  provide  funds for  future  growth as well as
provide incremental  earnings for EDHI.  Investments have been made in leveraged
and  direct  financing  leases,  project  financings,   venture  capital  funds,
leveraged  buyout  funds  and  securities.  The  maturities  of the  portfolio's
investments are also fairly diverse,  with some having terms exceeding 30 years.
PSRC's leveraged lease investments  include a wide range of asset sectors.  Some
of the transactions in which PSRC and its subsidiaries participate involve other
equity investors.

     PSRC is a limited partner in various  partnerships and is committed to make
investments  from  time to time,  upon the  request  of the  respective  general
partners.  At  December  31,  1996,  $30  million  remained  as PSRC's  unfunded
commitment  subject  to call.  As of year end 1996 and  1995,  PSRC's  long-term
investments aggregated $1.4 billion.

ERI

     ERI, a New Jersey  corporation,  has its principal executive offices at 499
Thornall  Street,  Edison,  New Jersey 08837.  ERI was  established  in 1996 and
provides a variety of energy  related  services  to  industrial  and  commercial
customers.  ERI includes PSRC's former  wholly-owned  subsidiaries,  U.S. Energy
Incorporated and Enterprise Strategic Energy Solutions.  As of December 31, 1996
and 1995, ERI's assets were $47 million and $19 million, respectively, including
the assets of the former PSRC subsidiaries.



<PAGE>


EGDC

     EGDC, a New Jersey  corporation  having its principal  executive offices at
One Riverfront Plaza,  Newark, New Jersey 07102, is a nonresidential real estate
development  and investment  business.  EGDC has  investments in nine commercial
real estate  properties  (one of which is developed) in several  states.  EGDC's
strategy  is to  preserve  the value of its  assets to allow for the  controlled
disposition of its properties as the real estate market improves.  EGDC has been
conducting a controlled  exit from the real estate  business  since 1993.  As of
December 31, 1996 and 1995, EGDC's  consolidated  assets aggregated $108 million
and $116 million, respectively.

Capital

     Capital, a New Jersey  corporation,  has its principal executive offices at
80 Park Plaza,  Newark, New Jersey 07101.  Capital serves as a financing vehicle
for EDHI's businesses  (excluding ERI) borrowing on their behalf on the basis of
a minimum  net worth  maintenance  agreement  with  Enterprise.  That  agreement
provides,  among other  things,  that  Enterprise  (i) maintain  its  ownership,
directly or indirectly,  of all outstanding common stock of Capital,  (ii) cause
Capital to have at all times a positive  tangible net worth of at least $100,000
and (iii) make sufficient  contributions of liquid assets to Capital in order to
permit  it to  pay  its  debt  obligations.  Intercompany  borrowing  rates  are
established based upon Capital's cost of funds. In 1993,  Enterprise agreed with
the BPU to make a good-faith effort to eliminate such Enterprise  support within
six to ten years.  Per an agreement  with the BPU,  effective  January 31, 1995,
Capital  will not have more than $650 million of debt  outstanding  at any time.
Capital's assets consist principally of demand notes of EDC (1995 only), CEA and
PSRC.  As of December 31, 1996 and 1995,  Capital had debt  outstanding  of $415
million  and $477.5  million,  respectively.  For  additional  information,  see
Construction  and Capital  Requirements--Financing  Activities and Liquidity and
Capital Resources--EDHI of MD&A.

Funding

     Funding, a New Jersey  corporation,  has its principal executive offices at
80 Park Plaza,  Newark, New Jersey 07101.  Funding serves as a financing vehicle
for EDHI's  businesses  (excluding EGDC and ERI),  borrowing on their behalf, as
well as investing their short-term funds.  Short-Term  investments are made only
if the funds cannot be employed in intercompany  loans.  Intercompany  borrowing
rates are established  based upon Funding's cost of funds.  Funding is providing
both long and short-term capital for the non-utility  businesses other than EGDC
and ERI on the basis of an unconditional  guaranty from EDHI, but without direct
support  from  Enterprise.  As of December 31, 1996 and 1995,  Funding's  assets
consisted  of demand notes of EDC (1995  only),  CEA and PSRC,  all of which are
pledged to Funding's  lenders and which aggregated $55 million and $492 million,
respectively,  and short-term  investments  which  aggregated $145 million as of
December  31,  1996.  For  additional  information,  see  Liquidity  and Capital
Resources--EDHI of MD&A.

Item 2. Properties

PSE&G

     The  statements  under this Item as to  ownership  of  properties  are made
without regard to leases, tax and assessment liens, judgments, easements, rights
of way, contracts,  reservations,  exceptions,  conditions, immaterial liens and
encumbrances and other  outstanding  rights  affecting such properties,  none of
which is considered to be significant  in the  operations of PSE&G,  except that
PSE&G's  First and  Refunding  Mortgage  (Mortgage),  securing  the bonds issued
thereunder,  constitutes a direct first  mortgage lien on  substantially  all of
such property.

     PSE&G maintains  insurance coverage against loss or damage to its principal
plants  and  properties,  subject  to certain  exceptions,  to the  extent  such
property is usually insured and insurance is available at a reasonable cost. For
a discussion  of nuclear  insurance,  see Note  13--Commitments  and  Contingent
Liabilities of Notes.

     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 easements or other rights. These
easements  and rights are deemed by PSE&G to be adequate  for the  purposes  for
which they are being used.  Generally,  where  payments are minor in amount,  no
examinations  of underlying  titles as to the rights of way for  transmission or
distribution lines or mains have been made.


<PAGE>


Electric Properties

     As of December 31, 1996, PSE&G's share of installed generating capacity was
10,405 MW, as shown in the following table:

<TABLE>
<CAPTION>
                                                                                             Net
                                                        Installed     Principal              Generation
                                                        Megawatt      Fuel       Heat        (Thousands    Capacity
Name and Location                                       Capacity      Used       Rate        of MWH)       Factor(a)
----------------------------------------------------    ---------     ---------  --------    ----------    ---------
<S>                                                         <C>                    <C>               <C>         <C>
Steam
Burlington, Burlington, NJ..........................        180        Oil         31,109            10          0.6
Conemaugh, New Florence, PA--22.50%(b)(c)...........        382        Coal         9,507         2,563         76.4
Hudson, Jersey City, NJ.............................        983        Coal        10,894         2,035         23.6
Kearny, Kearny, NJ..................................        292        Oil         33,667             9          0.4
Keystone, Shelocta, PA--22.84%(b)(c)................        388        Coal         9,561         2,884         84.6
Linden, Linden, NJ..................................        415        Oil         65,694             8          0.2
Mercer, Hamilton, NJ................................        642        Coal        10,342         1,934         34.3
Sewaren, Woodbridge Twp., NJ........................        453        Gas         15,963           139          3.5
                                                        -------                  --------    ----------    ---------
     Total Steam....................................      3,735                    10,173         9,794         29.2
                                                        -------                  --------    ----------    ---------
Nuclear (Capacity factor calculated in accordance
with
   industries maximum dependable capability
standards)
Hope Creek, Lower Alloways Creek, NJ 95%(b)(c)......        979        Nuclear     10,656         6,400         74.6
Peach Bottom 2, Peach Bottom, PA 42.49%(b)..........        465        Nuclear     10,881         3,228         79.8
Peach Bottom 3, Peach Bottom, PA 42.49%(b)..........        465        Nuclear     10,565         3,988         98.2
Salem 1, Lower Alloways Creek, NJ 42.59%(b).........        471        Nuclear          0           (14)           0
Salem 2, Lower Alloways Creek, NJ 42.59%(b).........        471        Nuclear          0           (16)           0
                                                       --------                  --------    ----------    ---------
     Total Nuclear(b)(c)............................      2,851                    10,843        15,593         54.6
                                                       --------                  --------    ----------    ---------
Combined Cycle
Bergen, Ridgefield, NJ..............................        650        Gas          8,274         1,150         20.1
Burlington, Burlington, NJ..........................        240        Gas          9,417           205          9.7
                                                       --------                  --------    ----------    ---------
     Total Combined Cycle...........................        890                     8,441         1,355         17.3
                                                       --------                  --------    ----------    ---------
Combustion Turbine
Bayonne, Bayonne, NJ................................         42        Oil              0          (0.1)         0.0
Bergen, Ridgefield, NJ..............................         21        Gas         21,764           0.3          0.2
Burlington, Burlington, NJ..........................        389        Oil         21,882           3.1          0.1
Edison, Edison Township, NJ.........................        504        Gas         15,293          19.9          0.4
Essex, Newark, NJ...................................        617        Gas         13,639          71.5          1.3
Hudson, Jersey City, NJ.............................        129        Oil        187,174           0.0          0.0
Kearny, Kearny, NJ..................................        504        Gas         40,655           3.4          0.1
Linden, Linden, NJ..................................        223        Gas         12,872          63.0          3.2
Mercer, Hamilton, NJ................................        129        Oil              0          (0.1)         0.0
National Park, National Park, NJ....................         21        Oil              0           0.0          0.0
Salem, Lower Alloways Creek, NJ 42.59%(b)...........         16        Oil         29,397           0.1          0.1
Sewaren, Woodbridge Township, NJ....................        129        Oil              0          (0.1)         0.0
                                                       --------                  --------    ----------    ---------
     Total Combustion Turbine.......................      2,724                    14,581         161.0          0.7
                                                       --------                  --------    ----------    ---------
Internal Combustion
Conemaugh, New Florence, PA--22.50%(b)...............         3        Oil         10,148           0.3          1.1
Keystone, Shelocta, PA--22.84%(b)....................         2        Oil         10,392           0.5          2.8
                                                       --------                  --------    ----------    ---------
     Total Internal Combustion......................          5                    10,303           0.8          1.8
                                                       --------                  --------    ----------    ---------
Pumped Storage
Yards Creek, Blairstown, NJ--50%(b)(c)...............       200                        --           316         18.0
                                                       ========                  ========    ==========    =========
     Total PSE&G....................................     10,405 (d)                10,402        25,001 (e)     27.4
                                                       ========                  ========    ==========    =========
</TABLE>

(a)  Net generation divided by the product of weighted average generating
     capacity times total hours.
(b)  PSE&G's share of jointly owned facility.
(c)  Excludes energy for pumping and synchronous condensers.
(d)  Excludes 664 MW of non-utility generation and 115 MW of capacity sales to
     ACE, DP&L, and GPU.
(e)  Excludes 4,960 (thousands of MWH) of non-utility generation.

     For information regarding construction see MD&A--Construction and Capital
Expenditures.

     In addition to the generating  facilities in New Jersey and Pennsylvania as
indicated in the table above, as of December 31, 1996,  PSE&G owned 41 switching
stations with an aggregate  installed  capacity of 30,980,000  kilovolt-amperes,
and  222  substations  with  an  aggregate   installed   capacity  of  7,276,000
kilovolt-amperes.  In addition,  7  substations  having an  aggregate  installed
capacity of 115,250  kilovolt-amperes  were operated on leased property.  All of
these facilities are located in New Jersey.

     As of December 31,  1996,  PSE&G's  transmission  and  distribution  system
included  151,612  circuit miles,  of which 36,793 miles were  underground,  and
791,644 poles, of which 534,831 poles were jointly owned.  Approximately  99% of
this property is located in New Jersey.

     In  addition,   as  of  December  31,  1996,   PSE&G  owned  four  electric
distribution  headquarters and five  subheadquarters in four operating divisions
all located in New Jersey.

Gas Properties

     As of December  31,  1996,  the daily gas  capacity  of PSE&G's  100%-owned
peaking  facilities (the maximum daily gas delivery  available  during the three
peak winter  months)  consisted of liquid  petroleum air gas (LPG) and liquefied
natural gas (LNG) and aggregated 2,973,000 therms (approximately 297,300 Mcf. on
an equivalent basis of 1,000 Btu/cubic foot) as shown in the following table:

                                  Daily Capacity
            Plant                    Location                 (Therms)
            -----                 --------------        -----------------

Burlington LNG................     Burlington, NJ                 773,000
Camden LPG....................     Camden, NJ                     280,000
Central LPG...................     Edison Twp., NJ                960,000
Harrison LPG..................     Harrison, NJ                   960,000
                                                        =================
     Total....................                                  2,973,000
                                                        =================

     As of December 31,  1996,  PSE&G owned and  operated  approximately  15,833
miles  of  gas  mains,   owned  11  gas   distribution   headquarters   and  two
subheadquarters  and  leased  one  other  subheadquarters  all in two  operating
regions located in New Jersey and owned one meter shop in New Jersey serving all
such areas.  In addition,  PSE&G  operated 61 natural gas metering or regulating
stations,  all located in New Jersey,  of which 28 were located on land owned by
customers or natural gas pipeline companies supplying PSE&G with natural gas and
were  operated  under  lease,  easement or other  similar  arrangement.  In some
instances,  portions of the metering and regulating facilities were owned by the
pipeline companies.

Office Buildings and Facilities

     PSE&G leases substantially all of a 26-story office tower for its corporate
headquarters at 80 Park Plaza,  Newark,  New Jersey,  together with an adjoining
three-story building.  PSE&G also leases other office space at various locations
throughout  New Jersey for  district  offices and offices for various  corporate
groups and services. PSE&G also owns various other sites for training,  testing,
parking, records storage, research, repair and maintenance, warehouse facilities
and for other purposes related to its business.

EDHI

     EDHI owns no real property.  EDHI leases its corporate  headquarters at One
Riverfront Plaza,  Newark,  New Jersey.  For a brief general  description of the
properties of the subsidiaries of EDHI, see Item 1. Business--EDHI.


<PAGE>


Item 3. Legal Proceedings

     As previously reported, four shareholder derivative action civil complaints
have been filed  against  Enterprise  and certain of its  directors and officers
seeking to recover  unspecified  damages for alleged losses purportedly  arising
out of PSE&G's  operations of Salem and Hope Creek.  Three of these actions have
been consolidated and a case management order to deal with discovery and motions
has been issued.  The  defendants  filed motions to dismiss  these  proceedings,
which motions were denied in January 1997. Also, in January 1997, the defendants
filed motions for leave to appeal the trial  court's  denial of their motions to
dismiss, which are still pending.

     Also  previously  reported,  PSE&G and the three other  co-owners  of Salem
filed suit in February 1996 in the U.S.  District  Court for the District of New
Jersey against Westinghouse Electric Corporation  (Westinghouse) seeking damages
to recover the cost of replacing  the steam  generators  at Salem Units 1 and 2.
The suit  alleges  fraud and breach of  contract  by  Westinghouse  in the sale,
installation  and  maintenance of the  generators.  In April 1996,  Westinghouse
filed an answer  and $2.5  million  counterclaim  for  unpaid  work  related  to
services at Salem. PSE&G cannot predict the outcome of these proceedings.

     Also previously reported,  PECO and DP&L as co-owners of Salem have filed a
lawsuit in March 1996 against  Enterprise  and PSE&G in the U.S.  District Court
for the Eastern District of Pennsylvania alleging  mismanagement by PSE&G in its
operation  of  Salem  and are  seeking  unspecified  compensatory  and  punitive
damages.  PSE&G's  answer  in this  matter  has  been  filed  and  discovery  is
proceeding.  While PSE&G cannot  predict the outcome of this  proceeding,  PSE&G
believes it has operated Salem in accordance with the requirements of the owners
agreement and applicable law and that it has  substantial  and valid defenses to
this  claim.  On July 30,  1996,  the  Federal  District  Court  issued an Order
scheduling discovery and setting a trial for May 1997.

     ACE also filed a similar suit in March 1996 against Enterprise and PSE&G in
the New Jersey Superior Court. PSE&G and ACE, a 7.41% owner of Salem Units 1 and
2, have entered into an agreement  (Agreement) to dismiss ACE's lawsuit alleging
mismanagement  in the  operation  of  Salem by  PSE&G.  Under  the  terms of the
Agreement,  ACE's  exposure for 1997 operation and  maintenance  (O&M) costs for
Salem  will  be  limited  to  a  fixed  charge  of  $10  million,  plus  certain
performance-based  additional  amounts,  up  to  a  maximum  of  $21.8  million,
depending  upon the capacity  factors for the Salem Units 1 and 2 for 1997.  The
cost of the settlement to PSE&G will depend upon actual performance of the Salem
Units.  Budgeted O&M costs for Salem for 1997 are $293.9  million of which ACE's
7.41% share  approximates $21.8 million.  Under the terms of the Agreement,  for
ACE to be responsible to pay the maximum amount,  Unit 1 would have to return to
service on July 1,  1997,  Unit 2 would have had to return to service on January
1, 1997 and each unit would have to operate at an 80% capacity  factor from such
respective dates for the remainder of 1997.

     During the past 10 years,  the average annual  capacity factor of the Salem
units  has been  68.1%  for  Unit 1 and  61.1%  for Unit 2. In the last  year of
operation  prior to the current Salem  shutdown  (1994) the  operating  capacity
factor was 59.3% for Unit 1 and 57.8% for Unit 2.

     In the event that the actual 1997 Salem O&M  expenses  exceed the  budgeted
amount of $293.9 million, ACE will not be responsible for its 7.41% share of any
such  excess O&M costs  unless (i) the excess O&M is  directly  attributable  to
requirements   imposed  by  the  NRC  or  other  governmental   agencies  having
jurisdiction  over Salem, (ii) notice from the NRC or such agency is received by
PSE&G after the effective date of the Agreement  (12/31/96) and (iii) the notice
is  generically   applicable  to  all  similar  nuclear  plants.  Certain  other
extraordinary  events  giving rise to  additional  O&M  expenses  have also been
excluded from the Agreement.

     The Agreement  applies only to calendar year 1997 and does not apply to any
damages  which may be alleged by ACE to  continue  beyond or be  incurred  after
December  31,  1997;  and does not apply to ACE's  rights under the Salem Owners
Agreement to review and approve  capital  projects  during 1997;  which, in each
instance,  will continue to be governed by the terms and conditions of the Salem
Owners  Agreement and the rights and  obligations  of ACE and PSE&G at law or in
equity.  The  settlement is subject to receipt of a Court Order,  which has been
applied for,  confirming that dismissal of the ACE litigation will not prejudice
either party in certain other litigation involving Salem.

     In addition, see the following at the pages indicated:

(1)  Page 2. Proceedings  before FERC relating to competition and electric
     wholesale  power markets.  (Inquiry  Concerning the Pricing Policy for
     Transmission  Services  Provided by Utilities  Under the Federal Power
     Act, Docket No. RM93-19.)

(2)  Page 18. Administrative proceedings before the NJDEP under Section 316 of
     the FWPCA for certain elective generating stations.

(3)  Page 17. Notice of Violation issued by EPA against Eagle Point
     Cogeneration Partnership regarding alleged violations of air permit.

(4)  Pages  19  through  23 and  78.  Various  administrative  actions,  claims,
     litigation and requests for  information by federal and/or state  agencies,
     and/or private parties, under CERCLA, RCRA, and state environmental laws to
     compel PRPs,  which may include PSE&G, to provide  information with respect
     to transportation and disposal of hazardous  substances and wastes,  and/or
     to undertake or contribute  to the costs of  investigative  and/or  cleanup
     actions at various  locations  because of actual or threatened  releases of
     one or more potentially hazardous substances and/or wastes.

(5)  Page 61. Proceedings before the BPU relating to recovery of replacement
     power costs in connection with the April 1994 Salem 1 shutdown, Docket No.
     ER94070293.

(6)  Page 61. Generic proceeding before the BPU relating to recovery of capacity
     costs associated with power purchases from cogenerators, Docket No. 
     EX93060255

(7)  Page 63. Generic proceedings before the BPU relating to standards for
     "off tariff" negotiated rate agreement programs, Docket No. EX95070320.

(8)  Page 62. Proceedings before the BPU relating to PSE&G's LGAC filed
     July 30, 1996, Docket No. GR96070554.

(9)  Page 62. Proceedings before the BPU relating to PSE&G's RAC filed
     July 30, 1996, Docket No. GR96070555.

(10) Page 63. Generic proceeding before the BPU relating to the matter of an
     inquiry into methods of implementation of SFAS-106, Docket No. AX96070530.

(11) Page 63. Proceedings before the BPU relating to PSE&G's proposed CTC filed
     September 19, 1996, Docket No. ET96090669.

(12) Page 63. Proceedings before the BPU relating to PSE&G's first Off Tariff
     Rate Agreement (OTRA), Docket No. OTRA-96-1.

(13) Page 28. Derivative actions related to nuclear operations and Salem Station
     shutdown, Public Service Enterprise Group Inc. by G. E. Stricklin,
     derivatively v. E. James Ferland, et. al., Docket No. L1068395, Superior
     Court of New Jersey, Law Division, Camden County. Dr. Steven Fink and
     Dr. David Friedman, P.C. Profit Sharing Plan, derivatively, et. al. v.
     Lawrence R. Codey, et. al., Superior Court of New Jersey, Chancery
     Division, Essex County, Docket No. C-65-96. A. Harold Datz Pension and 
     Profit Sharing Plan derivatively, et. al., v. Lawrence R. Codey, et. al.,
     Superior Court of New Jersey, Chancery Division, Essex County, Docket No.
     C-68-96.

(14) Page 28. Suit filed by co-owners of Salem against Westinghouse. PSE&G,
     et. al., v. Westinghouse Electric Corporation, United States District Court
     for the District of New Jersey, Civil Action No. CB-96-925.

(15) Page 28.  Lawsuits by the  co-owners of Salem against  Public  Service
     Electric and Gas Company.  PECO Energy Company,  and Delmarva Public &
     Light  Company v. Public  Service  Electric  and Gas  Company,  United
     States District Court for the Eastern  District of Pennsylvania  Civil
     Action No. 96-CU7705. Atlantic City Electric Company v. Public Service
     Electric and Gas Company,  New Jersey  Superior  Court,  Law Division,
     Atlantic County, Docket No. L-773-96.

(16) Page 62.  Proceeding  before the BPU  related to the LEAC rate  increase to
     recover DSM costs, Docket number not yet assigned.

Item 4. Submission of Matters to a Vote of Security Holders

     Enterprise and PSE&G, inapplicable.

<PAGE>


PART II


Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

     Enterprise's  Common Stock is listed 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, 1996, there were 167,205
holders of record of Enterprise Common Stock.

     The following table indicates the high and low sale prices for Enterprise's
Common Stock,  as reported in The Wall Street Journal as Composite  Transactions
and dividends paid for the periods indicated:

                                                                     Dividend
                                         High           Low          Per Share
                                       --------       --------       ---------
     Common Stock:
     1996
          First Quarter..........      $32 1/8        $25 1/4        $.54
          Second Quarter.........       27 7/8         25 1/8         .54
          Third Quarter..........       27 7/8         25 5/8         .54
          Fourth Quarter.........       29             26 3/8         .54


     Common Stock:
     1995
          First Quarter..........      $29 7/8        $26            $.54
          Second Quarter.........       30 1/4         26 3/4         .54
          Third Quarter..........       29 3/4         26 3/4         .54
          Fourth Quarter.........       30 5/8         28 3/4         .54

     Since 1986,  PSE&G has made regular cash payments to Enterprise in the form
of dividends  on  outstanding  shares of PSE&G's  Common  Stock.  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.  Since 1992,  EDHI has made regular
cash payments to Enterprise  in the form of dividends on  outstanding  shares of
EDHI's  common  stock.  Enterprise  has paid  quarterly  dividends  in each year
commencing with the corporate  restructuring of PSE&G when Enterprise became the
owner of all the outstanding common stock of PSE&G. While the Board of Directors
of Enterprise  intends to continue the practice of paying  dividends  quarterly,
amounts and dates of such  dividends  as may be  declared  will  necessarily  be
dependent upon Enterprise's  future earnings,  financial  requirements and other
factors.


<PAGE>



Item 6. Selected Financial Data

Enterprise

     The  information  presented  below  should  be  read  in  conjunction  with
Enterprise Consolidated Financial Statements and Notes thereto.
<TABLE>
<CAPTION>


                                                                           Years Ended December 31,
                                                --------------------------------------------------------------------------------
                                                    1996            1995             1994            1993            1992
                                                --------------- ---------------  --------------  --------------- ---------------
                                                                   (Thousands of Dollars, where applicable)

<S>                                                <C>             <C>             <C>              <C>             <C>       
Total Operating Revenues....................       $6,041,249      $5,893,662      $5,695,323       $5,427,524      $5,106,279
Income from Continuing Operations...........          587,358         627,287         666,521          549,178         475,150
Cumulative Effect of Change in Accounting
for
   Income Taxes.............................             --              --              --              5,414            --
Income from Discontinued Operations (A).....           24,238          35,036          12,512           46,341          28,967
Net Income..................................         $611,596        $662,323        $679,033         $600,933        $504,117
Earnings per Average Share:
   From Continuing Operations...............            $2.42           $2.57           $2.73            $2.29           $2.05
   From Cumulative Effect of Change in
     Accounting for Income Taxes............             --              --              --                .02            --
   From Discontinued Operations.............              .10             .14             .05              .19             .12
     Total Earnings per Average Share.......            $2.52           $2.71           $2.78            $2.50           $2.17
Dividends Paid per Share....................            $2.16           $2.16           $2.16            $2.16           $2.16
As of December 31:
   Total Assets.............................      $16,915,331     $16,816,491     $16,312,734      $15,995,433     $14,543,696
   Long-Term Liabilities:
     Long-Term Debt.........................       $4,580,231      $5,189,791      $5,110,022       $5,100,228      $4,962,884
     Other Long-Term Liabilities............         $184,769        $199,832        $215,603         $220,159        $146,785
Preferred Stock With Mandatory Redemption...         $150,000        $150,000        $150,000         $150,000         $75,000
Monthly Guaranteed Preferred Beneficial
   Interest in PSE&G's Subordinated
     Debentures.............................        $ 210,000       $ 210,000       $ 150,000             --              --
Quarterly Guaranteed Preferred Beneficial
   Interest in PSE&G's Subordinated
     Debentures.............................         $208,000            --              --               --              --
Ratio of Earnings to Fixed Charges plus
  Preferred Securities Dividend
  Requirements (B)(C).......................             2.68            2.78            2.84             2.57            2.33
</TABLE>


(A)  See Note 2--Discontinued Operations of Notes.

(B)  Fixed charges include the preferred securities dividend requirements of
     PSE&G.

(C)  Excludes income and expenses from discontinued operations.


<PAGE>


PSE&G

     The information  presented  below should be read in conjunction  with PSE&G
Consolidated Financial Statements and Notes thereto.

<TABLE>
<CAPTION>

                                                                               Years Ended December 31,
                                                        -------------------------------------------------------------------------
                                                           1996          1995            1994          1993            1992
                                                        ------------- -------------  -------------- -------------  --------------
                                                                       (Thousands of Dollars, where applicable)
<S>                                                      <C>           <C>             <C>           <C>             <C>       
Total Operating Revenues............................     $5,825,356    $5,707,245      $5,518,241    $5,290,455      $4,994,011
Net Income..........................................       $535,071      $616,964        $659,406      $614,868        $475,936
As of December 31:
   Total Assets.....................................    $14,799,354   $14,586,965     $14,259,398   $13,984,298     $12,396,593
   Long-Term Liabilities:
     Long-Term Debt.................................     $4,107,331    $4,586,268      $4,486,787    $4,364,437      $3,978,138
     Other Long-Term Liabilities....................       $184,769      $199,832        $215,603      $220,159        $146,785
Preferred Stock With Mandatory Redemption...........       $150,000      $150,000        $150,000      $150,000         $75,000
Monthly Guaranteed Preferred Beneficial Interest
   in PSE&G's Subordinated Debentures...............       $210,000      $210,000        $150,000            --              --
Quarterly Guaranteed Preferred Beneficial Interest
   in PSE&G's Subordinated Debentures...............       $208,000            --              --            --              --
Ratio of Earnings to Fixed Charges..................           2.83          3.25            3.35          3.30            2.70
Ratio of Earnings to Fixed Charges plus Preferred
   Securities Dividend Requirements.................           2.62          2.77            2.92          2.89            2.43
</TABLE>


<PAGE>


Item 7. Management's  Discussion  and Analysis of Financial Condition and
        Results of Operations

Enterprise

     This discussion refers to the Consolidated Financial Statements and related
Notes (Notes) of Public Service Enterprise Group  Incorporated  (Enterprise) and
should be read in conjunction with such statements and notes.

Corporate Structure

     Enterprise  has  two  direct  wholly  owned  subsidiaries,  Public  Service
Electric  and  Gas  Company   (PSE&G)  and   Enterprise   Diversified   Holdings
Incorporated (EDHI).  Enterprise's principal subsidiary,  PSE&G, is an operating
public utility providing  electric and gas service in certain areas in the State
of New Jersey.

     EDHI is the parent of Enterprise's non-utility businesses: Community Energy
Alternatives  Incorporated (CEA), an investor in, and developer and operator of,
cogeneration  and  independent  power  production  (IPP)  facilities  and exempt
wholesale generators (EWGs);  Public Service Resources Corporation (PSRC), which
has made primarily passive  investments;  Energis Resources  Incorporated (ERI),
formed in 1996 and  consolidating  two existing energy services  subsidiaries of
PSRC,  which  provides  total  energy  services  to  industrial  and  commercial
customers both within and outside of PSE&G's  traditional service territory (see
Competitive  Environment) and Enterprise Group Development Corporation (EGDC), a
nonresidential  real estate development and investment  business.  EDHI also has
two finance  subsidiaries:  PSEG Capital Corporation  (Capital),  which provides
privately placed debt financing to EDHI subsidiaries other than ERI on the basis
of a minimum net worth  maintenance  agreement  with  Enterprise  and Enterprise
Capital Funding  Corporation  (Funding),  which provides  privately  placed debt
financing to EDHI  subsidiaries  other than EDGC and ERI guaranteed by EDHI, but
without direct support from  Enterprise.  EDHI has been  conducting a controlled
exit from the real estate  business  since 1993. In July 1996,  EDHI sold Energy
Development Corporation (EDC), an oil and gas subsidiary.

     As of December 31, 1996 and 1995, PSE&G comprised 88% of Enterprise assets.
For each of the years 1996, 1995 and 1994, PSE&G revenues were approximately 97%
of Enterprise's  revenues and PSE&G's earnings  available to Enterprise for such
years were 87%, 88% and 91%, respectively, of Enterprise's net income.

Overview of 1996

     In January 1997,  the New Jersey Board of Public  Utilities  (BPU) unveiled
its draft Phase II report of the New Jersey  Energy  Master Plan (draft Phase II
report) for  deregulation of the electric utility  industry.  The draft Phase II
report  requires PSE&G and other New Jersey  electric  utilities to develop rate
and service plans to give customers a choice of suppliers.  Beginning in October
1998, five percent of retail electric customer load of all classes will be given
the ability to directly  choose their  electric power  suppliers.  All customers
would be phased-in by April 2001 (see Competitive Environment).

     Operation of the Salem Nuclear  Generating  Station (Salem) Units continued
to  present  challenges  to PSE&G.  Both  Salem  Units 1 and 2 were shut down in
mid-1995 to address equipment and human  performance  issues and remained out of
service  throughout  1996.  Salem Unit 2 is expected to return to service in the
second  quarter  of 1997  and  Salem  Unit 1 in the  Fall of 1997  (see  Nuclear
Operations).  The 1996  operating  results  reflect a one-time  reduction of net
income of $59 million or 25 cents per share stemming from the BPU's December 31,
1996  Order  (December  31st  Order)  resolving   outstanding  Salem  and  other
regulatory  issues  (see Note  3--Rate  Matters of Notes).  Despite  these Salem
issues, Enterprise was able to achieve the following results:

     -  Formed  ERI as a  subsidiary  of EDHI to better position Enterprise to
        benefit from opportunities arising from deregulation

     -  Experienced a sharp  increase in PSRC's income 

     -  Reduced staff levels by 4.5% primarily through attrition



<PAGE>


     -  Sold EDC, a  non-regulated  oil and gas  exploration  and  development
        business  for a $13 million gain

     -  Initiated a common stock  repurchase program of 5% of Enterprise's
        outstanding Common Stock with a portion of the EDC sale proceeds

     -  Implemented cost containment initiatives to reduce annual operating
        and maintenance expenses
      
     -  Initiated a refurbishment of five of PSE&G's older, less efficient
        fossil generating plants which were scheduled to be closed but will
        instead be used to serve the competitive capacity marketplace

Results of Operations

     Earnings per share of Enterprise  Common Stock were $2.52 in 1996, $2.71 in
1995 and $2.78 in 1994.

     In 1996, Enterprise earnings decreased 19 cents per share or 7% compared to
1995 primarily due to the refunds required by the BPU's December 31st Order (see
Note 3--Rate Matters of Notes).  Under this Order,  PSE&G has provided  electric
customers  with bill credits  totaling  $84 million and will forego  recovery of
another $12 million in energy costs that have been  deferred.  The December 31st
Order  resulted in a 1996 earnings  loss of $59 million,  or 25 cents per share.
Other factors that decreased earnings were:  increased operation and maintenance
expenses  related to the outages at Salem and the Hope Creek Nuclear  Generating
Station  (Hope Creek) and  increased  depreciation  expense due to more plant in
service.  The earnings per share  decrease  was  partially  offset by higher gas
sales  in  early  1996  due to  favorable  weather  conditions,  the gain on the
repurchase of certain of PSE&G's  outstanding  cumulative  preferred  stock at a
discount to par,  increased  investment  income from PSRC and a one-time gain on
the sale of EDC (see Note 2--Discontinued Operations of Notes).

     In 1995,  Enterprise earnings decreased 7 cents per share or 3% compared to
1994  primarily  due to  increased  operating  expenses and lower gas sales from
PSE&G.  These decreases in earnings were partially  offset by improved  electric
sales,  EDC revenues  resulting from the  settlement of litigation  related to a
take or pay sales  contract and from gains  realized on sales of  properties  by
EDC.

     PSE&G--Revenues

     Electric

                                           Increase or (Decrease)
                                           ----------------------
                                             1996          1995
                                              vs.           vs.
                                             1995          1994
                                           ---------------------
                                           (Millions of Dollars)
                                           ---------------------
Kilowatt-hour sales...................         $ (26)      $ 38
Salem Refund..........................           (84)        --
Recovery of energy costs..............            30        189
New Jersey Gross Receipts and
Franchise Tax (NJGRT).................            (7)        12
Other operating revenues..............            11         42
                                            ========    =======
     Total Electric Revenues..........         $ (76)      $281
                                            ========    =======

     Revenues decreased $76 million, or 1.9% in 1996 and 1995 revenues increased
$281 million, or 7.5%. In 1996, electric revenues decreased primarily due to the
refunds required by the December 31st Order,  lower industrial firm revenues due
to a new cogeneration  operation installed at a customer's facility,  outages at
some larger industrial customers and cooler summer weather. These decreases were
partially  offset by increased  residential and commercial sales due to economic
growth.  In 1995,  electric  revenues  increased due to higher  residential  and
commercial  sales  resulting  from a recovering New Jersey  economy,  hot summer
weather  and a  modest  increase  in  customer  base.  Other  electric  revenues
increased due to higher miscellaneous  revenues from increased capacity sales to
unaffiliated utilities and to wholesale customers.



<PAGE>


     Gas

                                           Increase or (Decrease)
                                           ----------------------
                                             1996          1995
                                              vs.           vs.
                                             1995          1994
                                           ---------------------
                                           (Millions of Dollars)
                                           ---------------------
Therm sales ..........................           $36       $(35)
Recovery of fuel costs................           164        (78)
NJGRT.................................            (8)        19
Other operating revenues..............             3          2
                                           =========    =======
     Total Gas Revenues...............          $195       $(92)
                                           =========    =======

     Revenues  increased  $195  million,  or 11.5%  in 1996  and  1995  revenues
decreased $92 million, or 5.2%. In 1996, gas revenues increased primarily due to
a higher recovery of fuel costs and favorable weather  conditions in early 1996.
In 1995, gas revenues decreased due to mild winter weather and lower recovery of
fuel  costs.  These  decreases  were  partially  offset  by  increased  revenues
resulting from off-system sales and higher gas service contract revenues.

     PSE&G--Expenses

     Fuel Expenses

     Variances in fuel expenses do not directly affect  earnings  because of the
adjustment clause mechanism.  In accordance with the December 31st Order,  PSE&G
will forego  recovery of $12 million in  deferred  energy  costs,  $5 million of
which was recorded in 1995 (see Note 1--Organization  and Summary of Significant
Accounting Policies and Note 3--Rate Matters of Notes).

     Other Operation and Maintenance Expenses

     Other  operation and  maintenance  expenses  increased $38 million or 3% in
1996 and  decreased  $6 million  or .5% in 1995.  The 1996  increase  was due to
higher  costs  related  to outage  expenses  for Salem  Units 1 and 2 and higher
refueling  outage costs at Hope Creek.  These expenses were partially  offset by
decreased  maintenance  expenses  at  PSE&G's  fossil  generating  stations  and
decreased  transmission and distribution  expenses. The 1995 decrease was due to
decreased  expenses in PSE&G's  steam  production  area and at electric  and gas
distribution facilities.  These savings were partially offset by outage expenses
at Salem Units 1 and 2.

     Depreciation and Amortization Expenses

     Depreciation and amortization  expenses increased $13 million or 2% in 1996
and $40 million or 7% in 1995.  The 1996  increase was due to the  completion of
the  repowering of the Bergen  Generating  Station in September  1995.  The 1995
increase was due to increases in plant in service.

     Federal Income Taxes

     Federal income taxes decreased $56 million or 17% in 1996 and increased $27
million or 9% in 1995.  The 1996  taxes were lower due to a decrease  in pre-tax
operating  income  while the 1995  taxes  were  higher  due to the  receipt of a
nontaxable insurance benefit in 1994 and higher 1995 pre-tax operating income.

     Allowance for Funds Used During Construction

     Allowance for Funds Used During  Construction  (AFDC) decreased $19 million
or 54% in 1996 and $2 million or 5% in 1995  primarily  due to a lower AFDC rate
in 1996 and the completion of the repowering of the Bergen Generating Station in
September 1995.

     Net Gain (Loss) on Preferred Stock Redemptions

     The  $18.2  million  net  gain on the  repurchase  of  certain  of  PSE&G's
outstanding Cumulative Preferred Stock at discounts to par resulted from PSE&G's
June 1996 tender offer (see External Financings--PSE&G).

EDHI--Net Income

<TABLE>
<CAPTION>

                                                            Increase or (Decrease)
                                         --------------------------------------------------------------
                                               1996 vs. 1995                   1995 vs. 1994
                                         ---------------------------   --------------------------------
                                                           Per                              Per
                                           Amount         Share          Amount            Share
                                         ------------  -------------   -------------   ----------------
                                                 (Millions of Dollars, except Per Share Data)
<S>                                            <C>           <C>             <C>                <C> 
PSRC................................           $22           $.09            $  1               $ --
CEA.................................            (2)          (.01)             (4)              (.02)
ERI.................................            (6)          (.02)             (1)                --
EGDC................................            (1)            --               1                 --
                                         ------------  -------------   -------------   ----------------
Continuing Operations...............            13            .06              (3)              (.02)
Discontinued Operations - EDC
  Income from Operations............           (24)          (.11)             23                .10
  Gain on Sale......................     ------------  ------------    ------------    ----------------
        Total.......................          $  2           $.01            $ 20              $ .08
                                         ============  =============   =============   ================
</TABLE>


     Continuing Operations

     EDHI's  income from  continuing  operations  was $57 million in 1996, a $13
million  increase over 1995 and $44 million in 1995, a $3 million  decrease from
1994.  The 1996  increase was due to PSRC's  increased  income from  partnership
investments.  ERI's income decreased due to increased administrative and general
expenditures  (startup costs) and lower margins related to retail gas marketing.
The 1995  decrease was due  primarily to CEA's higher  interest and  development
expenses.

     Discontinued Operations

     Income  related to EDC  operations  was $11 million in 1996,  a $24 million
decrease  from 1995 and $35 million in 1995, a $23 million  increase  over 1994.
The 1996  decrease was due to the inclusion of only seven months of earnings for
1996 and a $23 million after-tax gain realized in 1995 related to the settlement
of a  take-or-pay  sales  contract.  The 1995  increase  was due  mainly  to the
aforementioned gain related to the settlement of a take-or-pay sales contract.

Liquidity and Capital Resources

     Enterprise

     Cash generated from  operations  will provide the major source of funds for
the growth of the business.  Cash and cash  equivalents  totaled $279 million at
the end of 1996 compared with $62 million at the end of 1995.

     During 1996, Enterprise repurchased 11.2 million shares of its Common Stock
at an  aggregate  cost of $307  million.  The Common  Stock  repurchase  program
concluded on January 17, 1997. A total of 12.7 million  shares were  repurchased
under the program at a cost of $350 million.

     In 1996, cash provided by operating activities totaled $1.434 billion, down
from $1.535 billion in 1995. Major  contributors were net income of $612 million
and noncash  provisions of $607 million for depreciation and amortization.  Cash
used in investing activities totaled $9 million, down from $935 million in 1995;
primarily as a result of the sale of EDC.  Net  proceeds  from the EDC sale were
$704  million.  Cash used in financing  activities  was $1.208  billion in 1996.
Dividend payments on Common Stock were $2.16 per share and totaled $523 million,
a payout of 86% of net income.  Long-term debt decreased in 1996 by $610 million
to $4.580  billion due  primarily to scheduled  debt  maturities.  Common equity
decreased by $225 million to $5.213  billion due primarily to the  repurchase of
common stock.  The return on average  common  equity  decreased to 11.3% in 1996
compared to 12.3% in 1995 due primarily to a decrease in net income.

     In 1995, cash provided by operating  activities totaled $1.535 billion,  up
from $1.244 billion in 1994. Major  contributors were net income of $662 million
and noncash  provisions of $597 million for depreciation and amortization.  Cash
used in investing  activities  totaled  $935  million in 1995,  down from $1.010
billion in 1994  primarily  as a result of a decrease  in  additions  to utility
plant.  Cash used in financing  activities  was $603  billion in 1995.  Dividend
payments on Common Stock were $2.16 per share and totaled $529 million, a payout
of 80% of net income.  Long-term  debt increased in 1995 by $9 million to $5.190
billion.  Common equity increased by $132 million to $5.438 billion.  The return
on average  common  equity  decreased to 12.3% in 1995 compared to 13.0% in 1994
due primarily to a decrease in net income.

     As of December 31, 1996,  Enterprise's capital structure consisted of 49.8%
common equity, 43.7% long-term debt and 6.5% preferred stock and securities. The
capital  structure  as of December 31, 1995  consisted  of 48.1% common  equity,
45.8% long-term debt and 6.1% preferred stock and securities.

     PSE&G

     PSE&G had utility plant  additions of $603  million,  $686 million and $887
million, for 1996, 1995 and 1994,  respectively,  including AFDC of $17 million,
$36  million  and $38  million,  respectively.  Construction  expenditures  were
related to  improvements  in PSE&G's  existing  power plants,  transmission  and
distribution  system, gas system and common facilities.  PSE&G also expended $34
million,  $30  million and $34  million  for the cost of plant  removal  (net of
salvage) in 1996, 1995 and 1994,  respectively.  Construction  expenditures from
1997  through  2001 are  expected to aggregate  $2.6  billion,  including  AFDC.
Forecasted  construction  expenditures  are related to  improvements  in PSE&G's
transmission  and  distribution   system,   existing  power  plants   (including
acquisition of nuclear fuel), gas system and common facilities.
(See Construction and Capital Requirements Forecast below.)

     PSE&G  expects  that it will be  able  to  internally  generate  all of its
construction  and capital  requirements  over the next five years and reduce its
debt  outstanding  by  approximately  $1 billion,  assuming  adequate and timely
recovery  of costs,  as to which no  assurances  can be given (see Note  3--Rate
Matters and Note 13--Commitments and Contingent Liabilities of Notes).

     EDHI

     During the next five years, a majority of EDHI's capital  requirements  are
expected to be provided from  additional  debt  financing and  operational  cash
flows. (See Construction and Capital  Requirements  Forecast below.) CEA and ERI
are  expected  to  be  the  primary  vehicles  for  EDHI's  business  growth.  A
significant  portion of CEA's  growth is expected to occur in the  international
arena due to the current and anticipated growth in electric capacity required in
certain regions of the world.  ERI is expected to expand upon the current energy
related services being provided to industrial and commercial customers.

     PSRC will  continue  to limit new  investments  to those  related to energy
businesses, while EGDC will continue its exit from the real estate business in a
prudent manner. Over the next several years, EDHI and its subsidiaries will also
be required to refinance a portion of their maturing debt in order to meet their
capital  requirements.  Any inability to extend or replace  maturing debt and or
existing  agreements  at current  levels and  interest  rates may affect  future
earnings and result in an increase in EDHI's cost of capital.

     PSRC is a limited partner in various limited  partnerships and is committed
to make  investments  from  time to time,  upon the  request  of the  respective
general partners.  At December 31, 1996, $30 million remained as PSRC's unfunded
commitment subject to call.

     EDHI,  CEA and PSRC are  subject  to  restrictive  business  and  financial
covenants contained in existing debt agreements.  EDHI is required to maintain a
debt to equity ratio of no more than 2.0:1 and a  twelve-months  earnings before
interest and taxes to interest (EBIT)  coverage ratio of at least 1.50:1.  As of
December  31,  1996 and 1995,  EDHI had  consolidated  debt to equity  ratios of
1.05:1 and 1.15:1 respectively,  and for the years ended December 31, 1996, 1995
and 1994,  EBIT coverage  ratios,  as defined to exclude the effects of EGDC and
the  gain on the  sale of EDC,  of  2.45:1,  2.47:1  and  1.94:1,  respectively.
Compliance with applicable financial covenants will depend upon future financial
position and levels of earnings,  as to which no  assurance  can be given.  (See
Note 7--Schedule of Consolidated Debt of Notes.)


<PAGE>


     Construction and Capital Requirements Forecast
<TABLE>
<CAPTION>


                                                            1997        1998      1999       2000      2001       TOTAL
                                                         ---------  ---------- ---------  --------- ---------  ----------
                                                                       (Millions of Dollars)
<S>                                                         <C>         <C>       <C>        <C>       <C>       <C>   
Construction and Investment Requirements:
     PSE&G...........................................       $589        $547      $506       $505      $481      $2,628
     EDHI............................................        173         269       312        320       291       1,365
                                                         ---------  ---------- ---------  --------- ---------  ----------
     Total Construction and Investment Requirements..        762         816       818        825       772       3,993
                                                         ---------  ---------- ---------  --------- ---------  ----------
Mandatory Retirement of Securities:
     PSE&G...........................................        400         118       100        400       100       1,118
     EDHI............................................        125         195       200         78        --         598
                                                         ---------  ---------- ---------  --------- ---------  ----------
     Total Retirement of Securities                          525         313       300        478       100       1,716
                                                         ---------  ---------- ---------  --------- ---------  ----------

          Total Capital Requirements.................     $1,287      $1,129    $1,118     $1,303      $872      $5,709
                                                         =========  ========== =========  ========= =========  ==========
</TABLE>

External Financings--PSE&G

     PSE&G has BPU authority to issue  approximately  $4.734  billion  aggregate
amount of  Bonds/MTNs/Preferred  Securities through 1997 for refunding purposes.
Under its  Mortgage,  PSE&G may issue  new First and  Refunding  Mortgage  Bonds
(Bonds)  against  previous  additions  and  improvements  and/or  retired  Bonds
provided  that its ratio of  earnings  to fixed  charges is at least 2:1.  As of
December 31,  1996,  the Mortgage  would permit up to $3.047  billion  aggregate
principal  amount of new  Bonds to be  issued  against  previous  additions  and
improvements.  At December 31, 1996, the coverage  ratio under PSE&G's  Mortgage
was 3.30:1.

     In January 1996,  PSE&G issued $350 million of its Bonds.  The net proceeds
from the sale were  deposited  in an escrow  account and used to refund  PSE&G's
8.75%  Series  EE Bonds  due 2021 and  8.75%  Series  HH Bonds due 2022 at their
respective first optional redemption dates.

     In June 1996, PSE&G Capital Trust I (Trust I), a special purpose  statutory
business  trust  controlled  by PSE&G,  issued $208 million of 8.625%  Quarterly
Income Preferred Securities  (Quarterly Guaranteed Preferred Beneficial Interest
in  PSE&G's  Subordinated  Debentures).  PSE&G used the  proceeds  to redeem all
500,000 shares of each of its 7.52% and 7.40%  Cumulative  Preferred  Stock $100
par value at $101 per share on June 28,  1996.  In  addition,  PSE&G  purchased,
pursuant to a tender offer,  an aggregate  $111.6  million of its 4.08%,  4.18%,
4.30%, 5.05%, 5.28%, 6.80% and 6.92% Cumulative Preferred Stock $100 par value.

     In February  1997,  PSE&G  Capital  Trust II (Trust II), a special  purpose
statutory  business  trust  controlled  by PSE&G,  issued $95  million of 8.125%
Quarterly Income Preferred Securities (Quarterly Guaranteed Preferred Beneficial
Interest in PSE&G's  Subordinated  Debentures).  PSE&G used the proceeds to fund
the redemption of all 188,684  shares of its 6.80%  Cumulative  Preferred  Stock
$100 par value at $102 per share on January 31, 1997 and will redeem all 750,000
shares of its 7.44%  Cumulative  Preferred  Stock $100 par value at $103.72  per
share in June 1997.

     The BPU has authorized  PSE&G to issue and have outstanding at any one time
not more than $1.3 billion of short-term  obligations,  consisting of commercial
paper and other  unsecured  borrowings  from  banks  and other  lenders  through
January 2, 1999. At December 31, 1996, PSE&G had $525 million of short-term debt
outstanding.

     To provide  liquidity for its commercial  paper  program,  PSE&G has a $500
million one-year  revolving credit agreement  expiring in August 1997 and a $500
million  five-year  revolving  credit  agreement  expiring in August 2000 with a
group of  commercial  banks,  which  provides for  borrowing up to one year.  On
December  31,  1996,  there were no  borrowings  outstanding  under these credit
agreements.  PSE&G expects to be able to renew the credit agreement  expiring in
1997.

     Public Service Conservation Resources Corporation (PSCRC) has a $30 million
revolving  credit  facility  supported by a PSE&G  subscription  agreement in an
aggregate  amount  of $30  million  which  terminates  on March 7,  1997.  As of
December 31, 1996, PSCRC had $30 million outstanding under this facility.

     PSE&G Fuel Corporation (Fuelco) has a $125 million commercial paper program
to finance a 42.49% share of Peach Bottom  Atomic Power Station  (Peach  Bottom)
nuclear fuel, supported by a $125 million revolving credit facility with a group
of banks,  which  expires on June 28, 2001.  PSE&G has  guaranteed  repayment of
Fuelco's  respective  obligations  under this program.  As of December 31, 1996,
Fuelco had commercial paper of $83 million outstanding under such program.

External Financings--EDHI

     Through July 31, 1996, Funding had a commercial paper program, supported by
a commercial  bank letter of credit and credit  facility,  in the amount of $225
million.  Additionally,  Funding had a $225 million  revolving  credit facility.
Both  facilities  were  scheduled  to expire in March  1998.  On July 31,  1996,
Funding amended and restated its commercial  paper program and revolving  credit
facility in  conjunction  with the sale of EDC,  reducing  the total amount from
$450 million to $300 million and  extending the maturity from March 1998 to July
1999.  The $225 million  commercial  paper program was  eliminated  and the $225
million revolving credit facility was increased to $300 million.  As of December
31, 1996,  Funding had no borrowings  outstanding under the amended and restated
facility.

     Capital's  Medium-Term  Note  (MTN)  program  is  expected  to  provide  an
aggregate  principal amount of up to $650 million and its total debt outstanding
at any time,  including  MTNs,  is not expected to exceed such amount.  In 1996,
Capital repaid $20 million of its MTNs. At December 31, 1996,  Capital had total
debt outstanding of $415 million, including $335 million of MTNs.

Nuclear Operations

     PSE&G's Salem Units 1 and 2 were taken out of service in the second quarter
of 1995.  Salem Unit 2 is expected to return to service in the second quarter of
1997.  Salem  Unit 1 is  expected  to  return  to  service  in the  Fall of 1997
following  installation of new steam  generators.  Restart of each Salem Unit is
subject to the approval of the NRC. The cost of the steam generator replacement,
including  installation,  will be  approximately  $150 to $170 million  (PSE&G's
share will be $64 to $72 million). In addition, the cost of disposal of the four
old steam  generators could be as much as $20 million (PSE&G's share would be $9
million).  The inability to successfully return these units to continuous,  safe
operation  could  have a  material  adverse  effect on the  financial  position,
results  of  operations  and net cash  flows of  Enterprise  and PSE&G (see Note
3--Rate Matters of Notes).

     PSE&G's share of total  operating and  maintenance  expenses for both Salem
units for 1996 was $136  million and capital  costs were $119.2  million,  which
includes $59.7 million for steam  generator  replacement.  The outage of a Salem
unit causes PSE&G to incur  replacement  power costs of  approximately  $4 to $6
million per month. Such amounts vary, however,  depending on the availability of
other  generation,  the cost of purchased  energy and other  factors,  including
modifications to maintenance schedules of other units.

     On January 29, 1997, the Nuclear  Regulatory  Commission (NRC) Staff placed
Salem  Units 1 and 2 on the NRC Watch  List and  designated  the Salem  Units as
Category 2 facilities (a plant that is  authorized to operate,  but one that the
NRC Staff will  monitor  closely).  The NRC Staff noted that this action was not
due to any  performance  problems or decline during this  evaluation  period but
that Salem  should  have been  previously  designated  as a Category 2 plant and
would not be ready to leave that status until  satisfactory  integrated  station
performance at power could be observed.

Competitive Environment

     Many  forces are  reshaping  how the utility  industry  meets the needs and
expectations of its customers and shareholders.  Profound changes in the way the
industry is  regulated  will affect how  Enterprise  conducts  business  and its
financial  prospects in the future.  Competitive changes in the utility industry
continued to occur in 1996 and early 1997.  With the issuance of Federal  Energy
Regulatory  Commission  (FERC) Order No. 888 in July 1996 and the draft Phase II
report issued by the BPU in January 1997, Enterprise is now in a better position
to identify and develop  strategies  for addressing the issues that the changing
regulatory structure presents.

     Draft Phase II Report

     On January  16,  1997,  the BPU  addressed  wholesale  and retail  electric
competition in New Jersey and proposed the  restructuring  of the electric power
industry.  In 1997, New Jersey  regulators plan to establish the rules that will
eventually  enable  consumers in all market sectors to choose their providers of
energy and energy service in the future.  With the emergence of this competitive
marketplace,  Enterprise has and will continue to take significant steps to meet
the challenges posed by this changing environment.  A summary of the draft Phase
II report follows:

      Beginning in October  1998,  5% of retail  electric  customer  load of all
     classes (industrial,  commercial and residential) will be given the ability
     to directly choose their electric power  supplier.  All customer load would
     be phased-in,  with the percentage  increasing to 20% in April 1999, 35% in
     October  1999,  50% in April  2000,  75% in October  2000 and 100% in April
     2001.

      Beginning  October  1998,  the rates  for  bundled  electricity  services,
     consisting of power  generation,  transmission,  distribution and auxiliary
     customer services,  such as metering and billing, would be unbundled.  Each
     electric  utility,  including  PSE&G,  would continue to be responsible for
     providing  distribution  service to all  customers,  with price and service
     quality for  distribution  service  regulated  by the BPU.  Other  customer
     services  would also continue to be offered by each electric  utility for a
     monthly fee, including metering, billing and account administration,  which
     would also be regulated by the BPU.

      Transmission  service would be provided by an Independent  System Operator
     (ISO) which would be responsible  for  maintaining  the  reliability of the
     regional  power  grid and  would be  regulated  by  FERC.  Utilities  would
     continue to pass through the cost of transmission to customers in regulated
     rates.  Metering  and  billing  would  also be  reviewed  in  order to make
     recommendations  for the  introduction  of  competition  into the  customer
     services  area.  A  distribution   utility  would  be  permitted  to  offer
     customer-side services, such as equipment repair and service contracts in a
     competitive marketplace.

      The draft Phase II report states that a fully competitive marketplace must
     exist before the BPU will act to end economic  regulation  of power supply.
     This will require, at a minimum, utility generating assets and functions to
     be functionally separated and operate at arms length from the transmission,
     distribution and customer service functions of the electric utilities.  The
     BPU would reserve final  judgment on the issue of requiring  divestiture of
     utility  generating  assets until  detailed  analyses of the  potential for
     market power abuses by utilities have been performed.  In addition, the BPU
     indicated its belief that it is necessary to have a fully  independent  and
     operating  ISO prior to the  implementation  of  customer  choice.  The BPU
     proposes that retail competition in New Jersey be introduced  approximately
     12 to 18 months after the  implementation of full wholesale  competition as
     provided by FERC Order No. 888.

      Each  electric  utility  would be required to file, no later than July 15,
     1997,  complete  restructuring  plans,  stranded cost filings and unbundled
     rate filings. Review of the filings would be completed by October 1998.

      Consumer protections proposed include: maintaining the electric utility as
     a  universal  service or "basic  generation  service"  provider;  continued
     funding of social programs now provided by electric utilities; registration
     of all third party power suppliers with the BPU; establishment of standards
     of conduct for third  party  power  suppliers;  and  continued  funding for
     energy efficiency programs.

      Utilities  would  have an  opportunity  for a  limited  number of years to
     recover through rates stranded costs  associated  with generating  capacity
     commitments  made prior to the advent of  competition.  However,  while the
     draft Phase II report proposes that the quantification of eligible stranded
     costs and a determination of stranded cost recovery should be undertaken on
     a case-by-case  basis,  100% recovery of all eligible  stranded costs would
     not be guaranteed. The opportunity for full recovery of such eligible costs
     would be contingent  upon and may be constrained  by the utility  meeting a
     number of  conditions,  including  achievement  of the goal of delivering a
     near term rate reduction to customers of 5 to 10%. The  presumptive  cutoff
     point for electric generation stranded cost recovery for each utility would
     be its last base rate case with  costs  incurred  after such last base rate
     case to be subject  to a greater  burden of proof for  recovery,  including
     evidence  of a market  test to  determine  availability  of  cost-effective
     alternatives.  PSE&G's  last rate case was  finalized on December 31, 1992,
     reflecting a test year ended of June 30, 1992.

      The draft Phase II report states that  utilities are obligated to take all
     reasonably  available  measures to mitigate  stranded  costs  caused by the
     introduction  of retail  competition.  A specific  market charge would be a
     separate component of a customer's electric bill, to provide a mechanism to
     allow  utilities the  opportunity  to recover  stranded costs for a limited
     number  of years,  ranging  from four to  eight.  New  Jersey is  currently
     studying  the  "securitization"  of stranded  costs as a means of financing
     these costs at interest  rates  lower than the  utility's  cost of capital,
     thereby  helping to mitigate  the rate impact of  stranded  cost  recovery.
     Recovery of securitization may occur over a longer period of time.

      The draft Phase II report suggests the need for federal action in a number
     of areas as an  integral  part of  electric  restructuring.  Of  particular
     concern is the transport of nitrogen  oxides (NOx) and other  pollutants to
     New Jersey from power  plants  located in the Midwest  and  Southeast.  New
     Jersey will develop a  contingency  action plan if federal  action fails to
     mitigate adverse environmental impacts caused by electric restructuring.

     PSE&G is currently  assessing the draft Phase II report's proposed findings
and recommendations and in accordance with the proceeding  requirements and will
file formal  written  comments on February 28,  1997.  On February 4, 5, and 11,
1997, PSE&G  participated in a Phase II public hearings and will work vigorously
toward the goal of opening the New Jersey marketplace to competition. PSE&G also
indicated its intent to develop and submit a  comprehensive  restructuring  plan
that  meets  the  BPU's  and  PSE&G's  shared  objectives  by the July 15,  1997
deadline.  Since the Phase II proceeding is still in the proposal  phase,  PSE&G
cannot predict the outcome of the final Phase II report.

     FERC Order No. 888 (Order No. 888)

     Order No.  888 became  effective  on July 9, 1996 and  requires  all public
utilities  owning,   controlling  or  operating   transmission   lines  to  file
nondiscriminatory  open access  tariffs that offer others the same  transmission
service they provide to themselves.  By March 1, 1997,  intra-pool  transactions
for power pools must also be under a  nondiscriminatory,  pool-wide  open access
tariff. In July 1996, the member companies of Pennsylvania--New Jersey--Maryland
Interconnection (PJM), including PSE&G but excluding PECO Energy Company (PECO),
filed a  proposal  to  reorganize  PJM  into an ISO to  administer  a  pool-wide
open-access  transmission tariff and to operate a centrally dispatched bid-based
energy market in response to Order No. 888. PECO filed a separate  proposal with
FERC.  On  November  13,  1996,   FERC  announced  that  it  was  rejecting  the
restructuring proposals of both PECO and the other PJM companies due to concerns
regarding  the  independence  of the  proposed  ISO and directed PJM to submit a
single consensus pool  restructuring  proposal by December 31, 1996. On December
31,  1996,  PJM  submitted a  pool-wide  open-access  transmission  tariff and a
reformed  pooling  agreement.  The filing  consisted  of a pro forma  tariff and
revised pool agreement that contained some of the same  differences with PECO as
the  earlier   filings.   These   differences  were  presented  as  side-by-side
comparisons in the single  filing.  FERC has not yet responded to the filing but
is expected to do so by March 1, 1997.

     As a result of open access mandated by Order No. 888, there is likely to be
increased  competition from older, dirtier coal-fired plants in the Midwest that
are subject to less restrictive pollution control requirements than utilities in
Northeastern  states  and  consequently,   produce  lower  cost  energy.   These
facilities,  by  increasing  their  power  production  in order to sell into the
Northeast  market,  will,  in turn,  increase  the  release of  pollutants  that
eventually make their way to New Jersey and other northeastern states due to the
prevailing  westerly  winds.  PSE&G,  which has to comply with strict New Jersey
environmental  laws,  will be at a competitive  disadvantage if Order No. 888 is
not modified to recognize this issue.  Numerous  parties,  including PSE&G, have
filed requests seeking  rehearing and  clarification of various aspects of Order
No. 888. These filings are currently  pending before the FERC.  After exhausting
administrative remedies, judicial appeals of Order No. 888 are also possible. It
is possible, therefore, that Order No. 888 will be substantially modified.

     NJGRT

     A joint task force of the BPU and the New Jersey  Treasury  Department  has
proposed  replacing  the current 13% NJGRT  collected  by  utilities  from their
customers  with a combination  of a corporate  business tax, state sales and use
tax and a  transitional  assessment  which  would be phased out over an expected
seven year time frame.  After the  phase-out is  completed,  the proposal  would
improve the competitive position of PSE&G vis-a-vis non-utility energy providers
in New Jersey who do not collect  such tax.  If this tax reform is not  adopted,
PSE&G would remain at a significant competitive disadvantage since PSE&G's rates
would be up to 13%  higher  than  non-utility  energy  providers.  PSE&G  cannot
predict when or if this proposal will be adopted.

     Gas Unbundling

     On August 23,  1996,  PSE&G filed its Gas  Unbundling  Status  Report.  The
filing also contained  PSE&G's  proposal for a residential gas unbundling  pilot
program to be known as  SelectGas.  If approved,  this pilot  program will allow
certain  residential  natural gas  customers  to  participate  in a  competitive
marketplace.  The SelectGas  pilot  program  would  involve four  municipalities
representing approximately 65,000 residential customers. The review of the pilot
program,  including formal discovery,  has been initiated.  PSE&G cannot predict
when or if this proposal will be adopted.


<PAGE>


     Off-Tariff Rate Agreement (OTRA)

     In 1995, the BPU initiated a generic  proceeding  that would give PSE&G the
ability to offer  "off-tariff"  negotiated  rates to customers.  Although  these
OTRA's are offered at PSE&G's sole discretion,  they are subject to BPU approval
of minimum price, confidentiality of information,  contract duration, regulatory
filing  requirements and other reporting  requirements.  These negotiated OTRA's
form part of  PSE&G's  overall  strategy  to  retain  customers  in its  service
territory.  To date,  three  OTRA's have been filed with and approved by the BPU
and PSE&G is  currently in  negotiations  with several  other  customers.  PSE&G
cannot  predict  how many  customers  will  leave  or stay in this  increasingly
competitive environment.

     Competitive Transition Charge (CTC)

     On September 19, 1996,  PSE&G filed a petition with the BPU to establish an
interim CTC. The CTC is designed to recover stranded costs which may result from
a customer leaving PSE&G's system as a full requirements  customer.  If approved
by the BPU as filed,  this charge would apply to customers who, after  September
19,  1996,  commit to an  alternate  source of electric  power  while  remaining
physically  located in PSE&G's electric  franchise area.  Further,  this interim
charge would be limited to customers with present  billing  demands in excess of
500KW.  The proposed charge would be interim pending BPU resolution of the draft
Phase II report  which  addresses  the stranded  cost issue on a generic  basis.
PSE&G  cannot  predict  what  action  the BPU may take with  respect  to the CTC
petition.

     Stranded Costs

     Recoverability  of stranded  costs is largely  dependent on the  transition
rules established by regulators, including FERC and the BPU. Stranded costs that
could result as the industry  moves to a more  competitive  environment  include
investments  in  generating  facilities,  transmission  assets,  purchase  power
agreements where the price being paid under such an agreement exceeds the market
price for electricity  and regulatory  assets for which recovery is based solely
on continued cost based  regulation.  Since the Energy Master Plan proceeding is
still in the proposal phase,  and recognizing  that the issue of  securitization
and the  extent  of its  application  have not been  determined,  as well as the
potential need for legislative  action,  management  cannot predict the level of
PSE&G's  stranded costs or the extent to which regulators will allow recovery of
such costs.

     Bond Ratings

     The changes in the utility industry are attracting  increased  attention of
bond rating  agencies  which  regularly  assess  business and financial  matters
including  how  utility  companies  are  meeting   competition  and  competitive
initiatives,  especially as they affect potential  stranded costs.  Bond ratings
affect the cost of capital and the ability to obtain external  financing.  PSE&G
continually updates the rating agencies on all corporate matters. This minimizes
surprises  and gives the rating  agencies time to  comprehend  the  information.
Given the  uncertainty  of the  industry,  attention  and  scrutiny  of  PSE&G's
competitive  strategies  by rating  agencies  will likely  continue.  This could
result in changes to PSE&G's bond ratings.

     ERI

     On December  31,  1996,  Enterprise  formed ERI,  which it believes  better
positions  Enterprise  to  enter  the  rapidly  deregulating  energy  market  by
marketing   products  and  services  to  industrial  and  commercial   customers
throughout  the Northeast and  Mid-Atlantic  States.  ERI has  consolidated  the
operations  of two former PSRC  subsidiaries  with proven  track  records:  U.S.
Energy  Partners,  which sold  natural  gas,  and  Enterprise  Strategic  Energy
Solutions,  which  provided  consulting,  engineering  and repair  services.  In
addition,  the financing of energy-savings or demand-side  management  projects,
formerly offered by PSE&G's subsidiary,  PSCRC, will now be supplied by ERI. ERI
is expected to draw on Enterprise's  depth of experience and financial  strength
by offering a variety of services: sales of natural gas and electricity;  energy
consulting;  engineering,  equipment  installation  and repair;  inspection  and
diagnostic  services for motors,  generators and other energy conversion and use
equipment;  and up-front  financing.  ERI's  potential  customers  include small
businesses,  department stores, schools,  hospitals and manufacturers from Maine
to Maryland.

Accounting Issues

     Currently,  PSE&G accounts for the effects of regulation in accordance with
Statement of Financial  Accounting  Standards No. 71 "Accounting for the Effects
of Certain Types of Regulation"  (SFAS 71). In accordance with the provisions of
SFAS 71, PSE&G defers  certain  expenses  (regulatory  assets) on the basis that
they will be recovered from  customers  through the  ratemaking  process.  PSE&G
believes it  continues  to meet the  criteria  to account  for  certain  utility
revenues and expenses in accordance with SFAS 71.  However,  if future events or
regulatory  changes  limit  PSE&G's  ability to establish  prices to recover its
costs,  PSE&G might conclude that it no longer meets the applicable  criteria to
defer certain  expenses in accordance with SFAS 71. If PSE&G were to discontinue
the  application  of SFAS 71, the accounting  impact would be an  extraordinary,
noncash charge to operations  that could be material to the financial  position,
results of operations or net cash flows of Enterprise and PSE&G.

     PSE&G has certain  regulatory  assets  resulting from the use of a level of
depreciation expense in the ratemaking process that is less than the amount that
is recorded under generally  accepted  accounting  principles for  non-regulated
companies.  PSE&G cannot presently quantify what the financial  statement impact
would  be  if  depreciation  expense  were  required  to  be  determined  absent
regulation,  but the impact on the financial position,  results of operations or
net cash flows of Enterprise and PSE&G could be material.

     Statement of Position 96-1  "Environmental  Remediation  Liabilities"  (SOP
96-1)  issued by the  American  Institute of  Certified  Public  Accountants  is
effective  for the fiscal years that begin after  December  15,  1996.  SOP 96-1
provides  guidance  where  remediation  is  required  because  of the  threat of
litigation, a claim, or an assessment.  This Statement does not provide guidance
on accounting for pollution  control costs as it applies to current  operations,
costs of future site restoration or closure that are required upon the cessation
of operations or sale of facilities or for remediation obligations undertaken at
the sole  discretion of management.  The adoption of SOP 96-1 is not expected to
have a material impact on the financial  position,  results of operations or net
cash flows of Enterprise and PSE&G.

Rate Matters

     See Note 3--Rate Matters of Notes.

Site Restorations and Other Environmental Costs

     It is difficult to estimate the future  financial  impact of  environmental
laws, including potential  liabilities.  PSE&G accrues environmental  provisions
when it is probable  that a liability  has been  incurred  and the amount of the
liability is reasonably estimable.  Management expects that the amounts provided
as of  December  31,  1996  and  1995  will be  paid  out  over  the  period  of
investigation,  negotiation,  remediation  and  restoration  for the  applicable
sites,  which may be 30 years or more.  Provisions  for  estimated  losses  from
environmental  remediation  are,  depending  on the  site,  based  primarily  on
internal and third-party  environmental studies,  estimates as to the number and
participation level of any other Potentially  Responsible Parties, the extent of
the contamination  and the nature of required remedial and restoration  actions.
The cost of  environmental  remediation  could be  material  to  Enterprise  and
PSE&G's financial  position,  results of operations or net cash flows. (See Note
13--Commitments and Contingent Liabilities of Notes.)

Future Outlook

     One of the most important  lessons of 1996 was that  deregulation is coming
sooner, not later. To meet the challenge of deregulation, Enterprise is focusing
on three business objectives:  getting the rules right, investing for growth and
achieving operational excellence.

     Enterprise   is  seeking  to  ensure   that  the  new  rules  on   industry
restructuring  provide customer choice and lower cost without endangering public
safety or compromising New Jersey's stringent environmental standards.

     Equally  important are the investments that keep the business  growing.  To
this  end,  Enterprise  will  rely to a large  extent  on  CEA.  Because  of the
substantial opportunities overseas, CEA focuses on international markets. CEA is
already established and competitive in several  international  markets.  Another
way Enterprise  will grow the business is by providing  regional energy services
through  ERI.  ERI markets new and  existing  energy  products  and  services to
commercial  and  industrial  business  customers  throughout  the  Northeast and
Mid-Atlantic  states.  As the  deregulation of the gas and  electricity  markets
increase,  Enterprise  expects ERI to play a  significant  role in its  domestic
growth.

     Enterprise  is  continuing  to emphasize  operational  excellence  as a key
business   objective.   Enterprise  is  looking  at  all  operating   areas  for
opportunities to cut costs and increase efficiency. As part of its commitment to
operational excellence, Enterprise is implementing a business integration system
which is designed to increase operating  efficiencies across all of its business
organizations.

     Enterprise  and PSE&G  cannot  predict the  ultimate  outcome of the
ongoing changes that are taking place in the utility industry or predict whether
such outcome will have a material impact on its financial condition,  results of
operations or net cash flows. However, Enterprise and PSE&G believe that the end
result will involve a fundamental change in the way it conducts business.  These
changes  may impact  financial  operating  trends and could  result in  earnings
volatility.  PSE&G is actively seeking  regulatory and operational  changes that
will  allow it to  provide  energy  services  in a safe and  reliable  manner at
competitive prices while achieving strong financial  performance.

PSE&G

     The information  required by this item is incorporated  herein by reference
to the following portions of Enterprise's  Management's  Discussion and Analysis
of  Financial  Condition  and Results of  Operations,  insofar as they relate to
PSE&G and its subsidiaries:  Corporate  Structure;  Overview of 1996; Results of
Operations;  Liquidity and Capital Resources;  Nuclear  Operations;  Competitive
Environment;  Accounting  Issues;  Rate  Matters;  Site  Restorations  and Other
Environmental Costs and Future Outlook.

Forward Looking Statements

     The Private  Securities  Litigation Reform Act of 1995 (the Act) provides a
new "safe harbor" for  forward-looking  statements to encourage such disclosures
without the threat of litigation  providing  those  statements are identified as
forward-looking  and  are  accompanied  by  meaningful,   cautionary  statements
identifying  important  factors  that could  cause the actual  results to differ
materially  from those  projected in the statement.  Forward-looking  statements
have been made in this report. Such statements are based on management's beliefs
as  well  as  assumptions  made  by  and  information   currently  available  to
management.  When used  herein,  the  words  "will",  "anticipate",  "estimate",
"expect",   "objective"  and  similar   expressions  are  intended  to  identify
forward-looking  statements.  In addition to any  assumptions  and other factors
referred to  specifically in connection  with such  forward-looking  statements,
factors  that  could  cause  actual  results  to differ  materially  from  those
contemplated  in any  forward-looking  statements  include,  among  others,  the
following:  deregulation and the unbundling of energy supplies and services;  an
increasingly   competitive  energy  marketplace;   sales  retention  and  growth
potential in a mature service territory and a need to contain costs;  ability to
obtain adequate and timely rate relief,  cost recovery,  including the potential
impact of stranded costs, and other necessary regulatory approvals;  federal and
state  regulatory  actions;  costs  of  construction;   operating  restrictions,
increased  cost  and   construction   delays   attributable   to   environmental
regulations;  nuclear  decommissioning  and the availability of reprocessing and
storage  facilities for spent nuclear fuel;  licensing and  regulatory  approval
necessary for nuclear and other operating stations;  and credit market concerns.
Enterprise  and PSE&G  undertake no obligation to publicly  update or revise any
forward-looking  statements,  whether  as a result  of new  information,  future
events or otherwise.  The foregoing review of factors pursuant to the Act should
not be construed as  exhaustive  or as any  admission  regarding the adequacy of
disclosures made by Enterprise and PSE&G prior to the effective date of the Act.


<PAGE>


                      [THIS PAGE INTENTIONALLY LEFT BLANK]


<PAGE>
  Item 8. Financial Statements and Supplementary Data

<TABLE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                        CONSOLIDATED STATEMENTS OF INCOME
                  (Thousands of Dollars, Except Per Share Data)

<CAPTION>

                                                             For The Years Ended December 31,
                                                       ---------------------------------------------
                                                          1996             1995             1994
                                                       -----------     -----------      -----------
<S>                                                    <C>             <C>              <C>        
OPERATING REVENUES
  Electric                                             $ 3,944,362     $ 4,020,842      $ 3,739,713
  Gas                                                    1,880,994       1,686,403        1,778,528
  Nonutility Activities                                    215,893         186,417          177,082
                                                       -----------     -----------      -----------
     Total Opearting Revenues                            6,041,249       5,893,662        5,695,323
                                                       -----------     -----------      -----------

OPERATING EXPENSES
Operation
  Fuel for Electric Generation and
    Interchanged Power                                     918,514         891,782          695,763
  Gas Purchased                                          1,117,716         961,539        1,023,956
  Other                                                  1,053,520       1,007,735        1,015,806
  Maintenance                                              318,280         312,610          308,080
  Depreciation and Amortization                            607,293         596,966          555,461
  Taxes
    Federal Income Taxes (note 11)                         290,253         337,966          309,946
    New Jersey Gross Receipts Taxes                        598,016         612,961          583,167
    Other                                                   80,698          76,913           81,305
                                                       -----------     -----------      -----------
      Total Operating Expenses                           4,984,290       4,798,472        4,573,484
                                                       -----------     -----------      -----------

OPERATING INCOME                                         1,056,959       1,095,190        1,121,839
                                                       -----------     -----------      -----------

OTHER INCOME (EXPENSES)
  Allowance for Funds Used During Construction -
    Equity                                                    --             5,324           12,789
  Miscellaneous - net                                       (1,920)          8,041            6,430
                                                       -----------     -----------      -----------
       Total Other Income (Expenses)                        (1,920)         13,365           19,219
                                                       -----------     -----------      -----------

INCOME BEFORE INTEREST CHARGES AND
DIVIDENDS ON PREFERRED SECURITIES                        1,055,039       1,108,555        1,141,058
                                                       -----------     -----------      -----------

Interest Charges (note 7)
  Long-Term Debt                                           386,289         402,213          425,422
  Short-Term Debt                                           33,759          32,822           23,962
  Other                                                     33,063          29,172           12,805
                                                       -----------     -----------      -----------
       Total Interest Charges                              453,111         464,207          462,189

Allowance for Funds Used During Construction -
  Debt and Capitalized Interest                            (18,155)        (32,839)         (29,799)
                                                       -----------     -----------      -----------
Net Interest Charges                                       434,956         431,368          432,390

Preferred Securities Dividend Requirements
  (note 5)                                                  27,741          15,664            1,680
Preferred Stock Dividend Requirements (note 5)              23,161          33,762           40,467
Net Gain (Loss) on Preferred Stock Redemptions
   (note 5)                                                 18,177            (474)            --
                                                       -----------     -----------      -----------

INCOME FROM CONTINUING OPERATIONS                          587,358         627,287          666,521

Discontinued Operations - Net of Taxes (note 2)             10,746          35,036           12,512
Gain on Sale of Discontinued Operations - Net
  of Taxes                                                  13,492            --               --
                                                       -----------     -----------     ------------

NET INCOME                                             $   611,596     $   662,323     $    679,033
                                                       ===========     ===========     ============

SHARES OF COMMON STOCK OUTSTANDING
  End of Period                                        233,470,291     244,697,930      244,697,930
  Average for Period                                   242,400,755     244,697,930      244,470,794

EARNINGS PER AVERAGE SHARE
Income From Continuing Operations                      $      2.42     $      2.57     $       2.73
Income From Discontinued Operations                           0.04            0.14             0.05
Gain on Sale of Discontinued Operations                       0.06             --              --
                                                       -----------     -----------     ------------

TOTAL EARNINGS PER AVERAGE SHARE                       $      2.52     $      2.71     $       2.78
                                                       ===========     ===========     ============

DIVIDENDS PAID PER SHARE OF COMMON STOCK               $      2.16     $      2.16     $       2.16
                                                       ===========     ===========     ============


<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>


<PAGE>
<TABLE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                           CONSOLIDATED BALANCE SHEETS
                                     ASSETS
                             (Thousands of Dollars)

<CAPTION>

                                                                    December 31,   December 31,
                                                                       1996           1995
                                                                    ------------   ------------
<S>                                                                  <C>            <C>        
UTILITY PLANT - Original cost (note 16)
  Electric .....................................................     $13,314,033    $13,095,103
  Gas ..........................................................       2,555,901      2,442,572
  Common .......................................................         530,185        517,104
                                                                     -----------    -----------
      Total ....................................................      16,400,119     16,054,779
  Less: Accumulated depreciation and amortization ..............       5,889,098      5,440,414
                                                                     -----------    -----------
      Net ......................................................      10,511,021     10,614,365
  Nuclear Fuel in Service, net of accumulated amortization -
    1996, $259,384; 1995, $297,435..............................         198,845        180,018
                                                                     -----------    -----------
      Net Utility Plant in Service .............................      10,709,866     10,794,383
  Construction Work in Progress, including Nuclear Fuel in
    Process - 1996, $70,455;  1995, $104,743....................         445,321        369,082
  Plant Held for Future Use ....................................          23,966         23,966
                                                                     -----------    -----------
     Net Utility Plant .........................................      11,179,153     11,187,431
                                                                     -----------    -----------
INVESTMENTS AND OTHER NONCURRENT ASSETS (notes 4, 8, 9 and 12)
  Long-Term Investments, net of amortization - 1996, $12,679;
    1995 $6,009, and net of valuation allowances - 1996,
    $16,969; 1995, $ -                                                 1,854,304      1,808,368
  Real Estate Property and Equipment, net of accumulated
    depreciation - 1996, $5,906; 1995, $6,121...................          64,753         88,627
  Other Plant, net of accumulated depreciation and amortization
    - 1996, $6,518; 1995, $6,677................................          37,031         28,720
 Nuclear Decommissioning and Other Special Funds (note 4).......         382,348        313,178
  Other Assets - net of valuation allowances - 1996, $826; 1995,
    $ -                                                                   13,548          3,851
                                                                     -----------    -----------
      Total Investments and Other Noncurrent Assets ............       2,351,984      2,242,744
                                                                     -----------    -----------
 CURRENT ASSETS
   Cash and Cash Equivalents (note 10)..........................         278,903         61,964
   Accounts Receivable:
     Customer Accounts Receivable ...............................        499,858        525,404
     Other Accounts Receivable ..................................        241,483        201,775
     Less: Allowance for Doubtful Accounts                                42,283         38,003
   Unbilled Revenues ............................................        248,504        246,876
     Fuel, at average cost ......................................        313,019        253,360
     Materials and Supplies, at average cost, net of inventory
       valuation reserves - 1996, $16,100; 1995, $20,100.........        147,757        143,741
   Deferred Income Taxes (note 11)...............................         23,210         27,571
   Miscellaneous Current Assets .................................         33,976         39,884
   Net Assets of Discontinued Operations ........................           --          365,905
                                                                     -----------    -----------
        Total Current Assets ....................................      1,744,427      1,828,477
                                                                     -----------    -----------
 DEFERRED DEBITS (note 6)
   Property Abandonments - net.............. ....................         52,573         70,120
   Oil and Gas Property Write-Down...............................         30,924         36,078
   Unamortized Debt Expense .....................................        139,067        123,833
   Deferred OPEB Costs (notes 1 and 14)..........................        226,171        167,189
   Unrecovered Environmental Costs (notes 3 and 13)..............        125,900        130,070
   Unrecovered Plant and Regulatory Study Costs .................         33,941         35,150
   Underrecovered Electric Energy and Gas Costs - net
     (notes 3 and 6).............................................        176,055        170,565
   Unrecovered SFAS 109 Deferred Income Taxes (note 11)..........        751,763        769,136
   Deferred Decontamination and Decommissioning Costs (note 4)...         46,643         49,872
   Other ........................................................         56,730          5,826
                                                                     -----------    -----------
        Total Deferred Debits ...................................      1,639,767      1,557,839
                                                                     -----------    -----------
 Total ..........................................................    $16,915,331    $16,816,491
                                                                     ===========    ===========
<FN>
 See Notes to Consolidated Financial Statements.
</FN>
</TABLE>


<PAGE>
<TABLE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                           CONSOLIDATED BALANCE SHEETS
                         CAPITALIZATION AND LIABILITIES
                             (Thousands of Dollars)

<CAPTION>
                                                                    December 31,   December 31,
                                                                       1996           1995
                                                                    ------------   ------------
<S>                                                                  <C>           <C>         
CAPITALIZATION (notes 5 and 7)
  Common Equity:
    Common Stock .................................................   $ 3,626,792   $  3,801,157
    Retained Earnings ............................................     1,586,256      1,636,971
                                                                     -----------   ------------
       Total Common Equity .......................................     5,213,048      5,438,128
  Subsidiaries' Preferred Securities:
    Preferred Stock Without Mandatory Redemption .................       113,392        324,994
    Preferred Stock With Mandatory Redemption ....................       150,000        150,000
    Monthly Guaranteed Preferred Beneficial Interest in PSE&G's
       Subordinated Debentures....................................       210,000        210,000
    Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's
      Subordinated Debentures.....................................       208,000          --
  Long-Term Debt .................................................     4,580,231      5,189,791
                                                                     -----------   ------------
       Total Capitalization ......................................    10,474,671     11,312,913
                                                                     -----------   ------------
OTHER LONG-TERM LIABILITIES
  Decontamination, Decommissioning and Low Level Radwaste
    Costs (note 4).................... ...........................        46,643         50,449
  Environmental Costs (notes 3 and 13)............................        85,755         96,272
  Capital Lease Obligations (note 12).............................        52,371         53,111
                                                                     -----------   ------------
         Total Other Long-Term Liabilities .......................       184,769        199,832
                                                                     -----------   ------------
CURRENT LIABILITIES
  Long-Term Debt due within one year .............................       547,981         61,060
  Commercial Paper and Loans (note 7).............................       638,051        567,316
  Book Overdrafts ................................................       106,372         70,014
  Accounts Payable ...............................................       590,932        538,585
  Other Taxes Accrued ............................................        31,577         30,816
  Interest Accrued ...............................................        95,800        108,245
  Provision for Rate Refund.......................................        89,210         13,810
  Other ..........................................................       171,831        158,180
                                                                     -----------   ------------
       Total Current Liabilities .................................     2,271,754      1,548,026
                                                                     -----------   ------------
DEFERRED CREDITS
  Deferred Income Taxes (note 11).................................     3,250,343      3,083,426
  Deferred Investment Tax Credits ................................       361,786        392,324
  Deferred OPEB Costs (notes 1 and 14)............................       226,171        167,189
  Other ..........................................................       145,837        112,781
                                                                     -----------    -----------
       Total Deferred Credits ....................................     3,984,137      3,755,720
                                                                     -----------    -----------
 COMMITMENTS AND CONTINGENT LIABILITIES (note 13)                          --             --
                                                                     -----------    -----------
Total ............................................................   $16,915,331    $16,816,491
                                                                     ===========    ===========
</TABLE>

<PAGE>
<TABLE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Thousands of Dollars)

<CAPTION>

                                                                                   For the Years Ended December 31,
                                                                               ---------------------------------------
                                                                                 1996           1995          1994
                                                                               ----------   ----------    -----------
<S>                                                                            <C>          <C>           <C>       
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income ...........................................................       $ 611,596    $  662,323    $  679,033
  Adjustments to reconcile net income to net cash flows from
  operating activities:
    Depreciation and Amortization ......................................         607,293       596,966       555,461
    Amortization of Nuclear Fuel .......................................          59,881        75,028        95,173
    (Deferral) Recovery of Electric Energy and Gas Costs - net .........          (5,490)        1,998      (110,529)
    Unrealized Gains on Investments - net ..............................          (6,982)      (46,668       (26,329)
    Provision for Deferred Income Taxes - net ..........................          64,724       133,898       103,051
    Investment Tax Credits - net .......................................         (28,805)      (20,142       (20,247)
    Allowance for Funds Used During Construction - Debt and
      Equity and Capitalized Interest ..................................         (18,155)      (38,163)      (42,588)
    Proceeds from Leasing Activities ...................................          88,970        37,652        27,682
    Changes in certain current assets and liabilities:
    Net (increase) decrease in Accounts Receivable and Unbilled
      Revenues .........................................................         (11,510)     (169,148)       66,609
    Net (increase) decrease in Inventory - Fuel and Materials and
      Supplies .........................................................         (63,675)       18,589        41,163
    Net increase (decrease) in Accounts Payable ........................          24,049       116,029       (73,283)
    Net increase (decrease) in Provision for Rate Refund................          75,400        (8,143)       19,538
    Net increase (decrease) in Other Accrued Taxes .....................             761       (17,492)     (257,897)
    Net change in Other Current Assets and Liabilities .................          11,475        20,222        19,423
    Other ..............................................................         (28,693)       68,318        75,371
    Net cash provided by operating activities - Discontinued
      Operations .......................................................          53,621       103,606        92,147
                                                                             -----------    ----------    ----------
       Net Cash provided by operating activities .......................       1,434,460     1,534,873     1,243,778
                                                                             -----------    ----------    ----------
CASH FLOWS FROM INVESTING ACTIVITIES
  Additions to Utility Plant, excluding AFDC ...........................        (585,929)     (649,883)     (849,174)
  Net decrease (increase) in Long-Term Investments and Real
    Estate .............................................................           4,916       (66,374)        59,647
  Contribution to Decommissioning Funds and Other Special
   Funds ...............................................................         (29,280)      (29,617)       (35,394)
  Cost of Plant Removal - net ..........................................         (33,503)      (29,674)       (33,962)
  Other ................................................................         (18,113)      (46,715)         7,093
  Change in Net Assets - Discontinued Operations .......................         (51,568)     (113,042)      (158,630)
  Net Proceeds from the Sale of Discontinued Operations ................         704,252           --             --
                                                                             -----------    ----------   ------------
       Net cash used in investing activities ...........................          (9,225)     (935,305)    (1,010,420)
                                                                             -----------    ----------   ------------
CASH FLOWS FROM FINANCING ACTIVITIES
  Net increase (decrease) in Short-Term Debt ...........................          70,735       357,981        (86,050)
  Increase (decrease) in Book Overdrafts ...............................          36,358       (16,562)        23,584
  Issuance of Long-Term Debt ...........................................         373,500       156,320        849,800
  Redemption of Long-Term Debt .........................................        (808,241)     (556,294)      (593,790)
  Long-Term Debt Issuance and Redemption Costs .........................         (40,370)      (14,176)       (29,198)
  Issuance of Preferred Stock ..........................................             --            --         75,000
  Redemption of Preferred Stock ........................................        (211,602)      (60,000)      (120,000)
  Issuance of Preferred Securities of Subsidiaries......................         208,000        60,000        150,000
  Issuance of Common Stock .............................................            --            --           28,495
  Retirement of Common Stock ...........................................        (307,412)         --             --
  Cash Dividends Paid on Common Stock ..................................        (522,565)     (528,548)      (528,071)
  Other ................................................................          (6,699)       (1,814)        (6,970)
                                                                             -----------    ----------   ------------
       Net cash used in financing activities ...........................      (1,208,296)     (603,093)      (237,200)
                                                                             -----------    ----------   ------------
Net  increase (decrease) in Cash and Cash Equivalents ..................         216,939        (3,525)        (3,842)
Cash and Cash Equivalents at Beginning of Period .......................          61,964        65,489         69,331
                                                                             -----------    ----------   ------------
Cash and Cash Equivalents at End of Period .............................     $   278,903    $   61,964   $     65,489
                                                                             ===========    ==========   ============

Income Taxes Paid ......................................................     $   156,656    $  185,376   $    155,104
Interest Paid ..........................................................     $   462,877    $  481,264   $    432,873

<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>

<PAGE>
<TABLE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                  CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
                             (Thousands of Dollars)

<CAPTION>
                                                      For the Years Ended December 31,
                                               --------------------------------------------
                                                    1996            1995            1994
                                               -------------   ------------    ------------

<S>                                                <C>            <C>             <C>      
Balance at Beginning of Period ............... $   1,636,971  $   1,505,010     $ 1,361,018
Add:
Net Income ...................................       611,596        662,323         679,033
                                               -------------   ------------    ------------

Total                                              2,248,567      2,167,333       2,040,051
                                               -------------   ------------    ------------

Deduct:
  Cash Dividends on Common Stock .............       522,565        528,548         528,071
  Retirement of Common Stock .................       133,047              -               -
  Preferred Securities Issuance Expenses .....         6,699          1,814           6,970
                                               -------------   ------------    ------------

       Total Deductions ......................       662,311        530,362         535,041
                                               -------------   ------------    ------------

Balance at End of Period ..................... $   1,586,256  $   1,636,971   $   1,505,010
                                               =============   ============    ============
<FN>
Note:        The  ability  of   Enterprise  to  declare  and  pay  dividends  is
             contingent   upon  its  receipt  of  dividend   payments  from  its
             subsidiaries.   PSE&G,   Enterprise's  principal  subsidiary,   has
             restrictions on the payment of dividends which are contained in its
             Restated  Certificate of Incorporation,  as amended, and certain of
             the  debentures  supplemental  to its  Mortgage  and certain  other
             indentures.  However,  none of these restrictions  presently limits
             the payment of  dividends  out of current  earnings.  The amount of
             PSE&G's restricted retained earnings at December 31, 1996, 1995 and
             1994 was $10 million.  There are no restrictions on EDHI's retained
             earnings. See Notes to Consolidated Financial Statements.
</FN>
</TABLE>


<PAGE>
<TABLE>

                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                        CONSOLIDATED STATEMENTS OF INCOME
                             (Thousands of Dollars)

<CAPTION>

                                              For the Years Ended December 31,
                                       ------------------------------------------------
                                             1996             1995            1994
                                       -------------     -------------    -------------
<S>                                    <C>               <C>              <C>          
OPERATING REVENUES
  Electric                             $   3,944,362     $   4,020,842    $   3,739,713
  Gas                                      1,880,994         1,686,403        1,778,528
                                       -------------     -------------    -------------
     Total Operating Revenues              5,825,356         5,707,245        5,518,241
                                       -------------     -------------    -------------

OPERATING EXPENSES
Operation
Fuel for Electric Generation
  and Interchanged Power                     918,514           891,782          695,763
Gas Purchased                              1,117,716           961,539        1,036,701
Other                                        981,559           949,400          959,859
Maintenance                                  318,280           312,610          308,080
Depreciation and Amortization                604,245           591,114          551,372
Taxes
Federal Income Taxes (note 11)               265,376           321,433          294,529
New Jersey Gross Receipts Taxes              598,016           612,961          583,167
Other                                         75,169            70,904           76,100
                                       -------------     -------------    -------------
     Total Operating Expenses              4,878,875         4,711,743        4,505,571
                                       -------------     -------------    -------------

OPERATING INCOME                             946,481           995,502        1,012,670
                                       -------------     -------------    -------------

OTHER INCOME (EXPENSES)
Allowance for Funds Used During
 Construction - Equity                          --               5,324           12,789
Miscellaneous - net                           (1,942)            7,728            6,233
                                       -------------     -------------    -------------
     Total Other Income (Expenses)            (1,942)           13,052           19,022
                                       -------------     -------------    -------------

INCOME BEFORE INTEREST CHARGES AND
  DIVIDENDS ON PREFERRED SECURITIES          944,539         1,008,554        1,031,692
                                       -------------     -------------    -------------

Interest Charges (note 7)
Long-Term Debt                               343,351           357,584          366,894
Short-Term Debt                               26,014            20,740           18,175
Other                                         29,216            28,545           10,856
                                       -------------     -------------    -------------
   Total Interest Charges                    398,581           406,869          395,925

Allowance for Funds Used During
  Construction - Debt                        (16,854)          (30,943)         (25,319)
                                       -------------     -------------    -------------
   Net Interest Charges                      381,727           375,926          370,606
                                       -------------     -------------    -------------

Preferred Securities Dividend
Requirements of Subsidiaries
  (note 5)                                    27,741            15,664            1,680
                                       -------------     -------------    -------------

NET INCOME                                   535,071           616,964          659,406
                                       -------------     -------------    -------------

Preferred Stock Dividend Requirements
(note 5)                                      23,161            33,762           40,467
Net Gain (Loss) on Preferred Stock
Redemptions (note 5)                          18,177              (474)              --
                                       -------------     -------------    -------------

EARNINGS AVAILABLE TO PUBLIC SERVICE
  ENTERPRISE GROUP INCORPORATED        $     530,087     $     582,728    $     618,939
                                       =============     =============    =============

<FN>
See notes to Consolidated Financial Statements.
</FN>
</TABLE>


<PAGE>
<TABLE>

                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                           CONSOLIDATED BALANCE SHEETS
                                     ASSETS
                             (Thousands of Dollars)

<CAPTION>
                                                                    December 31,   December 31,
                                                                        1996           1995
                                                                    ------------   ------------
<S>                                                                   <C>            <C>       
UTILITY PLANT - Original cost (note 16)
  Electric ......................................................   $ 13,314,033  $  13,095,103
  Gas ...........................................................      2,555,901      2,442,572
  Common ........................................................        530,185        517,104
                                                                    ------------   ------------
       Total ....................................................     16,400,119     16,054,779
  Less: Accumulated depreciation and amortization ...............      5,889,098      5,440,414
                                                                    ------------   ------------
       Net ......................................................     10,511,021     10,614,365
  Nuclear Fuel in Service, net of accumulated amortization -
    1996, $259,384; 1995,  $297,435............... ..............        198,845        180,018
                                                                    ------------   ------------
       Net Utility Plant in Service .............................     10,709,866     10,794,383
  Construction Work in Progress, including Nuclear Fuel in
    Process - 1996, $70,455; 1995, $104,743.. ...................        445,321        369,082
  Plant Held for Future Use .....................................         23,966         23,966
                                                                    ------------   ------------
       Net Utility Plant ........................................     11,179,153     11,187,431
                                                                    ------------   ------------
INVESTMENTS AND OTHER NONCURRENT ASSETS
  Long-Term Investments,  net of amortization - 1996, $12,679;
     1995, $6,009, and net of valuation allowances - 1996, 
     $13,969; 1995, $ - (note 8).................................        133,342        119,474
  Nuclear Decommissioning and Other Special Funds (note 4).......        382,348        313,178
  Other Plant, net of accumulated depreciation and
    amortization - 1996, $1,171; 1995, $1,905....................         19,157         24,976
                                                                    ------------   ------------
       Total Investments and Other Noncurrent Assets ............        534,847        457,628
                                                                    ------------   ------------
CURRENT ASSETS
  Cash and Cash Equivalents (note 10)............................         47,639         32,373
  Accounts Receivable:
    Customer Accounts Receivable ................................        499,858        525,404
    Other Accounts Receivable ...................................        175,009        157,525
    Less: Allowance for Doubtful Accounts .......................         42,283         38,003
  Accounts Receivable - Associated Companies (note 19)...........          4,308             --
  Unbilled Revenues .............................................        248,504        246,876
  Fuel, at average cost .........................................        313,019        253,360
  Materials and Supplies, at average cost, net of inventory 
    valuation reserves - 1996, $16,100; 1995, $20,100 ...........        147,757        143,741
  Deferred Income Taxes (note 11)................................         23,210         27,571
  Miscellaneous Current Assets ..................................         30,409         37,130
                                                                    ------------   ------------
       Total Current Assets .....................................      1,447,430      1,385,977
                                                                    ------------   ------------
DEFERRED DEBITS (note 6)
  Property Abandonments - net....................................         52,573         70,120
  Oil and Gas Property Write-Down................................         30,924         36,078
  Unamortized Debt Expense.......................................        137,606        122,049
  Deferred OPEB Costs (notes 1 and 14)...........................        226,171        167,189
  Unrecovered Environmental Costs (notes 3 and 13)...............        125,900        130,070
  Unrecovered Plant and Regulatory Study Costs ..................         33,941         35,150
  Underrecovered Electric Energy and Gas Costs - net 
    (notes 3 and 6)..............................................        176,055        170,565
  Unrecovered SFAS 109 Deferred Income Taxes (note 11)...........        751,763        769,136
  Deferred Decontamination and Decommissioning Costs (note 4)....         46,643         49,872
  Other .........................................................         56,348          5,700
                                                                    ------------   ------------
       Total Deferred Debits ....................................      1,637,924      1,555,929
                                                                    ------------   ------------
Total ...........................................................   $ 14,799,354   $ 14,586,965
                                                                    ============   ============

<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>

<PAGE>
<TABLE>

                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                           CONSOLIDATED BALANCE SHEETS
                         CAPITALIZATION AND LIABILITIES
                             (Thousands of Dollars)

<CAPTION>
                                                                        December 31,       December 31,
                                                                            1996               1995
                                                                        ------------       ------------
<S>                                                                     <C>                  <C>      
CAPITALIZATION (notes 5 and 7)
  Common Equity:
    Common Stock ....................................................   $  2,563,003       $ 2,563,003
    Contributed Capital from Enterprise .............................        594,395           594,395
    Retained Earnings ...............................................      1,365,003         1,365,915
                                                                        ------------       -----------
       Total Common Equity ..........................................      4,522,401         4,523,313
  Preferred Stock Without Mandatory Redemption ......................        113,392           324,994
  Preferred Stock  With Mandatory Redemption ........................        150,000           150,000
  Subsidiaries' Preferred Securities:
    Monthly Guaranteed Preferred Beneficial Interest in PSE&G's
       Subordinated Debentures.......................................        210,000           210,000
    Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's
      Subordinated Debentures........................................        208,000              --
  Long-Term Debt ....................................................      4,107,331         4,586,268
                                                                        ------------      ------------
       Total Capitalization .........................................      9,311,124         9,794,575
                                                                        ------------      ------------
OTHER LONG-TERM LIABILITIES
  Decontamination, Decommissioning and Low Level Radwaste
    Costs (note 4)...................................................         46,643            50,449
  Environmental Costs (notes 3 and 13)...............................         85,755            96,272
  Capital Lease Obligations (note 12)................................         52,371            53,111
                                                                        ------------      ------------
       Total Other Long-Term Liabilities ............................        184,769           199,832
                                                                        ------------      ------------
CURRENT LIABILITIES
  Long-Term Debt due within one year ................................        423,500              --
  Commercial Paper and Loans (note 7)... ............................        638,051           567,316
  Book Overdrafts ...................................................        106,372            70,014
  Accounts Payable ..................................................        520,651           481,632
  Accounts Payable - Associated Companies - net (note 19)............           --               8,011
  Other Taxes Accrued ...............................................         33,745            32,767
  Interest Accrued ..................................................         86,674            95,811
  Provision for Rate Refund..........................................         89,210            13,810
  Other .............................................................        132,113           141,910
                                                                        ------------      ------------
       Total Current Liabilities ....................................      2,030,316         1,411,271
                                                                        ------------      ------------
DEFERRED CREDITS
  Deferred Income Taxes (note 11).................................         2,557,587         2,535,603
  Deferred Investment Tax Credits ..................................         351,637           370,610
  Deferred OPEB Costs (notes 1 and 14)...............................        226,171           167,189
  Other .............................................................        137,750           107,885
                                                                        ------------      ------------
       Total Deferred Credits .......................................      3,273,145         3,181,287
                                                                        ------------      ------------
COMMITMENTS AND CONTINGENT LIABILITIES (note 13)                               --                --
                                                                        ------------      ------------
Total ...............................................................   $ 14,799,354      $ 14,586,965
                                                                        ============      ============
</TABLE>


<PAGE>
<TABLE>

                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Thousands of Dollars)

<CAPTION>

                                                                                       For the Years Ended December 31,
                                                                                ------------------------------------------------
                                                                                      1996             1995             1994
                                                                                ------------       ------------      -----------
<S>                                                                             <C>                <C>               <C>        
CASH FLOWS FROM OPERATING ACTIVITIES
  Net Income ..............................................................     $    535,071       $    616,964      $   659,406
  Adjustments to reconcile net income to net cash flows from
  operating activities:
    Depreciation and Amortization .........................................          604,245            591,114          551,372
    Amortization of Nuclear Fuel ..........................................           59,881             75,028           95,173
    (Deferral) Recovery of Electric Energy and Gas Costs - net ............           (5,490)             1,998         (110,529)
    Provision for Deferred Income Taxes - net .............................           39,357             79,321          108,163
    Investment Tax Credits - net ..........................................          (18,973)           (19,111)         (19,208)
    Allowance for Funds Used During Construction - Debt and Equity ........          (16,854)           (36,267)         (38,108)
       Changes in certain current assets and liabilities:
    Net decrease (increase) in Accounts Receivable and Unbilled
      Revenues ............................................................            6,406           (142,770)          74,891
    Net (increase) decrease in Inventory - Fuel and Materials
      and Supplies ........................................................          (63,675)            18,589           41,163
    Net increase (decrease) in Accounts Payable ...........................           31,008            102,961          (99,788)
    Net increase (decrease) in Provision for Rate Refund...................           75,400             (8,143)          19,538
    Net increase (decrease) in Other Accrued Taxes ........................              978            (11,071)        (261,037)
    Net change in Other Current Assets and Liabilities ....................           (7,852)             6,043           16,707
  Other ...................................................................          (36,056)            57,159           27,763
                                                                                ------------       ------------       ----------
       Net cash provided by operating activities ..........................        1,203,446          1,331,815        1,065,506
                                                                                ------------       ------------       ----------
CASH FLOWS FROM INVESTING ACTIVITIES
  Additions to Utility Plant, excluding AFDC ..............................         (585,929)          (649,883)        (849,174)
  Net (increase) decrease in Long-Term Investments .......................           (21,217)           (65,189)          50,668
  Contribution to Decommissioning Funds and Other Special
   Funds ..................................................................          (29,280)           (29,617)         (35,394)
  Cost of Plant Removal - net .............................................          (33,503)           (29,674)         (33,962)
  Other ...................................................................            5,819                859            1,692
                                                                                ------------       ------------       ----------
       Net cash used in investing activities ..............................         (664,110)          (773,504)        (866,170)
                                                                                ------------       ------------       ----------
CASH FLOWS FROM FINANCING ACTIVITIES
  Net increase (decrease) in Short-Term Debt ..............................           70,735            165,557         (130,969)
  Increase (decrease) in Book Overdrafts ..................................           36,358            (16,562)          23,584
  Issuance of Long-Term Debt ..............................................          373,500            156,320          849,800
  Redemption of Long-Term Debt ............................................         (428,937)          (367,039)        (478,950)
  Long-Term Debt Issuance and Redemption Costs ........................              (36,141)           (13,462)         (29,731)
  Issuance of Preferred Stock .............................................             --                 --             75,000
  Redemption of Preferred Stock ...........................................         (211,602)           (60,000)        (120,000)
  Net Gain (loss) on Preferred Stock Redemptions ..........................           18,177               (474)            --  
  Issuance of Preferred Securities of Subsidiaries.........................          208,000             60,000          150,000
  Contributed Capital .....................................................             --               60,000             --  
  Cash Dividends Paid .....................................................         (547,461)          (535,962)        (545,767)
  Other ...................................................................           (6,699)            (1,814)          (6,970)
                                                                                ------------       ------------       ----------
       Net cash used in financing activities ..............................         (524,070)          (553,436)        (214,003)
                                                                                ------------       ------------       ----------
  Net increase (decrease) in Cash and Cash Equivalents .................              15,266              4,875          (14,667)
  Cash and Cash Equivalents at Beginning of Period .......................            32,373             27,498           42,165
                                                                                ------------       ------------       ----------
  Cash and Cash Equivalents at End of Period ..............................     $     47,639       $     32,373       $   27,498
                                                                                ============       ============       ==========

  Income Taxes Paid .......................................................     $    254,141       $    279,873       $  209,196
  Interest Paid ...........................................................     $    391,783       $    399,509       $  345,867

<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>

<PAGE>
<TABLE>

                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                  CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
                             (Thousands of Dollars)

<CAPTION>


                                                       For the Years Ended December 31,
                                                 --------------------------------------------
                                                      1996            1995           1994
                                                 -------------  -------------   -------------

<S>                                                  <C>             <C>            <C>      
Balance at Beginning of Period ................  $   1,365,915  $    1,287,201  $   1,180,532
Add:
 Net Income ....................................       535,071         616,964        659,406
                                                 -------------  --------------  -------------

     Total ....................................      1,900,986       1,904,165      1,839,938
                                                 -------------  --------------  -------------

Deduct Cash Dividends:
  Preferred Stock, at
  required rates ..............................         23,161          33,762         40,467
  Common Stock ................................        524,300         502,200        505,300
  Preferred Securities Issuance Expenses ......          6,699           1,814          6,970
                                                 -------------  --------------  -------------

            Total Deductions ..................        554,160         537,776        552,737
                                                 -------------  --------------  -------------

Net Gain (Loss) on Preferred Stock
 Redemptions ..................................         18,177            (474)          --
                                                 -------------  --------------  -------------

Balance at End of Period ......................  $   1,365,003  $    1,365,915  $   1,287,201
                                                 =============  ==============  =============
<FN>
Note:        PSE&G has  restrictions on the payment of dividends which are
             contained in its Restated Certificate of Incorporation, as amended,
             and certain of the  debentures  supplemental  to its  Mortgage  and
             certain  other  indentures.  However,  none of  these  restrictions
             presently limits the payment of dividends out of current  earnings.
             The amount of PSE&G's restricted  retained earnings at December 31,
             1996, 1995 and 1994 was $10 million. See Notes to Consolidated 
             Financial Statements.
</FN>
</TABLE>

<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1. Organization and Summary of Significant Accounting Policies

Organization

     Enterprise  has  two  direct  wholly  owned  subsidiaries,  Public  Service
Electric  and  Gas  Company   (PSE&G)  and   Enterprise   Diversified   Holdings
Incorporated (EDHI).  Enterprise's principal subsidiary,  PSE&G, is an operating
public utility providing  electric and gas service in certain areas in the State
of New Jersey.

     EDHI is the parent of Enterprise's non-utility businesses: Community Energy
Alternatives  Incorporated (CEA), an investor in, and developer and operator of,
cogeneration  and  independent  power  production  (IPP)  facilities  and exempt
wholesale generators (EWGs);  Public Service Resources Corporation (PSRC), which
has made primarily passive  investments;  Energis Resources  Incorporated (ERI),
which provides total energy services to industrial and commercial customers both
within and outside of PSE&G's  traditional  service  territory (see  Competitive
Environment)   and  Enterprise   Group   Development   Corporation   (EGDC),   a
nonresidential  real estate development and investment  business.  EDHI also has
two finance  subsidiaries:  PSEG Capital Corporation  (Capital),  which provides
privately placed debt financing on the basis of a minimum net worth  maintenance
agreement with Enterprise and Enterprise Capital Funding Corporation  (Funding),
which provides  privately placed debt financing  guaranteed by EDHI, but without
direct support from Enterprise.  EDHI has been conducting a controlled exit from
the real estate business since 1993. In July 1996, EDHI sold Energy  Development
Corporation (EDC), an oil and gas subsidiary.

Summary of Significant Accounting Policies

     Regulation--PSE&G

     The accounting and rates of PSE&G are subject, in certain respects,  to the
requirements  of the New Jersey Board of Public  Utilities (BPU) and the Federal
Energy Regulatory  Commission (FERC). As a result,  PSE&G maintains its accounts
in accordance with their prescribed  Uniform Systems of Accounts,  which are the
same. The  application of Generally  Accepted  Accounting  Principles  (GAAP) by
PSE&G differs in certain respects from applications by non-regulated businesses.
PSE&G  prepares its financial  statements in accordance  with the  provisions of
Statement of Financial Accounting Standards No.  71--"Accounting for the Effects
of Certain Types of Regulation"  (SFAS 71). In general,  SFAS 71 recognizes that
accounting for  rate-regulated  enterprises  should reflect the  relationship of
costs and revenues.  As a result, a regulated  utility may defer  recognition of
costs (a regulatory asset) or recognize  obligations (a regulatory liability) if
it  is  probable  that,  through  the  rate-making  process,  there  will  be  a
corresponding increase or decrease in revenues.  Accordingly, PSE&G has deferred
certain costs, which will be amortized over various periods.  To the extent that
collection of such costs or payment of  liabilities  is no longer  probable as a
result of  changes  in  regulation  and/or  PSE&G's  competitive  position,  the
associated  regulatory  asset or  liability  will be  reversed  with a charge or
credit to income (see Note 6--Deferred  Items). If PSE&G were to discontinue the
application of SFAS 71, the accounting impact would be an extraordinary, noncash
charge to operations that could be material to the financial  position,  results
of operations or net cash flows of Enterprise and PSE&G.

     Amounts charged to operations for  depreciation  expense reflect  estimated
useful  lives and  methods,  which  include  estimates  of cost of  removal  and
salvage,  prescribed  and  approved by  regulators  rather than those that might
otherwise apply to non-regulated  enterprises.  PSE&G cannot presently  quantify
what the financial  statement  impact may be if depreciation  expense were to be
determined absent regulation.


<PAGE>


     Consolidation Policy

     The consolidated  financial  statements  include the accounts of Enterprise
and its  subsidiaries.  All significant  intercompany  accounts and transactions
have been eliminated in consolidation.  Certain  reclassifications of prior year
data have been made to conform with the current presentation.

     Unamortized Debt Expense

     Gains,  losses and the costs of issuing and  redeeming  long-term  debt for
PSE&G are deferred and amortized over the life of the applicable debt.

     Utility Plant--PSE&G

     Additions  to  utility  plant and  replacements  of units of  property  are
capitalized at original cost. The cost of maintenance, repair and replacement of
minor items of property is charged to appropriate expense accounts.  At the time
units of depreciable  property are retired or otherwise  disposed,  the original
cost less net salvage value is charged to accumulated depreciation.

     Depreciation and Amortization

     Depreciation is computed under the  straight-line  method.  Depreciation is
based on estimated average remaining lives of the several classes of depreciable
property.  These  estimates  are  reviewed  on a  periodic  basis and  necessary
adjustments  are made as  approved  by the BPU.  Depreciation  rates  stated  in
percentages of original cost of depreciable  property were 3.53% in 1996,  3.52%
in 1995 and 3.51% in 1994.

     Nuclear   Fuel   burnup   costs  are   charged   to  fuel   expense   on  a
units-of-production  basis over the  estimated  life of the fuel.  Rates for the
recovery of fuel used at all nuclear  units  include a provision of one mill per
kilowatt-hour  (KWH) of nuclear  generation  for spent fuel disposal  costs (see
Note 4--PSE&G Nuclear Decommissioning ).

     Use of Estimates

     The process of  preparing  financial  statements  in  conformity  with GAAP
requires the use of estimates and assumptions regarding certain types of assets,
liabilities, revenues and expenses. Such estimates primarily relate to unsettled
transactions and events as of the date of the financial statements. Accordingly,
upon settlement, actual results may differ from estimated amounts.

     Decontamination and Decommissioning--PSE&G

     In 1993, FERC issued Order No. 557 regarding the accounting and rate-making
treatment of special  assessments levied under the National Energy Policy Act of
1992 (EPAct).  Order No. 557 provides that special  assessments  are a necessary
and reasonable  current cost of fuel and shall be fully  recoverable in rates in
the same manner as other fuel costs.  By Order dated December 31, 1996 (December
31st Order), the BPU approved a settlement that provides that PSE&G can continue
to follow  deferred  accounting  treatment for the non-energy  components of the
Electric  Levelized Energy Adjustment Clause (LEAC). The parties to the December
31st Order,  including  the New Jersey  Division of  Ratepayer  Advocate and BPU
Staff,  reserved  the right to review  the  reasonableness  of these  costs in a
future  proceeding,  prior to recovery from customers (see Note 4--PSE&G Nuclear
Decommissioning and Amortization of Nuclear Fuel).

     Allowance for Funds Used During Construction (AFDC)--PSE&G

     AFDC  represents  the cost of debt and equity  funds  used to  finance  the
construction  of new  utility  facilities.  The  amount of AFDC  capitalized  is
reported in the  Consolidated  Statements  of Income as a reduction  of interest
charges for the  borrowed  funds  component  and as other  income for the equity
funds component. The rates used for calculating AFDC in 1996, 1995 and 1994 were
5.83%, 6.98% and 6.48%, respectively.


<PAGE>


     Revenues and Fuel Costs--PSE&G

     Revenues are recorded based on services  rendered to customers  during each
accounting  period.  PSE&G records unbilled revenues  representing the estimated
amount customers will be billed for services  rendered from the time meters were
last  read  to the  end of  the  respective  accounting  period.  Rates  include
projected fuel costs for electric  generation,  purchased and interchanged power
and gas purchased.

     Any LEAC and Levelized Gas  Adjustment  Charge  (LGAC)  underrecoveries  or
overrecoveries,  together with interest (in the case of net overrecoveries), are
deferred and included in operations in the period in which they are reflected in
rates (see Note 3--Rate Matters).

     Financial Instruments

     Gains and losses on hedges of existing  assets or liabilities  are included
in the  carrying  amounts of those  assets and  liabilities  and are  ultimately
recognized in income as part of those carrying amounts. Gains and losses related
to qualifying  hedges of firm commitments or anticipated  transactions  also are
deferred and recognized in income or as adjustments of carrying amounts when the
hedged   transaction   occurs  (see  Note  9--Financial   Instruments  and  Risk
Management).

     Income Taxes

     Enterprise  and its  subsidiaries  file a  consolidated  federal income tax
return and income taxes are allocated to Enterprise's  subsidiaries based on the
taxable income or loss of each  subsidiary.  Investment tax credits are deferred
and amortized over the useful lives of the related  property,  including nuclear
fuel.

     Benefit Plans

     Non-represented  employees of PSE&G  commencing  service  before January 1,
1996,  represented  employees of PSE&G commencing  employment  before January 1,
1997 and certain  employees  of PSE&G's  affiliated  companies  are covered by a
noncontributory  trusteed  pension  plan  (Pension  Plan) from the date of hire.
Non-represented  employees of PSE&G who commenced service after January 1, 1996,
represented  employees of PSE&G who commence employment after January 1, 1997 as
well as certain employees of PSE&G's affiliated  companies are covered by a Cash
Balance  Pension  Plan.  The policy is to fund pension  costs  accrued (see Note
15--Pension Plan).

     In 1993,  Enterprise  and PSE&G adopted  Statement of Financial  Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions"  (SFAS  106)  which  requires  that the  expected  cost of  employees'
postretirement  health  care and life  insurance  benefits be charged to expense
during the years in which employees render service (see Note  14--Postretirement
Benefits Other Than Pensions).

     Impairment of Long-Lived Assets

     On January 1, 1996,  Enterprise  and PSE&G  adopted  Statement of Financial
Accounting  Standards  No. 121,  "Accounting  for the  Impairment  of Long-Lived
Assets and for Long-Lived  Assets to be Disposed of" (SFAS 121),  which requires
review for  possible  impairment  whenever  events or  changes in  circumstances
indicate  that the  carrying  amount  of an asset  may not be  recoverable.  The
adoption  of SFAS 121 did not  have an  impact  on the  results  of  operations,
financial condition or net cash flows of Enterprise and PSE&G.  However,  future
developments in the electric  industry and utility  regulation  could jeopardize
the full  recovery of the carrying  cost of certain  investments.  Consequently,
Enterprise and PSE&G are monitoring the changing  conditions facing the electric
utility industry.

     Stock Based Compensation

     Statement  of  Financial  Accounting  Standards  No.  123  "Accounting  for
Stock-Based  Compensation"  (SFAS 123) is effective  for fiscal years that begin
after December 15, 1995. SFAS 123 establishes financial accounting and reporting
standards for stock based  compensation  plans and includes all  arrangements by
which  employees  receive  shares of stock or other  equity  instruments  of the
employer or by which the  employer  incurs  liabilities  to employees in amounts
based on the price of the  employer's  stock.  SFAS 123  provides  an entity the
option to either  adopt the new method or to  continue  to measure  compensation
cost as  prescribed  by  Accounting  Principles  Board  Opinion  No. 25 (APB 25)
"Accounting  for Stock Issued to Employees" and provide  proforma  disclosure of
the effect of adopting SFAS 123.  Enterprise has elected to continue its current
accounting  treatment  for  stock  compensation  under  APB 25.  If stock  based
compensation  costs for  Enterprise had been  determined  based on  methodology
prescribed  in SFAS 123,  there  would not have  been a  material  effect on the
financial position, results of operations or net cash flows of Enterprise.

Note 2. Discontinued Operations

     On July 1,  1996,  EDHI  entered  into a  contract  for the  sale of EDC to
Samedan  Oil  Corporation,  a  subsidiary  of  Noble  Affiliates,  Inc.,  for an
aggregate  purchase  price of $779  million  subject to various  purchase  price
adjustments.  As a result,  Consolidated  Financial Statements previously issued
have been restated to give effect to the  classification  of EDC as discontinued
operations.  The sale,  which was  completed  on July 31,  1996,  resulted in an
after-tax gain of $13 million.

     Operating  results  of EDC  for  1996  (7  months),  1995,  and  1994  are
summarized in the following table:

                                           1996            1995           1994
                                        (7 months)
                                       -------------    ------------  ----------
                                                 (Thousands of Dollars)
Revenues..............................   $128,353        $270,134      $234,608
Operating income......................     24,551          80,786        43,938
Earnings before income taxes..........      9,062          53,299        14,196
Income taxes..........................     (1,684)         18,263         1,684
Net income............................     10,746          35,036        12,512


     The net assets of EDC included in Enterprise's  Consolidated  Balance Sheet
at December 31, 1995 are summarized in the following table:

                                                       December 31,
                                                           1995
                                                       ------------
                                                       (Thousands
                                                        of Dollars)
Property                                                 $608,015
Current assets, primarily receivables                      90,986
Other assets                                               56,836
Current liabilities                                        62,204
Debt                                                      311,821
Deferred credits and other liabilities                     15,907
                                                       ------------
Net assets                                               $365,905
                                                       ===========

Note 3. Rate Matters

Settlement of Certain Regulatory Issues

     By Order dated December 31, 1996 (December 31st Order),  the BPU approved a
settlement among PSE&G, the staff of the BPU (Staff) and the New Jersey Division
of Ratepayer Advocate  addressing (i) the cost impact of the current shutdown of
Salem Units 1 and 2,  including the "used and useful" issue related to the units
through December 31, 1998; (ii) the recovery of certain  replacement power costs
associated with the 1994 Salem Unit 1 outage; and (iii) the recovery of capacity
costs  associated  with PSE&G's  power  purchases  from  cogeneration  producers
through  December 31, 1998.  Under the December  31st Order,  PSE&G has provided
electric  customers  with bill  credits  totaling  $83.9  million in January and
February  1997 and PSE&G will forego  recovery of $12  million  associated  with
energy costs that previously have been deferred.  The resulting earnings loss of
$62.3  million or 26 cents per share of Enterprise  common stock was  previously
recorded  ($59.0  million or 25 cents per share in the third quarter of 1996 and
$3.3 million or 1 cent per share in 1995).

     Under  the  terms of the  December  31st  Order,  Salem  Units 1 and 2 will
continue in base rates without  being  subject to further  refund and PSE&G will
assume all nuclear and fossil generating fuel and performance  risks,  including
replacement  power costs associated with the Salem,  Hope Creek and Peach Bottom
nuclear  stations  from  January 1, 1997 through  December  31, 1998.  The BPU's
nuclear performance  standard (NPS) will not apply to PSE&G from January 1, 1996
through December 31, 1998 (see Note 13--Commitments and Contingent Liabilities).
In addition,  the energy component of PSE&G's LEAC will be fixed at its existing
level  with  no  increase  to  customers  until  at  least  January,  1999.  Any
underrecovered or overrecovered  LEAC balance existing on December 31, 1998 will
not be considered in any LEAC review  subsequent to that date. Any  overrecovery
at that date will be  applied  to reduce any  potential  stranded  costs and any
underrecovered balance will be charged to income in the period identified.

     The December 31st Order provides PSE&G the  opportunity,  but no guarantee,
during the period  January 1, 1997 through  December 31, 1998,  to fully recover
the  December  31, 1996  underrecovered  LEAC energy  balance of $151.2  million
without  any  change  in  the  current  energy  component  of the  LEAC  charge.
Management  believes that it will fully recover the underrecovered  LEAC balance
by December 31, 1998 and will continue to follow deferred  accounting  treatment
for the LEAC.

     In addition to the  resolution  of the Salem "used and useful"  issue,  the
December 31st Order addresses two other separate long-standing issues that PSE&G
had been  litigating  before the BPU.  The first  pertains  to the  recovery  of
certain  replacement power costs associated with a 58-day outage at Salem Unit 1
in 1994.  The December 31st Order  required  PSE&G to reduce its  underrecovered
LEAC  balance by $7 million.  The second  pertains  to the  recovery of capacity
costs  associated  with  electric  utility  power  purchases  from  cogeneration
producers  through  December 31, 1998. The December 31st Order required PSE&G to
provide  bill  credits to electric  customers  totaling  $6.4  million in during
January and February 1997. In addition,  PSE&G reduced its  underrecovered  LEAC
balance by $5 million.

     Through separate letter agreements, PSE&G and the Ratepayer Advocate agreed
on a commitment by PSE&G to provide financial  assistance toward economic growth
and development in New Jersey. This commitment,  which runs through December 31,
1999, has four key elements.  First,  PSE&G will create a $30 million  revolving
economic  development fund with emphasis on stimulating jobs and developing high
technology  projects in urban areas.  Second,  PSE&G will provide  incentives to
encourage local public housing  authorities to replace up to 4,000 refrigerators
a year.  Third,  PSE&G  will  commit $1  million  to  develop a fund to  provide
innovative  assistance to low-income  residents who are having difficulty paying
energy bills. Finally, PSE&G will develop a computer system to assist low-income
residents in identifying government and community programs from which they would
be eligible to receive  benefits.  On February 24, 1997, an  intervenor's  group
filed an appeal in New Jersey  Superior  Court  seeking an  invalidation  of the
December 31st Order. PSE&G cannot predict the outcome of this appeal.

LGAC

     On July 30,  1996,  PSE&G  filed its  1996/97  LGAC  petition  with the BPU
requesting that it be effective October 1, 1996 through December 31, 1997. PSE&G
has  requested the LGAC be modified so as to more closely track the market price
of gas and avoid the distortions and dislocations  resulting from the reflection
of  over  and   underrecoveries.   The  1996/97  LGAC  proposal  requested  that
residential  and certain other  customer  billings be converted from a levelized
charge to one  derived  on a monthly  basis.  The  requested  change in the LGAC
pricing  is the same as the  change in  pricing  for Large  Volume Gas (LVG) and
General  Service Gas (GSG)  customers  which was  approved by the BPU in PSE&G's
1995/96 LGAC filing.  In addition,  there would be a cap of five cents per therm
in the month to month change in the 1996/97 LGAC rate for all customer  classes.
PSE&G has also requested that the 1996/97 LGAC reflect a refund of approximately
$14 million to LVG and GSG customers in the form of bill credits,  stemming from
over collections which occurred during the 1995/96 LGAC period.

     On November 22, 1996, the BPU approved an approximate $80 million  increase
based upon a modified Interim  Stipulation in the LGAC  proceeding.  The BPU did
not approve PSE&G's  1996/1997 LGAC proposal that  residential and certain other
customer billings be converted from an annual levelized charge to one derived on
a monthly basis. The monthly pricing methodology for LVG and GSG customers, with
minor  modifications,  will  continue.  During the months of  December  1996 and
January  1997,  approximately  $14 million was refunded  through bill credits to
customers that purchased LVG or GSG service (excluding  off-peak service) during
the period January 1, 1996 through  October 31, 1996. The refund was based on an
overcollection  of gas costs from those  customer  classes  and was  apportioned
based on those customers' billed usage during that period.  PSE&G, Staff and the
Ratepayer  Advocate have the right to revisit all issues in a later  proceeding.
PSE&G cannot predict the outcome of such a proceeding.

Electric Levelized Energy Adjustment Clause

     On  February  24,  1997,  PSE&G  filed with the BPU for an  increase in the
Demand Side Adjustment  Factor  component of the LEAC, to become effective on or
before May 1, 1997.  The filing would be effective  for the period from May 1997
through December 1998 and requests an annualized increase of $151.8 million. The
filing  includes  recovery of demand side  management  (DSM)/conservation  costs
related to BPU approved  programs and would raise rates to a level sufficient to
recover such costs. At December 31, 1996, PSE&G had an underrecovered balance of
approximately $43 million related to these programs.  Such amount is included in
other Deferred Debits on PSE&G's balance sheets.  This underrecovery is expected
to grow to approximately $75 million by April 30, 1997.  Approval of this filing
would result in recovery of this balance, as well as the costs of these programs
through December 1998. PSE&G cannot predict the outcome of this matter.

See Settlement of Certain Regulatory Issues for other LEAC matters.


Remediation Adjustment Charge (RAC)

     In 1992,  the BPU  approved a  mechanism  for  recovery  of  PSE&G's  costs
associated with its  Manufactured  Gas Plant  Remediation  Program  (Remediation
Program)  since  October 1, 1992,  allowing  the  recovery of actual  costs plus
carrying charges, net of insurance recoveries,  over a seven-year period through
PSE&G's  LGAC and LEAC,  with 60%  charged to gas  customers  and 40% charged to
electric  customers.  On November  22,  1996,  the BPU  approved an Interim LGAC
Stipulation  regarding  costs incurred  during the period August 1, 1995 through
July 31, 1996. Under this Order,  PSE&G is expected to recover $2.7 million from
gas  customers  and $1.8  million  from  electric  customers  during  the period
November 1, 1996 through October 31, 1997.

Consolidated Tax Benefits

     In a case affecting  another utility in which neither  Enterprise nor PSE&G
were parties,  the BPU considered  the extent to which tax savings  generated by
non-utility affiliates included in the consolidated tax return of that utility's
holding  company should be considered in setting that utility's  rates. In 1992,
the BPU approved an order in such case treating certain consolidated tax savings
generated  after June 30, 1990 by that  utility's  non-utility  affiliates  as a
reduction  of its rate base.  Also in 1992,  the BPU  issued an order  resolving
PSE&G's  1992  base  rate  proceeding  without  separate  quantification  of the
consolidated  tax issue.  Such order did not  provide  final  resolution  of the
consolidated  tax issue for any subsequent  base rate filing.  While  Enterprise
continues  to account for its two  wholly-owned  subsidiaries  on a  stand-alone
basis,  resulting in a realization of tax benefits by the entity  generating the
benefit, an ultimate unfavorable  resolution of the consolidated tax issue could
reduce  PSE&G's and  Enterprise's  revenues,  net income or net cash  flows.  In
addition,   an  unfavorable   resolution  may  adversely   impact   Enterprise's
non-utility  investment strategy.  Enterprise believes that PSE&G's taxes should
be  treated  on a  stand-alone  basis  for  rate-making  purposes,  based on the
separate  nature  of the  utility  and  non-utility  businesses.  The  issue  of
Enterprise  sharing the benefits of  consolidated  tax savings with PSE&G or its
ratepayers  was addressed by the BPU in its July 28, 1996 letter which  informed
PSE&G that the issue of consolidated tax savings can be discussed in the context
of PSE&G's next base rate case or plan for an  alternative  form of  regulation.
However,  neither  Enterprise nor PSE&G is able to predict what action,  if any,
the BPU may  take  concerning  consolidation  of tax  benefits  in  future  rate
proceedings (see Note 11--Federal Income Taxes).

Alternative Rate Plan

     On January 16, 1996,  PSE&G  proposed to the BPU an  alternative  rate plan
that  included  an  immediate  $50  million  rate  reduction  for  its  electric
customers, various types of rate freezes, assurances that future price increases
related  to  controllable  costs will be lower  than the rate of  inflation  and
funding  of up to an  aggregate  of  $55  million  in two  economic  development
initiatives.  As a result of the findings and filing  requirements  of the BPU's
draft Phase II report of the Master Plan (draft Phase II report), on January 31,
1997, PSE&G withdrew its alternative rate plan from further consideration.

Other Rate Matters

     In 1995, the BPU initiated a generic  proceeding that would eventually lead
to New  Jersey  electric  utilities  having the  ability  to offer  "off-tariff"
negotiated rates to customers.  Although these Off-Tariff Rate Agreements (OTRA)
are offered at PSE&G's  sole  discretion,  they are  subject to BPU  approval of
minimum price,  confidentiality of information,  contract  duration,  regulatory
filing  requirements  and other reporting  requirements.  These negotiated OTRAs
form part of  PSE&G's  overall  strategy  to  retain  customers  in its  service
territory and maintain long term electric sales. To date,  three OTRAs have been
filed with and approved by the BPU and PSE&G is currently in  negotiations  with
several other customers.  PSE&G cannot predict what impact OTRAs may have on its
financial position, results of operations and net cash flows.

     On August 1, 1996,  the BPU  initiated a generic  proceeding to resolve the
regulatory and rate issues associated with SFAS 106. On January 8, 1997, the BPU
issued  its Order  adopting  a  stipulation  of the  parties  to the  proceeding
regarding SFAS 106 cost recovery mechanisms and initiating a second phase of the
generic proceeding requiring each utility's individual filing to obtain SFAS 106
accrual rate recognition under one of the rate mechanisms established in the BPU
Order. PSE&G cannot predict the outcome of this proceeding.

     On September 19, 1996,  PSE&G filed a petition with the BPU to establish an
interim  Competitive  Transition  Charge  (CTC).  The CTC is designed to recover
stranded costs which may result from a customer leaving PSE&G's system as a full
requirements  customer. If approved by the BPU as filed, this charge would apply
to customers who,  after  September 19, 1996,  commit to an alternate  source of
electric power while remaining  physically located in PSE&G's electric franchise
area.  Further,  this interim  charge would be limited to customers with present
billing  demands  in excess of 500KW.  The  proposed  charge  would be  interim,
pending BPU  resolution  of the  stranded  cost issue on a generic  basis in the
Energy  Master  Plan.  PSE&G  cannot  predict  what action the BPU may take with
respect to the CTC petition.

     Recoverability  of stranded  costs is largely  dependent on the  transition
rules established by regulators,  including the FERC and the BPU. Stranded costs
that  could  result  as the  industry  moves to a more  competitive  environment
include  investments in generating  facilities,  transmission  assets,  purchase
power agreements where the price being paid under such an agreement  exceeds the
market price for electricity  and regulatory  assets for which recovery is based
solely on  continued  cost  based  regulation.  Since  the  Energy  Master  Plan
proceeding is still in the proposal  phase,  and  recognizing  that the issue of
securitization  and the extent of its application have not been  determined,  as
well as the potential need for legislative action, management cannot predict the
level of PSE&G's  stranded  costs or the extent to which  regulators  will allow
recovery of such costs.

Note 4. PSE&G Nuclear Decommissioning

     The BPU  decision in PSE&G's  most recent base rate case  utilized  studies
based on the prompt  removal/dismantlement  method of decommissioning for all of
PSE&G's  nuclear  generating  stations.  This method  consists of removing fuel,
source material and all other  radioactive  materials with activity levels above
accepted release limits from the nuclear sites.  PSE&G has an ownership interest
in five nuclear units:  Salem 1 and Salem  2--42.59%  each,  Hope Creek--95% and
Peach Bottom 2 and 3--42.49%  each. In accordance with rate orders received from
the BPU, PSE&G has established an external master nuclear  decommissioning trust
for all its nuclear units.  This trust contains two separate  funds: a qualified
fund and a non-qualified  fund, due to an Internal Revenue Service (IRS) ruling.
Section 468A of the Internal Revenue Code limits the amount of money that can be
contributed into a "qualified"  fund.  Contributions  made into a qualified fund
are tax deductible.  PSE&G estimated the total cost of decommissioning its share
of these five  nuclear  units at $986 million in year end 1995 dollars (the year
that  the  most  recent  site  specific  estimates  were  prepared),   excluding
contingencies.  On  December  23,  1996,  PSE&G  filed  its 1995  nuclear  plant
decommissioning  cost update with the BPU. The filing  included  decommissioning
cost updates for PSE&G's respective  ownership shares of its five nuclear units.
PSE&G's filing was based on site specific studies (year end 1995 dollars).

     The most  recent base rate  decision  provided  that $15.6  million of such
costs are to be collected  through base rates and an additional annual amount of
$7 million in 1993 and $14  million  each year  thereafter  are to be  recovered
through PSE&G's LEAC. At December 31, 1996 and 1995, the  accumulated  provision
for depreciation and amortization included reserves for nuclear  decommissioning
for PSE&G's nuclear units of $338 million and $292 million,  respectively. As of
December 31, 1996 and 1995, PSE&G had contributed $249 million and $220 million,
respectively,  into independent,  external,  qualified and non-qualified nuclear
decommissioning trust funds. The fair market value of these funds as of December
31, 1996 and 1995 was $375 million and $311 million, respectively.

     The  staff of the SEC has  questioned  certain  of the  current  accounting
practices of the electric  utility  industry,  including  PSE&G,  regarding  the
recognition,  measurement and classification of nuclear decommissioning costs in
their  financial  statements.  In response  to these  questions,  the  Financial
Accounting  Standards  Board  (FASB)  has agreed to review  the  accounting  for
removal costs, including  decommissioning.  If current electric utility industry
accounting  practices for decommissioning are changed: (1) annual provisions for
decommissioning could increase, (2) the estimated cost for decommissioning could
be recorded as a liability rather than as accumulated depreciation and (3) trust
fund  income  from the  external  decommissioning  trusts  could be  reported as
investment income rather than as a reduction to decommissioning expense.

Uranium Enrichment Decontamination and Decommissioning Fund

     In accordance with EPAct,  domestic  utilities that own nuclear  generating
stations  are  required  to pay a  cumulative  total of $150  million  each year
(adjusted for inflation) into a decontamination and decommissioning  fund, based
on their past purchases of U.S. government  enrichment  services.  These amounts
are being  collected over a period of 15 years or until $2.25 billion  (adjusted
for inflation) has been collected.  Under this legislation,  PSE&G's  obligation
for the nuclear  generating  stations in which it has an interest is $69 million
(adjusted for inflation). Since 1993, PSE&G has paid $22 million, resulting in a
balance due of $47 million. PSE&G has deferred the expenditures incurred to date
as part of  deferred  underrecovered  electric  energy  costs (see Note  3--Rate
Matters).

Spent Nuclear Fuel Disposal Costs

     In accordance  with the Nuclear Waste Policy Act (NWPA),  PSE&G has entered
into  contracts  with the  Department  of Energy (DOE) for the disposal of spent
nuclear fuel.  Payments made to the DOE for disposal  costs are based on nuclear
generation and are included in Fuel for Electric Generation and Net Interchanged
Power in the Statements of Income.
These costs are being recovered through the LEAC (see Note 3--Rate Matters).

Note 5. Schedule of Consolidated Capital Stock and Other Securities

<TABLE>
<CAPTION>

                                                                              Current
                                                                             Redemption
                                                            Outstanding        Price         December 31,     December 31,
                                                               Shares        Per Share           1996             1995
                                                            --------------  --------------   ---------------  --------------
                                                                                (Thousands of Dollars)
<S>                                                              <C>              <C>             <C>             <C>     
  Enterprise Common Stock (no par)--(Note A)--
     Authorized 500,000,000 shares; issued and
     outstanding at December 31, 1996, 233,470,291
     shares and at December 31, 1995 and December
     31, 1994, 244,697,930 shares                                                               $3,626,792      $3,801,157

  Enterprise Preferred Securities (Note B)
     PSE&G Cumulative Preferred Securities (Note C)
       Without Mandatory Redemption (Notes D and E)
       $100 par value series
       4.08%...........................................          146,221          103.00          $ 14,622        $ 25,000
       4.18%...........................................          116,958          103.00            11,696          24,994
       4.30%...........................................          149,478          102.75            14,948          25,000
       5.05%...........................................          104,002          103.00            10,400          25,000
       5.28%...........................................          117,864          103.00            11,786          25,000
       6.80%...........................................          188,684          102.00            18,869          25,000
       6.92%...........................................          160,711           --               16,071          60,000
       7.40%...........................................            --              --                --             50,000
       7.52%...........................................            --              --                --             50,000

     $25 par value series
       6.75%...........................................          600,000           --               15,000          15,000
                                                                                             ---------------  ---------------
     Total Preferred Stock without Mandatory Redemption                                          $ 113,392       $ 324,994
                                                                                             ===============  ==============
       With Mandatory Redemption (Notes D and F) $100
       par value series
       7.44%...........................................          750,000           --             $ 75,000        $ 75,000
       5.97%...........................................          750,000           --               75,000          75,000
                                                                                             ---------------  ---------------
     Total Preferred Stock with Mandatory Redemption...                                          $ 150,000       $ 150,000
                                                                                             ===============  ==============
     Monthly Guaranteed Preferred Beneficial Interest
     in PSE&G's Subordinated Debentures (Notes D, F and G)
       9.375%..........................................        6,000,000           --            $ 150,000       $ 150,000
       8.00%...........................................        2,400,000           --               60,000          60,000
                                                                                             ---------------  --------------
       Total Monthly  Guaranteed  Preferred  Beneficial
       Interest in PSE&G's Subordinated Debentures.....                                          $ 210,000       $ 210,000
                                                                                             ===============  ==============
     Quarterly    Guaranteed    Preferred    Beneficial
     Interest in PSE&G's
     Subordinated Debentures (Notes D, F and H)........
       8.625%..........................................        8,320,000           --             $208,000           --
                                                                                             ---------------
       Total Guaranteed  Preferred  Beneficial Interest
       in PSE&G's
       Subordinated Debentures.........................                                           $208,000           --
                                                                                             ===============
</TABLE>

(A)    In July 1996,  Enterprise initiated a common stock repurchase program. As
       of December 31, 1996,  11,227,639  shares had been  repurchased  for $307
       million.  The program  concluded on January 17, 1997. The total number of
       shares  repurchased  under the program was  12,740,322  at a cost of $350
       million.

       Total  authorized  and  unissued  shares  include   7,302,488  shares  of
       Enterprise  Common  Stock  reserved  for  issuance  through  Enterprise's
       Dividend  Reinvestment  and  Stock  Purchase  Plan and  various  employee
       benefit  plans.  In 1996 and 1995, no shares of  Enterprise  Common Stock
       were issued or sold through these plans.


<PAGE>


(B)   Enterprise has authorized a class of 50,000,000  shares of Preferred Stock
      without par value, none of which is outstanding.

(C)    At December 31, 1996,  there were aggregates of 5,016,082  shares of $100
       par value and  9,400,000  shares  of $25 par value  Cumulative  Preferred
       Stock which were authorized and unissued,  and which upon issuance may or
       may not provide for mandatory sinking fund redemption.  If dividends upon
       any shares of  Preferred  Stock are in arrears in an amount  equal to the
       annual dividend thereon,  voting rights for the election of a majority of
       PSE&G's  Board of  Directors  become  operative  and  continue  until all
       accumulated and unpaid  dividends  thereon have been paid,  whereupon all
       such voting rights cease, subject to being revived from time to time.

(D)    At December  31,  1996,  the annual  dividend  requirement  and  embedded
       dividend  rate for  Preferred  Stock  without  mandatory  redemption  was
       $6,283,425  and  5.45%,  respectively,   and  for  Preferred  Stock  with
       mandatory redemption was $10,057,500 and 6.75%, respectively.

       At December  31,  1995,  the annual  dividend  requirement  and  embedded
       dividend  rate for  Preferred  Stock  without  mandatory  redemption  was
       $20,046,765  and  6.14%,  respectively,  and  for  Preferred  Stock  with
       mandatory redemption was $10,057,500 and 6.75%, respectively.

       At  December  31,  1996 and 1995,  the annual  dividend  requirement  and
       embedded cost of the   Monthly  Income  Preferred  Securities (Guaranteed
       Preferred  Beneficial Interest in PSE&G's Subordinated Debentures) was
       $18,862,500 and 6.04%, respectively.

       At December 31, 1996,  the annual  dividend  requirement of the Quarterly
       Income Preferred  Securities  (Guaranteed  Preferred  Beneficial Interest
       in PSE&G's Subordinated  Debentures)  and  their  embedded  costs  were
       $17,940,000 and 5.80%, respectively.

(E)    On June 28, 1996,  PSE&G redeemed all of the 500,000 shares of each of
       its outstanding 7.52% and 7.40% cumulative preferred stock ($100 par), at
       a redemption price of $101 per share.

       In addition,  PSE&G  purchased  an  aggregate of 1,116,024  shares of its
       4.08%, 4.18%,  4.30%, 5.05%, 5.28%, 6.80% and 6.92% Cumulative  Preferred
       Stock ($100 par) through a tender offer.

(F)    For information concerning fair value of financial instruments, see Note
       9--Financial Instruments and Risk Management.

(G)    Public Service Electric and Gas Capital,  L.P. was formed for the purpose
       of  issuing  Monthly  Income  Preferred  Securities  (Monthly  Guaranteed
       Preferred  Beneficial Interest in PSE&G's Subordinated  Debentures).  The
       proceeds of Monthly Guaranteed  Preferred  Beneficial Interest in PSE&G's
       Subordinated Debentures sales were lent to PSE&G and evidenced by PSE&G's
       Deferrable  Interest  Subordinated  Debentures.  If and  for as  long  as
       payments on PSE&G's Deferrable Interest Subordinated Debentures have been
       deferred,  or PSE&G has defaulted on the indenture related thereto or its
       guarantee  thereof,  PSE&G may not pay any  dividends  on its  Common and
       Preferred Stock.

(H)    On June 26,  1996,  PSE&G  Capital  Trust I  (Trust),  a special  purpose
       statutory  business  trust wholly owned by PSE&G,  issued $208 million of
       8.625%  Quarterly  Income  Preferred  Securities   (Quarterly  Guaranteed
       Preferred  Beneficial Interest in PSE&G's Subordinated  Debentures).  The
       sole asset of the Trust is PSE&G's  8.625%  Series A Deferrable  Interest
       Subordinated Debenture, evidenced by such loan, in an aggregate principal
       amount of $214,433,000  with a stated maturity date of June 26, 2045. The
       Subordinated   Debentures  and  the  Indenture   constitute  a  full  and
       unconditional  guarantee by PSE&G of the Preferred  Securities  issued by
       the Trust.


<PAGE>


Note 6. Deferred Items

Property Abandonments

     The BPU has  authorized  PSE&G to recover  after-tax  property  abandonment
costs from its  customers.  The  following  table  reflects the  application  of
Statement   of   Financial    Accounting    Standards    No.   90,    "Regulated
Enterprises--Accounting  for  Abandonments  and  Disallowances  of Plant Costs,"
(SFAS 90) on property abandonments, and related tax effects, for which no return
is earned. The net-of-tax discount rate used was between 4.868% and 5.292%.

<TABLE>
<CAPTION>

                                                             Property Abandonments
                                         ----------------------------------------------------------------
                                              December 31, 1996                December 31, 1995
                                         -----------------------------   --------------------------------
                                          Discounted                      Discounted
                                             Cost           Taxes            Cost             Taxes
                                         --------------  -------------   ---------------  ---------------
                                                             (Thousands of Dollars)
<S>                                           <C>            <C>               <C>              <C>    
Atlantic Project....................          $45,718        $19,178           $58,221          $24,440
LNG Project.........................                0              0             2,992              957
Uranium Projects....................            6,855          3,019             8,907            3,871
                                         ==============  =============   ===============  ===============
                                              $52,573        $22,197           $70,120          $29,268
                                         ==============  =============   ===============  ===============
</TABLE>

Underrecovered Electric Energy and Gas Costs--net

     Recoveries of electric energy and gas costs are determined by the BPU under
the LEAC and LGAC.  PSE&G's  deferred  fuel balances as of December 31, 1996 and
1995 reflect underrecovered costs as follows:

                                                  December 31,
                                           -----------------------------
                                               1996           1995
                                           --------------  -------------
                                              (Millions of Dollars)
Underrecovered Electric Energy Costs.....        $151.2         $162.4
Underrecovered Gas Fuel Costs............          24.9            8.2
                                           ==============  =============
           Total                                 $176.1         $170.6
                                           ==============  =============

     The December 31st Order provides PSE&G the  opportunity,  but no guarantee,
during the period  January 1, 1997 through  December 31, 1998,  to fully recover
its December 31, 1996  underrecovered LEAC balance of $151.2 million without any
change in the current energy component of the LEAC charge.  Management  believes
that it will fully recover the underrecovered  LEAC balance by December 31, 1998
and will continue to follow deferred accounting treatment for the LEAC.

Unrecovered Plant and Regulatory Study Costs

     Amounts  shown  in  the  consolidated   balance  sheets  consist  of  costs
associated with  developing,  consolidating  and documenting the specific design
basis of PSE&G's jointly owned nuclear generating  stations,  as well as PSE&G's
share of costs  associated with the cancellation of the Hydrogen Water Chemistry
System Project (HWCS  Project) at Peach Bottom.  PSE&G has received both BPU and
FERC approval to defer and amortize, over the remaining lives of the Salem, Hope
Creek and Peach  Bottom  nuclear  units,  costs  associated  with  configuration
baseline documentation and the canceled HWCS Project.

Oil and Gas Property Write-Down

     On December 31, 1992, the BPU approved the recovery of PSE&G's  deferral of
an EDC write-down  through PSE&G's LGAC over a ten-year period beginning January
1, 1993.



<PAGE>


Note 7. Schedule of Consolidated Debt
<TABLE>

LONG-TERM
<CAPTION>

                                                                                   December 31,
                                                                          ---------------------------------
Interest Rates                                           Maturity            1996               1995
------------------------------------------------------   ---------------  ---------------    --------------
                                                                              (Thousands of Dollars)
<S>                                                      <C>                  <C>               <C>    
PSE&G
First and Refunding Mortgage
Bonds (Note A)
6.875%-7.125%                                            1997.........        $300,000          $300,000
6.00%                                                    1998.........         100,000           100,000
8.75%                                                    1999.........         100,000           100,000
6.00%-7.625%                                             2000.........         400,000           400,000
7.875%                                                   2001.........         100,000           100,000
6.125%-9.125%                                            2002-2006....       1,200,000         1,200,000
6.25%-6.90%                                              2007-2011....         152,990             2,990
6.75%-7.375%                                             2012-2016....         398,500           198,500
Variable                                                 2012-2016....          66,120            42,620
6.45%-9.25%                                              2017-2021....         172,980           375,600
Variable                                                 2017-2021....          13,700            13,700
5.20%-8.75%                                              2022-2026....         689,362           917,500
5.70%-6.55%                                              2027-2031....         349,200           349,200
5.45%-6.40%                                              2032-2036....         295,200           295,200
5.00%-8.00%                                              2037.........          15,001            15,001
Medium-Term Notes
7.10%-7.13%                                              1997.........         100,000           100,000
8.10%-8.16%                                              2009.........          60,000            60,000
7.15%-7.18%                                              2023.........          40,500            40,500
                                                                          ---------------    --------------
   Total First and Refunding Mortgage Bonds...........................       4,553,553         4,610,811
                                                                          ---------------    --------------
Debenture Bonds Unsecured
6.00%                                                    1998.........          18,195            18,195
                                                                          ---------------    --------------
   Total Debenture Bonds..............................................          18,195            18,195
                                                                          ---------------    --------------
Principal Amount Outstanding (Note F).................................       4,530,831         4,629,006
Amounts Due Within One Year (Note B)..................................        (423,500)             --
Net Unamortized Discount..............................................         (40,917)          (42,738)
                                                                          ---------------    --------------
   Total Long-Term Debt of PSE&G (Note G).............................      $4,107,331        $4,586,268
EDHI
Capital (Note C) Senior notes
9.875%--10.05%                                           1998.........         $80,000          $122,500
Medium-Term Notes
9.00%                                                    1996.........            --              20,000
5.79%-5.92%                                              1997.........          27,000            27,000
9.00%                                                    1998.........          75,000            75,000
8.95%-9.93%                                              1999.........         155,000           155,000
6.54%                                                    2000.........          78,000            78,000
                                                                          ---------------    --------------
Principal Amount Outstanding (Note F).................................         415,000           477,500
Amount included in Net Assets of Discontinued Operations..............            --              (1,570)
Amounts Due Within One Year (Note B)..................................         (69,481)          (60,912)
Net Unamortized Discount..............................................            (619)             (901)
                                                                          ===============    ==============
   Total Long-Term Debt of Capital....................................        $344,900          $414,117
                                                                          ===============    ==============
Funding (Note D)
9.55%                                                    1996.........        $   --             $28,000
6.85%-9.59%                                              1997.........          55,000            55,000
9.95%                                                    1998.........          83,000            83,000
7.58%                                                    1999.........          45,000            45,000
                                                                          ---------------    --------------
Principal Amount Outstanding (Note F).................................         183,000           211,000
Amount included in Net Assets of Discontinued Operations..............            --             (28,000)
Amounts Due Within One Year (Note B)..................................         (55,000)             --
                                                                          ===============    ==============
   Total Long-Term Debt of Funding....................................        $128,000          $183,000
                                                                          ===============    ==============
EGDC Mortgage Notes
10.625%--12.75% (Note F)                                  2012........      $     --              $6,554
Amounts Due Within One Year...........................................            --                (148)
                                                                          ---------------    --------------
     Total Long-Term Debt of EGDC.....................................      $     --              $6,406
                                                                          ===============    ==============
     Total Long-Term Debt of EDHI.....................................      $  472,900          $603,523
                                                                          ===============    ==============
        Consolidated Long-Term Debt (Note E)..........................      $4,580,231        $5,189,791
                                                                          ===============    ==============
</TABLE>

Notes:
(A)    PSE&G's Mortgage, securing the Bonds, constitutes a direct first mortgage
       lien on substantially all PSE&G's property and franchises.

       During the year, PSE&G reacquired on the open market $75.1 million of its
       8 1/2% Series LL First and Refunding  Mortgage  Bonds and $6.6 million of
       its 9 1/4% Series CC First and Refunding  Mortgage  Bonds. On January 30,
       1996, PSE&G issued $200 million and $150 million, respectively, principal
       amount of its First and  Refunding  Mortgage  Bonds 6 3/4%  Series VV due
       2016 and 6 1/4% Series WW due 2007, respectively.

(B)    The aggregate  principal  amounts of mandatory  requirements  for sinking
       funds and  maturities for each of the five years  following  December 31,
       1996 are as follows:

<TABLE>
<CAPTION>

                     Sinking
                      Funds                                      Maturities
                  ---------------   ----------------------------------------------------------------------
    Year             Capital            PSE&G            Capital            Funding           Total
---------------   ---------------   ---------------   ----------------   ---------------  ----------------
                                                  (Thousands of Dollars)
<C>                     <C>              <C>                 <C>               <C>              <C>     
1997.........           $42,500          $400,000            $27,000           $55,000          $524,500
1998.........            37,500           118,195             75,000            83,000           313,695
1999.........             --              100,000            155,000            45,000           300,000
2000.........             --              400,000             78,000             --              478,000
2001.........             --              100,000              --                --              100,000
                  ===============   ===============   ================   ===============  ================
                        $80,000        $1,118,195           $335,000          $183,000        $1,716,195
                  ===============   ===============   ================   ===============  ================
</TABLE>

(C)    Capital  has  provided  up to $750  million  debt  financing  for  EDHI's
       businesses, except ERI, on the basis of a net worth maintenance agreement
       with Enterprise.  Effective January 31, 1995, Capital agreed to limit its
       borrowings to no more than $650 million.

(D)    Funding  provides debt financing for EDHI's  businesses,  other than EGDC
       and ERI, on the basis of an unconditional guarantee from EDHI.

(E)    At  December  31,  1996 and 1995,  the  annual  interest  requirement  on
       long-term  debt was $369.9  million and $399.8  million,  of which $302.0
       million and $315.6 million,  respectively, was the requirement for Bonds.
       The embedded  interest cost on long-term  debt on such date was 7.62% and
       7.71%, respectively.

(F)    For information concerning fair value of financial instruments,  see Note
       9--Financial Instruments and Risk Management.

(G)    At December 31, 1996 and 1995,  PSE&G's  annual  interest  requirement on
       long-term  debt was $316.8  million and $330.5  million,  of which $302.0
       million and $315.6 million,  respectively, was the requirement for Bonds.
       The embedded  interest cost on long-term debt on such dates was 7.45% and
       7.54%,  respectively.  The embedded  interest cost on long-term  debt due
       within one year at December 31, 1996 was 7.46%.

SHORT-TERM (Commercial Paper and Loans)

     Commercial paper represents  unsecured bearer promissory notes sold through
dealers at a discount with a term of nine months or less.

         Bank loans represent  PSE&G's  unsecured  promissory notes issued under
informal credit arrangements with various banks and have a term of eleven months
or less.


<PAGE>


PSE&G
                                                  1996         1995        1994
                                                  ----         ----        ----
                                                       (Millions of Dollars)
                                                       ---------------------
Principal amount outstanding at year end,
  primarily commercial paper...................   $638         $567        $402
Weighted average interest rate for
  short-term debt at year end..................   5.70%        5.93%       6.07%

     PSE&G has authorization from the BPU to issue and have outstanding not more
than $1.3 billion of its short-term  obligations at any one time,  consisting of
commercial  paper and other  unsecured  borrowings from banks and other lenders.
This authorization expires January 2, 1999.

     PSE&G has a $1 billion  commercial paper program  (Program)  supported by a
$500 million one year revolving credit  agreement  expiring in August 1997 and a
$500 million five year revolving credit agreement expiring in August 2000 with a
group of commercial  banks.  As of December 31, 1996,  1995 and 1994,  PSE&G had
$443 million, $391 million and $258 million respectively,  outstanding under the
Program, which amounts are included in the table above. As of December 31, 1996,
there was no debt outstanding under the revolving credit agreements.

     PSE&G has $114 million in uncommitted lines of credit  facilities  extended
by a number of banks to primarily support  short-term  borrowings,  of which $64
million  was  outstanding  on December  31,  1996 and are  included in the table
above.

     PSE&G had various lines of credit facilities extended by banks to primarily
support the issuance of letters of credit.  As of December 31, 1996,  letters of
credit were issued in the amount of $20.6 million.

     PSE&G Fuel Corporation (Fuelco) has a $125 million commercial paper program
to finance a 42.49%  share of Peach  Bottom  nuclear  fuel,  supported by a $125
million revolving credit facility with a group of banks,  which expires in March
2000. PSE&G has guaranteed repayment of Fuelco's respective  obligations.  As of
December 31, 1996, 1995 and 1994,  Fuelco had commercial paper of $83.2 million,
$87.7 million and $93.7 million, respectively,  outstanding under the commercial
paper program, which amounts are included in the table above. As of December 31,
1996, there was no debt outstanding under the revolving credit facility.

     Public Service Conservation Resources Corporation (PSCRC) has a $30 million
revolving  credit  facility  supported by a PSE&G  subscription  agreement in an
aggregate  amount  of $30  million  which  terminates  on March 7,  1997.  As of
December 31, 1996, PSCRC had $30 million outstanding under this facility,  which
amount is included in the table above.

     PSE&G has entered into standby financing  arrangements with a bank totaling
$80 million.  These facilities  support  tax-exempt  multi-mode  financings done
through  the New  Jersey  Economic  Development  Authority  and the York  County
(Pennsylvania)  Industrial  Development  Authority.  As of December 31, 1996, no
amounts were outstanding under such arrangements.

EDHI

                                                     1996      1995      1994
                                                     ----      ----      ----
                                                        (Millions of Dollars)
                                                        ---------------------
Principal amount outstanding at year end........      --       $182 (A)  $90 (A)
Weighted average interest rate for short-term
  debt at year end..............................      --       6.26%    5.97%


(A)    Amounts included in Net Assets of Discontinued Operations.

     Through July 31, 1996, Funding had a commercial paper program, supported by
a commercial  bank letter of credit and credit  facility,  in the amount of $225
million.  Additionally,  Funding had a $225 million  revolving  credit facility.
Both  facilities  were  scheduled  to expire in March  1998.  On July 31,  1996,
Funding amended and restated its commercial  paper program and revolving  credit
facility in  conjunction  with the sale of EDC,  reducing  the total amount from
$450 million to $300 million and  extending the maturity from March 1998 to July
1999.  The $225 million  commercial  paper program was  eliminated  and the $225
million revolving credit facility was increased to $300 million.  As of December
31, 1996,  Funding had no borrowings  outstanding under the amended and restated
facility.



ENTERPRISE

     At December 31, 1996,  1995 and 1994,  Enterprise had a $25 million line of
credit with a bank.  At those dates,  Enterprise  had no  borrowings  under this
line.

Note 8. Long-Term Investments

     Long-Term Investments are primarily those of EDHI.

                                                              December 31,
                                                     ---------------------------
                                                           1996          1995
                                                     -------------  ------------
                                                        (Millions of Dollars)
     Lease Agreements (see Note 12--Leasing
       Activities):
          Leveraged Leases.......................         $ 932           $ 845
          Direct-Financing Leases................            33              35
          Other Leases...........................             3               6
                                                     -------------  ------------
               Total.............................           968             886
                                                     -------------  ------------
     Partnerships:
          General Partnerships...................           138             173
          Limited Partnerships...................           495             518
                                                     -------------  ------------
               Total.............................           633             691
                                                     -------------  ------------
     Corporate Joint Ventures....................            75              49
     Securities..................................            48              63
     Other Investments...........................           130             119
                                                     =============  ============
               Total Long-Term Investments.......       $ 1,854         $ 1,808
                                                     =============  ============

     PSRC's  leveraged  leases are  reported  net of  principal  and interest on
nonrecourse loans, unearned income and deferred tax credits. Income and deferred
tax credits are  recognized at a level rate of return from each lease during the
periods in which the net investment is positive.

     Partnership  investments are those of PSRC, EGDC and CEA and are undertaken
with other investors.  PSRC is a limited partner in various  partnerships and is
committed  to make  investments  from  time  to time  upon  the  request  of the
respective  general  partners.  At December  31, 1996,  $30 million  remained as
PSRC's unfunded commitment subject to call.

     Other  investments  relate  primarily to PSCRC's  investment in Demand Side
Management  projects.  PSCRC's  investment balance at December 31, 1996 and 1995
was approximately $101 million and $91 million, respectively.

Note 9. Financial Instruments and Risk Management

     Enterprise's  operations give rise to exposure to market risks from changes
in natural gas prices,  interest  rates,  foreign  exchange  rates and  security
prices of investments. Enterprise's policy is to use derivatives for the purpose
of  managing  market  risk  consistent  with  its  business  plans  and  prudent
practices.  Enterprise does not hold or issue financial  instruments for trading
purposes.

Natural Gas Hedging

     Through  December 31, 1996 and 1995, ERI entered into futures  contracts to
buy  10,810,000  mmbtu and 4,970,000  mmbtu of natural gas at average  prices of
$2.10 per mmbtu and $1.78 per mmbtu, respectively,  related to fixed-price sales
commitments.  Such contracts,  together with physical purchase contracts, hedged
approximately  95% and 91% of its fixed-price  sales commitments at December 31,
1996 and 1995,  respectively.  ERI had deferred  unrealized  hedge gains of $3.6
million and $3.1 million at those respective dates.



<PAGE>


Fair Value of Financial Instruments

     The  estimated  fair value was  determined  using the market  quotations or
values of securities with similar terms,  credit ratings,  remaining  maturities
and redemptions at the end of 1996 and 1995, respectively.

<TABLE>
<CAPTION>

                                                                                     December 31,
                                                                                     ------------
                                                                        1996                       1995
                                                                        ----                       ----
                                                                Carrying       Fair        Carrying       Fair
                                                                 Amount        Value        Amount        Value
                                                              ----------    ---------     ----------   --------
                                                                            (Thousands of Dollars)
<S>                                                           <C>           <C>           <C>          <C>       
Long-Term Debt (A):
     EDHI..................................................   $  597,381    $  606,000    $  694,153   $  731,000
     PSE&G.................................................    4,530,831     4,591,947     4,586,268    4,828,008
Preferred Securities Subject to Mandatory Redemption:
     PSE&G Cumulative Preferred Securities.................      150,000       151,875       150,000      156,000
     Monthly Guaranteed Preferred Beneficial Interest in
        PSE&G's Subordinated Debentures....................      210,000       220,200       210,000      225,300
     Quarterly Guaranteed Preferred Beneficial Interest in
        PSE&G's Subordinated Debentures....................      208,000       211,120          --           --
</TABLE>

(A) Includes current maturities

Note 10. Cash and Cash Equivalents

     The December 31, 1996 and 1995 balances consist  primarily of working funds
and highly  liquid  marketable  securities  (commercial  paper and money  market
funds) with a maturity of three months or less.

Note 11. Federal Income Taxes

     A  reconciliation  of reported Net Income with pretax income and of Federal
income tax expense with the amount computed by multiplying  pretax income by the
statutory Federal income tax rate of 35% is as follows:

<TABLE>
<CAPTION>

                                                                        1996            1995              1994
                                                                  --------------   --------------   ---------------
                                                                              (Thousands of Dollars)
                                                                              ----------------------
<S>                                                                 <C>              <C>                <C>      
Net Income.......................................................   $ 611,596        $  662,323         $ 679,033
Preferred securities (net).......................................       4,984            34,236            40,467
Discontinued Operations..........................................     (24,238)          (35,036)          (12,512)
                                                                  --------------   --------------   ---------------
          Subtotal...............................................     592,342           661,523           706,988
                                                                  --------------   --------------   ---------------
Federal income taxes:
   Operating income:
     Current provision...........................................     124,436           207,663           166,088
     Provision for deferred income taxes--net(A).................     187,479           152,222           167,155
     Investment tax credits--net.................................     (21,662)          (21,919)          (23,297)
                                                                  --------------   --------------   ---------------
          Total included in operating income.....................     290,253           337,966           309,946
Miscellaneous other income:
     Current provision...........................................         537            (9,897)           (8,186)
     Provision for deferred income taxes(A)......................          21             9,816            10,422
     SFAS 90 deferred income taxes(A)............................       1,781             2,161             2,530
                                                                  --------------   --------------   ---------------
          Total Federal income tax provisions....................     292,592           340,046           314,712
                                                                  ==============   ==============   ===============
Pretax income....................................................   $ 884,934        $1,001,569        $1,021,700
                                                                  ==============   ==============   ===============
</TABLE>

<PAGE>


     Reconciliation between total Federal income tax provisions and tax computed
at the statutory tax rate on pretax income:

<TABLE>
<CAPTION>

                                                                       1996             1995              1994
                                                                  --------------  ---------------   --------------
                                                                             (Thousands of Dollars)
                                                                            ----------------------
<S>                                                                  <C>              <C>              <C>     
Tax computed at the statutory rate.......................            $309,727         $350,549         $357,595

                                                                  --------------  ---------------   --------------
Increase (decrease) attributable to flow through of certain
  tax adjustments:
     Depreciation................................................      11,031           16,257           (4,597)
     Amortization of investment tax credits......................     (21,662)         (21,919)         (23,297)
     Other.......................................................      (6,504)          (4,841)         (14,989)
                                                                  --------------  ---------------   --------------
          Subtotal...............................................     (17,135)         (10,503)         (42,883)
                                                                  ==============  ===============   ==============
          Total Federal income tax provisions....................    $292,592         $340,046         $314,712
                                                                  ==============  ===============   ==============
Effective Federal income tax rate................................        33.1%            34.0%            30.8%

</TABLE>

     (A) The provision for deferred  income taxes  represents the tax effects of
the following items:

<TABLE>
<CAPTION>

                                                                        1996             1995              1994
                                                                   ---------------  ---------------  --------------
                                                                                 (Thousands of Dollars)
<S>                                                                     <C>              <C>              <C>     
Deferred Credits:
     Additional tax depreciation and amortization.................      $ 38,487         $133,764         $102,934
     Leasing Activities...........................................       136,402           64,567           60,129
     Property Abandonments........................................        (6,985)          (7,411)          (6,606)
     Oil and Gas Property Write-Down..............................        (2,451)          (2,451)          (2,451)
     Deferred Fuel Costs--net.....................................         6,533           (3,601)          39,361
     Other........................................................        17,295          (20,669)         (13,260)
                                                                   ================  ===============   ==============
          Total...................................................      $189,281         $164,199         $180,107
                                                                   ================  ===============   ==============
</TABLE>

     Between the years 1987 and 1994,  Enterprise's  Federal Alternative Minimum
Tax (AMT)  liability  exceeded its regular  Federal income tax  liability.  This
excess  can be  carried  forward  indefinitely  to  offset  regular  income  tax
liability in future years.  Enterprise commenced using these AMT credits in 1995
and expects to continue  using them in future years as the regular tax liability
exceeds AMT. As of December 31, 1996, 1995 and 1994,  Enterprise had AMT credits
of $88 million, $183 million and $225 million, respectively.

     In March 1992, the IRS issued reports  following its examination of PSE&G's
consolidated tax return for 1985 and  Enterprise's  consolidated tax returns for
1986 and 1987.  The  reports  proposed  an  increase  in tax  liability  of $121
million,  primarily  due to  issues  related  to the Hope  Creek  nuclear  unit.
Interest,  after taxes,  on the increased  liability  totaled an additional $119
million as of December 31, 1995. In August 1996, Enterprise reached an agreement
with  the IRS  covering  most of the  disputed  issues.  The  partial  agreement
included  resolution  of all disputed  issues  related to Hope Creek and did not
have a material impact on the financial  position,  results of operations or net
cash flows of PSE&G or Enterprise.  While no assurances  can be given  regarding
the outcome of the remaining unresolved issues, an unfavorable resolution is not
expected to have a material adverse impact on the financial position, results of
operations or net cash flows of PSE&G or Enterprise.

     Enterprise  provides  deferred taxes at the enacted  statutory tax rate for
all temporary  differences  between the financial statement carrying amounts and
the tax bases of existing assets and  liabilities  irrespective of the treatment
for  rate-making  purposes.  Management  believes  that it is probable  that the
accumulated  tax benefits that  previously  have been treated as a  flow-through
item to PSE&G customers will be recovered from utility  customers in the future.
Accordingly,  an offsetting regulatory asset was established. As of December 31,
1996,  PSE&G had a deferred tax liability and an offsetting  regulatory asset of
$752 million  representing the future revenue  expected to be recovered  through
rates based upon  established  regulatory  practices  which  permit  recovery of
current taxes payable.  This amount was determined using the 1996 Federal income
tax rate of 35%.



<PAGE>


     The following is an analysis of deferred income taxes:

<TABLE>
<CAPTION>


                                                                         December 31,
                                                                -----------------------------
                                                                   1996            1995
 DEFERRED INCOME TAXES                                                                -------------   -------------
                                                                   (Thousands of Dollars)
<S>                                                                 <C>             <C>    
Assets:
   Current (net)...........................................         $23,210         $27,571
                                                                -------------   -------------
   Noncurrent:
     Unrecovered Investment Tax Credits....................         123,073         129,713
     Nuclear Decommissioning...............................          27,156          25,241
     Construction Period Interest and Taxes................          16,292          17,199
     Vacation Pay..........................................           6,796           6,681
     AMT Credit............................................          87,806         183,237
     Real Estate Impairment................................           3,244           5,213
     Other.................................................          22,948           4,108
                                                                -------------   -------------
          Total Noncurrent.................................         287,315         371,392
                                                                -------------   -------------
          Total Assets.....................................         310,525         398,963
                                                                -------------   -------------
Liabilities:
   Noncurrent:
     Plant Related Items...................................       2,361,656       2,341,374
     Leasing Activities....................................         669,405         616,914
     Property Abandonments.................................          16,281          21,469
     Oil and Gas Property Write-Down.......................          11,196          13,061
     Underrecovered Electric Energy & Gas Costs (net)......          62,817          56,283
     Unamortized Debt Expense..............................          39,980          36,945
     Taxes Recoverable Through Future Rates (net)..........         258,740         262,625
     Other.................................................         117,583         106,147
                                                                -------------   -------------
          Total Noncurrent.................................       3,537,658       3,454,818
                                                                -------------   -------------
          Total Liabilities................................       3,537,658       3,454,818
                                                                -------------   -------------
Summary--Deferred Income Taxes
   Net Current Assets......................................          23,210          27,571
   Net Deferred Liability..................................       3,250,343       3,083,426
                                                                =============   =============
        Total..............................................      $3,227,133      $3,055,855
                                                                =============   =============
</TABLE>

Note 12. Leasing Activities

As Lessee

     The  Consolidated  Balance Sheets  include  assets and related  obligations
applicable  to  capital  leases  under  which  PSE&G  is  a  lessee.  The  total
amortization of the leased assets and interest on the lease  obligations  equals
the net minimum  lease  payments  included in rent  expense for capital  leases.
Capital leases of PSE&G relate primarily to its corporate headquarters and other
capital equipment. Certain of the leases contain renewal and purchase options as
well as  escalation  clauses.  Enterprise  and its  other  subsidiaries  are not
lessees in any capitalized leases.

     Utility plant includes the following amounts for capital leases at December
31:

                                                 1996             1995
                                             --------------- ----------------
                                                 (Thousands of Dollars)
     Common Plant........................          $58,610          $58,610
     Less: Accumulated Amortization......            6,239            5,499
                                             =============== ================
     Net Assets under Capital Leases.....          $52,371          $53,111
                                             =============== ================


<PAGE>


     Future  minimum  lease  payments for  non-cancelable  capital and operating
leases at December 31, 1996 were:

                                                    Capital          Operating
                                                    Leases            Leases
                                                  -----------   ----------------
                                                   (Thousands of Dollars)
1997............................................  $  13,175          $  11,190
1998............................................     13,176              8,322
1999............................................     13,177              7,621
2000............................................     12,834              5,217
2001............................................     12,810              4,403
Later Years.....................................    176,420              9,185
                                                  -----------        ===========
Minimum Lease Payments..........................   $241,592          $  45,938
                                                                     ===========
Less: Amount representing estimated executory
      costs, together with any profit thereon,
      included in minimum lease payments........    119,606
                                                  -----------
Net minimum lease payments......................    121,986
Less: Amount representing interest..............     69,615
                                                  ===========
Present value of net minimum lease
   payments (A).................................  $  52,371
                                                  ===========

(A)    Reflected  in the  Consolidated  Balance  Sheets  for 1996 and 1995  were
       Capital Lease  Obligations of $52.371  million and $53.111  million which
       includes  Capital Lease  Obligations due within one year of $829 thousand
       and $739 thousand, respectively.

     The following  schedule shows the  composition of rent expense  included in
Operating Expenses:

<TABLE>
<CAPTION>

                                                                  For the Years Ended
                                                                      December 31,
                                                       --------------------------------------------
                                                          1996            1995           1994
                                                       -------------  --------------  -------------
                                                                 (Thousands of Dollars)
<S>                                                        <C>             <C>            <C>    
Interest on Capital Lease Obligations.................     $ 6,004         $ 6,084        $ 6,156
Amortization of Utility Plant under Capital Leases....         739             659            588
                                                       -------------  --------------  -------------
Net minimum lease payments relating to Capital
   Leases.............................................       6,743           6,743          6,744
Other Lease payments..................................      24,801          27,219         28,447
                                                       =============  ==============  =============
     Total Rent Expense...............................     $31,544         $33,962        $35,191
                                                       =============  ==============  =============
</TABLE>

As Lessor

     PSRC's  net  investments  in  leveraged  and  direct  financing  leases are
composed of the following elements:

<TABLE>
<CAPTION>

                                                December 31, 1996                     December 31, 1995
                                        -----------------------------------   -----------------------------------
                                              (Millions of Dollars)                 (Millions of Dollars)
                                                       Direct                                Direct
                                        Leveraged    Financing                 Leveraged    Financing
                                          Leases       Leases      Total        Leases       Leases      Total
                                        ------------ ------------ ---------   ------------- ----------- ---------
<S>                                        <C>            <C>     <C>            <C>            <C>     <C>   
Lease rents receivable............         $1,094         $ 35    $1,129         $ 1,031        $ 39    $1,070
Estimated residual value..........            638            8       646             635           8       643
                                        ------------ ------------ ---------   ------------- ----------- ---------
                                            1,732           43     1,775           1,666          47     1,713
Unearned and deferred income......           (800)         (10)     (810)           (821)        (12)     (833)
                                        ------------ ------------ ---------   ------------- ----------- ---------
     Total investments............            932           33       965             845          35       880
Deferred taxes....................           (530)         (10)     (540)           (405)        (11)     (416)
                                        ============ ============ =========   ============= =========== =========
     Net investments..............           $402          $23      $425            $440         $24      $464
                                        ============ ============ =========   ============= =========== =========
</TABLE>

<PAGE>


     PSRC's  other  capital  leases are with  various  regional,  state and city
authorities  for  transportation  equipment  and  aggregated  $3 million  and $6
million as of December 31, 1996 and 1995, respectively.

Note 13. Commitments and Contingent Liabilities

Nuclear Performance Standard

     The BPU has  established its NPS for nuclear  generating  stations owned by
New Jersey electric  utilities,  including the five nuclear units in which PSE&G
has an  ownership  interest.  Under the NPS,  an  aggregate  capacity  factor is
calculated  annually  using  maximum  dependable  capability of each of the five
nuclear units. This method takes into account actual operating conditions of the
units.  Failure to attain a satisfactory  capacity factor percentage  results in
penalties.

     While the NPS does not specifically have a gross negligence provision,  the
BPU has indicated that it would consider allegations of gross negligence brought
upon a sufficient  factual basis. A finding of gross  negligence could result in
penalties other than those prescribed under the NPS. The BPU's December 31, 1996
Order  provides  that the NPS will not apply to PSE&G for the period  January 1,
1996 through December 31, 1998 (see Note 3--Rate Matters).

Nuclear Insurance Coverages and Assessments

     PSE&G's insurance coverages and maximum  retrospective  assessments for its
nuclear operations are as follows:

<TABLE>
<CAPTION>

                                                                                             PSE&G
                                                                                            Maximum
                                                                     Total                Assessments
                                                                     Site                 for a Single
Type and Source of Coverages                                       Coverages                Incident
---------------------------------------------------------------   -------------         ------------------
                                                                          (Millions of Dollars)

<S>                                                                   <C>                           
Public Liability:
     American Nuclear Insurers...............................         $ 200.0                    N/A
     Indemnity(A)............................................         8,720.3                 $210.2
                                                                  =============         ==============
                                                                     $8,920.3 (B)             $210.2
                                                                  =============         ==============
Nuclear Worker Liability:
     American Nuclear Insurers(C)............................         $ 200.0                   $8.0
                                                                  =============         ==============


Property Damage:
   Primary Coverage
     American Nuclear Insurers (Peach Bottom)................          $500.0                    N/A

     Nuclear Mutual Limited (Salem/Hope Creek)...............           500.0                   $9.3

   Excess Coverage
     Nuclear Electric Insurance Ltd. (NEIL II)...............         2,250.0                   17.7
                                                                  -------------         --------------
     Per Site Total..........................................        $2,750.0                  $27.0
                                                                  =============         ==============

Replacement Power:
     Nuclear Electric Insurance Ltd. (NEIL I)................            $3.5 (D)              $11.5
                                                                         ==== ===              =====
</TABLE>

(A)    Retrospective   premium  program  under  the   Price-Anderson   liability
       provisions of the Atomic Energy Act of 1954, as amended (Price-Anderson).
       Subject to retrospective assessment with respect to loss from an incident
       at any licensed nuclear reactor in the United States.  This retrospective
       assessment  can be adjusted  for  inflation  every five  years.  The last
       adjustment was effective as of August 20, 1993.

(B)    Limit of liability for each nuclear incident under Price-Anderson.

(C)    Industry  aggregate  limit  representing  the  potential  liability  from
       workers claiming exposure to the hazard of nuclear radiation. This policy
       includes  automatic  reinstatements  up to an aggregate of $200  million,
       thereby  providing  total  coverage of $400  million.  This policy is not
       subject to retrospective assessments under the Price-Anderson Act.

(D)    Represents  limit of coverage  available  to  co-owners of Salem and Hope
       Creek, for each plant. Each co-owner  purchases its own policy.  PSE&G is
       currently  covered for its percent  ownership  interest in each plant for
       this limit.

     Price-Anderson  sets the "limit of  liability"  for claims that could arise
from an incident  involving  any licensed  nuclear  facility in the nation.  The
"limit of liability" is based on the number of licensed  nuclear reactors and is
adjusted  at least  every five years  based on the  Consumer  Price  Index.  The
current  "limit of liability" is $8.9  billion.  All utilities  owning a nuclear
reactor,  including PSE&G, have provided for this exposure through a combination
of private insurance and mandatory  participation in a financial protection pool
as  established  by  Price-Anderson.  Under  Price-Anderson,  each party with an
ownership  interest  in a nuclear  reactor  can be  assessed  its share of $79.3
million  per  reactor  per  incident,  payable at $10  million  per  reactor per
incident per year. If the damages exceed the "limit of liability", the President
is to submit to Congress a plan for  providing  additional  compensation  to the
injured  parties.  Congress could impose further revenue raising measures on the
nuclear  industry  to pay  claims.  PSE&G's  maximum  aggregate  assessment  per
incident is $210.2 million (based on PSE&G's ownership  interests in Hope Creek,
Peach Bottom and Salem) and its maximum aggregate annual assessment per incident
is $26.5 million.

     Further,  a recent  decision  by the U.S.  Court of  Appeals  for the Third
Circuit,  not involving PSE&G, held that the Price Anderson Act did not preclude
awards based on state law claims for punitive damage.

     PSE&G is a member  of two  industry  mutual  insurance  companies;  Nuclear
Mutual  Limited  (NML),  and Nuclear  Electric  Insurance  Limited  (NEIL).  NML
provides the primary property  insurance at Salem and Hope Creek.  NEIL provides
excess  property  insurance  through  its NEIL II policy and  replacement  power
coverage  through  its NEIL I  policy.  Both  companies  may make  retrospective
premium  assessments  in  case  of  adverse  loss  experience.  PSE&G's  maximum
potential  liabilities  under these  assessments  are  included in the table and
notes above.  Certain of the policies  also provide that the insurer may suspend
coverage with respect to all nuclear  units on a site without  notice if the NRC
suspends  or revokes  the  operating  license  for any unit on a site,  issues a
shutdown order with respect to such unit or issues a confirmatory  order keeping
such unit  down.  While the NRC has  issued  confirmatory  action  letters  with
respect to the Salem  shutdown,  PSE&G does not expect any action to be taken by
any insurer as a result of these NRC letters.

Construction and Fuel Supplies

    PSE&G  has  substantial  commitments  as  part of its  ongoing  construction
program  which  include   capital   requirements   for  nuclear  fuel.   PSE&G's
construction  program is  continuously  reviewed and  periodically  revised as a
result of changes in economic  conditions,  revised  load  forecasts,  scheduled
retirement dates of existing facilities, business strategies, site changes, cost
escalations under construction contracts, requirements of regulatory authorities
and laws,  the timing of and amount of  electric  and gas rate  changes  and the
ability of PSE&G to raise necessary capital.  Pursuant to an electric integrated
resource  plan (IRP),  PSE&G  periodically  reevaluates  its forecasts of future
customers,  load and peak growth,  sources of electric  generating  capacity and
demand side management (DSM) to meet such projected  growth,  including the need
to  construct  new  electric  generating  capacity.  The IRP takes into  account
assumptions   concerning   future   demands  of  customers,   effectiveness   of
conservation and load management activities,  the long-term condition of PSE&G's
plants,  capacity  available from electric utilities and other suppliers and the
amounts  of  co-generation  and  other  non-utility  capacity  projected  to  be
available.

    PSE&G's  construction  expenditures are expected to aggregate  approximately
$2.6 billion during the years 1997 through 2001, which includes $433 million for
nuclear fuel and $96 million of AFDC. The estimate of construction  requirements
is  based  on  expected  project  completion  dates  and  includes   anticipated
escalation   due  to  inflation  of   approximately   3%  annually.   Therefore,
construction delays or higher inflation levels could cause significant increases
in these amounts.  PSE&G expects to internally  generate the funds  necessary to
satisfy its construction  expenditures  over this period,  assuming adequate and
timely  recovery of costs,  as to which no assurances can be given. In addition,
PSE&G does not presently  anticipate any  difficulties  in obtaining  sufficient
sources of fuel for electric  generation  or adequate  gas  supplies  during the
years 1997 through 2001.


<PAGE>


Hazardous Waste

    Certain Federal and State laws authorize the U.S.  Environmental  Protection
Agency (EPA) and the New Jersey Department of Environmental  Protection (NJDEP),
among other agencies,  to issue orders and bring  enforcement  actions to compel
responsible parties to investigate and take remedial actions at any site that is
determined  to present an imminent and  substantial  danger to the public or the
environment  because of an actual or threatened release of one or more hazardous
substances.  Because of the nature of PSE&G's business, including the production
of electricity,  the distribution of gas and, formerly,  the manufacture of gas,
various by-products and substances are or were produced or handled which contain
constituents classified as hazardous.  PSE&G generally provides for the disposal
or processing  of such  substances  through  licensed  independent  contractors.
However,  these  statutory  provisions  impose joint and several  responsibility
without regard to fault on all responsible parties,  including the generators of
the hazardous  substances,  for certain  investigative  and remediation costs at
sites where these  substances  were  disposed  of or  processed.  PSE&G has been
notified  with  respect to a number of such sites and the  remediation  of these
potentially  hazardous sites is receiving  greater attention from the government
agencies   involved.   Generally,   actions   directed  at  funding   such  site
investigations  and  remediation  include  all  suspected  or known  responsible
parties.  Except as discussed  below with respect to its  manufactured  Gas Plan
Remediation   Program   (Remediation   Program),   PSE&G  does  not  expect  its
expenditures  for any  such  site to have a  material  effect  on its  financial
position, results of operations or net cash flows.

PSE&G Manufactured Gas Plant Remediation Program

     In 1988,  NJDEP  notified  PSE&G that it had identified the need for PSE&G,
pursuant  to  a  formal  arrangement,  to  systematically  investigate  and,  if
necessary,  resolve environmental concerns extant at PSE&G's former manufactured
gas plant sites.  To date,  NJDEP and PSE&G have  identified 38 former gas plant
sites.  PSE&G is  currently  working  with  NJDEP  under a  program  to  assess,
investigate and, if necessary,  remediate environmental concerns at these sites.
The Remediation  Program is periodically  reviewed and revised by PSE&G based on
regulatory  requirements,  experience with the Remediation Program and available
technologies.   The  cost  of  the  Remediation  Program  cannot  be  reasonably
estimated,  but  experience to date indicates that costs of at least $20 million
per year  could be  incurred  over a period  of more  than 30 years and that the
overall  cost  could be  material  to  PSE&G's  financial  position,  results of
operations or net cash flows.

     Costs  incurred  through  December  31,  1996 for the  Remediation  Program
amounted to $81.2 million,  net of certain insurance proceeds.  In addition,  at
December 31, 1996,  PSE&G's  estimated  liability for remediation  costs through
1999 aggregate $86 million.

Note 14. Postretirement Benefits Other Than Pensions

     In 1993,  Enterprise  and PSE&G  adopted SFAS 106 which  requires  that the
expected  cost of  employees'  postretirement  health  care and  life  insurance
benefits  be  charged  to expense  during  the years in which  employees  render
service.  PSE&G elected to amortize,  over 20 years, its unfunded  obligation of
$609.3 million at January 1, 1993. The following table discloses the significant
components of the net periodic postretirement benefit obligation:


<PAGE>
<TABLE>
<CAPTION>


NET PERIODIC POSTRETIREMENT BENEFIT OBLIGATION                      December 31,
                                                       ---------------------------------------
                                                        1996          1995          1994
                                                       ----------  ------------- -------------
                                                             (Millions of Dollars)
<S>                                                      <C>            <C>           <C>  
Service cost...........................................  $10.4          $ 8.5         $11.1
Interest on accumulated postretirement obligation......   51.2           48.2          45.4
Amortization of transition obligation..................   30.5           30.5          30.5
Amortization of Net (Gain)/Loss (A)....................   (1.0)          (3.8)          --
Deferral of current expense............................  (59.0)         (50.7)        (57.8)
                                                       ----------  ------------- -------------
        Annual net expense.............................  $32.1          $32.7         $29.2
                                                       ==========  ============= =============
</TABLE>

(A) Reflects change in Plan Assumptions.

     The discount rate used in determining the PSE&G net periodic postretirement
benefit cost was 8.0% and 8.5% for 1996 and 1995, respectively.

     A one percentage-point  increase in the assumed health care cost trend rate
for each year would  increase the  aggregate  of the service and  interest  cost
components of net periodic postretirement health care cost by approximately $5.2
million,  or  10.0%,  and  increase  the  accumulated   postretirement   benefit
obligation as of December 31, 1996 by $51.4 million, or 8.3%.

     The assumed health care cost trend rates used in measuring the  accumulated
postretirement  benefit  obligation  in 1996  were:  medical  costs for  pre-age
sixty-five retirees--12.5%, medical costs for post-age sixty-five retirees--8.5%
and dental  costs--6.5%;  such rates are assumed to gradually decline to 5% each
in 2011. The medical costs above include a provision for prescription drugs.

     In its most recent base rate case,  PSE&G  requested  full  recovery of the
costs associated with  postretirement  benefits other than pensions (OPEB) on an
accrual basis,  in accordance  with SFAS 106. The BPU's base rate order provided
that (1) PSE&G's  pay-as-you-go basis OPEB costs will continue to be included in
cost of service and will be recoverable in base rates on a pay-as-you-go  basis;
(2) prudently incurred OPEB costs, that are accounted for on an accrual basis in
accordance with SFAS 106, will be recoverable in future rates;  (3) PSE&G should
account for the  differences  between its OPEB costs on an accrual basis and the
pay-as-you-go  basis being recovered in rates as a regulatory asset; and (4) the
issue of cash versus accrual  accounting will be revisited and in the event that
FASB or the SEC  requires  the use of  accrual  accounting  for OPEB  costs  for
rate-making purposes,  the regulatory asset will be recoverable,  through rates,
over an appropriate amortization period.

     Accordingly,  PSE&G is accounting for the differences  between its SFAS 106
accrual cost and the cash cost currently recovered through rates as a regulatory
asset.  OPEB costs charged to expense during 1996 were $32.1 million and accrued
OPEB costs deferred were $59.0 million. The amount of the unfunded liability, at
December 31, 1996,  as shown below,  is $734.5  million and funding  options are
currently  being   explored.   The  primary  effect  of  adopting  SFAS  106  on
Enterprise's  and PSE&G's  financial  reporting was on the presentation of their
financial positions with minimal effect on their results of operations.

     In 1993,  the FASB's  Emerging  Issues  Task Force  (EITF)  concluded  that
deferral of such costs is acceptable,  provided  regulators allow SFAS 106 costs
in  rates  within  approximately  five  years  of the  adoption  of SFAS 106 for
financial reporting purposes, with any cost deferrals recovered in approximately
twenty years.  In accordance with the BPU's January 8, 1997 Order regarding SFAS
106 cost recovery mechanisms,  PSE&G expects full SFAS 106 recovery and believes
that it is probable that current and deferred costs as of December 31, 1996 will
be recovered from utility  customers within such twenty-year time period.  As of
December 31, 1996, PSE&G had deferred $226.2 million of such costs.


<PAGE>



     In accordance with SFAS 106 disclosure  requirements, a reconciliation  of
the funded status of the plan is as follows:

ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION        December 31,
                                               --------------------------
                                                  1996          1995
                                               ------------  ------------
                                                (Millions of Dollars)
Retirees.......................................  $(493.0)      $(444.6)
Fully eligible active plan participants........    (35.9)        (52.9)
Other active plan participants.................   (205.6)       (220.4)
                                               ------------  ------------
     Total.....................................   (734.5)       (717.9)
Plan assets at fair value......................       --             --
                                               ------------  ------------
Accumulated postretirement benefit 
  obligation  in excess of plan assets.........   (734.5)       (717.9)
Unrecognized net (gain)/loss from past 
  experience different from that assumed
  and from changes in assumptions..............     14.9          32.8
Unrecognized prior service cost................     33.9           --
Unrecognized transition obligation.............    459.5         517.9
                                               ============  ============
Accrued postretirement obligation..............  $(226.2)      $(167.2)
                                               ============  ============

     The  discount  rate  used in  determining  the  accumulated  postretirement
benefit obligation was 7.50% and 7.25% for 1996 and 1995, respectively.

Note 15. Pension Plan

     The discount  rates, expected long-term rates of return on assets and
average compensation growth rates used in determining the Pension Plan's funded
status and net pension cost as of December 31, 1996 and 1995 were as follows:

                                                                1996      1995
                                                               -------   -------
Funded Status:
     Discount Rate used to Determine Benefit
       Obligations........................................      7.50%      7.25%
     Average Compensation Growth to Determine
       Benefit Obligations................................       4.50%     4.50%
Net Pension Cost:
     Discount Rate........................................       8.00%     8.50%
     Expected Long-Term Return on Assets..................       8.50%     8.50%
     Average Compensation Growth..........................       4.50%     4.50%

The following table shows the Pension Plan's funded status:

<TABLE>
<CAPTION>

                                                                                             December 31,
                                                                                   ----------------------------------
                                                                                       1996              1995
                                                                                   ---------------  -----------------
                                                                                        (Thousands of Dollars)
<S>                                                                                     <C>                <C>     
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested benefits of $1,474,074
   in 1996 and $1,403,313 in 1995................................................   $(1,571,807)       $(1,509,841)
Effect of projected future compensation..........................................      (459,251)          (321,545)
                                                                                   ---------------  -----------------
Projected benefit obligations....................................................    (2,031,058)        (1,831,386)
Plan assets at fair value, primarily listed equity and debt securities...........     1,686,532          1,533,446
                                                                                   ---------------  -----------------
Projected benefit obligations in excess of plan assets...........................      (344,526)          (297,940)
Unrecognized net gain (loss) from past experience and effects of changes in
   assumptions...................................................................       151,440            120,859
Prior service cost not yet recognized in net pension cost........................       130,664            110,213
Unrecognized net obligations being recognized over 16.7 years....................        53,187             61,287
Additional minimum liability for Cash Balance Plan...............................          (115)                --
                                                                                   ---------------  -----------------
Accrued pension expense..........................................................       $(9,350)           $(5,581)
                                                                                   ===============  =================
</TABLE>

     The net pension cost for the years ended December 31, 1996,  1995 and 1994,
include the following components:

<TABLE>
<CAPTION>

                                                                   1996              1995              1994
                                                              ----------------  ---------------- ------------------
                                                                            (Thousands of Dollars)
<S>                                                              <C>                <C>                 <C>     
Service cost--benefits earned during year....................    $   50,610        $  37,033           $ 42,904
Interest cost on projected benefit obligations...............       136,333           124,147            108,394
Return on assets.............................................      (131,728)         (312,190)             5,022
SFAS 88 early retirement (A).................................         1,800                --                 --
Net amortization and deferral................................        18,639           222,916            (90,752)
                                                              ================  ================ ==================
     Total...................................................    $   75,654         $  71,906           $ 65,568
                                                              ================  ================ ==================
</TABLE>


     See Note 1--Organization and Summary of Significant Accounting Policies.

(A)  Effective May 1, 1996,  PSE&G's Pension Plan was amended allowing employees
     the option to retire early upon  attainment of age 55 and  completion of 25
     or more years of service.  Also,  between  May 1, 1996 and April 30,  1997,
     early  retirement  without reduction  is  available  to  employees who have
     attained  age 50 and  have  completed  30 or more  years  of  service.  The
     accounting  statement that  establishes the standards for this is Statement
     of  Financial  Accounting  Standard  No.  88,  "Employers'  Accounting  for
     Settlements  and  Curtailments  of Defined  Benefit  Pension  Plans and for
     Termination  Benefits"  (SFAS 88).  SFAS 88 requires  that an employer that
     offers  special  termination   benefits  to  employees  shall  recognize  a
     liability  when the  employees  accept  the  offer  and the  amount  can be
     reasonably  estimated.  This results in an immediate expense  applicable to
     the employees who, as of December 31, 1996, have accepted the offer.


Note 16. Financial Information by Business Segments

     Information  related to the segments of  Enterprise's  business is detailed
below:

<TABLE>
<CAPTION>

                                                                                     Non-utility
                                                    Electric           Gas          Activities (A)        Total
                                                  ---------------  --------------   ----------------  ----------------
                                                                        (Thousands of Dollars)
<S>                                                  <C>             <C>                  <C>             <C>       
For the Year Ended December 31, 1996
Total Operating Revenues.........................    $3,944,362      $1,880,994           $215,893        $6,041,249
                                                  ---------------  --------------   ----------------  ----------------
Depreciation and Amortization....................       516,968          87,277              3,048           607,293
Operating Income Before Income Taxes.............       977,545         234,215            140,136         1,351,896
Capital Expenditures.............................       463,263         139,520             46,829           649,6120
December 31, 1996
Net Utility Plant................................     9,565,698       1,613,455                --         11,179,153
Other Corporate Assets...........................     2,839,894         780,307          2,115,977         5,736,178
                                                  ===============  ==============   ================  ================
Total Assets.....................................   $12,405,592      $2,393,762         $2,115,977       $16,915,331
                                                  ===============  ==============   ================  ================
For the Year Ended December 31, 1995
Total Operating Revenues.........................    $4,020,842      $1,686,403           $186,417        $5,893,662
                                                  ---------------  --------------   ----------------  ----------------
Depreciation and Amortization....................       503,022          88,092              5,852           596,966
Operating Income Before Income Taxes.............     1,140,279         178,718            121,362         1,440,359
Capital Expenditures.............................       545,997         140,153            139,538           825,688
December 31, 1995
Net Utility Plant................................     9,651,695       1,535,736                --         11,187,431
Other Corporate Assets...........................     2,730,245         669,289          2,229,526         5,629,060
                                                  ===============  ==============   ================  ================
Total Assets.....................................   $12,381,940      $2,205,025         $2,229,526       $16,816,491
                                                  ===============  ==============   ================  ================
For the Year Ended December 31, 1994
Total Operating Revenues.........................    $3,739,713      $1,778,528         $  177,082       $ 5,695,323
                                                  ---------------  --------------   ----------------  ----------------
Depreciation and Amortization....................       471,910          79,462              4,089           555,461
Operating Income Before Income Taxes.............     1,083,155         226,196            129,366         1,438,717
Capital Expenditures.............................       734,100         153,183            142,501         1,029,784
December 31, 1994
Net Utility Plant................................     9,642,177       1,456,068                 --        11,098,245
Other Corporate Assets...........................     2,586,847         574,306          2,053,336         5,214,489
                                                  ===============  ==============   ================  ================
Total Assets.....................................   $12,229,024      $2,030,374         $2,053,336      $ 16,312,734
                                                  ===============  ==============   ================  ================
</TABLE>

(A) The Non-utility  Activities  include amounts  applicable to Enterprise,  the
parent corporation.



<PAGE>


     Information  related to Property,  Plant and Equipment of PSE&G is detailed
below:

<TABLE>
<CAPTION>

                                                                  December 31,
                                              ------------------------------------------------------
                                                   1996              1995                1994
                                              ----------------  -----------------   ----------------
                                                             (Thousands of Dollars)
<S>                                             <C>                <C>                <C>         
Utility Plant--Original Cost
   Electric Plant in Service
     Steam Production........................   $  1,843,257       $  1,791,010       $  1,810,674
     Nuclear Production......................      6,000,860          5,992,341          5,931,049
     Transmission                                  1,145,760          1,127,031          1,078,928
     Distribution............................      3,170,851          3,044,830          2,877,862
     Other...................................      1,153,305          1,139,891            647,406
                                              ----------------  -----------------   ----------------
          Total Electric Plant in Service....     13,314,033         13,095,103         12,345,919
                                              ----------------  -----------------   ----------------
   Gas Plant in Service
     Transmission                                     67,218             65,109             62,213
     Distribution                                  2,357,584          2,250,705          2,131,816
     Other...................................        131,099            126,758            124,204
                                              ----------------  -----------------   ----------------
          Total Gas Plant in Service.........      2,555,901          2,442,572          2,318,233
                                              ----------------  -----------------   ----------------
   Common Plant in Service
     Capital Leases..........................         58,610             58,610             58,610
     General.................................        471,575            458,494            486,521
                                              ----------------  -----------------   ----------------
          Total Common Plant in Service......        530,185            517,104            545,131
               Total.........................    $16,400,119        $16,054,779        $15,209,283
                                              ================  =================   ================
</TABLE>

Note 17. Jointly Owned Facilities--Utility Plant

     PSE&G has ownership interests in and is responsible for providing its share
of the  necessary  financing for the following  jointly  owned  facilities.  All
amounts   reflect  the  share  of  PSE&G's   jointly  owned   projects  and  the
corresponding direct expenses are included in Consolidated  Statements of Income
as operating  expenses.  (See Note  1--Organization  and Summary of  Significant
Accounting Policies.)

<TABLE>
<CAPTION>

                                                            Plant--December 31, 1996
                                    -------------------------------------------------------------------------
                                      Ownership        Plant in          Accumulated         Plant Under
                                      Interest          Service          Depreciation        Construction
                                    ---------------  ---------------   ------------------  ------------------
                                                            (Thousands of Dollars)
<S>                                        <C>            <C>                   <C>                 <C>   
Coal Generating
     Conemaugh....................         22.50%         $203,436              $45,353             $1,104
     Keystone.....................         22.84%          123,525               36,789              1,349
Nuclear Generating
     Peach Bottom.................         42.49%          767,410              337,481             28,822
     Salem........................         42.59%        1,052,143              394,752            136,019
     Hope Creek...................         95.00%        4,127,669            1,189,222             15,045
     Nuclear Support Facilities...        Various          186,685               39,958              2,788
Pumped Storage Generating
     Yards Creek..................         50.00%           27,628                9,955              3,750
Transmission Facilities...........        Various          122,264               38,847                818
Merrill Creek Reservoir...........         13.91%           37,241               13,731                --
Linden Gas Plant..................         90.00%           15,853               20,495                --
</TABLE>


<PAGE>


Note 18. Selected Quarterly Data (Unaudited)

     The  information  shown below,  in the opinion of Enterprise,  includes all
adjustments,  consisting only of normal recurring accruals,  necessary to a fair
presentation  of  such  amounts.  Due  to the  seasonal  nature  of the  utility
business, quarterly amounts vary significantly during the year.

<TABLE>
<CAPTION>

                                                                Calendar Quarter Ended
                           -------------------------------------------------------------------------------------------------
                                 March 31,                 June 30,               September 30,            December 31,
                           ------------------------ ------------------------- -----------------------  ---------------------
                              1996        1995         1996         1995        1996        1995         1996        1995
                           ------------ ----------- ------------- ----------- ----------- -----------  ---------- ----------
                                                             (Thousands where Applicable)
<S>                        <C>          <C>         <C>           <C>         <C>         <C>          <C>        <C>       
Operating Revenues.........$1,797,245   $1,629,792  $1,335,892    $1,274,410  $1,333,957  $1,432,848   $1,574,155 $1,556,612
Operating Income...........   307,387      326,499     235,029       225,645     263,023     307,337      251,520    235,709
Net Income.................   194,104      212,592     134,538       110,667     155,833     186,782      127,121    152,282
Earnings Per Share of
  Common Stock.............      0.79        0.87          0.55       0.45         0.64        0.76        0.54         0.63
Average Shares of Common
  Stock Outstanding........   244,698     244,698       244,698    244,698      243,114     244,698     237,143      244,698
</TABLE>

See Note 2--Discontinued Operations of Notes.

PSE&G

     Except as modified below, the Notes to Consolidated Financial Statements of
Enterprise are incorporated  herein by reference insofar as they relate to PSE&G
and its subsidiaries:

Note  1.  --   Organization and Summary of Significant Accounting Policies
Note  2.  --   Discontinued Operations
Note  3.  --   Rate Matters
Note  4.  --   PSE&G Nuclear Decommissioning
Note  5.  --   Schedule of Consolidated Capital Stock and Other Securities
Note  6.  --   Deferred Items
Note  7.  --   Schedule of Consolidated Debt
Note  8.  --   Long-Term Investments
Note  9.  --   Financial Instruments and Risk Management
Note 12.  --   Leasing Activities--As Lessee
Note 13.  --   Commitments and Contingent Liabilities
Note 14.  --   Postretirement Benefits Other Than Pensions
Note 15.  --   Pension Plan
Note 16.  --   Financial Information by Business Segments
Note 17.  --   Jointly Owned Facilities--Utility Plant

Note 1. Organization and Summary of Significant Accounting Policies

Consolidation Policy

     The consolidated financial statements include the accounts of PSE&G and its
subsidiaries.  All significant  intercompany accounts and transactions have been
eliminated in consolidation. Certain reclassifications of prior years' data have
been made to conform with the current presentation.

     Enterprise owns all of PSE&G's common stock (without nominal or par value).
Of the 150,000,000  authorized shares of such common stock at December 31, 1996,
1995 and 1994, there were 132,450,344 shares outstanding, with an aggregate book
value of $2.6 billion.

Note 10. Cash and Cash Equivalents

     The December 31, 1996 and 1995 balances consist primarily of working funds.


<PAGE>


Note 11. Federal Income Taxes

     A  reconciliation  of reported Net Income with pretax income and of Federal
income tax expense with the amount computed by multiplying  pretax income by the
statutory Federal income tax rate of 35% is as follows:

<TABLE>
<CAPTION>

                                                                          1996            1995            1994
                                                                       -------------   -------------   -------------
                                                                                 (Thousands of Dollars)
<S>                                                                      <C>             <C>             <C>     
Net Income......................................................         $535,071        $616,964        $659,406
                                                                       -------------   -------------   -------------
Federal income taxes:
   Operating income:
     Current provision..........................................          240,852         275,460         230,709
     Provision for deferred income taxes--net(A).................          43,497          65,084          83,028
     Investment tax credits--net.................................         (18,973)        (19,111)        (19,208)
                                                                       -------------   -------------   -------------
     Total included in operating income.........................          265,376         321,433         294,529
Miscellaneous other income:
     Current provision..........................................              537          (9,897)         (8,186)
     Provision for deferred income taxes(A).....................               21           9,816          10,422
     SFAS 90 deferred income taxes(A)...........................            1,781           2,161           2,530
                                                                       -------------   -------------   -------------
          Total Federal income tax provisions...................          267,715         323,513         299,295
                                                                       =============   =============   =============
Pretax income...................................................         $802,786        $940,477        $958,701
                                                                       =============   =============   =============
</TABLE>

     Reconciliation between total Federal income tax provisions and tax computed
at the statutory tax rate on pretax income:

<TABLE>
<CAPTION>

                                                                          1996            1995             1994
                                                                       -------------   -------------    -------------
                                                                                    (Thousands of Dollars)
<S>                                                                      <C>             <C>               <C>     
Tax computed at the statutory rate...............................        $280,975        $329,167          $335,546
                                                                       -------------   -------------    -------------
Increase (decrease) attributable to flow through of 
  certain tax adjustments:
     Depreciation................................................          11,031          16,257           (4,597)
     Amortization of investment tax credits......................         (18,973)        (19,111)         (19,208)
     Other.......................................................          (5,318)         (2,800)         (12,446)
                                                                       -------------   -------------    -------------
          Subtotal...............................................         (13,260)         (5,654)         (36,251)
                                                                       -------------   -------------    -------------
          Total Federal income tax provisions....................        $267,715        $323,513         $299,295
                                                                       =============   =============    =============
Effective Federal income tax rate................................            33.3%           34.4%            31.2%

</TABLE>

(A) The provision for deferred  income taxes  represents  the tax effects of the
following items:

<TABLE>
<CAPTION>

                                                                          1996             1995            1994
                                                                       -------------   --------------   -------------
                                                                                  (Thousands of Dollars)

<S>                                                                       <C>             <C>              <C>    
Deferred Credits:
     Additional tax depreciation and amortization................         $30,907         $111,193         $85,335
     Property Abandonments.......................................          (6,985)          (7,411)         (6,606)
     Oil and Gas Property Write-Down.............................          (2,451)          (2,451)         (2,451)
     Deferred Fuel Costs--net.....................................          6,533           (3,601)         39,361
     Other.......................................................          17,295          (20,669)        (19,659)
                                                                       =============   ==============   =============
          Total..................................................         $45,299          $77,061         $95,980
                                                                       =============   ==============   =============
</TABLE>

<PAGE>


SFAS 109

     The following is an analysis of deferred income taxes:

<TABLE>
<CAPTION>

                                                                        December 31,
                                                                -------------------------------
                                                                   1996              1995
                                                                -------------    --------------

<S>                                                                 <C>               <C>    
Deferred Income Taxes                                              (Thousands of Dollars)
Assets:
   Current (net)...........................................         $23,210           $27,571
   Noncurrent:
     Unrecovered Investment Tax Credits....................         123,073           129,713
     Nuclear Decommissioning...............................          27,156            25,241
     Construction Period Interest and Taxes................          16,292            17,199
     Vacation Pay..........................................           6,796             6,681
     Other.................................................          16,862             5,057
                                                                -------------    --------------
        Total Noncurrent...................................         190,179           183,891
                                                                -------------    --------------
        Total Assets.......................................         213,389           211,462
                                                                -------------    --------------
Liabilities:
   Noncurrent:
     Plant Related Items...................................       2,255,650         2,237,386
     Property Abandonments.................................          16,281            21,469
     Oil and Gas Property Write-Down.......................          11,196            13,061
     Deferred Electric Energy & Gas Costs..................          62,817            56,283
     Unamortized Debt Expense..............................          39,980            36,945
     Taxes Recoverable Through Future Rates (Net)..........         258,740           262,625
     Other.................................................         103,102            91,725
                                                                -------------    --------------
        Total Noncurrent...................................       2,747,766         2,719,494
                                                                -------------    --------------
        Total Liabilities..................................       2,747,766         2,719,494
                                                                -------------    --------------
Summary--Deferred Income Taxes
   Net Current Assets......................................          23,210            27,571
   Net Deferred Liability..................................       2,557,587         2,535,603
                                                                =============    ==============
        Total..............................................      $2,534,377        $2,508,032
                                                                =============    ==============
</TABLE>

     The balance of Federal  income tax  (receivable  from)  payable by PSE&G to
Enterprise  was $(4.9)  million and $5.3  million,  as of December  31, 1996 and
December 31, 1995, respectively.

Note 18. Selected Quarterly Data (Unaudited)

     The  information  shown  below,  in the  opinion  of  PSE&G,  includes  all
adjustments,  consisting only of normal recurring accruals,  necessary to a fair
presentation  of  such  amounts.  Due  to the  seasonal  nature  of the  utility
business, quarterly amounts vary significantly during the year.

<TABLE>
<CAPTION>

  Calendar Quarter Ended         March 31,                 June 30,              September 30,           December 31,
  ----------------------                                                                                             
                           ------------------------ ------------------------ ----------------------- -----------------------
                             1996         1995        1996         1995        1996        1995        1996        1995
                           ----------- ------------ -----------  ----------- ----------- ----------- ----------- -----------
                                                               (Thousands of Dollars)
<S>                         <C>         <C>          <C>          <C>         <C>         <C>         <C>         <C>       
Operating Revenues........  $1,755,249  $1,579,516   $1,285,637   $1,235,435  $1,269,447  $1,381,004  $1,515,023  $1,511,290
Operating Income..........     285,102      298,432     209,095      204,606     227,965     280,525     224,319     211,939
Net.......................     183,650      206,896     108,767      111,300     121,739     184,878     120,915     113,890
Income Earnings Available
to Enterprise............     $176,124     $198,214    $119,797     $102,620    $117,654    $176,196    $116,512    $105,698
</TABLE>

<PAGE>


Note 19.       Accounts Receivable (Accounts Payable) from (to)
               Associated Companies--Net

     The balance at December 31, 1996 and 1995 consisted of the following:

<TABLE>
<CAPTION>

                                                              1996              1995
                                                          ---------------   ---------------
                                                              (Thousands of Dollars)
<S>                                                             <C>              <C>     
Public Service Enterprise Group Incorporated (A)........        $1,540           $(9,055)
Enterprise Diversified Holdings Incorporated............         2,758             1,145
Other...................................................            10              (101)
                                                          ===============   ===============
          Total.........................................        $4,308           $(8,011)
                                                          ===============   ===============
</TABLE>

(A) Principally Federal income taxes related to PSE&G's taxable income.



<PAGE>


                 FINANCIAL STATEMENT RESPONSIBILITY--ENTERPRISE


     Management of Enterprise is responsible for the preparation,  integrity and
objectivity  of the  consolidated  financial  statements  and  related  notes of
Enterprise. The consolidated financial statements and related notes are prepared
in accordance  with  generally  accepted  accounting  principles.  The financial
statements  reflect  estimates  based  upon the  judgment  of  management  where
appropriate.  Management believes that the consolidated financial statements and
related  notes present  fairly  Enterprise's  financial  position and results of
operations.  Information  in  other  parts  of this  Annual  Report  is also the
responsibility of management and is consistent with these consolidated financial
statements and related notes.

     The firm of  Deloitte & Touche  LLP,  independent  auditors,  is engaged to
audit Enterprise's consolidated financial statements and related notes and issue
a report  thereon.  Deloitte & Touche's  audit is conducted in  accordance  with
generally accepted auditing standards. Management has made available to Deloitte
& Touche all the  corporation's  financial  records and related data, as well as
the minutes of directors'  meetings.  Furthermore,  management believes that all
representations  made to  Deloitte  & Touche  during  its audit  were  valid and
appropriate.

     Management has  established  and maintains a system of internal  accounting
controls to provide reasonable  assurance that assets are safeguarded,  and that
transactions  are executed in accordance  with  management's  authorization  and
recorded  properly for the  prevention  and  detection of  fraudulent  financial
reporting,  so as to maintain the  integrity  and  reliability  of the financial
statements.  The  system is  designed  to  permit  preparation  of  consolidated
financial  statements and related notes in accordance  with  generally  accepted
accounting  principles.  The concept of reasonable assurance recognizes that the
costs of a system of internal  accounting controls should not exceed the related
benefits. Management believes the effectiveness of this system is enhanced by an
ongoing program of continuous and selective training of employees.  In addition,
management has  communicated to all employees its policies on business  conduct,
safeguarding assets and internal controls.

     The Internal Auditing Department of PSE&G conducts audits and appraisals of
accounting and other operations of Enterprise and its subsidiaries and evaluates
the effectiveness of cost and other controls and, where appropriate,  recommends
to management  improvements  thereto.  Management  has  considered  the internal
auditors' and Deloitte & Touche's  recommendations  concerning the corporation's
system of  internal  accounting  controls  and has taken  actions  that,  in its
opinion,  are  cost-effective in the  circumstances to respond  appropriately to
these  recommendations.  Management  believes that, as of December 31, 1996, the
corporation's  system of internal  accounting controls is adequate to accomplish
the objectives discussed herein.

     The Board of  Directors of  Enterprise  carries out its  responsibility  of
financial overview through its Audit Committee,  which presently consists of six
directors  who are not employees of  Enterprise  or any of its  affiliates.  The
Audit   Committee   meets   periodically   with   management  as  well  as  with
representatives  of the  internal  auditors  and  Deloitte  & Touche.  The Audit
Committee   reviews   the  work  of  each  to   ensure   that   its   respective
responsibilities  are being carried out and discusses related matters.  Both the
internal  auditors and Deloitte & Touche  periodically meet alone with the Audit
Committee  and have  free  access  to the Audit  Committee,  and its  individual
members, at all times.

                E. JAMES FERLAND                  ROBERT C. MURRAY
             Chairman of the Board,              Vice President and
     President and Chief Executive Officer     Chief Financial Officer


                PATRICIA A. RADO
          Vice President and Controller
          Principal Accounting Officer

February 14, 1997


<PAGE>


                    FINANCIAL STATEMENT RESPONSIBILITY--PSE&G


     Management  of PSE&G is  responsible  for the  preparation,  integrity  and
objectivity of the consolidated financial statements and related notes of PSE&G.
The  consolidated  financial  statements  and  related  notes  are  prepared  in
accordance  with  generally  accepted  accounting   principles.   The  financial
statements  reflect  estimates  based  upon the  judgment  of  management  where
appropriate.  Management believes that the consolidated financial statements and
related  notes  present  fairly  PSE&G's  financial   position  and  results  of
operations.  Information  in  other  parts  of this  Annual  Report  is also the
responsibility of management and is consistent with these consolidated financial
statements and related notes.

     The firm of  Deloitte & Touche  LLP,  independent  auditors,  is engaged to
audit PSE&G's  consolidated  financial  statements and related notes and issue a
report  thereon.  Deloitte & Touche's  audit is  conducted  in  accordance  with
generally accepted auditing standards. Management has made available to Deloitte
& Touche all the  corporation's  financial  records and related data, as well as
the minutes of directors'  meetings.  Furthermore,  management believes that all
representations  made to  Deloitte  & Touche  during  its audit  were  valid and
appropriate.

     Management has  established  and maintains a system of internal  accounting
controls to provide reasonable  assurance that assets are safeguarded,  and that
transactions  are executed in accordance  with  management's  authorization  and
recorded  properly for the  prevention  and  detection of  fraudulent  financial
reporting,  so as to maintain the  integrity  and  reliability  of the financial
statements.  The  system is  designed  to  permit  preparation  of  consolidated
financial  statements and related notes in accordance  with  generally  accepted
accounting  principles.  The concept of reasonable assurance recognizes that the
costs of a system of internal  accounting controls should not exceed the related
benefits. Management believes the effectiveness of this system is enhanced by an
ongoing program of continuous and selective training of employees.  In addition,
management has  communicated to all employees its policies on business  conduct,
safeguarding assets and internal controls.

     The  Internal  Auditing   Department  conducts  audits  and  appraisals  of
accounting  and other  operations  and evaluates the  effectiveness  of cost and
other controls and,  where  appropriate,  recommends to management  improvements
thereto.  Management  has  considered  the  internal  auditors'  and  Deloitte &
Touche's  recommendations   concerning  the  corporation's  system  of  internal
accounting  controls  and has  taken  actions  that  are  cost-effective  in the
circumstances  to respond  appropriately  to these  recommendations.  Management
believes  that, as of December 31, 1996,  the  corporation's  system of internal
accounting controls is adequate to accomplish the objectives discussed herein.

     The Board of Directors carries out its responsibility of financial overview
through the Audit  Committee  of  Enterprise,  which  presently  consists of six
directors  who  are  not  employees  of  PSE&G  or any of  its  affiliates.  The
Enterprise  Audit Committee meets  periodically  with management as well as with
representatives  of the  internal  auditors  and  Deloitte  & Touche.  The Audit
Committee   reviews   the  work  of  each  to  ensure   that  their   respective
responsibilities  are being carried out and discusses related matters.  Both the
internal auditors and Deloitte & Touche,  periodically meet alone with the Audit
Committee  and have  free  access  to the Audit  Committee,  and its  individual
members, at all times.

                E. JAMES FERLAND                  ROBERT C. MURRAY
             Chairman of the Board,              Vice President and
     President and Chief Executive Officer     Chief Financial Officer


                PATRICIA A. RADO
          Vice President and Controller
          Principal Accounting Officer

February 14, 1997


<PAGE>


                          INDEPENDENT AUDITORS' REPORT


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

     We  have  audited  the  consolidated   balance  sheets  of  Public  Service
Enterprise  Group  Incorporated  and  its  subsidiaries  (the  "Company")  as of
December 31, 1996 and 1995, and the related  consolidated  statements of income,
retained  earnings,  and cash  flows for each of the three  years in the  period
ended  December 31, 1996.  Our audits also included the  consolidated  financial
statement  schedule  listed in the Index in Item  14(b)(1).  These  consolidated
financial  statements and the consolidated  financial statement schedule are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated  financial  statements and consolidated  financial
statement schedule based on our audits.

     We conducted  our audits in accordance  with  generally  accepted  auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion,  such consolidated  financial statements present fairly, in
all material respects, the financial position of Public Service Enterprise Group
Incorporated and its subsidiaries at December 31, 1996 and 1995, and the results
of their  operations  and their  cash  flows for each of the three  years in the
period ended December 31, 1996 in conformity with generally accepted  accounting
principles.   Also,  in  our  opinion,  such  consolidated  financial  statement
schedule,  when  considered  in  relation  to the basic  consolidated  financial
statements  taken as a whole,  presents  fairly  in all  material  respects  the
information set forth therein.

     We have also  previously  audited,  in accordance  with generally  accepted
auditing  standards,  the  consolidated  balance sheets as of December 31, 1994,
1993,  and 1992,  and the related  consolidated  statements of income,  retained
earnings and cash flows for the years ended  December 31, 1993 and 1992 (none of
which are  presented  herein)  and we  expressed  unqualified  opinions on those
consolidated 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, 1996 for the Company,  presented in Item 6, is fairly stated in all
material  respects,  in relation to the consolidated  financial  statements from
which it has been derived.


DELOITTE & TOUCHE LLP

February 14, 1997
Parsippany, New Jersey



<PAGE>


                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors of
Public Service Electric and Gas Company:

     We have audited the consolidated  balance sheets of Public Service Electric
and Gas Company and its subsidiaries (the "Company") as of December 31, 1996 and
1995, and the related consolidated  statements of income, retained earnings, and
cash flows for each of the three years in the period  ended  December  31, 1996.
Our audits also included the consolidated financial statement schedule listed in
the Index in Item  14(b)(2).  These  consolidated  financial  statements and the
consolidated   financial  statement  schedule  are  the  responsibility  of  the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated  financial statements and consolidated financial statement schedule
based on our audits.

     We conducted  our audits in accordance  with  generally  accepted  auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion,  such consolidated  financial statements present fairly, in
all material respects, the financial position of Public Service Electric and Gas
Company and its  subsidiaries  at December 31, 1996 and 1995, and the results of
their  operations and their cash flows for each of the three years in the period
ended  December  31,  1996 in  conformity  with  generally  accepted  accounting
principles.   Also,  in  our  opinion,  such  consolidated  financial  statement
schedule,  when  considered  in  relation  to the basic  consolidated  financial
statements  taken as a whole,  presents  fairly  in all  material  respects  the
information set forth therein.

     We have also  previously  audited,  in accordance  with generally  accepted
auditing  standards,  the  consolidated  balance sheets as of December 31, 1994,
1993,  and 1992,  and the related  consolidated  statements of income,  retained
earnings and cash flows for the years ended  December 31, 1993 and 1992 (none of
which are  presented  herein)  and we  expressed  unqualified  opinions on those
consolidated 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, 1996 for the Company,  presented in Item 6, is fairly stated in all
material  respects,  in relation to the consolidated  financial  statements from
which it has been derived.


DELOITTE & TOUCHE LLP

February 14, 1997
Parsippany, New Jersey

<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and 
        Financial Disclosure

     Enterprise and PSE&G, none.

                                    PART III


Item 10. Directors and Executive Officers of the Registrants

Directors of the Registrants

   Enterprise

     The  information  required by Item 10 of Form 10-K with  respect to present
directors  who are nominees for  election as  directors at  Enterprise's  Annual
Meeting of  Stockholders to be held on April 15, 1997, and directors whose terms
will continue  beyond the meeting,  is set forth under the heading  "Election of
Directors" in Enterprise's definitive Proxy Statement for such Annual Meeting of
Stockholders,  which definitive Proxy Statement is expected to be filed with the
Securities  and  Exchange  Commission  on or  about  March  1,  1997  and  which
information  set  forth  under  said  heading  is  incorporated  herein  by this
reference thereto.

   PSE&G

     There is shown as to each present director  information as to the period of
service as a director  of PSE&G,  age as of April 15,  1997,  present  committee
memberships,  business  experience  during the last five years and other present
directorships.  For discussion of certain litigation  involving the directors of
PSE&G,   except  Forrest  J.  Remick,   see  Part  I--Business,   Item  3--Legal
Proceedings.

     LAWRENCE  R.  CODEY  has been a  director  since  1988.  Age 52.  Member of
Executive  Committee.  Has been President and Chief  Operating  Officer of PSE&G
since 1991.  Director of  Enterprise.  Director of Sealed Air  Corporation,  The
Trust Company of New Jersey,  United Water  Resources Inc. and Blue Cross & Blue
Shield of New Jersey.

     E. JAMES  FERLAND  has been a director  since  1986.  Age 55.  Chairman  of
Executive  Committee.  Chairman  of the  Board,  President  and Chief  Executive
Officer of Enterprise since July 1986, Chairman of the Board and Chief Executive
Officer  of PSE&G  since  September  1991 and  Chairman  of the  Board and Chief
Executive  Officer of EDHI since June 1989.  Director of Enterprise  and of EDHI
and its principal  subsidiaries.  Director of Foster Wheeler Corporation and The
Hartford Steam Boiler Inspection and Insurance Company.

     RAYMOND V. GILMARTIN has been a director  since 1993.  Age 56.  Director of
Enterprise.  Has been  Chairman  of the  Board,  President  and Chief  Executive
Officer  of  Merck & Co.,  Inc.,  Whitehouse  Station,  New  Jersey  (discovers,
develops,  produces and markets human and animal health products) since November
1994. Was President and Chief Executive Officer from June 1994 to November 1994.
Was  Chairman  of the Board,  President  and Chief  Executive  Officer of Becton
Dickinson  and Company from  November  1992 to June 1994 and President and Chief
Executive Officer from February 1989 to November 1992.  Director of Merck & Co.,
Inc. and Providian Corporation.

     IRWIN  LERNER has been a director  since  1993.  Age 66. Was  previously  a
director from 1981 to February 1988. Director of Enterprise. Was Chairman, Board
of  Directors  from  January  1993 to  September  1993 and  President  and Chief
Executive Officer from 1980 to December 1992 of Hoffmann-La Roche Inc.,  Nutley,
New Jersey  (prescription  pharmaceuticals,  vitamins  and fine  chemicals,  and
diagnostic   products  and   services).   Director  of  Humana   Inc.,   Sequana
Therapeutics, Inc. and Medarex, Inc.

     JAMES C. PITNEY has been a director  since 1993.  Age 70. Was  previously a
director from 1979 to February 1988. Member of Executive Committee.  Director of
Enterprise.  Has been a partner in the law firm of Pitney, Hardin, Kipp & Szuch,
Morristown,  New Jersey,  since 1958.  Director of Tri-Continental  Corporation,
sixteen  funds of the Seligman  family of funds and Seligman  Quality,  Inc. Mr.
Pitney  will  retire as a  Director  at the  expiration  of his term at the 1997
Annual Meeting of Stockholders.

     FORREST J.  REMICK has been a director  since  1995.  Age 66.  Director  of
Enterprise.  Has been an engineering  consultant  since 1994. Was  Commissioner,
U.S.  Nuclear  Regulatory  Commission,  from  December  1989 to June  1994.  Was
Associate  Vice  President--Research  and  Professor of Nuclear  Engineering  at
Pennsylvania State University, from 1985 to 1989.



Executive Officers of the Registrants

     The following table sets forth certain information concerning the executive
officers of Enterprise and PSE&G, respectively.

<TABLE>
<CAPTION>

                                       Age                                                         Effective Date
Name                            December 31, 1996                  Office                     First Elected to Present
                                                                                                      Position
-----------------------------  --------------------- -----------------------------------------------------------------------
<S>                                    <C>           <C>                                       <C>            
E. James Ferland............           54            Chairman of the Board, President          July 1986 to present
                                                     and Chief Executive Officer
                                                     (Enterprise)

                                                     Chairman of the Board and Chief           July 1986 to present
                                                     Executive Officer (PSE&G)

                                                     President (PSE&G)                         June 1986 to September 1991

                                                     Chairman of the Board and Chief           June 1989 to present
                                                     Executive Officer (EDHI)

Lawrence R. Codey..........            52            President and  Chief Operating            September 1991 to present
                                                     Officer (PSE&G)

Robert C. Murray...........            51            Vice President and Chief Financial        January 1992 to present
                                                     Officer (Enterprise)

                                                     Senior Vice President and Chief           January 1992 to present
                                                     Financial Officer (PSE&G)

Patricia A. Rado...........            54            Vice President and Controller             April 1993 to present
                                                     (Enterprise)

                                                     Vice President and Controller             April 1993 to present
                                                     (PSE&G)

                                                     Controller of Yankee Energy               July 1989 to April 1993
                                                     Systems Incorporated

R. Edwin Selover...........            51            Vice President and General Counsel        April 1988 to present
                                                     (Enterprise)

                                                     Senior Vice President and General         January 1988 to present
                                                     Counsel (PSE&G)

Frank Cassidy..............            49            President and Chief Executive             November 1996 to present
                                                     Officer (Energis Resources)

                                                     Senior Vice President--Fossil             February 1995 to November 1996
                                                     Generation (PSE&G)

                                                     Vice President--Transmission              November 1989 to February 1995
                                                     Systems (PSE&G)

Robert J. Dougherty, Jr....            45            President and Chief Operating             January 1997 to present
                                                     Officer (EDHI)

                                                     President--Enterprise Ventures and        February 1995 to December 1996
                                                     Services Corporation

                                                     Senior Vice President--Electric           September 1991 to February 1995
                                                     (PSE&G)
</TABLE>


<PAGE>
<TABLE>
<CAPTION>

                                       Age                                                          Effective Date
Name                            December 31, 1996                  Office                      First Elected to Present
                                                                                                       Position
-----------------------------  --------------------- ------------------------------------------------------------------------
<S>                                    <C>           <C>                                       <C>            
Leon R. Eliason.............           57            Chief Nuclear Officer and                 October 1994 to present
                                                     President--Nuclear Business Unit
                                                     (PSE&G)

                                                     President--Power Supply Business          January 1993 to September 1994
                                                     Unit, Northern States Power
                                                     Company

                                                     Vice President--Nuclear Generation,       July 1990 to January 1993
                                                     Northern States Power

Alfred C. Koeppe............           50            Senior Vice President--Corporate          October 1996 to present
                                                     Services and External Affairs

                                                     Senior Vice President--External           October 1995 to October 1996
                                                     Affairs (PSE&G)

                                                     President and Chief Executive             February 1993 to October 1995
                                                     Officer, Bell Atlantic--New Jersey

                                                     Vice President--Public Affairs,           February 1991 to February 1993
                                                     Bell Atlantic--New Jersey

Michael J. Thomson..........           38            President and Chief Executive             January 1997 to present
                                                     Officer
                                                     (CEA)

                                                     Senior Vice President and Chief           February 1994 to December 1996
                                                     Operating Officer (CEA)

                                                     Senior Vice President (CEA)               July 1993 to February 1994

                                                     Vice President--Business                  July 1992 to July 1993
                                                     Development and Planning (EDHI)

                                                     Director--Business Planning and           April 1991 to July 1992
                                                     Development (EDHI)
</TABLE>

Item 11. Executive Compensation

Enterprise

     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 15, 1997 which  definitive
Proxy  Statement  is  expected  to be filed  with the  Securities  and  Exchange
Commission on or about March 3, 1997 and such  information  set forth under such
heading is incorporated herein by this reference thereto.


<PAGE>


PSE&G

     Information  regarding the compensation of the Chief Executive  Officer and
the four most highly compensated  executive officers of PSE&G as of December 31,
1996 is set forth  below.  Amounts  shown were paid or awarded for all  services
rendered to Enterprise and its subsidiaries and affiliates including PSE&G.

<TABLE>

                                            SUMMARY COMPENSATION TABLE
<CAPTION>

                                             Annual Compensation                Awards      Payouts
                                          ----------------------------         ----------  -----------


                                                        Bonus/Annual                          LTIP     All Other
                                           Salary        Incentive              Options     Payouts   Compensation
Name and Principal Position          Year     $         Award($)(1)             (#)(2)       ($)(3)      ($)(4)
--------------------------------------------------------------------------------------------------------------------
<S>                                 <C>     <C>               <C>                <C>        <C>            <C>   
E. James Ferland.................   1996    712,261                  (5)         6,500      168,084        10,994
Chairman of the Board, President    1995    682,377           225,411            5,800      246,288         8,681
and CEO of Enterprise               1994    652,492           251,383            5,400      127,140         5,628


Lawrence R. Codey................   1996    435,327                  (5)         3,000       81,144         5,934
President and Chief Operating       1995    418,392           141,931            2,800      118,746         5,756
Officer of PSE&G                    1994    398,468           129,276            2,500       48,900         5,351


Robert J. Dougherty, Jr..........   1996    379,586(11)              (5)         2,600       57,960         4,444
President of Enterprise Ventures    1995    322,759           111,259            2,500       70,368         4,269
and Services Corporation (8)        1994    273,946            72,027            1,800       26,895         4,227


Leon R. Eliason.................    1996    336,706           100,000(5)(6)      2,500       34,776         6,239
President--Nuclear                  1995    323,755           229,168(7)         5,500       26,388         3,242
Business Unit and Chief Nuclear     1994     74,713                 0              600            0             0
Officer of PSE&G (9)


Robert C. Murray................    1996    332,721                  (5)         2,000       57,960         5,248
Vice President and Chief Financial  1995    318,775           117,577(5)(10)     2,000       70,368         5,169
Officer of Enterprise               1994    303,832           152,621(10)        1,800       26,895         4,944

</TABLE>

(1)  Amount  awarded  in  given  year  was  earned  under  Management  Incentive
     Compensation  Plan (MICP) and  determined in following year with respect to
     the given year based on individual  performance and financial and operating
     performance  of  Enterprise  and  PSE&G,   including  comparison  to  other
     companies.  For plan years  prior to 1996,  the award is  accounted  for as
     market-priced  phantom  stock with dividend  reinvestment  at 95% of market
     price,  with  payment  made over  three  years  beginning  in  second  year
     following grant. Beginning in 1997 with respect to the 1996 and future plan
     years, awards will be payable in one lump sum and not deferred.

(2)  Granted under  Long-Term  Incentive Plan (LTIP) in tandem with equal number
     of  performance  units and  dividend  equivalents  which may  provide  cash
     payments,  dependent  upon future  financial  performance  of Enterprise in
     comparison  to other  companies  and dividend  payments by  Enterprise,  to
     assist recipients in exercising  options granted.  The grant is made at the
     beginning of a three-year  performance period and cash payment of the value
     of such performance  units and dividend  equivalents is made following such
     period in proportion to the options, if any, exercised at such time.

(3)  Amount paid in proportion to options  exercised,  if any, based on value of
     previously  granted  performance  units and dividend  equivalents,  each as
     measured  during  three-year  period  ending  the year prior to the year in
     which payment is made.


<PAGE>


(4)  Includes employer  contribution to Thrift and Tax-Deferred Savings Plan and
     value of 5% discount on phantom stock dividend reinvestment under MICP:

<TABLE>
<CAPTION>

                          Ferland               Codey             Dougherty          Eliason           Murray
                      ------------------ --------------------------------------------------------- -----------------
                       Thrift    MICP    Thrift      MICP      Thrift    MICP     Thrift   MICP    Thrift    MICP
                        ($)      ($)       ($)        ($)        ($)      ($)      ($)     ($)       ($)     ($)
                      ------------------ --------------------------------------------------------- -----------------
<C>                      <C>     <C>       <C>          <C>      <C>        <C>     <C>      <C>     <C>       <C>
1996.................    4,150   2,861     4,502        1,432    3,750      694     2,678    212     4,502     746
1995.................    3,752   2,383     4,502        1,254    3,754      515     1,795      0     4,502     667
1994.................    3,751   1,877     4,197        1,154    3,752      475         0      0     4,504     440
</TABLE>

     In  addition,  1996 and 1995  amounts  include for Mr.  Ferland  $3,983 and
$2,546  and  for Mr.  Eliason  $3,349  and  $1,447,  respectively,  representing
interest on compensation  deferred under PSE&G's Deferred  Compensation  Plan in
excess of 120% of the  applicable  federal  long-term  rate as prescribed  under
Section  1274(d)  of  the  Internal   Revenue  Code.   Under  PSE&G's   Deferred
Compensation Plan, interest is paid at prime rate plus 1/2%, adjusted quarterly.

(5)  The 1996 MICP award amount has not yet been determined. The target award is
     40% of salary for Mr. Ferland, 30% for Messrs. Codey, Dougherty and Eliason
     and  25%  for  Mr.  Murray.   The  target  award  is  adjusted  to  reflect
     Enterprise's return on capital,  PSE&G's comparative electric and gas costs
     and individual performance.

(6)  Amount paid pursuant to Mr. Eliason's employment agreement.

(7)  Includes $165,000 paid pursuant to Mr. Eliason's employment agreement.

(8)  Mr. Dougherty  became  President  and Chief  Operating  Officer of EDHI on
     January 1, 1997.

(9)  Mr. Eliason commenced employment September 26, 1994.

(10) 1995 amount  includes  $25,000  paid  pursuant to Mr.  Murray's  employment
     agreement.  1994 amount  includes  $50,000  paid  pursuant to Mr.  Murray's
     employment agreement.

<TABLE>


                    OPTION GRANTS IN LAST FISCAL YEAR (1996)

<CAPTION>
                                                              Individual Grants                   Potential Realizable
                                               -------------------------------------------------
                                                            % of Total                              Value at Assumed
                                                Number of     Options                                Annual Rates of
                                                Securities  Granted to                                 Stock Price
                                                Underlying   Employees  Exercise or              Appreciation for Option
                                                 Options        in      Base Price  Expiration           Term(2)
                                                                                                ---------------------------
Name                                            Granted(1)  Fiscal Year   ($/Sh)       Date     0%($)   5%($)    10%($)
---------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>          <C>       <C>       <C>  <C> <C>     <C>       <C>    
E. James Ferland..............................        6,500        22.6      30.875    1/03/06  0       126,211   319,844
Lawrence R. Codey.............................        3,000        10.5      30.875    1/03/06  0        58,251   147,620
Robert J. Dougherty, Jr. .....................        2,600         9.1      30.875    1/03/06  0        50,485   127,938
Leon R. Eliason...............................        2,500         8.7      30.875    1/03/06  0        48,543   123,017
Robert C. Murray..............................        2,000         7.0      30.875    1/03/06  0        38,834    94,414
</TABLE>

(1)  Granted  under LTIP in tandem with equal  number of  performance  units and
     dividend  equivalents which may provide cash payments,  dependent on future
     financial  performance  of Enterprise in comparison to other  companies and
     dividend  payments  by  Enterprise,  to  assist  recipients  in  exercising
     options,  with  exercisability  commencing January 1, 1999. Cash payment is
     made, based on the value, if any, of performance units awarded and dividend
     equivalents  accrued,  if any, as  measured  during the  three-year  period
     ending the year prior to the year in which payment,  if any, is made,  only
     if the specified  performance level is achieved,  dividend equivalents have
     accrued and options are exercised.

(2)  All  options  reported  have a  ten-year  term,  as  noted.  Amounts  shown
     represent  hypothetical  future values at such term based upon hypothetical
     price  appreciation  of Enterprise  Common Stock and may not necessarily be
     realized. Actual values which may be realized, if any, upon any exercise of
     such options,  will be based on the market price of Enterprise Common Stock
     at the  time of any  such  exercise  and thus  are  dependent  upon  future
     performance of Enterprise Common Stock.


<PAGE>


<TABLE>


           AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR (1996) AND
                    FISCAL YEAR END OPTION VALUES (12/31/96)

<CAPTION>
                                                                                                Value of Unexercised
                                                               Number of Unexercised            In-The-Money Options
                                                              Options At Fy-End(#)(1)              At Fy-End($)(3)
                                                            ------------------------------  -------------------------------

                                       Shares
                                      Acquired     Value
                                    on Exercise   Realized  Exercisable   Unexercisable      Exercisable   Unexercisable
Name                                   (#)(1)      ($)(2)       (#)            (#)               ($)            ($)
---------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>        <C>              <C>        <C>                    <C>        <C>  
E. James Ferland...................        5,800      2,900            0          17,700                 0          3,625
Lawrence R. Codey..................        2,800          0          700           8,300             2,100          1,750
Robert J. Dougherty................        2,000          0            0           6,900                 0          1,250
Leon R. Eliason....................        1,200          0            0           6,800                 0          1,562
Robert C. Murray...................        2,000          0            0           5,800                 0          1,250
</TABLE>

(1)  Does not  reflect  any  options  granted  and/or  exercised  after year end
     (12/31/96). The net effect of any such grants and exercises is reflected in
     the table appearing under Security Ownership of Directors and Management.

(2)  Represents  difference between exercise price and market price of
     Enterprise Common Stock on date of exercise.

(3)  Represents  difference  between market price of Enterprise Common Stock and
     the  respective   exercise  prices  of  the  options  at  fiscal  year  end
     (12/31/96).  Such amounts may not  necessarily  be realized.  Actual values
     which may be  realized,  if any,  upon any exercise of such options will be
     based on the market  price of  Enterprise  Common  Stock at the time of any
     such exercise and thus are dependent upon future  performance of Enterprise
     Common Stock.

Employment Contracts and Arrangements

     Employment agreements were entered into with Messrs.  Ferland,  Eliason and
Murray  at the  time  of  their  employment.  For  Mr.  Ferland,  the  remaining
applicable  provisions of the agreement provide for additional  credited service
for  retirement  benefits  purposes  in the  amount of 22 years.  The  principal
remaining applicable terms of the agreement with Mr. Eliason provide for payment
of severance in the amount of one year's  salary,  if  discharged  without cause
during his first five years of  employment  which began in September  1994,  for
lump sum cash  payments  of  $65,000  in 1997 and  $35,000  in 1998 to align Mr.
Eliason with MICP payments for other executive officers, and additional years of
credited service for retirement  benefits for allied work experience of 19 years
after completion of three years of service,  and up to 29 years after completion
of ten  years  of  service.  The  principal  remaining  applicable  terms of the
agreement with Mr. Murray provide for additional  years of credited  service for
retirement  benefits  purposes  for allied work  experience  of five years after
completion of five years of service, and up to fifteen years after completion of
ten years of service.

Compensation Committee Interlocks and Insider Participation

     PSE&G  does  not  have  a  compensation   committee.   Decisions  regarding
compensation  of PSE&G's  executive  officers are made by the  Organization  and
Compensation  Committee  of  Enterprise.  Hence,  during 1996 the PSE&G Board of
Directors  did not have,  and no officer,  employee  or former  officer of PSE&G
participated in any  deliberations of such Board,  concerning  executive officer
compensation.


<PAGE>


Compensation of Directors and Certain Business Relationships

     A director  who is not an officer of  Enterprise  or its  subsidiaries  and
affiliates,  including PSE&G, is paid an annual retainer of $22,000 and a fee of
$1,200  for  attendance  at any Board or  committee  meeting,  inspection  trip,
conference or other similar activity relating to Enterprise, PSE&G or EDHI. Each
of the  directors  of PSE&G is also a  director  of  Enterprise.  No  additional
retainer is paid for service as a director of PSE&G. Fifty percent of the annual
retainer is paid in Enterprise Common Stock.

     Enterprise  also maintains a Stock Plan for Outside  Directors  pursuant to
which directors who are not employees of Enterprise or its subsidiaries  receive
300 shares of  restricted  stock for each year of service  as a  director.  Such
shares held by each non-employee  director are included in the table below under
Item 12. Security Ownership of Certain  Beneficial Owners and Management.  Prior
to 1996, Enterprise had maintained a retirement plan for non-employee  directors
which  provided an annual benefit for life equal to the annual Board retainer in
effect at the time the  director's  service  terminated if the director  retired
from the Board after 10 years of service. Participation of all current directors
under that plan was terminated December 31, 1995. As of January 1, 1996, current
non-employee  directors  with ten years or more of service  received an award of
shares of restricted stock equal to the present value of the retirement  benefit
under  this  prior  retirement  plan,  while  those  with less than ten years of
service  received  an award of 300  shares  per year of  service.  The number of
shares  awarded were as follows:  Mr.  Gilmartin:  900; Mr. Lerner:  3,768;  Mr.
Pitney:  5,467;  and Dr. Remick:  300. No current  director  remains eligible to
receive a benefit under the prior retirement plan.

     The  restrictions  on the stock  granted  under the Stock Plan for  Outside
Directors  provide  that the shares are subject to  forfeiture  if the  director
leaves service at any time prior to the Annual Meeting of Stockholders following
his or her  70th  birthday.  This  restriction  would  be  deemed  to have  been
satisfied if the director's  service were terminated if Enterprise were to merge
with another corporation and not be the surviving corporation or if the director
were to die in office. Enterprise also has the ability to waive this restriction
for good cause shown.  Restricted stock may not be sold or otherwise transferred
prior to the lapse of the  restrictions.  Dividends  on shares  held  subject to
restrictions  are paid directly to the director,  and the director has the right
to vote the shares.

Compensation Pursuant to Pension Plans

     The table below illustrates  annual retirement  benefits expressed in terms
of single life  annuities  based on the average final  compensation  and service
shown and retirement at age 65. A person's  annual  retirement  benefit is based
upon a  percentage  that is equal to years of credited  service plus 30, but not
more than 75%,  times average final  compensation  at the earlier of retirement,
attainment  of age 65 or death.  These  amounts are  reduced by Social  Security
benefits and certain retirement  benefits from other employers.  Pensions in the
form of joint and survivor annuities are also available.

<TABLE>



                                     PENSION PLAN TABLE

<CAPTION>
   Average Final                                 Length of Service
                       -----------------------------------------------------------------------
   Compensation           30 Years          35 Years          40 Years          45 Years
---------------------  ----------------  ----------------- ----------------- -----------------
<S>       <C>                <C>                <C>               <C>               <C>     
          $ 300,000          $180,000           $195,000          $210,000          $225,000
            400,000           240,000            260,000           280,000           300,000
            500,000           300,000            325,000           350,000           375,000
            600,000           360,000            390,000           420,000           450,000
            700,000           420,000            455,000           490,000           525,000
            800,000           480,000            520,000           560,000           600,000
            900,000           540,000            585,000           630,000           675,000
          1,000,000           600,000            650,000           700,000           750,000
</TABLE>

     Average  final  compensation,   for  purposes  of  retirement  benefits  of
executive officers,  is generally  equivalent to the average of the aggregate of
the salary and bonus amounts  reported in the Summary  Compensation  Table above
under 'Annual  Compensation'  for the five years  preceding  retirement,  not to
exceed  130% of the average  annual  salary for such five year  period.  Messrs.
Ferland,  Codey,  Dougherty,  Eliason and Murray will have accrued approximately
48, 41, 48, 42 and 39 years of credited service, respectively, as of age 65.


<PAGE>


Item 12. Security Ownership of Certain Beneficial Owners and Management

Enterprise

     The information  required by Item 12 of Form 10-K with respect to directors
and  executive  officers is set forth under the heading  'Security  Ownership of
Directors and  Management' in  Enterprise's  definitive  Proxy Statement for the
Annual Meeting of Stockholders to be held April 15, 1997 which  definitive Proxy
Statement is expected to be filed with the Securities and Exchange Commission on
or about  March 3, 1997 and such  information  set forth  under such  heading is
incorporated herein by this reference thereto.

PSE&G

     All of PSE&G's  132,450,344  outstanding  shares of Common  Stock are owned
beneficially and of record by PSE&G's parent,  Enterprise,  80 Park Plaza,  P.O.
Box 1171, Newark, New Jersey.

     The following table sets forth  beneficial  ownership of Enterprise  Common
Stock, including options, by the directors and executive officers named below as
of January 31, 1997.  None of these amounts exceed 1% of the  Enterprise  Common
Stock  outstanding at such date. No director or executive officer owns any PSE&G
Preferred Stock of any class.

                                                              Amount and
                                                              Nature of
                                                              Beneficial
Name                                                          Ownership
--------------------------------------------------------  --------------------
Lawrence R. Codey.....................................           25,811 (1)
Robert J. Dougherty, Jr...............................           17,618 (2)
Leon R. Eliason.......................................           11,600 (3)
E. James Ferland......................................           72,206 (4)
Raymond V. Gilmartin..................................            3,130
Irwin Lerner..........................................            9,168
Robert C. Murray......................................           16,964 (5)
James C. Pitney.......................................            9,888
Forrest J. Remick.....................................            1,457
All directors and executive officers (12) as a group..          188,961 (6)

(1)    Includes options to purchase 13,200 additional shares, 3,200 of which are
       currently exercisable.

(2)    Includes  the  equivalent  of 739  shares  held  under  PSE&G  Thrift and
       Tax-Deferred Savings Plan. Includes options to purchase 10,500 additional
       shares, 1,800 of which are currently exercisable.

(3)    Includes options to purchase 9,800 additional shares, 1,800 of which are
       currently exercisable.

(4)    Includes  the  equivalent  of 10,159  shares held under PSE&G  Thrift and
       Tax-Deferred Savings Plan. Includes options to purchase 25,700 additional
       shares, 5,400 of which are currently exercisable.

(5)    Includes  the  equivalent  of 964  shares  held  under  PSE&G  Thrift and
       Tax-Deferred  Savings Plan. Includes options to purchase 8,800 additional
       shares, 1,800 of which are currently exercisable.

(6)    Includes  the  equivalent  of 11,841  shares held under PSE&G  Thrift and
       Tax-Deferred Savings Plan. Includes options to purchase 81,900 additional
       shares, of which 18,300 are currently exercisable.

Item 13. Certain Relationships and Related Transactions

Enterprise

     The  information  required  by Item 13 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 15, 1997,  which  definitive
Proxy  Statement  is  expected  to be filed  with the  Securities  and  Exchange
Commission  on or about  March 3, 1997.  Such  information  set forth under such
heading is incorporated herein by this reference thereto.

PSE&G

     None.


PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

     (a) Financial Statements:

          (1) Enterprise Consolidated Statements of Income for the years ended
              December 31, 1996, 1995, and 1994, on page 59.

              Enterprise Consolidated Balance Sheets for the years ended
              December 31, 1996 and 1995, on pages 60 and 61.

              Enterprise Consolidated Statements of Cash Flows for the years
              ended December 31, 1996, 1995, and 1994 on page 62.

              Enterprise Statements of Retained Earnings for the years ended
              December 31, 1996, 1995, and 1994 on page 63.

              Enterprise Notes to Consolidated Financial Statements on pages 70
              through 101.

          (2) PSE&G Consolidated Statements of Income for the years ended
              December 31, 1996, 1995, and 1994, on page 65.

              PSE&G Consolidated Balance Sheets for the years ended December 31,
              1996 and 1995, on pages 66 and 67.

              PSE&G Consolidated Statements of Cash Flows for the years ended
              December 31, 1996, 1995, and 1994 on page 68.

              PSE&G Statements of Retained Earnings for the years ended December
              31, 1996, 1995, and 1994 on page 69.

              PSE&G Notes to Consolidated Financial Statements on pages 102
              through 105.

     (b) The following documents are filed as a part of this report:

          (1) Enterprise Financial Statement Schedules:

              Schedule II--Valuation and Qualifying Accounts for each of the
              three years in the period ended December 31, 1996 (page 117).

          (2) PSE&G Financial Statement Schedules:

              Schedule  II--Valuation  and  Qualifying  Accounts for each of the
              three years in the period ended December 31, 1996 (page 118).

              Schedules other than those listed above are omitted for the reason
              that they are not required or are not applicable,  or the required
              information is shown in the consolidated  financial  statements or
              notes thereto.

<PAGE>



     (c) The following exhibits are filed herewith:

          (1) Enterprise:

     4a(94)   Pollution Control Series W Supplemental Indenture
     10a(20)  Management Incentive Compensation Program
     12       Computation of Ratios of Earnings to Fixed Charges
     21       Subsidiaries of Registrant
     23       Independent Auditors' Consent
     27       Financial Data Schedule


     (See Exhibit Index on pages 121 through 128).

          (2) PSE&G:

     4a(94)   Pollution Control Series W Supplemental Indenture
     10a(19)  Management Incentive Compensation Program
     12(a)    Computation of Ratios of Earnings to Fixed Charges
     12(b)    Computation of Ratios of Earnings to Fixed Charges Plus
                Preferred Securities Dividend Requirements
     23       Independent Auditors' Consent
     27       Financial Data Schedule
              
     (See Exhibit Index on page 121 and pages 129 through 135.)

     (d) The following reports on Form 8-K were filed by the registrant(s) named
below during the last quarter of 1996 and the 1997 period covered by this report
under Item 5:

        Registrant            Date of Report         Item Reported
        ----------            --------------         -------------

Enterprise and PSE&G        January 29, 1997     Item 5. Other Events (PSE&G--
                                                 Nuclear Operations)

Enterprise and PSE&G        January 24, 1997     Item 5. Other Events (PSE&G--
                                                 Competition/Rate Matters/
                                                 Regulation; PSE&G--Nuclear
                                                 Operations; PSE&G--Rate
                                                 Matters; and Legal Proceedings)

                                                 
Enterprise and PSE&G        October 23, 1996     Item 5. Other Events (PSE&G--
                                                 Rate Matters--Nuclear
                                                 Performance Standard--Nuclear
                                                 Operations (Salem))



<PAGE>
<TABLE>

                                                                     SCHEDULE II

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED

                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

                Years Ended December 31, 1996--December 31, 1994

<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
                                             Column B               Column C                 Column D          Column E
---------------------------------------------------------------------------------------------------------------------------
                                                                    Additions
                                                           -----------------------------
                                            Balance at     Charged to     Charged to                          Balance at
                                             beginning      cost and         other          Deductions-         end of
                                                of                         accounts-
               Description                    period        expenses       describe          describe           period
---------------------------------------------------------------------------------------------------------------------------
                                                                       (Thousands of Dollars)
<S>                                             <C>          <C>               <C>            <C>                 <C>     
                  1996
Allowance for Doubtful Accounts..........       $ 38,003     $ 42,376          $  --          $ 38,096 (A)        $ 42,283
Discount on Property Abandonments........       $ 7,466      $   --            $  --          $  3,038 (B)        $ 4,428
Inventory Valuation Reserve..............       $ 20,100     $   --            $  --          $  4,000            $ 16,100
Other Valuation Allowances...............       $  --        $ 17,873          $  --          $     78            $ 17,795

                  1995
Allowance for Doubtful Accounts..........       $ 40,977     $ 32,855          $  --          $ 35,829 (A)        $ 38,003
Discount on Property Abandonments........       $ 11,423     $   --            $  --          $  3,957 (B)        $ 7,466
Inventory Valuation Reserve..............       $ 18,200     $  1,900          $  --          $   --              $ 20,100
Other Valuation Allowances (C)...........       $  --        $   --            $  --          $   --              $  --

                  1994
Allowance for Doubtful Accounts..........       $ 27,948     $ 50,188          $  --          $ 37,159 (A)        $ 40,977
Discount on Property Abandonments........       $ 16,263     $   --            $  --          $  4,840 (B)        $ 11,423
Inventory Valuation Reserve..............       $ 8,525      $  9,950          $  --          $    275            $ 18,200
Other Valuation Allowances (C)...........       $  --        $   --            $  --          $   --              $  --
</TABLE>


NOTES:

(A)  Accounts Receivable/Investments written off.

(B)  Amortization of discount to income.

(C)  Valuation Allowance eliminated in 1994 and 1995 to conform with 
      current presentation.

<PAGE>
<TABLE>

                                                                                                              SCHEDULE II

                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY

                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

                Years Ended December 31, 1996--December 31, 1994

<CAPTION>

---------------------------------------------------------------------------------------------------------------------------
                                             Column B               Column C                 Column D          Column E
---------------------------------------------------------------------------------------------------------------------------
                                                                    Additions
                                                           -----------------------------
                                            Balance at     Charged to     Charged to                          Balance at
                                             beginning      cost and         other          Deductions-         end of
                                                of                         accounts-
               Description                    period        expenses       describe          describe           period
---------------------------------------------------------------------------------------------------------------------------
                                                                       (Thousands of Dollars)
<S>                                             <C>          <C>               <C>            <C>                 <C>     
                  1996
Allowance for Doubtful Accounts..........       $ 38,003     $ 42,376          $  --          $ 38,096 (A)        $ 42,283
Discount on Property Abandonments........       $ 7,466      $   --            $  --          $  3,038 (B)        $ 4,428
Inventory Valuation Reserve..............       $ 20,100     $   --            $  --          $  4,000            $ 16,100
Other Valuation Allowances...............       $  --        $ 14,047          $  --          $     78            $ 13,969

                  1995
Allowance for Doubtful Accounts..........       $ 40,977     $ 32,855          $  --          $ 35,829 (A)        $ 38,003
Discount on Property Abandonments........       $ 11,423     $   --            $  --          $  3,957 (B)        $ 7,466
Inventory Valuation Reserve..............       $ 18,200     $  1,900          $  --          $   --              $ 20,100
Other Valuation Allowances...............       $  --        $   --            $  --          $   --              $  --

                  1994
Allowance for Doubtful Accounts..........       $ 27,948     $ 50,188          $  --          $ 37,159 (A)        $ 40,977
Discount on Property Abandonments........       $ 16,263     $   --            $  --          $  4,840 (B)        $ 11,423
Inventory Valuation Reserve..............       $ 8,525      $  9,950          $  --          $    275            $ 18,200
Other Valuation Allowances...............       $  --        $   --            $  --          $   --              $  --
</TABLE>

NOTES:

(A) Accounts Receivable/Investments written off.

(B) Amortization of discount to income.



<PAGE>
                                   SIGNATURES

     Pursuant  to the  requirements  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 INCORPORATED


                                 By                 E. JAMES FERLAND
                                                    E. James Ferland
                                              Chairman of the Board, President
                                                 and Chief Executive Officer

Date: February 26, 1997


     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 Board,       February 26, 1997
------------------------       President and Chief
  E. James Ferland             Executive Officer 
                               and Director 
                               (Principal Executive
                               Officer)


  ROBERT C. MURRAY             Vice President and           February 26, 1997
------------------------       Chief Financial 
  Robert C. Murray             Officer (Principal
                               Financial Officer)


  PATRICIA A. RADO             Vice President and           February 26, 1997
------------------------       Controller (Principal
  Patricia A. Rado             Accounting Officer)


  LAWRENCE R. CODEY            Director                     February 26, 1997
-----------------------
  Lawrence R. Codey


   ERNEST H. DREW              Director                     February 26, 1997
------------------------
   Ernest H. Drew


  T. J. DERMOT DUNPHY          Director                     February 26, 1997
------------------------
  T. J. Dermot Dunphy


  ------------------------       Director                    February 26, 1997
  Raymond V. Gilmartin


    IRWIN LERNER               Director                     February 26, 1997
------------------------
    Irwin Lerner



<PAGE>



MARILYN M. PFALTZ             Director                      February 26, 1997
----------------------
Marilyn M. Pfaltz


                              Director                      February 26, 1997
----------------------
 James C. Pitney


FORREST J. REMICK             Director                      February 26, 1997
----------------------
Forrest J. Remick


RICHARD J. SWIFT              Director                      February 26, 1997
----------------------
Richard J. Swift


 JOSH S. WESTON               Director                      February 26, 1997
----------------------
 Josh S. Weston


<PAGE>



                                   SIGNATURES

     Pursuant  to the  requirements  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 ELECTRIC AND GAS COMPANY


                                 By             E. JAMES FERLAND
                                        -------------------------------
                                                E. James Ferland
                                                Chairman of the Board
                                                and Chief Executive Officer

Date: February 26, 1997


     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 Board,       February 26, 1997
------------------------       President and Chief
  E. James Ferland             Executive Officer 
                               and Director 
                               (Principal Executive
                               Officer)


  ROBERT C. MURRAY             Vice President and           February 26, 1997
------------------------       Chief Financial 
  Robert C. Murray             Officer (Principal
                               Financial Officer)


  PATRICIA A. RADO             Vice President and           February 26, 1997
------------------------       Controller (Principal
  Patricia A. Rado             Accounting Officer)


  LAWRENCE R. CODEY            Director                     February 26, 1997
-----------------------
  Lawrence R. Codey


                               Director                     February 26, 1997
-----------------------
  Raymond V. Gilmartin


    IRWIN LERNER               Director                     February 26, 1997
-----------------------
    Irwin Lerner



                                Director                     February 26, 1997
-----------------------
   James C. Pitney


  FORREST J. REMICK            Director                     February 26, 1997
-----------------------
  Forrest J. Remick


<PAGE>


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 convenient
reference.

          (a)  Filed by PSE&G with Form 8-A under the Securities Exchange Act of
               1934, on the respective dates indicated, File No. 1-973.

          (b)  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 dates indicated, File No. 1-973.

          (e)  Filed by Enterprise with Form 10-K under the Securities  Exchange
               Act of 1934, on the respective dates indicated, File No. 1-9120.

          (f)  Filed with registration  statement of PSE&G under the Securities
               Exchange Act of 1934,  File No.  1-973,  effective  July 1, 1935,
               relating to the registration of various issues of securities.

          (g)  Filed with registration statement of PSE&G under the Securities
               Act of 1933, No. 2-4995, effective May 20, 1942, relating to the
               issuance of $15,000,000 First and Refunding  Mortgage  Bonds, 3%
               Series due 1972.

          (h)  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.

          (i)  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
               3/4% Series due 1980.

          (j)  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.

          (k)  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 1/8% Series I due 2007.

          (l)  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.

          (m)  Filed 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.

          (n)  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.

          (o)  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.

          (p)  Filed with  registration  statement of PSE&G under the Securities
               Act of 1933, No.  33-13209  filed April 9, 1987,  relating to the
               registration of $575,000,000  First and Refunding  Mortgage Bonds
               pursuant to Rule 415.


<PAGE>


                                                       ENTERPRISE

                 Exhibit Number
---------------------------------------------------
     This                Previous Filing
               ------------------------------------
    Filing       Commission        Exchanges
3a             (o)   3a      (o)  3a              Certificate of Incorporation
                                                  Public Service Enterprise
                                                  Group Incorporated

3b             (e)   3b      (e)  3b              Copy of By-Laws of Public
                                  4/11/88         Service Enterprise Group
                                                  Incorporated, as in effect
                                                  May 1,1987

3c             (e)   3c      (e)  3c              Certificate of Amendment of
                                  4/11/88         Certificate of Incorporation
                                                  of Public Service Enterprise
                                                  Group Incorporated,
                                                  effective April 23, 1987

4a(1)          (f)   B-1     (c)  4b(1)                                       
                                  2/18/81         Indenture
                                                  between PSE&G and Fidelity
                                                  Union Trust Company, (now
                                                  First Union National Bank) as
                                                  Trustee, dated August 1, 1924,
                                                  securing First and Refunding
                                                  Mortgage Bonds

                                                  Indentures  between PSE&G and
                                                  First Union National Bank as
                                                  Trustee, supplemental to
                                                  Exhibit 4a(1), dated  as
                                                  follows:

4a(2)          (i)   7(1a)   (c)  4b(2)           April 1, 1927
                                  2/18/81

4a(3)          (k)   2b(3)   (c)  4b(3)           June 1, 1937
                                  2/18/81

4a(4)          (k)   2b(4)   (c)  4b(4)           July 1, 1937
                                  2/18/81

4a(5)          (k)   2b(5)   (c)  4b(5)           December 19, 1939
                                  2/18/81

4a(6)          (g)   B-10    (c)  4b(6)           March 1, 1942
                                  2/18/81

4a(7)          (k)   2b(7)   (c)  4b(7)           June 1, 1949
                                  2/18/81

4a(8)          (k)   2b(8)   (c)  4b(8)           May 1, 1950
                                  2/18/81

4a(9)          (k)   2b(9)   (c)  4b(9)           October 1, 1953
                                  2/18/81

4a(10)         (k)   2b(10)  (c)  4b(10)          May 1, 1954
                                  2/18/81

4a(11)         (j)   4b(16)  (c)  4b(11)          November 1, 1956
                                  2/18/81

4a(12)         (k)   2b(12)  (c)  4b(12)          September 1, 1957
                                  2/18/81

4a(13)         (k)   2b(13)  (c)  4b(13)          August 1, 1958
                                  2/18/81

4a(14)         (k)   2b(14)  (c)  4b(14)          June 1, 1959
                                  2/18/81


<PAGE>


                                                        ENTERPRISE

                 Exhibit Number
---------------------------------------------------
    This               Previous Filing
   Filing      Commission         Exchanges
--------------
4a(15)       (k)  2b(15)     (c)  4b(15)          September 1, 1960
                                  2/18/81

4a(16)       (k)  2b(16)     (c)  4b(16)          August 1, 1962
                                  2/18/81

4a(17)       (k)  2b(17)     (c)  4b(17)          June 1, 1963
                                  2/18/81

4a(18)       (k)  2b(18)     (c)  4b(18)          September 1, 1964
                                  2/18/81

4a(19)       (k)  2b(19)     (c)  4b(19)          September 1, 1965
                                  2/18/81


4a(20)       (k)  2b(20)     (c)  4b(20)          June 1, 1967
                                  2/18/81

4a(21)       (k)  2b(21)     (c)  4b(21)          June 1, 1968
                                  2/18/81

4a(22)       (k)  2b(22)     (c)  4b(22)          April 1, 1969
                                  2/18/81

4a(23)       (k)  2b(23)     (c)  4b(23)          March 1, 1970
                                  2/18/81

4a(24)       (k)  2b(24)     (c)  4b(24)          May 15, 1971
                                  2/18/81

4a(25)       (k)  2b(25)     (c)  4b(25)          November 15, 1971
                                  2/18/81

4a(26)       (k)  2b(26)     (c)  4b(26)          April 1, 1972
                                  2/18/81

4a(27)       (a)  2          (c)  4b(27)          March 1, 1974
                  3/29/74         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)       (k)  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)       (l)  2b(33)     (c)  4b(33)          September 1, 1977
                                  2/18/81


<PAGE>



                  Exhibit Number
----------------------------------------------------
    This                Previous Filing
   Filing      Commission          Exchanges
--------------
4a(34)       (a)  2          (c)  4b(34)          November 1, 1978
                  11/21/78        2/18/81

4a(35)       (a)  2          (c)  4b(35)          July 1, 1979
                  7/25/79         2/18/81

4a(36)       (m)  2d(36)     (c) 4b(36)           September 1, 1979 (No. 1)
                                 2/18/81

4a(37)       (m)  2d(37)     (c) 4b(37)           September 1, 1979 (No. 2)
                                 2/18/81

4a(38)       (a)  2          (c) 4b(38)           November 1, 1979
                  12/3/79        2/18/81

4a(39)       (a)  2          (c) 4b(39)           June 1, 1980
                  6/10/80        2/18/81

4a(40)       (a)  2          (a) 2                August 1, 1981
                  8/19/81        8/19/81

4a(41)       (b)  4e         (b) 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

4a(43)       (a)  2          (a) 2                December 1, 1982
                  12/21/82       12/21/82

 4a(44)      (d)  4(ii)      (d) 4(ii)            June 1, 1983
                  7/26/83        7/27/83

4a(45)       (a)  4          (a) 4                August 1, 1983
                  8/19/83        8/19/83

4a(46)       (d)  4(ii)      (d) 4(ii)            July 1, 1984
                  8/14/84        8/17/84

4a(47)       (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)
                  1/4/85         1/9/85

4a(49)       (b)  4(ii)      (b) 4(ii)            November 1, 1984 (No. 2)
                  1/4/85         1/9/85

4a(50)       (a)  2          (a) 2                July 1, 1985
                  8/2/85         8/2/85


4a(51)       (c)  4a(51)     (c) 4a(51)           January 1, 1986
                  2/11/86        2/11/86

4a(52)       (a)  2          (a) 2                March 1, 1986
                  3/28/86        3/28/86


<PAGE>



                  Exhibit Number
----------------------------------------------------
    This                Previous Filing
   Filing      Commission          Exchanges
--------------
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)
                  5/1/86         5/1/86

4a(55)       (p)  4a(55)     (p) 4a(55)           March 1, 1987
                  4/9/87         4/9/87

4a(56)       (a)  4          (a) 4                July 1, 1987 (No. 1)
                  8/17/87        8/17/87

4a(57)       (d)  4          (d) 4                July 1, 1987 (No. 2)
                  11/13/87       11/20/87

4a(58)       (a)  4          (a) 4                May 1, 1988
                  5/17/88        5/18/88

4a(59)       (a)  4          (a) 4                September 1, 1988
                  9/27/88        9/28/88

4a(60)       (a)  4          (a) 4                July 1, 1989
                  7/25/89        7/26/89

4a(61)       (a)  4          (a) 4                July 1, 1990 (No. 1)
                  7/25/90        7/26/90

4a(62)       (a)  4          (a) 4                July 1, 1990 (No. 2)
                  7/25/90        7/26/90

4a(63)       (a)  4          (a) 4                June 1, 1991 (No. 1)
                  7/1/91         7/2/91

4a(64)       (a)  4          (a) 4                June 1, 1991 (No. 2)
                  7/1/91         7/2/91

4a(65)       (a)  4          (a) 4                November 1, 1991 (No. 1)
                  12/2/91        12/3/91

4a(66)       (a)  4          (a) 4                November 1, 1991 (No. 2)
                  12/2/91        12/3/91

4a(67)       (a)  4          (a) 4                November 1, 1991 (No. 3)
                  12/2/91        12/3/91

4a(68)       (a)  4          (a) 4                February 1, 1992 (No. 1)
                  2/27/92        2/28/92

4a(69)       (a)  4          (a) 4                February 1, 1992 (No. 2)
                  2/27/92        2/28/92

4a(70)       (a)  4          (a) 4                June 1, 1992 (No. 1)
                  6/17/92        6/11/92

4a(71)       (a)  4          (a) 4                June 1, 1992 (No. 2)
                  6/17/92        6/11/92


<PAGE>



                  Exhibit Number
----------------------------------------------------
    This                Previous Filing
   Filing      Commission          Exchanges
--------------
4a(72)       (a)  4          (a) 4                June 1, 1992 (No. 3)
                  6/17/92        6/11/92

4a(73)       (a)  4          (a) 4                January 1, 1993 (No.1)
                  2/2/93         2/2/93

4a(74)       (a)  4          (a) 4                January 1, 1993 (No. 2)
                  2/2/93         2/2/93

4a(75)       (a)  4          (a) 4                March 1, 1993
                  3/17/93        3/18/93

4a(76)       (b)  4          (a) 4                May 1, 1993
                  5/27/93        5/28/93

4a(77)       (a)  4          (a) 4                May 1, 1993 (No. 2)
                  5/25/93        5/25/93

4a(78)       (a)  4          (a) 4                May 1, 1993 (No. 3)
                  5/25/93        5/25/93

4a(79)       (b)  4          (b) 4                July 1, 1993
                  12/1/93        12/1/93

4a(80)       (a)  4          (a) 4                August 1, 1993
                  8/3/93         8/3/93

4a(81)       (b)  4          (b) 4                September 1, 1993
                  12/1/93        12/1/93

4a(82)       (b)  4          (b) 4                September 1, 1993 (No. 2)
                  12/1/93        12/1/93

4a(83)       (b)  4          (b) 4                November 1, 1993
                  12/1/93        12/1/93


4a(84)       (a)  4          (a) 4                February 1, 1994
                  2/3/94         2/14/94

4a(85)       (a)  4          (a) 4                March 1, 1994 (No. 1)
                  3/15/94        3/16/94

4a(86)       (a)  4          (a) 4                March 1, 1994 (No. 2)
                  3/15/94        3/16/94

4a(87)       (d)  4          (d) 4                May 1, 1994
                  11/8/94        12/2/94

4a(88)       (d)  4          (d) 4                June 1, 1994
                  11/8/94        12/2/94

4a(89)       (d)  4          (d) 4                August 1, 1994
                  11/8/94        12/2/94



<PAGE>



----------------------------------------------------
                  Exhibit Number
----------------------------------------------------
    This                Previous Filing
   Filing      Commission          Exchanges
--------------

4a(90)       (d)  4          (d) 4                October 1, 1994 (No. 1)
                  11/8/94        12/2/94



4a(91)       (d)  4          (d) 4                October 1, 1994 (No. 2)
                  11/8/94        12/2/94

4a(92)       (a)  4          (a) 4                January 1, 1996 (No. 1)
                  1/26/96        1/26/96

4a(93)       (a)  4          (a) 4                January 1, 1996 (No. 2)
                  1/26/96        1/26/96

4a(94)                                            December 1, 1996

4b           (h)  7(12)      (c) 4c(1)            Indenture between PSE&G and
                                 2/18/81          Federal Trust Company, as
                                                  Trustee (Midlantic National
                                                  Bank, Successor Trustee) dated
                                                  July 1, 1948, providing for 6%
                                                  Debenture Bonds due 1998

4c           (l)  2c(8)      (c) 4c(8)            Indenture between PSE&G and
                                 2/18/81          Chase Manhattan Bank (National
                                                  Association), as Trustee,
                                                  dated August 15, 1971
                                                  providing for 7 3/4% Debenture
                                                  Bonds due 1996

4d           (b)  4          (b) 4                Indenture of Trust between 
                  12/1/93        12/1/93          PSE&G and Chase Manhattan Bank
                                                  (National Association), as
                                                  Trustee, providing for 
                                                  Secured Medium-Term Notes
                                                  dated July 1, 1993

4e(1)        (c)             (c)                  Indenture between PSE&G and 
                   2/23/95        2/23/95         First Union National Bank,
                                                  National Association (now
                                                  known as First Union National 
                                                  Bank), as Trustee, dated
                                                  November 1, 1994, providing
                                                  for Deferrable Interest
                                                  Subordinated Debentures in 
                                                  Series

4e(2)        (a)             (a)                  Supplemental Indenture between
                   9/11/95        9/11/95         PSE&G and First Fidelity Bank,
                                                  National Association (now
                                                  known as First Union National
                                                  Bank), as Trustee, dated
                                                  September 1, 1995 providing
                                                  for Deferrable Interest 
                                                  Subordinated Debentures,
                                                  Series B

9                                                 Inapplicable

10a(1)       (c)  10c(1)     (c) 10c(1)           Directors' Deferred 
                  3/17/82        3/19/82          Compensation Plan

10a(2)       (c)  10c(2)     (c) 10c(2)           Officers' Deferred
                  3/17/82        3/19/82          Compensation Plan

10a(3)       (c)  10c(3)     (c) 10c(3)           Supplemental Death Benefits 
                  3/17/82        3/19/82          Plan for officers

10a(4)       (c)  10c(4)     (c) 10c(4)           Description of additional 
                  3/17/82        3/19/82          retirement benefits for
                                                  certain officers

10a(5)(i)    (c)  10b(5)     (c) 10b(5)           Limited Supplemental Death 
                  3/31/83        4/8/83           Benefits and Retirement Plan


<PAGE>



                  Exhibit Number
----------------------------------------------------
    This                Previous Filing
   Filing      Commission          Exchanges
--------------
10a(5)(ii)   (c)  10a(5)(ii) (c) 10a(5)(ii)       Limited Supplemental Benefits 
                  2/25/94        3/1/94           Plan for Certain Employees

10a(6)(i)    (c)  10a(6)     (c) 10a(6)           Description of additional 
                  3/10/87        4/16/87          retirement benefits for
                                                  certain officers

10a(6)(ii)   (c)  10a(6)(1)  (c) 10a(6)(1)        Description of additional 
                  3/30/90        3/30/90          retirement benefits for 
                                                  certain officers

10a(6)(iii)  (c)  10a(6)(2)  (c) 10a(6)(2)        Description of additional 
                  3/30/92        4/27/92          retirement benefits for a
                                                  certain officer

10a(7)       (c)  10a(8)     (c) 10a(8)           Long-Term Incentive Plan
                  3/30/89        4/18/89

10a(8)       (c)  10a(9)     (c) 10a(9)           Public Service Enterprise 
                  3/30/89        4/18/89          Group Incorporated Pension 
                                                  Plan for Outside Directors

10a(9)       (c)  10a(11)    (c) 10a(11)          Letter Agreement with
                  2/10/93        2/11/93          E. James Ferland dated
                                                  April 16, 1986

10a(10)   (c)  10a(12)           (c)  10a(12)     Letter Agreement with 
               2/10/93                2/11/93     Paul H. Way dated
                                                  March 28, 1988

10a(11)   (c)  10a(15)           (c)  10a(15)     Letter Agreement with 
               2/10/93                2/11/93     Robert C. Murray dated
                                                  December 17, 1991

10a(12)   (c)  10a(14)           (c)  10a(14)     Letter Agreement with
               2/26/94                3/9/94      Patricia A. Rado dated
                                                  March 24, 1993

10a(13)   (c)  10a(15)           (c)  10a(15)     Letter Agreement, as amended, 
               2/23/95                2/23/95     with Leon R. Eliason dated
                                                  September 14, 1995

10a(14)   (d)  10a(15)           (d)  10a(15)     Letter Agreement with 
               8/14/95                8/14/95     Louis F. Storz dated
                                                  July 7, 1996

10a(15)   (d)  10a(16)           (d)  10a(16)     Letter Agreement with 
               8/14/95                8/14/95     Elbert C. Simpson dated
                                                  May 31, 1996

10a(16)   (d)  10a(17)           (d)  10a(17)     Letter Agreement with
               11/14/95               11/14/95    Alfred C. Koeppe dated
                                                  August 23, 1996

10a(17)   (e)  10a(19)           (e)  10a(19)     Directors' Stock Plan
               2/22/96                2/22/96

10a(18)   (e)  10a(20)           (e)  10a(20)     Mid Career Hire Supplemental
               2/22/96                2/22/96     Retirement Plan

10a(19)   (e)  10a(21)           (e)  10a(21)     Retirement Income 
               2/22/96                2/22/96     Reinstatement Plan

10a(20)                                           Management Incentive
                                                  Compensation Plan


11                                                Inapplicable

12                                                Computation of Ratios of
                                                  Earnings to Fixed Charges


                  Exhibit Number
----------------------------------------------------
   This               Previous Filing
 Filing         Commission           Exchanges
-----------

13                                                Inapplicable

16                                                Inapplicable

18                                                Inapplicable

21                                                Subsidiaries of the Registrant

22                                                Inapplicable

23                                                Independent Auditors' Consent

24                                                Inapplicable

27                                                Financial Data Schedule

28                                                Inapplicable

99                                                Inapplicable


<PAGE>


                                                          PSE&G

                 Exhibit Number
---------------------------------------------------
  This                Previous Filing
          -----------------------------------------
 Filing         Commission          Exchanges
  3a(1)   (b)  3a                (b)  3a          Restated Certificate of
               8/28/86                8/29/86     Incorporation of PSE&G,
                                                  effective May 1, 1986

  3a(2)   (c)  3a(2)             (c)  3a(2)       Certificate of Amendment of 
                                      4/10/87     Certificate of Restated
                                                  Certificate of Incorporation
                                                  of PSE&G filed February  18, 
                                                  1987 with the State of New
                                                  Jersey adopting limitations of
                                                  liability provisions in 
                                                  accordance with an amendment
                                                  to New Jersey Business
                                                  Corporation Act

  3a(3)   (a)  3(a)3             (a)  3(a)3       Certificate of Amendment of 
               2/3/94                 2/14/94     Restated Certificate of
                                                  Incorporation of PSE&G filed
                                                  June 17, 1992 with the State
                                                  of New Jersey, establishing 
                                                  the 7.44% Cumulative Preferred
                                                  Stock ($100  Par) as a series
                                                  of the Preferred Stock

  3a(4)   (a)  3(a)4             (a)  3(a)4       Certificate of Amendment of 
               2/3/94                 2/14/94     Restated Certificate of
                                                  Incorporation of PSE&G filed
                                                  March 11, 1993 with the State
                                                  of New  Jersey, establishing
                                                  the 5.97% Cumulative Preferred
                                                  Stock ($100  Par) as a series
                                                  of Preferred Stock

  3a(5)   (a)  3(a)5             (a)  3(a)5       Certificate of Amendment of 
               2/3/94                 2/14/94     Restated Certificate of 
                                                  Incorporation of PSE&G filed
                                                  January 27, 1995 with the
                                                  State of New Jersey,
                                                  establishing the 6.92%
                                                  Cumulative Preferred Stock
                                                  ($100 Par) and the 6.75%
                                                  Cumulative Preferred Stock --
                                                  $25 Par as series of Preferred
                                                  Stock

  3b                                              Copy of By-Laws of PSE&G, as
                                                  in effect September 1, 1995

  4a(1)   (f)  B-1               (c)  4b(1)       Indenture between PSE&G and
                                      2/18/81     Fidelity Union Trust Company, 
                                                  (now First Union National
                                                  Bank, National Association),
                                                  as Trustee, dated August 1,
                                                  1924, securing First and
                                                  Refunding Mortgage Bond

                                                  Indentures  between  PSE&G and
                                                  First Fidelity Bank,  National
                                                  Association,    as    Trustee,
                                                  supplemental to Exhibit 4a(1),
                                                  dated as follows:

  4a(2)   (i)  7(1a)             (c)  4b(2)       April 1, 1927
                                      2/18/81

  4a(3)   (k)  2b(3)             (c)  4b(3)       June 1, 1937
                                      2/18/81

  4a(4)   (k)  2b(4)             (c)  4b(4)       July 1, 1937
                                      2/18/81

  4a(5)   (k)  2b(5)             (c)  4b(5)       December 19, 1939
                                      2/18/81


<PAGE>


                 Exhibit Number
  This                Previous Filing
---------------------------------------------------
 Filing         Commission          Exchanges
  4a(6)   (g)  B-10              (c)  4b(6)       March 1, 1942
                                      2/18/81

  4a(7)   (k)  2b(7)             (c)  4b(7)       June 1, 1949
                                      2/18/81

  4a(8)   (k)  2b(8)             (c)  4b(8)       May 1, 1950
                                      2/18/81

  4a(9)   (k)  2b(9)             (c)  4b(9)       October 1, 1953
                                      2/18/81

  4a(10)  (k)  2b(10)            (c)  4b(10)      May 1, 1954
                                      2/18/81

  4a(11)  (j)  4b(16)            (c)  4b(11)      November 1, 1956
                                      2/18/81

  4a(12)  (k)  2b(12)            (c)  4b(12)      September 1, 1957
                                      2/18/81

  4a(13)  (k)  2b(13)            (c)  4b(13)      August 1, 1958
                                      2/18/81

  4a(14)  (k)  2b(14)            (c)  4b(14)      June 1, 1959
                                      2/18/81

  4a(15)  (k)  2b(15)            (c)  4b(15)      September 1, 1960
                                      2/18/81

  4a(16)  (k)  2b(16)            (c)  4b(16)      August 1, 1962
                                      2/18/81

  4a(17)  (k)  2b(17)            (c)  4b(17)      June 1, 1963
                                      2/18/81

  4a(18)  (k)  2b(18)            (c)  4b(18)      September 1, 1964
                                      2/18/81

  4a(19)  (k)  2b(19)            (c)  4b(19)      September 1, 1965
                                      2/18/81

  4a(20)  (k)  2b(20)            (c)  4b(20)      June 1, 1967
                                      2/18/81

  4a(21)  (k)  2b(21)            (c)  4b(21)      June 1, 1968
                                      2/18/81

  4a(22)  (k)  2b(22)            (c)  4b(22)      April 1, 1969
                                      2/18/81

  4a(23)  (k)  2b(23)            (c)  4b(23)      March 1, 1970
                                      2/18/81

  4a(24)  (k)  2b(24)            (c)  4b(24)      May 15, 1971
                                      2/18/81

  4a(25)  (k)  2b(25)            (c)  4b(25)      November 15, 1971
                                      2/18/81


<PAGE>



                 Exhibit Number
  This                Previous Filing
---------------------------------------------------
 Filing         Commission           Exchanges
  4a(26)  (k)  2b(26)            (c)  4b(26)      April 1, 1972
                                      2/18/81

  4a(27)  (a)  2                 (c)  4b(27)      March 1, 1974
               3/29/74                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)  (k)  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)  (l)  2b(33)            (c)  4b(33)      September 1, 1977
                                      2/18/81

  4a(34)  (a)  2                 (c)  4b(34)      November 1, 1978
               11/21/78               2/18/81

  4a(35)  (a)  2                 (c)  4b(35)      July 1, 1979
               7/25/79                2/18/81

  4a(36)  (m)  2d(36)            (c)  4b(36)      September 1, 1979 (No. 1)
                                      2/18/81

  4a(37)  (m)  2d(37)            (c)  4b(37)      September 1, 1979 (No. 2)
                                      2/18/81

  4a(38)  (a)  2                 (c)  4b(38)      November 1, 1979
               12/3/79                2/18/81

  4a(39)  (a)  2                 (c)  4b(39)      June 1, 1980
               6/10/80                2/18/81

  4a(40)  (a)  2                 (a)  2           August 1, 1981
               8/19/81                8/19/81

  4a(41)  (b)  4e                (b)  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

  4a(43)  (a)  2                 (a)  2           December 1, 1982
               12/21/82               12/21/82

  4a(44)  (d)  4(ii)             (d)  4(ii)       June 1, 1983
               7/26/83                7/27/83

  4a(45)  (a)  4                 (a)  4           August 1, 1983
               8/19/83                8/19/83


<PAGE>



                 Exhibit Number
---------------------------------------------------
  This                Previous Filing
          -----------------------------------------
 Filing         Commission           Exchanges
  4a(46)  (d)  4(ii)             (d)  4(ii)       July 1, 1984
               8/14/84                8/17/84

  4a(47)  (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)
               1/4/85                 1/9/85

  4a(49)  (b)  4(ii)             (b)  4(ii)       November 1, 1984 (No. 2)
               1/4/85                 1/9/85

  4a(50)  (a)  2                 (a)  2           July 1, 1985
               8/2/85                 8/2/85

  4a(51)  (c)  4a(51)            (c)  4a(51)      January 1, 1986
               2/11/86                2/11/86

  4a(52)  (a)  2                 (a)  2           March 1, 1986
               3/28/86                3/28/86

  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)
               5/1/86                 5/1/86

  4a(55)  (p)  4a(55)            (p)  4a(55)      March 1, 1987
               4/9/87                 4/9/87

  4a(56)  (a)  4                 (a)  4           July 1, 1987 (No. 1)
               8/17/87                8/17/87

  4a(57)  (d)  4                 (d)  4           July 1, 1987 (No. 2)
               11/13/87               11/20/87

  4a(58)  (a)  4                 (a)  4           May 1, 1988
               5/17/88                5/18/88

  4a(59)  (a)  4                 (a)  4           September 1, 1988
               9/27/88                9/28/88

  4a(60)  (a)  4                 (a)  4           July 1, 1989
               7/25/89                7/26/89

  4a(61)  (a)  4                 (a)  4           July 1, 1990 (No. 1)
               7/25/90                7/26/90

  4a(62)  (a)  4                 (a)  4           July 1, 1990 (No. 2)
               7/25/90                7/26/90

  4a(63)  (a)  4                 (a)  4           June 1, 1991 (No. 1)
               7/1/91                 7/2/91

  4a(64)  (a)  4                 (a)  4           June 1, 1991 (No. 2)
               7/1/91                 7/2/91

  4a(65)  (a)  4                 (a)  4           November 1, 1991 (No. 1)
               12/2/91                12/3/91


<PAGE>



                 Exhibit Number
---------------------------------------------------
  This                Previous Filing
          -----------------------------------------
 Filing         Commission           Exchanges
  4a(66)  (a)  4                 (a)  4           November 1, 1991 (No. 2)
               12/2/91                12/3/91

  4a(67)  (a)  4                 (a)  4           November 1, 1991 (No. 3)
               12/2/91                12/3/91

  4a(68)  (a)  4                 (a)  4           February 1, 1992 (No. 1)
               2/27/92                2/28/92

  4a(69)  (a)  4                 (a)  4           February 1, 1992 (No. 2)
               2/27/92                2/28/92

  4a(70)  (a)  4                 (a)  4           June 1, 1992 (No. 1)
               6/17/92                6/11/92

  4a(71)  (a)  4                 (a)  4           June 1, 1992 (No. 2)
               6/17/92                6/11/92

  4a(72)  (a)  4                 (a)  4           June 1, 1992 (No. 3)
               6/17/92                6/11/92

  4a(73)  (a)  4                 (a)  4           January 1, 1993 (No. 1)
               2/2/93                 2/2/93

  4a(74)  (a)  4                 (a)  4           January 1, 1993 (No. 2)
               2/2/93                 2/2/93

  4a(75)  (a)  4                 (a)  4           March 1, 1993
               3/17/93                3/18/93

  4a(76)  (b)  4                 (a)  4           May 1, 1993
               5/27/93                5/28/93

  4a(77)  (a)  4                 (a)  4           May 1, 1993 (No. 2)
               5/25/93                5/25/93

  4a(78)  (a)  4                 (a)  4           May 1, 1993 (No. 3)
               5/25/93                5/25/93

  4a(79)  (b)  4                 (b)  4           July 1, 1993
               12/1/93                12/1/93

  4a(80)  (a)  4                 (a)  4           August 1, 1993
               8/3/93                 8/3/93

  4a(81)  (b)  4                 (b)  4           September 1, 1993
               12/1/93                12/1/93

  4a(82)  (a)  4                 (a)  4           September 1, 1993 (No. 2)
               12/1/93                12/1/93



<PAGE>



                 Exhibit Number
---------------------------------------------------
  This                Previous Filing
          -----------------------------------------
 Filing         Commission           Exchanges
  4a(84)  (a)  4                 (a)  4           February 1, 1994
               2/3/94                 2/14/94

  4a(85)  (a)  4                 (a)  4           March 1, 1994 (No. 1)
               3/15/94                3/16/94

  4a(86)  (a)  4                 (a)  4           March 1, 1994 (No. 2)
               3/15/94                3/16/94

  4a(87)  (d)  4                 (d)  4           May 1, 1994
               11/8/94                12/2/94

  4a(88)  (d)  4                 (d)  4           June 1, 1994
               11/8/94                12/2/94

  4a(89)  (d)  4                 (d)  4           August 1, 1994
               11/8/94                12/2/94

  4a(90)  (d)  4                 (d)  4           October 1, 1994 (No. 1)
               11/8/94                12/2/94

  4a(91)  (d)  4                 (d)  4           October 1, 1994 (No. 2)
               11/8/94                12/2/94

  4a(92)  (a)  4                 (a)  4           January 1, 1996 (No.1)
                1/26/96               1/26/96

  4a(93)  (a)  4                 (a)  4           January 1, 1996 (No. 2)
               1/26/96                1/26/96

4a(94)                                            December 1, 1996

  4b      (h)  7(12)             (c)  4c(1)       Indenture between PSE&G and 
                                      2/18/81     Federal Trust Company, as 
                                                  Trustee, (Midlantic National
                                                  Bank, Successor Trustee) dated
                                                  July 1, 1948, providing for 6%
                                                  Debenture Bonds due 1998

  4c      (l)  2c(8)             (c)  4c(8)       Indenture between PSE&G and 
                                      2/18/81     the Chase Manhattan Bank 
                                                  (National Association), as
                                                  Trustee, dated August 15,1971,
                                                  providing for 7 3/4% Debenture
                                                  Bonds due 1996

  4d      (b)   4                (b)  4           Indenture of Trust between 
               12/1/93                12/1/93     PSE&G and The Chase Manhattan 
                                                  Bank (National Association), 
                                                  as Trustee,providing for
                                                  Secured Medium-Term Notes
                                                  dated July
                                                  1, 1993

  4e(i)   (b)                    (c)              Indenture between PSE&G and 
                 2/23/95                2/23/95   First Fidelity Bank, National
                                                  Association (now known as
                                                  First Union National Bank), as
                                                  Trustee, dated November 1,
                                                  1994, providing for Deferrable
                                                  Interest Subordinated
                                                  Debentures in Series


<PAGE>



                 Exhibit Number
---------------------------------------------------
  This                Previous Filing
          -----------------------------------------
 Filing         Commission           Exchanges
  4e(2)   (a)  4b(5)             (a)  4b(5)       Supplemental Indenture between
                                                  PSE&G and First Fidelity Bank,
                                                  National Association (now
                                                  known as First Union National 
                                                  Bank), as Trustee, dated
                                                  September 1, 1995 providing
                                                  for Deferrable Interest
                                                  Subordinated Debentures in
                                                  Series B

9                                                 Inapplicable

10a(1)    (c)  10c(1)            (c)  10c(1)      Directors' Deferred 
               3/17/82                3/19/82     Compensation Plan

10a(2)    (c)  10c(2)            (c)  10c(2)      Officers' Deferred
               3/17/82                3/19/82     Compensation Plan

               2/25/94                3/1/94      Supplemental Benefits Plan for
                                                  Certain Employees

  10a(3)  (c)  10c(3)            (c)  10c(3)      Supplemental Death Benefits
               3/17/82                3/19/82     Plan for officers

  10a(4)  (c)  10c(4)            (c)  10c(4)      Description of additional 
               3/17/82                3/19/82     retirement for certain
                                                  officers

          (c)  10b(5)            (c)  10b(5)      Limited Supplemental Death 
10a(5)(i)      3/31/83                4/8/83      Benefits and Retirement Plan

          (c)  10a(5)(ii)        (c)  10a(5)(ii)  Limited Supplemental Benefits 
10a(5)(ii)                                        Plan for Certain Employees

          (c)  10a(6)            (c)  10a(6)      Description of additional 
10a(6)(i)      3/10/87                4/16/87     retirement benefits for
                                                  certain officers

          (c)  10a(6)(1)         (c)  10a(6)(1)   Description of additional
10a(6)(ii)     3/30/90                3/30/90     retirement benefits for
                                                  certain officers

          (c)  10a(6)(2)         (c)  10a(6)(2)   Description of additional
10a(6)(iii)    3/30/92                4/27/92     retirement benefit for a 
                                                  certain officer

10a(7)    (c)  10a(8)            (c)  10a(8)      Long-Term Incentive Plan
               3/30/89                4/18/89

10a(8)    (c)  10a(9)            (c)  10a(9)      Public Service Enterprise
               3/30/89                4/18/89     Group Incorporated Pension
                                                  Plan for Outside Directors

10a(9)    (c)  10a(9)            (c)  10a(9)      Letter Agreement with
               2/10/93                2/11/93     E. James Ferland dated
                                                  April 16, 1986

10a(10)   (c)  10a(12)           (c)  10a(12)     Letter Agreement with
               2/10/93                2/11/93     Robert C. Murray dated
                                                  December 17, 1991


<PAGE>



                 Exhibit Number
---------------------------------------------------
  This                Previous Filing
          -----------------------------------------
 Filing         Commission           Exchanges
 10a(11)  (c)  10a(13)           (c)  10a(13)     Letter Agreement with
               2/26/94                3/9/94      Patricia A. Rado dated
                                                  March 24, 1993.

 10a(12)  (c)  10a(14)           (c)  10a(14)     Letter Agreement, as amended,
               2/23/95                2/23/95     with Leon R. Eliason dated
                                                  September 14, 1994

 10a(13)  (d)  10a(15)           (d)  10a(15)     Letter Agreement with
               8/14/95                8/14/95     Louis F. Storz dated
                                                  July 7, 1995

 10a(14)  (d)  10a(16)           (d)  10a(16)     Letter Agreement with
               8/14/95                8/14/95     Elbert C. Simpson dated
                                                  May 31, 1995

 10a(15)  (d)  10a(17)           (d)  10a(17)     Letter Agreement with 
               11/14/95               11/14/95    Alfred C. Koeppe dated
                                                  August 23, 1995

 10a(16)  (e)  10a(18)           (e)  10a(18)     Directors' Stock Plan
               2/22/96                2/22/96

 10a(17)  (e)  10a(19)           (e)  10a(19)     Mid Career Hire Supplemental
               2/22/96                2/22/96     Retirement Plan

 10a(18)  (e)  10a(20)           (e)  10a(20)     Retirement Income
               2/22/96                2/22/96     Reinstatement Plan

 10a(19)                                          Management Incentive
                                                  Compensation Plan

 11                                               Inapplicable

 12(a)                                            Computation of Ratios of
                                                  Earnings to Fixed Charges

 12(b)                                            Computation of Ratios of
                                                  Earnings to Fixed Charges 
                                                  Plus Preferred Stock Dividend
                                                  Requirements

 13                                               Inapplicable

 16                                               Inapplicable

 19                                               Inapplicable

 21                                               Inapplicable

 23                                               Independent Auditors' Consent

 27                                               Financial Data Schedule