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

                                  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 December 31, 1997
                                       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
                               973-430-7000
                           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                 New York Stock Exchange
                       par value                     Philadelphia Stock Exchange

   Trust  Originated  Preferred  Securities   (Guaranteed  Preferred  Beneficial
Interest  in  Enterprise's  Debentures),  $25 par  value  at  7.44%,  issued  by
Enterprise  Capital Trust I  (Registrant)  and  registered on the New York 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
                             973-430-7000

                       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  21,  1998,  which
                     definitive Proxy Statement is expected to be filed with the
                     Securities  and  Exchange  Commission  on or about March 6,
                     1998, as specified herein.

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<PAGE>


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

                                                            Name of Each
                                                            Exchange
                                                            on Which
 Title of Each Class            Title of Each Class         Registered
 --------------------------    -------------------------    -------------
Cumulative Preferred Stock     First and Refunding
$100 par value Series:         Mortgage Bonds Series Due:
    4.08%                      8 3/4%    Z       1999
    4.18%                      9 1/8%    BB      2005
    4.30%                      9 1/4%    CC      2021
    5.05%                      8 7/8%    DD      2003
    5.28%                      7 7/8%    FF      2001
    5.97%                      7 5/8%    II      2000
                               6 7/8%    MM      2003
                               6%        NN      1998
                               7 1/2%    OO      2023        New York Stock
                               6 1/2%    PP      2004        Exchange
  $25 par value Series:        6%        QQ      2000
    6.75%                      6 1/8%    RR      2002
                               7%        SS      2024
                               7 3/8%    TT      2014
                               6 3/4%    UU      2006
                               6 3/4%    VV      2016
                               6 1/4%    WW      2007
                               6 1/2%    XX      2000
                               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,  1998  was
$7,184,603,338 based upon the New York Stock Exchange Composite Transaction
closing price.

   The  number  of  shares   outstanding  of  Public  Service  Enterprise  Group
Incorporated's  sole class of Common Stock, as of the latest  practicable  date,
was as follows:

                  Class                         Outstanding at January 31, 1998
                  -----                         -------------------------------
      Common Stock, without par value                 231,957,608

   As of January 31, 1998,  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.......................................................     i
Glossary of Terms.......................................................     iii

PART I
Item 1.  Business.......................................................     1
         General........................................................     1
         Enterprise.....................................................     1
         PSE&G..........................................................     1
         Industry Issues................................................     1
         Segment Information............................................     2
         Competitive Environment........................................     2
         Construction and Capital Requirements..........................     4
         Financing Activities...........................................     4
         Federal Income Taxes...........................................     5
         Credit Ratings.................................................     5
         PSE&G..........................................................     5
         Rate Matters...................................................     5
         Customers......................................................     5
         Resource Plan..................................................     6
         Power Purchases................................................     6
         Demand Side Management.........................................     6
         Electric Generating Capacity...................................     7
         Nuclear Operations.............................................     7
         Electric Fuel Supply and Disposal..............................    10
         Gas Operations and Supply......................................    12
         Employee Relations.............................................    13
         Environmental Controls.........................................    13
         EDHI...........................................................    21
Item 2.  Properties.....................................................    23
Item 3.  Legal Proceedings..............................................    26
Item 4.  Submission of Matters to a Vote of Security Holders............    28

PART II
Item 5.  Market for Registrant's Common Equity and Related Stockholder
           Matters......................................................    29
Item 6.  Selected Financial Data........................................    30
Item 7.  Management's Discussion and Analysis of Financial Condition and
           Results of Operations........................................    31
         Enterprise.....................................................    31
         Corporate Structure............................................    31
         Overview of 1997...............................................    32
         Results of Operations..........................................    32
         Liquidity and Capital Resources................................    35
         External Financings............................................    39
         Qualitative and Quantitative Disclosures about Market Risk.....    41
         Nuclear Operations.............................................    43
         Competitive Environment........................................    43
         Rate Matters...................................................    46
         Accounting Issues..............................................    46
         Impact of New Accounting Pronouncements........................    46
         Site Restorations and Other Environmental Costs................    46
         Future Outlook.................................................    46
         PSE&G..........................................................    47
         Forward Looking Statements.....................................    47
Item 7A. Qualitative and Quantitative Disclosures about Market Risk.....    48


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                    TABLE OF CONTENTS - (Continued)
                                                                            Page

Item 8.  Financial Statements and Supplementary Data....................    48
         Consolidated Statements of Income (Enterprise).................    49
         Consolidated Balance Sheets (Enterprise).......................    50
         Consolidated Statements of Cash Flows (Enterprise).............    52
         Consolidated Statements of Common Stockholders' Equity
           (Enterprise).................................................    53
         Consolidated Statements of Income (PSE&G)......................    55
         Consolidated Balance Sheets (PSE&G)............................    56
         Consolidated Statements of Cash Flows (PSE&G)...................   58
         Consolidated Statements of Common Stockholder's Equity (PSE&G)..   59
         Notes to Consolidated Financial Statements (Enterprise).........   60
         Notes to Consolidated Financial Statements (PSE&G)..............   93
         Financial Statement Responsibility (Enterprise).................   96
         Financial Statement Responsibility (PSE&G)......................   97
         Independent Auditors' Report (Enterprise).......................   98
         Independent Auditors' Report (PSE&G)............................   99
Item 9.  Changes in and Disagreements With Accountants on Accounting
           and Financial Disclosure......................................  100

PART III
Item 10. Directors and Executive Officers of the Registrants.............  100
         Directors of the Registrants....................................  100
         Enterprise......................................................  100
         PSE&G...........................................................  100
         Executive Officers of the Registrants...........................  101
Item 11. Executive Compensation..........................................  103
         Enterprise......................................................  103
         PSE&G...........................................................  103
         Summary Compensation Table......................................  103
         Option Grants in Last Fiscal Year (1997)........................  105
         Aggregated Option Exercises in Last Fiscal Year (1997) and
           Fiscal Year End Option Values (12/31/97)......................  106
         Employment Contracts and Arrangements............................ 106
         Compensation Committee Interlocks and Insider Participation...... 106
         Compensation of Directors and Certain Business Relationships..... 106
         Compensation Pursuant to Pension Plans........................... 107
Item 12. Security Ownership of Certain Beneficial Owners and Management... 107
         Enterprise....................................................... 107
         PSE&G............................................................ 107 
Item 13. Certain Relationships and Related Transactions................... 108
         Enterprise....................................................... 108
         PSE&G............................................................ 108

PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
           8-K............................................................ 109
         Schedule II--Valuation and Qualifying Accounts (Enterprise)...... 111
         Schedule II--Valuation and Qualifying Accounts (PSE&G)........... 111
         Signatures--Public Service Enterprise Group Incorporated......... 112
         Signatures--Public Service Electric and Gas Company.............. 113
         Exhibit Index.................................................... 114
         Enterprise....................................................... 115
         PSE&G............................................................ 122


<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
ACO...............   Administrative Consent Order
ADR...............   Alternative Dispute Resolution
AFDC..............   Allowance for Funds used During Construction
AMT...............   Alternative Minimum Tax
APB 25............   Accounting   Principles   Board  Opinion,   No.  25
                     "Accounting for Stock Issued to Employees"
Bonds.............   First and Refunding Mortgage Bonds
BPU...............   New Jersey Board of Public Utilities
BTU...............   British Thermal Units
BWR...............   Boiling Water Nuclear Reactor
CAA...............   Federal Clean Air Act
Capital...........   PSEG Capital Corporation
CEA...............   Community Energy Alternatives Incorporated
CERCLA............   Federal Comprehensive Environmental Response, Compensation
                     and Liability Act of 1980
Combe Site........   Combe Fill South  Sanitary  Landfill in  Washington
                     and Chester Township, Morris County, New Jersey
CORP..............   New Jersey Commission on Radiation Protection
December 31st
  Order...........   BPU's December 31, 1996 Order settling outstanding Salem 
                     and other outstanding regulatory issues
Directive.........   Spill Act Multi-Site Directive
Directive One.....   Directive and Notice to Insurers Number One
Directive Two.....   Directive and Notice to Insurers Number Two
DOE...............   U.S. Department of Energy
DOJ...............   U.S. Department of Justice
DP&L..............   Delmarva Power & Light Company
Draft Phase II
  Report..........   Draft Phase II Report of The New Jersey Energy Master Plan
DRBC..............   Delaware River Basin Commission
DSAF..............   Demand Side Adjustment Factor
DSM...............   Demand Side Management
Eagle Point.......   CEA Eagle Point, Inc.
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
EITF 92-12........   Emerging   Issues  Task  Force,   Issue  No.  92-12
                     "Accounting   for  OPEB  Costs  by   Rate-Regulated
                     Enterprises"
EITF 97-4.........   Emerging   Issues  Task   Force,   Issue  No.  97-4
                     "Deregulation   of  the  Pricing  of   Electricity;
                     Issues   Related   to  the   Application   of  FASB
                     Statements No. 71 and 101"
EMF...............   Electric and Magnetic Fields
Energis...........   Energis Resources Incorporated
Enterprise........   Public Service Enterprise Group Incorporated
EPA...............   U.S. Environmental Protection Agency
EPAct.............   National Energy Policy Act of 1992
EPC...............   Eagle Point Cogeneration Facility
EWGs..............   Exempt Wholesale Generators
FASB..............   Financial Accounting Standards Board
Fault Act.........   New Jersey Public Utility Accident Fault Determination Act
FERC..............   Federal Energy Regulatory Commission


<PAGE>


                     GLOSSARY TERMS -- (Continued)

Term                 Meaning

FUCO..............   Foreign Utility Company
Fuelco............   PSE&G Fuel Corporation
Funding...........   Enterprise Capital Funding Corporation
FWPCA.............   Federal Water Pollution Control Act
GAAP..............   Generally Accepted Accounting Principles
GE................   General Electric Company
Global OU2........   Global Landfill Site Operable Unit Two
Global Site.......   Global Landfill Site in Old Bridge Township, Middlesex
                     County, New Jersey
GSG...............   General Service Gas
Hope Creek........   Hope Creek Nuclear Generating Station
HWCS Project......   Hydrogen Water Chemistry System
ICTC..............   Interim Competitive Transition Charge
IPP...............   Independent Power Producers
IRP...............   Integrated Resource Plan
IRS...............   Internal Revenue Service
ISO...............   Independent System Operator
KWH...............   Kilowatt-hour
LEAC..............   Electric Levelized Energy Adjustment Clause
LGAC..............   Levelized Gas Adjustment Clause
LLRW..............   Low Level Radioactive Waste
LMP...............   Locational Marginal Pricing
LNG...............   Liquefied Natural Gas
LPG...............   Liquid Petroleum Air Gas
LTIP..............   Long-Term Incentive Plan
LVG...............   Large Volume Gas
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
MOU...............   Memorandum of Understanding
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
NJPDES............   New Jersey Pollution Discharge Elimination System
NJWPCA............   New Jersey Water Pollution Control Act
NML...............   Nuclear Mutual Limited
Notes.............   Notes to Consolidated Financial Statements
Notice............   Notice of Potential Liability
NOV...............   Notice of Violation
November 25th
  Order...........   November 25, 1997 PJM Restructuring Order
NOx...............   Nitrogen Oxides
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


<PAGE>


                     GLOSSARY TERMS -- (Continued)

Term                 Meaning

OAL...............   Office of the Administrative Law
ODEC..............   Old Dominion Electric Cooperative
OPEB..............   Other Postretirement Benefits
Order No. 888.....   FERC Order No. 888, effective July 9, 1996
OTAG..............   Ozone Transport Assessment Group
OTR...............   Ozone Transport Region
OTRA..............   Off-Tariff Rate Agreement
Peach Bottom......   Peach Bottom Atomic Power Station, Units 2 and 3
PECO Energy.......   PECO Energy Company
PJM...............   Pennsylvania--New Jersey--Maryland Interconnection
PJM Board.........   An independent, 7-Member Board of Managers responsible for
                     supervision of PJM operations
PPG...............   PPG Industries, Inc.
PPUC..............   Pennsylvania Public Utility Commission
PRAP..............   Proposed Remedial Action Plan
Price Anderson....   Price-Anderson  liability  provisions of the Atomic
                     Energy Act of 1954, as amended
PRPs..............   Potentially Responsible Parties
PSCRC.............   Public Service Conservation Resources Corporation
PSE&G.............   Public Service Electric and Gas Company
PSETC.............   Public Service Energy Trading Company
PSRC..............   Public Service Resources Corporation
PUHCA.............   Public Utility Holding Company Act of 1935
PWR...............   Pressurized Water Nuclear Reactor
QFs...............   Qualifying Facilities
RAC...............   Remediation Adjustment Charge
RCRA..............   Federal Resource Conservation and Recovery Act of 1976
Remediation
  Program.........   PSE&G Manufactured Gas Plant Remediation Program
RHR...............   Residual Heat Removal
RI................   Remedial Investigation
RI/FS.............   Remedial Investigation and Feasibility Study
ROD...............   Record of Decision
Salem.............   Salem Nuclear Generating Station, Units 1 and 2
SEC...............   Securities and Exchange Commission
Sewell Site.......   Marvin Jonas Transfer Station
SFAS 71...........   Statement of Financial Accounting Standards No. 71,
                     "Accounting for the Effects of Certain Types of Regulation"
SFAS 88...........   Statement of  Financial  Accounting  Standards  No. 88
                     "Accounting for Settlements and Curtailments of Defined 
                     Benefit Pension Plans and for Termination Benefits"
SFAS 90...........   Statement of Financial Accounting Standards  No. 90 
                     "Regulated Enterprises Accounting for Abandonments and 
                     Disallowances of Plant Costs Statement No. 90"
SFAS 101..........   Statement of  Financial  Accounting  Standards  No. 101
                     "Regulated Enterprises Accounting for Discontinuation of
                     Application  of FASB Statement No. 71"
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"
SFAS 130..........   Statement of  Financial  Accounting  Standards  No.
                     130, "Reporting Comprehensive Income"


<PAGE>


                     GLOSSARY TERMS -- (Continued)

Term                 Meaning

SFAS 131..........   Statement of  Financial  Accounting  Standards  No.
                     131,  "Disclosures  about Segments of an Enterprise
                     and Related Information"
SO2...............   Sulfur Dioxide
SOP 96-1..........   Statement of Position 96-1 "Environmental Remediation
                     Liabilities"
SPCC..............   Spill Prevention Control and Countermeasure
Spill Act.........   New Jersey Spill Compensation and Control Act
Superfund.........   Federal Comprehensive Environmental Response, Compensation
                     and Liability Act of 1980
TEFA..............   Transitional Energy Facility Assessment
Trust.............   PSE&G Capital Trust I
UGI...............   UGI Utilities, Inc.
Westinghouse......   Westinghouse Electric Corporation

<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  (Energis),  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 16.
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  people,  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

    The  electric and gas  industries  in the State of New Jersey and across the
country are undergoing a major transformation. Enterprise and PSE&G are affected
by many issues  that are generic to the  electric  and gas  industries  such as:
deregulation   and  the   unbundling   of  energy   supplies  and  services  and
establishment of a competitive energy marketplace (see Competitive Environment);
sales retention and growth potential in a mature service territory;  the need to
reduce  costs;  the  ability to obtain  adequate  and timely rate  relief,  cost
recovery and other necessary  regulatory  approvals (see Note 2. Rate Matters of
Notes);  the  ability  to  economically  operate  nuclear  facilities  safely 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.

Segment Information

    Financial  information  with  respect  to  business  segments  of PSE&G  and
Enterprise is set forth in Note 15. Financial  Information by Business  Segments
of Notes.

Competitive Environment

    Overview

    The regulatory  structure which has  historically  governed the electric and
gas industries in the United States 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 regulation.  For further information
on regulatory  changes,  see  Competitive  Environment  of MD&A and Note 2. Rate
Matters of Notes.

     Enterprise's  non-utility businesses are subject to substantial competition
as well.  Energis  competes with other providers of energy  services,  including
utilities and their affiliates.  Some of the power generation  projects in which
CEA invests  compete with other  independent  power providers as well as utility
generators both domestically and internationally.  CEA's distribution businesses
in  Argentina  and Brazil  operate  pursuant to franchise  arrangements  and are
generally not subject to  competition.  For additional  information see EDHI and
MD&A.

    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 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.  For  information  on
environmental regulation, see Environmental Controls.

    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 grown,  resulting in lower cost alternatives for large commercial
and industrial customers.

    For further  discussion  of Federal  regulation  of the  electric  industry,
including a discussion of the Pennsylvania--New Jersey--Maryland Interconnection
(PJM)  responses  to FERC orders  related to FERC Order No. 888 (Order No. 888),
see Competitive  Environment of Item 7. Management's  Discussion and Analysis of
Financial  Condition  and Results of  Operations  (MD&A).  For a  discussion  of
PSE&G's actions related to the potential  environmental impact of Order No. 888,
see Environmental Controls.

    Gas

    Over the last decade,  the natural gas industry has  experienced  a dramatic
transformation   as  several  FERC  initiatives  have  opened  the  industry  to
competitive  market forces. On the interstate level, the pipeline suppliers that
serve PSE&G have unbundled gas supply and transportation  services 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 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.  In April 1997 in its Energy Master
Plan  proceedings,  the BPU  issued  its final  report on  wholesale  and retail
electric  competition in New Jersey. For further discussion of the Energy Master
Plan proceedings  regarding  deregulation and unbundling of the electric utility
industry in New Jersey,  including  PSE&G's  proposal in response,  see MD&A and
Note 2. Rate Matters of Notes.

    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 (OTRAs)
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, ten OTRAs have been
filed with and approved by the BPU and PSE&G is currently in  negotiations  with
several  other  customers.  PSE&G  does not expect the impact of OTRAs to have a
material  effect on its financial  position,  results of operations and net cash
flows.

    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.  If such an accident were to occur
at a PSE&G  facility,  the Fault Act could  have a  material  adverse  effect on
Enterprise's  and PSE&G's  financial  position if it were ultimately  determined
that the  accident  was due to the  fault  of PSE&G  and if 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. The  applicability of the Fault Act may
be significantly affected as a result of the Energy Master Plan proceedings (see
Note 2. Rate Matters of Notes).

    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. For further discussion of gas unbundling,  see Note 2. Rate
Matters of Notes.

    On October 10, 1997, PSE&G filed a Petition for Expedited Approvals with the
BPU seeking approval,  pursuant to a FERC authorized capacity release mechanism,
to transfer to its subsidiary Public Service Energy Trading Company (PSETC), all
of PSE&G's rights and obligations under its transportation and storage contracts
with interstate  pipelines.  PSETC, in turn, would supply all of the natural gas
requirements  of  PSE&G  pursuant  to a  Requirement  Contract  between  the two
parties. The proposed transaction would transfer to PSETC all future contractual
liabilities  under these agreements and protect the regulatory status of certain
off-system sales  transactions  currently being performed.  On December 3, 1997,
one of the interstate  pipeline companies from which PSE&G obtains service filed
a declaratory  judgment action with FERC challenging  PSE&G's  interpretation of
the capacity release rules. Under the interpretation  proposed by the interstate
pipeline company,  PSE&G would be required to guarantee the performance of PSETC
under the transferred agreements.  PSE&G disagreed with these claims and filed a
protest  challenging  the  December 3, 1997 filing.  On February 11, 1998,  FERC
ruled  in favor  of the  interstate  pipeline  company  finding  that it was not
unreasonable  for the pipeline  company to refuse to  discharge  PSE&G under the
circumstances  addressed  in  the  order.  PSE&G  is  currently  evaluating  its
alternatives in response to that ruling, which could include seeking a rehearing
of that order.  PSE&G cannot  predict the ultimate  resolution of this matter at
this time.

    General

    The issue of  Enterprise  sharing the benefits of  consolidated  tax savings
with PSE&G or its  ratepayers was addressed by the BPU in 1995 in a 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.  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.

    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.

    In an Order dated June 25, 1997, the BPU commenced  management audits of all
New Jersey  electric  utilities,  with the assistance of one or more  consulting
firms,  under the direction of its own audit staff. The audit process  included,
but was not limited to, focused reviews of electric  utility filings in response
to the Energy Master Plan. The management  audit process for PSE&G was concluded
in December 1997 with a report filed by the  management  consulting  firms which
performed  the audit on behalf of the BPU. The report was approved by the BPU on
January 29,  1998. A second  report on  restructuring  has yet to be filed.  For
additional  information  regarding the management audit report, see Note 2. Rate
Matters of Notes.  For a discussion of the BPU's  previous  focused audit of the
non-utility  businesses of Enterprise and its potential  effects,  see Liquidity
and Capital Resources of MD&A.

    The BPU can  adopt,  reject or  modify  the audit  report's  results  in its
decision on PSE&G's proposal in the Energy Master Plan proceedings. PSE&G cannot
predict to what extent the BPU will rely on the results of the audit  report nor
what the  ultimate  outcome  of the  Energy  Master  Plan  proceedings  will be;
however,  the  decision of the BPU will  fundamentally  change the rules for the
sale of  electricity in New Jersey and therefore  could have a material  adverse
effect on Enterprise's and PSE&G's  financial  condition,  results of operations
and net cash flows.

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 4. Long-Term Investments and Note 10. 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 1997,  see Item 5. Market for  Registrant's  Common Equity
and Related Stockholder Matters and Liquidity and Capital Resources of MD&A.

    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.


<PAGE>



Federal Income Taxes

     For information  regarding  Federal income taxes, see Note 1.  Organization
and Summary of Significant  Accounting  Policies,  Note 2. Rate Matters and Note
12. Federal Income Taxes of Notes.

Credit Ratings

    The current  ratings of securities of Enterprise  and its  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 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,  EDHI's and
PSE&G's securities and serve to increase their cost of capital.

   
                                                              Standard    Duff &
                                                  Moody's     & Poor's    Phelps
                                                  -------     --------    ------
Enterprise
Preferred Securities............................  Baa2        BBB         BBB

PSE&G
Mortgage Bonds..................................  A3          A-          A
Debenture Bonds.................................  Baa1        BBB+        A-
Preferred Securities............................  Baa1        BBB+        A-
Commercial Paper (including PSE&G Fuel Corp.)...  P2          A2          Duff 1

EDHI
Senior Debt (Capital)...........................  Baa2        BBB         BBB+

    As a component of PSE&G's ratings,  each rating agency issues its opinion of
the  credit  trend or  outlook.  Each of the  three  rating  agencies  currently
evaluate that credit trend or outlook as negative.

PSE&G

Rate Matters

    For information  concerning the 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  2.  Rate  Matters  of  Notes.  For
information  concerning  PSE&G's under (over) recovered  electric energy and gas
fuel costs, see Note 3. Regulatory Assets and Liabilities of Notes.

Customers

    As of December 31, 1997, 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, 1997, PSE&G's operating revenues  aggregated $6.1 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.


<PAGE>



    1997 Revenues were derived as follows:

                                                              Revenues
                                                     ---------------------------
                                                     Electric            Gas
                                                     --------         ----------
                                                        (Millions of Dollars)
      Residential.................................      $1,260              $953
      Commercial..................................       1,845               362
      Industrial..................................         649               295
      Transportation Service--Gas.................          --               168
      Other.......................................         434               159
                                                     ---------        ----------
          Total...................................      $4,188            $1,937
                                                     =========        ==========

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

Resource Plan

    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 DSM below and Note 2. Rate Matters of Notes).
The Resource  Plan takes into account  assumptions  concerning  future  customer
demand,  future cost trends,  especially fuel and purchased power expenses,  the
impacts 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 forecast for electric system
peak demand over the period  1998-2002  has been  developed  based on an assumed
compound annual rate of growth of 0.9%.

Power Purchases

    A component of PSE&G's Resource Plan consists of expected capacity additions
from PJM and  non-utility  generators  (NUGs).  NUG  projects  are  expected  to
comprise  approximately  6.5% of capacity resources by 2005. The availability of
NUG  generation  reduces  the need for  PSE&G  to  build or  acquire  additional
generation.  For  further  information  on PJM,  NUGs and  Stranded  Costs,  see
Competitive Environment of MD&A and Note 2. Rate Matters of Notes.

Demand Side Management (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 1996
and are  designed to place DSM on equal  regulatory  footing with supply side or
energy production  investments.  In the Energy Master Plan proceedings,  the BPU
proposed 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 and Note 2. Rate Matters of Notes).

    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  Resource  Plan calls for PSE&G to  utilize  DSM to meet most of its
incremental  resource  needs for the next decade.  PSE&G  projects 233 Megawatts
(MW) of passive DSM and 455 MW of active DSM by 2002.


<PAGE>


Electric Generating Capacity

    The following table sets forth certain  information as to PSE&G's  installed
generating capacity as of December 31, 1997:

                                                    Installed
     Source                                     Capacity (A)(MW)     Percentage
     ------                                     ----------------     ----------
     Conventional Steam Electric:
         Oil-fired (B)..........................     1,531             15%
         Coal-fired New Jersey (C)..............     1,248             12%
         Coal-fired Pennsylvania (mine mouth)(D)       770              7%
     Combustion Turbine (E).....................     2,724             27%
     Combined Cycle.............................       922              9%
     Diesel (D).................................         5              0%
     Nuclear (D):
         New Jersey.............................     1,921             19%
         Pennsylvania...........................       930              9%
     Pumped Storage (D) (E).....................       200              2%
                                                    ------            ----
              Total.............................    10,251            100%
                                                    ======            ====

     (A)  Excludes 687 MW of non-utility generation, 352 MW of capacity sales to
          Delmarva Power & Light Company (DP&L), Allegheny Power System and GPU,
          Inc. and 50 MW of capacity purchases from 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
noted  in  the  table  above  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 1997 was 9,548 MW, which occurred on July 15, 1997, when the day's output was
184,357  megawatt-hours  (MWH) of  electricity.  This  was an all  time  record,
surpassing  the old record of 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,  the Salem Nuclear  Generating  Station,  Units 1 and 2
(Salem 1 and 2), and the Hope Creek  Nuclear  Generating  Station  (Hope Creek).
PECO Energy Company (PECO Energy) operates the Peach Bottom Atomic Power Station
Units 2 and 3 (Peach  Bottom 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.  Continuous demonstrations to the
NRC that plant operations meet applicable  requirements  are also required.  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 10. Commitments and Contingent Liabilities of Notes.


<PAGE>



    The scheduled  1998, 1999 and 2000 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                         1998          1999           2000
    -----------------                         ----          ----           ----
    Salem 1...............................     --         September        --
    Salem 2...............................     --          January       October
    Hope Creek............................     --         February         May
    Peach Bottom 2........................   October         --          October
    Peach Bottom 3........................     --          October         --

    Salem

    Salem  consists of two 1,106 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
Energy--42.59%; Atlantic City Electric Company (ACE)--7.41%; and DP&L--7.41%. As
of December 31, 1997,  PSE&G's net book value was approximately $285 million for
Salem 1, $287 million for Salem 2 and $162  million in common plant  between the
two units.  Each Salem unit  represents  approximately  5% of PSE&G's  installed
electric  generating  capacity,   approximately  2%  of  its  total  assets  and
approximately 4% of its net utility plant in service.

     For further  discussion  of Salem,  see  Nuclear  Operations  of MD&A.  For
certain litigation relating to Salem, see Item 3. Legal Proceedings and Note 10.
Commitments and Contingent Liabilities of Notes.

    Hope Creek

    Hope Creek  consists of one 1,031 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, 1997,  PSE&G's net book value for Hope
Creek was approximately $2.8 billion. Hope Creek represents approximately 10% of
PSE&G's installed electric generating  capacity,  approximately 19% of its total
assets and approximately 27% of its net utility plant in service.

    Hope Creek completed its latest planned refueling and maintenance  outage in
December 1997. An outage at Hope Creek causes PSE&G to incur replacement  energy
costs of approximately $8 to $12 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.

    Peach Bottom

    Peach Bottom consists of two 1,093 MW BWRs located on the Susquehanna  River
in southeastern Pennsylvania.  PECO Energy 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, 1997, PSE&G's net book value was
approximately  $200 million for Peach Bottom 2 and $205 million for Peach Bottom
3. Each Peach  Bottom  unit  represents  approximately  4% of PSE&G's  installed
electric  generating  capacity,   approximately  1%  of  its  total  assets  and
approximately 2% of its net utility plant in service.

    On July 17, 1997, the NRC issued its latest periodic  Systematic  Assessment
of Licensee  Performance Report for Peach Bottom for the period October 15, 1995
to June 7,  1997.  Peach  Bottom  was  rated  Category  1 in the  areas of Plant
Operations,  Maintenance  and Plant Support and rated  Category 2 in the area of
Engineering.  Overall,  the NRC observed  excellent  performance at Peach Bottom
during the assessment period.  The NRC stated that station  management  provided
excellent oversight and control of engineering activities throughout the period.
The NRC noted that, while overall  engineering  performance was good, there were
several instances where operating  procedures,  surveillances and tests were not
consistent  with the design and licensing  bases.  PECO Energy has advised PSE&G
that it will continue to take actions to improve performance at Peach Bottom.

    PECO Energy has advised PSE&G that during planned inspections,  conducted as
part of the  Peach  Bottom 3  refueling  outage in  October  1997,  cracks  were
identified in three of the ten recirculation  system jet pump riser pipes within
the reactor  vessel.  PECO Energy has further  advised  PSE&G that  conservative
analysis  authorized  resumption of power  operation after refueling and that an
operational  strategy was  developed  allowing  continued  plant  operation  for
several months at 94% of rated capacity, while a permanent repair was developed.
PECO Energy plans to remove Peach  Bottom 3 from service for  approximately  two
weeks during March 1998 to perform repairs which it expects will allow return of
the unit to full power  operation.  PECO Energy  estimates that the cost of such
repairs  will be  approximately  $3  million,  of which  PSE&G's  share would be
approximately $1 million.

    Peach Bottom 3 successfully  completed a scheduled refueling and maintenance
outage in November 1997. The outage of a Peach Bottom unit causes PSE&G to incur
additional  replacement energy costs of approximately $4 to $5 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 Energy (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.   Although  Hope  Creek  was   initially   placed  in  the  lowest
susceptibility  category under these  guidelines,  due to Hope Creek's operating
time, it now falls into the intermediate susceptibility category. Another shroud
inspection  was performed by PSE&G during Hope Creek's latest  refueling  outage
and the results were  provided to the NRC in a letter  dated  November 10, 1997.
The inspection  disclosed no indications of cracking in the accessible  areas of
the four welds examined.

    PECO Energy has advised PSE&G that Peach Bottom 2 was reinspected during its
1996 refueling outage.  While additional minor flaw indications were discovered,
neither  repair  nor  modification  to the core  shroud was  necessary  prior to
restarting  the reactor.  PECO Energy has also advised that  examination  of the
Peach Bottom 3 core shroud was not required during its 1997 refueling outage and
that an examination will be performed during its next refueling outage in 1999.

    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 1996 to operators of BWRs  requesting  that measures be
taken to  minimize  the  potential  for  clogging.  The NRC has  proposed  three
resolution  options and  required  that  actions be  completed by the end of the
unit's first  refueling  outage after  January 1, 1997.  Alternative  resolution
options  will be  subject  to NRC  approval.  PSE&G  installed  a portion of the
required  large  capacity  passive  strainers  at Hope Creek during Hope Creek's
latest refueling  outage.  On October 31, 1997, the NRC permitted PSE&G to defer
installation  of the  remaining  strainers  until  the  next  refueling  outage,
currently  scheduled for February 1999. PECO Energy has advised PSE&G that large
capacity passive strainers were installed at Peach Bottom 3 during its refueling
outage in October 1997.  Passive  strainers  will be installed at Peach Bottom 2
during its next  refueling  outage  scheduled  for October  1998.  PSE&G  cannot
predict what other actions, if any, the NRC may take in this matter.

    In 1996,  PSE&G and PECO Energy,  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  required  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. PECO Energy provided a similar response to the NRC on
February  4, 1997  concerning  Peach  Bottom.  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 July 8, 1997, a  predecisional  enforcement  conference was held with the
NRC  to  discuss  apparent  violations  at  Salem.  These  apparent  violations,
identified  in May and  June  1997,  concerned  emergency  core  cooling  system
switchover  and  related  residual  heat  removal  system  (RHR) flow issues and
Appendix R (fire protection)  issues. In a letter dated October 8, 1997, the NRC
informed  PSE&G that a Level III violation was cited for the issues  surrounding
the RHR system and Level IV violations were cited for the two Appendix R issues.
There was no civil penalty issued by the NRC for any of these violations.

    A predecisional  enforcement  conference was held with the NRC on August 12,
1997 to discuss  apparent  violations at Hope Creek relating to the installation
of  cross-tie  valves in the RHR  system at Hope Creek in 1994.  On October  20,
1997, the NRC issued a severity  Level III violation for this matter.  There was
no civil penalty issued by the NRC for this violation.

    Predecisional  enforcement  conferences  were  held on  December  9, 1997 to
discuss two  allegations  concerning  security  program issues which occurred at
Salem and Hope Creek in 1996.  PSE&G cannot predict what other actions,  if any,
the NRC may take in these matters.

    Two  predecisional  enforcement  conferences  for Hope  Creek  were  held on
January 14, 1998 to discuss two apparent violations concerning implementation of
the  Maintenance  Rule  and  one  apparent  violation   concerning  control  rod
operation.  PSE&G cannot predict what other actions, if any, the NRC may take in
these matters.

    For a discussion of the BPU's  Nuclear  Performance  Standard,  see Note 10.
Commitments and Contingent  Liabilities of Notes.  For discussion of the lawsuit
by PSE&G and the other  co-owners  of Salem  seeking to recover  damages for the
costs of  replacing  the steam  generators  at Salem 1 and 2, see Item 3.  Legal
Proceedings.

    Nuclear Decommissioning

    In  accordance  with Federal  regulations,  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. Although PSE&G's Energy Master Plan proposal continues this treatment,
no  assurances  can be given as to the final  outcome of the Energy  Master Plan
proceedings.  For information concerning nuclear decommissioning costs, see Note
2. Rate Matters and Note 11. PSE&G Nuclear Decommissioning of Notes.

Electric Fuel Supply and Disposal

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

                                                   Actual          Estimated (A)
Source                                              1997               1998
------                                          ------------     ---------------
Nuclear:
  New Jersey facilities.....................           17%             36%
  Pennsylvania facilities...................           17%             15%
Fossil:
  Coal:
    New Jersey facilities...................           12%              8%
    Pennsylvania facilities.................           14%             13%
Natural Gas.................................            5%              4%
Net PJM Interchange and Purchases From
    Utilities and NUGs......................           35%             24%
                                                ============     ===============
         Total (B) .........................          100%            100%
                                                ============     ===============

     (A)  No assurances can be given that actual output will match estimates.

     (B)  Oil  generation for 1997 was less than 1% and for 1998 is estimated to
          be less than 1%.

    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  uranium  ore  operators,
converters,  enrichers  and  fabricators  to  process  uranium  ore  to  uranium
concentrate  to meet the  currently  projected  requirements  for Salem and Hope
Creek.  PSE&G has been  advised by PECO Energy that it has similar  contracts to
satisfy the fuel  requirements of Peach Bottom 2 and 3.  Currently,  there is an
adequate  supply of nuclear fuel for Salem,  Hope Creek and Peach Bottom.  For a
discussion  of issues  related to  disposal  of spent  nuclear  fuel and related
litigation,  see Nuclear Fuel Disposal and Note 10.  Commitments  and Contingent
Liabilities of Notes.

    Coal

    Approximately  42% 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, many of whom PSE&G has dealt with 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  owns  approximately  23% of the  Keystone  and  Conemaugh  coal-fired
generating stations located in western Pennsylvania and operated by Pennsylvania
Electric  Company.  At least 80% of the fuel required by the Keystone station is
supplied by five coal companies  under contracts with varying  expiration  dates
through  December 31, 2003.  At least 70% of the fuel  required by the Conemaugh
station  is  supplied  by  ten  coal  companies  under  contracts  with  varying
expiration dates through 2002. The balance of the fuel required for each station
is supplied through spot purchases  obtained from local suppliers.  The Keystone
Conemaugh Projects Office, which performs 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 the Nuclear  Waste  Policy Act of 1982  (NWPA),  as  amended,  the Federal
government has entered into contracts for  transportation  and ultimate disposal
of the spent fuel and the nuclear  utilities  agreed to  contribute to a Nuclear
Waste Fund at a rate of one mill per kilowatt-hour  (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 U.S.
Department of Energy (DOE) for  permanently  discharged  spent fuels  irradiated
prior to 1983.  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  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.

    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 2012 for Salem 1
and 2016 for  Salem 2,  prior to  losing  an  operational  full  core  discharge
reserve.  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.  PECO Energy has advised PSE&G that spent fuel racks at Peach
Bottom have  storage  capacity  until 2000 for Peach Bottom 2 and 2001 for Peach
Bottom 3, prior to losing full core discharge  reserve  capability.  PECO Energy
has also advised PSE&G that it is constructing  an on-site dry storage  facility
which is  expected  to be  operational  in 2000 to  provide  additional  storage
capacity.  For further  discussion of Nuclear Fuel Disposal,  see Note 11. PSE&G
Nuclear Decommissioning of Notes.

    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.
LLRW 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 $70 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. PSE&G has provided about $5
million to date.  New Jersey  has  established  a  volunteer  siting  process to
establish a LLRW  disposal  facility  by 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.
Consequently,  on February  10,  1998,  the State  agency  responsible  for this
program recommended to the Governor that this effort be abandoned.

    Because of the  uncertainties  regarding  disposal,  PSE&G  built an on-site
facility which was completed in July 1994.  The 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. The facility is being used for interim
storage of  radioactive  materials  and waste prior to  transport to a permanent
disposal facility.

    PECO Energy 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
Energy 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.

    As of December 31, 1997, 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 1997 was 4.1 billion therms.  Included in this amount is 1.0
billion  therms of gas  delivered  to  customers  under  PSE&G's  transportation
tariffs and individual  cogeneration  contracts.  During 1997,  PSE&G  purchased
approximately  3.7  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 10  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 (see
Federal Regulation).

    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 2. 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.  PSE&G
buys  gas  from  producers,  marketers,   unregulated  marketing  affiliates  of
interstate  pipeline  companies and others.  Interstate  transportation is still
being regulated by the FERC (see Competitive Environment--State Regulation).

    PSE&G was able to meet all of the demands of its firm  customers  during the
1996-97  winter  season and  expects  to  continue  to meet such  energy-related
demands of its firm customers  during the 1997-98 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, 1997, PSE&G had 10,092 full
time employees.  Six-year collective bargaining agreements with all of its union
groups,  representing  6,111 PSE&G employees,  expire on April 30, 2002. Also at
December 31, 1997, EDHI and its subsidiaries had 530 employees,  of whom 38 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 13. Pension Plan and Note 14. Postretirement Benefits
Other Than Pensions 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 1997, PSE&G expended  approximately  $24 million for capital
related  expenditures  to  improve  the  environment  and comply  with  changing
regulations  and estimates that it will expend  approximately  $31 million,  $52
million and $38 million in the years 1998 through 2000,  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,
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.

    An industry issue with respect to the construction and operation of electric
transmission and distribution  lines has been the alleged adverse health effects
of  electric  and  magnetic  fields  (EMF)  exposure.  In 1990,  the New  Jersey
Commission on Radiation  Protection  (CORP) decided  against  setting a limit on
magnetic  fields  produced  by  high-voltage  power  lines  citing  the  lack of
convincing  evidence  required to determine  dangerous  levels.  Proposed  power
regulations  were studied by CORP. If revised,  the rules would have  authorized
the NJDEP to screen all new power line projects of 100 kilovolts or more using a
principle of "as low as reasonably  achievable"  to  demonstrate  that all steps
within reason,  including  modest cost,  were taken to reduce EMFs. In May 1997,
CORP  decided  to take no  further  action  regarding  regulation  of  limits on
magnetic field levels from new and modified  transmission lines operating at 100
kilovolts and higher.

    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
nitrogen  oxides (NOx) and requires  attainment of National  Ambient Air Quality
Standards  (NAAQS).  The New Jersey Air Pollution  Control Code (NJAPCC) governs
compliance  with, and  maintenance  of, the NAAQS in New Jersey.  PSE&G also has
approximately  a 23% interest in Conemaugh and Keystone,  coal-fired  generating
stations  located in western  Pennsylvania.  State  regulations in  Pennsylvania
govern compliance with, and maintenance of the NAAQS in Pennsylvania.

     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  EPA  and  NJDEP.   PSE&G  filed  permit
applications  for its major facilities in New Jersey in 1995. A draft permit for
one  facility  was issued for  comment  in 1997,  and the final  permit for that
facility is expected in 1998. Draft and final permits may be issued by NJDEP for
all of PSE&G's remaining major facilities in 1998. Operating permits for certain
PSE&G  facilities  may require  changes to facility  operations  or  technology,
installation   of  additional   air  pollution   controls  and   performance  of
supplemental emissions monitoring.  To the extent estimates of the capital costs
of  complying   with  these  and  other  CAA   requirements   through  2000  are
quantifiable,  they are  included  in  PSE&G's  construction  expenditures  (see
Construction  and  Capital  Requirements).  PSE&G's  generating  stations in New
Jersey are located in areas of the State classified as "non-attainment"  for the
ozone NAAQS. In  non-attainment  areas,  construction or expansion of a facility
may commence only upon a showing that any  additional  emissions from the source
will be more than  offset by  reductions  in  similar  emissions  from  existing
sources.  These requirements may affect PSE&G's ability to locate,  construct or
expand generating  facilities in New Jersey in the future.  Additionally,  these
requirements  may impact the customers and potential  customers of PSE&G and, in
so doing, inhibit PSE&G's ability to grow its customer base in New Jersey.

    Air quality in the  northeastern  United States is affected by air pollution
transported  within and into the region by prevailing  winds. In September 1994,
11  Northeastern  states and the  District of Columbia  signed a  memorandum  of
understanding (MOU) establishing a regional plan for reducing NOx emissions from
utility and large industrial boilers. NOx contributes to the formation of ozone.
The 12  jurisdictions  signing this MOU fall within the Ozone  Transport  Region
(OTR), created under section 184 of the CAA in recognition of the regional ozone
problem facing the northeastern United States.

    In September  1997, the NJDEP  proposed  regulations  implementing  the MOU.
Consistent with the MOU, New Jersey's proposed rule calls for a 65% reduction in
NOx from 1990  levels  starting  in 1999 and a 90%  reduction  starting in 2003.
These reductions will be achieved  through a regional  emission trading program,
similar to the federal Acid Rain Program contained in Title IV of the CAA. PSE&G
is currently assessing the compliance options under this proposal. The extent of
investment  in control  technologies  or  operational  changes  will be directly
related  to the number of  allowances  PSE&G  receives.  PSE&G will not know the
final  allocation until the rule is adopted and thus cannot assess the potential
costs at this time but such costs could be material.

    To   further   improve   northeastern   air   quality,   PSE&G  is   working
collaboratively with several  environmental  organizations,  electric utilities,
environmental  regulators  and  large  manufacturing  companies  located  in the
Northeast to achieve  significant  NOx emission  reductions from power plants in
the South and Midwest.  It is expected that emission reductions from these power
plants will improve the Northeast's air quality,  thereby lessening the need for
additional emission controls in New Jersey beyond those already in effect.

    These   collaborative   efforts,   coupled   with   growing   concerns   for
cost-effective compliance with CAA requirements,  resulted in the creation of an
environmental  forum  called  the  Ozone  Transport   Assessment  Group  (OTAG),
consisting of the 37 states east of the Mississippi River. OTAG's charter was to
study the nature and extent of the regional ozone transport  problem and produce
consensus  recommendations  concerning the need for additional emission controls
necessary to address it.

    In June 1997, OTAG issued several recommendations for the reduction of ozone
and  ozone   precursors   throughout  22  states  of  the  OTAG  region.   These
recommendations  include a call for reducing  power plant NOx emissions by up to
85% from 1990 levels,  or restricting power plants within the targeted 22 states
to a 0.15  lb./mmbtu  emission  limit,  whichever is less  stringent.  OTAG also
recommended that air emissions trading be used to implement this recommendation.
These  recommendations  apply to all Northeastern states, as well as many states
in the  South and  Midwest.  The  recommendations  are  consistent  with the NOx
reduction program adopted by the OTR's MOU and,  therefore,  do not constitute a
new  or  additional   regulatory   burden  for  PSE&G.  If  implemented,   these
recommendations  will require  power plants in the South and Midwest to meet NOx
control  requirements  that  are  similar  to the  requirements  faced  by PSE&G
facilities.

    On October 10, 1997, the EPA took steps to implement OTAG's  recommendations
by issuing an emissions  reduction proposal under section 110 of the CAA for the
22 states targeted by OTAG's recommendations.  PSE&G supports the EPA's position
since scientific  evidence  indicates the change will improve air quality in New
Jersey and the region.  Because EPA's action is still a proposal,  the impact to
the operation of PSE&G facilities cannot be fully assessed at this time.

    In July 1997,  EPA adopted new Federal air quality  standards  for ozone and
particulate  matter. The new ozone standard was lowered to be more protective of
human  health and the measure of the  standard  was  revised to more  accurately
reflect  the nature of the ozone  problem  confronting  many areas of the United
States.  In announcing the new ozone standard,  EPA stated that the regional NOx
control  program for power plants  recommended  by OTAG will bring nearly 80% of
all new non-attainment areas back into attainment. EPA took action in October to
implement the OTAG  recommendations.  PSE&G  supports the new ozone standard and
EPA's  implementation  policy because it addresses the ozone  transport  problem
which burdens much of the northeastern United States.

    The new particulate matter standard addressed fine particulate matter. It is
widely  understood that attainment of the fine  particulate  matter standard may
require reductions in NOx and SO2. However, under the time schedule announced by
EPA  when  the  new  standard  was  adopted,   it  will  be  five  years  before
non-attainment  areas are  designated  and nearly  eight  years  before  control
measures to meet this standard are identified.

    CEA Eagle Point, Inc. (Eagle Point), an indirect  subsidiary of EDHI, 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,  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 the 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 they have met with the staffs of the 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.
Discussions  with the DOJ were  initiated  in the last half of 1997 to explore a
negotiated resolution to the NOV issues. Those negotiations are continuing.  Any
adverse  resolution of the NOV issues is not expected to have a material adverse
effect on Enterprise's or PSE&G's financial position,  results of operations and
net cash flows.

    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. EPA
has been designated as the agency charged with  responsibility  for implementing
the NPDES program.  The FWPCA authorizes the EPA to delegate  implementation  of
the NPDES  program  to states  with  approved  programs.  The New  Jersey  Water
Pollution  Control Act (NJWPCA)  and  implementing  regulations  were adopted to
regulate discharges to surface waters and ground waters of the State through the
New Jersey Pollutant  Discharge  Elimination  System (NJPDES)  permits.  EPA has
delegated to New Jersey  authority to administer  the NPDES program  through the
NJWPCA and to implement  regulations with EPA oversight.  The NJDEP  administers
the NPDES/NJPDES permit program. Certain PSE&G facilities are directly regulated
by NJPDES permits issued by NJDEP pursuant to FWPCA and the NJWPCA.

     The FWPCA  authorizes  the  imposition  of less  stringent  thermal  limits
pursuant to a variance  procedure set forth in its Section  316(a) and regulates
cooling water intake structures pursuant to its Section 316(b).  PSE&G has filed
or will file data and  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 in connection  with renewal of
the facilities' NJPDES permits. With respect to Section 316(b) requirements, the
EPA must propose draft  regulations on or before July 1999 and promulgate  final
regulations by August 2001. These regulations will address,  among other things,
regulatory  approaches for determining  what constitutes  adverse  environmental
impact and what constitutes the best technology available for minimizing adverse
environmental  impact.  It is not possible to determine at this time how the EPA
will resolve these issues. EPA's regulations in general and these determinations
in  particular  may have a material  effect on agency  review of section  316(b)
determinations.

     Permit  proceedings  involving the Hudson  Station,  the Mercer Station and
Salem have the  potential to impose new or more  stringent  terms or  conditions
which could require changes to operations or significant expenditures.

     The NJPDES permit for the Hudson Station,  a 983 MW coal-fired fossil plant
located in Jersey City,  New Jersey,  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  Station 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. PSE&G does not believe that closed cycle
cooling  will  be  required.   PSE&G  presently   estimates  that  the  cost  of
retrofitting  Hudson Station to operate with closed cycle cooling,  if required,
to be approximately $100 million in 1998 dollars.  It is not possible to predict
the NJDEP's determinations on these demonstrations.  Such amount is not included
in PSE&G's  estimate of  construction  expenditures  (see  Liquidity and Capital
Resources of MD&A).

     NJDEP has advised  PSE&G that it is  preparing a renewal  permit for Mercer
Station,  a 648 MW coal fired fossil  plant  located in Hamilton  Township,  New
Jersey, and in connection with that renewal,  will be reexamining the effects of
Mercer  Station's  cooling water system  pursuant to Sections 316(a) and 316(b).
PSE&G has  submitted a proposed  plan of study for updating its Sections  316(a)
and 316(b) demonstrations for Mercer Station for submission to NJDEP in 2000. It
is not possible to predict the outcome of such review at this time.

    PSE&G  is  implementing  the 1994  NJPDES  permit  issued  for  Salem  which
requires,  among other things,  water intake screen  modifications  and wetlands
restoration.  The estimated  capital cost of compliance with the final permit is
approximately  $100 million,  of which  approximately  $10 million remains to be
spent.  PSE&G's  share is 42.59% and is included in its  1998-2002  construction
program.  PSE&G  must apply to renew the Salem  permit in 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  and Capital  Requirements
Forecast.)  Failure to obtain  renewal of this permit on a timely  basis,  which
cannot be assured,  could have a material  adverse  effect on  Enterprise's  and
PSE&G's financial position, results of operations and net cash flows.

     The DRBC  issued a  revised  Docket  for  Salem  in 1995  (Revised  Docket)
approving a modification to the 1970 Salem Docket that approved the construction
and  operation  of the  station's  cooling  water  system.  The  Revised  Docket
authorized, among other things, the continued operation of the station's cooling
water system for an additional five years.  The Revised Docket provides that the
authorization  expires in  September  2000  absent  renewal by the DRBC on or by
August 31, 1999.

    NJDEP issued a final renewal permit for Hope Creek effective April 1, 1997.

<PAGE>
    Control of Hazardous Substances

    PSE&G Manufactured Gas Plant Remediation Program

     For  information  regarding  PSE&G's  Manufactured  Gas  Plant  Remediation
Program,  see Note 2.  Rate  Matters  and Note 10.  Commitments  and  Contingent
Liabilities of Notes.

    Other Sites

    A  preliminary  review  of  possible  mercury  contamination  at the  Kearny
Station,  a 280 MW oil  fired  fossil  plant  located  in  Kearny,  New  Jersey,
concluded that an additional  study and  investigations  are required.  In 1996,
PSE&G  entered  into a Memorandum  of Agreement  (MOA) with NJDEP for the Kearny
Station which  required  PSE&G to conduct a Remedial  Investigation  (RI) of the
site.  A RI Work Plan has been  approved  by the NJDEP;  field  work  activities
associated  with the RI were  completed  in  February  1997.  An RI  Report  was
submitted to the NJDEP in September 1997 and is currently under technical review
by the NJDEP. As currently  issued,  the RI Report found that the mercury at the
site is stable  and  immobile  and  should be  addressed  at the time the Kearny
Station is retired. PSE&G does not anticipate that remediation of this site will
have a material effect on its financial position,  results of operations and net
cash flows.

    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),  authorizes EPA to issue orders and/or to bring  enforcement  actions to
compel responsible  parties to take investigative  and/or cleanup actions at any
site that is determined to present an actual or potential threat to human health
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  substances  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.  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.

    The EPA has  determined  that a six mile  stretch  of the  Passaic  River in
Newark,  New Jersey is a "facility" within the meaning of that term under CERCLA
and that at least thirteen corporations,  to date, may be potentially liable for
performing   required  remedial  actions  to  address  potential   environmental
pollution at the facility.  The EPA anticipates  identifying  other  potentially
responsible  parties (PRP). One PRP  (Cooperating  Party) entered into a consent
decree with the EPA in 1994  obligating  it to conduct a remedial  investigation
and  feasibility  study of available and applicable  corrective  actions for the
site. The Cooperating Party has reported that it has incurred  approximately $30
million to date in  connection  with the  implementation  of  required  remedial
actions for the site and that future costs for prospective  remedial actions may
be material.

     PSE&G and certain of its  predecessors  operated  industrial  facilities at
properties  along the stretch of the Passaic  River  designated  as the site. In
April 1996, the EPA directed PSE&G to provide information  concerning the nature
and  quantity  of raw  materials,  by-products  and  wastes  which may have been
generated,  treated,  stored or  disposed  at certain of these  facilities.  The
facilities are PSE&G's former Harrison Gas Plant and Essex  Generating  Station.
PSE&G submitted responses to the EPA requests for these sites in August 1996. In
July 1997, the EPA named PSE&G as a PRP for this site. PSE&G cannot predict what
action,  if any, the EPA or any third party may take against  PSE&G with respect
to this site,  or in such event,  what costs PSE&G may incur to address any such
claims. However, such costs are expected to be material.

    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)  In July 1997,  EPA Region III completed its deletion of a site operated
         by Sealand Ltd. in Mount Pleasant Township, New Castle County, Delaware
         from the National  Priorities List. The State of Delaware has initiated
         a separate  action  against  PSE&G and other PRP's  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. Based on
         the claims made and activities taken to date, PSE&G does not anticipate
         that its  obligations  with  respect  to this site will have a material
         adverse effect on its financial position, results of operations and net
         cash flows.

    (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 does not  anticipate  that its  obligations  with
         respect  to this  site  will  have a  material  adverse  effect  on its
         financial position, results of operations and net cash flows.

    (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  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 activities taken to date, PSE&G does not anticipate
         that its  obligations  with  respect  to this site will have a material
         adverse effect on its financial position, results of operations and net
         cash flows.

     (5)  Claim by EPA,  Region III,  under  CERCLA with  respect to a Superfund
          site in Philadelphia,  Pennsylvania,  owned and formerly operated as a
          non-ferrous scrap reclamation facility by Metal Bank of America,  Inc.
          PSE&G,  other  utilities and other  companies are alleged to be liable
          for  contamination  at the site.  PSE&G and other utilities  signed an
          Administrative  Order by  Consent  (AOC) in 1991 to perform a remedial
          investigation and prepare a feasibility  statement which was submitted
          to EPA in 1994. In 1995,  EPA issued a Proposed  Remedial  Action Plan
          for the site in which  EPA's  proposed  remedy was  estimated  to cost
          between $17 and $30 million.  In December 1997, EPA issued a Record of
          Decision  (ROD).  EPA  estimates  that the  selected  remedy will cost
          approximately  $17  million.  PSE&G  cannot  predict  with  reasonable
          certainty the actual cost of the selected remedy or who will implement
          the remedy.  If PSE&G  participates in performing the selected remedy,
          the estimated cost of such  participation  could be between $4 million
          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 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 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  taken to date,  PSE&G  does  not  anticipate  that its
         obligations  with  respect  to this site will have a  material  adverse
         effect on its financial  position,  results of operations  and net cash
         flows.

    (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  million).  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.  In 1993,  the
         NJDEP and various other 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 as
         specified  in  a  1991  Superfund  ROD  (approximate  total  cost:  $30
         million).  In 1996,  13 of the  Directive  Two  Respondents,  including
         PSE&G, filed a contribution action pursuant to CERCLA and the Spill Act
         against approximately 190 parties seeking contribution for an equitable
         share of all liability for response  costs  incurred and to be incurred
         in  connection  with the site.  In September  1997,  the NJDEP issued a
         Superfund  ROD for the  operable  unit  two  remedy  at the  site.  The
         estimated  cost of the site  operable  unit two remedy is $3.7 million.
         Based on the claims made and activities  taken to date,  PSE&G does not
         anticipate that its  obligations  with respect to this site will have a
         material  adverse  effect  on  its  financial   position,   results  of
         operations and net cash flows.

    (9)  In 1991, the NJDEP issued  Directive and Notice To Insurers  Number One
         (Directive No. 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  NJDEP's 10% share of total estimated site remediation costs
         and administrative  oversight costs pursuant to a cooperative agreement
         with the United States  concerning the selected remedial action for the
         site. In 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 NJDEP's future
         costs of these  activities,  estimated to be $39 million.  In addition,
         Directive No. Two directs the respondents to prepare a workplan for the
         development and implementation of a Natural Resource Damage Restoration
         Plan.  Based on the claims made in  Directives  No. One and No. Two and
         PSE&G's  investigation  and response to same, PSE&G does not anticipate
         that its  obligation  with  respect  to this site will have a  material
         adverse effect on its financial position, results of operations and net
         cash flows.

    (10) Spill Act Multi-Site Directive (Directive) issued by the NJDEP to PRPs,
         including  PSE&G,  listing four  separate  sites,  including the former
         solid  waste  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
         Administrative  Consent  Order  (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  does  not  anticipate  that  its
         obligations  with  respect  to this site will have a  material  adverse
         effect on its financial  position,  results of operations  and net cash
         flows.

    (11) In Transtech Industries, Inc. et al. v. A&Z Septic Clean et al., Docket
         No. 2-90-2578 (HAA),  filed in 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.  In December 1997, PSE&G
         entered  into a  settlement  resolving  the  claims  against it in this
         matter.  In  accordance  with the  settlement,  PSE&G made a de minimis
         contribution to past costs incurred as of April 30, 1997. Further,  the
         settlement  obligates PSE&G to make future de minimis  contributions to
         future response costs.  Although future response costs at this site are
         not currently estimable, PSE&G does not anticipate that its obligations
         with  respect to this site will have a material  adverse  effect on its
         financial position, results of operations and net cash flows.

    (12) In 1993, in a matter  entitled The Fishbein  Family  Partnership v. PPG
         Industries,  Inc. and Public  Service  Electric and Gas Company,  Civil
         Action No. 93-653  (D.N.J.),  the plaintiff filed an action pursuant to
         CERCLA,  the Spill Act and various  common law  theories of  liability,
         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 a
         property  located  in Jersey  City,  Hudson  County,  New  Jersey.  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 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 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. Also in 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 judgment filed
         by plaintiff and PPG. In 1996,  following the court's  determination of
         plaintiff's and PPG's  cross-motions  for summary  judgment,  the Court
         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,  but is not  expected  to have a
         material  adverse  effect  on  its  financial   position,   results  of
         operations and net cash flows.

    (13) 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 Wood  Ridge,  Bergen  County,  New Jersey and an
         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 with respect to the site 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,
         but is not expected to have a material  adverse effect on its financial
         position, results of operations and net cash flows.

    (14) The  EPA  issued  a  Notice  of   Potential   Liability   (Notice)   to
         approximately  twenty entities  including PSE&G in 1996 with respect to
         the Custom Distribution Services site in Perth Amboy, Middlesex County,
         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.  The EPA'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.  Based upon
         the claims made and activities taken to date, PSE&G does not anticipate
         that its  obligations  with  respect  to this site will have a material
         adverse effect on its financial position, results of operations and net
         cash flows.

    (15) The NJDEP assumed control of a former petroleum  products  blending and
         mixing operation and waste oil recycling  facility in Elizabeth,  Union
         County,  New  Jersey  (Borne  Chemical  Co.  site) 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 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,  with  respect to this site will have a  material  adverse
         effect on its financial  position,  results of operations  and net cash
         flows.

    Other Potential Liability

    In addition to the sites  individually  listed above,  PSE&G has received 15
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 actual or  potential  threat to human health 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,
with respect to same will not have a material  adverse  effect on its  financial
position, results of operations and net cash flows.

    The  EPA   conducted  an  inspection   of  Spill   Prevention   Control  and
Countermeasure  (SPCC)  Plan  compliance  at three PSE&G  electric  distribution
facilities  in 1997.  The EPA  identified  certain  procedural  and  substantive
deficiencies in the SPCC Plans for these sites. PSE&G has submitted revised SPCC
Plans  to the EPA for  these  sites  and is  currently  working  with the EPA to
finalize these SPCC Plans.  PSE&G has also developed and will initiate in 1998 a
program to evaluate SPCC Plan compliance at all electric distribution facilities
and resolve  identified  deficiencies.  It is anticipated that this program will
take up to several  years to  implement.  While the costs of the program are not
currently  estimable,  PSE&G  does not  anticipate  that the  costs  will have a
material adverse effect on its financial position, results of operations and net
cash flows.

EDHI

     EDHI, the wholly owned,  direct  non-utility  subsidiary of Enterprise,  is
incorporated  under the laws of New  Jersey  and is the  parent  company of CEA,
PSRC, Energis, EGDC, Capital and Funding. EDHI's principal executive offices are
located  at 80  Park  Plaza,  Newark,  New  Jersey  07101.  EDHI's  focus  is on
investment  opportunities in the domestic  non-utility and international  energy
markets.  For a discussion  of  Enterprise's  agreement  with the BPU  regarding
utility/non-utility activities and its impact on EDHI, see Liquidity and Capital
Resources of MD&A.

    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 projects in the generation, transmission and
distribution  of energy,  which  include  cogeneration  and IPP  facilities  and
electric distribution  companies.  CEA's investments include domestic qualifying
facilities (QFs), foreign exempt wholesale generators (EWGs) and foreign utility
companies  (FUCOs).  CEA is expected to be a primary vehicle for EDHI's business
growth for the foreseeable  future,  with emphasis on international  investments
due to expected growth opportunities. CEA and/or its subsidiaries and affiliates
have investments in 26 cogeneration or independent power projects (including two
under  construction) and two electric  distribution  ventures.  CEA continuously
evaluates the status of project  development  and  construction  in light of the
realities of timely completion and the costs incurred.

    CEA's projects are diversified  geographically and  technologically  and are
generally  financed  through   non-recourse  debt  (see  Liquidity  and  Capital
Resources of MD&A).  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 is an investor in partnerships  and corporate joint ventures which own these
projects and the electric  capacity of these  facilities  is not part of PSE&G's
installed  capacity.  However,  some of the  electric  power  generated by these
facilities is being purchased by PSE&G pursuant to long-term  contracts with the
applicable  partnerships  and corporate joint ventures.  For more information on
CEA's 1997 investment activity, see Liquidity and Capital Resources of MD&A.

     As of December 31, 1997 and 1996, CEA's consolidated assets aggregated $1.2
billion and $286 million, respectively.


<PAGE>



    PSRC

    PSRC, a New Jersey  corporation,  has its principal  executive offices at 80
Park Plaza,  Newark, New Jersey 07101. PSRC makes primarily passive  investments
in  assets  that  can  provide  funds  for  future  growth  as well  as  provide
incremental  earnings for EDHI. PSRC's  investments are diverse as to asset type
and  maturity  and  include  leveraged  and  direct  financing  leases,  project
financings,  venture capital funds,  leveraged  buyout funds and securities (see
Liquidity and Capital Resources of MD&A). Some of the transactions in which PSRC
and its subsidiaries  participate involve other equity investors. For additional
discussion  of PSRC's  operations  and  investments,  see  Liquidity and Capital
Resources of MD&A.

     As of December 31, 1997 and 1996,  PSRC's  consolidated  assets  aggregated
$1.6 billion and $1.4 billion, respectively.

    Energis

    Energis,  a New Jersey  corporation  established  in 1996, has its principal
executive offices at 499 Thornall Street,  Edison, New Jersey 08837. Energis, an
energy  services  business,  provides a variety of energy  related  services  to
industrial  and  commercial   customers  both  within  and  outside  of  PSE&G's
traditional  service  territory.  Energis  includes  PSRC's former  wholly-owned
subsidiaries,  U.S. Energy Partners Incorporated and Enterprise Strategic Energy
Solutions.  In January 1998,  Energis acquired a diversified  mechanical service
contractor  which provides  services for  commercial  and industrial  clients in
Pennsylvania, New Jersey and Delaware. Energis has also entered into a strategic
alliance to market and service compact portable generators.

    As of December 31, 1997 and 1996,  Energis'  assets were $60 million and $48
million, respectively, including the assets of the former PSRC subsidiaries. For
additional information, see Liquidity and Capital Resources of MD&A.

    EGDC

    EGDC, a New Jersey corporation having its principal  executive offices at 80
Park  Plaza,   Newark,  New  Jersey  07101,  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, 1997 and 1996, EGDC's consolidated assets aggregated $83
million and $108 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 Energis) borrowing on their behalf on the basis of
a minimum net worth maintenance agreement with Enterprise.

    As of December  31,  1997 and 1996,  Capital  had debt  outstanding  of $611
million and $415 million, respectively. For additional information, see External
Financings--EDHI 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
PSRC,  CEA  and  their  subsidiaries,  borrowing  on  their  behalf,  as well as
investing their short-term funds.

    As of December  31,  1997 and 1996,  Funding  had  outstanding  debt of $395
million and $183 million, respectively. For additional information, see External
Financings--EDHI and 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 10.
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, 1997, PSE&G's share of installed  generating capacity was
10,251 MW, as shown in the following table:

                                                      Installed        Principal
 Name and Location                                  Capacity (MW)      Fuel Used
 -----------------                                   ------------      ---------
 Steam:
     Hudson, Jersey City, NJ.........................     983            Coal
     Mercer, Hamilton, NJ............................     648            Coal
     Sewaren, Woodbridge Twp., NJ....................     453            Gas
     Linden, Linden, NJ..............................     415            Oil
     Keystone, Shelocta, PA--22.84%(B)...............     388            Coal
     Conemaugh, New Florence, PA--22.50%(B)..........     382            Coal
     Kearny, Kearny, NJ..............................     280            Oil
                                                       ------
          Total Steam................................   3,549
                                                       ------
 Nuclear: (Capacity factor calculated in accordance
          with industry maximum dependable capability
          standards)
     Hope Creek, Lower Alloways Creek, NJ 95%(B).....     979            Nuclear
     Salem 1, Lower Alloways Creek, NJ 42.59%(B).....     471            Nuclear
     Salem 2, Lower Alloways Creek, NJ 42.59%(B).....     471            Nuclear
     Peach Bottom 2, Peach Bottom, PA 42.49%(B)......     465            Nuclear
     Peach Bottom 3, Peach Bottom, PA 42.49%(B)......     465            Nuclear
                                                       ------
          Total Nuclear..............................   2,851
                                                       ------
 Combined Cycle:
     Bergen, Ridgefield, NJ..........................     682            Gas
     Burlington, Burlington, NJ......................     240            Gas
                                                       ------
     Total Combined Cycle............................     922
                                                       ------
 Combustion Turbine:
     Essex, Newark, NJ...............................     617            Gas
     Edison, Edison Township, NJ.....................     504            Gas
     Kearny, Kearny, NJ..............................     504            Gas
     Burlington, Burlington, NJ......................     389            Oil
     Linden, Linden, NJ..............................     223            Gas
     Hudson, Jersey City, NJ.........................     129            Oil
     Mercer, Hamilton, NJ............................     129            Oil
     Sewaren, Woodbridge Township, NJ................     129            Oil
     Bayonne, Bayonne, NJ............................      42            Oil
     Bergen, Ridgefield, NJ..........................      21            Gas
     National Park, National Park, NJ................      21            Oil
     Salem, Lower Alloways Creek, NJ 42.59%(B).......      16            Oil
                                                       ------
     Total Combustion Turbine........................   2,724
                                                       ------
 Internal Combustion:
     Conemaugh, New Florence, PA--22.50%(B)..........       3            Oil
     Keystone, Shelocta, PA--22.84%(B)...............       2            Oil
                                                       ------
          Total Internal Combustion..................       5
                                                       ------
 Pumped Storage:
     Yards Creek, Blairstown, NJ--50%(B)(C)..........     200
                                                       ------
          Total PSE&G................................  10,251 (A)
                                                       ======

     (A)  Excludes  687 MW of  non-utility  generation  and 302 MW of  temporary
          capacity sales.

     (B)  PSE&G's share of jointly owned facility.

     (C)  Excludes energy for pumping and synchronous condensers.

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


<PAGE>



    In addition to the generating  facilities in New Jersey and  Pennsylvania as
indicated in the table above, as of December 31, 1997,  PSE&G owned 41 switching
and/or generating  stations with an aggregate  installed  capacity of 30,255,000
kilovolt-amperes,  and 222 substations with an aggregate  installed  capacity of
7,295,000  kilovolt-amperes.  In addition, seven 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,  1997,  PSE&G's  transmission  and  distribution  system
included  153,238  circuit miles,  of which 37,694 miles were  underground,  and
801,811 poles, of which 537,208 poles were jointly owned.  Approximately  99% of
this property is located in New Jersey.

    In addition, as of December 31, 1997, 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,  1997,  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  288,600,000
cubic  feet on an  equivalent  basis  of 1,030  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, 1997, PSE&G owned and operated approximately 16,000 miles
of gas mains, owned 11 gas distribution headquarters and two 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

    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 80
Park  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

    In October 1995,  Enterprise  received a letter from a  representative  of a
purported shareholder demanding that it commence legal action against certain of
its officers and directors  with regard to nuclear  operations of Salem and Hope
Creek. The Board of Directors  promptly  commenced an investigation  and advised
the purported  shareholder  thereof.  While the investigation  was pending,  the
purported  shareholder  nevertheless  commenced,  by complaint filed in December
1995,  a  shareholder  derivative  action on behalf of  Enterprise  shareholders
against the then  incumbent  directors,  except Dr. Remick.  Similar  derivative
complaints were filed by two profit sharing plans and one individual in February
and March 1996 against Messrs.  Ferland, Codey, Eliason and others. On March 19,
1996, the Board's  investigation  was concluded,  and the Board  determined that
this  litigation  should not have been  instituted and should be terminated.  On
July 3, 1996, another individual purported shareholder filed a similar complaint
naming the same defendants as the first derivative  lawsuit. On August 21, 1996,
all  defendants  filed  motions to dismiss all four  derivative  actions,  which
motions were denied and attempts to appeal were unsuccessful.  Pursuant to Court
Order,  the defendants have filed motions for summary judgment to dismiss two of
the  cases,  which  motions  are  pending.  In the other two  cases,  one of the
plaintiffs  has sold her shares and is seeking to withdraw from the  litigation.
Another of the  plaintiffs (a profit sharing plan) has been dissolved and one of
the individual participants in the plan is seeking to maintain the litigation is
his individual name. Discovery in these latter two cases is continuing. The four
complaints  generally  seek recovery of damages for alleged  losses  purportedly
arising out of PSE&G's operation of Salem and Hope Creek,  together with certain
other  relief,  including  removal of certain  executive  officers  of PSE&G and
Enterprise  and certain  changes in the  composition  of  Enterprise's  Board of
Directors. Enterprise cannot predict the outcome of these matters.

    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 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.  Westinghouse  has
filed a motion  for  summary  judgment  on the  grounds  that  the  claim of the
plaintiffs is barred by the statute of  limitations  and oral  arguments on this
motion  were  held  in  February   1998.  A  decision  is   anticipated   within
approximately 30 days. PSE&G cannot predict the outcome of this proceeding.

    PECO Energy and DP&L as  co-owners  of Salem filed a lawsuit in 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
seeking  unspecified  compensatory  and punitive  damages.  On May 12, 1997, the
parties  settled  the  lawsuit.  This  settlement,  which  required a payment in
December 1997 to the plaintiffs  totaling $82 million,  resulted in an after-tax
charge to  earnings,  recorded in the first  quarter of 1997,  of $53 million or
$.23 per share of Enterprise  Common Stock.  PSE&G is also obligated to pay $1.4
million for each  reactor  month that the outage  continues  beyond an aggregate
outage of 64 reactor months, up to a maximum payment under this provision of $17
million.  As of  January  31,  1998,  an  aggregate  of 59  reactor  months  had
accumulated  due to Salem  outages.  PSE&G does not expect to make any  payments
under this provision. Salem 2 returned to service on August 30, 1997. Salem 1 is
expected to return to service around the end of the first quarter of 1998.

    PECO  Energy,  DP&L and PSE&G have also agreed to an  operating  performance
standard  through  December 31, 2011 for Salem and through December 31, 2007 for
Peach Bottom. Under this standard, the operator of each respective station would
be  required  to make  payments to the  non-operating  owners if the  three-year
capacity factor,  determined  annually,  of such station falls below 40 percent,
subject to a maximum of $25 million  per year.  The  initial  three-year  period
begins on January 1, 1998 for Peach  Bottom and on the date the later of the two
Salem units  (Salem 1) returns to service for Salem.  The parties  have  further
agreed to forego litigation in the future, except for limited cases in which the
operator would be responsible for damages of no more than $5 million per year.

    ACE also filed a similar suit  alleging  mismanagement  in the  operation of
Salem by PSE&G in 1996 against  Enterprise and PSE&G in the New Jersey  Superior
Court.  PSE&G and ACE entered  into an  agreement  (Agreement)  to dismiss  this
lawsuit.  Under  the  Agreement,  ACE pays a  portion  of its  share of the 1997
operation  and  maintenance  expenses  based on the amount of  generation of the
Salem units.  PSE&G  incurred  approximately  $13 million of ACE's share of 1997
operation and  maintenance  expenses since Salem 2 did not operate for the first
eight months of 1997 and Salem 1 did not return to service during 1997.

    The  Agreement  applied 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 did not apply to ACE's  rights  under the Salem Owners
Agreement  to review and approve  capital  projects;  which,  in each  instance,
continue to be governed by the terms and  conditions  of that  agreement and the
rights and obligations of ACE and PSE&G at law or in equity.

    In addition, see the following at the pages indicated:

     (1)  Pages  2 and 43  through  44.  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)  Pages 2 and 44.  Proceeding before FERC relating to the development by
          PSE&G  and  other  regional  transmission  owners  in  PJM  of  a  new
          transmission  service tariff and an Independent System Operator,  FERC
          Docket Nos. OA97-261-000, et al.

     (3)  Page 3. Generic  proceedings  before the BPU relating to standards for
          "off  tariff"   negotiated   rate  agreement   programs,   Docket  No.
          EX95070320.

     (4)  Page 3.  Proceedings  before the BPU  relating  to  PSE&G's  first Off
          Tariff Rate Agreement (OTRA), Docket No. OTRA-96-1.

     (5)  Pages 3, 43 and 64.  Proceedings  before  the BPU in the matter of the
          Energy  Master  Plan Phase II  Proceeding  to  investigate  the future
          structure of the Electric  Power  Industry,  Docket Nos.  EX94120585Y,
          EO97070462 and EO97070463.

     (6)  Page 3.  Proceedings  before the BPU  relating  to PSE&G's  request to
          transfer  its  rights and  obligations  under its  transportation  and
          storage contracts with interstate pipelines to PSETC, Docket No.
          GM97100758.

     (7)  Page 3.  Proceedings  before FERC relating to a  declaratory  judgment
          action  challenging  PSE&G's  interpretation  of the capacity  release
          rules, Texas Eastern Transmission Corporation, FERC Docket No.
          RP98-83-000.

     (8)  Pages  12 and 84.  Proceedings  before  the  United  States  Court  of
          Appeals,  District  of  Columbia  Circuit,  in the matter of the DOE's
          unconditional obligation to begin spent fuel acceptance by January 31,
          1998,  Northern  States  Power v.  Department  of  Energy,  Docket No.
          97-1064.

     (9)  Page 15.  Notice  of  Violation  issued  by EPA  against  Eagle  Point
          Cogeneration Partnership regarding alleged violations of air permit.

     (10) Page 15. Administrative proceedings before the NJDEP under Section 316
          of the FWPCA for certain electric generating stations.

     (11) Pages 18 through 21 and 83 through 84. 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.

     (12) Page 26.  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.   Tillie  Greenberg,
          derivatively  v. E. James  Ferland,  et.  al.,  Superior  Court of New
          Jersey, Chancery Division, Essex County, Docket No. C-188-96.

     (13) Page 26. Suit filed by co-owners of Salem against Westinghouse. Public
          Service Electric and Gas Company,  et. al., v.  Westinghouse  Electric
          Corporation,  United  States  District  Court for the  District of New
          Jersey, Civil Action No. CB-96-925.

     (14) Pages 26 and 81.  Lawsuits by the  co-owners of Salem  against  Public
          Service Electric and Gas Company. PECO Energy Company,  Delmarva Power
          & 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.

     (15) Page  44.  Complaint  before  FERC  regarding  Old  Dominion  Electric
          Cooperative v. PSE&G  challenging as unjust and unreasonable the rates
          in  a  negotiated  contract  under  which  ODEC  purchases  generation
          capacity and  associated  energy and  generation  reserves from PSE&G,
          FERC Docket No. EL98-6-000.

     (16) Pages 45 and 70. Implementation of P.L.1997,C.162, an Act Revising the
          Taxation of Electric and Gas  Utilities,  Docket Nos.  ER97090661  and
          GR97090672.

     (17) Page  67.   Proceedings   before  the  BPU  relating  to  recovery  of
          replacement  power  costs in  connection  with the April  1994 Salem 1
          shutdown, Docket No. ER94070293.

     (18) Page 67.  Generic  proceeding  before the BPU  relating to recovery of
          capacity costs  associated  with power  purchases  from  cogenerators,
          Docket No. EX93060255.

     (19) Page 68.  Proceedings before the BPU relating to PSE&G's Levelized Gas
          Adjustment   Clause  (LGAC)  filed  November  14,  1997,   Docket  No.
          GR97110839.

     (20) Page 68.  Proceeding  before the BPU related to the Electric Levelized
          Energy  Adjustment  Clause  (LEAC) rate increase to recover DSM costs,
          Docket No. ER97020101.

     (21) Page 69.  Proceedings  before the BPU  relating  to PSE&G's  RAC filed
          August 1, 1997, Docket No. GR97080573.
     
     (22) Page 69. Generic  proceeding  before the BPU relating to the matter of
          an inquiry into  methods of  implementation  of  SFAS-106,  Docket No.
          AX96070530.

     (23) Page 70.  Proceedings  before the BPU relating to PSE&G's proposed CTC
          filed September 19, 1996, Docket No. ET96090669.

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 parent company.  As of December 31, 1997, there were 154,478
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
    Common Stock                                  High       Low       Per Share
    ------------                                  ----       ---       ---------
    1997:
      First Quarter.........................       $29 1/4    $26 1/8      $.54
      Second Quarter........................        26 1/2     22 7/8       .54
      Third Quarter.........................        26 3/16    24 1/16      .54
      Fourth Quarter........................        31 13/16   24 3/4       .54
    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

     For  additional  information   concerning  dividend  history,   policy  and
potential preferred voting rights and restrictions on payment, see Liquidity and
Capital  Resources  and  External  Financings  of MD&A  and Note  6.Schedule  of
Consolidated Capital Stock and Other Securities of Notes.


<PAGE>


Item 6. Selected Financial Data

Enterprise

    The  information   presented  below  should  be  read  in  conjunction  with
Enterprise's Consolidated Financial Statements and Notes thereto.

<TABLE>
<CAPTION>


                                                           Years Ended December 31,
                                        -----------------------------------------------------------------
                                           1997          1996         1995         1994         1993
                                        ------------  ------------ ------------ ------------ ------------
                                                    (Millions of Dollars, where applicable)
<S>                                         <C>           <C>          <C>          <C>          <C>   
Total Operating Revenues............        $6,370        $6,041       $5,893       $5,695       $5,428
                                        ============  ============ ============ ============ ============

Income from Continuing Operations...          $560          $588         $627         $667         $549
Cumulative Effect of Change in
  Accounting for Income Taxes.......            --            --           --          --             6
Income from Discontinued
  Operations (A)....................            --            24           35           12           46
                                        ------------  ------------ ------------ ------------ ------------
Net Income..........................          $560          $612         $662         $679         $601
                                        ============  ============ ============ ============ ============

Earnings per Average Share (Basic
and Diluted):
  From Continuing Operations........         $2.41         $2.42        $2.57        $2.73        $2.29
  From Cumulative Effect of Change in
    Accounting for Income Taxes.....            --            --           --           --          .02
  From Discontinued Operations......            --           .10          .14          .05          .19
                                        ------------  ------------ ------------ ------------ ------------
    Total Earnings per Average Share         $2.41         $2.52        $2.71        $2.78        $2.50
                                        ============  ============ ============ ============ ============

Dividends Paid per Share............         $2.16         $2.16        $2.16        $2.16        $2.16

As of December 31:
  Total Assets......................       $17,943       $16,915      $16,816      $16,313      $15,995
  Long-Term Liabilities:
    Long-Term Debt..................        $4,873        $4,580       $5,190       $5,110       $5,100
    Other Long-Term Liabilities.....          $168          $185         $200         $216         $220

Preferred Stock With Mandatory                 
Redemption..........................           $75          $150         $150         $150         $150
Monthly Guaranteed Preferred
Beneficial Interest in PSE&G's
  Subordinated Debentures...........          $210          $210         $210         $150          --
Quarterly Guaranteed Preferred
Beneficial Interest in PSE&G's
  Subordinated Debentures...........          $303          $208          --           --           --

Ratio of Earnings to Fixed Charges
plus Preferred Securities Dividend
 Requirements (B)                             2.61          2.68         2.78         2.84         2.57

<FN>
   (A)  See Note 16. Discontinued Operations of Notes.

   (B)  Excludes income and expenses from discontinued operations.
</FN>
</TABLE>

<PAGE>
PSE&G

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

<TABLE>
<CAPTION>

                                                               Years Ended December 31,
                                              ------------------------------------------------------------
                                                1997        1996        1995        1994         1993
                                              ----------- ----------- ----------- ----------- ------------
                                                       (Millions of Dollars, where applicable)
<S>                                              <C>         <C>         <C>         <C>          <C>   
Total Operating Revenues...................      $6,125      $5,825      $5,707      $5,518       $5,290
Net Income.................................        $528        $535        $617        $659         $615

As of December 31:
  Total Assets.............................     $14,920     $14,799     $14,587     $14,259      $13,984
  Long-Term Liabilities:
    Long-Term Debt.........................      $4,126      $4,107      $4,586      $4,487       $4,364
    Other Long-Term Liabilities............        $168        $185        $200        $216         $220

Preferred Stock With Mandatory Redemption..         $75        $150        $150        $150         $150
Monthly Guaranteed Preferred Beneficial
Interest in PSE&G's Subordinated
  Debentures...............................        $210        $210        $210        $150          --
Quarterly Guaranteed Preferred Beneficial
Interest in PSE&G's Subordinated 
  Debentures...............................        $303        $208         --          --           --

Ratio of Earnings to Fixed Charges.........        2.81        2.83        3.25        3.35         3.30
Ratio of Earnings to Fixed Charges plus
Preferred Securities Dividend
  Requirements.............................        2.70        2.62        2.77        2.92         2.89
</TABLE>

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 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  within 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
projects in the generation,  transmission and distribution of energy,  including
cogeneration  and  independent  power  production  (IPP)  facilities,   electric
distribution  companies,  exempt wholesale generators (EWGs) and foreign utility
companies (FUCOs);  Public Service Resources  Corporation (PSRC), which has made
primarily passive investments;  Energis Resources  Incorporated  (Energis) which
provides a variety of energy  related  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's  operating  subsidiaries,   except
Energis,  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 PSRC, CEA and their subsidiaries,  which debt
is guaranteed by EDHI, but without direct support from Enterprise. EGDC has been
conducting a controlled  exit from its real estate  business since 1993. In July
1996, EDHI sold Energy Development Corporation (EDC), an oil and gas subsidiary.

    As of December 31, 1997 and 1996, PSE&G comprised 83% and 88%, respectively,
of  Enterprise's  assets.  For each of the  years  1997,  1996 and  1995,  PSE&G
revenues were  approximately  96%, 96%, and 97%,  respectively,  of Enterprise's
revenues and PSE&G's  earnings  available to Enterprise for such years were 92%,
87% and 88%, respectively, of Enterprise's net income.

Overview of 1997

    A major event which will impact  Enterprise and PSE&G in the future occurred
in April 1997 when the New Jersey Board of Public  Utilities  (BPU) unveiled its
final report  regarding  Phase II of the New Jersey  Energy  Master Plan (Energy
Master Plan) (final Phase II report)  addressing  wholesale and retail  electric
competition  in New Jersey.  The final Phase II report  required PSE&G and other
New  Jersey  electric  utilities  to  develop  rate  and  service  plans to give
customers  a choice of  suppliers.  PSE&G  filed its  proposal  in July 1997 and
hearings  before the BPU are in progress  (see Note 2. Rate  Matters of Notes to
Consolidated Financial Statements (Notes)).  PSE&G cannot predict the outcome of
the Energy Master Plan proceedings.  The outcome of these proceedings could have
a material  adverse  impact on  Enterprise's  and PSE&G's  financial  condition,
results of operations and net cash flows.

    Another significant event in 1997 was the progress made at the Salem Nuclear
Generating Station (Salem). As previously reported, Salem Units 1 and 2 (Salem 1
and 2) were taken out of service in mid-1995.  During these outages,  PSE&G made
significant  changes  and  improvements  related to the  people,  processes  and
equipment at Salem to improve the long-term  reliability  of the units.  Salem 2
returned to service in August 1997. Salem 1 is scheduled to restart,  subject to
Nuclear Regulatory  Commission (NRC) approval,  during the first quarter of 1998
(see Nuclear Operations).

     To further  Enterprise's  strategy  to  develop  its  non-utility  business
through international  expansion,  CEA established  strategic  partnerships with
other  companies,  expanding as a developer and operator of electric  generation
projects  and an  operator  of  distribution  systems.  CEA  was  successful  in
expanding   operations  in  its  various  targeted  regions  in  South  America,
particularly  Brazil and Argentina.  In 1997,  CEA's assets  quadrupled to about
$1.2  billion,  bringing  the level of its  portfolio at December 31, 1997 to 26
generation  projects  and  two  distribution  ventures  around  the  world  (see
Liquidity and Capital Resources).

Results of Operations

    Earnings per share of Enterprise  common stock  (Common  Stock) was $2.41 in
1997,  representing a decrease of $0.11 per share or 4% from 1996.  Earnings per
share was $2.52 in 1996, a decrease of $0.19 per share or 7% from 1995.

     PSE&G's contribution to earnings per share in 1997 decreased $0.07 compared
to 1996 due to higher administrative costs attributable to systems modifications
for Year 2000 readiness,  legal fees associated with the settlement of the Salem
co-owner  litigation  and a gain recorded in the second quarter of 1996 from the
repurchase of a portion of PSE&G's  outstanding  cumulative  preferred  stock at
discounts to par. These  decreases were partially  offset by lower operation and
maintenance  expenses  at  Salem  and the  Hudson  generating  station.  Salem's
refueling  outage  expenses  and  restart  activities  declined  while  Hudson's
expenses  benefited  from a decrease in the  workforce as well as a reduction of
outage work  performed  in 1997.  Earnings  per share in 1997 and 1996 were each
negatively  impacted by charges  related to the  shutdown of Salem 1 and 2 which
began in 1995.  The  settlement of the lawsuits  filed by the co-owners of Salem
negatively impacted 1997 earnings by $0.27 per share and refunds required by the
BPU's  December 31, 1996 Order  (December  31st Order) which  resolved Salem and
other outstanding  regulatory issues negatively  impacted 1996 earnings by $0.25
per share (see Note 2. Rate Matters of Notes).

    EDHI's  contribution  to earnings per share in 1997 decreased $0.14 compared
to 1996 primarily due to the absence of 1996 earnings of $0.10 per share related
to the discontinued  operations of EDC and higher operating  expenses of Energis
as it continued to grow.

    As a result of  Enterprise's  stock  repurchase  program which began in July
1996,  earnings per share of Common Stock for 1997 increased  $0.10 from 1996. A
total of 12.7 million  shares were  repurchased  at a cost of $350 million under
this program which concluded in January 1997.

    In 1996, PSE&G's contribution to earnings per share decreased $0.22 compared
to 1995 due to the refunds required by the December 31st Order (see Note 2. Rate
Matters of Notes).  Other factors that decreased earnings per share in 1996 were
increased operation and maintenance expenses related to the outages at Salem and
Hope Creek Nuclear  Generating  Station (Hope Creek) and increased  depreciation
due to  additional  plant in  service.  The  earnings  per  share  decrease  was
partially  offset by higher  gas sales in early  1996 due to  favorable  weather
conditions  and the gain on the  repurchase  of certain  of PSE&G's  outstanding
cumulative preferred stock at a discount to par.

    EDHI's  contribution  to earnings per share in 1996 increased $0.01 compared
to 1995 principally due to increased investment income from PSRC.

    Earnings  per share of Common Stock in 1996  increased  $0.02 as a result of
Enterprise's stock repurchase program, described above.

    PSE&G--Revenues

    Electric

    Revenues  increased  $244 million or 6% in 1997 and decreased $77 million or
2% in 1996.  The  increase  in 1997 was  primarily  due to an increase in energy
sales to  wholesale  customers  and 1996 refunds  required by the December  31st
Order, partially offset by lower kilowatt sales from unfavorable weather.

    Gas

    Revenues  increased  $56  million or 3% and $195  million or 12% in 1997 and
1996, respectively.  The 1996 increase was primarily due to a higher recovery of
fuel costs and favorable weather conditions in early 1996.

    PSE&G--Expenses

    Fuel for Electric Generation and Interchanged Power

    Fuel for Electric  Generation and Interchanged  Power increased $260 million
or 28% in 1997 and $27 million or 3% in 1996.  The  increases in both years were
primarily due to increases in energy sales to wholesale customers. To the extent
fuel revenue and expense flow through the Electric  Levelized Energy  Adjustment
Clause (LEAC) mechanism, variances in fuel revenues and expenses offset and thus
have no direct effect on earnings.  For a discussion of fuel related revenue and
expense  included  in  the  LEAC,  see  Note  1.  Organization  and  Summary  of
Significant Accounting Policies of Notes.

    Gas Purchased

    Gas purchased decreased $17 million or 2% in 1997 and increased $156 million
or 16% in 1996.  The 1996  increase  was due to an increase  in energy  sales to
wholesale customers. Due to the operation of the Levelized Gas Adjustment Clause
(LGAC)  mechanism,  variances in fuel revenues and expenses offset,  and have no
direct effect on earnings.

    Federal Income Taxes

    Federal income taxes  increased $42 million or 16% in 1997 and decreased $56
million or 17% in 1996. The 1997 taxes were higher due to an increase in pre-tax
operating  income  while 1996  taxes  were  lower due to a  decrease  in pre-tax
operating income (see Note 12. Federal Income Taxes of PSE&G Notes).

    Net Loss (Gain) on Preferred Stock Redemptions

    Net Loss (Gain) on Preferred Stock Redemptions decreased $21 million in 1997
from the  comparable  1996  period.  The decrease  was  primarily  due to an $18
million net gain on the repurchase of certain of PSE&G's outstanding  cumulative
preferred  stock at discounts to par in the second quarter of 1996 (see External
Financings--PSE&G).

    Year 2000 Expenses--Enterprise and PSE&G

    Many of  Enterprise's  and PSE&G's  systems must be modified due to computer
program  limitations  in recognizing  dates beyond 1999. If not  corrected,  the
systems could fail or cause  erroneous  results by, at or after January 1, 2000.
Substantial  changes  to, and some  replacements  of,  Enterprise's  and PSE&G's
present  systems  are being made in an effort to  mitigate  potential  Year 2000
issues.  Costs are being expensed as incurred in accordance with Emerging Issues
Task Force (EITF) Issue No. 96-14,  "Accounting  for the Costs  Associated  with
Modifying Computer Software for the Year 2000." During 1997, $8 million of costs
related to Year 2000  readiness were  incurred.  Management  estimates the total
cost of this  effort to be about $92 million to be  incurred  from 1997  through
2001, of which $41 million is expected to be incurred in 1998.

    Enterprise  and PSE&G have assembled a  cross-functional  team to inventory,
assess and  identify  and  implement  solutions  for  Enterprise's  and  PSE&G's
systems.  Plans  provide  for 80% of  critical  systems to be Year 2000 ready in
1998, with the remaining  critical  systems to be ready by July 1999. By the end
of 1999,  plans call for 80% of non-critical  systems to be Year 2000 ready with
the remainder of those systems to be Year 2000 ready in 2000.

    Additionally,  the team  has  surveyed  Enterprise's  and  PSE&G's  top 3000
vendors to assess  their plans for Year 2000  readiness.  The team has also been
working  with  critical  suppliers  and the  Pennsylvania--New  Jersey--Maryland
Interconnection (PJM) on their plans for Year 2000 readiness.

    An inability of Enterprise,  PSE&G,  their  subsidiaries,  members of PJM or
Enterprise's or PSE&G's critical  suppliers to meet the Year 2000 deadline could
have a material adverse impact on Enterprise's and PSE&G's operations, financial
condition, results of operations and net cash flows. For a discussion of the NRC
proposal regarding Year 2000 readiness, see Note 10.
Commitments and Contingent Liabilities.

    EDHI--Net Income

                                              Increase or (Decrease)
                                  ----------------------------------------------
                                     1997 vs. 1996            1996 vs. 1995
                                  ----------------------  ----------------------
                                                Per                       Per
                                   Amount      Share       Amount        Share
                                  ---------- -----------  -----------  ---------
                                   (Millions of Dollars, except Per Share Data)
CEA..........................          $4        $.02          $(2)       $(.01)
PSRC.........................           3         .01           22          .09
EGDC.........................          (5)       (.02)          (1)          --
Energis......................         (12)       (.05)          (6)        (.02)
                                  ---------- -----------  -----------  ---------
Continuing Operations........         (10)       (.04)          13          .06
Discontinued Operations--EDC
 Income from Operations......         (11)       (.04)         (24)        (.11)
 Gain on Sale................         (13)       (.06)          13          .06
                                  ---------- -----------  -----------  ---------
      Total..................        $(34)      $(.14)          $2         $.01
                                  ========== ===========  ===========  =========

    Continuing Operations

    EDHI's  income from  continuing  operations  was $47 million for 1997, a $10
million  decrease  from  1996.  The loss for  Energis  increased  due to  higher
selling,  general and administrative  expenditures as Energis continued to grow.
PSRC's  income  increased  primarily  due to income from new lease  investments,
partially  offset by lower  income from  partnership  investments.  CEA's income
increased due to improved financial performance of several projects.

    EDHI's  income from  continuing  operations  was $57 million in 1996,  a $13
million increase over 1995. The 1996 increase was due to PSRC's increased income
from  partnership  investments.  Energis'  income  decreased  due  to  increased
administrative  and  general  expenditures  (startup  costs)  and lower  margins
related to retail gas  marketing.  Energis  was formed on  December  31, 1996 by
consolidating  the  operations  of two former  PSRC  subsidiaries,  U.S.  Energy
Partners and Enterprise Strategic Energy Solutions.

    Discontinued Operations

    EDC was sold on July 31,  1996.  Income  related to EDC  operations  was $11
million in 1996, a $24 million  decrease from 1995. 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.


<PAGE>



Liquidity and Capital Resources

    Enterprise

    Enterprise  is a  public  utility  holding  company  and  as  such,  has  no
operations of its own. The following  discussion of  Enterprise's  liquidity and
capital resources is on a consolidated  basis, noting the uses and contributions
of Enterprise's two direct subsidiaries, PSE&G and EDHI.

    Cash  generated  from  PSE&G's  operations  is expected to provide the major
source of funds for  PSE&G's  business.  EDHI's  growth  will be funded  through
external  financings,  cash generated from its  operations,  and equity capital.
Cash and cash  equivalents  totaled $83 million at the end of 1997 compared with
$279 million at the end of 1996.

    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.

    Dividend  payments  on Common  Stock were $2.16 per share and  totaled  $501
million for the year ended December 31, 1997. 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.
From 1992 through  1996,  EDHI made regular cash  payments to  Enterprise in the
form of dividends  on  outstanding  shares of EDHI's  common  stock.  Due to the
growth in EDHI investment  activities,  no dividends on EDHI's common stock were
paid in 1997 or are anticipated for 1998.

    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 a key  objective  of the  Board of
Directors of Enterprise is to keep the Common Stock dividend secure, amounts and
dates of such  dividends as may be declared will  necessarily  be dependent upon
Enterprise's future earnings, financial requirements and other factors including
the receipt of dividend payments from its subsidiaries.

    Enterprise and PSE&G have issued Deferrable Interest Subordinated Debentures
in connection with the issuance of tax deferred preferred securities. If and for
as long as payments on those Deferrable  Interest  Subordinated  Debentures have
been  deferred,  or Enterprise  or PSE&G has defaulted on the indenture  related
thereto  or its  guarantee  thereof,  neither  Enterprise  nor PSE&G may pay any
dividends  on  their  common  and  preferred  stock  (see  Note 6.  Schedule  of
Consolidated Capital Stock and Other Securities of Notes).

    PSE&G paid  dividends of $523 million and $524 million to Enterprise  during
the years ended December 31, 1997 and 1996, respectively. EDHI paid dividends of
$369 million  during the year ended December 31, 1996 primarily from proceeds of
the sale of EDC.

    Cash provided by operating  activities  totaled $1.095 billion in 1997, down
from $1.470  billion in 1996.  The major  contributor  in 1997 was net income of
$560  million,   which   included  $630  million  of  non-cash   deductions  for
depreciation and amortization (see Results of Operations).

    Cash provided by operating  activities  totaled $1.470 billion in 1996, down
from $1.518  billion in 1995.  The major  contributor  in 1996 was net income of
$612  million,   which   included  $607  million  of  non-cash   deductions  for
depreciation and amortization (see Results of Operations).

    Cash used in investing activities totaled $1.614 billion in 1997, up from $9
million in 1996. The primary use of cash in 1997 was a net increase in long-term
investments of $914 million,  including CEA's  investments in  distribution  and
generation companies of $852 million,  PSRC's net increase in investments of $97
million and utility plant additions,  excluding  Allowance for Funds Used During
Construction (AFDC), of $542 million at PSE&G (see Capital Requirements--PSE&G).

    Cash used in investing activities totaled $9 million in 1996, down from $935
million in 1995.  The proceeds  from the sale of EDC were almost fully offset by
PSE&G's  additions to utility  plant (see Capital  Requirements  -- PSE&G).  Net
proceeds from the EDC sale were $704 million.

    Cash provided by financing  activities  was $323 million in 1997 as compared
to  $1.244  billion  of  cash  used  in  financing  activities  in  1996.  Major
contributors  in 1997  were an  increase  in  short-term  debt by  PSE&G of $468
million,  EDHI of $267 million and Enterprise of $75 million,  primarily used to
fund certain  scheduled  long-term debt maturities,  CEA's investments and a net
increase in long-term  debt of $85 million,  partially  offset by the payment of
dividends on Common Stock of $501 million. PSE&G's long-term debt decreased $287
million in 1997 while EDHI's long-term debt increased $372 million.

    Cash used in financing  activities  was $1.244 billion in 1996, up from $586
million in 1995. The primary use of cash in 1996 was the payment of dividends on
Common Stock of $523  million,  the  retirement of Common Stock of $307 million,
and a net decrease in long-term debt $434 million.

    As of December 31, 1997,  Enterprise's  capital structure consisted of 48.4%
common equity, 45.3% long-term debt and 6.3% preferred  securities.  The capital
structure  as of December  31, 1996  consisted  of 49.8%  common  equity,  43.7%
long-term debt and 6.5% preferred securities.

    As a result of the 1992 focused audit of Enterprise's non-utility businesses
(Focused  Audit),  the BPU approved a plan which,  among other things,  provides
that: (1) 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, 1997 were  approximately  16% of assets);  (2) 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)  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) EDHI pay PSE&G an
affiliation  fee of up to $2 million a year to be applied by PSE&G  through  its
LGAC and its LEAC to reduce utility rates. Beginning in 1995, the debt supported
by the minimum net worth  maintenance  agreement was limited to $650 million and
the affiliation fee has been  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.

     As a result of Enterprise's  intent that EDHI and its subsidiaries  provide
the primary growth vehicles for  Enterprise,  financing  requirements  connected
with continued growth of EDHI,  changes to the utility  industry  resulting from
the final outcome of the Energy Master Plan proceedings and potential accounting
impacts  resulting  from the  deregulation  of the  generation  of  electricity,
modifications  will be  required  to  certain of the  restrictions  agreed to by
Enterprise  with the BPU in response to the Focused  Audit.  Enterprise  expects
that these modifications will be addressed in conjunction with the Energy Master
Plan  proceedings.  The  resolution  of these  matters  could  impact the future
relative  size  and  financing  of the  non-utility  businesses  and may  affect
Enterprise's future  financial  position,  results  of  operations  and net cash
flows (see Note 2. Rate Matters of Notes).

    EDHI

    CEA,  PSRC and Energis are  expected to be the growth  vehicles for EDHI and
Enterprise. During the next five years, EDHI's capital requirements are expected
to be provided from additional debt financing, operational cash flows and equity
capital.  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. PSRC will continue its focus
on  investments  related to the energy  business.  Energis is expected to expand
upon the current  energy  related  services  being  provided to  industrial  and
commercial customers.


<PAGE>

    EDHI's  cash  provided  by (used  in)  operating,  investing  and  financing
activities was as follows:
<TABLE>
<CAPTION>

                                                          1997         1996         1995
                                                         ---------   ----------  ----------
                                                             (Millions of Dollars)
<S>                                                         <C>           <C>         <C>
    Operating Activities:
       CEA.........................................         $(9)          $9          $9
       PSRC........................................         130          164          58
       Other.......................................         (23)         (16)         12
                                                         ---------   ----------  ----------
       Continuing Operations.......................          98          157          79
       EDC.........................................          --           78         138
                                                         ---------   ----------  ----------
          Total Operating Activities..............          $98         $235        $217
                                                         =========   ==========  ==========
    Investing Activities:
       CEA.........................................       $(852)         $(8)       $(27)
       PSRC........................................         (97)           2         (49)
       Other.......................................          (2)          12          53
                                                         ---------   ----------  ----------
       Continuing Operations.......................        (951)           6         (23)
       EDC.........................................          --          653        (113)
                                                         ---------   ----------  ----------
            Total Investing Activities..............      $(951)        $659       $(136)
                                                         =========   ==========  ==========
    Financing Activities:
       Debt........................................        $638        $(380)         $2
       Equity......................................          78         (369)        (87)
                                                         ---------   ----------  ----------
          Total Financing Activities..............         $716        $(749)       $(85)
                                                         =========   ==========  ==========
</TABLE>

    For a discussion  of the source of EDHI's  funds,  see External  Financings.
Over the next  several  years,  EDHI and its  subsidiaries  will be  required to
refinance their maturing debt and provide  additional debt and equity  financing
for growth. Any inability to obtain required  additional  external capital or to
extend or replace maturing debt and/or existing agreements at current levels and
interest  rates may affect  future  earnings.  As of December 31, 1997 and 1996,
EDHI's embedded cost of debt of its finance  subsidiaries was approximately 8.2%
and 8.9%,  respectively.  During  1997,  EDHI's  finance  subsidiaries  provided
additional  long-term debt financing of $265 million at an average interest rate
of 6.8%.

    CEA

    During 1997, CEA's investment activities included:

          Acquisition of approximately 30% of a Brazilian electric  distribution
          company serving  customers in the State of Rio Grande Do Sul,  located
          in Southern  Brazil.  The total  purchase  price was $1.49  billion of
          which CEA's share was $498 million. This investment is an exempt FUCO.

          Acquisition of a 50% interest in a 200 Megawatt (MW) natural gas-fired
          power plant  located in Colombia,  South  America which is expected to
          become  operational in the first quarter of 1998. This investment is a
          foreign EWG.

          Acquisition with a partner of a 90% interest in two Argentine electric
          distribution  companies  serving the Buenos  Aires  Province  for $565
          million. CEA's indirect ownership of the two companies is 30%. Each of
          these investments is an exempt FUCO.

          Acquisition  of a  49%  interest  in an  operating  180  MW  oil-fired
          cogeneration  plant  located  on the  island of Oahu in  Hawaii.  This
          investment is a U.S. domestic QF.

          Acquisition  of an 80%  interest  in a 30 MW  coal-fired  cogeneration
          plant in the  Jiangsu  Province  of China  which  is  currently  under
          construction. This investment is a foreign EWG.

          Acquisition of 27% and 50% ownership  interests in energy  development
          companies located in the Philippines and Thailand,  respectively.  The
          project in the Philippines is a foreign EWG and the Thai investment is
          a power development company.

     The aggregate  investment made in 1997 was approximately  $852 million,  of
which $233 million was financed with non-recourse debt.

    PSRC

    During 1997,  PSRC entered into leveraged  leases of four power plants:  one
located in the United  Kingdom and three in the  Netherlands.  The  aggregate of
these investments was approximately $145 million.

    During 1997, PSRC's  investments in certain  collateralized  bond obligation
securities and its equity investment in the underlying limited  partnership were
liquidated.  Also in 1997,  PSRC sold a DC10  aircraft,  which was  subject to a
direct  financing  lease.  The  aggregate  proceeds  from these  asset sales was
approximately $62 million, which approximated the book cost of the assets sold.

    On January 2, 1998, the lessee of one of PSRC's  leveraged  leases exercised
an early  buyout  option  contained  in the lease.  As a result,  in 1998,  PSRC
received approximately $59 million of proceeds resulting in an after-tax gain of
approximately $6 million.

    Energis

    Energis  continued to expand its customer base to more than 5,000 businesses
and  increased  its  capabilities  in providing  energy  services to  customers,
including:

     Securing over 800 new business  customers  during a  Pennsylvania  Electric
     Pilot Program.

     Acquiring,  in January 1998, a diversified  mechanical  service  contractor
     which  provides   services  to   commercial  and  industrial   clients  in
     Pennsylvania, New Jersey and Delaware.

     Entering into a strategic alliance to market and service compact,  portable
     generators.

    Capital Requirements--PSE&G

    PSE&G had utility  plant  additions of $557  million,  $603 million and $686
million, for 1997, 1996 and 1995,  respectively,  including AFDC of $15 million,
$17  million  and $36  million,  respectively.  Construction  expenditures  were
related to improvements in PSE&G's existing power plants (including  acquisition
of nuclear fuel),  transmission and distribution  system,  gas system and common
facilities. PSE&G also expended $28 million, $34 million and $30 million for the
cost of plant  removal  (net of salvage) in 1997,  1996 and 1995,  respectively.
Construction  expenditures from 1998 through 2002 are expected to aggregate $3.1
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.) The
decision to make these  improvements  will depend,  in part, upon the outcome of
the Energy Master Plan proceeding.

    PSE&G  expects  that  it will be  able  to  internally  generate  all of its
construction  and  capital  requirements  over the  next  five  years,  assuming
adequate and timely  recovery of costs,  as to which no assurances  can be given
(see Note 2. Rate Matters and Note 10. Commitments and Contingent Liabilities of
Notes).


<PAGE>
    Construction and Capital Requirements Forecast
<TABLE>
<CAPTION>


                                                 1998    1999    2000      2001    2002    Total
                                                ------  ------  ------   -------  ------  -------
                                                              (Millions of Dollars) 
<S>                                              <C>      <C>      <C>     <C>     <C>     <C>   
Construction and Investment Requirements
(Estimate):
       PSE&G.................................     $606    $613     $619     $626    $652   $3,116
       EDHI..................................      284     182      293      195     313    1,267
                                                ------  ------   ------   ------  ------   ------
       Total Construction and Investment         
       Requirements..........................      890     795      912      821     965    4,383
                                                ------  ------   ------   ------  ------   ------
Mandatory Retirement of Securities:
       PSE&G.................................      118     100      635      100     300    1,253
       EDHI..................................      222     314      105      162     157      960
                                                ------  ------   ------   ------ -------   ------
       Total Retirement of Securities........      340     414      740      262     457    2,213
                                                ------  ------   ------   ------ -------   ------  
         Total Capital Requirements..........   $1,230  $1,209   $1,652   $1,083  $1,422   $6,596
                                                ======  ======   ======   ====== =======   ======
</TABLE>

  The projected effect of  securitization,  as included in PSE&G's Energy Master
Plan  proposal,  is not included in the above forecast (see Note 2. Rate Matters
of Notes).

External Financings

    Enterprise

    At  December  31,  1997 and 1996,  Enterprise  had a $75  million  and a $25
million uncommitted line of credit,  respectively,  with a bank. At December 31,
1997,  Enterprise  had $75  million  outstanding  under this line of credit.  At
December 31, 1997,  Enterprise  had a committed  $150 million  revolving  credit
facility which expires in December 2002. At December 31, 1997, Enterprise had no
debt outstanding under this revolving credit facility.

     In January 1998,  Enterprise  Capital Trust I, a special purpose  statutory
business  trust  controlled  by  Enterprise,  issued $225 million of 7.44% Trust
Originated  Preferred  Securities  (Guaranteed  Preferred Beneficial Interest in
Enterprise's Debentures).  Proceeds were lent to Enterprise and are evidenced by
deferrable interest subordinated debenture. Enterprise used the proceeds to make
a $218 million  equity  investment  in EDHI.  The  debentures  and their related
indenture  constitute a full and  unconditional  guarantee by  Enterprise of the
Preferred  Securities  issued by the trust.  If and for as long as  payments  on
Enterprise's  debentures have been deferred,  or Enterprise has defaulted on the
indenture related thereto or its guarantee  thereof,  Enterprise may not pay any
dividends on its Common Stock. Also in January 1998, Enterprise paid off the $75
million outstanding under its line of credit.

    PSE&G

    PSE&G  has   obtained   BPU   approval   through   December   31,   1998  to
opportunistically  refinance essentially all of its long-term debt and to refund
up to $250  million of matured  debt.  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, 1997,  the Mortgage  would permit up
to $3.3 billion  aggregate  principal  amount of new Bonds to be issued  against
previous  additions and  improvements.  At December 31, 1997, the coverage ratio
under PSE&G's Mortgage was 3.45:1.

    In  February  1997,  PSE&G  Capital  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 redeemed all 750,000  shares
of its 7.44%  Cumulative  Preferred Stock $100 par value at $103.72 per share in
June 1997. 

    In April 1997,  PSE&G issued $25 million of Variable Rate Pollution  Control
Bonds,  Series X, due 2031.  PSE&G also  issued $19  million  of  Variable  Rate
Pollution  Control  Notes due 2027 in June 1997.  The  proceeds of each of these
issuances were used to redeem prior debt related to pollution control facilities
of PSE&G.

    In June 1997, PSE&G issued $235 million of 6.50% Bonds, Series XX, due 2000.
The  proceeds  were used  primarily  to refund $117  million of its 8.50% Bonds,
Series LL, due 2022 and to  reimburse  its  treasury  for the  purchase of other
Bonds in the open market. Also in June 1997, PSE&G's 6.875% Bonds, Series KK, of
$150 million matured.

    On  November  1, 1997,  $150  million of PSE&G's  7.125%  Bonds,  Series GG,
matured.  The redemption of these bonds was funded by the issuance of commercial
paper.  Also in November 1997, PSE&G issued $9 million of Secured MTNs, Series A
at 7.04% and redeemed $9 million of its 9.25% Bonds, Series CC.

    In January 1998, $100 million of PSE&G's 6.00% Bonds, Series NN, matured.

    To provide  liquidity for its  commercial  paper  program,  PSE&G has a $650
million  revolving  credit  agreement  expiring in June 1998 and a $650  million
revolving  credit  agreement  expiring  in June 2002 with a group of  commercial
banks,  which  provide for  borrowings  of up to one year. On December 31, 1997,
there were no borrowings outstanding under these credit agreements.

    The BPU has authorized  PSE&G to issue and have  outstanding at any one time
through  January 2, 1999, not more than $1.3 billion of short-term  obligations,
consisting of commercial  paper and other  unsecured  borrowings  from banks and
other lenders. On December 31, 1997, PSE&G had $1.026 billion of short-term debt
outstanding,  including $74 million  borrowed against its uncommitted bank lines
of credit which lines of credit totaled $174 million as of December 31, 1997.

    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 on June
28, 2001.  PSE&G has  guaranteed  repayment of Fuelco's  respective  obligations
under this program.  As of December 31, 1997, Fuelco had commercial paper of $80
million outstanding under the program.

    EDHI

    The minimum net worth  maintenance  agreement between Capital and Enterprise
provides,  among other  things,  that  Enterprise  (1) maintain  its  ownership,
directly or indirectly,  of all outstanding  common stock of Capital,  (2) cause
Capital to have at all times a positive  tangible net worth of at least $100,000
and (3) make  sufficient  contributions  of liquid assets to Capital in order to
permit it to pay its debt obligations.  In 1993,  Enterprise agreed with the BPU
to make a good-faith  effort to eliminate such Enterprise  support within six to
ten years. Effective January 31, 1995, Capital notified the BPU of its intention
not to have more than $650 million of debt  outstanding  at any time.  Capital's
assets  consist  principally  of  demand  notes  of CEA and  PSRC.  Intercompany
borrowing rates are established  based upon Capital's cost of funds. At December
31, 1997,  Capital had total debt  outstanding  of $611 million,  including $573
million of MTNs.  In October 1997,  Capital  issued $165 million of MTNs with an
average interest rate of 6.75%, which was used to fund CEA's investments.

    As of December 31, 1997, Funding had $300 million and $150 million revolving
credit  facilities with two groups of banks and had $128 million of Senior Notes
outstanding.  Funding makes  short-term  investments 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 PSRC and CEA and their  subsidiaries  on the basis of an
unconditional guaranty from EDHI, but without direct support from Enterprise. As
of December 31, 1997, Funding had $395 million of total debt outstanding.

    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,  1997 and 1996,  EDHI had  consolidated  debt to equity  ratios of
1.80:1 and 1.05:1 respectively,  and for the years ended December 31, 1997, 1996
and 1995,  EBIT coverage  ratios,  as defined to exclude the effects of EGDC and
the  gain on the  sale of EDC,  of  2.20:1,  2.45:1  and  2.47:1,  respectively.
Compliance with applicable financial covenants will depend upon future financial
position  and levels of  earnings,  as to which no  assurance  can be given.  In
addition,  EDHI's  ability to  continue  to grow its  business  will depend upon
Enterprise's  and EDHI's ability to obtain  additional  financing beyond current
levels.

<PAGE>


Qualitative and Quantitative Disclosures about Market Risk

    The market risk inherent in Enterprise's  market risk sensitive  instruments
and  positions is the potential  loss arising from adverse  changes in commodity
prices,  equity security prices,  interest rates and foreign  currency  exchange
rates as discussed  below.  Enterprise's  policy is to use physical  forward and
options contracts, and to a lesser extent, financial derivatives for the purpose
of managing  risk  consistent  with its  business  plans and prudent  practices.
Enterprise has a Risk Management  Committee made up of executive officers and an
independent risk oversight function to enhance its risk management practices.

    Enterprise  is exposed to credit losses in the event of  non-performance  or
non-payment by counterparties.  Enterprise has a credit management process which
is used to assess,  monitor and  mitigate  counterparty  exposure  for PSE&G and
EDHI.  Management does not expect counterparty defaults to materially impact the
financial condition,  results of operations and net cash flows of Enterprise and
PSE&G.

    Commodities--PSE&G

    The availability and price of energy commodities are subject to fluctuations
from  factors  such as weather,  environmental  policies,  changes in demand and
state and Federal  regulatory  policies.  To reduce  price risk caused by market
fluctuations, PSE&G enters into physical forward and options contracts and, to a
lesser extent,  financial  derivatives  including forwards,  futures,  swaps and
options with approved  counterparties  to hedge its  anticipated  demand.  These
contracts,  in conjunction with owned electric generating capacity, are designed
to cover  estimated  electric  and gas  customer  commitments.  Gains and losses
resulting from physical forward and options contracts and financial  derivatives
are recognized as a component of fuel revenue and expense upon maturity of these
contracts.   Additionally,  PSE&G  enters  into  physical  forward  and  options
contracts that are  speculative in nature which are immaterial to PSE&G's market
portfolio  and do not have a  material  impact on PSE&G's  financial  condition,
results of operations and net cash flows (see Note 1.  Organization  and Summary
of Significant Accounting Policies of Notes).

    PSE&G uses a value-at-risk  model to assess the market risk of its commodity
business.  This model includes fixed price sales commitments,  owned generation,
native  load   requirements,   physical   contracts  and  financial   derivative
instruments.   Value-at-risk  represents  the  potential  gains  or  losses  for
instruments or portfolios due to changes in market factors, for a specified time
period and confidence level. PSE&G estimates  value-at-risk across its commodity
business  using a model  with  historical  volatilities  and  correlations.  The
measured  value-at-risk using a  variance/co-variance  model with a 97.5 percent
confidence  level and  assuming a one week  horizon  at  December  31,  1997 was
approximately $7 million.  PSE&G's calculated  value-at-risk exposure represents
an estimate of potential net losses that could be recognized on its portfolio of
physical and financial  derivative  instruments assuming historical movements in
future market rates. These estimates, however, are not necessarily indicative of
actual results which may occur, since actual future gains and losses will differ
from those historical estimates, based upon actual fluctuations in market rates,
operating exposures, and the timing thereof, and changes in PSE&G's portfolio of
hedging instruments during the year.

    Commodities--EDHI

    During  1997,  Energis  entered  into  futures  contracts to buy natural gas
related to fixed-price  natural gas sales  commitments.  Such  contracts  hedged
approximately  97% of its fixed price sales commitments at December 31, 1997. As
of December 31, 1997, Energis had a net unrealized hedge loss of $2 million.

    During 1997, Energis entered into fixed price electricity sales commitments.
Physical purchase  contracts hedged  approximately 10% of such fixed price sales
commitments at December 31, 1997.

    Energis  estimates   value-at-risk  across  its  electric  and  natural  gas
commodities  using a model with historical  volatilities and  correlations.  The
measured  value-at-risk using a  variance/co-variance  model with a 97.5 percent
confidence  level and  assuming a  one-week  horizon at  December  31,  1997 was
approximately  $0.2  million.   Energis'   calculated   value-at-risk   exposure
represents  an estimate of  potential  losses  that could be  recognized  on its
portfolio of physical and financial  derivative  instruments assuming historical
movements in future market prices. These estimates, however, are not necessarily
indicative  of actual  results  which may occur,  since actual  future gains and
losses  will  differ  from  those  historical   estimates,   based  upon  actual
fluctuations in market rates,  operating exposures,  and the timing thereof, and
changes in Energis' portfolio of hedging instruments during the year.

    Nuclear Decommissioning Trust Funds--PSE&G

    Contributions made into the Nuclear Decommissioning Trust Funds are invested
in debt and equity  securities.  These marketable debt and equity securities are
recorded at a fair value of $458 million at December 31, 1997 and have  exposure
to price risk. The potential  change in fair value resulting from a hypothetical
10% change in quoted market prices of these  securities  amounts to $46 million.
All  realized  gains on  Nuclear  Decommissioning  Trust  Fund  investments  are
recorded as a component of accumulated  depreciation  while unrealized gains are
recorded as deferred credits and neither affects earnings.

    Equity Securities--EDHI

    PSRC has investments in equity  securities and partnerships  which invest in
equity securities. The aggregate amount of such investments which have available
market  prices at December  31, 1997 are  recorded at fair value of $185 million
and have  exposure to price risk. A  sensitivity  analysis has been  prepared to
estimate  EDHI's  exposure  to  market  sensitivity  of these  investments.  The
potential  change in fair  value  resulting  from a  hypothetical  10% change in
quoted market prices of these investments amounts to $15 million.

    Interest Rates--PSE&G

    PSE&G is subject  to the risk of  fluctuating  interest  rates in the normal
course of business.  PSE&G's policy is to manage  interest rates through the use
of fixed and, to a lesser extent, floating rate debt. PSE&G's interest rate risk
related to existing  fixed,  long-term debt is not  significant as PSE&G has BPU
approval to issue long-term debt for opportunistic  refinancing  purposes. As of
December 31, 1997, a hypothetical 10% change in interest rates would result in a
$8 million  change in interest  costs  related to  short-term  and floating rate
debt.

    Interest Rates--EDHI

    EDHI is  subject  to the risk of  fluctuating  interest  rates in the normal
course of business. EDHI's policy is to manage interest rates through the use of
fixed rate debt,  floating rate debt and interest rate swaps. As of December 31,
1997, a  hypothetical  10% change in interest rates would result in a $2 million
change in interest costs related to short-term and floating rate debt.

    In June 1997,  an indirect  subsidiary  of CEA entered  into an agreement to
swap  floating  rate  borrowings  into  fixed  rate  borrowings.   The  interest
differential  to be received or paid under the interest  rate swap  agreement is
recorded over the life of the agreement as an adjustment to the interest expense
of the related borrowing. The swap terminates on May 28, 1999.

    The notional amounts and interest rates are as follows:

        Pay-Fixed Swap
        --------------
        Notional amount........................    $43.5 million
        Pay rate...............................    6.65%
        Average receive rate...................    5.73%
        Year-end receive rate..................    5.91%

    Foreign Currencies--EDHI

    CEA has non-recourse  debt of $135 million which is denominated in Brazilian
Reals that is indexed to a basket of currencies  including  U.S.  dollars.  As a
result,  it is subject to foreign currency  exchange rate risk due to the effect
of  exchange  rate  movements  between the indexed  foreign  currencies  and the
Brazilian  Real.   Exchange  rate  changes  ultimately  impact  the  debt  level
outstanding  in  the  denominated   currency  and  result  in  foreign  currency
transactions  in  accordance  with  current  accounting  guidance.  Any  related
transaction  gains or losses  resulting  from such  exchange  rate  changes  are
included in  determining  net income for the  period.  The  potential  change in
non-recourse  debt resulting  from a  hypothetical  10% change in exchange rates
amounts to approximately $9 million.


<PAGE>


Nuclear Operations

    As previously reported,  Salem 1 and 2 were taken out of service by PSE&G in
the second  quarter of 1995.  In June 1995,  the Nuclear  Regulatory  Commission
(NRC) issued a Confirmatory Action Letter (CAL) which documented  commitments of
PSE&G to keep each unit off line until it is satisfied that the unit is ready to
return to service and to operate  reliably  over the long term and until the NRC
agrees that the unit is  sufficiently  prepared to restart.  Salem 2 returned to
service  on  August  30,  1997.  The  NRC  amended  the CAL to  require  a final
assessment of Salem 2 after approximately two months of full power operation.  A
meeting was held with the NRC on December 4, 1997 which satisfied this final CAL
requirement for Salem 2.

    Installation of Salem 1 steam generators has been completed and that unit is
expected  to return to  service  around  the end of the first  quarter  of 1998.
Restart of Salem 1 is subject to completion of the  requirements  of the restart
plan to the  satisfaction  of PSE&G and the NRC. The cost of the steam generator
replacement,  including  installation,  was approximately  $170 million (PSE&G's
share was $72 million). In addition,  the cost of disposal of the four old steam
generators was $16 million (PSE&G's share was $7 million). Restart of Salem 1 is
also  subject to  completion  of the  requirements  of the  restart  plan to the
satisfaction  of  PSE&G  and  the  NRC.  The  NRC's  Readiness  Assessment  Team
Inspection  (RATI) of Salem 1 (a requirement for restart)  commenced on February
10, 1998.  PSE&G expects that the NRC will  complete its  inspection in February
1998.  The inability to  successfully  return Salem 1 to operation  could have a
material  adverse impact on the financial  condition,  results of operations and
net cash flows of Enterprise and PSE&G (see Forward Looking Statements).

    PSE&G's  share of total  operating and  maintenance  expenses for both Salem
units for 1997 was $115  million  and  capital  costs  were $65  million,  which
includes $19 million for steam  generator  replacement  and excludes $13 million
related to the ACE settlement described below. The outage of a Salem unit causes
PSE&G to incur  replacement  power costs of  approximately  $4 to $5 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.

    PSE&G and ACE entered  into an  operating  agreement  which  resulted in the
dismissal of a lawsuit initiated by ACE related to Salem performance.  Under the
agreement, ACE paid a portion of its share of the 1997 operation and maintenance
expenses  based on the amount of generation of the Salem units.  PSE&G  incurred
approximately  $13  million of ACE's  share of 1997  operation  and  maintenance
expenses  since Salem 2 did not  operate for the first eight  months of 1997 and
Salem 1 did not return to service during 1997.

     At the January 1997  semi-annual  NRC Senior  Management  Meeting,  the NRC
placed  Salem 1 and 2 on the NRC Watch List and  designated  them as  Category 2
facilities  (i.e.,  a plant that is authorized to operate,  but one that the NRC
will monitor  closely),  noting that this action was not due to any  performance
problems or decline during its current  evaluation  period but rather that Salem
should have been placed on the NRC Watch List  earlier.  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. Salem 1 and 2 remain on the NRC Watch List as
a Category 2 plant.

     For  information  on  Salem  litigation,   see  Note  10.  Commitments  and
Contingent Liabilities of Notes.

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 1997 and early 1998. See Note 2. Rate Matters of Notes for
information on the final Phase II report and the Energy Master Plan proceedings.

    FERC Order No. 888 (Order No. 888)

    Order  No.  888  became  effective  in July  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  which they provide to  themselves.  Intra-pool  transactions  for power
pools were also required to be under a nondiscriminatory,  pool-wide open access
tariff by March 1, 1997.  Numerous  parties,  including  PSE&G,  filed  requests
seeking  rehearing and  clarification  of various aspects of Order No. 888. As a
result of those  requests,  FERC  issued  Orders  No.  888-A and  888-B.  Orders
No.888-A and 888-B  clarified and largely  reaffirmed the legal and policy bases
on which Order No. 888 was  grounded.  Orders  No.888-A and 888-B also  provided
clarifications  and  modifications  to the FERC's original pro forma open access
transmission  tariff and process for recovery of stranded  costs from  wholesale
customers  ordered as a result of Order No.  888.  Numerous  parties,  including
PSE&G,  have  filed  petitions  for  judicial  review of these  orders and these
petitions are currently  pending  before the United States Courts of Appeals for
the District of Columbia and the Second Circuits (see PJM).

     As a result of open access  mandated by Order No. 888,  PSE&G and other New
Jersey utilities are facing 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, are able to
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.

    On October 27,  1997,  Old  Dominion  Electric  Cooperative  (ODEC)  filed a
Complaint at FERC seeking to modify its 1992 Agreement with PSE&G for a ten-year
sale of 150 MW of capacity and energy.  ODEC's  Complaint  argues that given the
restructuring  of  PJM,  particularly  PJM's  new  regional  rate  design  which
effectively  eliminates rate  "pancaking" for  transmission  that traverses more
than one  transmission  system,  it is  unreasonable  to leave  intact  existing
bilateral  agreements  that have the same  effect.  It  therefore  urges FERC to
reduce ODEC's  contract  capacity rate with PSE&G  (reducing  PSE&G's revenue by
$3-$5  million per year) to eliminate  the imputed  transmission  charge.  In an
answer filed  December 1, 1997,  PSE&G  responded  that the contract  rates were
negotiated  at arm's  length,  are fully cost  justified  and cannot  legally be
modified absent an overriding public interest.  Although it has not yet acted on
these filings,  FERC appears to have summarily decided the issue in ODEC's favor
in its  November 25, 1997 PJM  Restructuring  Order  (November  25th Order) (see
discussion  below).  PSE&G has  requested  rehearing  and  clarification  of the
November 25th Order.

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

    PSE&G is a member of 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.  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  hourly  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, 1997,
the aggregate installed  generating capacity of the PJM companies was 57,216 MW.
The all time record peak one-hour demand  experienced by PJM was 49,406 MW which
occurred on July 15, 1997.  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 1998-2002
period.

    PSE&G is also a party to the  Mid-Atlantic  Area  Reliability  Council 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,  including  PSE&G but excluding
PECO  Energy,  filed a proposal 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 in response to Order No.
888. PECO Energy filed a separate proposal with FERC. On November 13, 1996, FERC
announced that it was rejecting the restructuring  proposals of both PECO Energy
and the other PJM  companies  (the PJM  Supporting  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. FERC issued an order on February 28, 1997, accepting
most of the PJM Supporting  Companies'  proposal on an interim basis,  effective
April 1, 1997.

    On June 2, 1997, the PJM member companies,  except for PECO Energy,  filed a
revised  proposal with the FERC to reorganize  PJM into an ISO. On June 9, 1997,
PECO Energy filed a competing  proposal  that  continued to advocate a different
design of the energy market and transmission tariffs.

    In its November 25th Order, FERC conditionally  approved,  effective January
1, 1998, the PJM  Supporting  Companies'  proposal to restructure  the PJM power
pool and establish an ISO consistent with the requirements of Order No. 888. The
November 25th Order specifically  approved a two-tier governance structure under
which an independent 7-member Board of Managers (PJM Board) would be responsible
for  supervision  and oversight of the  day-to-day  operations  of PJM;  while a
Members Committee,  consisting of five sectors  representing  generation owners,
other  suppliers,   transmission  owners,   electric  distribution  and  end-use
customers  would  elect,  and provide  advice to, the PJM Board.  The order also
accepted the proposed zonal rate design, subject to its being replaced by a more
uniform, regional rate design within five years. FERC also accepted the proposed
locational  marginal  pricing  (LMP)  methodology  for recovery of  transmission
congestion  costs,  but  acknowledged  that  the lack of  price  certainty  is a
limitation  of LMP and  ordered  the ISO to  initiate a process to address  this
concern. FERC subsequently approved the ISO's request to defer implementation of
LMP until April 1, 1998.

     The  November  25th  Order also  introduced  a new issue that could have an
impact of approximately  $3 to $5 million  annually on PSE&G.  FERC ordered that
all existing  power sales and  wheeling  agreements,  such as between  PSE&G and
ODEC, be modified to eliminate  multiple  transmission  charges to be consistent
with the  restructured  PJM.  PSE&G  separately,  and  along  with the other PJM
Supporting Companies,  has requested rehearing and clarification  regarding this
issue and is vigorously  contesting  this issue.  PSE&G cannot predict the final
outcome of these proceedings.

    A further potential impact of PJM restructuring  relates to the operation of
the  Keystone-Conemaugh  coal-fired  electric  power plants which are owned by a
joint venture  consisting of PSE&G and nine other utilities.  In order to assure
that the joint  venture's  proposed  operation of these plants in the context of
the new PJM energy exchange would be consistent with antitrust law requirements,
the  Antitrust  Division of the DOJ was  requested  to  indicate  that it has no
present  intention  of  taking  enforcement  action  with  respect  to the joint
venture's  proposed  plan of  operation.  The DOJ  responded on January 30, 1998
indicating no antitrust concerns.

    New Jersey Gross Receipts and Franchise Tax (NJGRT) Reform

    For a discussion of NJGRT Reform, see Note 2. Rate Matters of Notes.

    Gas Unbundling

    For a discussion of Gas Unbundling, see Note 2. Rate Matters of Notes.

    Energy Resources and Trading

     PSE&G has  established  an energy  resources  and trading  organization  to
engage  in  wholesale  transactions  in  electricity  and  gas.  For  additional
information, see Qualitative and Quantitative Disclosures About Market Risk.

    Energis

     Energis has been formed to better position  Enterprise to enter the rapidly
deregulating energy market by marketing a variety of energy related products and
services to industrial  and  commercial  customers  throughout the Northeast and
Mid-Atlantic states. Energis offers 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.  Energis' customers
include   small   businesses,   department   stores,   schools,   hospitals  and
manufacturers  from  Maine  to  Maryland.   For  additional   information,   see
Qualitative and Quantitative Disclosures About Market Risk.

    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 in order to
minimize  surprises  and  give  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 Enterprise's and PSE&G's bond ratings (see Item 1.
General--Credit Ratings).


<PAGE>


Rate Matters

    For discussions of the Energy Master Plan,  Stranded Costs,  Securitization,
Depreciation,  NJGRT Reform,  Settlement of Certain Regulatory Issues, the LGAC,
the LEAC, the Demand Side Adjustment Factor, the Remediation  Adjustment Charge,
Consolidated  Tax  Benefits,  OPEB,  and other  rate  matters,  see Note 2. Rate
Matters of Notes.

Accounting Issues

    For a discussion of significant  accounting policies in regard to regulation
of PSE&G,  including  discussion of Statement of Financial  Accounting Standards
(SFAS) 71,  "Accounting  for the Effects of Certain  Types of  Regulation,"  and
Emerging Issues Task Force (EITF) Issue 97-4,  "Deregulation  for the Pricing of
Electricity - Issues Related to the  Application  of FASB  Statements No. 71 and
101," see Note 1. Organization and Summary of Significant Accounting Policies of
Notes.

Impact of New Accounting Pronouncements

    In June 1997, the Financial  Accounting  Standards  Board (FASB) issued SFAS
130, "Reporting  Comprehensive Income" (SFAS 130), which is effective for fiscal
years  beginning  after  December  15, 1997.  SFAS 130  requires  that all items
required  to  be  recognized  under   accounting   standards  as  components  of
comprehensive  income be reported in a financial  statement  displayed  with the
same  prominence  as  other  financial  statements.  It  also  requires  that an
enterprise  classify  items of other  comprehensive  income by their nature in a
financial  statement and display the accumulated  balance of other comprehensive
income separately from retained  earnings and additional  paid-in capital in the
equity section of a statement of financial position.

    Also in June 1997, the FASB issued SFAS 131,  "Disclosures about Segments of
an  Enterprise  and Related  Information"  (SFAS 131),  which is  effective  for
financial  statements  for periods  beginning  after  December  15,  1997.  This
Statement  need not be applied to interim  financial  statements  in the initial
year of its application.  SFAS 131 supersedes SFAS 14, "Financial  Reporting for
Segments of a Business  Enterprise" and requires that companies disclose segment
data based on how  management  makes  decisions  about  allocating  resources to
segments and measuring their performance.

    The  adoption  of SFAS 130 and SFAS 131 is not  expected  to have a material
impact on the financial  condition,  results of operations and net cash flows of
Enterprise or PSE&G.

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.   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 and net cash flows (see Note
10. Commitments and Contingent Liabilities of Notes).

Future Outlook

    Enterprise  and PSE&G will face  additional  challenges  with the continuing
emergence of competition in 1998. Depending upon the BPU's actions in the Energy
Master Plan  proceedings,  PSE&G's  customers  could begin choosing their energy
suppliers as early as October 1998 with their choices becoming effective January
1999. In light of this,  Enterprise and PSE&G are seeking to ensure that the new
rules for electric industry restructuring provide customer choice and lower cost
without  endangering  public  safety  or  compromising  New  Jersey's  stringent
environmental standards or the reliability of electric service.

    Further  expansion in the  non-regulated  businesses of  Enterprise  will be
necessary to allow Enterprise to achieve its future growth  objectives.  To this
end,  Enterprise's  strategy  will be to rely to a large extent on CEA, PSRC and
Energis.  CEA will continue to focus on the international  market. PSRC plans to
continue to make investments in the energy sector.  Energis plans to continue to
market  new  and  existing  energy  products  and  services  to  commercial  and
industrial business customers throughout the Northeast and Mid-Atlantic states.

    Deregulation  will also place a greater  emphasis  on  lowering  electricity
prices and costs. If PSE&G's Energy Master Plan proposal is adopted,  rates will
be frozen for seven  years.  PSE&G will  continue to bear the risk of changes in
fuel costs. Enterprise's wholesale energy trading and resource organization will
continue to develop strategies to reduce costs, increase profits and manage both
commodity and financial risks. Expansion of other non-traditional utility areas,
such as the appliance  service  business within and outside of New Jersey,  will
also be key to the future of Enterprise and PSE&G.

     Enterprise  is  continuing  to emphasize  operational  excellence  as a key
business  objective.  While Enterprise and PSE&G have improved  productivity and
efficiencies,  efforts continue to improve response speed, reliability, employee
safety,     customer     satisfaction,     quality,    cost    management    and
cost-competitiveness.

    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 a key  objective  of the  Board of
Directors of Enterprise is to keep the Common Stock dividend secure, amounts and
dates of such  dividends as may be declared will  necessarily  be dependent upon
Enterprise's future earnings, financial requirements and other factors including
the receipt of dividend payments from its subsidiaries.

    Enterprise  and PSE&G  cannot  predict the  ultimate  outcome of the ongoing
changes in the utility industry. Decisions in the Energy Master Plan proceedings
including those which will impact PSE&G's recovery of stranded costs and ability
to use  securitization  could have a material adverse impact on Enterprise's and
PSE&G's  financial  condition,   results  of  operations  and  net  cash  flows.
Enterprise  and PSE&G  believe  that the end result will  involve a  fundamental
change in the way their  businesses  are  conducted.  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  (see Note 1.  Organization  and
Summary of Significant Accounting Policies and Note 2. Rate Matters of Notes).

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  1997;  Results  of
Operations;  Liquidity and Capital Resources;  External Financings;  Qualitative
and Quantitative Disclosures About Market Risk; Nuclear Operations;  Competitive
Environment;   Rate  Matters;   Accounting  Issues;  Impact  of  New  Accounting
Pronouncements;  Site  Restorations  and Other  Environmental  Costs and  Future
Outlook.

Forward Looking Statements

    The Private  Securities  Litigation  Reform Act of 1995 (the Act) provides a
"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",  "hypothetical",  "potential" 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.


Item 7A. Qualitative and Quantitative Disclosures About Market Risk

    Information relating to quantitative and qualitative disclosure about market
risk is set forth under the caption  "Qualitative and  Quantitative  Disclosures
about Market Risk" in Item 7. Management's  Discussion and Analysis of Financial
Condition  and Results of  Operations  and  "Financial  Instruments"  in Note 1.
Organization  and  Summary of  Significant  Accounting  Policies of the Notes to
Consolidated  Financial  Statements.  Such information is incorporated herein by
reference.  For PSE&G,  the  information  required by this item is  incorporated
herein by reference insofar as it relates to PSE&G and its subsidiaries.

Item 8. Financial Statements and Supplementary Data


<PAGE>
<TABLE>


                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                        CONSOLIDATED STATEMENTS OF INCOME
                  (Millions of Dollars, except Per Share Data)
<CAPTION>


                                                                            For The Years Ended December 31,
                                                                            1997          1996          1995
                                                                         -----------    ----------    ----------
<S>                                                                      <C>            <C>           <C>      
OPERATING REVENUES
    Electric                                                             $    4,188     $   3,944     $   4,021
    Gas                                                                       1,937         1,881         1,686
    Nonutility Activities                                                       245           216           186
                                                                         -----------    ----------    ----------
       TOTAL OPERATING REVENUES                                               6,370         6,041         5,893
                                                                         -----------    ----------    ----------

OPERATING EXPENSES
Operation
    Fuel for Electric Generation and Interchanged Power                       1,179           919           892
    Gas Purchased                                                             1,101         1,118           962
    Other                                                                     1,082         1,053         1,008
Maintenance                                                                     282           318           313
Depreciation and Amortization                                                   630           607           597
Taxes
    Federal Income Taxes (Note 12)                                              329           290           338
    New Jersey Gross Receipts Taxes                                             576           598           613
    Other                                                                        76            81            77
                                                                         -----------    ----------    ----------
       TOTAL OPERATING EXPENSES                                               5,255         4,984         4,800
                                                                         -----------    ----------    ----------

OPERATING INCOME                                                              1,115         1,057         1,093
                                                                         -----------    ----------    ----------

OTHER INCOME AND DEDUCTIONS
  Settlement of Salem Litigation - Net of Applicable
   Taxes of $29                                                                 (53)            -             -
  Other - net                                                                     7            (2)           13
                                                                         -----------    ----------    ----------
    Total Other Income and Deductions                                           (46)           (2)           13
                                                                         -----------    ----------    ----------

INCOME BEFORE INTEREST CHARGES AND
    DIVIDENDS ON PREFERRED SECURITIES                                         1,069         1,055         1,106
                                                                         -----------    ----------    ----------

INTEREST EXPENSE AND PREFERRED DIVIDENDS
    Interest Expense (Note 7)                                                   470           453           464
     Allowance for Funds Used During Construction -
      Debt and Capitalized Interest                                             (20)          (18)          (33)
    Preferred Securities Dividend Requirements (Note 6)                          56            50            48
    Net Loss (Gain) on Preferred Stock Redemptions (Note 6)                       3           (18)            -
                                                                         -----------    ----------    ----------
    Total Interest Expense and Preferred Dividends                              509           467           479
                                                                         -----------    ----------    ----------

INCOME FROM CONTINUING OPERATIONS                                               560           588           627

Discontinued Operations - Net of Taxes (Note 16):
    Discontinued Operations                                                       -            11            35
    Gain on Sale of Discontinued Operations                                       -            13             -
                                                                         -----------    ----------    ----------

NET INCOME                                                               $      560     $     612     $     662
                                                                         ===========    ==========    ==========

AVERAGE SHARES OF COMMON STOCK
    OUTSTANDING (000's)                                                     231,986       242,401       244,698

EARNINGS PER AVERAGE SHARE (Basic and Diluted)
    Income From Continuing Operations                                    $     2.41     $    2.42      $   2.57
    Income From Discontinued Operations                                           -          0.04          0.14
    Gain on Sale of Discontinued Operations                                       -          0.06             -
                                                                         -----------    ----------    ----------

       TOTAL EARNINGS PER AVERAGE SHARE                                  $     2.41     $    2.52     $    2.71
                                                                         ===========    ==========    ==========

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
                              (Millions of Dollars)
<CAPTION>
                                                                                                         December 31,
                                                                                               --------------------------------
                                                                                                   1997               1996
                                                                                               --------------     -------------
<S>                                                                                                  <C>               <C>    
UTILITY PLANT - Original cost  (Note 15)
  Electric                                                                                           $13,692           $13,314
  Gas                                                                                                  2,697             2,556
  Common                                                                                                 558               530
                                                                                               --------------     -------------
       Total                                                                                          16,947            16,400
  Less: Accumulated depreciation and amortization                                                      6,463             5,889
                                                                                               --------------     -------------
       Net                                                                                            10,484            10,511
  Nuclear Fuel in Service, net of accumulated amortization -
     1997, $302; 1996, $259                                                                              216               199
                                                                                               --------------     -------------
       Net Utility Plant in Service                                                                   10,700            10,710
  Construction Work in Progress, including Nuclear Fuel in
    Process - 1997, $60; 1996, $70                                                                       326               445
  Plant Held for Future Use                                                                               24                24
                                                                                               --------------     -------------
       Net Utility Plant                                                                              11,050            11,179
                                                                                               --------------     -------------
INVESTMENTS AND OTHER NONCURRENT ASSETS  (Notes 4,
    5, 8 and 11)
 Long-Term Investments, net of amortization - 1997, $21; 1996,
    $13, and net of valuation allowances - 1997, $10; 1996, $10                                        2,873             1,854
 Nuclear Decommissioning and Other Special Funds                                                         492               382
 Other Noncurrent Assets,  net of amortization - 1997, $16; 1996, $12,                                   167               116
                                                                                               --------------     -------------
       Total Investments and Other Noncurrent Assets                                                   3,532             2,352
                                                                                               --------------     -------------
CURRENT ASSETS
  Cash and Cash Equivalents  (Note 9)                                                                     83               279
  Accounts Receivable:
    Customer Accounts Receivable                                                                         520               520
    Other Accounts Receivable                                                                            293               225
    Less: Allowance for Doubtful Accounts                                                                 41                46
  Unbilled Revenues                                                                                      270               248
  Fuel, at average cost                                                                                  310               313
  Materials and Supplies, at average cost, net of inventory valuation
    reserves - 1997, $12; 1996, $16                                                                      142               148
  Miscellaneous Current Assets                                                                            86                57
                                                                                               --------------     -------------
       Total Current Assets                                                                            1,663             1,744
                                                                                               --------------     -------------
DEFERRED DEBITS (Notes 2 and 3)
  Unamortized Debt Expense                                                                               136               139
  Deferred OPEB Costs                                                                                    289               226
  Unrecovered Environmental Costs                                                                        122               126
  Underrecovered Electric Energy and Gas Costs                                                           167               176
  Unrecovered SFAS 109 Deferred Income Taxes  (Note 12)                                                  725               752
  Deferred Demand Side Management Costs                                                                  116                40
Other                                                                                                    143               181
                                                                                               --------------     -------------
       Total Deferred Debits                                                                           1,698             1,640
                                                                                               --------------     -------------
Total                                                                                                $17,943           $16,915
                                                                                               ==============     =============

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


<PAGE>

<TABLE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                           CONSOLIDATED BALANCE SHEETS
                         CAPITALIZATION AND LIABILITIES
                              (Millions of Dollars)
<CAPTION>

                                                                                                   December 31,
                                                                                         --------------------------------
                                                                                             1997              1996
                                                                                         -------------     --------------
<S>                                                                                           <C>                <C>    
CAPITALIZATION  (Notes 6 and 7)
  Common Stockholders' Equity:
    Common Stock                                                                              $ 3,603            $ 3,627
    Retained Earnings                                                                           1,623              1,586
    Foreign Currency Translation Adjustment                                                       (15)                --
                                                                                         -------------     --------------
       Total Common Stockholders' Equity                                                        5,211              5,213
  Subsidiaries' Preferred Securities:
    Preferred Stock Without Mandatory Redemption                                                   95                114
    Preferred Stock With Mandatory Redemption                                                      75                150
    Monthly Guaranteed Preferred Beneficial Interest in PSE&G's
       Subordinated Debentures                                                                    210                210
    Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's
      Subordinated Debentures                                                                     303                208
  Long-Term Debt                                                                                4,873              4,580
                                                                                         -------------     --------------
       Total Capitalization                                                                    10,767             10,475
                                                                                         -------------     --------------
OTHER LONG-TERM LIABILITIES
  Decontamination and Decommissioning Costs  (Note 11)                                             43                 47
  Environmental Costs  (Notes 2 and 10)                                                            73                 86
  Capital Lease Obligations  (Note 5)                                                              52                 52
                                                                                         -------------     --------------
       Total Other Long-Term Liabilities                                                          168                185
                                                                                         -------------     --------------
CURRENT LIABILITIES
  Long-Term Debt due within one year                                                              340                548
  Commercial Paper and Loans  (Note 7)                                                          1,448                638
  Accounts Payable                                                                                686                697
  Other                                                                                           353                389
                                                                                         -------------     --------------
       Total Current Liabilities                                                                2,827              2,272
                                                                                         -------------     --------------
DEFERRED CREDITS
  Deferred Income Taxes  (Note 12)                                                              3,394              3,250
  Deferred Investment Tax Credits                                                                 343                361
  Deferred OPEB Costs  (Notes 1, 2 and 14)                                                        289                226
  Other                                                                                           155                146
                                                                                         -------------     --------------
       Total Deferred Credits                                                                   4,181              3,983
                                                                                         -------------     --------------
COMMITMENTS AND CONTINGENT LIABILITIES  (Note 10)                                                   -                  -
                                                                                         -------------     --------------
Total                                                                                        $ 17,943           $ 16,915
                                                                                         =============     ==============

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

<PAGE>
<TABLE>
                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (Millions of Dollars)
<CAPTION>

                                                                             For the Years Ended December 31,
                                                                            ------------------------------------
                                                                              1997         1996          1995
                                                                            ---------    ---------     ---------
<S>                                                                            <C>          <C>           <C>  
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                                                   $ 560        $ 612         $ 662
  Adjustments to reconcile net income to net cash flows from
   operating activities:
    Depreciation and Amortization                                                630          607           597
    Amortization of Nuclear Fuel                                                  60           60            75
    Recovery (deferral) of Electric Energy and Gas Costs - net                     9           (5)            2
    Unrealized Earnings on Investments - net                                     (56)          (7)          (47)
    Provision for Deferred Income Taxes - net                                     47           65           134
    Investment Tax Credits - net                                                 (17)         (29)          (20)
    Allowance for Funds Used During Construction - Debt and
      Equity (AFDC), and Capitalized Interest                                    (20)         (18)          (38)
    Proceeds from Leasing Activities                                              71           89            38
    Changes in certain current assets and liabilities:
     Net increase in Accounts Receivable and Unbilled Revenues                   (95)         (12)         (169)
     Net decrease (increase) in Inventory - Fuel and Materials and Supplies        9          (64)           19
     Net (decrease) increase in Accounts Payable                                 (11)          60            99
     Net (decrease) increase in Provision for Rate Refund                        (80)          75            (8)
     Net change in Prepaid / Other Accrued Taxes                                  22            1           (18)
     Net change in Other Current Assets and Liabilities                           (7)          11            20
    Other                                                                        (27)         (29)           68
    Net cash provided by operating activities - Discontinued
      Operations                                                                   -           54           104
                                                                            ---------    ---------     ---------
       Net cash provided by operating activities                               1,095        1,470         1,518
                                                                            ---------    ---------     ---------
CASH FLOWS FROM INVESTING ACTIVITIES
  Additions to Utility Plant, excluding AFDC                                    (542)        (586)         (650)
  Net (increase) decrease in Long-Term Investments and Real Estate              (914)           5           (66)
  Contribution to Decommissioning Funds and Other Special Funds                  (63)         (29)          (29)
  Cost of Plant Removal - net                                                    (28)         (34)          (30)
  Other                                                                          (67)         (18)          (47)
  Net Proceeds from the Sale of Discontinued Operations                            -          704             -
  Change in Net Assets - Discontinued Operations                                   -          (51)         (113)
                                                                            ---------    ---------     ---------
       Net cash used in investing activities                                  (1,614)          (9)         (935)
                                                                            ---------    ---------     ---------
CASH FLOWS FROM FINANCING ACTIVITIES
  Net increase  in Short-Term Debt                                               810           71           358
  Issuance of Long-Term Debt                                                     785          374           156
  Redemption of Long-Term Debt                                                  (700)        (808)         (556)
  Long-Term Debt Issuance and Redemption Costs                                   (11)         (40)          (14)
  Redemption of Preferred Stock                                                  (94)        (212)          (60)
  Issuance of Preferred Securities of Subsidiaries                                95          208            60
  Retirement of Common Stock                                                     (43)        (307)            -
  Cash Dividends Paid on Common Stock                                           (501)        (523)         (528)
  Other                                                                          (18)          (7)           (2)
                                                                            ---------    ---------     ---------
       Net cash provided by (used in) financing activities                       323       (1,244)         (586)
                                                                            ---------    ---------     ---------
Net (decrease) increase in Cash and Cash Equivalents                            (196)         217            (3)
Cash and Cash Equivalents at Beginning of Period                                 279           62            65
                                                                            ---------    ---------     ---------
Cash and Cash Equivalents at End of Period                                      $ 83        $ 279          $ 62
                                                                            =========    =========     =========

Income Taxes Paid                                                              $ 170        $ 157         $ 185
Interest Paid                                                                  $ 416        $ 463         $ 481
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>


<PAGE>
<TABLE>
                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
                              (Millions of Dollars)
<CAPTION>


                                                        Common         Retained                 Foreign Currency
                                                        Stock          Earnings              Translation Adjustment    Total
                                                      ----------     -------------------------------------------------------------

<S>                                                      <C>             <C>                          <C>                  <C>   
Balance as of January 1, 1995                            $3,801          $ 1,505                      $ -                  $5,306
    Net Income                                                -              662                        -                     662
    Cash Dividends on Common Stock                            -             (528)                       -                    (528)
    Preferred Securities Issuance Expenses                    -               (2)                       -                      (2)
                                                      ----------     ------------              -----------             -----------
Balance as of December 31, 1995                           3,801            1,637                        -                   5,438
                                                      ----------     ------------              -----------             -----------
    Net Income                                                -              612                        -                     612
    Cash Dividends on Common Stock                            -             (523)                       -                    (523)
    Retirement of Common Stock                             (174)            (133)                       -                    (307)
    Preferred Securities Issuance Expenses                    -               (7)                       -                      (7)
                                                      ----------     ------------              -----------             -----------
Balance as of December 31, 1996                           3,627            1,586                        -                   5,213
                                                      ----------     ------------              -----------             -----------
    Net Income                                                -              560                        -                     560
    Cash Dividends on Common Stock                            -             (501)                       -                    (501)
    Retirement of Common Stock                              (24)             (19)                       -                     (43)
    Currency Translation Adjustment                           -                -                      (15)                    (15)
    Preferred Securities Issuance Expenses                    -               (3)                       -                      (3)
                                                      ----------     ------------              -----------             -----------
Balance as of December 31, 1997                          $3,603          $ 1,623                    $ (15)                 $5,211
                                                      ==========     ============              ===========             ===========
<FN>
Note:   The ability of  Enterprise  to declare and pay  dividends is  contingent
        upon its receipt of dividends 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, 1997, 1996 and 1995 was $10
        million. There are no restrictions on EDHI's retained earnings.

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

<PAGE>


                               [THIS PAGE INTENTIONALLY LEFT BLANK]


<PAGE>
<TABLE>
                      PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                        CONSOLIDATED STATEMENTS OF INCOME
                              (Millions of Dollars)

<CAPTION>

                                                                                    For The Years Ended December 31,
                                                                                 ----------------------------------------
                                                                                  1997            1996            1995
                                                                                 --------        --------       ---------
<S>                                                                              <C>             <C>            <C>     
OPERATING REVENUES
    Electric                                                                     $ 4,188         $ 3,944        $  4,021
    Gas                                                                            1,937           1,881           1,686
                                                                                 --------        --------       ---------
           Total Operating Revenues                                                6,125           5,825           5,707
                                                                                 --------        --------       ---------

OPERATING EXPENSES
Operation
    Fuel for Electric Generation and Net Interchanged Power                        1,179             919             892
    Gas Purchased                                                                  1,101           1,118             962
    Other                                                                            994             981             949
Maintenance                                                                          282             318             313
Depreciation and Amortization                                                        616             604             591
Taxes
    Federal Income Taxes (Note 12)                                                   307             265             321
    New Jersey Gross Receipts Taxes                                                  576             598             613
    Other                                                                             72              75              71
                                                                                 --------        --------       ---------
           Total Operating Expenses                                                5,127           4,878           4,712
                                                                                 --------        --------       ---------
OPERATING INCOME                                                                     998             947             995

OTHER INCOME AND DEDUCTIONS
    Settlement of Salem Litigation - Net of  Applicable
      Taxes of $29                                                                   (53)              -               -
    Other - net                                                                        7              (2)             13
                                                                                 --------        --------       ---------
         Total Other Income and Deductions                                           (46)             (2)             13
                                                                                 --------        --------       ---------

INCOME BEFORE INTEREST CHARGES AND
  DIVIDENDS ON PREFERRED SECURITIES                                                  952             945           1,008
                                                                                 --------        --------       ---------

INTEREST EXPENSES AND PREFERRED SECURITIES DIVIDENDS
    Interest Expense (Note 7)                                                        395             399             407
    Allowance for Funds Used During Construction - Debt                              (15)            (17)            (31)
    Preferred Securities Dividend Requirements of Subsidiaries (Note 6)               44              28              15
                                                                                 --------        --------       ---------
      Total Interest Expense and Preferred Securities Dividends                      424             410             391
                                                                                 --------        --------       ---------

Net Income                                                                           528             535             617
                                                                                 --------        --------       ---------

Preferred Stock Dividend Requirements (Note 6)                                        12              23              34
Net Loss (Gain) on Preferred Stock Redemptions (Note 6)                                3             (18)              -
                                                                                 --------        --------       ---------

EARNINGS AVAILABLE TO PUBLIC SERVICE ENTERPRISE
  GROUP INCORPORATED                                                             $   513         $   530        $    583
                                                                                 ========        ========       =========

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

<PAGE>

<TABLE>

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

<CAPTION>
                                                                                                 December 31,
                                                                                         -----------------------------
                                                                                               1997          1996
                                                                                         -------------   -------------
<S>                                                                                         <C>              <C>     
UTILITY PLANT - Original cost  (Note 15)
  Electric                                                                                  $ 13,692         $ 13,314
  Gas                                                                                          2,697            2,556
  Common                                                                                         558              530
                                                                                         ------------    -------------
       Total                                                                                  16,947           16,400
  Less: Accumulated depreciation and amortization                                              6,463            5,889
                                                                                         ------------    -------------
       Net                                                                                    10,484           10,511
  Nuclear Fuel in Service, net of accumulated amortization -
     1997, $302; 1996, $259                                                                      216              199
                                                                                         ------------    -------------
       Net Utility Plant in Service                                                           10,700           10,710
  Construction Work in Progress, including Nuclear Fuel in
    Process - 1997, $60; 1996, $70                                                               326              445
  Plant Held for Future Use                                                                       24               24
                                                                                         ------------    -------------
       Net Utility Plant                                                                      11,050           11,179
                                                                                         ------------    -------------
INVESTMENTS AND OTHER NONCURRENT ASSETS
  Long-Term Investments, net of amortization - 1997, $21; 1996, $13,
    and net of valuation allowances - 1997, $10; 1996, $10  (Note 4)                             137              134
  Nuclear Decommissioning and Other Special Funds  (Note 11)                                     492              382
 Other Noncurrent Assets, net of amortization - 1997, $21; 1996, $13                              45               19
                                                                                         ------------    -------------
       Total Investments and Other Noncurrent Assets                                             674              535
                                                                                         ------------    -------------
CURRENT ASSETS
  Cash and Cash Equivalents  (Note 9)                                                             17               48
  Accounts Receivable:
    Customer Accounts Receivable                                                                 488              500
    Other Accounts Receivable                                                                    232              183
    Less: Allowance for Doubtful Accounts                                                         41               46
  Unbilled Revenues                                                                              270              248
  Fuel, at average cost                                                                          310              313
  Materials and Supplies, at average cost, net of inventory
    valuation reserves - 1997, $12; 1996, $16                                                    142              148
  Miscellaneous Current Assets                                                                    81               53
                                                                                         ------------    -------------
       Total Current Assets                                                                    1,499            1,447
                                                                                         ------------    -------------
DEFERRED DEBITS (Notes 2 and 3)
  Unamortized Debt Expense                                                                       135              138
  Deferred OPEB Costs                                                                            289              226
  Unrecovered Environmental Costs                                                                122              126
  Underrecovered Electric Energy and Gas Costs                                                   167              176
  Unrecovered SFAS 109 Deferred Income Taxes  (Note 12)                                          725              752
  Deferred Demand Side Management Costs                                                          116               40
  Other                                                                                          143              180
                                                                                         ------------    -------------
       Total Deferred Debits                                                                   1,697            1,638
                                                                                         ------------    -------------
       Total                                                                                $ 14,920         $ 14,799
                                                                                         ============    =============

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




<TABLE>
                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                           CONSOLIDATED BALANCE SHEETS
                         CAPITALIZATION AND LIABILITIES
                              (Millions of Dollars)

<CAPTION>

                                                                                   December 31,
                                                                          -------------------------------
                                                                             1997               1996
                                                                          ------------       ------------
<S>                                                                           <C>                <C>    
CAPITALIZATION  (Notes 6 and 7)
  Common Stockholder's Equity: 
    Common Stock                                                              $ 2,563            $ 2,563
    Contributed Capital                                                           594                594
    Retained Earnings                                                           1,352              1,365
                                                                          ------------       ------------
       Total Common Stockholder's Equity                                        4,509              4,522
  Preferred Stock Without Mandatory Redemption                                     95                114
  Preferred Stock  With Mandatory Redemption                                       75                150
  Subsidiaries' Preferred Securities:
    Monthly Guaranteed Preferred Beneficial Interest in PSE&G's
       Subordinated Debentures                                                    210                210
    Quarterly Guaranteed Preferred Beneficial Interest in PSE&G's
      Subordinated Debentures                                                     303                208
  Long-Term Debt                                                                4,126              4,107
                                                                          ------------       ------------
       Total Capitalization                                                     9,318              9,311
                                                                          ------------       ------------
OTHER LONG-TERM LIABILITIES
  Decontamination and Decommissioning Costs  (Note 11)                             43                 47
  Environmental Costs  (Notes 2 and 10)                                            73                 86
  Capital Lease Obligations  (Note 5)                                              52                 52
                                                                          ------------       ------------
       Total Other Long-Term Liabilities                                          168                185
                                                                          ------------       ------------
CURRENT LIABILITIES
  Long-Term Debt due within one year                                              118                424
  Commercial Paper and Loans  (Note 7)                                          1,106                638
  Accounts Payable                                                                608                627
  Other                                                                           268                341
                                                                          ------------       ------------
       Total Current Liabilities                                                2,100              2,030
                                                                          ------------       ------------
DEFERRED CREDITS
  Deferred Income Taxes  (Note 12)                                              2,569              2,557
  Deferred Investment Tax Credits                                                 333                352
  Deferred OPEB Costs  (Notes 1, 2 and 14)                                        289                226
  Other                                                                           143                138
                                                                          ------------       ------------
       Total Deferred Credits                                                   3,334              3,273
                                                                          ------------       ------------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 10)                                    -                  -
                                                                          ------------       ------------
Total                                                                        $ 14,920           $ 14,799
                                                                          ============       ============

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


<PAGE>
<TABLE>
                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (Millions of Dollars)

<CAPTION>
                                                                                         For the Years Ended December 31,
                                                                                       -------------------------------------
                                                                                        1997         1996          1995
                                                                                       --------     --------      --------
<S>                                                                                       <C>          <C>           <C> 
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                                                              $528         $535          $617
  Adjustments to reconcile net income to net cash flows from
   operating activities:
    Depreciation and Amortization                                                          616          604           591
    Amortization of Nuclear Fuel                                                            60           60            75
    Recovery (deferral) of Electric Energy and Gas Costs - net                               9           (5)            2
    Provision for Deferred Income Taxes - net                                               39           39            79
    Investment Tax Credits - net                                                           (19)         (19)          (19)
    Allowance for Funds Used During Construction - Debt and
       Equity (AFDC)                                                                       (15)         (17)          (36)
    Changes in certain current assets and liabilities:
     Net (increase) decrease in Accounts Receivable and Unbilled Revenues                  (64)           7          (143)
     Net decrease (increase) in Inventory - Fuel and Materials and Supplies                  9          (64)           19
     Net (decrease) increase in Accounts Payable                                           (19)          67            86
     Net (decrease) increase in Provision for Rate Refund                                  (80)          75            (8)
     Net change in Prepaid / Other Accrued Taxes                                           (15)           1           (11)
     Net change in Other Current Assets and Liabilities                                     (6)          (8)            6
    Other                                                                                  (35)         (36)           57
                                                                                       --------     --------      --------
       Net cash provided by operating activities                                         1,008        1,239         1,315
                                                                                       --------     --------      --------
CASH FLOWS FROM INVESTING ACTIVITIES
  Additions to Utility Plant, excluding AFDC                                              (542)        (586)         (650)
  Net increase in Long-Term Investments                                                    (13)         (21)          (65)
  Contribution to Decommissioning Funds and Other Special Funds                            (62)         (29)          (30)
  Cost of Plant Removal - net                                                              (28)         (34)          (30)
  Other                                                                                    (26)           6             1
                                                                                       --------     --------      --------
       Net cash used in investing activities                                              (671)        (664)         (774)
                                                                                       --------     --------      --------
CASH FLOWS FROM FINANCING ACTIVITIES
  Net increase in Short-Term Debt                                                          468           71           166
  Issuance of Long-Term Debt                                                               288          374           156
  Redemption of Long-Term Debt                                                            (575)        (429)         (367)
  Long-Term Debt Issuance and Redemption Costs                                              (9)         (36)          (13)
  Redemption of Preferred Stock                                                            (94)        (212)          (60)
  Net (Loss) Gain on Preferred Stock Redemptions                                            (3)          18            --
  Issuance of Preferred Securities of Subsidiaries                                          95          208            60
  Contributed Capital                                                                       --           --            60
  Cash Dividends Paid                                                                     (535)        (547)         (536)
  Other                                                                                     (3)          (7)           (2)
                                                                                       --------     --------      --------
       Net cash used in financing activities                                              (368)        (560)         (536)
                                                                                       --------     --------      --------
Net (decrease) increase in Cash and Cash Equivalents                                       (31)          15             5
Cash and Cash Equivalents at Beginning of Period                                            48           33            28
                                                                                       --------     --------      --------
Cash and Cash Equivalents at End of Period                                                 $17          $48           $33
                                                                                       ========     ========      ========
Income Taxes Paid                                                                         $259         $254          $280
Interest Paid                                                                             $357         $392          $400

<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
                                 PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                          CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
                                          (Millions of Dollars)

<CAPTION>
                                                                Contributed
                                                 Common        Capital from     Retained
                                                Stock            Enterprise     Earnings      Total
                                              ----------    ------------------------------------------
<S>                                             <C>               <C>           <C>           <C>    
Balance as of January 1, 1995                   $ 2,563           $ 534         $ 1,287       $ 4,384
    Net Income                                        -               -             617           617
    Cash Dividends on Common Stock                    -               -            (502)         (502)
    Cash Dividends on Preferred Stock                 -               -             (34)          (34)
    Preferred Securities Issuance Expenses            -               -              (2)           (2)
    Contributed Capital from Enterprise               -              60               -            60
                                              ----------      ----------      ----------    ----------
Balance as of December 31, 1995                   2,563             594           1,366         4,523
                                              ----------      ----------      ----------    ----------
    Net Income                                        -               -             535           535
    Cash Dividends on Common Stock                    -               -            (524)         (524)
    Cash Dividends on Preferred Stock                 -               -             (23)          (23)
    Preferred Securities Issuance Expenses            -               -              (7)           (7)
    Net Gain on Preferred Stock Redemptions           -               -              18            18
                                              ----------      ----------      ----------    ----------
Balance as of December 31, 1996                   2,563             594           1,365         4,522
                                              ----------      ----------      ----------    ----------
    Net Income                                        -               -             528           528
    Cash Dividends on Common Stock                    -               -            (523)         (523)
    Cash Dividends on Preferred Stock                 -               -             (12)          (12)
    Preferred Securities Issuance Expenses            -               -              (3)           (3)
    Net Loss on Preferred Stock Redemptions           -               -              (3)           (3)
                                              ----------      ----------      ----------    ----------
Balance as of December 31, 1997                 $ 2,563           $ 594         $ 1,352       $ 4,509
                                              ==========      ==========      ==========    ==========
<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, 1997, 1996 and 1995 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

    Public Service  Enterprise  Group  Incorporated  (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 within 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
projects in the generation,  transmission and distribution of energy,  including
cogeneration  and  independent  power  production  (IPP)  facilities,   electric
distribution  companies,  exempt wholesale generators (EWGs) and foreign utility
companies (FUCOs);  Public Service Resources  Corporation (PSRC), which has made
primarily passive investments;  Energis Resources Incorporated (Energis),  which
provides a variety of energy  related  services  to  industrial  and  commercial
customers both within and outside of PSE&G's  traditional  service territory 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's operating  subsidiaries,  except Energis,  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
PSRC, CEA and their subsidiaries,  which debt is guaranteed by EDHI, but without
direct support from Enterprise.  EGDC 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  (SFAS) 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  charged or
credited  to income  (see Note 3.  Regulatory  Assets  and  Liabilities).  PSE&G
continues to meet the requirements for application of SFAS 71.

    The regulatory changes proposed in the New Jersey Energy Master Plan (Energy
Master Plan) will create a shift from regulated  pricing to  competitive  market
pricing for electric  generation.  Assuming  enactment of the required  enabling
legislation,  these proposed changes will limit Enterprise's and PSE&G's ability
to  continue  to meet  the  applicable  criteria  of SFAS 71 for the  generation
portion of PSE&G's  business.  If PSE&G were to discontinue  the  application of
SFAS 71, there could be an  extraordinary,  non-cash  charge to operations  that
could be  material  to the  financial  position  and  results of  operations  of
Enterprise  and PSE&G.  However,  if PSE&G's  proposal in response to the Energy
Master Plan is approved by the BPU as filed, PSE&G does not expect such a charge
to occur.

    In response to the continuing deregulation of the electric utility industry,
the Financial  Accounting  Standards  Board (FASB),  through its Emerging Issues
Task Force  (EITF),  undertook  an  initiative  designated  as EITF Issue  97-4,
"Deregulation  of the Pricing of Electricity - Issues Related to the Application
of FASB  Statements  No.  71 and No.  101"  (EITF  97-4).  The  purpose  of this
initiative was to develop  guidance for the application of SFAS 101,  "Regulated
Enterprises  Accounting for the Discontinuation of Application of FASB Statement
No. 71" (SFAS 101). SFAS 101 addresses how an enterprise that ceases to meet the
criteria  for  application  of SFAS 71 to all or part of its  operations  should
report that event in its general-purpose financial statements.

    The EITF's  consensus  on this issue is that an  enterprise  is  required to
discontinue  the  application  of  SFAS 71 for the  deregulated  portion  of its
business once  legislation  is passed or a rate order is issued which contains a
sufficiently  detailed  plan to  transition  from  regulated  pricing  to market
pricing.  In addition,  the EITF  concluded  that an enterprise  may continue to
carry on its books the regulatory  assets and  liabilities of the portion of the
business  to which SFAS 101 is being  applied,  provided  that  regulators  have
approved a regulated cash flow stream. This also applies to costs or obligations
not  yet  recorded  as  regulatory  assets  or  liabilities  regardless  of when
incurred.  The  discontinuance  of  SFAS  71  also  requires  an  enterprise  to
reevaluate  the  impact  of SFAS No.  121,  "Accounting  for the  Impairment  of
Long-Lived  Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121). SFAS
121  requires  that  regulatory  assets be  written  off once they are no longer
probable of recovery  and that  impairment  losses be  recorded  for  long-lived
assets  when  related  future  cash flows or  appraised  value are less than the
carrying value of the assets.

    The impact to Enterprise  and PSE&G will be determined  based on the outcome
of the Energy  Master Plan  proceedings,  including  PSE&G's  proposal  filed in
response  to  those  proceedings.  Under  its  proposal,  PSE&G  would  have the
opportunity,  through  various  mechanisms,  to recover its electric  generation
related potentially stranded costs. Management cannot predict the outcome of the
Energy Master Plan proceeding,  its related  legislative  process or the related
impact of EITF 97-4 on  Enterprise's  and PSE&G's  future  financial  condition,
results of operations and net cash flows. However,  depending on legislative and
regulatory  actions  taken  in New  Jersey  with  respect  to  electric  utility
deregulation, there could be a material adverse effect on such results (see Note
2. Rate Matters).

    PSE&G has certain  regulatory  assets  resulting  from the use of a level of
depreciation expense in the ratemaking process that differs from 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 and
net cash  flows of  Enterprise  and PSE&G  could be  material  (see Note 2. Rate
Matters).

    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 did not have a
material impact on the financial  condition,  results of operations and net cash
flows of Enterprise and PSE&G. For additional  information concerning certain of
PSE&G's Environmental Remediation Liabilities, see Note 2. Rate Matters and Note
10. Commitments and Contingent Liabilities.

    Consolidation Policy

    The consolidated financial statements include the accounts of Enterprise and
its subsidiaries.  Enterprise and its subsidiaries consolidate those entities in
which they have a controlling  interest.  All significant  intercompany accounts
and  transactions  are  eliminated  in  consolidation.  Those  entities in which
Enterprise  does not have a controlling  interest are being  accounted for under
the equity method of accounting.  For investments in which significant influence
does  not  exist,   the  cost  method  of   accounting   is   applied.   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 are
deferred and amortized over the life of the applicable debt.


<PAGE>



    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 1997 and 1996
and 3.52% in 1995 (see Note 2. Rate Matters).

    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 11. 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 (see Note 2. Rate Matters and Note 11. PSE&G
Nuclear Decommissioning).

    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 1997, 1996 and 1995 were
5.71%, 5.83% and 6.98%, respectively.

    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.  The fuel component of the LEAC rate was frozen for 1997 and
1998 as part of the  December  31st Order and PSE&G  bears all risks  associated
with fuel prices (see Note 2. Rate Matters).

    Any Electric  Levelized  Energy  Adjustment  Clause (LEAC) and Levelized Gas
Adjustment  Clause  (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. Effective January
1,  1998,  the  amount  included  for  LEAC  under/overrecovery  represents  the
difference  between fuel related  revenues and fuel related  expenses  which are
comprised   of  the  cost  of   generation   and   interchanged   power  at  the
Pennsylvania--New  Jersey--Maryland  Interconnection (PJM) market clearing price
(see Note 2. Rate Matters).


<PAGE>



    Financial Instruments--PSE&G

    Under its commodity hedging program,  PSE&G may enter into certain contracts
with  counterparties  to manage  exposure  to  electric  and  natural  gas price
volatility.  These  contracts,  in conjunction  with owned  electric  generating
capacity, are designed to cover estimated electric and gas customer commitments.
PSE&G's  accounting  policy for physical  instruments is to recognize  gains and
losses in income upon settlement of the contracts. PSE&G's accounting policy for
financial  instruments  is to  mark-to-market  and record  unrealized  gains and
losses on hedged  transactions  as a component  of  stockholder's  equity  while
unrealized gains and losses on speculative  transactions are recorded in results
of operations.  These financial  instruments and the effect of marking to market
do not have a  material  impact  on  PSE&G's  financial  condition,  results  of
operations and net cash flows. PSE&G does not hold any financial  instruments of
a leveraged nature.

    Financial Instruments--EDHI

    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 8. Financial Instruments).

    Foreign Currency Translation--EDHI

    The assets and liabilities of EDHI's foreign  operations are translated into
U.S.  dollars at current exchange rates and revenues and expenses are translated
at average exchange rates for the year.  Resulting  translation  adjustments are
reflected as a separate component of stockholders' equity.

    Transaction  gains and losses that arise from exchange rate  fluctuations on
transactions  denominated  in a  currency  other than the  functional  currency,
except those  transactions  which operate as a hedge of an identifiable  foreign
currency commitment or as a hedge of a foreign currency investment position, are
included in the results of operations as incurred.

    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 were deferred
in prior  years and are being  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 commenced  employment  after January 1, 1997
and certain  employees  of PSE&G's  affiliated  companies  are covered by a cash
balance  pension plan. The policy is to fund pension costs accrued.  The funding
policy for the plan year 1997 was  modified  to provide  annual  funding  not to
exceed the maximum tax deductible  amount.  Contributions will be made each year
based on targeted funding levels for the plan (see Note 13. Pension Plan).

    In 1993,  Enterprise and PSE&G adopted SFAS 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 income during the years in which employees render service
(see  Note 2. Rate  Matters  and Note 14.  Postretirement  Benefits  Other  Than
Pensions).

    Impairment of Long-Lived Assets

    On January 1, 1996,  Enterprise  and PSE&G adopted 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 and 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.

    Stock-Based Compensation

    SFAS No.  123  "Accounting  for  Stock-Based  Compensation"  (SFAS  123) was
effective  for  fiscal  years  commencing  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 pro forma  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 the  methodology  prescribed in SFAS 123, there would
have been a charge to earnings of  approximately  $0.1 million with no impact on
earnings per share.

    Earnings Per Share

    In February 1997, the FASB issued SFAS No. 128, "Earnings per Share",  which
is effective for financial  statements issued after December 15, 1997. Under the
new  standard,  basic  earnings  per share is computed as earnings  available to
common stockholders divided by weighted average shares outstanding excluding the
dilutive effect of potential common shares.  Diluted earnings per share includes
the dilutive effect of potential common shares. Enterprise has an existing stock
option plan which  allows for options to be granted on a periodic  basis.  These
potential  common  shares  had no impact on diluted  earnings  per share for the
years ended December 31, 1997, 1996 and 1995.

Note 2. Rate Matters

New Jersey Energy Master Plan (Energy Master Plan)

    On April 30, 1997, the BPU issued its final report regarding Phase II (final
Phase II report) of the  Energy  Master  Plan  addressing  wholesale  and retail
electric  competition  in New Jersey.  The final Phase II report was approved by
the Governor and Legislature in July 1997. In accordance with the final Phase II
report,  PSE&G filed a proposal regarding  competition and rates with the BPU on
July 15,  1997.  The BPU is in the process of  reviewing  the filing and holding
public hearings.  The hearings on PSE&G's  proposal  commenced in early February
1998 and are  expected to  conclude  during the second  quarter of 1998,  with a
decision  expected by July 1998.  Legislation  providing the BPU with  requisite
authority to implement such competition is necessary.

    The final Phase II report included the following key provisions:

          Beginning January 1, 1999, 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 continuing to
          be 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
          continue to be regulated by the BPU.

          The phase-in  period for customers'  choice of energy  suppliers is to
          include 10% in October 1998,  20% by January 1999,  35% by April 1999,
          50% by October 1999, 75% by April 2000, and 100% by July 2000.

          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 services,  such as equipment repair and service contracts, in
          a competitive marketplace.

          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 activities to be functionally
          separated   and  operated  at  arms  length  from  the   transmission,
          distribution   and  customer   service   activities  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  proposed  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.

          Customer protections will 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  will have an  opportunity  for a limited number of years to
          recover  through  rates  stranded  costs  associated  with  generating
          capacity investment and independent power contract costs made prior to
          the  advent  of  competition.  Utilities  are  obligated  to take  all
          reasonably available measures to mitigate stranded costs caused by the
          introduction of retail  competition.  A market transition charge is to
          be  established  for a limited  time of 4-8 years to  provide  for the
          recovery  of  non-mitigated  stranded  costs and  would be a  separate
          component of a customer's electric bill.

          The issue of securitization of stranded costs is to be explored.

          There is a 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.

          Near-term  rate  reductions  in  retail  electric  rates of 5-10%  are
          required.

          A rate unbundling plan,  stranded cost status report and restructuring
          plan to be filed by each utility by July 15, 1997.

          The final Phase II report endorsed  environmental  disclosure by power
          suppliers to provide  consumers with  information  necessary to choose
          cleaner sources of power available in the marketplace. The information
          will enable  verification  of claimed  emission  rates,  which will be
          explored by a Consumer Protection Task Force.

    PSE&G's  proposal  in  response  to the final  Phase II report of the Energy
Master Plan included the following key elements:

          A rate  decrease  of  between 5% and 10%,  effective  January 1, 1999,
          dependent upon BPU approval of several key elements of the proposal.

          Allowing all  customers in all classes to register for their choice of
          energy supplier  beginning October 1, 1998. Those customers choosing a
          supplier  other  than PSE&G  would be  permitted  to switch  effective
          January 1, 1999.

          A  transition  period of seven years with basic  tariff  rates  capped
          during that period. During the transition period, PSE&G would maintain
          responsibility for system reliability of energy and capacity supply.

          Recovery   of   transition   costs   through   asset   securitization,
          restructuring  of  certain   non-utility   generation   contracts  and
          depreciation  accounting  changes (see Stranded Costs,  Securitization
          and Depreciation below).

          Recovery of mandated societal costs,  such as nuclear  decommissioning
          and Demand Side Management  (DSM),  would be adjusted based on changes
          in these costs.

          Discontinuation  of PSE&G's LEAC  effective  December 31, 1998.  PSE&G
          would be  responsible  for all  risks  associated  with  fuel  prices,
          changes in operation and  maintenance  expenses and  mitigation of the
          transition  costs  of  non-securitized  generation  production  assets
          within the price capped rates.

          Transfer of PSE&G's nuclear and fossil generation  assets, at net book
          value, to a separate entity  functionally  independent of PSE&G at the
          conclusion of the transition period.

          PSE&G  would  file a rate  case or a plan  for a form  of  alternative
          regulation for its electric  distribution  delivery service  functions
          one year prior to the end of the transition period.

          At the end of the  transition  period,  responsibility  for generation
          reliability  would shift to the marketplace and PSE&G would retain its
          obligation  to  connect  and  deliver  energy  and would  offer  basic
          generation service.

    Pursuant  to  actions  taken  by  the  BPU  under  its  Energy  Master  Plan
proceeding,  various  BPU-sponsored  working groups have been created to address
and recommend solutions regarding certain issues regarding restructuring.  PSE&G
is participating in these working groups including the Consumer  Protection Task
Force,  Phase-In  Mechanisms Working Group,  Customer Services Working Group and
DSM and Renewables  Working Group. In addition,  PSE&G is  participating  in BPU
proceedings  dealing with certain  generic issues,  including exit fees,  market
power,  affiliate  relationships,   mechanics  of  customer  phase-in  and  fair
competition.  The working groups and the generic issues  proceedings are running
concurrently with the Energy Master Plan proceedings.

    In an Order dated June 25, 1997, the BPU commenced  management audits of all
New Jersey  electric  utilities,  with the assistance of one or more  consulting
firms,  under the direction of its own audit staff. The audit process  included,
but was not limited to, focused reviews of electric  utility filings in response
to the Energy Master Plan. The management  audit process for PSE&G was concluded
in December 1997 with a report filed by the  management  consulting  firms which
performed  the audit on behalf of the BPU. A second report on  restructuring  is
yet to be filed. The audit report,  which was approved by the BPU on January 29,
1998, among other things:

          Supported a consumer  rate  reduction  target of 8.4% to 11.7% and the
          use of an energy and capacity credit mechanism on customers' bills.

          Substantiated  $2.9  billion of PSE&G's  $3.9  billion  stranded  cost
          estimate,  challenging  certain assumptions as well as $230 million of
          capital additions incurred since 1992.

          Agreed with the use of securitization as a means of financing stranded
          costs in order to obtain rate  reductions,  recommending  $2.2 billion
          (compared to the $2.5 billion requested by PSE&G) of securitization.

          Noted that an incentive or true-up  mechanism  may be  appropriate  to
          reduce the risk of  significant  overrecovery  of stranded costs given
          the uncertainty  surrounding load, market prices and the potential for
          mitigation.

    The BPU can  adopt,  reject or  modify  the audit  report's  results  in its
decision on PSE&G's  proposal.  PSE&G cannot predict to what extent the BPU will
rely on the  results of the audit  report nor what the  ultimate  outcome of the
Energy  Master Plan  proceedings  will be. The decision of the BPU in the Energy
Master  Plan  proceeding  and the  legislation  to be  adopted by the New Jersey
Legislature  required to implement certain aspects of electric  restructuring in
the State will  establish the industry  rules for the future.  These actions are
expected  to  fundamentally  change  the  electric  industry  in  the  State  by
introducing  retail  competition  to  replace  the  utilities'  former  monopoly
position and  potentially  requiring or resulting in the  separation  or sale of
generation  assets.  Depending  upon the  outcome  of these  proceedings,  these
fundamental   industry   changes  could  have  a  material   adverse  effect  on
Enterprise's and PSE&G's financial condition, results of operations and net cash
flows. Enterprise and PSE&G cannot predict the outcome of this matter.

    Stranded Costs

    Stranded costs represent the portion of the book value of generation related
assets or the portion of payments  under power purchase  contracts  which are in
excess  of their  value in a  competitive  deregulated  marketplace.  PSE&G  has
identified its  potentially  stranded costs  associated  with fossil and nuclear
generating  stations at $3.9 billion,  based on certain  assumptions,  including
future market prices of electricity and performance of generating units. Changes
in these  assumptions could materially alter the estimated amount of potentially
stranded costs.

    Recoverability  of these costs is largely  dependent on the transition rules
to be established by regulators.  PSE&G has proposed to securitize  $2.5 billion
of these costs,  with the remainder to be mitigated through cost saving measures
during a  transition  period of seven years.  In  addition,  PSE&G is seeking to
restructure  certain of its BPU approved  contracts with Non-utility  Generators
(NUGs),  which are  estimated to be $1.6 billion  above  assumed  future  market
prices.  As presently  proposed,  the Energy Master Plan would allow recovery of
these  restructuring  costs in rates. Since the Energy Master Plan proceeding is
still in progress, the issue of securitization and the extent of its application
have not been  determined;  and  recognizing  the potential need for legislative
action,  management  cannot  predict the extent to which  regulators  will allow
recovery of such costs. As noted above, the management  audit report  identified
$2.9  billion of stranded  costs as compared to the $3.9  billion  estimated  by
PSE&G.  The  decision  of the BPU in this matter  could have a material  adverse
effect on Enterprise's and PSE&G's  financial  condition,  results of operations
and net cash flows.

    Securitization

    In its Energy Master Plan  proposal,  PSE&G has proposed to securitize  $2.5
billion of its  potentially  stranded  costs  through the issuance of transition
bonds  with an  estimated  term  of 15  years.  Securitization  is a  method  of
refinancing  potentially stranded costs with lower cost debt. The credit quality
of the debt would be enhanced via enabling State legislation and approval by the
BPU of an  irrevocable,  non-bypassable  charge  to  service  the  interest  and
principal  payments on the debt. The use of  securitization as a means to reduce
rates depends on enabling  legislation,  which the New Jersey Legislature is not
expected  to  consider  prior to the  second  quarter  of 1998.  If  legislative
approval is not granted,  PSE&G will alter its Energy  Master Plan  proposal and
projected rate reduction range. Since the Energy Master Plan proceeding is still
in progress,  the issue of securitization and the extent of its application have
not been determined;  and recognizing the potential need for legislative action,
management  cannot predict the extent to which  regulators will allow the use of
such  securitization  for  recovery  of  stranded  costs.  As noted  above,  the
management audit report recommended $2.2 billion of securitization. The decision
of the BPU and/or the related  legislative  action required in this matter could
have a material adverse effect on Enterprise's and PSE&G's financial  condition,
results of operations and net cash flows.

    Depreciation

    In its Energy  Master Plan  proposal,  PSE&G has  proposed  to lengthen  the
depreciable lives of its electric distribution assets from 28 to 45 years. These
assets  are  expected  to remain  regulated.  The excess  depreciation  reserve,
calculated based on this change in depreciable  lives, would be amortized over a
seven year transition  period. If PSE&G's plan is adopted as proposed,  it would
result in a reduction of annual depreciation expense of $116 million during such
transition  period and $35 million  thereafter  over the remaining life of these
assets.

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 (Ratepayer Advocate) addressing (1) the cost impact of the
1995 shutdown of Salem Nuclear Generating Station (Salem) Units 1 and 2 (Salem 1
and 2),  including  the "used and  useful"  issue  related to the units  through
December  31,  1998;  (2)  the  recovery  of  certain  replacement  power  costs
associated with the 1994 Salem 1 outage;  and (3) 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  recorded a charge of
$83.9  million for bill credits to electric  customers  who received  credits in
January and February 1997.  PSE&G also agreed to forego  recovery of $12 million
associated  with energy costs that  previously had been deferred.  The resulting
after-tax  earnings  loss of $62  million  or 26 cents per  share of  Enterprise
Common Stock was  previously  recorded ($59 million or 25 cents per share in the
third quarter of 1996 and $3 million or 1 cent per share in 1995).

     Under the terms of the December 31st Order,  Salem 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  Generating  Station  (Hope
Creek) and Peach Bottom Atomic Power Station  (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 10.  Commitments and Contingent  Liabilities).  In addition,  the
energy  component  of  PSE&G's  LEAC was  fixed at its  existing  level  with no
increase to customers until at least January 1999 (see Electric Levelized Energy
Adjustment  Clause/Demand  Side Adjustment  Factor below) with PSE&G responsible
for all risks associated with fuel prices.  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 million ($91
million as of  December  31,  1997)  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 (see discussion of the Energy Master
Plan above).

    In addition to the  resolution  of the Salem  "used and useful"  issue,  the
December 31st Order addressed 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 1 in
1994. The December 31st Order required PSE&G to reduce its  underrecovered  LEAC
balance  by $7 million  related  to that  outage.  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  during  January and  February  1997.  In  addition,  PSE&G  reduced its
underrecovered  LEAC  balance by $5 million  related to the recovery of capacity
costs.

    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  created a $30  million  revolving
economic  development fund with emphasis on stimulating jobs and developing high
technology  projects  in urban  areas.  Second,  PSE&G will  continue to provide
incentives to encourage local public housing  authorities to replace up to 4,000
refrigerators  a year.  Third,  PSE&G  committed $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.  Notices of
Dismissal of Appeal were filed by the Intervenor's  group on August 1, 1997 with
the Superior Court of New Jersey, Appellate Division.

Levelized Gas Adjustment Clause (LGAC)

     In November  1996,  the BPU approved an  approximate  $80 million  increase
based upon a modified Interim  Stipulation in the LGAC  proceeding.  The monthly
pricing  methodology  for Large  Volume Gas (LVG) and General  Service Gas (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 over collection of gas costs from those customer classes and was
apportioned  based on those customers' billed usage during that period. On April
2, 1997, the BPU approved PSE&G's LGAC stipulation. The interim residential LGAC
charge, approved in November 1996, continued through December 31, 1997.

    On July 30, 1997, the BPU authorized  PSE&G to hedge or lock-in up to 50% of
its residential  natural gas portfolio,  which may be accomplished  using either
physical or financial hedging  mechanisms,  beginning with the 1997-1998 heating
season.  Such hedges are intended to provide  price  stability  for  residential
customers (see Note 8. Financial Instruments).

    On November 14, 1997,  PSE&G filed its 1997/98  LGAC  petition  with the BPU
requesting a $45 million  increase on an annual basis in its LGAC for the period
January 1, 1998 to  December  31,  1998.  This  increase,  as filed,  amounts to
approximately  4.8% on a typical  residential bill. Public hearings were held on
February 3, 1998. On February 18, 1998, the BPU approved a Stipulation agreed to
by the  parties  in the  proceeding.  The  Stipulation  provides  for an interim
increase in LGAC revenues of  approximately  $31 million,  excluding State sales
and use tax. This represents an increase of 3.5% on a typical  residential bill.
The parties will continue to litigate and PSE&G cannot predict the final outcome
of this proceeding.

Electric Levelized Energy Adjustment Clause (LEAC)/Demand Side Adjustment
Factor (DSAF)

    As discussed  above,  the December 31st Order has fixed the energy component
of the LEAC as of  December  31,  1996 (see  Settlement  of  Certain  Regulatory
Issues).  Additionally,  under PSE&G's Energy Master Plan proposal, if approved,
the LEAC would be discontinued. Certain components of the LEAC would become part
of the societal  benefits  clause under PSE&G's  proposal.  No assurances can be
given as to the outcome of the Energy Master Plan proceedings.

    On February 24,  1997,  PSE&G filed with the BPU for an increase in the DSAF
component of the LEAC, to become  effective on or before May 1, 1997. The filing
was to be  effective  for the period  from May 1997  through  December  1998 and
requested an annualized increase of $151.8 million. The filing included 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
incurred  through  December  31,  1998.  At  December  31,  1997,  PSE&G  had an
underrecovered  balance,  including  interest,  of  approximately  $122  million
related to these programs. Such amount is included in Deferred Debits on PSE&G's
balance sheet.

    A  hearing  was held  before  the  Office  of  Administrative  Law  (OAL) in
September 1997 and on December 5, 1997, the Administrative Law Judge recommended
in his  initial  decision  that the BPU  approve  $150.1  million  of the $151.8
million requested. On January 19, 1998, the BPU extended its period of review to
accept,  reject or modify the Judge's  decision.  Approval of this filing by the
BPU would  result in  recovery  of this  balance,  as well as the costs of these
programs through 2000. PSE&G cannot predict the outcome of this matter.

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)  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.  In
November  1996,  the BPU approved an Interim LGAC  Stipulation  regarding  costs
incurred  during the period  August 1, 1995 through  July 31, 1996.  On July 30,
1997, the BPU approved the recovery of remediation program costs incurred during
the period August 1, 1995 through July 31, 1996 on a final basis.

    On August 1, 1997,  PSE&G  requested  that the BPU approve  recovery of $6.8
million through PSE&G's RAC for manufactured gas plant  remediation  costs. This
represents  an  increase  in the  amount of  PSE&G's  recovery  of such costs by
approximately  $2 million over current  rate  levels.  On October 9, 1997,  this
matter was  transferred  to the OAL.  PSE&G  cannot  predict the outcome of this
proceeding.

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 12. Federal Income Taxes).

Postretirement Benefits Other Than Pensions (OPEB)

    In August  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 (see Note 3. Regulatory Assets and Liabilities and Note 14. Postretirement
Benefits Other Than Pensions).


<PAGE>



Other Rate Matters

    Interim Competitive Transition Charge (ICTC)

    In September 1996,  PSE&G filed a petition with the BPU to establish an ICTC
which is  designed to recover  stranded  costs which will 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. On April 24, 1997, the BPU issued a
generic  order to  investigate  policy issues  related to whether  customers who
cease to receive  electric  service from a utility and go to on-site  generation
should be charged an exit fee.  PSE&G's  petition  and  motions  concerning  its
September  1996 ICTC filing have been placed in abeyance  pending the conclusion
of the  separate  generic  proceeding  on this issue.  The  generic  ICTC matter
continues to be reviewed by the BPU.  PSE&G  cannot  predict the outcome of this
proceeding.

    Gas Unbundling

    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  pipelines  and require PSE&G to deliver such gas to
the customer's facility. To date, approximately 17,000 commercial and industrial
customers,  of approximately  180,000 such customers  eligible,  have elected to
utilize this  service.  It is expected  that this number will not  significantly
increase with the changes in the law affecting the gross  receipts and franchise
tax which became effective on January 1, 1998. Those changes now apply sales tax
to sales by  marketers,  putting a similar  tax burden on them as borne by PSE&G
(see NJGRT Reform below).

    Current  transportation rate schedules produce the same non-fuel revenue per
therm as existing sales tariff rate schedules.  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,  Energis, provides
non-utility  gas  marketing  services  operating in New Jersey and several other
states.

    In April 1997,  the BPU  approved  PSE&G's  proposal for a  residential  gas
unbundling  pilot program known as  SelectGas.  The pilot program  allows 65,000
residential natural gas customers to participate in the competitive marketplace.
To date, of the 65,000 eligible  customers,  none has subscribed to the program.
PSE&G  cannot  predict  the  future  impact  of this  program  on its  financial
condition, results of operations and net cash flows.

    PSE&G also  participates in a retail pilot program of the New Jersey Natural
Gas Company (New Jersey  Natural) to provide  unbundled  gas  transportation  to
former  residential  customers of New Jersey  Natural.  PSE&G has enrolled  over
1,300 former residential gas customers of New Jersey Natural.

    New Jersey Gross Receipts and Franchise Tax (NJGRT) Reform

    On July 14, 1997, Governor Whitman signed legislation eliminating the NJGRT,
effective  January  1,  1998.  This  legislation   replaces  the  NJGRT  with  a
combination  of the  corporate  business  tax, the State sales and use tax and a
Transitional Energy Facility Assessment (TEFA). The TEFA will be phased out over
five years.  While PSE&G was subject to  approximately  13% tax under the NJGRT,
after the phase out of the TEFA, the tax rate will be substantially reduced. The
new tax  structure  is  expected to improve  the  competitive  position of PSE&G
vis-a-vis non-utility energy providers in New Jersey who were not subject to the
NJGRT. On September 15,  November 18 and December 24, 1997,  PSE&G filed revised
tariff  schedules  and  other  pertinent  information,  in  compliance  with the
legislation.  On December  31,  1997,  the BPU  accepted  PSE&G's  filings  with
revisions for the purpose of  implementing  interim rates with regard to the new
tax structure  effective with service rendered on and after January 1, 1998. The
BPU continues its  administrative  review of the filings of all utilities and is
expected to approve permanent rates no later than April 1, 1998.


<PAGE>


Note 3. Regulatory Assets and Liabilities

    Regulatory  assets and  liabilities  are  recorded  in  accordance  with the
provisions  of SFAS 71 (see Note 1.  Organization  and  Summary  of  Significant
Accounting  Policies and Note 2. Rate  Matters).  At December 31, 1997 and 1996,
PSE&G had deferred the following  regulatory assets on the Consolidated  Balance
Sheet:

                                                           December 31,
                                                      ---------------------
                                                       1997          1996
                                                      ------        -------
                                                        (Millions of Dollars)
Unamortized Debt Expense............................    $135          $138
Deferred OPEB Costs.................................     289           226
Unrecovered Environmental Costs.....................     122           126
Underrecovered Electric Energy and Gas Costs........     167           176
Unrecovered SFAS 109 Income Taxes...................     725           752
Deferred Demand Side Management Costs...............     116            40
Deferred Decontamination and Decommissioning Costs..      43            47
Property Abandonments...............................      37            52
Unrecovered Plant and Regulatory Study Costs........      34            34
Oil and Gas Property Write-Down.....................      26            31
                                                      ------        ------
    Total Regulatory Assets.........................  $1,694        $1,622
                                                      ======        ======

Unamortized Debt Expense:  Represents bond issuance costs,  premiums,  discounts
and losses on reacquired  long-term  debt.  Bond issuance  costs and  associated
premiums  and  discounts  are  generally  amortized  over  the  life of the debt
issuance.  In  accordance  with FERC  regulations,  costs to reacquire  debt are
amortized over the remaining original life of the retired debt. When refinancing
debt,  the  unamortized  portion of the original debt issuance costs of the debt
being retired must be amortized over the life of the replacement debt.

Deferred OPEB Costs:  Includes costs  associated with adoption of SFAS 106 which
are  deferred in  accordance  with EITF Issue 92-12.  For a  discussion  of OPEB
Costs, see Note 14. Postretirement Benefits Other Than Pensions and Note 2. Rate
Matters.

Unrecovered  Environmental  Costs:  Represents  environmental  costs  which  are
probable  of  recovery  in  future  rates.   For   discussion   of   unrecovered
environmental costs, see Note 2. Rate Matters.

Underrecovered  Electric Energy and Gas Costs: 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, 1997 and 1996 reflect  underrecovered  costs as
follows:
                                                          December 31,
                                                       -------------------
                                                       1997           1996
                                                       ----           ----
                                                       (Millions of Dollars)
Underrecovered Electric Energy Costs.............       $91          $151
Underrecovered Gas Fuel Costs....................        76            25
                                                       ----          ----
  Total..........................................      $167          $176
                                                       ====          ====

    PSE&G has 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  million  without any change in the current
energy  component of the LEAC charge.  Management  believes that it will recover
this amount by December  31, 1998 and  continues to follow  deferred  accounting
treatment for the LEAC. For additional discussion, see Note 2. Rate Matters.

Unrecovered  SFAS 109 Income Taxes:  Represents  regulatory asset related to the
implementation of SFAS 109,  "Accounting for Income Taxes" in 1993 (see Note 12.
Federal Income Taxes).


<PAGE>



Deferred  Demand Side Management  Costs:  Recoveries of  DSM/conservation  costs
(related to BPU-approved  programs) are determined by the BPU.  PSE&G's deferred
DSM  balance  as  of  December  31,  1997  and  1996,   respectively,   reflects
underrecovered/(overrecovered) costs as follows:
                                                         December 31,
                                                      -------------------
                                                      1997           1996
                                                      ----           ----
                                                      (Millions of Dollars)
Deferred DSM (Including Interest)--Electric..........  $122          $45
Deferred DSM (Including Interest)--Gas...............    (6)          (5)
                                                        ----         ----
  Total..............................................   $116          $40
                                                        ====         ====

    The  increase  in the  electric  balance  is  primarily  due to the  ongoing
underrecovery of DSM costs. In February 1997, PSE&G filed for an increase in the
DSAF,  which is a component of the LEAC.  Approval of the filing would result in
recovery of the existing  deferred DSM balance as well as the estimated costs of
these programs through December 1998 (see Note 2. Rate Matters).

Deferred  Decontamination and Decommissioning Costs:  Represents amounts related
to decontamination and decommissioning  which are probable of recovery in future
rates. For discussion of decontamination and decommissioning costs, see Note 11.
PSE&G Nuclear Decommissioning.

Property  Abandonments:  The BPU  has  authorized  PSE&G  to  recover  after-tax
property  abandonment  costs from its customers.  The table of Regulatory Assets
above  reflects  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%.

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.

Note 4. Long-Term Investments

    Long-Term Investments are primarily those of EDHI.

                                                          December 31,
                                                      -----------------------
                                                         1997        1996
                                                      ----------- -----------
                                                       (Millions of Dollars)
    Lease Agreements (see Note 5. Leasing Activities):
        Leveraged Leases.........................       $1,143       $932
        Direct-Financing Leases..................            2         33
        Other Leases.............................            2          3
                                                     ----------- -----------
            Total................................        1,147        968
                                                     ----------- -----------
    Partnerships:
        General Partnerships.....................          142        138
        Limited Partnerships.....................          534        495
                                                     ----------- -----------
            Total................................          676        633
                                                     ----------- -----------

    Corporate Joint Ventures.....................          885         75
    Securities...................................           28         48
    Other Investments............................          137        130
                                                     ----------- -----------
            Total Long-Term Investments..........       $2,873     $1,854
                                                     =========== ===========

    PSRC's  leveraged  leases are  reported  net of  principal  and  interest on
non-recourse  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 and corporate joint ventures are those of PSRC, EGDC
and CEA.

    Other Investments,  above,  relate primarily to Public Service  Conservation
Resources  Corporation  (PSCRC),  a  wholly-owned  subsidiary of PSE&G.  PSCRC's
investment  in DSM  projects  had  balances  at  December  31,  1997 and 1996 of
approximately $84 million and $98 million, respectively.

Note 5. Leasing Activities

As Lessor

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

                                      December 31, 1997              December 31, 1996
                                 -----------------------------  -----------------------------
                                    (Millions of Dollars)          (Millions of Dollars)
                                             Direct                         Direct
                                 Leveraged  Financing           Leveraged   Financing
                                  Leases     Lease    Total      Leases     Leases   Total
                                 ---------- ------------------  ----------- -----------------
<S>                               <C>           <C>   <C>         <C>         <C>    <C>   
Lease rents receivable......      $1,498         $3   $1,501      $1,094      $ 35   $1,129
Estimated residual value....         635         --     635          638         8     646
                                 ---------- ------------------  ----------- -----------------
                                   2,133          3   2,136        1,732        43   1,775
Unearned and deferred income        (990)        (1)   (991)        (800)      (10)   (810)
                                 ---------- ------------------  ----------- -----------------
    Total investments.......       1,143          2   1,145          932        33     965
Deferred taxes..............        (670)        --    (670)        (530)      (10)   (540)
                                 ---------- ------------------  ----------- -----------------
    Net investments.........        $473         $2     $475        $402       $23    $425
                                 ========== ==================  =========== =================
</TABLE>

    PSRC's  other  capital  leases  are with  various  regional,  state and city
authorities  for  transportation  equipment  and  aggregated  $2 million  and $3
million as of December 31, 1997 and 1996, respectively.

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 $52 million for capital  leases net of  accumulated
amortization at December 31, 1997 and 1996.  Rent expense  included in Operating
Expenses for 1997,  1996 and 1995 was $34 million,  $32 million and $34 million,
respectively.


<PAGE>
Note 6. Schedule of Consolidated Capital Stock and Other Securities
<TABLE>
<CAPTION>

                                                                Current
                                                               Redemption
                                                 Outstanding     Price      December 31,    December 31,
                                                   Shares      Per Share        1997           1996
                                                 ------------  -----------  ------------- ------------
                                                                             (Millions of Dollars)
<S>                                                 <C>           <C>           <C>           <C>
 Enterprise Common Stock (no par) (A)
   Authorized  500,000,000 shares; issued and                                    $3,603       $3,627
   outstanding    at   December   31,   1997,
   231,957,608  shares, at December 31, 1996,
   233,470,291  shares  and at  December  31,
   1995, 244,697,930 shares

 Enterprise Preferred  Securities (B)
   PSE&G Cumulative  Preferred Stock (C) without
   Mandatory Redemption (D) (E) $100 par value
   series:
     4.08%...................................       146,221       103.00            $15          $15
     4.18%...................................       116,958       103.00             12           12
     4.30%...................................       149,478       102.75             15           15
     5.05%...................................       104,002       103.00             10           10
     5.28%...................................       117,864       103.00             12           12
     6.80%...................................          --           --               --           19
     6.92%...................................       160,711         --               16           16
   $25 par value series
     6.75%...................................       600,000         --               15           15
                                                                            ------------- ------------
   Total Preferred Stock without Mandatory                                          $95         $114
     Redemption..............................
                                                                            ============= ============
     With Mandatory Redemption (D) (F) $100
     par value series
     7.44%...................................          --           --               $--         $75
     5.97%...................................       750,000         --               75           75
                                                                            ------------- ------------
   Total Preferred Stock with Mandatory                                             $75         $150
     Redemption...............................
                                                                            ============= ============
   Monthly Guaranteed Preferred Beneficial
     Interest in PSE&G's Subordinated 
     Debentures (D) (F) (H)
     9.375%..................................     6,000,000         --             $150         $150
     8.00%...................................     2,400,000         --               60           60
                                                                            ------------- ------------
     Total Monthly Guaranteed Preferred
       Beneficial Interest in PSE&G's 
       Subordinated Debentures...............                                      $210         $210
                                                                            ============= ============
   Quarterly  Guaranteed Preferred Beneficial
     Interest in PSE&G's Subordinated
     Debentures (D) (F) (G) (H)
     8.625%..................................     8,320,000         --             $208         $208
     8.125%..................................     3,800,000         --               95          --
                                                                            ------------- ------------
     Total  Guaranteed  Preferred  Beneficial
       Interest in PSE&G's Subordinated
       Debentures............................                                      $303         $208
                                                                            ============= ============
<FN>
(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
     1997 and 1996,  no shares of  Enterprise  Common  Stock were issued or sold
     through these plans.

(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, 1997, there were aggregates of 5,954,766 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, 1997, the annual dividend requirement and embedded dividend
     rate for Preferred Stock without  mandatory  redemption was $10,886,758 and
     5.18%, respectively,  and for Preferred Stock with mandatory redemption was
     $4,477,500 and 6.02%, respectively.

     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,  1997 and 1996,  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, 1997 and 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
     $25,658,750 and 5.70% and $17,940,000 and 5.80%, respectively.

(E)  During  1996,  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 8.
     Financial Instruments.

(G)  In  February  1997,  PSE&G  Capital  Trust II issued $95  million of 8.125%
     Quarterly  Guaranteed Preferred Beneficial Interest in PSE&G's Subordinated
     Debentures.


(H)  PSE&G Capital  L.P.,  PSE&G Capital Trust I and PSE&G Capital Trust II were
     formed and are  controlled by PSE&G for the purpose of issuing  Monthly and
     Quarterly Income  Preferred  Securities  (Monthly and Quarterly  Guaranteed
     Preferred  Beneficial  Interest in PSE&G's  Subordinated  Debentures).  The
     proceeds  were  lent to  PSE&G  and are  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 indentures  related thereto or its guarantees thereof,
     PSE&G may not pay any  dividends  on its common and  preferred  stock.  The
     Subordinated   Debentures   and  the   indentures  constitute  a  full  and
     unconditional  guarantee by PSE&G of the Preferred Securities issued by the
     partnership and the trusts.
</FN>
</TABLE>

<PAGE>
<TABLE>
Note 7. Schedule of Consolidated Debt
<CAPTION>
LONG-TERM                                                                        December 31,
                                                                         -------------------------------
Interest Rates                                           Maturity           1997              1996
--------------                                          --------------  -------------    --------------
                                                                             (Millions of Dollars)
<S>                                                      <C>                    <C>              <C> 
PSE&G
First and Refunding Mortgage Bonds (A)
6.875%-7.125%                                            1997........           $--              $300
6.00%                                                    1998........           100               100
8.75%                                                    1999........           100               100
6.00%-7.625%                                             2000........           635               400
7.875%                                                   2001........           100               100
6.125%                                                   2002........           300               300
6.25%-9.125%                                             2003-2007...         1,050             1,050
6.80%-6.90%                                              2008-2012...             3                26
Variable                                                 2008-2012...            66                66
6.75%-7.375%                                             2013-2017...           375               400
6.45%-9.25%                                              2018-2022...           139               267
Variable                                                 2018-2022...            14                14
5.55%-7.50%                                              2023-2027...           568               571
5.70%-6.55%                                              2028-2032...           499               499
Variable                                                 2028-2032...            25                --
5.00%-8.00%                                              2033-2037...           160               160
Medium-Term Notes
7.10%-7.13%                                              1997                    --               100
8.10%-8.16%                                              2008-2012...            60                60
7.04%                                                    2018-2022...             9                --
7.15%-7.18%                                              2023-2027...            41                41
                                                                         -------------    --------------
   Total First and Refunding Mortgage Bonds..........................         4,244             4,554
                                                                         -------------    --------------
Debenture Bonds Unsecured
6.00%                                                    1998........            18                18
Variable (B)                                                                     19                --
                                                                         -------------    --------------
   Total Debenture Bonds.............................................            37                18
                                                                         -------------    --------------
Principal Amount Outstanding (C).....................................         4,281             4,572
Amounts Due Within One Year (D)......................................          (118)             (424)
Net Unamortized Discount.............................................           (37)              (41)
                                                                         -------------    --------------
   Total Long-Term Debt of PSE&G (E).................................        $4,126            $4,107
                                                                         =============    ==============
EDHI
Capital
Senior Notes (F)
9.875%--10.05%                                           1998........           $38               $80
Medium-Term Notes
5.79%-5.92%                                              1997........            --                27
9.00%                                                    1998........            75                75
8.95%-9.93%                                              1999........           155               155
6.54%                                                    2000........            78                78
6.74%                                                    2001........           135                --
6.80%-7.00%                                              2002........           130                --
                                                                         -------------    --------------
Principal Amount Outstanding (C).....................................           611               415
Amounts Due Within One Year (D)......................................          (113)              (69)
Net Unamortized Discount.............................................            (2)               (1)
                                                                         -------------    --------------
   Total Long-Term Debt of Capital...................................           496               345
                                                                         -------------    --------------
Funding (G)
6.85%-9.59%                                              1997........            --                55
9.95%                                                    1998........            83                83
7.58%                                                    1999........            45                45
                                                                         -------------    --------------
Principal Amount Outstanding (C).....................................           128               183
Amounts Due Within One Year (D)......................................           (83)              (55)
                                                                         -------------    --------------
   Total Long-Term Debt of Funding...................................            45               128
                                                                         -------------    --------------
CEA
Non-recourse Debt
7.995% - Bank Loan                                      1999.........            87                --
12.82% - Bank Loan                                      2002.........           135                --
14.00% - Minority Interest Loan                         2027.........            10                --
                                                                         -------------    --------------
Principal Amount Outstanding (C).....................................           232                --
Amounts Due Within One Year..........................................           (26)               --
                                                                         -------------    --------------
     Total Long-Term Debt of CEA.....................................           206                --
                                                                         -------------    --------------
     Total Long-Term Debt of EDHI....................................          $747              $473
                                                                         =============    ==============
        Consolidated Long-Term Debt (H)..............................        $4,873            $4,580
                                                                         =============    ==============
</TABLE>

<PAGE>

(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 $117 million of its
     8.50% Series LL First and Refunding Mortgage Bonds (Bonds). In April 1997,
     PSE&G issued $25 million of Variable Rate Pollution Control Bonds,  Series
     X, due 2031.  In June 1997,  PSE&G issued $235 million of its 6.50% Series
     XX Bonds due 2000 and in November  1997,  PSE&G issued $9 million of 7.04%
     Medium Term Notes. Also in November 1997, PSE&G redeemed $9 million of its
     9.25% Series CC Bonds.

(B)  PSE&G issued $19 million of Variable Rate Pollution  Control Notes due 2027
     in June 1997.

(C)  For information concerning fair value of financial instruments, see Note 8.
     Financial Instruments.

(D)  The aggregate principal amounts of mandatory requirements for sinking funds
     and maturities for each of the five years  following  December 31, 1997 are
     as follows:

<TABLE>
<CAPTION>

                           Sinking Funds                           Maturities
                        ---------------------   ---------------------------------------------------
           Year          Capital      CEA         PSE&G        Capital      Funding        CEA           Total
       --------------   ----------- ---------   ------------  -----------  -----------   ----------  ---------------
      <S>                     <C>       <C>           <C>           <C>          <C>          <C>              <C> 
       1998........           $38       $26           $118          $75          $83           --             $340
       1999........            --        27            100          155           45          $87              414
       2000........            --        27            635           78           --           --              740
       2001........            --        27            100          135           --           --              262
       2002........            --        27            300          130           --           --              457
                        ----------- ---------   ------------  -----------  -----------   ----------  ---------------
                              $38      $134         $1,253         $573         $128          $87           $2,213
                        =========== =========   ============  ===========  ===========   ==========  ===============
</TABLE>

(E)  At December  31, 1997 and 1996,  PSE&G's  annual  interest  requirement  on
     long-term debt was $291 million and $317 million, of which $283 million and
     $302 million,  respectively,  was the requirement  for Bonds.  The embedded
     interest  cost on  long-term  debt on  such  dates  was  7.44%  and  7.45%,
     respectively.  The embedded  interest cost on long-term debt due within one
     year at December 31, 1997 was 7.14%.

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

(G)  Funding provides debt financing for PSRC, CEA and their subsidiaries on the
     basis of an unconditional guarantee from EDHI.

(H)  At December 31, 1997 and 1996, the annual interest requirement on long-term
     debt was $378  million  and $370  million,  of which $283  million and $302
     million, respectively, was the requirement for Bonds. The embedded interest
     cost on long-term debt on such dates was 7.64% and 7.62%, respectively.

SHORT-TERM (Commercial Paper and Bank 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.

    ENTERPRISE

    At December  31, 1997,  Enterprise  had a committed  $150 million  revolving
credit  facility  which expires in December 2002. At December 31, 1997 and 1996,
Enterprise  had a $75  million  and a $25  million  uncommitted  line of credit,
respectively,  with a bank.  At December  31, 1997,  Enterprise  had $75 million
outstanding  under  this  line of  credit  with an  interest  rate of 6.2%.  The
consolidated weighted-average, short-term debt rate of Enterprise was 6.2%, 5.7%
and 6.0% for the years ended December 31, 1997, 1996 and 1995, respectively.

    PSE&G
<TABLE>
<CAPTION>

                                                                                      1997         1996       1995
                                                                                      ----         ----       ----
                                                                                           (Millions of Dollars)
     <S>                                                                              <C>          <C>        <C> 
     Principal amount outstanding at year end, primarily commercial paper.......      $1,106       $638       $567
     Weighted average interest rate for short-term debt at year end.............      6.07%        5.70%      5.93%
</TABLE>

    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.

    The $1.3 billion  commercial paper program  (Program) is supported by a $650
million  revolving  credit  agreement  expiring in June 1998 and a $650  million
revolving  credit  agreement  expiring  in June 2002 with a group of  commercial
banks.  As of  December  31,  1997 and  1996,  PSE&G had $952  million  and $443
million, respectively, outstanding under the Program, which amounts are included
in the table above. As of December 31, 1997, there was no debt outstanding under
the revolving credit agreements.

    PSE&G has $174 million in uncommitted lines of credit facilities extended by
a number  of banks to  primarily  support  short-term  borrowings,  of which $74
million was outstanding on December 31, 1997 and is 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, 1997,  letters of
credit were issued in the amount of $21 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 on June
28, 2001. PSE&G has guaranteed repayment of Fuelco's respective obligations.  As
of December 31, 1997 and 1996,  Fuelco had  commercial  paper of $80 million and
$83 million, respectively, outstanding under the commercial paper program, which
amounts are included in the table above.  As of December 31, 1997,  there was no
debt outstanding under the revolving credit facility.

    PSE&G has entered into standby  financing  arrangements  with banks totaling
$124 million.  These facilities support long-term tax-exempt multi-mode mortgage
bond financings done through the New Jersey Economic Development Authority,  The
Pollution  Control  Financing  Authority of Salem County (New Jersey),  the York
County  (Pennsylvania)  Industrial  Development Authority and the Indiana County
(Pennsylvania)  Industrial  Development  Authority.  As of December 31, 1997, no
amounts were outstanding under such arrangements.

    EDHI
 <TABLE>
<CAPTION>
                                                                                      1997         1996       1995
                                                                                      ----         ----       ----
                                                                                           (Millions of Dollars)
     <S>                                                                              <C>           <C>      <C>    
     Principal amount outstanding at year end...................................      $267          --        $182(A)
     Weighted average interest rate for short-term debt at year end.............      6.92%         --        6.26%
<FN>
     (A) Amounts included in Net Assets of Discontinued Operations.
</FN>
</TABLE>

     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. In November  1997,  Funding  entered into an additional
$150 million revolving  credit  agreement with a group of banks. Such  agreement
terminates in November 1998.


<PAGE>


Note 8. Financial Instruments

    Fair Value of Financial Instruments

    The  estimated  fair value was  determined  using the market  quotations  or
values of instruments with similar terms, credit ratings,  remaining  maturities
and redemptions at the end of 1997 and 1996, respectively.
<TABLE>
<CAPTION>

                                                                    December 31,
                                                 -----------------------------------------------------
                                                           1997                       1996
                                                 -------------------------- --------------------------
                                                  Carrying       Fair        Carrying       Fair
                                                   Amount        Value        Amount        Value
                                                 ------------ ------------- ------------ -------------
                                                                (Millions of Dollars)
<S>                                                    <C>           <C>          <C>           <C> 
Long-Term Debt (A):
    EDHI........................................       $969          $978         $597          $606
    PSE&G.......................................      4,244         4,389        4,531         4,592
Preferred Securities Subject to Mandatory
  Redemption:
    PSE&G Cumulative Preferred Securities.......         75            78          150           152
    Monthly Guaranteed Preferred Beneficial
      Interest in PSE&G's Subordinated
      Debentures................................        210           221          210           220
    Quarterly Guaranteed Preferred Beneficial
      Interest in PSE&G's Subordinated 
      Debentures................................        303           316          208           211

<FN>

(A)  Includes  current  maturities  and an interest rate swap of $44 million for
     EDHI.
</FN>
</TABLE>


    Natural Gas Hedging--EDHI

    As of December 31, 1997 and 1996, Energis had outstanding  futures contracts
to buy natural gas related to fixed-price  natural gas sales  commitments.  Such
contracts hedged  approximately 97% and 95% of its fixed price sales commitments
at December 31, 1997 and 1996,  respectively.  As of December 31, 1997,  Energis
had a net  unrealized  hedge loss of $2 million  and as of  December  31,  1996,
Energis had a net unrealized hedge gain of $4 million.

    Nuclear Decommissioning Trust Funds

    Contributions made into the Nuclear Decommissioning Trust Funds are invested
in debt and equity  securities.  The carrying value of these funds  approximates
the fair market  value of $458  million and $375 million as of December 31, 1997
and 1996, respectively.

    Equity Securities--EDHI

    PSRC has investments in equity  securities and partnerships  which invest in
equity  securities.  The aggregate  carrying value  approximates the fair market
value of $185  million  and $131  million  as of  December  31,  1997 and  1996,
respectively.

Note 9. Cash and Cash Equivalents

    The December 31, 1997 and 1996 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.


<PAGE>


Note 10. Commitments and Contingent Liabilities

Nuclear Performance Standard (NPS)

    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 December  31st Order
provides  that the NPS will not apply to PSE&G for the  period  January  1, 1996
through December 31, 1998 (see Note 2. Rate Matters).

Nuclear Insurance Coverages and Assessments

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


                                                                   PSE&G Maximum
                                                      Total        Assessments
                                                      Site         for a Single
Type and Source of Coverages                          Coverages    Incident
----------------------------                          ---------    -------------
                                                        (Millions of Dollars)
Public Liability (Primary Layer):
  American Nuclear Insurers.......................    $  200.0              N/A
Nuclear Liability (Excess Layer):
  Price-Anderson Act..............................     8,720.3  (A)       $210.2
                                                      --------            ------
      Nuclear Liability Total.....................    $8,920.3  (B)       $210.2
                                                      ========            ======
Nuclear Worker Liability (Primary Layer):
  American Nuclear Insurers.......................      $200.0  (C)         $8.0

Property Damage (Primary Layer):
  American Nuclear Insurers (Peach Bottom)........      $500.0              N/A
  Nuclear Mutual Limited (Salem/Hope Creek).......       500.0              $9.7
Property Damage (Excess Layer):
  Nuclear Electric Insurance Limited (NEIL II)....     2,250.0              13.7
                                                      --------             -----
      Property Damage Total (Per Site)............    $2,750.0             $23.4
                                                      ========             =====

Replacement Power:
  Nuclear Mutual Limited (NML)....................       $21.0  (D)         N/A
  Nuclear Electric Insurance Limited (NEIL I).....       473.2  (E)        $11.3
                                                        ------             -----
      Replacement Power Total (Salem/Hope Creek)..      $494.2  (F)        $11.3
                                                        ======             =====

(A)  Retrospective premium program under the Price-Anderson liability provisions
     of the  Atomic  Energy  Act of  1954,  as  amended.  PSE&G  is  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. This retrospective  program
     is excess over the Public and Nuclear Worker Liability primary layers.

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

(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.


(D)  After a waiting period, NML insured sites may receive a weekly indemnity of
     $3.5 million for six weeks.

(E)  Aggregate  indemnity  limit for a weekly  indemnity  of $3.5 million for 52
     weeks  followed  by  80% of the  weekly  indemnity  for  104  weeks.  Also,
     represents  limit of  coverage  for Peach  Bottom  which does not  purchase
     insurance from NML.

(F)  Combined aggregate limit of NML and NEIL I coverages available to co-owners
     of Salem and Hope Creek for each plant. Of this limit, PSE&G is covered for
     its percent ownership in each plant.

    The  Price-Anderson  Act 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 the  Price-Anderson  Act. Under the  Price-Anderson  Act, 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.  This does not include the $8.0 million that could be assessed
under the nuclear worker policies.

    Further,  a recent decision by the U.S.  Supreme Court, 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 an industry mutual insurance  company,  NEIL, which, as
of January 1, 1998, was  consolidated  with NML. NEIL provides all the coverages
formerly provided by NML,  including the primary property insurance at Salem and
Hope Creek.  Also, NEIL continues to provide excess property  insurance  through
its NEIL II policy and  replacement  power  coverage  through its NEIL I policy.
Both NEIL and NML policies 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 provisions in the
NEIL policies  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.

Settlement of Salem Litigation

    On May 12, 1997, PSE&G settled the lawsuit brought against it by PECO Energy
Company (PECO Energy) and Delmarva Power & Light Company  (DP&L),  two co-owners
of the Salem Units,  related to alleged damages resulting from the outage of the
facility. This settlement,  which totaled $82 million,  resulted in an after-tax
charge to  earnings,  recorded in the first  quarter of 1997,  of $53 million or
$0.23 per share of Enterprise  Common Stock and was paid in December 1997.  This
settlement  also obligates PSE&G to pay $1.4 million for each reactor month that
the outage continues  beyond an aggregate  outage of 64 reactor months,  up to a
maximum payment under this provision of $17 million.  As of January 31, 1998, an
aggregate of 59 reactor months had accumulated due to Salem outages.  PSE&G does
not expect to make any  payments  under  this  provision.  Salem 2  returned  to
service on August 30, 1997.  Salem 1 is expected to return to service around the
end of the first quarter of 1998.

    PECO  Energy,  DP&L and PSE&G have also agreed to an  operating  performance
standard  through  December 31, 2011 for Salem and through December 31, 2007 for
Peach Bottom which is operated by PECO Energy. Under this standard, the operator
of  each  respective   station  would  be  required  to  make  payments  to  the
non-operating owners if the three-year capacity factor,  determined annually, of
such  station  falls below 40  percent,  subject to a maximum of $25 million per
year. The initial  three-year  period begins on January 1, 1998 for Peach Bottom
and on the date the later of the two Salem  units  (Salem 1)  returns to service
for Salem.  The parties have further agreed to forego  litigation in the future,
except for limited cases in which the operator would be responsible  for damages
of no more than $5 million per year.


<PAGE>



Year 2000

    Many of  Enterprise's  and PSE&G's  systems must be modified due to computer
program  limitations  in recognizing  dates beyond 1999. If not  corrected,  the
systems could fail or cause  erroneous  results by, at or after January 1, 2000.
Substantial  changes  to, and some  replacements  of,  Enterprise's  and PSE&G's
present  systems  are being made in an effort to  mitigate  potential  Year 2000
issues.  Costs are being  expensed as incurred  in  accordance  with EITF 96-14,
"Accounting for the Costs  Associated with Modifying  Computer  Software for the
Year 2000." During 1997, $8 million of costs related to Year 2000 readiness were
incurred.  Management  estimates  the total cost of this  effort to be about $92
million to be incurred  from 1997 through 2001, of which $41 million is expected
to be incurred in 1998.

    Enterprise  and PSE&G have assembled a  cross-functional  team to inventory,
assess and  identify  and  implement  solutions  for  Enterprise's  and  PSE&G's
systems.  Plans  provide  for 80% of  critical  systems to be Year 2000 ready in
1998, with the remaining  critical  systems to be ready by July 1999. By the end
of 1999,  plans call for 80% of non-critical  systems to be Year 2000 ready with
the remainder of those systems to be Year 2000 ready in 2000.

    Additionally,  the team  has  surveyed  Enterprise's  and  PSE&G's  top 3000
vendors to assess  their plans for Year 2000  readiness.  The team has also been
working  with   critical   suppliers  and   Pennsylvania--New   Jersey--Maryland
Interconnection (PJM) on their plans for Year 2000 readiness.

     On January 29, 1998, the NRC proposed to issue a generic letter which would
require  all nuclear  plant  operators  to provide  the agency with  information
concerning their programs, planned or implemented, to address Year 2000 computer
and systems issues at their facilities. In particular,  operators would be asked
to provide  confirmation of  implementation  of their programs and certification
that their  facilities are Year 2000 ready and in compliance  with the terms and
conditions of their licenses and NRC regulations. Licensees would be required to
submit a written  response  indicating  the status of their Year 2000  readiness
program  including scope,  assessment  process and plans for corrective  action.
Further,  upon completion of their Year 2000 readiness program and no later than
July 1,  1999,  licensees  would be  required  to  confirm to the NRC that their
facility is Year 2000 ready,  together with a status report of work necessary to
be Year 2000 compliant.  Year 2000 ready means computer systems and applications
are suitable for continued use into 2000.  Year 2000  compliant  means that such
systems and applications  accurately  process  date/time data beyond 2000. PSE&G
cannot predict if this or any proposal will be adopted by the NRC.

    An inability of Enterprise,  PSE&G,  their  subsidiaries,  members of PJM or
Enterprise's or PSE&G's critical  suppliers to meet the Year 2000 deadline could
have a material adverse impact on Enterprise's and PSE&G's operations, financial
condition, results of operations and net cash flows.

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  resource
plan (Resource  Plan),  PSE&G  periodically  reevaluates its forecasts of future
customers, load and peak growth, sources of electric generating capacity and DSM
to meet such  projected  growth,  including  the need to construct  new electric
generating capacity. The Resource Plan 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
$3.1 billion during the years 1998 through 2002, which includes $457 million for
nuclear fuel and excludes 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 1998
through 2002.

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 actual or  potential  threat to human  health 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  investigation  and
remediation of these potentially hazardous sites is receiving 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  Remediation  Program,
Enterprise and PSE&G do not expect its  expenditures for any such site to have a
material  effect on  financial  condition,  results of  operations  and net cash
flows.

     The NJDEP has recently revised  regulations  concerning site  investigation
and  remediation.  These  regulations  will require an ecological  evaluation of
potential   injuries  to  natural   resources  in  connection  with  a  remedial
investigation  of contaminated  sites.  The NJDEP is presently  working with the
utility industry to develop procedures for implementing these regulations. These
regulations may substantially increase the costs of remedial  investigations and
remediations,  where  necessary,  particularly at sites situate on surface water
bodies. PSE&G and predecessor companies owned and/or operated certain facilities
situate on surface water  bodies,  certain of which are currently the subject of
remedial activities. The financial impact of these regulations on these projects
is not currently  estimable.  PSE&G does not anticipate that the compliance with
these regulations will have material adverse 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 manufactured
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 remediation  technologies.  The cost of the Remediation Program cannot
be  reasonably  estimated,  but  experience  to date  indicates  that  costs  of
approximately  $20 million per year could be incurred  over a period of about 30
years and that the overall  cost could be material to  Enterprise's  and PSE&G's
financial condition, results of operations and net cash flows.

    Costs  incurred  through  December  31,  1997  for the  Remediation  Program
amounted to $122 million.  In addition,  at December 31, 1997, PSE&G's estimated
liability  for   remediation   costs  through  2000   aggregated   $73  million.
Expenditures   beyond  2000  cannot  be  reasonably   estimated   (see  Note  1.
Organization  and Summary of  Significant  Accounting  Policies and Note 2. Rate
Matters).

Note 11. 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. On December 17, 1997, the BPU accepted
PSE&G's  decommissioning  cost  updates  and  found  that  the  current  funding
requirements  as presented in PSE&G's  1996 Nuclear  Decommissioning  Trust Fund
Report, dated May 15, 1997, appear adequate.

    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.  Although  PSE&G's  Energy Master Plan  proposal  continues  this
treatment,  no  assurances  can be given as to the outcome of the Energy  Master
Plan proceedings (see Note 2. Rate Matters).  At December 31, 1997 and 1996, the
accumulated  provision for depreciation and amortization  included  reserves for
nuclear  decommissioning  for  PSE&G's  nuclear  units of $428  million and $338
million,  respectively.  As of December 31, 1997 and 1996, PSE&G had contributed
$279  million  and  $249  million,  respectively,  into  independent,  external,
qualified and non-qualified nuclear decommissioning trust funds. The fair market
value of these funds as of December  31, 1997 and 1996 was $458 million and $375
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  materially   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  all,  or any of which,  could have a material  adverse
effect on Enterprise's and PSE&G's  financial  condition,  results of operations
and net cash flows (see Note 2. Rate Matters).

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 $70 million
(adjusted for inflation). Since 1993, PSE&G has paid $27 million, resulting in a
balance due of $43 million. PSE&G has deferred the expenditures incurred to date
as part of underrecovered electric energy costs (see Note 2. 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 2. Rate Matters).

     DOE construction of a permanent disposal facility has not begun and DOE has
announced  that it does not expect a facility to be available  until 2010 at the
earliest.  Accordingly,  legislation  which  would  have  the  DOE  establish  a
centralized interim spent fuel storage facility has been introduced in Congress.
In  cases  brought  by  PSE&G,  32 other  utilities  and many  state  and  local
governments,  the United  States  Court of Appeals for the  District of Columbia
Circuit reaffirmed DOE's unconditional obligation to begin spent fuel acceptance
by January 31, 1998.  In November  1997,  the court ruled that the utilities had
fulfilled  their  obligations  under  their  respective  contracts  with  DOE by
contributing  to the Nuclear  Waste  Fund.  The court  further  ruled that DOE's
argument of unavoidable delay to meet its obligation was without merit. However,
the court did not order DOE to  commence  spent fuel  acceptance  by January 31,
1998;  instead,  it decided that the standard  contract  provided a  potentially
adequate remedy in the form of payment of damages if DOE failed its obligations.
Consequently,   PSE&G  is  working  with  the  utility  industry  to  develop  a
methodology  for  determining  damages  incurred as a result of DOE's failure to
meet its  obligation and a strategy for its  implementation.  PSE&G is presently
studying  options to recover  damages  from DOE.  The  decision  of the Court of
Appeals has been appealed to the U.S.  Supreme  Court by the U.S.  Department of
Justice.  No  assurances  can be  given  as to the  ultimate  availability  of a
facility.

Note 12. 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>

                                                                      1997             1996             1995
                                                                  --------------   --------------   ---------------
                                                                               (Millions of Dollars)
<S>                                                                       <C>              <C>               <C> 
Net Income.......................................................         $560             $612              $662
Preferred securities (net).......................................           15                5                34
Discontinued Operations..........................................           --              (24)              (35)
                                                                  --------------   --------------   ---------------
          Subtotal...............................................         $575             $593              $661
                                                                  --------------   --------------   ---------------
Federal income taxes:
   Operating income:
     Current provision...........................................          185              124               208
     Provision for deferred income taxes--net(A).................          164              187               152
     Investment tax credits--net.................................          (20)             (21)              (22)
                                                                  --------------   --------------   ---------------
          Total included in operating income.....................          329              290               338
Miscellaneous other income:
     Current provision...........................................          (24)               1               (10)
     Provision for deferred income taxes (A).....................           --               --                10
     SFAS 90 deferred income taxes(A)............................            1                2                 2
                                                                  --------------   --------------   ---------------
          Total Federal income tax provisions....................          306              293               340
                                                                  --------------   --------------   ---------------
Pretax income....................................................         $881             $886            $1,001
                                                                  ==============   ==============   ===============
</TABLE>
<PAGE>
    Reconciliation  between total Federal income tax provisions and tax computed
at the statutory tax rate on pretax income:
<TABLE>
<CAPTION>

                                                                                  1997           1996          1995
                                                                                -----------  -------------- ------------
                                                                                        (Millions of Dollars)
<S>                                                                                 <C>             <C>          <C> 
Tax computed at the statutory rate...........................................       $308            $310         $351
Increase (decrease) attributable to flow through of certain tax adjustments:
     Depreciation.............................................................        27              11           16
     Amortization of investment tax credits...................................       (20)            (22)         (22)
     Other....................................................................        (9)             (6)          (5)
                                                                                -----------  -------------- ------------
          Subtotal............................................................        (2)            (17)         (11)
                                                                                -----------  -------------- ------------
          Total Federal income tax provisions.................................      $306            $293         $340
                                                                                ===========  ============== ============
Effective Federal income tax rate.............................................      34.7%           33.1%        34.0%
</TABLE>

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

                                                                                  1997           1996          1995
                                                                                -----------  -------------- ------------
                                                                                        (Millions of Dollars)
<S>                                                                                  <C>             <C>         <C> 
 Deferred Credits:   
     Additional tax depreciation and amortization.............................       $34             $39         $134
     Leasing Activities.......................................................       114             136           64
     Conservation Costs.......................................................        27              15           (1)
     Deferred Fuel Costs--net.................................................        (4)              6           (4)
     Other....................................................................        (6)             (7)         (29)
                                                                                -----------  -------------- ------------
          Total...............................................................      $165            $189         $164
                                                                                ===========  ============== ============
</TABLE>

    Between the years 1987 and 1994,  Enterprise's  Federal  Alternative Minimum
Tax (AMT)  liability  exceeded its regular  Federal income tax  liability.  This
excess was carried  forward to offset  regular  income tax  liability  in future
years.  Enterprise  used these AMT  credits as a reduction  against  regular tax
liability  for 1995,  1996 and  1997.  There  were no  remaining  credits  as of
December 31, 1997.

    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,
1997,  PSE&G had a deferred tax liability and an offsetting  regulatory asset of
$725 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 enacted  Federal
income tax rate of 35% and State income tax rate of 9%.
<PAGE>

    The following is an analysis of deferred income taxes:

                                                             December 31,
                                                         --------------------
                                                           1997         1996
                                                         --------     -------
                                                         (Millions of Dollars)
Deferred Income Taxes                                    
Assets:
   Current (net)....................................          $25         $23
                                                          -------     -------
   Non-current:
     Unrecovered Investment Tax Credits.............          117         123
     Nuclear Decommissioning........................           33          27
     Construction Period Interest and Taxes.........           15          16
     Vacation Pay...................................            7           7
     AMT Credit.....................................           --          88
     Real Estate Impairment.........................            6           3
     Other..........................................           33          24
                                                          -------     -------
          Total Non-current.........................          211         288
                                                          -------     -------
          Total Assets..............................          236         311
                                                          -------     -------
Liabilities:
   Non-current:
     Plant Related Items............................        2,349       2,361
     Leasing Activities.............................          720         669
     Conservation Costs.............................           39          12
     Hope Creek O&M Costs...........................           21          22
     Underrecovered Electric Energy and Gas Costs...           60          63
     Unamortized Debt Expense.......................           44          40
     Taxes Recoverable Through Future Rates (net)...          249         259
     Other..........................................          123         112
                                                          -------     -------
          Total Non-current.........................        3,605       3,538
                                                          -------     -------
          Total Liabilities.........................        3,605       3,538
                                                          -------     -------
Summary -- Accumulated Deferred Income Taxes
   Net Current Assets...............................           25          23
   Net Non-current Liability........................        3,394       3,250
                                                          -------     -------
        Total.......................................       $3,369      $3,227
                                                          =======     =======

Note 13. Pension Plan

     The  discount  rates,  expected  long-term  rates of return  on assets  and
average  compensation  growth rates used in  determining  the qualified  Pension
Plans'  funded status and net pension cost as of December 31, 1997 and 1996 were
as follows:

                                                            1997          1996
                                                          -------       --------
Funded Status:
  Discount Rate used to Determine Benefit
    Obligations.......................................      7.25%         7.50%
  Average Compensation Growth to Determine
    Benefit Obligations...............................      4.50%         4.50%
Net Pension Cost:
  Discount Rate.......................................      7.50%         8.00%
  Expected Long-Term Return on Assets.................      9.00%         8.50%
  Average Compensation Growth.........................      4.50%         4.50%

The following table shows the qualified Pension Plans' funded status:
<TABLE>
<CAPTION>
                                                                                   December 31,
                                                                           ------------------------------
                                                                               1997            1996
                                                                           --------------   -------------
                                                                                (Millions of Dollars)
<S>                                                                            <C>             <C>     
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested benefits
   of $1,602 in 1997 and $1,474 in 1996................................        $(1,711)        $(1,572)
Effect of projected future compensation................................           (374)           (459)
                                                                           --------------   -------------
Projected benefit obligations..........................................         (2,085)         (2,031)
Plan assets at fair value, primarily listed equity and debt securities.          1,959           1,687
                                                                           --------------   -------------
Projected benefit obligations in excess of plan assets.................           (126)           (344)
Unrecognized net (gain) loss from past experience and effects
   of changes in assumptions...........................................             (5)            151
Prior service cost not yet recognized in net pension cost..............            119             131
Unrecognized net obligations being recognized over 16.7 years..........             45              53
                                                                           --------------   -------------
Prepaid (Accrued) pension cost.........................................            $33             $(9)
                                                                           ==============   =============
</TABLE>
<PAGE>

     The net pension cost for the  qualified  Pension  Plans for the years ended
December 31, 1997, 1996 and 1995, includes the following components:
<TABLE>
<CAPTION>

                                                                  1997          1996            1995
                                                                  ----          ----            ----
                                                                        (Millions of Dollars)
<S>                                                                <C>           <C>             <C>
Service cost--benefits earned during year...............           $52           $51             $37
Interest cost on projected benefit obligations..........           148           136             124
Return on assets........................................          (296)         (206)           (312)
SFAS 88 early retirement (A)............................             2             2              --
Net amortization and deferral...........................           164            93             223
                                                                  ----           ---             ---
     Total..............................................           $70           $76             $72
                                                                  ====           ===             ===
<FN>
     See Note 1. Organization and Summary of Significant Accounting Policies.

(A) Effective May 1, 1996,  PSE&G's  qualified 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  was  available  to
    employees  who had  attained  age 50 and had  completed  30 or more years of
    service.   SFAS  No.  88,   "Employers'   Accounting  for   Settlements  and
    Curtailments of Defined Benefit Pension Plans and for Termination  Benefits"
    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 resulted in an immediate
    expense  applicable to the employees who, as of April 30, 1997, had accepted
    the offer.
</FN>
</TABLE>

     The  discount  rates  and  average   compensation   growth  rates  used  in
determining the non-qualified  Pension Plans' funded status and net pension cost
as of December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>

                                                                       1997         1996 (A)
                                                                    ------------- --------------
<S>                                                                       <C>            <C>  
Funded Status:
    Discount Rate used to Determine Benefit Obligations............       7.25%          7.50%
    Average Compensation Growth to Determine Benefit Obligations...       4.50%          4.50%
Net Pension Cost:
    Discount Rate..................................................       7.50%           --
    Average Compensation Growth....................................       4.50%           --
</TABLE>

<PAGE>

     The following table shows the non-qualified Pension Plans' funded status:
<TABLE>
<CAPTION>

                                                                                 December 31,
                                                                           ---------------------------
                                                                              1997         1996 (A)
                                                                           ------------   ------------
                                                                             (Millions of Dollars)
<S>                                                                             <C>            <C>  
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested benefits
   of $25 in 1997 and $22 in 1996......................................         $(34)          $(30)
Effect of projected future compensation................................           (4)            (4)
                                                                           ------------   ------------
Projected benefit obligations..........................................          (38)           (34)
Plan assets at fair value..............................................           --             --
                                                                           ------------   ------------
Projected benefit obligations in excess of plan assets.................          (38)           (34)
Unrecognized net (gain) loss from past experience and effects
   of changes in assumptions...........................................            2             --
Prior service cost not yet recognized in net pension cost..............           31             34
Additional minimum liability...........................................          (29)            --
                                                                           ------------   ------------
Prepaid (Accrued) pension cost.........................................         $(34)            $--
                                                                           ============   ============
</TABLE>

     The net  pension  cost for the  non-qualified  Pension  Plans for the years
ended December 31, 1997, 1996 and 1995, includes the following components:

<TABLE>
<CAPTION>

                                                                1997 (A)
                                                                --------
                                                           (Millions of Dollars)        
<S>                                                                 <C>
Service cost--benefits earned during year................           $2 
Interest cost on projected benefit obligations...........            2 
Net amortization and deferral............................            3 
                                                                 --------                                                        
     Total...............................................           $7 
                                                                 ========
</TABLE>

(A)  Beginning in 1997, SFAS 87 was applied to the  non-qualified Pension Plans.
     Prior to that date, because the plans amounts were  considered  immaterial,
     SFAS 87 was not applied.

Note 14. Postretirement Benefits Other Than Pensions

     Upon adoption of SFAS 106,  PSE&G elected to amortize,  over 20 years,  its
unfunded  obligation  of $609 million at January 1, 1993.  The  following  table
discloses the significant components of the net periodic  postretirement benefit
cost:
<TABLE>
<CAPTION>

                                                                                          December 31,
                                                                             -----------------------------------------
                                                                                1997          1996          1995
                                                                             ------------- ------------- -------------
                                                                                      (Millions of Dollars)
<S>                                                                                 <C>           <C>           <C>
Service cost.............................................................           $12           $10           $ 9
Interest on accumulated postretirement obligation........................            54            51            48
Amortization of transition obligation....................................            30            31            31
Prior service cost.......................................................             2            --            --
Amortization of Net (Gain)/Loss (A)......................................            (2)           (1)           (4)
Deferral of current expense..............................................           (63)          (59)          (51)
                                                                             ------------- ------------- -------------
        Total............................................................           $33           $32           $33
                                                                             ============= ============= =============
<FN>
(A) Reflects change in Plan Assumptions.
</FN>
</TABLE>
<PAGE>
    The discount rate used in determining the PSE&G net periodic  postretirement
benefit cost was 7.5% and 8.0% for 1997 and 1996, 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 $6
million,  or  10.5%,  and  increase  the  accumulated   postretirement   benefit
obligation as of December 31, 1997 by $57 million, or 9.4%.

    The assumed  health care cost trend rates used in measuring the  accumulated
postretirement  benefit  obligation  in 1997  were:  medical  costs for  pre-age
sixty-five retirees--11.5%, medical costs for post-age sixty-five retirees--7.5%
and dental  costs--5.5%;  such rates are  assumed to  decrease  by 0.5% per year
until they reach 5.0% and then remain constant.  The medical costs above include
a provision for prescription drugs.

    From January 1, 1993 through  December 31,  1997,  PSE&G  accounted  for the
differences  between  its SFAS 106  accrual  cost  and the cash  cost  currently
recovered  through rates as a regulatory  asset in  accordance  with SFAS 71 and
EITF 92-12. OPEB costs expensed and capitalized during 1997 were $33 million and
accrued  OPEB  costs  deferred  were $63  million.  The  amount of the  unfunded
liability, at December 31, 1997, as shown below, is $724 million.

    In  1993,  the  FASB's  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,  which was  December 31,
1997, for financial  reporting  purposes,  with any cost deferrals  recovered in
approximately  twenty  years.  On December 17, 1997,  the BPU ruled that PSE&G's
current  rates are  sufficient  to recover  both the ongoing  OPEB costs and the
amortization of the deferred  regulatory asset created by the accounting  change
from the  cash  basis of  accounting  to the  accrual  basis  of  accounting  in
accordance  with SFAS 106 and EITF  92-12.  As a result  of the BPU's  decision,
PSE&G will  amortize the  regulatory  asset over 15 years  beginning  January 1,
1998. Also effective January 1, 1998, PSE&G will record the annual SFAS 106 OPEB
cost.

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

                                                                                                 December 31,
                                                                                           --------------------------
                                                                                              1997          1996
                                                                                           ------------  ------------
                                                                                               (Millions of Dollars)
<S>                                                                                            <C>           <C>   
Accumulated Postretirement Benefit Obligation: 
Retirees............................................................................           $(496)        $(493)
Fully eligible active plan participants.............................................             (32)          (36)
Other active plan participants......................................................            (196)         (206)
                                                                                           ------------  ------------
       Total........................................................................            (724)         (735)
Plan assets at fair value...........................................................              --            --
                                                                                           ------------  ------------
Accumulated postretirement benefit obligation in excess of plan assets..............            (724)         (735)
Unrecognized net (gain)/loss from past experience different from that assumed and
   from changes in assumptions......................................................             (26)           15
Unrecognized prior service cost.....................................................              32            34
Unrecognized transition obligation..................................................             429           460
                                                                                           ------------  ------------
Accrued postretirement obligation...................................................           $(289)        $(226)
                                                                                           ============  ============
</TABLE>

     The  discount  rate  used in  determining  the  accumulated  postretirement
benefit obligation was 7.25% and 7.50% for 1997 and 1996, respectively.


<PAGE>


Note 15. 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
                                                  --------------  -------------  --------------   --------------
                                                                     (Millions of Dollars)
<S>                                                     <C>            <C>               <C>            <C>   
For the Year Ended December 31, 1997:    
    Total Operating Revenues....................        $4,188         $1,937            $245           $6,370
                                                  --------------  -------------  --------------   --------------
    Depreciation and Amortization...............           531             85              14              630
    Operating Income Before Income Taxes........           978            328             144            1,450
    Capital Expenditures........................           426            131             953            1,510

As of December 31, 1997:
    Net Utility Plant...........................         9,352          1,698             --            11,050
    Other Corporate Assets......................         3,096            774           3,023            6,893
                                                  --------------  -------------  --------------   --------------
    Total Assets................................       $12,448         $2,472          $3,023          $17,943
                                                  ==============  =============  ==============   ==============

For the Year Ended December 31, 1996:
    Total Operating Revenues....................        $3,944         $1,881            $216           $6,041
                                                  --------------  -------------  --------------   --------------
    Depreciation and Amortization...............           517             87               3              607
    Operating Income Before Income Taxes........           978            234             140            1,352
    Capital Expenditures........................           463            140              47              650

As of December 31, 1996:
    Net Utility Plant...........................         9,566          1,613             --            11,179
    Other Corporate Assets......................         2,840            780           2,116            5,736
                                                  --------------  -------------  --------------   --------------
    Total Assets................................       $12,406         $2,393          $2,116          $16,915
                                                  ==============  =============  ==============   ==============

For the Year Ended December 31, 1995:
    Total Operating Revenues....................        $4,021         $1,686            $186           $5,893
                                                  --------------  -------------  --------------   --------------
    Depreciation and Amortization...............           503             88               6              597
    Operating Income Before Income Taxes........         1,140            179             121            1,440
    Capital Expenditures........................           546            140             140              826

As of December 31, 1995:
    Net Utility Plant...........................         9,652          1,536             --            11,188
    Other Corporate Assets......................         2,730            669           2,230            5,629
                                                  --------------  -------------  --------------   --------------
    Total Assets................................       $12,382         $2,205          $2,230          $16,817
                                                  ==============  =============  ==============   ==============
<FN>
(A)  The Non-utility  Activities include amounts  applicable to Enterprise,  the
     parent corporation, and EDHI.
</FN>
</TABLE>


<PAGE>


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

                                                                  December 31,
                                              ------------------------------------------------------
                                                   1997              1996                1995
                                              ----------------  -----------------   ----------------
                                                             (Millions of Dollars)
<S>                                                   <C>                <C>                <C>   
Utility Plant--Original Cost
   Electric Plant in Service:     
     Steam Production.......................          $1,840             $1,843             $1,791
     Nuclear Production.....................           6,162              6,001              5,992
     Transmission...........................           1,163              1,146              1,127
     Distribution...........................           3,315              3,171              3,045
     Other..................................           1,212              1,153              1,140
                                              ----------------  -----------------   ----------------
          Total Electric Plant in Service...          13,692             13,314             13,095
                                              ----------------  -----------------   ----------------
   Gas Plant in Service:
     Transmission...........................              67                 67                 65
     Distribution...........................           2,472              2,358              2,251
     Other..................................             158                131                127
                                              ----------------  -----------------   ----------------
          Total Gas Plant in Service........           2,697              2,556              2,443
                                              ----------------  -----------------   ----------------
   Common Plant in Service:
     Capital Leases.........................              59                 59                 59
     General................................             499                471                458
                                              ----------------  -----------------   ----------------
          Total Common Plant in Service.....             558                530                517
                                              ----------------  -----------------   ----------------
               Total........................         $16,947            $16,400            $16,055
                                              ================  =================   ================
</TABLE>

Note 16. Discontinued Operations

     On July 31, 1996, EDHI sold 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  resulting in an after-tax  gain of $13
million. As a result,  Consolidated  Financial Statements previously issued have
been  restated  to give  effect  to the  classification  of EDC as  discontinued
operations.

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

                                                       (7 months)
                                                          1996           1995
                                                          ----           ----
                                                           (Millions of Dollars)
     Revenues........................................     $128           $270
     Operating income................................       24             81
     Earnings before income taxes....................        9             53
     Income taxes....................................       (2)            18
     Net income......................................       11             35


<PAGE>
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, 1997
                                    ----------------------------------------------------------------------
                                     Ownership        Plant in        Accumulated          Plant Under
                                      Interest        Service         Depreciation        Construction
                                    --------------  --------------  ------------------   -----------------
                                                           (Millions of Dollars)
<S>                                      <C>             <C>                  <C>                   <C>
Coal Generating
     Conemaugh....................       22.50%          $201                 $49                   $2
     Keystone.....................       22.84%           124                  40                    3
Nuclear Generating
     Peach Bottom.................       42.49%           785                 367                   26
     Salem........................       42.59%         1,195                 425                   52
     Hope Creek...................       95.00%         4,142               1,312                   15
     Nuclear Support Facilities...      Various           191                  46                    3
Pumped Storage Facilities
     Yards Creek..................       50.00%            28                  11                    4
Transmission Facilities...........      Various           128                  41                   --
Merrill Creek Reservoir...........       13.91%            37                  15                   --
Linden SNG Plant..................       90.00%            16                  22                   --
</TABLE>

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,
                           ------------------------ ------------------------- -----------------------  -----------------------
                              1997       1996(A)       1997        1996(A)      1997       1996(A)       1997      1996(A)
                           ------------ ----------- ------------- ----------- ----------- -----------  ---------- ------------
                                                              (Millions where Applicable)
<S>                            <C>         <C>           <C>         <C>         <C>         <C>         <C>          <C>   
Operating Revenues.........    $1,733      $1,798        $1,323      $1,337      $1,568      $1,335      $1,746       $1,571
Operating Income...........       309         309           219        237          301         265         286          246
Net Income.................       140         194            91        135          176         156         153          127
Earnings per Average Share
  of Common Stock (Basic
  and Diluted).............      0.60        0.79          0.39       0.55         0.76        0.64        0.66         0.54
Average Shares of Common
  Stock Outstanding........       232         245           232        245          232         243         232          237
<FN>
(A)  See Note 16. Discontinued Operations.
</FN>
</TABLE>
<PAGE>


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.  Rate Matters
     Note  3.  Regulatory Assets and Liabilities
     Note  4.  Long-Term Investments
     Note  5.  Leasing Activities--As Lessee
     Note  6.  Schedule of Consolidated Capital Stock and Other Securities
     Note  7.  Schedule of Consolidated Debt
     Note  8.  Financial Instruments
     Note 10.  Commitments and Contingent Liabilities
     Note 11.  PSE&G Nuclear Decommissioning
     Note 13.  Pension Plan
     Note 14.  Postretirement Benefits Other Than Pensions
     Note 15.  Financial Information by Business Segments
     Note 17.  Jointly Owned Facilities--Utility Plant

Note 1. Organization and Summary of Significant Accounting Policies

    Enterprise owns all of PSE&G's common stock (without  nominal or par value).
Of the 150,000,000  authorized shares of common stock at December 31, 1997, 1996
and 1995,  there were  132,450,344  shares  outstanding,  with an aggregate book
value of $2.6 billion.

Note 9. Cash and Cash Equivalents

    The December 31, 1997 and 1996 balances consist primarily of working funds.


<PAGE>



Note 12. 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>

                                                                          1997            1996            1995
                                                                       -------------   -------------   -------------
                                                                                  (Millions of Dollars)
<S>                                                                          <C>             <C>             <C> 
Net Income.......................................................             $528            $535            $617
                                                                       -------------   -------------   -------------
Federal income taxes:
   Operating income:
     Current provision...........................................              292             241             275
     Provision for deferred income taxes--net(A).................               34              43              65
     Investment tax credits--net.................................              (19)            (19)            (19)
                                                                       -------------   -------------   -------------
     Total included in operating income..........................              307             265             321
Miscellaneous other income:
     Current provision...........................................              (24)              1             (10)
     Provision for deferred income taxes(A)......................               --              --              10
     SFAS 90 deferred income taxes(A)............................                1               2               2
                                                                       -------------   -------------   -------------
          Total Federal income tax provisions....................              284             268             323
                                                                       -------------   -------------   -------------
Pretax income....................................................             $812            $803            $940
                                                                      -------------   -------------   -------------
</TABLE>

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


                                                                          1997            1996             1995
                                                                       -------------   -------------    -------------
                                                                                    (Millions of Dollars)
<S>                                                                          <C>             <C>              <C> 
Tax computed at the statutory rate..............................             $284            $281             $329
                                                                       -------------   -------------    -------------
Increase (decrease) attributable to flow through of
  certain tax adjustments:
     Depreciation...............................................               27              11               16
     Amortization of investment tax credits.....................              (19)            (19)             (19)
     Other......................................................               (8)             (5)              (3)
                                                                       -------------   -------------    -------------
          Subtotal..............................................               --             (13)              (6)
                                                                       -------------   -------------    -------------
          Total Federal income tax provisions...................             $284            $268             $323
                                                                       =============   =============    =============
Effective Federal income tax rate...............................             35.0%           33.3%            34.4%
</TABLE>

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

<TABLE>
<CAPTION>
                                                                          1997             1996            1995
                                                                       -------------   --------------   -------------
                                                                                  (Millions of Dollars)
<S>                                                                           <C>              <C>            <C> 
Deferred Credits: 
     Additional tax depreciation and amortization...............              $16              $31            $111
     Conservation Costs.........................................               27               15              (1)
     Deferred Fuel Costs--net...................................               (4)               6              (4)
     Other......................................................               (4)              (7)            (29)
                                                                       -------------   --------------   -------------
          Total.................................................              $35              $45             $77
                                                                       =============   ==============   =============
</TABLE>


<PAGE>


SFAS 109

     The following is an analysis of deferred income taxes:
<TABLE>
<CAPTION>

                                                                        December 31,
                                                                -------------------------------
                                                                   1997              1996
                                                                -------------    --------------
                                                                   (Millions of Dollars)
<S>                                                                     <C>               <C>
Deferred Income Taxes   
Assets:
   Current (net)..........................................              $25               $23
   Non-current:
     Unrecovered Investment Tax Credits...................              117               123
     Nuclear Decommissioning..............................               33                27
     Construction Period Interest and Taxes...............               15                16
     Vacation Pay.........................................                7                 7
     Other................................................               17                17
                                                                -------------    --------------
        Total Non-current.................................              189               190
                                                                -------------    --------------
        Total Assets......................................             $214              $213
                                                                -------------    --------------
Liabilities:
   Non-current:
     Plant Related Items..................................            2,246             2,255
     Conservation Costs...................................               39                12
     Hope Creek O&M Costs.................................               21                22
     Deferred Electric Energy & Gas Costs.................               60                63
     Unamortized Debt Expense.............................               44                40
     Taxes Recoverable Through Future Rates (Net).........              249               259
     Other................................................               99                96
                                                                -------------    --------------
        Total Non-current.................................            2,758             2,747
                                                                -------------    --------------
        Total Liabilities.................................            2,758             2,747
                                                                -------------    --------------
Summary--Deferred Income Taxes
   Net Current Assets.....................................               25                23
   Net Non-current Liability..............................            2,569             2,557
                                                                -------------    --------------
        Total.............................................           $2,544            $2,534
                                                                =============    ==============
</TABLE>


     The  balance of Federal  income tax payable by  (receivable  from) PSE&G to
Enterprise was $5 million and $(5) million, as of December 31, 1997 and December
31, 1996, 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,
                                                         ---------------   ---------------   ---------------   ---------------
                                                           1997     1996     1997     1996     1997     1996     1997     1996
                                                         ------   ------   ------   ------   ------   ------   ------   ------
                                                                                   (Millions of Dollars)
<S>                                                      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>   
Operating Revenues ..............................        $1,694   $1,756   $1,270   $1,286   $1,497   $1,270   $1,664   $1,513
Operating Income.................................           292      287      195      212      264      230      247      218
Net Income.......................................           140      184       87      109      159      122      142      120
Earnings Available to Enterprise.................           136      176       81      120      157      118      139      116
</TABLE>


<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, 1997, 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 13, 1998


<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, 1997,  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 and           Executive Vice President--Finance
        Chief Executive Officer              (Principal Financial Officer)

          PATRICIA A. RADO
    Vice President and Controller
   (Principal Accounting Officer)

February 13, 1998



<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, 1997
and  1996,   and  the  related   consolidated   statements  of  income,   common
stockholders'  equity and cash  flows for each of the three  years in the period
ended  December 31, 1997.  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, 1997 and 1996, and the results
of their  operations  and their  cash  flows for each of the three  years in the
period ended December 31, 1997 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, 1995,
1994,  and 1993,  and the related  consolidated  statements of income,  retained
earnings and cash flows for the years ended  December 31, 1994 and 1993 (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, 1997 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

Parsippany, New Jersey
February 13, 1998




<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, 1997 and
1996, and the related  consolidated  statements of income,  common stockholder's
equity and cash flows for each of the three years in the period  ended  December
31, 1997. 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, 1997 and 1996, and the results of
their  operations and their cash flows for each of the three years in the period
ended  December  31,  1997 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, 1995,
1994,  and 1993,  and the related  consolidated  statements of income,  retained
earnings and cash flows for the years ended  December 31, 1994 and 1993 (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, 1997 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


Parsippany, New Jersey
February 13, 1998


<PAGE>


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

    Enterprise and PSE&G, none.
<PAGE>

                                    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 21, 1998, 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  6,  1998  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 21,  1998,  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 and Conrad K. Harper, see Part I--Business, Item
3--Legal Proceedings.

     LAWRENCE  R.  CODEY  has been a  director  since  1988.  Age 53.  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 56.  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.
Director of Foster Wheeler Corporation and The HSB Group, Inc.

     RAYMOND V. GILMARTIN has been a director  since 1993.  Age 57.  Director of
Enterprise.  Has been  Chairman  of the  Board,  President  and Chief  Executive
Officer of Merck & Company,  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.  Director of Merck & Co.,
Inc. and General Mills, Inc.

     CONRAD K. HARPER has been a director  since May 1997.  Age 57.  Director of
Enterprise.  Has been a partner in the law firm of Simpson  Thacher &  Bartlett,
New York,  New York  since  October  1996 and from  1974 to May 1993.  Was Legal
Adviser,  U.S.  Department of State from May 1993 to June 1996.  Director of New
York Life Insurance Company.

     IRWIN LERNER has been a director  since 1993.  Age 67.  Member of Executive
Committee.  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., AXYS Pharmaceuticals, Inc., Medarex, Inc. and Covance Inc.

     FORREST J.  REMICK has been a director  since  1995.  Age 67.  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, 1997                  Office                     First Elected to Present
                                                                                                      Position
-----------------------------  --------------------- ------------------------------------ ----------------------------------
<S>                                    <C>           <C>                                       <C>            
E. James Ferland............           55            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)

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

Lawrence R. Codey..........            53            President   and  Chief   Operating        September 1991 to present
                                                     Officer (PSE&G)

Robert C. Murray...........            52            Vice President and Chief Financial        January 1992 to present
                                                     Officer (Enterprise)

                                                     Executive Vice President--Finance         June 1997 to present
                                                     (PSE&G)

                                                     Senior Vice President and Chief           January 1992 to June 1997
                                                     Financial Officer (PSE&G)

Patricia A. Rado...........            55            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...........            52            Vice President and General Counsel        April 1988 to present
                                                     (Enterprise)

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

Frank Cassidy..............            50            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....            46            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, 1997                  Office                      First Elected to Present
                                                                                                       Position
-----------------------------  --------------------- ------------------------------------  ---------------------------------
<S>                                    <C>                                                     <C>            
Leon R. Eliason.............           58            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............           51            Senior Vice President--Corporate          October 1996 to present
                                                     Services and External Affairs
                                                     (PSE&G)

                                                     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

Harold W. Keiser............           54            Executive Vice President--Nuclear         January 1998 to present
                                                     (PSE&G)

                                                     Private Consultant                        October 1997 to January 1998

                                                     Vice President and Chief Nuclear          March 1996 to October 1997
                                                     Operating Officer, Commonwealth
                                                     Edison

                                                     Vice President, Pressurized Water         December 1995 to March 1996
                                                     Reactor, Commonwealth Edison

                                                     Executive Vice President and Chief        April 1993 to December 1995
                                                     Operating Officer, Entergy
                                                     Operations Incorporated

Eileen A. Moran.............           43            President (PSRC)                          May 1990 to present
     
                                                     President (EGDC)                          January 1997 to present
     
Michael J. Thomson..........           39            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)

</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 21, 1998 which  definitive
Proxy  Statement  is  expected  to be filed  with the  Securities  and  Exchange
Commission on or about March 6, 1998 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,
1997 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....................    1997         712,261               (5)    118,000       108,702           15,747
Chairman of the Board, President and    1996         712,261        279,811         6,500       168,084           10,994
CEO of Enterprise                       1995         682,377        225,411         5,800       246,288            8,681


Lawrence R. Codey...................    1997         435,327               (5)     59,200        50,325            5,459
President and Chief Operating           1996         435,327        141,968         3,000        81,144            5,934
Officer of PSE&G                        1995         418,392        141,931         2,800       118,746            5,756


Robert C. Murray....................    1997         345,671               (5)     32,000        36,234            5,260
Vice President and Chief Financial      1996         332,721         83,887         2,000        57,960            5,248
Officer of Enterprise                   1995         318,775        117,577(6)      2,000        70,368            5,169

Leon R. Eliason.....................    1997         336,706         65,000(5)(10) 15,500        36,234            7,505
President--Nuclear Business Unit and    1996         336,706        180,839(7)      2,500        34,776            6,239
Chief Nuclear Officer of PSE&G (9)      1995         323,755        229,168(8)      2,500        26,388            3,242

R. Edwin Selover....................    1997         278,928               (5)    14,300        26,169            9,065
Vice President and General Counsel      1996         268,967         59,828        1,400        40,572            7,172
of Enterprise                           1995         253,028         65,966        1,400        57,174            6,596
</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 are payable in one lump sum.

(2)  Includes  grant of options to purchase  8,000 and 10,000;  4,200 and 5,000;
     3,000 and 4,000;  3,000 and  2,500;  1,800 and 2,500  shares of  Enterprise
     Common Stock in January and  December,  respectively,  to Messrs.  Ferland,
     Codey, Murray, Eliason and Selover, respectively, 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.  Also includes  options to purchase  100,000;
     50,000; 25,000; 10,000 and 10,000 shares of Enterprise Common Stock granted
     to Messrs. Ferland, Codey, Murray, Eliason and Selover, respectively, under
     LTIP not in tandem with performance units and dividend equivalents.

(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                  Murray           Eliason           Selover
                      ----------------   --------------------    ---------------    --------------   ---------------
                       Thrift   MICP      Thrift     MICP         Thrift    MICP     Thrift   MICP    Thrift    MICP
                        ($)     ($)        ($)       ($)            ($)      ($)       ($)     ($)      ($)     ($)
                      ----------------   --------------------    ---------------    --------------   --------------
<S>                    <C>      <C>       <C>          <C>        <C>       <C>      <C>      <C>     <C>       <C>
1997.................  4,801    1,122     4,802        657        4,802     458        519      0     4,802     325
1996.................  4,150    2,861     4,502      1,432        4,502     746      2,678    212     4,502   1,272
1995.................  3,752    2,383     4,502      1,254        4,502     667      1,795      0     4,501   1,144
</TABLE>

     In addition,  1997,  1996 and 1995 amounts  include for Mr. Ferland $9,824,
$3,983 and $2,546; for Mr. Eliason $6,986, $3,349 and $1,447 and for Mr. Selover
$3,938,  $1,398 and $951,  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 1997 MICP award amount has not yet been determined. The target award is
     50% of salary for Mr. Ferland,  40% for Messrs.  Codey and Eliason, 35% for
     Mr. Murray and 30% for Mr. Selover. The target award is adjusted to reflect
     Enterprise's return on capital,  PSE&G's comparative electric and gas costs
     and individual performance.

(6)  Includes $25,000 paid pursuant to Mr. Murray's employment agreement.

(7)  Includes $100,000 paid pursuant to Mr. Eliason's employment agreement.

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

(9)  Mr. Eliason is scheduled to retire effective April 30, 1998.

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

<PAGE>
<TABLE>

                                                 OPTION GRANTS IN LAST FISCAL YEAR (1997)
<CAPTION>
                                         Number of        % of Total
                                        Securities         Options
                                        Underlying        Granted to       Exercise
                                                                               or
                                          Options        Employees in      Base Price     Expiration           Grant Date
Name                                    Granted(1)       Fiscal Year         ($/Sh)          Date          Present Value ($)(4)
-------------------------------------  ---------------  ----------------   ------------   -------------   ----------------------
<S>                                         <C>                    <C>         <C>           <C>                <C>   
E. James Ferland...................         8,000(1)               2.2         27.625        01/03/07            69,600
                                           10,000(2)               2.7         29.563        12/16/07           100,800
                                          100,000(3)              27.0         29.563        12/16/07           262,000

Lawrence R. Codey..................         4,200(1)               1.1         27.625        01/03/07            36,540
                                            5,000(2)               1.3         29.563        12/16/07            50,400
                                           50,000(3)              13.5         29.563        12/16/07           131,000

Robert C. Murray...................         3,000(1)               0.8         27.625        01/03/07            26,100
                                            4,000(2)               1.1         29.563        12/16/07            40,320
                                           25,000(3)               6.7         29.563        12/16/07            65,500

Leon R. Eliason....................         3,000(1)               0.8         27.625        01/03/07            26,100
                                            2,500(2)               0.7         29.563        12/16/07            25,200
                                           10,000(3)               2.7         29.563        12/16/07            26,200

R. Edwin Selover...................         1,800(1)               0.5         27.625        01/03/07            15,660
                                            2,500(2)               0.7         29.563        12/16/07            25,200
                                           10,000(3)               2.7         29.563        12/16/07            26,200
</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, 2000. 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)  Granted  under LTIP in tandem with equal  number of  performance  units and
     dividend   equivalents,   as  described   in  Note  (1)  above,   but  with
     exercisability commencing January 1, 2001.

(3)  Granted  under  LTIP not in tandem  with  performance  units  and  dividend
     equivalents, with exercisability commencing December 16, 1998, December 16,
     1999 and December 16, 2000, respectively,  with respect to one-third of the
     options at each such date.

(4)  Determined  using the  Black-Scholes  model,  incorporating  the  following
     material  assumptions and  adjustments  for the grants expiring  January 3,
     2007 and December 16, 2007,  respectively:  (a) exercise  prices of $27.625
     and $29.563,  equal to the fair market value of the  underlying  Enterprise
     Common Stock on the dates of grant;  (b) an option term of ten years on all
     grants;  (c) interest  rates of 6.58% and 5.81% that represent the interest
     rates on U.S.  Treasury  securities  on the dates of grant  with a maturity
     date corresponding to that of the option terms; (d) volatilities of 17.847%
     and 18.948%  calculated using daily Enterprise  Common Stock prices for the
     one-year  period prior to the grant dates;  (e) a dividend yield of 0% with
     respect to the  dividend  equivalent  feature of the tandem  grants,  since
     dividend  payments accrue while the option is held; (f) a dividend yield of
     7.31% on the non-tandem  grants and (g) reductions of approximately  11.51%
     and 7.8% for the non-tandem and tandem grants, respectively, to reflect the
     probability  of  forfeiture  due  to  termination  prior  to  vesting,  and
     approximately  26.3%,  17.36% and 1.75% for the grant  expiring  January 3,
     2007 and each of the grants expiring  December 16, 2007,  respectively,  to
     reflect the  probability  of a shortened  option term due to termination of
     employment prior to the option  expiration date. 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.
     There is no assurance  that any such value  realized will be at or near the
     value estimated by the Black-Scholes model utilized.

<PAGE>
<TABLE>
           AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR (1997) AND
                    FISCAL YEAR END OPTION VALUES (12/31/97)

<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...............        5,400         0               0          130,300              0        300,839
Lawrence R. Codey.............         2,500         0             700           65,000          5,206        138,623
Robert C. Murray..............         1,800         0               0           36,000              0         77,048
Leon R. Eliason...............         1,800         0               0           20,500              0         42,806
R. Edwin Selover..............         1,300         0           2,200           17,100         10,862         36,144
</TABLE>

(1)  Does not  reflect  any  options  granted  and/or  exercised  after year end
     (12/31/97). 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
     (12/31/97).  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,  Murray and
Eliason  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.  Murray,  as modified in
1998,  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 seventeen years after  completion of  approximately  nine
years of service. The principal remaining applicable terms of the agreement with
Mr. Eliason  provide for a lump sum cash payment of $35,000 in 1998 to align Mr.
Eliason with MICP payments for other executive officers, and additional years of
credited service for retirement  benefits purposes for allied work experience of
19 years at his scheduled retirement date of April 30, 1998.

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 1997 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.

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 above under
the heading Security Ownership of Directors and Management.

     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.
<PAGE>

                        PENSION PLAN TABLE


                                         Length of Service
                  --------------------------------------------------------------
Average Final  
Compensation          30 Years        35 Years         40 Years        45 Years
----------------  ------------- --------------- ---------------- ---------------
      $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
     1,100,000        660,000         715,000          770,000         825,000
     1,200,000        720,000         780,000          840,000         900,000

     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,  Murray and Selover will have accrued  approximately 48, 41, 41
and 43 years of credited  service,  respectively,  as of age 65. Mr.  Eliason is
scheduled to retire at age 59 with 23 years of credited service.

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 21, 1998 which  definitive Proxy
Statement is expected to be filed with the Securities and Exchange Commission on
or about  March 6, 1998 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, 1998.  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
  Name                                                    Beneficial Ownership
  ----                                                    --------------------
  Lawrence R. Codey......................................       80,811 (1)
  Leon R. Eliason........................................       24,108 (2)
  E. James Ferland.......................................      183,057 (3)
  Raymond V. Gilmartin...................................        3,989
  Conrad K. Harper.......................................          300
  Irwin Lerner...........................................       10,367
  Robert C. Murray.......................................       46,179 (4)
  Forrest J. Remick......................................        2,213
  R. Edwin Selover.......................................       26,891 (5)
  All directors and executive officers (12) as a group...      410,159 (6)

(1)  Includes  options to purchase  65,700 shares,  3,500 of which are currently
     exercisable.

(2)  Includes  the   equivalent   of  8  shares  held  under  PSE&G  Thrift  and
     Tax-Deferred  Savings Plan.  Includes  options to purchase  20,500  shares,
     2,500 of which are currently exercisable.

(3)  Includes  the  equivalent  of 10,989  shares  held under  PSE&G  Thrift and
     Tax-Deferred  Savings Plan.  Includes  options to purchase  130,300 shares,
     5,800 of which are currently exercisable.

(4)  Includes  the  equivalent  of 1,179  shares  held  under  PSE&G  Thrift and
     Tax-Deferred  Savings Plan.  Includes  options to purchase  36,000  shares,
     2,000 of which are currently exercisable.

(5)  Includes  options to purchase  19,300 shares,  of which 3,600 are currently
     exercisable.

(6)  Includes  the  equivalent  of 12,453  shares  held under  PSE&G  Thrift and
     Tax-Deferred  Savings Plan. Includes options to purchase 302,400 shares, of
     which 18,400 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 21, 1998,  which  definitive
Proxy  Statement  is  expected  to be filed  with the  Securities  and  Exchange
Commission  on or about  March 6, 1998.  Such  information  set forth under such
heading is incorporated herein by this reference thereto.

PSE&G

     None.


<PAGE>


                                     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, 1997, 1996, and 1995, on page 49.

          Enterprise  Consolidated  Balance  Sheets for the years ended December
          31, 1997 and 1996, on pages 50 and 51.

          Enterprise  Consolidated  Statements of Cash Flows for the years ended
          December 31, 1997, 1996, and 1995 on page 52.

          Enterprise  Statements  of Common  Stockholders'  Equity for the years
          ended December 31, 1997, 1996, and 1995 on page 53.

          Enterprise  Notes to  Consolidated  Financial  Statements  on pages 60
          through 92.

     (2)  PSE&G  Consolidated  Statements of Income for the years ended December
          31, 1997, 1996, and 1995, on page 55.

          PSE&G  Consolidated  Balance  Sheets for the years ended  December 31,
          1997 and 1996, on pages 56 and 57.

          PSE&G  Consolidated  Statements  of Cash  Flows  for the  years  ended
          December 31, 1997, 1996, and 1995 on page 58.

          PSE&G  Statements of Common  Stockholder's  Equity for the years ended
          December 31, 1997, 1996, and 1995 on page 59.

          PSE&G Notes to Consolidated  Financial  Statements on pages 93 through
          95.

(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, 1997 (page 111).

     (2)  PSE&G Financial Statement Schedules:

          Schedule  II--Valuation and Qualifying  Accounts for each of the three
          years in the period ended December 31, 1997 (page 111).

     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.

(C)  The following exhibits are filed herewith:

     (1)  Enterprise:

          Exhibit 10a(1) Directors' Deferred Compensation Plan
          Exhibit 10a(2) Deferred Compensation Plan for Certain Employees
          Exhibit 10a(3) Limited Supplemental Benefits Plan for Certain
                         Employees
          Exhibit 10a(4) Mid Career Hire Supplemental  Retirement Plan
          Exhibit 10a(5) Retirement Income Reinstatement Plan 
          Exhibit 10a(6) Long-Term  Incentive Plan
          Exhibit 10a(9)(i) Amendment to Letter Agreement with Robert C. Murray
          Exhibit 10a(16) Letter Agreement with Harold W. Keiser 
          Exhibit 10a(17) CEA  Deferred  Compensation  Plan
          Exhibit 10a(18) CEA Executive Incentive Compensation Plan
          Exhibit 10a(19) EDHI Management Incentive Compensation Plan
          Exhibit 10a(20) EDHI Deferred Compensation Plan
          Exhibit 10a(21) Energis Executive Incentive Compensation Plan 
          Exhibit 10a(22) EDHI Limited Supplemental Benefits Plan for Certain
                          Employees
          Exhibit 12 Computation of Ratios of Earnings to Fixed Charges
          Exhibit 21 Subsidiaries of Registrant
          Exhibit 23 Independent Auditors' Consent
          Exhibit 27 Financial Data Schedule

          (See Exhibit Index on pages 115 through 122.)

     (2) PSE&G:

          Exhibit 10a(1) Directors' Deferred Compensation Plan
          Exhibit 10a(2) Deferred Compensation Plan for Certain Employees
          Exhibit 10a(3) Limited Supplemental Benefits Plan for Certain
                         Employees
          Exhibit 10a(4) Mid Career Hire Supplemental Retirement Plan
          Exhibit 10a(5) Retirement Income Reinstatement Plan
          Exhibit 10a(6) Long-Term Incentive Plan
          Exhibit 10a(9)(i) Amendment to Letter Agreement with Robert C. Murray
          Exhibit 10a(16) Letter Agreement with Harold W. Keiser
          Exhibit 12(a) Computation  of Ratios of Earnings to Fixed Charges
          Exhibit 12(b) Computation of Ratios of Earnings to Fixed Charges 
                        Plus Preferred Stock Dividend Requirements
          Exhibit 23 Independent Auditors' Consent
          Exhibit 27 Financial Data Schedule

          (See Exhibit Index on pages 122 through 128)

(D)  The  following  reports on Form 8-K were filed by the  registrant(s)  named
     below during the last  quarter of 1997 and the 1998 period  covered by this
     report under Item 5:

        Registrant            Date of Report                Item Reported

           None.



<PAGE>
<TABLE>
                                                                                                            SCHEDULE II
                                      PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                                     Schedule II -- Valuation and Qualifying Accounts
                                    Years Ended December 31, 1997 -- December 31, 1995

<CAPTION>
                                             Column B               Column C               Column D        Column E
                                            -------------  -----------------------------  -------------   -------------
                                                                    Additions
                                                           -----------------------------
                                            Balance at     Charged to     Charged to                      Balance at
                                             beginning      cost and    other accounts    Deductions-       end of
Description                                  of period      expenses       describe        describe         period
------------------------------------------- -------------  -----------------------------  -------------   -------------
                                                                      (Millions of Dollars)
<S>                                                 <C>           <C>                         <C>                 <C>
1997:
Allowance for Doubtful Accounts..........           $46           $44              $--        $49 (A)             $41
Discount on Property Abandonments........             4            --               --          2 (B)               2
Inventory Valuation Reserve..............            16            --               --          4                  12
Other Valuation Allowances...............            10            --               --         --                  10

1996:
Allowance for Doubtful Accounts..........           $38           $46              $--        $38 (A)             $46
Discount on Property Abandonments........             7            --               --          3 (B)               4
Inventory Valuation Reserve..............            20            --               --          4                  16
Other Valuation Allowances...............            --            10               --         --                  10

1995:
Allowance for Doubtful Accounts..........           $41           $33               $--       $36 (A)             $38
Discount on Property Abandonments........            11            --               --          4 (B)               7
Inventory Valuation Reserve..............            18             2               --         --                  20
Other Valuation Allowances...............            --            --               --         --                  --

<FN>
(A)  Accounts Receivable/Investments written off.

(B)  Amortization of discount to income.
</FN>
</TABLE>


<TABLE>

                                         PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                                     Schedule II -- Valuation and Qualifying Accounts
                                    Years Ended December 31, 1997 -- December 31, 1995

<CAPTION>
                                             Column B               Column C                Column D       Column E
                                            -------------  ----------------------------   --------------- -------------
                                                                     Additions
                                                           ----------------------------
                                             Balance at     Charged to     Charged to                      Balance at
                                             beginning      cost and    other accounts    Deductions-       end of
Description                                  of period      expenses       describe        describe         period
------------------------------------------- -------------  -----------------------------  -------------   ------------- 
                                                                 (Millions of Dollars)
<S>                                                 <C>           <C>              <C>         <C>                <C>
1997:
Allowance for Doubtful Accounts..........           $46           $44             $--          $49 (A)            $41
Discount on Property Abandonments........             4            --              --            2 (B)              2
Inventory Valuation Reserve..............            16            --              --            4                 12
Other Valuation Allowances...............            10            --              --           --                 10

1996:
Allowance for Doubtful Accounts..........           $38           $46             $--          $38 (A)            $46
Discount on Property Abandonments........             7            --              --            3 (B)              4
Inventory Valuation Reserve..............            20            --              --            4                 16
Other Valuation Allowances...............            --            10              --           --                 10

1995:
Allowance for Doubtful Accounts..........           $41           $33             $--          $36 (A)            $38
Discount on Property Abandonments........            11            --              --            4 (B)              7
Inventory Valuation Reserve..............            18             2              --           --                 20
Other Valuation Allowances...............            --            --              --           --                 --

<FN>
(A)  Accounts Receivable/Investments written off.

(B)  Amortization of discount to income.
</FN>
</TABLE>
<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 23, 1998

     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 23, 1998
 E. James Ferland           President and Chief 
                            Executive Officer and 
                            Director (Principal Executive
                            Officer)

 ROBERT C. MURRAY           Vice President and Chief           February 23, 1998
 Robert C. Murray           Financial Officer (Principal
                            Financial Officer)

 PATRICIA A. RADO           Vice President and Controller      February 23, 1998
 Patricia A. Rado           (Principal Accounting Officer)

 LAWRENCE R. CODEY          Director                           February 23, 1998
 Lawrence R. Codey

 ERNEST H. DREW             Director                           February 23, 1998
 Ernest H. Drew

 T. J. DERMOT DUNPHY        Director                           February 23, 1998
 T. J. Dermot Dunphy

 RAYMOND V. GILMARTIN       Director                           February 23, 1998
 Raymond V. Gilmartin

 CONRAD K. HARPER           Director                           February 23, 1998
 Conrad K. Harper

 IRWIN LERNER               Director                           February 23, 1998
 Irwin Lerner

 MARILYN M. PFALTZ          Director                           February 23, 1998
 Marilyn M. Pfaltz

 FORREST J. REMICK          Director                           February 23, 1998
 Forrest J. Remick

 RICHARD J. SWIFT           Director                           February 23, 1998
 Richard J. Swift

 JOSH S. WESTON             Director                           February 23, 1998
 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 23, 1998

     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 and Chief     February 23, 1998
E. James Ferland           Chief Executive Officer and
                           Director (Principal Executive
                           Officer)

ROBERT C. MURRAY           Executive Vice President--Finance   February 23, 1998
Robert C. Murray           (Principal Financial Officer)

PATRICIA A. RADO           Vice President and Controller       February 23, 1998
Patricia A. Rado           (Principal Accounting Officer)

LAWRENCE R. CODEY          Director                            February 23, 1998
Lawrence R. Codey

RAYMOND V. GILMARTIN       Director                            February 23, 1998
Raymond V. Gilmartin

CONRAD K. HARPER           Director                            February 23, 1998
Conrad K. Harper

IRWIN LERNER               Director                            February 23, 1998
Irwin Lerner

FORREST J. REMICK          Director                            February 23, 1998
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

4a(1)      (f)   B-1     (c)  4b(1)           Incorporated, effective 
                              2/18/81         April 23, 1987 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    Exchange
------     ----------    ---------
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>



                    ENTERPRISE
----------------------------------------------------
                  Exhibit Number
----------------------------------------------------
 This               Previous Filing
           -----------------------------------------
Filing     Commission    Exchanges
------     ----------    ---------
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>



                    ENTERPRISE
----------------------------------------------------
                  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>



                    ENTERPRISE
----------------------------------------------------
                  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

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


<PAGE>



                    ENTERPRISE
----------------------------------------------------
                  Exhibit Number
----------------------------------------------------
 This               Previous Filing
           -----------------------------------------
Filing     Commission    Exchanges
------     ----------    ---------
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)    (e)  4                                December 1, 1996
               2/26/97

4a(95)    (a)  4          (a) 4                 June 1, 1997
               6/17/97        6/17/97

  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      (b)  4          (b) 4                 Indenture of Trust between PSE&G
               12/1/93        12/1/93           and The Chase Manhattan Bank
                                                (National Association), as 
                                                Trustee, providing for Secured 
                                                Medium-Term Notes dated July
                                                1, 1993

4d(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

4d(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)                                          Directors' Deferred
                                                Compensation Plan

10a(2)                                          Deferred Compensation Plan 
                                                for Certain Employees

10a(3)                                          Limited Supplemental Benefits
                                                Plan for Certain Employees

10a(4)                                          Mid Career Hire
                                                Supplemental Retirement Plan

10a(5)                                          Retirement Income Reinstatement
                                                Plan

10a(6)                                          Long-Term Incentive Plan


<PAGE>



                    ENTERPRISE
----------------------------------------------------
                  Exhibit Number
----------------------------------------------------
 This               Previous Filing
           -----------------------------------------
Filing     Commission    Exchanges
------     ----------    --------- 
10a(7)    (e)  10a(20)    (e) 10a(20)           Management Incentive
                2/26/97        2/26/97          Compensation Plan


  10a(8)    (c)  10a(11)    (c) 10a(11)         Letter Agreement with E. James 
                 2/10/93        2/11/93         Ferland dated April 16, 1986

  10a(9)    (c)  10a(15)    (c) 10a(15)         Letter Agreement with Robert C. 
                 2/10/93        2/11/93         Murray dated December 17, 1991

10a(9)(i)                                       Amendment to Letter Agreement 
                                                with Robert C. Murray dated 
                                                January 6, 1998

10a(10)    (c)  10a(14)    (c) 10a(14)          Letter Agreement with 
                 2/26/94        3/9/94          Patricia A. Rado dated
                                                March 24, 1993

10a(11)    (c)  10a(15)    (c) 10a(15)          Letter Agreement, as amended, 
                 2/23/95        2/23/95         with Leon R. Eliason dated
                                                September 14, 1994

 10a(12)    (d)  10a(15)    (d) 10a(15)         Letter Agreement with
                 8/14/95        8/14/95         Louis F. Storz dated
                                                July 7, 1995

 10a(13)    (d)  10a(16)    (d) 10a(16)         Letter Agreement with
                 8/14/95        8/14/95         Elbert C. Simpson dated
                                                May 31, 1995

 10a(14)    (d)  10a(17)    (d) 10a(17)         Letter Agreement with 
                 11/14/95       11/14/95        Alfred C. Koeppe dated
                                                August 23, 1995

 10a(15)    (e)  10a(19)    (e) 10a(19)         Directors' Stock Plan
                 2/22/96        2/22/96

 10a(16)                                        Letter Agreement with
                                                Harold W. Keiser dated 
                                                January 5, 1998

 10a(17)                                        CEA Deferred Compensation Plan

 10a(18)                                        CEA Executive Incentive 
                                                Compensation Plan

 10a(19)                                        EDHI Management Incentive
                                                Compensation Plan

 10a(20)                                        EDHI Deferred Compensation
                                                Plan

 10a(21)                                        Energis Executive Incentive
                                                Compensation Plan

 10a(22)                                        EDHI Limited Supplemental
                                                Benefits Plan for Certain
                                                Employees

    11                                          Inapplicable

    12                                          Computation of Ratios of
                                                Earnings to Fixed Charges

    13                                          Inapplicable

    16                                          Inapplicable


    18                                          Inapplicable



<PAGE>



                    ENTERPRISE
----------------------------------------------------
                  Exhibit Number
----------------------------------------------------
 This               Previous Filing
           -----------------------------------------
Filing     Commission    Exchanges
------     ----------    --------- 
     21                                         Subsidiaries of the Registrant

     22                                         Inapplicable

     23                                         Independent Auditors' Consent

     24                                         Inapplicable

     27                                         Financial Data Schedule

     28                                         Inapplicable

     99                                         Inapplicable


                      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


<PAGE>


                      PSE&G
                  Exhibit Number
----------------------------------------------------
 This               Previous Filing
           -----------------------------------------
Filing     Commission    Exchanges
------     ----------    --------- 
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

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


<PAGE>



                      PSE&G
                  Exhibit Number
----------------------------------------------------
 This               Previous Filing
           -----------------------------------------
Filing     Commission    Exchanges
------     ----------    --------- 
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

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



<PAGE>



                      PSE&G
----------------------------------------------------
                  Exhibit Number
----------------------------------------------------
 This               Previous Filing
           -----------------------------------------
Filing     Commission    Exchanges
------     ----------    --------- 
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

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


<PAGE>



                      PSE&G
----------------------------------------------------
                  Exhibit Number
----------------------------------------------------
 This               Previous Filing
           -----------------------------------------
Filing     Commission    Exchanges
------     ----------    --------- 
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

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


<PAGE>



                   PSE&G
----------------------------------------------------
                  Exhibit Number
----------------------------------------------------
 This               Previous Filing
           -----------------------------------------
Filing     Commission    Exchanges
------     ----------    --------- 
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)    (c)  4                                December 1, 1996
               2/26/97

4a(95)    (a)  4          (a)  4                June 1, 1997
               6/17/97         6/17/97

  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      (b)   4         (b)  4                Indenture of Trust between PSE&G
               12/1/93         12/1/93          and Chase Manhattan Bank 
                                                (National Association), as 
                                                Trustee, providing for 
                                                Secured Medium-Term Notes 
                                                dated July 1, 1993

4d(1)     (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

4d(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)                                          Directors' Deferred
                                                Compensation Plan

10a(2)                                          Deferred Compensation Plan for 
                                                Certain Employees

10a(3)                                          Limited Supplemental Benefits
                                                Plan for Certain Employees

10a(4)                                          Mid Career Hire Supplemental 
                                                Retirement Plan

10a(5)                                          Retirement Income Reinstatement
                                                Plan

10a(6)                                          Long-Term Incentive Plan

10a(7)    (c)  10a(20)    (c)   10a(20)         Management Incentive
               2/26/97          2/26/97         Compensation Plan


<PAGE>




                      PSE&G
----------------------------------------------------
                  Exhibit Number
----------------------------------------------------
  This               Previous Filing
           -----------------------------------------
Filing     Commission    Exchanges
------     ----------    --------- 

10a(8)    (c)  10a(9)     (c)   10a(9)            Letter Agreement with
               2/10/93          2/11/93           E. James Ferland dated
                                                  April 16, 1986

10a(9)    (c)  10a(12)    (c)   10a(12)           Letter Agreement with 
               2/10/93          2/11/93           Robert C. Murray
                                                  dated December 17, 1991

10a(9)(i)                                         Amendment to Letter Agreement 
                                                  with Robert C. Murray
                                                  dated January 6, 1998

 10a(10)    (c)  10a(13)    (c)   10a(13)         Letter Agreement with 
                 2/26/94          3/9/94          Patricia A. Rado dated
                                                  March 24, 1993

 10a(11)    (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(12)    (d)  10a(15)    (d)   10a(15)         Letter Agreement with
                 8/14/95          8/14/95         Louis F. Storz dated
                                                  July 7, 1995

 10a(13)    (d)  10a(16)    (d)   10a(16)         Letter Agreement with 
                 8/14/95          8/14/95         Elbert C. Simpson dated
                                                  May 31, 1995

 10a(14)    (d)  10a(17)    (d)   10a(17)         Letter Agreement with
                 11/14/95         11/14/95        Alfred C. Koeppe dated
                                                  August 23, 1995

 10a(15)    (e)  10a(18)    (e)   10a(18)         Directors' Stock Plan
                 2/22/96          2/22/96

 10a(16)                                          Letter Agreement with
                                                  Harold W. Keiser dated
                                                  January 5, 1998

    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