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

                                    FORM 10-K

(Mark One)

             |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

                                       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:

     TITLE OF EACH CLASS              NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------------------       -------------------------------------------
Common Stock without par value                  New York Stock Exchange
                                              Philadelphia Stock Exchange

Trust Originated Preferred Securities (Guaranteed Preferred Beneficial Interest
in PSEG's Debentures), $25 par value at 7.44%, issued by Enterprise Capital
Trust I (Registrant).

Trust Originated Preferred Securities (Guaranteed Preferred Beneficial Interest
in PSEG's Debentures), $25 par value at 7.25%, issued by Enterprise Capital
Trust III (Registrant).

          SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:

Floating Rate Capital Securities (Guaranteed Preferred Beneficial Interest in
PSEG's Debentures), $1,000 par value issued by Enterprise Capital Trust II
(Registrant), LIBOR plus 1.22%.

Extendible Notes, Series A, LIBOR plus .75%, Due 2000.

Extendible Notes, Series B, LIBOR plus .78%, Due 2000.

     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 20, 1999,
                        which definitive Proxy Statement is expected to be filed
                        with the Securities and Exchange Commission on or about
                        March 2, 1999, as specified herein.

================================================================================
<PAGE>

           SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

<TABLE>
<CAPTION>
                                                                                           NAME OF EACH EXCHANGE
            TITLE OF EACH CLASS                         TITLE OF EACH CLASS                 ON WHICH REGISTERED
            -------------------                         -------------------                 -------------------
Cumulative Preferred Stock $100 par value    First and Refunding Mortgage Bonds Series
Series:                                      Due:
<S>                                          <C>           <C>        <C>               <C>
     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
     6.92%                                   6 7/8%         MM         2003               New York Stock Exchange
                                             6 1/2%         PP         2004
   $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
                                             6 3/8%         YY         2023
                                             8 %                       2037
                                             5 %                       2037
</TABLE>

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 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, 1999 was
$8,840,858,422 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, 1999
             -----                           -------------------------------
Common Stock, without par value                       223,136,208

As of January 31, 1999, 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

PART I
Item 1.       Business....................................................   1
              General.....................................................   1
              PSEG........................................................   1
              PSE&G.......................................................   1
              Industry Issues and Risk Factors............................   1
              Segment Information.........................................   2
              Competitive Environment.....................................   2
              Construction and Capital Requirements.......................   5
              Financing Activities........................................   6
              Income Taxes................................................   6
              Credit Ratings..............................................   6
              PSE&G.......................................................   6
              Rate Matters................................................   6
              Customers...................................................   6
              Electric Supply and Capacity................................   7
              Nuclear Operations..........................................  10
              Electric Fuel Supply and Disposal...........................  14
              Gas Operations and Supply...................................  16
              Employee Relations..........................................  17
              Environmental Controls......................................  17
              Energy Holdings.............................................  22
Item 2.       Properties..................................................  24
Item 3.       Legal Proceedings...........................................  27
Item 4.       Submission of Matters to a Vote of Security Holders.........  33

PART II
Item 5.       Market for Registrant's Common Equity and Related
                Stockholder Matters.......................................  33
Item 6.       Selected Financial Data.....................................  34
Item 7.       Management's Discussion and Analysis of Financial Condition
                and Results of Operations.................................  35
              PSEG........................................................  35
              Corporate Structure.........................................  35
              Overview of 1998 and Future Outlook.........................  36
              Results of Operations.......................................  38
              Liquidity and Capital Resources.............................  41
              External Financings.........................................  46
              Qualitative and Quantitative Disclosures About Market Risk..  49
              Foreign Operations..........................................  51
              Year 2000 Readiness Disclosure..............................  51
              Rate Matters................................................  54
              Accounting Issues...........................................  55
              Impact of New Accounting Pronouncements.....................  55
              Site Restorations and Other Environmental Costs.............  55
              PSE&G.......................................................  55
              Forward Looking Statements..................................  56
Item 7A.      Qualitative and Quantitative Disclosures About Market Risk..  56


                                       i
<PAGE>

                        TABLE OF CONTENTS -- (Continued)

                                                                           PAGE
                                                                           ----
Item 8.       Financial Statements and Supplementary Data.................  57
              Consolidated Statements of Income (PSEG)....................  58
              Consolidated Balance Sheets (PSEG)..........................  59
              Consolidated Statements of Cash Flows (PSEG)................  61
              Consolidated Statements of Common Stockholders' Equity
                (PSEG)....................................................  62
              Consolidated Statements of Income (PSE&G)...................  64
              Consolidated Balance Sheets (PSE&G).........................  65
              Consolidated Statements of Cash Flows (PSE&G)...............  67
              Consolidated Statements of Common Stockholder's Equity
                (PSE&G)...................................................  68
              Notes to Consolidated Financial Statements (PSEG)...........  69
              Notes to Consolidated Financial Statements (PSE&G).......... 112
              Financial Statement Responsibility (PSEG)................... 116
              Financial Statement Responsibility (PSE&G).................. 117
              Independent Auditors' Report (PSEG)......................... 118
              Independent Auditors' Report (PSE&G)........................ 119
Item 9.       Changes in and Disagreements With Accountants on Accounting
                and Financial Disclosure.................................. 120

PART III
Item 10.      Directors and Executive Officers of the Registrants......... 120
              Directors of the Registrants................................ 120
              PSEG........................................................ 120
              PSE&G....................................................... 120
              Executive Officers of the Registrants....................... 121
Item 11.      Executive Compensation...................................... 122
              PSEG........................................................ 122
              PSE&G....................................................... 122
              Summary Compensation Table.................................. 123
              Option Grants in Last Fiscal Year (1998).................... 124
              Aggregated Option Exercises in Last Fiscal Year (1998) and
                Fiscal Year End Option Values (12/31/98).................. 125
              Employment Contracts and Arrangements....................... 125
              Compensation Committee Interlocks and Insider
                Participation............................................. 126
              Compensation of Directors and Certain Business
                Relationships............................................. 126
              Compensation Pursuant to Pension Plans...................... 126
Item 12.      Security Ownership of Certain Beneficial Owners and
                Management................................................ 127
              PSEG........................................................ 127
              PSE&G....................................................... 127
Item 13.      Certain Relationships and Related Transactions.............. 128
              PSEG........................................................ 128
              PSE&G....................................................... 128

PART IV
Item 14.      Exhibits, Financial Statement Schedules and Reports on
              Form 8-K.................................................... 129
              Schedule II--Valuation and Qualifying Accounts (PSEG)....... 131
              Schedule II--Valuation and Qualifying Accounts (PSE&G)...... 131
              Signatures--Public Service Enterprise Group Incorporated.... 132
              Signatures--Public Service Electric and Gas Company......... 133
              Exhibit Index............................................... 134
              PSEG........................................................ 135
              PSE&G....................................................... 144

Glossary of Terms......................................................... 151


                                       ii
<PAGE>

                                     PART I

ITEM 1. BUSINESS

GENERAL

      PSEG

      Public Service Enterprise Group Incorporated (PSEG), incorporated under
the laws of the State of New Jersey with its principal executive offices located
at 80 Park Plaza, Newark, New Jersey 07102, is an exempt public utility holding
company. PSEG has two principal direct wholly-owned subsidiaries: Public Service
Electric and Gas Company (PSE&G) and PSEG Energy Holdings Inc. (Energy
Holdings), formerly Enterprise Diversified Holdings Incorporated. Energy
Holdings is the parent of PSEG's non-utility businesses: PSEG Global Inc.
(Global), formerly Community Energy Alternatives Incorporated; PSEG Resources
Inc. (Resources), formerly Public Service Resources Corporation; PSEG Energy
Technologies Inc. (Energy Technologies) formerly Energis Resources Incorporated;
Enterprise Group Development Corporation (EGDC); PSEG Capital Corporation (PSEG
Capital) and Enterprise Capital Funding Corporation (Funding).

      PSE&G

      PSE&G, a New Jersey corporation with its principal executive offices at 80
Park Plaza, Newark, New Jersey 07102, 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
distribution operations in the territory it serves. Such franchise rights are
not exclusive.

      INDUSTRY ISSUES AND RISK FACTORS

      The electric and gas utility industries in the State of New Jersey and
across the country are undergoing major transformations. Legislation has been
passed in New Jersey mandating retail competition in the electric and gas
industries and rate decreases in the electric industry in New Jersey. The New
Jersey Board of Public Utilities (BPU) is expected to issue rulings that will
decide company specific issues by March 31, 1999 and generic issues for the
State sometime thereafter. For discussion of this activity including related
potential financial impacts, volatility of earnings and accounting changes, see
Overview of 1998 and Future Outlook of Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations (MD&A) and Note 2.
Regulatory Issues of Notes to Consolidated Financial Statements (Notes).

      PSEG and PSE&G are affected by many issues that are generic to the
electric and gas industries such as: deregulation, the unbundling of energy
supplies and services and the establishment of a competitive energy marketplace
for products and services (see Competitive Environment and Note 2. Regulatory
Issues of Notes); energy sales retention and growth potential in a mature,
competitive service territory; the need to reduce operating and capital costs in
a competitive environment and in light of mandated rate reductions; revenue
stability and growth, including the ability to obtain adequate and timely rate
relief, cost recovery, including stranded costs, and other necessary regulatory
approvals (see Note 2. Regulatory Issues of Notes); the ability to economically
and safely operate nuclear facilities in accordance with regulatory requirements
(see Nuclear Operations); increased capital investments attributable to
environmental regulations


                                       1
<PAGE>

(see Construction and Capital Requirements and Environmental Controls); nuclear
decommissioning and the availability of storage facilities for spent nuclear
fuel and related costs of disposal (see Electric Fuel Supply and Disposal);
managing wholesale energy trading operations in conjunction with electricity and
gas production, transmission and distribution systems, including commodity price
fluctuations, volatility and credit risk from counterparties; managing foreign
investments and electric generation and distribution operations in locations
outside of the traditional utility service territory (see Foreign Operations of
MD&A and Note 20. Subsequent Events of Notes); political and foreign currency
risks; exposure to market price fluctuations and volatility (see Qualitative and
Quantitative Disclosures About Market Risk and Foreign Operations of MD&A); Year
2000 issues (see Year 2000 Readiness Disclosure of MD&A and Note 10. Commitments
and Contingent Liabilities of Notes); accounting changes resulting from
deregulation (see Note 19. Accounting Matters of Notes); and debt and equity
market concerns associated with these issues.

SEGMENT INFORMATION

      Financial information with respect to business segments of PSEG and PSE&G
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 and in New Jersey is in transition.
Deregulation is underway in New Jersey and in other states in the Northeast,
including Pennsylvania and New York, and across the United States. The
deregulation and restructuring of the nation's energy markets, unbundling of
services, the diverse industry strategies related to generation capacity and the
anticipated resulting industry consolidation will have a profound effect on PSEG
and PSE&G, providing new opportunities and exposing PSEG and PSE&G to new risks
(see Overview of 1998 and Future Outlook of MD&A).

      Legislative and regulatory initiatives, at both the State and Federal
levels, are designed to promote competition and will continue to impose
additional pressures on PSE&G's ability to retain customers. Statutorily
mandated unbundling of the services traditionally provided by vertically
integrated companies, such as PSE&G, and the rapid growth of independent
generation, energy trading and marketing together with 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. Recently, a number of utility-affiliated entities and other
companies have purchased generating units from utilities in the Northeast which
are divesting such assets. In addition, a variety of energy marketers have
expressed interest in operating in New Jersey. These and others selling
generation and other products and services will be competitors of PSEG and
PSE&G. For further information on regulatory changes, see Overview of 1998 and
Future Outlook of MD&A and Note 2. Regulatory Issues of Notes.

      PSEG's non-utility businesses are subject to substantial competition in
the United States as well as in the international markets. Restructuring of
world energy markets including the privatization of government owned utilities
and the opening of opportunities to foreign investors will impact PSEG. Some of
the power generation projects in which Global invests compete with other
independent power providers as well as utility generators both domestically and
internationally. Global's distribution businesses in Argentina and Brazil
operate pursuant to franchise arrangements and are generally not subject to
competition. Energy Technologies also competes with other providers of energy
services, including utilities and their affiliates. For additional information,
see Energy Holdings.

      STATE REGULATORY BODIES

      As a New Jersey public utility, PSE&G is subject to comprehensive
regulation by the 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. PSEG 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,
PSEG and PSEG's non-


                                        2
<PAGE>

utility subsidiaries (see Energy Holdings). Additionally, PSEG and PSE&G are
subject to the rules and regulations of the New Jersey Department of
Environmental Protection (NJDEP) and the State Department of Transportation.

      STATE REGULATION

      ELECTRIC

      The BPU, as well as the New Jersey State Legislature, have each undertaken
the task of restructuring the electric and gas industries in New Jersey.
Throughout 1998, the BPU held hearings and reviewed an Administrative Law
Judge's recommendations and the results of management audits in the proceedings
relating to its Energy Master Plan issued in 1997. In January 1999, the State
Legislature enacted legislation to guide the restructuring of New Jersey's
electric and gas industries. That legislation, the New Jersey Electric Discount
and Energy Competition Act (Energy Competition Act), was signed into law by the
Governor on February 9, 1999. The Energy Competition Act provides, among other
things, for rate reductions and customer choice by August 1, 1999.

      Over the next few months, the BPU is expected to issue a series of orders
to continue to provide the specific rules to govern the new deregulated electric
marketplace in New Jersey in accordance with the Energy Competition Act. The BPU
has set a target date for finalizing electric restructuring rules for March 31,
1999, but has yet to establish a target date for a gas restructuring order. For
further discussion of the aforementioned BPU activities, the Energy Competition
Act and the forthcoming BPU proceedings (collectively, the Energy Master Plan
Proceedings) regarding deregulation and unbundling of the electric utility
industry in New Jersey, see Overview of 1998 and Future Outlook of MD&A and Note
2. Regulatory Issues of Notes.

      The BPU's response to the New Jersey legislation will significantly impact
PSEG's and PSE&G's future prospects. The BPU will continue in its regulatory
role over many aspects of the New Jersey electric industry, both in determining
the rules for the competitive marketplace and continuing to regulate the
portions of PSE&G's business that remain regulated, including transmission and
distribution of electricity.

      In other matters, in 1995 the BPU initiated a generic proceeding that led
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
have formed part of PSE&G's overall strategy to retain customers in its service
territory and maintain long-term electric sales. PSE&G files an annual report
with the BPU which discusses OTRA activities in the prior year. This report
allows the BPU to evaluate the impact of the OTRAs on the financial integrity of
PSE&G. PSE&G is currently in negotiation with several customers for OTRAs. These
agreements have been or will shortly be submitted to the BPU for review and
approval. The Energy Competition Act provides that OTRAs implemented on or after
the effective date of retail competition may establish a price only for the
transmission or distribution of electricity to a retail customer that is
different from, but in no case higher than, that specified in the electric
public utility's current cost-of-service-based tariff rate for transmission or
distribution service otherwise applicable to that customer. The electric rates
under these OTRAs shall include the appropriate societal benefits charge, market
transition charge and securitization transition bond charge. For further
discussion of the Energy Competition Act and the Energy Master Plan Proceedings,
see Note 2. Regulatory Issues of Notes. 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 Energy Competition Act repealed the New Jersey Public Utility Accident
Fault Determination Act (Fault Act) which had required 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. The Energy
Competition Act also repealed the requirement that electric utilities obtain a
certificate of need prior to construction of a new electric generating facility.
For more information on the Energy Competition Act and the Energy Master Plan
Proceedings, see Note 2. Regulatory Issues.


                                       3
<PAGE>

      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.

      Under the Energy Competition Act, utilities are required to offer all of
their customers the choice to buy the gas commodity from alternate suppliers by
December 31, 1999. For further discussion of gas unbundling and the Energy
Master Plan Proceedings, see Note 2. Regulatory Issues of Notes.

      GENERAL

      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.

      The issue of PSEG 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. PSEG 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 PSEG 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 June 1997, the BPU commenced management audits of all New Jersey
electric utilities, with the assistance of certain 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 BPU's
Energy Master Plan. The management audit process for PSE&G was concluded in
December 1997 with a report of the BPU's management consultants relating to
issues of stranded costs, securitization and consumer rate reductions. A second
report on restructuring was filed in February 1998. These management audit
reports were approved for release by the BPU in January 1998 and March 1998,
respectively, and are being considered by the BPU as part of the Energy Master
Plan Proceedings. For additional information regarding the management audit
report, see Note 2. Regulatory Issues of Notes. For a discussion of the BPU's
previous focused audit of the non-utility businesses of PSEG and its impact on
PSEG, see Liquidity and Capital Resources of MD&A.

      The BPU can adopt, reject or modify the audit report's results in its
decision 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 generation and
sale of electricity in New Jersey and therefore could have a material adverse
effect on PSEG's and PSE&G's financial condition, results of operations and net
cash flows.

      On August 31, 1998, the BPU mandated the commencement of an audit of
PSE&G's competitive services, including PSE&G's Appliance Service Business, to
determine whether PSE&G's competitive services have impaired or could impair
PSE&G's ability to provide safe, adequate and proper service; if
cross-subsidization exists between the regulated utility and the entity
providing competitive services; if rates for competitive services are unjust,
unreasonable, discriminatory or unduly preferential and if the utility is in
compliance with the BPU's compliance monitoring and reporting requirements. The
BPU completed its audit by December 31, 1998 and is expected to issue a draft
report of its findings in concert with the Energy Master Plan Proceedings. PSE&G
cannot predict the outcome of this matter.


                                       4
<PAGE>

      The Energy Competition Act requires an independent audit of the
relationship between PSE&G's regulated businesses and its and its affiliates'
competitive businesses every two years.

      On December 16, 1998, the BPU issued an Order in connection with its
investigation of the damage caused by a September 1998 storm that passed through
PSE&G's territory. This Order recommended improvement in communications between
PSE&G and its customers and emergency officials after storm-related power
outages. PSE&G responded to the BPU on January 4, 1999 stating that it will
comply and will work with the BPU on any open recommendations.

      FEDERAL REGULATORY BODIES

      PSE&G and certain of Energy Holdings' subsidiaries are 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. PSEG 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. Additionally, PSE&G is
subject to the rules and regulation of the Federal Environmental Protection
Agency (EPA), Department of Transportation (USDOT) and Department of Energy
(DOE). 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.

      FERC Order No. 888 (Order No. 888) became effective in July 1996 and
required all public utilities owning, controlling or operating electric
transmission lines to offer nondiscriminatory open access to their transmission
systems. Intra-pool transactions for power pools were also required to be
conducted 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, which clarified and largely
reaffirmed the legal and policy bases on which Order No. 888 was grounded, and
also provided a process for recovery of stranded costs from wholesale customers.
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
Interconnection, L.L.C. (PJM)). In March 1998, all of these appeals were
consolidated in the Court of Appeals for the District of Columbia Circuit (D.C.
Circuit). On April 30, 1998, the D.C. Circuit entered an order permitting
certain additional parties to intervene and establishing certain procedural
guidelines for the hearing of these appeals. Briefs were filed on October 1,
1998. Additional briefs are to be filed later in 1999. Oral argument has been
scheduled for November 1999.

      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.


                                       5
<PAGE>

CONSTRUCTION AND CAPITAL REQUIREMENTS

      For information concerning investments, construction and capital
requirements see MD&A--Liquidity and Capital Resources--Construction and Capital
Requirements Forecast, Note 4. Long-Term Investments, Note 7. Schedule of
Consolidated Debt and Note 10. Commitments and Contingent Liabilities of Notes.

FINANCING ACTIVITIES

      For a discussion of issuance, repurchase, book value and market value of
PSEG's Common Stock and external financing activities of PSEG, PSE&G and Energy
Holdings for the year 1998, 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 PSEG Capital and Funding, see Energy Holdings--PSEG
Capital and Energy Holdings--Funding. For further discussion of long-term debt
and short-term debt, see Note 7. Schedule of Consolidated Debt of Notes.

INCOME TAXES

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

CREDIT RATINGS

      The current ratings of securities of PSEG 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 PSEG's, Energy Holdings' and
PSE&G's securities and serve to increase those companies' cost of capital.

                                                             STANDARD    DUFF &
                                                  MOODY'S    & POOR'S    PHELPS
                                                  -------    --------    ------
PSEG
Preferred Securities............................  Baa2       BB+         BBB
Extendible Notes................................  Baa2       BBB         BBB+

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

ENERGY HOLDINGS
Senior Debt (PSEG Capital)......................  Baa2       BBB         BBB+

      As a component of PSE&G's ratings, each rating agency issues its opinion
of the credit trend or outlook. Duff and Phelps currently evaluates that credit
trend or outlook as negative. Standard and Poor's and Moody's evaluate the
outlook as stable.

      In February 1999, Standard & Poor's introduced a single credit rating
scale for both debt and preferred securities to replace the separate rating
scales that were applied to these two classes of securities. By rating all debt
and preferred securities according to the same scale, Standard & Poor's has
stated that it believes investors will gain a clearer picture of the credit risk
that these securities present. Broadly, the criteria of the new scale calls in
part for Standard & Poor's to rate preferred securities at least two notches
below the corporate credit rating of an investment-grade issuer. This has
resulted in the re-rating of the preferred securities of PSEG and PSE&G to BB+
and BBB, respectively.


                                       6
<PAGE>

PSE&G

RATE MATTERS

      For information concerning the Energy Master Plan Proceedings, PSE&G's
rate matters and environmental remediation and fuel adjustment clauses, see
General--Competitive Environment--State Regulation (Electric), Note 1.
Organization and Summary of Significant Accounting Policies and Note 2.
Regulatory Issues 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, 1998, PSE&G provided service to approximately 1.9
million electric customers and 1.6 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, 1998, PSE&G's operating revenues aggregated $5.6
billion, of which 72% was from its electric operations and 28% from its gas
operations. PSE&G's business is weather sensitive and 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.

      Revenues were derived as follows for 1998:

                                                     REVENUES
                                           ----------------------------
                                             ELECTRIC           GAS
                                           ------------      ----------
                                               (MILLIONS OF DOLLARS)
      Residential.......................       $1,272             $833
      Commercial........................        1,849              194
      Industrial........................          631              237
      Transportation Service--Gas.......           --              245
      Other.............................          279               50
                                           ------------      ----------
          Total.........................       $4,031           $1,559
                                           ============      ==========

      For information on the impact of competition and the Energy Master Plan
Proceedings on PSE&G's customer and revenue base, see Overview of 1998 and
Future Outlook of MD&A and Note 2. Regulatory Issues of Notes.

ELECTRIC SUPPLY AND CAPACITY

      The supply of electricity for PSE&G's business is provided by various
sources. Generation, power purchases within PJM, from other power pools and from
non-utility generators (NUGs), and demand side management programs provide
sources for electricity as a commodity. Capacity is provided by the installed
generation production facilities which PSE&G owns as well as through bilateral
purchases and purchases in the new capacity market administered by PJM. The
nature of the supply and capacity markets are changing due to deregulation in
various states and FERC initiatives. The resulting development of new markets
has increased volatility and risks and also has created opportunities for PSE&G.
For further discussion, see Qualitative and Quantitative Disclosures About
Market Risk of MD&A.

      RESOURCE PLAN AND POWER PURCHASES

      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.
Regulatory Issues 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 1999-2003 has been
developed based on an assumed compound annual rate of growth of 1.47%.


                                       7
<PAGE>

      A component of PSE&G's Resource Plan consists of expected capacity
additions from PJM and NUGs. PSE&G is engaged in wholesale purchases and sales
of electricity and gas. These transactions help satisfy the Resource Plan
requirements and may include both purchasing power from PJM and other electric
systems. Analysis of the lowest cost sources of electricity is made and based on
the expectation that, at certain times, purchases at the wholesale level will
replace production of electricity by PSE&G's facilities. For further discussion
of wholesale activities, see Quantitative and Qualitative Disclosures About
Market Risk of MD&A and Note 8. Financial Instruments and Risk Management of
Notes.

      NUG projects are expected to comprise approximately 6% 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 PJM Interconnection, L.L.C. and Note 2. Regulatory
Issues 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 treat DSM on equal regulatory footing with supply side or
energy production investments. The Energy Competition Act permits the
continuation of DSM programs. The recovery of costs for DSM programs is to be
through a societal benefits charge, on all electric customers' bills, initially
set at the level in rates for DSM cost recovery in place on February 9, 1999.
Within the subsequent twelve months, the BPU is required to complete a statewide
comprehensive resource analysis of energy efficiency and renewable energy
programs and determine the appropriate level of funding for each utility based
on this analysis.

      PSE&G's most recent DSM Resource Plan (1995 Plan) was approved by the BPU
in 1995 and was 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 1995 Plan consisted of two major program areas for both electric
and gas; (1) Core Programs which include many specialized programs such as
energy audits, building envelope efficiency improvements and rebates for high
efficiency heating and cooling equipment; and (2) the 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.

      BPU approval of the 1995 Plan included a requirement to file the next DSM
Plan by July 1, 1997. In April of 1997 PSE&G filed a request with the BPU to
extend the 1995 Plan for one year and to defer filing the next DSM Plan until
July 1, 1998, which requests were granted with the condition that the Core
Programs would continue until the next DSM Plan was approved. The BPU further
directed that PSE&G also extend existing project acceptance and in-service
deadline dates by one year. On June 29, 1998, PSE&G filed with the BPU the 1999
Interim Demand Side Management Plan which included Core Programs and the
Standard Offer, and hearings on the filing were conducted. No action has been
taken by the BPU leaving no mechanism open at this time for the accepting of new
Standard Offer project proposals. It is anticipated that there will be BPU
action on the 1999 Interim Plan in the near future, but PSE&G cannot predict the
outcome of such action.

      ELECTRIC GENERATING CAPACITY

      The following table sets forth certain information as to PSE&G's installed
generating capacity as of December 31, 1998:

                                                       INSTALLED
SOURCE                                             CAPACITY (A) (MW)  PERCENTAGE
-------------------------------------------------  -----------------  ----------
Conventional Steam Electric:
     Oil-fired (B)...............................         1,531            15%
     Coal-fired New Jersey (C)...................         1,271            12%
     Coal-fired Pennsylvania (mine mouth) (D)....           770             7%
Combustion Turbine (E)...........................         2,724            27%
Combined Cycle...................................           920             9%
Diesel (D).......................................             5             0%
Nuclear (D):
     New Jersey..................................         1,921            19%


                                       8
<PAGE>

     Pennsylvania................................           930             9%
Pumped Storage (D) (E)...........................           200             2%
                                                      -----------      ---------
         Total...................................        10,272           100%
                                                      ===========      =========

      (A)   Excludes 695 MW of non-utility generation and 505 MW of capacity
            sales to other utilities.

      (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 including environmental
constraints or unforeseen circumstances (see Environmental Controls). The
maximum one-hour demand (peak load) which PSE&G experienced in 1998 was 9,226
MW, which occurred on July 22, 1998, when the day's output was 178,741
megawatt-hours (MWH) of electricity. The all time peak load record is 9,548 MW,
which occurred on July 15, 1997, when the day's output was 184,357 MWH of
electricity.

      Demand for electricity will come from PSE&G's retail customers to whom
PSE&G will continue to provide service following implementation of competition
as well as basic generation service customers as mandated by the Energy
Competition Act. See Note 2. Regulatory Issues for further discussion of basic
generation service under the Energy Competition Act. 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 energy delivery systems.

      PJM INTERCONNECTION, L.L.C. (PJM)

      PSE&G is a member of PJM and participates on the PJM Members Committee as
part of its governance structure. The PJM Office of Interconnection (PJM OI)
administers the open-access transmission tariff for the PJM power pool and
operates the centrally dispatched bid-based energy market for the PJM region,
including sections of Pennsylvania, New Jersey, Delaware, Maryland, Virginia and
the District of Columbia. The PJM electric system is interconnected with other
major electric utility companies in the eastern half of the United States. The
PJM area of the power grid is operated as one system to provide increased
reliability, an assurance of an adequate supply of electricity, security to
withstand disturbances and reduced operating costs to its members. 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, 1998,
the aggregate installed generating capacity of the PJM companies was 57,551 MW.
The maximum one-hour demand experienced by PJM in 1998 was 48,397 MW which
occurred on July 22, 1998. 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 1999-2003 period.

      PSE&G is also a member of 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.

      PJM operates under a two-tier governance structure under which an
independent 7-member Board of Managers (PJM Board) is responsible for
supervision and oversight of the day-to-day operations of PJM. A Members
Committee, consisting of five sectors representing generation owners, other
suppliers, transmission owners, electric distribution and end-use customers
elects, and provides advice to, the PJM Board. PJM has implemented a zonal rate
design for


                                       9
<PAGE>

transmission service, subject to its being replaced by a more uniform, regional
rate design within five years in accordance with FERC requirements.

      On October 15, 1998, PJM began operating a centralized capacity credit
market, providing a new option to participants for procuring and selling surplus
capacity to meet reliability obligations within the PJM Control Area. Capacity
is the capability to produce electric power, typically from owned generation or
third-party purchase contracts and differs from the electric energy markets,
which trade the actual energy being generated. This market facilitates the
selling and buying of capacity for participants by providing a single point of
contact for market participants and a published capacity market clearing price.
The design of the PJM capacity market is compatible with the already existing
bilateral capacity market. PSE&G will continue trading capacity both through
bilateral transactions and by participating in the centralized PJM capacity
market.

      Effective April 1, 1998, PJM implemented locational marginal pricing (LMP)
to establish the market clearing prices for electric energy and to price
electric transmission usage based upon costs associated with transmission system
congestion. When there is no congestion on the power system and energy is
flowing on the grid in an unconstrained manner, energy prices are cleared at the
highest bid accepted by PJM for the entire PJM region. When a limit is reached
on the transmission grid, PJM will operate the generators to preserve system
reliability. LMP allows PJM to send signals to raise and lower generator output
when the power flows are constrained. Different energy market clearing prices
are paid by wholesale power buyers and sellers on the power grid that reflect
the value relative to a system constraint. LMP provides for an efficient
allocation of congestion costs to transmission users within the PJM control
area. FERC has approved the use of the LMP congestion management system to allow
electric energy market participants with power contracts on neighboring electric
systems to compensate PJM for any unintended flows on the PJM system, rather
than forcing those participants to curtail their contracts. PSE&G cannot predict
how the changes in the energy market will impact PSE&G's cost of power.

      On December 31, 1997, the PJM Supporting Companies, including PSE&G, filed
market enhancements with the FERC. The filing seeks the ability to auction
residual and released Fixed Transmission Rights (FTRs), which are financial
hedges against congestion costs, beginning in April 1999. As proposed, these
systems would all be administered by the PJM Independent System Operator (ISO).
The FERC Order on this filing instructs PJM to submit further details on how
the auction will be implemented. PSE&G cannot predict the impacts of PJM
implementing these proposed market enhancements.

      Currently, the PJM Operating Agreement dictates that bids for electric
energy offered for sale in the PJM interchange energy market from generation
located within the PJM control area shall not exceed the variable cost of
producing such energy. Transactions that are bid into the PJM pool from
generation located outside the PJM control area are capped at $1,000 per
megawatt hour. All power providers are paid the LMP set through power providers'
bids. Certain PJM members, including PSE&G, have requested that FERC revise the
PJM Operating Agreement to allow the submission of market based bids to the PJM
interchange energy market. The lifting of such caps could provide opportunity
for PSE&G's generation business to receive higher prices for energy it sells
while exposing the delivery business to higher prices when PSE&G is a net buyer.
It is anticipated that should FERC find that no single market participant can
unduly influence market prices and that a market monitoring function is provided
by the ISO, the current bidding restrictions would be eliminated. Furthermore,
in the event that all available generation within the PJM control area is
insufficient to satisfy demand, PJM may institute emergency purchases from
adjoining regions. The cost of such emergency purchases is not subject to any
PJM price cap. PSEG and PSE&G cannot predict the outcome of this request or the
impact on PSEG's and PSE&G's future financial condition, results of operations
and net cash flows if such request is successful, but risk would increase if the
cap were eliminated. For further discussion of price volatility of electricity,
see Qualitative and Quantitative Disclosures About Market Risk of MD&A.

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


                                       10
<PAGE>

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 1998, PSE&G's
nuclear units achieved an average capacity factor of approximately 85%. For
information concerning the performance of PSE&G's nuclear units, see Note 10.
Commitments and Contingent Liabilities of Notes.

      Refueling outages, expected to last approximately seven weeks in duration,
are scheduled in 1999 for Salem 1 and 2, Hope Creek and Peach Bottom 3. Hope
Creek commenced its refueling outage in February 1999.

      On September 16, 1998, the NRC suspended its Systematic Assessment of
Licensee Performance (SALP) program for an interim period until the NRC staff
completes a review of its nuclear power plant performance assessment process.
During the interim period while the SALP program is suspended, the NRC has
indicated that it will utilize the results of its plant performance reviews to
provide nuclear power plant performance information to licensees, state and
local officials and the public. The NRC has indicated that these reviews are
intended to identify performance trends since the previous assessment and make
any appropriate changes to the NRC's inspection plans. At the end of the
process, the NRC will decide whether to resume the SALP program or substitute an
alternative program. PSE&G cannot predict the final outcome of this NRC review
nor its impact on its nuclear operations.

      SALEM

      Salem consists of two 1,106 MW pressurized water nuclear reactors (PWR)
located in Salem County, 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%. In March 1998, ACE and DP&L merged to become Conectiv. As of
December 31, 1998, PSE&G's net book value was approximately $362 million for
Salem 1, $340 million for Salem 2 and $153 million in common plant between the
two units. Each Salem unit represents approximately 5% of PSE&G's installed
electric generating capacity, approximately 3% of its total assets and
approximately 4% of its net utility plant in service. For 1998, Salem achieved
an average capacity factor of approximately 74%.

      As previously reported, Salem 1 and 2 were taken out of service by PSE&G
in the second quarter of 1995. Salem 2 returned to service on August 30, 1997.
Salem 1 returned to service on April 17, 1998. In July 1998, the NRC removed
Salem 1 and 2 from the NRC Watch List. The NRC noted that plant material
condition, safety culture and management oversight and effectiveness had
substantially improved. The NRC also observed that, while the maintenance
backlog resulting from discovery efforts during the outage remains high, PSE&G
is effectively managing the prioritization and resolution of those items.
Additionally, the NRC noted that PSE&G's management team has instituted robust
safety oversight and self-assessment at the site and that Salem has demonstrated
sustained successful plant performance.

      In the past, the outage of a Salem unit has caused PSE&G to incur
replacement energy costs of approximately $4 to $6 million per month per unit.
Such amounts vary, however, depending upon the availability of other generation,
the cost of purchased energy and other factors including modifications to
maintenance schedules of other units. These costs will also vary greatly
depending upon the time of year an outage occurs, since with the competitive PJM
marketplace, times of higher demand will cause prices to rise significantly. For
further discussion, see Electric Supply and Capacity.

      On September 15, 1998, the NRC issued its latest SALP Report for Salem for
the period March 1, 1997 to August 1, 1998. In the areas of Maintenance and
Engineering, Salem was rated Category 2 or "good" performance. In the areas of
Operations and Plant Support, Salem received "superior", or Category 1, ratings.
The NRC noted improved performance overall during the period, as demonstrated by
the nearly event free return of both units to operation following the extended
outage. The NRC identified strong management oversight, safe and conservative
operations, good engineering support and effective programs for independent
oversight and self-assessment. The NRC also noted that although human
performance has improved significantly due to extensive training interventions,
continued close management attention is warranted in the Operations and
Maintenance areas.

      For certain litigation relating to Salem, see Item 3. Legal Proceedings.
For information on the operating performance standard applicable to Salem, see
Note 10. Commitments and Contingent Liabilities of Notes.


                                       11
<PAGE>


      HOPE CREEK

      Hope Creek consists of one 1,031 MW boiling water nuclear reactor (BWR)
located in Salem County, 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, 1998, 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 26% of its net utility plant in service. For
1998, Hope Creek achieved an average capacity factor of approximately 96%.

      Hope Creek completed its latest planned refueling and maintenance outage
in December 1997. In the past, an outage at Hope Creek has caused PSE&G to incur
replacement energy costs of approximately $8 to $10 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. These costs will also vary greatly
depending upon the time of year an outage occurs, since with the competitive PJM
marketplace, times of higher demand will cause prices to rise significantly.

      On June 8, 1998, the NRC issued its latest SALP Report for Hope Creek for
the period November 10, 1996 to May 16, 1998. In the areas of Operations,
Maintenance and Engineering, Hope Creek was rated Category 2 or "good"
performance. In the area of Plant Support, Hope Creek received a "superior", or
Category 1, rating. The NRC noted improved performance in all functional areas
during the period, with marked improvement in the Plant Support area,
particularly concerning security and emergency preparedness. The NRC also noted
that although several human performance issues associated with procedure
violations, attention to detail and work controls were evident during the fall
1997 outage, operation since then has been nearly event-free.

      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, 1998, PSE&G's net
book value was approximately $237 million for Peach Bottom 2 and $243 million
for Peach Bottom 3. Each Peach Bottom unit represents approximately 5% of
PSE&G's installed electric generating capacity, approximately 2% of its total
assets and approximately 2% of its net utility plant in service. For 1998, Peach
Bottom achieved an average capacity factor of approximately 86%.

      Peach Bottom 2 completed a scheduled refueling and maintenance outage in
November 1998. In the past, an outage of a Peach Bottom unit has caused PSE&G to
incur additional replacement energy costs of approximately $4 to $6 million per
month per unit. Such amounts vary, however, depending upon the availability of
other generation, the cost of purchased energy and other factors including
modifications to maintenance schedules of other units. These costs will also
vary greatly depending upon the time of year an outage occurs, since with the
competitive PJM marketplace, times of higher demand will cause prices to rise
significantly.

      On July 17, 1997, the NRC issued its latest periodic SALP 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.

      OTHER NUCLEAR MATTERS

      On November 24, 1998, the NRC issued a new rule concerning nuclear plant
license transfers, in response to increasing numbers of license transfer
requests brought on by electric utility deregulation. Each company that operates
and/or owns an interest in a nuclear generating station in the United States
must possess a license from the NRC specific to that station. Any transfers to
third parties or to subsidiaries or affiliates of a utility will require a new
license for the entity becoming the owner and/or operator of the nuclear
generating station. The new rule changes the license transfer process


                                       12
<PAGE>

by utilizing a legislative-type hearing rather than the former adjudicatory
proceeding. PSE&G cannot predict what other actions, if any, the NRC may take in
such 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. Hope Creek's core
shroud was inspected during a refueling outage in 1997 with no indication of
cracking found. PECO Energy has advised PSE&G that examination of the Peach
Bottom 2 and 3 core shrouds were not required during their refueling outages in
1998 and 1997, and that examinations will be performed during their next
refueling outages in 2000 and 1999, respectively. PECO Energy has also advised
PSE&G that Peach Bottom 3 was shut down from March 13 through March 31, 1998 to
repair cracks in three recirculation system jet pump risers within the reactor
vessel. Permanent repairs were completed and Peach Bottom 3 returned to full
power operation.

      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 last
refueling outage in December 1997. The remaining strainers are being installed
during the current refueling outage. PECO Energy has advised PSE&G that large
capacity passive strainers were installed at Peach Bottom 3 during its refueling
outage in October 1997 and at Peach Bottom 2 during its refueling outage in
October 1998. PSE&G cannot predict what other actions, if any, the NRC may take
in this matter.

      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. On April 24, 1998, the NRC issued a severity Level
III violation for one of these matters and informed PSE&G that it would await
issuance of the Secretary of Labor's Administrative Review Board decision before
making an enforcement decision in the other matter. There was no civil penalty
issued by the NRC for this violation. PSE&G did not contest this violation.
PSE&G cannot predict what other actions, if any, the NRC may take in regard to
the second matter.

      In a March 1998 letter to PSE&G, the Nuclear Regulatory Commission (NRC)
said that two issues identified at Hope Creek have resulted in two Level III
violations and an associated $55,000 civil penalty. PSE&G met with NRC officials
in 1998 and discussed these issues, including corrective actions and
improvements. These were implemented across PSE&G's nuclear operations to ensure
the continued safe, reliable operation of all three nuclear units. The first
issue was identified at Hope Creek during an NRC inspection in November 1997,
while the unit was shut down for normal refueling maintenance. The NRC noted
that certain plant conditions required more strict procedure compliance and
management oversight than was provided. This resulted in one of the two Level
III violations and the civil penalty. The NRC issued the civil penalty because a
similar issue had been identified in 1996. The second issue concerned the
implementation of the Maintenance Rule, which requires utilities to monitor the
effectiveness of equipment reliability. The NRC said that PSE&G's Maintenance
Rule program did not include all necessary equipment. Because this issue was
self-identified and immediate corrective actions were taken, the NRC issued a
Level III violation with no civil penalty.

      In accordance with NRC requirements, nuclear plants utilize various fire
barrier systems to protect equipment necessary for the safe shutdown of the
plant in the event of a fire. As part of an inspection by the NRC in April 1997,
the NRC noted certain weaknesses in Salem's fire barrier systems. PSE&G sent a
letter to the NRC in June 1997 addressing these issues concerning the
qualification of fire wrap barriers used to protect electrical cabling at Salem.
The letter outlined a resolution plan and schedule to address the fire wrap
issues. PSE&G has committed to alternative measures in the form of fire watches
until this plan is implemented. A review of the installed fire barrier materials
and safe shutdown analysis is currently in progress. If certain modifications
are necessary to comply with NRC requirements, it is expected that the cost of
such will not be material. However, failure to resolve these fire barrier issues
could result in potential NRC violations, fines and/or plant shutdown which
could have a material adverse impact to PSE&G's financial condition, results of
operations and net cash flows.

      PECO Energy has advised PSE&G that the NRC held a predecisional
enforcement conference on May 21, 1998 to discuss two apparent violations
concerning failure to maintain the operability of a Peach Bottom Unit 3
emergency core

                                       13
<PAGE>

cooling system pump. On June 11, 1998, the NRC issued an aggregate Level III
violation and a civil penalty of $55,000. PECO Energy has advised PSE&G that it
will not dispute the violation.

      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. For discussion of the 1994 NJPDES
permit related to Salem and its operations, see Water Pollution Control.

      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 and the
Energy Master Plan Proceedings, see Note 2. Regulatory Issues 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:

<TABLE>
<CAPTION>
                                                               ACTUAL   ESTIMATED (A)
SOURCE                                                          1998         1999
------------------------------------------------------------   ------   -------------
<S>                                                            <C>           <C>
Nuclear:
     New Jersey facilities..................................      34%         33%
     Pennsylvania facilities................................      16%         16%
Fossil:
     Coal:
     New Jersey facilities..................................       9%         11%
     Pennsylvania facilities................................      14%         13%
Natural Gas.................................................       5%          5%
Net PJM Interchange and Purchases From Utilities and NUG's..      22%         22%
                                                               ------   -----------
         Total (B)..........................................     100%        100%
                                                               ======   ===========
</TABLE>

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

      (B)   Oil generation for 1998 was less than 1% and for 1999 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. 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. PSE&G is currently
renegotiating this contract to extend it through 2001. 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,


                                       14
<PAGE>

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 GPU
Generation, Inc., a subsidiary of GPU Energy, Inc. Pending regulatory approval,
it is expected that GPU Generation, Inc. will sell its ownership interest and
transfer operation of the stations to Sithe Energies, Inc. in the third quarter
of 1999. 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) through long-term contracts and spot
market purchases.

      NATURAL GAS

      PSE&G utilizes natural gas available from various spot and short-term gas
contracts for electric generation. 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 DOE for
permanently discharged spent fuels irradiated prior to 1983. Payments made to
the DOE for disposal costs are based on nuclear generation and are included in
Net Interchanged Power and Fuel for Electric Generation in the Statements of
Income. Until the start of retail competition pursuant to the Energy Competition
Act, these costs are being recovered through the Electric Levelized Energy
Adjustment Clause (LEAC). Thereafter, PSE&G will bear the risks of nuclear fuel
disposal costs. For more information on the Energy Master Plan Proceedings, see
Note 2. Regulatory Issues and Note 3. Regulatory Assets and Liabilities of
Notes.

      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.
DOE construction of a permanent disposal facility has not begun and DOE has
announced that it does not expect a facility to be available earlier than 2010.
For a discussion of legislation regarding a centralized interim spent fuel
storage facility, see Note 11. PSE&G Nuclear Decommissioning.

      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 2008, again prior to losing an operational
full core discharge reserve. PSE&G is currently assessing available options
which could satisfy the potential need for additional storage capacity,
including the option of constructing an on-site storage facility that would
satisfy the spent fuel storage needs of both Salem and Hope Creek. 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.


                                       15
<PAGE>

      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 licensed permanent
disposal facilities.

      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 was expected to be about 40% of the total cost. PSE&G has provided about
$6 million to date. New Jersey established a volunteer siting process to
establish a LLRW disposal facility by 2000. Public meetings were held across the
State in an effort to provide information to and obtain feedback from the
public; however, no voluntary sites were identified. Consequently, on February
10, 1998, the New Jersey agency responsible for this program recommended to the
Governor that this volunteer plan be abandoned. The Governor has accepted the
agency's plan to reduce the scope of siting activities since the development of
a disposal facility in New Jersey may not be economically feasible in light of
current out-of-state disposal options. As a result, the refund of the unspent
funds paid by waste generators in New Jersey to finance the siting process needs
to be addressed. PSE&G expects to partially recover the funds it paid in
connection with this effort.

      Because of the uncertainties regarding disposal, PSE&G built an on-site
facility which was completed in July 1994. The facility has the capacity to
store five years of LLRW from Hope Creek and Salem. The facility was used from
July 1994 through June 1995, while there was no permanent disposal site
available. The facility is currently 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 has the capacity for at least 5 years of temporary
storage. PECO Energy has also advised PSE&G that Pennsylvania pursued its own
LLRW site development via State-selected candidate sites, along with a volunteer
plan option. On June 18, 1998, the Appalachian States LLRW Compact Commission
unanimously agreed to suspend efforts to site a radwaste storage facility in
Pennsylvania. The Pennsylvania Department of Environmental Protection had
suggested ending the search due to the declining amounts of radwaste produced by
hospitals, nuclear power plants and research facilities. The other compact
members (Delaware, Maryland and West Virginia) have asked Pennsylvania to make
provisions to resume the search if conditions change.

      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 of fuel for energy
production.

      As of December 31, 1998, the daily gas capacity of PSE&G was as follows:

TYPE OF GAS                                                      THERMS PER DAY
-----------                                                      --------------
Natural gas..............................................            22,513,000
Liquefied petroleum gas..................................             2,200,000
Refinery/landfill gas....................................               323,000
                                                                     ----------
  Total..................................................            25,036,000
                                                                     ==========

      About 40% of the daily gas capacity is firm transportation which 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 1998 was 3.6 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 1998, PSE&G purchased
approximately 3.6 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 four interstate pipeline suppliers.


                                       16
<PAGE>

      The majority of PSE&G's gas transportation and 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.

      Currently, 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. Different rate
structures could be implemented in the future as part of gas industry
restructuring in New Jersey. For more information on gas regulation, see State
Regulation--Gas.

      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. Rates for
gas sold in interstate commerce are not subject to cost of service ratemaking
but are subject to market forces. PSE&G buys gas from producers, marketers,
unregulated marketing affiliates of interstate pipeline companies and others.
Interstate transportation is 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
1997-98 winter season and expects to continue to meet such energy-related
demands of its firm customers during the 1998-99 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

      PSEG has no employees. As of December 31, 1998, PSE&G had 10,126
employees. Six-year collective bargaining agreements with all of its union
groups, representing 6,147 PSE&G employees, expire on April 30, 2002. Also at
December 31, 1998, Energy Holdings had 810 employees, of whom 200 were
represented by unions. PSE&G and Energy Holdings 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 and Note 13. Pension, Other Postretirement Benefit and
Savings Plans of Notes.

ENVIRONMENTAL CONTROLS

      PSEG and PSE&G, like most industrial enterprises, are 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 EPA, USDOT, 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. Global and EGDC are also subject to similar regulation with respect
to operation of their facilities (see Energy Holdings).

      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 1998, PSE&G expended approximately $26 million for capital
related expenditures to improve the environment and comply with changing
regulations and estimates that it will expend approximately $48 million, $40
million and $46 million in the years 1999 through 2001, respectively, for such
purposes. Such amounts are included in PSE&G's estimates of construction
expenditures (see MD&A--Liquidity and Capital Resources).


                                       17
<PAGE>

      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.

      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) and the EPA's regulations implementing the
CAA impose 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 Act (NJAPCA) and regulations of the NJDEP implementing the
NJAPCA govern compliance with, and maintenance of, the NAAQS in New Jersey and
also impose emission control requirements. PSE&G's approximate 23% ownership
interest in Conemaugh and Keystone subject it to State regulation in
Pennsylvania governing compliance with, and maintenance of, the NAAQS in
Pennsylvania.

      The CAA provides for SO2 emission reductions to be achieved through a
total cap on SO2 emissions from affected units, and an allocation of SO2
"allowances" (each allowance authorizes the emission of one ton of SO2). Units
needing to cover emissions above their allocations can buy allowances from
sources that have excess allowances. At this time, PSE&G does not expect that it
will incur material expenditures for the units subject to the program.

      The NJDEP's regulations also require 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. Draft and final permits may be
issued by NJDEP for all of PSE&G's remaining major facilities in 1999. 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. Capital costs of complying with these and
other air pollution control requirements through 2003 are included in PSE&G's
estimate of 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 operate, locate, construct or expand generating
facilities in New Jersey in the future which could have an adverse material
impact on PSEG's and PSE&G's financial condition, results of operations and net
cash flows.

      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 the CAA in recognition of the regional ozone problem facing
the northeastern United States.

      In June 1998, the NJDEP adopted regulations implementing the MOU.
Consistent with the MOU, New Jersey's regulations are expected to result in a
65% reduction in NOx emissions from 1990 levels starting in 1999 and a 90%
reduction starting in 2003. These reductions are to be achieved through a
regional cap on NOx emissions from the largest sources of NOx, including PSE&G's
fossil-fueled electric generating facilities. Under formulas established in the


                                       18
<PAGE>

regulations, each source will be allocated a number of "allowances," with each
allowance representing one ton of NOx that the source is allowed to emit. The
allowances can be bought and sold through a regional trading program similar to
the trading of SO2 allowances in the Federal Acid Rain Program established in
Title IV of the CAA which has been in place since 1995. The extent of investment
in control technologies, operational changes, and allowance purchases required
to comply with these regulations will be directly related to the number of
allowances PSE&G receives. PSE&G will receive a preliminary allocation of
allowances in March 1999 and the final allocation will be determined in
accordance with the NJDEP regulations in November 1999 which is subsequent to
the May 1 through September 30, 1999 period governed by the regulations. PSE&G
has attempted to minimize the uncertainty associated with the timing of the
allocation by purchasing allowances, upgrading control technologies and
estimating the expected allocation with as much precision as is practicable
using available data. However PSE&G's present analysis leads it to believe that
the potential costs for purchasing additional NOx budget allowances should not
exceed a total of $10 million through December 31, 2002. Expenditures associated
with installing control technology could result in an additional $72 million.
However, PSE&G is currently analyzing alternatives which could preclude the
necessity of capital improvements.

      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. 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 as much as 85% from 1990 levels. OTAG
also recommended that air emissions trading be used to implement this
recommendation.

      In July 1997, EPA adopted new Federal air quality standards for ozone. 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. 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.

      On September 24, 1998, EPA issued regulations (referred to as a State
Implementation Plan (SIP) Call) implementing the OTAG recommendations by
requiring the 22 states in the eastern half of the United States to make
significant NOx emission reductions by 2003 and to subsequently cap these
emissions. The NOx reduction requirements are consistent with requirements
already in place in New Jersey and thus are not likely to have an additional
impact on New Jersey facilities nor change the capacity availability from
PSE&G's New Jersey facilities. The impact on facilities in Pennsylvania cannot
be assessed at this time as such impacts are dependent upon Pennsylvania's
implementation of the SIP Call through state regulations which have not been
proposed. If implemented as adopted, 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 in New Jersey. PSE&G
supports adoption and implementation of the EPA SIP Call because it addresses
the ozone transport problem which burdens much of the northeastern United
States.

      A new particulate matter standard was also adopted by EPA in July 1997 to
address emission of 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, non-attainment areas will not be designated until 2002 and control
measures to meet this standard will not be identified until 2005.

      PSEG Eagle Point, Inc. (Eagle Point), an indirect subsidiary of Global, 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. EPC 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


                                       19
<PAGE>

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 U.S. Department of Justice
(DOJ) were initiated in the last half of 1997 to explore a negotiated resolution
to the NOV issues. The NOV was settled in 1998 and did not have a material
adverse effect on PSEG'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 New Jersey's surface waters and ground waters 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 the renewal
of the facilities' NJPDES permits. With respect to Section 316(b) requirements,
the EPA is presently required under a consent decree to propose draft
regulations on or before July 1999 and promulgate final regulations by August
2001. EPA has indicated that it intends to seek an extension of these deadlines.
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 316(b) regulations in general and these determinations in particular may
have a material effect on the review of section 316(b) demonstrations.

      The NJPDES permit renewal application for PSE&G's Hudson Station, a 983 MW
coal-fired fossil plant located in Jersey City, New Jersey, is in the process of
being reviewed 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 collected additional data which was used
in the updated demonstrations. PSE&G in its 316(b) demonstration, included a
proposal for certain modifications to the intake structure which included
modified screens with fish buckets and a fish return system. PSE&G submitted
these demonstrations to NJDEP in the fourth quarter of 1998. While PSE&G
believes that these demonstrations address the issues identified by the NJDEP's
consultant and provide an adequate basis for favorable determinations under
Sections 316(a) and 316(b) without the imposition of closed cycle cooling, it is
impossible to predict the outcome of the agency's review at the present time.
PSE&G presently estimates that the cost of retrofitting Hudson Station to
operate with closed cycle cooling, if required, to be approximately $100
million. 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 reviewing a renewal application 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).
In 1998, PSE&G submitted to NJDEP a plan of study for updating its Sections
316(a) and 316(b) demonstrations for Mercer Station. PSE&G is in the process of
implementing the plan of study which includes the collection of additional data
which will be used to update demonstrations to be submitted to the NJDEP in
2000. It is not possible to predict the outcome of such review.


                                       20
<PAGE>

      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, the
preparation of a renewal submittal and the activities required to obtain a
renewed permit is approximately $140 million. The project is approximately 90%
complete. Under the 1994 permit, which remains in effect until such time as a
renewal permit is issued, PSE&G is continuing to restore wetlands and to conduct
the requisite management and monitoring associated with the implementation of
the special conditions of that permit. The existing permit remains in full force
and effect indefinitely upon submission of a timely renewal filing. PSE&G's
share is 42.59% and is included in its 1999-2003 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 and MD&A--Liquidity and Capital
Resources--Construction and Capital Requirements Forecast). On March 4, 1999
PSE&G will file a comprehensive application for the renewal of Salem's NJDEP
permit and will file updated Section 316(a) and 316(b) demonstrations. While it
is impossible to predict the outcome of the review of this application
presently, an unfavorable determination could have a material adverse effect on
PSEG'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 September 27, 2000 absent review of the Docket on or
before August 31, 1999 and renewal by the DRBC. DRBC review of the matter is
planned to commence in the second quarter of 1999.

      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. Regulatory Issues 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. 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

      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. For a discussion of these hazardous waste
issues, see Note 10. Commitments and Contingent Liabilities. For a discussion of
remediation/clean-up actions involving PSE&G, see Item 3. Legal Proceedings.

      For information regarding the Passaic River site, see Note 10. Commitments
and Contingent Liabilities of Notes.

      In addition to the sites individually listed in Item 3. Legal Proceedings,
PSE&G has received 15 claims and/or inquiries concerning prospective enforcement
actions by the EPA and/or NJDEP. Such claims/inquiries relate to
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


                                       21
<PAGE>

actual or threatened release of one or more hazardous substances. PSE&G's
investigation and initial response concerning each such claim and/or inquiry
indicates that PSE&G's potential liability, if any, with respect to these claims
will not have a material adverse effect on its financial position, results of
operations and net cash flows.

      Other liabilities associated with environmental remediation include
Natural Resource Damages. The Comprehensive Environmental Response,
Compensation, and Liability Act of 1980 (CERCLA) and the New Jersey Spill
Compensation and Control Act (Spill Act) authorize Federal and state trustees
for natural resources to assess "damages" against persons who have discharged a
hazardous substance, which discharge resulted in an "injury" to natural
resources. Until recently, the State trustee, NJDEP, has not aggressively
pursued natural resource damages. In February 1997, the NJDEP adopted changes to
the Technical Requirements for Site Remediation pursuant to the Spill Act. Among
these changes was a new provision requiring all persons conducting remediation
to characterize "injuries" to natural resources. Further, these changes required
persons to address those injuries through restoration or damages. Since that
time, PSE&G and others, including industry groups, have been working with NJDEP
on policies to implement this regulatory requirement. The State's program is
still developing and PSE&G cannot assess the magnitude of the potential impact
of this regulatory change. Although inestimable, these costs could be material.

      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. In 1998, PSE&G evaluated SPCC Plan compliance at all
electric distribution facilities and identified deficiencies. PSE&G has begun
making the necessary upgrades. It is anticipated that these upgrades will take
several years to complete. 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.

ENERGY HOLDINGS

      Energy Holdings, the wholly-owned, direct non-utility subsidiary of PSEG,
is incorporated under the laws of New Jersey and is the parent company of
Global, Resources, Energy Technologies, EGDC, PSEG Capital and Funding. Energy
Holdings' principal executive offices are located at 80 Park Plaza, Newark, New
Jersey 07102. Energy Holdings' focus is on investment opportunities in the
domestic non-utility and international energy markets. Resources' investments
are designed to produce immediate earnings and cash flows, which enable Global
and Energy Technologies to focus on longer-term growth. For a discussion of
PSEG's agreement with the BPU regarding utility/non-utility activities and its
impact on Energy Holdings, see Liquidity and Capital Resources of MD&A. For more
information on Energy Holdings investment activities, see Note 15. Financial
Information by Business Segments of Notes.

      GLOBAL

      Global, a New Jersey corporation, has its principal executive offices at
1200 East Ridgewood Avenue, Ridgewood, New Jersey 07450. Global invests and
participates in the development and operation of projects in the generation and
distribution of energy, which include cogeneration and IPP facilities and
electric distribution companies. Global's investments include domestic
qualifying facilities (QFs), foreign exempt wholesale generators (EWGs) and
foreign utility companies (FUCOs). Global is expected to be a primary vehicle
for Energy Holdings' long-term business growth with emphasis on growth
opportunities in the generation and distribution markets arising from domestic
electric utility deregulation and international privatization and development.
Global has investments in 25 cogeneration or independent power projects (ten in
California, two in New Jersey, two in China and one each in New Hampshire,
Pennsylvania, Hawaii, Maine, the Philippines, Argentina and Venezuela),
including four under construction (three in China and one in India), and four
electric distribution ventures (three in Argentina and one in Brazil). Global
continuously evaluates the status of project development and construction
activities in light of the realities of timely completion and the costs
incurred.

      Global's projects are diversified geographically and technologically and
are generally financed with equity and non-recourse debt (see Liquidity and
Capital Resources of MD&A). Global's investments in QF projects have been
undertaken with other participants because Global, 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 or FUCOs are not
restricted to a 50% investment limitation. Global 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


                                       22
<PAGE>

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 Global's investment activity, see Liquidity and Capital
Resources and Foreign Operations of MD&A.

      As of December 31, 1998 and 1997, Global's consolidated assets aggregated
$1.1 billion and $1.2 billion, respectively, of which 20 % was financed with
non-recourse debt.

      RESOURCES

      Resources, a New Jersey corporation, has its principal executive offices
at 80 Park Plaza, Newark, New Jersey 07102. Resources makes primarily passive
investments in assets that can provide funds for future growth as well as
provide incremental earnings for Energy Holdings. Resources' investments are
diverse as to asset type and maturity and include leveraged leases, limited
partnerships, leveraged buyout funds and securities. Some of the transactions in
which Resources participates involve other equity investors. For more
information on Resources' operations and investments, see Liquidity and Capital
Resources of MD&A and Note 4. Long-Term Investments of Notes.

      As of December 31, 1998 and 1997, Resources' consolidated assets
aggregated $1.8 billion and $1.6 billion, respectively.

      ENERGY TECHNOLOGIES

      Energy Technologies, a New Jersey corporation, has its principal executive
offices at 499 Thornall Street, Edison, New Jersey 08837. Energy Technologies,
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. In January 1998, Energy Technologies acquired a
diversified mechanical service contractor which provides services for commercial
and industrial clients in Pennsylvania, New Jersey and Delaware. In January
1999, Energy Technologies acquired another mechanical service contractor
servicing Rhode Island, Connecticut and Massachusetts. Energy Technologies has
also entered into a strategic alliance to market and service compact portable
generators.

      As of December 31, 1998 and 1997, Energy Technologies' assets were $124
million and $60 million, respectively. For additional information, see Liquidity
and Capital Resources of MD&A. See Note 20. Subsequent Events related to the
transfer of Public Service Conservation Resources Corporation's (PSCRC) assets
from PSE&G to Energy Technologies effective January 1, 1999.

      EGDC

      EGDC, a New Jersey corporation having its principal executive offices at
80 Park Plaza, Newark, New Jersey 07102, is a nonresidential real estate
development and investment business. EGDC has investments in eight 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, 1998 and 1997, EGDC's consolidated assets aggregated
$75 million and $83 million, respectively.

      PSEG CAPITAL

      PSEG Capital, a New Jersey corporation, has its principal executive
offices at 80 Park Plaza, Newark, New Jersey 07102. PSEG Capital serves as a
financing vehicle for Energy Holdings' businesses (excluding Energy Technologies
and EGDC), borrowing on their behalf on the basis of a minimum net worth
maintenance agreement with PSEG.

      As of December 31, 1998 and 1997, PSEG Capital had debt outstanding of
$498 million and $611 million, respectively. For additional information, see
External Financings--Energy Holdings and Liquidity and Capital Resources--Energy
Holdings of MD&A.


                                       23
<PAGE>

      FUNDING

      Funding, a New Jersey corporation, has its principal executive offices at
80 Park Plaza, Newark, New Jersey 07102. Funding serves as a financing vehicle
for Resources, Global and their subsidiaries, borrowing on their behalf, as well
as investing their short-term funds.

      As of December 31, 1998 and 1997, Funding had outstanding debt of $251
million and $395 million, respectively. For additional information, see External
Financings--Energy Holdings and Liquidity and Capital Resources--Energy Holdings
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.


                                       24
<PAGE>

      ELECTRIC PROPERTIES

      As of December 31, 1998, PSE&G's share of installed generating capacity
was 10,272 MW, as shown in the following table:

                                                     INSTALLED      PRINCIPAL
NAME AND LOCATION                                  CAPACITY (MW)    FUELS USED
-------------------------------------------------  --------------   ----------
Steam:
    Hudson, Jersey City, NJ......................        1,006       Coal/Gas
    Mercer, Hamilton, NJ.........................          648       Coal/Gas
    Sewaren, Woodbridge Twp., NJ.................          453        Gas/Oil
    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.............................        3,572
                                                     -----------
Nuclear:
    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.......................          675          Gas
    Burlington, Burlington, NJ...................          245          Gas
                                                     -----------
         Total Combined Cycle....................          920
                                                     -----------
Combustion Turbine:
    Essex, Newark, NJ............................          617        Gas/Oil
    Edison, Edison Township, NJ..................          504        Gas/Oil
    Kearny, Kearny, NJ...........................          504        Gas/Oil
    Burlington, Burlington, NJ...................          389          Oil
    Linden, Linden, NJ...........................          223        Gas/Oil
    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.............................       10,272(A)
                                                     ===========

      (A)   Excludes 695 MW of non-utility capacity and 505 MW of 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
Requirements Forecast.


                                       25
<PAGE>

      In addition to the generating facilities in New Jersey and Pennsylvania as
indicated in the table above, as of December 31, 1998, PSE&G owned 41 switching
and/or generating stations with an aggregate installed capacity of 30,417,670
kilovolt-amperes and 222 substations with an aggregate installed capacity of
7,497,000 kilovolt-amperes. In addition, seven substations having an aggregate
installed capacity of 103,250 kilovolt-amperes were operated on leased property.
All of these facilities are located in New Jersey.

      As of December 31, 1998, PSE&G's transmission and distribution system
included approximately 154,634 circuit miles, of which approximately 38,538
miles were underground, and approximately 808,164 poles, of which approximately
538,759 poles were jointly owned. Approximately 99% of this property is located
in New Jersey.

      In addition, as of December 31, 1998, 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, 1998, 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 2,886,000 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, 1998, PSE&G owned and operated approximately 16,240
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.

ENERGY HOLDINGS

      Energy Holdings maintains insurance coverage against loss or damage to its
properties, subject to certain exceptions, to the extent such property is
usually insured and insurance is available at a reasonable cost.

      For a brief general description of the properties of the subsidiaries of
Energy Holdings and their locations, see Item 1. Business--Energy Holdings.

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.


                                       26


<PAGE>


      ENERGY HOLDINGS

     Energy Holdings owns no real property. Energy Holdings leases office space
for its corporate headquarters at 80 Park Plaza, Newark, New Jersey from PSE&G.

ITEM 3. LEGAL PROCEEDINGS

      As previously disclosed, in October 1995, PSEG 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
PSEG 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 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. The
defendants filed motions for summary judgment to dismiss all four of the cases,
which motions are pending. One of the plaintiffs has sold her shares and has
withdrawn from the litigation. Another of the plaintiffs (a profit sharing plan)
has been dissolved, and one of the individual participants in the plan is
maintaining the litigation in his individual name. The four complaints generally
seek recovery of damages for alleged losses purportedly arising out of PSE&G's
operation of the Salem and Hope Creek generating stations, together with certain
other relief, including removal of certain executive officers of PSE&G and PSEG
and certain changes in the composition of PSEG's Board of Directors. Discovery
in all four cases is proceeding to permit plaintiffs to respond to the
defendants' motions for summary judgement. PSEG cannot predict the outcome of
this matter. 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.

      As previously disclosed, on June 25, 1998, a complaint was filed against
the directors of PSEG, and PSEG as a nominal defendant, by the same purported
shareholder of PSEG who instituted the December 1995 shareholder derivative
suit, alleging that the 1996, 1997 and 1998 proxy statements provided to
shareholders of PSEG were false and misleading by reason, among other things, of
failure to disclose certain material facts relating to (i) the controls over and
oversight of PSEG's nuclear operations, (ii) the condition of problems at and
reserves with respect to PSEG's nuclear operations, (iii) the demand letter and
derivative litigation disclosed above, (iv) PSEG's liabilities to the Salem
co-owners as a result of the shutdown of the Salem plants and (v) a shareholder
proposal relating to operations of Salem 1 and 2 which was voted upon at the
1998 annual meeting of shareholders. The complaint sought to have the 1996, 1997
and 1998 proxy statements declared to be in violation of law, and to set aside
the elections of directors of PSEG, the ratification of the selection of
Deloitte & Touche LLP as PSEG's auditors at those annual meetings and the other
matters voted upon at the 1996, 1997 and 1998 annual meetings, and to require
PSEG to conduct a special meeting of shareholders providing for election of
directors following timely dissemination of a proxy statement approved by the
Court hearing this matter, which should include as nominees for election as
directors persons having no previous relationship with PSEG or the current
directors, and other relief. A motion to dismiss the complaint was granted by
the Court on November 10, 1998 except with respect to allegations concerning the
1998 shareholder proposal and with respect to the disclosure in the 1998 proxy
statement of the settlement of litigation between PSE&G and the Salem co-owners.
Following the filing of an amended complaint and a second amended complaint, the
Court, on January 19, 1999, again granted defendants' motion to dismiss the
second amended complaint, again except to the extent set forth in the Court's
November 10, 1998 decision. Discovery on the two remaining claims has commenced.
PSEG cannot predict the outcome of this matter. G.E. Stricklin v. E. James
Ferland, et al., United States District Court for the Eastern District of
Pennsylvania, Civil Action No. 98-3279.

      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 (Civil Action No.
CB96-925) 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


                                       27
<PAGE>

Westinghouse in the sale, installation and maintenance of the generators,
including a claim under the Federal Racketeering Influenced and Corrupt
Organizations Act (RICO). 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. On November 6, 1998, the Court granted
Westinghouse summary judgment on the RICO claim but did not address the
plaintiffs' remaining claims, dismissing them without prejudice since the Court
only had original jurisdiction over the RICO claim. The plaintiffs have appealed
this decision to the Third Circuit Court of Appeals and have re-filed their
remaining claims in the Superior Court of New Jersey.

      In October 1997, Old Dominion Electric Cooperative (ODEC) filed a
Complaint at FERC (Docket No. EL 98-6-000) seeking to modify its 1992 Agreement
with PSE&G for a ten-year sale of 150 MW of capacity and energy. ODEC's
Complaint argued that, given the restructuring of PJM, particularly PJM's new
open access regional transmission service rate design which effectively
eliminates rate "pancaking" for energy transactions that traverse more than one
transmission system, it is unreasonable to leave intact existing bilateral
agreements that result in multiple transmission charges. ODEC therefore urged
FERC to reduce ODEC's contract capacity rate with PSE&G to eliminate an imputed
transmission charge. In an answer filed in December 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 at the
time, FERC had not acted on these filings, it appears FERC summarily decided the
issue in ODEC's favor in its November 25, 1997 PJM Restructuring Order (November
25th Order). PSE&G has requested rehearing and clarification of the November
25th Order. In May 1998, while the ODEC complaint was pending, in a separate
proceeding relating to the restructuring of PJM, FERC ordered PSE&G to reduce
its charges to ODEC by $5.5 million annually for each of the remaining six years
of the agreement. FERC determined that a transmission charge, which it imputed
to the agreement, violated FERC policy, specifically, that users of the PJM
transmission system must pay one rate for transmission based on the transmission
zone in which they are delivering power rather than multiple rates based on
their actual use of multiple transmission systems through which their energy
transactions are moving. PSE&G has applied to FERC for a rehearing of its order
which is pending at this time. On August 4, 1998, FERC dismissed ODEC's October
1997 complaint, determining that issues relating to rate "pancaking" of
transmission were more appropriately addressed in the separate FERC proceeding
on PJM restructuring and that ODEC had failed to show it was entitled to relief
on the remaining issues. ODEC did not seek further review of this order.

      On October 10, 1997, PSE&G filed a Petition for Expedited Approvals with
the BPU (Docket No. GM97100758) 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 (Texas Eastern Transmission Corporation, Docket No.
RP98.83-000) finding that it was not unreasonable for the pipeline company to
refuse to discharge PSE&G under the circumstances addressed in the order. On
April 29, 1998, FERC issued an order on rehearing in which it denied PSE&G's
request for a rehearing. On June 26, 1998, PSE&G filed a petition for review of
FERC's order with the U.S. Court of Appeals, District of Columbia Circuit. In
January 1999, PSE&G filed a brief. The matter is currently pending.

      In addition, see the following below or at the pages indicated:

      (1)   Pages 2, 9 and 72. 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.

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


                                       28

<PAGE>


      (3)   Page 4. Proceeding before the BPU in the Matter of the Board's
            Determination a Management Audit be Performed on PSE&G, Docket No.
            EA97060397.

      (4)  Pages 4 and 73. Proceedings before the BPU relating to an audit of
            PSE&G's competitive services, Docket No. EC98080627.

      (5)   Page 5. Proceedings before the United States Court of Appeals,
            District of Columbia Circuit, in the matter of appeal of FERC Orders
            No. 888, 888A and 888B. (Transmission Access Policy Study Group v.
            Federal Energy.

      (6)   Pages 5 and 9 through 10. 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.)

      (7)   Pages 5 and 10. 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.

      (8)   Pages 14 and 97. 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 19. Notice of Violation issued by EPA against Eagle Point
            Cogeneration Partnership regarding alleged violations of air permit.

      (10)  Page 20. Administrative proceedings before the NJDEP under Section
            316 of the FWPCA for certain electric generating stations.

      (11)  Pages 40 and 98. Implementation of P.L.1997,C.162, an Act
            Revising the Taxation of Electric and Gas Utilities, Docket Nos.
            ER97090661 and GR97090672.

      (12)  Page 71. Generic proceeding before the BPU relating to the matter of
            an inquiry into methods of implementation of SFAS-106, Docket No.
            AX96070530.

      (13)  Page 77. Generic proceeding before the BPU relating to recovery of
            capacity costs associated with power purchases from cogenerators,
            Docket No. EX93060255.

      (14)  Page 78. Proceedings before the BPU relating to PSE&G's Levelized
            Gas Adjustment Clause (LGAC) filed November 14, 1997, Docket No.
            GR97110839.

      (15)  Page 78. Proceeding before the Superior Court of New Jersey,
            Appellate Division in the matter of the motion of PSE&G to increase
            the level of the Electric Demand Side Adjustment Factor, Appellate
            Docket No. A-005257-97T2.

      (16)  Page 78. Proceeding before the BPU related to the Electric Levelized
            Energy Adjustment Clause (LEAC) rate increase to recover DSM costs,
            Docket No. ER97020101.

      (17)  Page 79. Proceedings before the BPU relating to PSE&G's RAC filed
            August 1, 1997, Docket No. GR97080573.


                                       29
<PAGE>

      (18)  Page 80. Proceedings before the BPU in the Matter of the Electric
            Restructuring Plans Filed by Atlantic City Electric Company, Jersey
            Central Power & Light Company, D/B/A GPU Energy, Public Service
            Electric and Gas Company, and Rockland Electric Company -- General
            Auction Standards and Review Criteria, Order Adopting Auction
            Standards, Docket Nos. EX94120585Y, EO97070457, EO97070460,
            EO97070463 and EO97070466.

      (19)  Page 80. Proceedings before the BPU relating to PSE&G's proposed CTC
            filed September 19, 1996, Docket No. ET96090669.

      (20)  Page 96. Investigation by the U.S. Environmental Protection Agency
            (EPA) regarding the Passaic River site.

      (21)  Page 96. Additional investigation by the U.S. Environmental
            Protection Agency (EPA) regarding the Passaic River site.

      (22)  Page 98. Proceedings before the United States Court of Claims and
            United States District Court for the Southern District of New York
            relating to recovery of certain uranium enrichment decontamination
            and decommissioning payments. Docket Nos. 96-490C and
            98CIV.4155(WK).

      In addition, see the following environmental related matters. Based on
current information, PSEG and PSE&G do not expect expenditures for any such
site, individually or all such current sites in the aggregate, to have a
material effect on financial condition, results of operations and net cash
flows.

      (23)  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.

      (24)  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. PSE&G has agreed
            to enter into a Consent Decree with the State of Delaware under the
            Delaware Hazardous Substance Cleanup Act, requiring the PRPs to
            conduct additional limited monitoring at the Sealand site for five
            years and to reimburse Delaware for past and future oversight costs.

      (25)  Duane Marine Salvage Corporation Superfund Site is in Perth Amboy,
            Middlesex County, New Jersey.

      (26)  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.

      (27)  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 has been named as a
            potentially responsible party and alleged to be liable for
            contamination at the Metal Bank Cottman Avenue Superfund Site, a
            former non-ferrous scrap reclamation facility located in
            Philadelphia, Pennsylvania. 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. PSE&G estimates that its share of the
            cost of performing the remedy selected by the U.S. Environmental
            Protection Agency (EPA) could be $4 to $8 million. On June 26, 1998,
            EPA Region III issued an Administrative Order For Remedial Design
            And Remedial Action, Docket No. III-98-082-DC, to thirteen
            Respondents including PSE&G, other utilities, and other persons and
            entities, ordering the Respondents to implement the remedy selected
            ROD issued by EPA Region III in December, 1997. Additionally, with
            respect to this site, the


                                       30
<PAGE>

            United States of America application in the matter entitled United
            States of America, et. al., v. Union Corporation, et. al., Civil
            Action No. 80-1589, United States District Court for the Eastern
            District of Pennsylvania, seeking leave of court to file an amended
            complaint adding claims under the CERCLA was granted. PSE&G and one
            other utility were named as third party defendants in the foregoing
            captioned matter. Defendants have filed an amended third party
            complaint naming PSE&G as a third party defendant. On July 28, 1998,
            PSE&G and seven other utilities named as Respondents in the
            above-referenced Administrative Order filed with EPA Region III a
            Notice of Intent to Comply With Administrative Order for Remedial
            Design and Remedial Action, Metal Bank Cottman Avenue Site, Docket
            No. III-98-082-DC.

      (28)  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.

      (29)  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. On July 31, 1998, PSE&G and 23 other
            third-party defendants entered into a Settlement Agreement with
            third-party plaintiffs. The Settlement Agreement provides the
            settling defendants, including PSE&G, a release from all claims for
            contribution, diminution of property value, and certain defined
            response costs. PSE&G's financial contribution to the settlement was
            not material. By Order dated September 2, 1998, the matter was
            dismissed with prejudice.

      (30)  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). PSE&G and
            other participating PRPs have agreed with NJDEP to a partial
            settlement of such costs and to perform the remedial design and
            remedial action. 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 with estimated cost of $3.7
            million.

      (31)  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. In October 1998, the NJDEP
            and The United States of America filed separate cost recovery
            actions pursuant to CERCLA and/or the Spill Act against
            approximately 30 parties seeking recovery of their respective shares
            of past and future site investigation and remediation response and
            administrative oversight costs incurred and to be incurred at the
            site. Third party contribution actions were also filed in each of
            the foregoing cost recovery actions seeking contribution for an
            equitable share of all liability for these same costs from
            approximately 170 third party defendants. PSE&G is a named defendant
            in the


                                       31
<PAGE>

            NJDEP cost recovery action and a named third party defendant in the
            contribution action filed in the United States' lawsuit.

      (32)  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.

      (33)  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.

      (34)  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.


                                       32
<PAGE>

      (35)  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.

      (36)  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.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      PSEG and PSE&G, inapplicable.

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      PSEG'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 PSEG,
its parent company. As of December 31, 1998, there were 144,218 holders of
record of PSEG Common Stock.

      The following table indicates the high and low sale prices for PSEG's
Common Stock and dividends paid for the periods indicated:

                                                                    DIVIDEND
COMMON STOCK                              HIGH         LOW          PER SHARE
------------                              ----         ---          ---------
1998:
  First Quarter........................   $37 15/16    $30 5/16       $.54
  Second Quarter.......................    37 7/8       31 3/4         .54
  Third Quarter........................    39 11/16     32 5/16        .54
  Fourth Quarter.......................    42 3/4       36 15/16       .54
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

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


                                       33
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

PSEG

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

<TABLE>
<CAPTION>
                                                                                YEARS ENDED DECEMBER 31,
                                                     -----------------------------------------------------------------------------
                                                         1998            1997            1996            1995            1994
                                                     -------------   -------------   -------------   -------------  --------------
                                                                       (MILLIONS OF DOLLARS, WHERE APPLICABLE)
<S>                                                      <C>             <C>             <C>             <C>             <C>
Total Operating Revenues..........................        $5,931          $6,100          $6,041          $5,893          $5,695
                                                     =============   =============   =============   =============  ==============

Income from Continuing Operations.................          $644            $560            $588            $627            $667
Income from Discontinued Operations (A)...........            --              --              24              35              12
                                                     -------------   -------------   -------------   -------------  --------------
Net Income........................................          $644            $560            $612            $662            $679
                                                     =============   =============   =============   =============  ==============

Earnings per Average Share (Basic and
Diluted):
   From Continuing Operations.....................         $2.79           $2.41           $2.42           $2.57           $2.73
   From Discontinued Operations...................            --              --             .10             .14             .05
                                                     -------------   -------------   -------------   -------------  --------------
     Total Earnings per Average Share.............         $2.79           $2.41           $2.52           $2.71           $2.78
                                                     =============   =============   =============   =============  ==============

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

As of December 31:
   Total Assets...................................       $17,997         $17,943         $16,915         $16,816         $16,313
   Long-Term Liabilities:
     Long-Term Debt...............................        $4,763          $4,873          $4,580          $5,190          $5,110
     Other Long-Term Liabilities..................          $517            $457            $411            $367            $332

Preferred Stock With Mandatory Redemption.........           $75             $75            $150            $150            $150
Monthly Guaranteed Preferred Beneficial Interest
   in PSE&G's Subordinated Debentures.............          $210            $210            $210            $210            $150
Quarterly Guaranteed Preferred Beneficial Interest
   in PSE&G's Subordinated Debentures.............          $303            $303            $208              --              --
Quarterly Guaranteed Preferred Beneficial Interest
   in PSEG's Subordinated Debentures..............          $525              --              --              --              --

Ratio of Earnings to Fixed Charges plus
Preferred
   Securities Dividend Requirements (B)...........          2.86            2.61            2.68            2.78            2.84
</TABLE>

(A)   For discussion of discontinued operations, see Note 16. Discontinued
      Operations of Notes.

(B)   Excludes income and expenses from discontinued operations.


                                       34
<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,
                                                          ------------------------------------------------------------------
                                                             1998          1997          1996          1995          1994
                                                          -----------  ------------   -----------  ------------   ----------
                                                                      (MILLIONS OF DOLLARS, WHERE APPLICABLE)
<S>                                                         <C>           <C>           <C>           <C>          <C>
Total Operating Revenues..............................       $5,590        $5,855        $5,825        $5,707       $5,518
Net Income............................................         $604          $528          $535          $617         $659

As of December 31:
   Total Assets.......................................      $14,748       $14,920       $14,799       $14,587      $14,259
   Long-Term Liabilities:
     Long-Term Debt...................................       $4,045        $4,126        $4,107        $4,586       $4,487
     Other Long-Term Liabilities......................         $517          $457          $411          $367         $332

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

Ratio of Earnings to Fixed Charges....................         3.27          2.81          2.83          3.25         3.35
Ratio of Earnings to Fixed Charges plus Preferred
   Securities Dividend Requirements...................         3.15          2.70          2.62          2.77         2.92
</TABLE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

PSEG

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

CORPORATE STRUCTURE

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

      Energy Holdings is the parent of PSEG's non-utility businesses: PSEG
Global Inc. (Global), formerly Community Energy Alternatives Incorporated, an
investor in and developer and operator of projects in the generation and
distribution of energy, including cogeneration and independent power production
(IPP) facilities, electric distribution companies, exempt wholesale generators
(EWGs) and foreign utility companies (FUCOs); PSEG Resources Inc. (Resources),
formerly Public Service Resources Corporation, which has made primarily passive
investments; PSEG Energy Technologies Inc. (Energy Technologies), formerly
Energis Resources Incorporated, 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. Energy Holdings also has two finance subsidiaries: PSEG Capital
Corporation (PSEG Capital), which provides privately-placed debt financing to
Energy Holdings' operating subsidiaries, except Energy Technologies, on the
basis of a minimum net worth maintenance agreement with PSEG and Enterprise
Capital Funding Corporation (Funding), which provides privately-placed debt
financing to Resources, Global and their subsidiaries, which debt is guaranteed
by Energy Holdings,


                                       35
<PAGE>

but without direct support from PSEG. EGDC has been conducting a controlled exit
from its real estate business since 1993. In July 1996, Energy Holdings sold
Energy Development Corporation (EDC), an oil and gas subsidiary.

      As of December 31, 1998 and 1997, PSE&G comprised 82% and 83%,
respectively, of PSEG's assets. For each of the years 1998, 1997 and 1996, PSE&G
revenues were approximately 94%, 96%, and 96%, respectively, of PSEG's revenues
and PSE&G's earnings available to PSEG for such years were 92%, 92% and 87%,
respectively, of PSEG's net income.

OVERVIEW OF 1998 AND FUTURE OUTLOOK

      In 1998, energy industry restructuring continued to advance in New Jersey
as PSE&G completed the evidentiary hearings related to the Energy Master Plan
and the Office of Administrative Law filed its decision providing its
recommendations to the New Jersey Board of Public Utilities (BPU). On February
9, 1999, the New Jersey Electric Discount and Energy Competition Act (Energy
Competition Act) was enacted. It provides that all New Jersey retail electric
customers may select their electric supplier commencing August 1, 1999 and all
New Jersey retail gas customers may select their gas suppliers commencing
January 1, 2000, thus fully opening the New Jersey energy markets to
competition. The Energy Competition Act also:

      o     Requires electric rate decreases of at least 10%, to be phased in
            over a period of up to 36 months.

      o     Allows utilities to have an opportunity to recover up to 100% of
            electric-related stranded (above market) costs.

      o     Allows securitization of up to 75% of electric-related stranded
            costs.

      o     Permits the BPU to require the functional separation or divestiture
            of generating assets if required for competition to develop.

      o     Provides for customer account services (e.g., metering, billing and
            related administrative services) to become competitive in one year.

      o     Authorizes private and municipal aggregation of customers to
            collectively choose their electric supplier.

      o     Authorizes "shopping credits" or discounts for customers that switch
            from their current electric utility supplier.

      o     Requires disclosure of the environmental impact of generation used
            for supplying electric customers.

      o     Authorizes the collection of costs of certain social programs,
            nuclear plant decommissioning, demand side management, manufactured
            gas plant clean up costs and consumer education through a
            non-bypassable Societal Benefits Charge.

      The BPU has been conducting related proceedings pursuant to the New Jersey
Energy Master Plan (Energy Master Plan), under which the BPU is expected to
issue a series of orders that will decide both generic issues for the energy
industry (e.g., affiliate standards) and company specific matters (e.g. the
levels of rate decrease, shopping credit, stranded asset recovery and
securitization) for each utility. The BPU has set a target date of March 31,
1999 for issuing an electric restructuring order, but has yet to establish a
target date for the gas restructuring order. For further discussion of the
aforementioned BPU activities, the Energy Competition Act and the forthcoming
BPU proceedings (collectively, the Energy Master Plan Proceedings), see Note 2.
Regulatory Issues of Notes to Consolidated Financial Statements (Notes). These
decisions will fundamentally change the energy industry in New Jersey and will
result in competitive markets for electric and gas supply and for customer
services. The transmission and distribution businesses will remain regulated.
The outcome of these proceedings could have a material adverse impact on PSEG's
and PSE&G's financial condition, results of operations and net cash flows
including a potentially material impact resulting from the discontinuation of
the regulated accounting model currently used by PSE&G. For discussion of
potential accounting changes resulting from deregulation, see Note 19.
Accounting Matters of Notes.

      PSEG has been engaged in the competitive energy business for a number of
years through certain of its non-utility subsidiaries. Due to the regulatory
changes outlined above, in the future, PSEG will include a larger component of


                                       36
<PAGE>

competitive businesses. As the unregulated component of the business continues
to grow, potential financial risks and rewards will be greater, financial
requirements will change, and the volatility of earnings will increase. The
pending regulatory decisions and the business experience PSEG has acquired in
operating non-regulated energy business will be significant components in
determining future success.

      As part of its Energy Master Plan proposal, PSE&G has proposed to recover
$2.5 billion of its potentially stranded costs through the issuance of its
transition bonds, referred to as securitization. The Energy Competition Act
provides that the net proceeds from securitization must be used to reduce
utility debt and equity. Dependent upon the level of securitization authorized
by the BPU in the Energy Master Plan Proceedings, PSE&G may use a number of
alternatives to reduce utility debt and equity, including purchasing outstanding
PSEG common stock and the redemption, tender or purchase of outstanding PSE&G
mortgage bonds and PSE&G preferred stock. For further discussion of
securitization, see Note 2. Regulatory Issues of Notes.

      To the extent that recovery of stranded costs occasioned by deregulation
are not probable of recovery and not eligible for deferred accounting treatment
under Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation" (SFAS 71) and 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), PSE&G would incur an
extraordinary, non-cash charge to operations, which could be material to the
financial position and results of operations of PSEG and PSE&G. For discussion
of potential accounting changes due to deregulation, see Note 19. Accounting
Matters of Notes.

      PSEG and PSE&G believe that the end result of the Energy Master Plan
Proceedings 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, write down of asset values, reduction in dividend
payments and adverse impacts on revenues due to the mandated electric rate cut,
electric and gas retail choice and fuel and energy price risks. 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.

      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 are affecting how PSEG conducts business and its financial
prospects in the future. Competitive changes in the utility industry continued
to occur in 1998 and will continue to occur in 1999. For discussions of the New
Jersey Energy Master Plan Proceedings and other rate matters, see Note 2.
Regulatory Issues and Note 3. Regulatory Assets and Liabilities of Notes.

      The New Jersey Gross Receipts and Franchise Tax (NJGRT) was eliminated
effective January 1, 1998 and replaced with a combination of the New Jersey
Corporate Business Tax which is a State income tax, the State sales and use tax
and a Transitional Energy Facility Assessment (TEFA), with no material impact on
the financial condition, results of operations and net cash flows of PSEG and
PSE&G. As a result of such tax reform, after the phase out of the TEFA, the
effective state tax rate applicable to PSE&G will be substantially reduced,
putting PSE&G on a more level playing field with competitors. For additional
discussion of energy tax reform, see Note 12. Income Taxes of Notes.

      To the extent that the discussion that follows reports on business
conducted under full monopoly regulation of the utility business, it must be
understood that such business will change in 1999 and that past results are not
necessarily an indication of future business prospects or financial results.

      In 1998, PSE&G's operations were highlighted by the return to service of
Salem 1 and the overall successful operation of the nuclear generation program.
Complimenting PSE&G's generation capability was the activity of its wholesale
energy operations which positively contributed to PSE&G's results and, through
its risk management policies, mitigated PSE&G's exposure to the dramatic price
volatility and credit concerns seen throughout the energy commodity markets
during the summer of 1998 (see Qualitative and Quantitative Disclosures About
Market Risk).

     In 1998, Energy Holdings continued to implement its strategy to develop its
business through international expansion as Global made its first investment in
India and continued its growth in Latin America through the acquisition of its
third


                                       37
<PAGE>

Argentine electric distribution company. Resources also continued its investment
strategy through its investments in several leveraged leases on energy-related
assets in Europe. For discussion of related risks, see Qualitative and
Quantitative Disclosures About Market Risk and Foreign Operations.

      Going forward, PSEG will continue to pursue its strategies to grow its
family of businesses. As previously reported, more emphasis will be placed on
finding opportunities for expansion outside of its traditional utility services
and markets. PSE&G's strategy is to size its electric generation fleet in New
Jersey to meet its anticipated needs, while seeking to increase its value and
manage commodity price risk through its wholesale trading activity. PSE&G will
also seek to capitalize on synergies which may exist with its natural gas
purchasing and trading activities. PSE&G's transmission and distribution
strategy, both gas and electric, is to provide cost-effective, high quality
service. PSEG will also consider opportunities for expansion through business
combinations. Global's strategy is to invest in both generation and distribution
facilities worldwide with the goal of creating long-term value. Resources'
strategy is to continue focusing on passive investments in the energy sector
worldwide seeking to provide earnings and economic value. Energy Technologies'
strategy is to expand upon the current energy related services it provides to
industrial and commercial customers to create long-term value and to participate
in the retail energy marketplace.

      Successful implementation of these strategies, coupled with the
restructuring of the electric and gas industries will shift more of the assets
and earnings of the PSEG companies from regulated to competitive businesses. As
a result of the deregulation of the electric utility industry, PSE&G could be
required to separate its electric generation services, and potentially other
competitive services, from its regulated utility operations and to possibly
transfer those operations to an entity functionally independent from PSE&G.

RESULTS OF OPERATIONS

      Basic and diluted earnings per share of PSEG common stock (Common Stock)
were $2.79 in 1998, representing an increase of $0.38 per share or 16% from
1997. Basic and diluted earnings per share were $2.41 in 1997, a decrease of
$0.11 per share or 4% from 1996.

      PSE&G's contribution to earnings per share of Common Stock in 1998
increased $0.37 or 17% compared to 1997 primarily due to the settlement of the
lawsuits filed by the co-owners of Salem which negatively impacted 1997 earnings
by $0.27 per share, an increase in electric revenues resulting from considerably
warmer weather in the third quarter of 1998 and wholesale power activities of
PSE&G (see Item 7A. Qualitative and Quantitative Disclosures About Market Risk).
These increases were partially offset by lower gas sales in 1998 due to mild
winter weather during the 1998 heating seasons. It is expected that PSE&G's 1999
earnings will be impacted by the outcome of the Energy Master Plan Proceedings.

      Energy Holdings' contribution to earnings per share in 1998 increased
$0.01 or 5% compared to 1997. Energy Holdings' earnings were primarily those of
PSEG Resources due to the strong overall performance of its investment
portfolio, including leveraged leases, limited partnerships, leveraged buyout
funds and marketable securities. Global's 1998 earnings were negatively impacted
by the loss on the sale of its investment in an electric generating facility
located in Colombia. Global's 1999 earnings will be negatively impacted as a
result of the recent economic developments in Brazil, including the devaluation
of its currency, however, this is not expected to have a material adverse effect
on the results of operations for PSEG. For further discussion, see Foreign
Operations and Note 20. Subsequent Events of Notes.

      PSE&G's contribution to earnings per share in 1997 decreased $0.07 or 3%
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. For discussion of the December 31st Order, see Note 2.
Regulatory Issues of Notes.


                                       38
<PAGE>

      Energy Holdings' contribution to earnings per share in 1997 decreased
$0.14 or 17% compared to 1996 primarily due to the inclusion in 1996 of earnings
of $0.10 per share related to the discontinued operations of EDC and higher
operating expenses of Energy Technologies as it continued to grow.

      As a result of PSEG'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.

      PSE&G--REVENUES

      Certain of the below listed year to year variances did not impact earnings
as there was a corresponding variance in expense. To the extent fuel revenue and
expense flowed through the LEAC and LGAC mechanisms, variances in fuel revenues
and expenses offset and thus had no direct effect on earnings. These include
base fuel revenues, demand side management (DSM) revenue and Remediation
Adjustment Charge (RAC) revenue. See Note 2. Regulatory Issues and Note 3.
Regulatory Assets and Liabilities of Notes for a discussion of LEAC, LGAC, RAC
and DSM and their current and proposed status under the Energy Competition Act.

      ELECTRIC

      Electric revenues increased $113 million or 3% in 1998 and decreased $26
million or 1% in 1997. The increase in 1998 was primarily due to higher sales
resulting from considerably warmer weather in the third quarter of 1998
augmented by positive economic factors in New Jersey. Additionally, revenue from
wholesale power activities and DSM revenue were higher in 1998 than in 1997.
These increases were partially offset by a decrease to revenue caused by New
Jersey energy tax reform in 1998. For a discussion of energy tax reform, see
Note 12. Income Taxes of Notes. Collection of New Jersey Gross Receipts and
Franchise Tax (NJGRT) was reflected in revenue and expense in prior years. As a
result of energy tax reform, the portion of NJGRT replaced by the New Jersey
sales and use tax is no longer reflected in revenue or expense on the income
statement. State sales and use tax is a liability of the customer, collected by
PSE&G and remitted to the State and is recorded in Other Current Liabilities on
the Consolidated Balance Sheets.

      The decrease in 1997 was primarily due to lower kilowatt sales from
unfavorable weather partially offset by 1996 refunds required by the December
31st Order.

      GAS

      Gas revenues decreased $378 million or 20 % in 1998 and increased $56
million or 3% in 1997. The decrease in 1998 is primarily due to lower therm
sales resulting from milder winter weather in 1998 and energy tax reform.

      PSE&G--EXPENSES

      NET INTERCHANGED POWER AND FUEL FOR ELECTRIC GENERATION

      Net Interchanged Power and Fuel for Electric Generation increased $36
million or 4% in 1998 and decreased $10 million or 1% in 1997. The increase in
1998 was primarily due to increased sales of electricity resulting in increased
purchases of fuel for electric generation and purchases of power from the PJM
Interconnection, L.L.C. (PJM) pool. Effective January 1, 1998, the amount
included for the 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 PJM market clearing price. Effective
April 1, 1998, PJM, as independent system operator (ISO), replaced the PJM
uniform market clearing price with locational marginal pricing (LMP) for
determining the market clearing pricing to energy providers. Experience to date
shows no material adverse impact of this change to LMP on PSE&G's cost of Net
Interchanged Power and Fuel for Electric Generation.

      To the extent fuel revenue and expense flow through the LEAC mechanism,
variances in fuel revenues and expenses offset and thus have no direct effect on
earnings. In 1999, the LEAC mechanism will be discontinued as a result of the
Energy Master Plan Proceedings. This may increase earnings volatility


                                       39
<PAGE>

and fuel and energy price risk since PSE&G will bear the full risks and rewards
of changes in nuclear and fossil generating fuel costs and replacement power
costs. For a discussion of fuel related revenue and expense included in the LEAC
and for the current status of the LEAC, see Note 1. Organization and Summary of
Significant Accounting Policies, Note 2. Regulatory Issues and Note 3.
Regulatory Assets and Liabilities of Notes.

      GAS PURCHASED

      Gas Purchased decreased $131 million or 12% and $17 million or 2% in 1998
and 1997, respectively. The decrease in 1998 was primarily due to the milder
winter weather in 1998. Due to the operation of the Levelized Gas Adjustment
Clause (LGAC) mechanism, variances in fuel revenues and expenses offset and had
no direct effect on earnings.

      OPERATION AND MAINTENANCE

      Operation and Maintenance expense increased $81 million or 6% in 1998 and
decreased $23 million or 2% in 1997. The increase in 1998 was primarily due to
higher DSM recovery resulting in a greater recognition of previously deferred
expenses, higher information technology costs in 1998 due to Year 2000
remediation work, higher marketing costs, and higher administrative and general
cost related to wholesale power activities. These increases were partially
offset by lower nuclear operation and maintenance costs due to restart expenses
in 1997 for Salem. DSM costs are currently recoverable through the demand side
adjustment factor of the LEAC and are recorded in both expense and revenue and
therefore, have no direct effect on earnings. For discussion of DSM under the
Energy Master Plan Proceedings, see Note 2. Regulatory Issues of Notes.

      INCOME TAXES

      Income Taxes increased $91 million or 30% and $42 million or 16% in 1998
and 1997, respectively. The 1998 increase was primarily due to inclusion of New
Jersey State income tax of $103 million in 1998. PSE&G became subject to New
Jersey State income tax, effective January 1, 1998, due to energy tax reform in
the State of New Jersey. For more detail on energy tax reform and changes in New
Jersey taxes, see Note 12. Income Taxes of Notes. Partially offsetting the
increase in 1998 was a decrease from 1997 in Federal income tax due to
adjustments of prior year taxes. The 1997 taxes were higher due to an increase
in pre-tax operating income.

      TRANSITIONAL ENERGY FACILITY ASSESSMENT (TEFA) / NEW JERSEY GROSS RECEIPTS
      AND FRANCHISE TAX (NJGRT)

      TEFA/NJGRT decreased $405 million or 70% and $22 million or 4% in 1998 and
1997, respectively. The 1998 decrease is due to New Jersey energy tax reform.
For 1998, the amount represents TEFA unit-based taxes while the 1997 amount
represents NJGRT unit-based taxes. The TEFA unit tax rates are approximately 30%
of the NJGRT unit tax rates. See Note 12. Income Taxes of Notes for other
impacts of New Jersey energy tax reform.

      SETTLEMENT OF SALEM LITIGATION

      In January and February 1997, the settlement of the Salem litigation
related to the 1995 shutdown was recorded. That settlement reduced Other Income
and Deductions by $53 million, net of taxes of $29 million, in 1997. For a
further discussion of the Salem settlement, see Note 2. Regulatory Issues of
Notes.


                                       40
<PAGE>

      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.

      ENERGY HOLDINGS--NET INCOME

<TABLE>
<CAPTION>
                                                          INCREASE OR (DECREASE)
                                         ----------------------------------------------------------
                                               1998 VS. 1997                 1997 VS. 1996
                                         ---------------------------   ----------------------------
                                                            PER                            PER
                                            AMOUNT         SHARE          AMOUNT          SHARE
                                         ------------  -------------   -------------   ------------
                                               (MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
<S>                                             <C>          <C>              <C>          <C>
Global..............................            $(6)         $(.03)            $4           $.02
Resources...........................             (3)          (.01)             3            .01
EGDC................................              6            .03             (5)          (.02)
Energy Technologies.................              5            .02            (12)          (.05)
                                         ------------  -------------   -------------   ------------
Continuing Operations...............              2            .01            (10)          (.04)
Discontinued Operations--EDC
  Income from Operations............             --             --            (11)          (.04)
  Gain on Sale......................             --             --            (13)          (.06)
                                         ------------  -------------   -------------   ------------
        Total.......................            $ 2           $.01           $(34)         $(.14)
                                         ============  =============   =============   ============
</TABLE>

      CONTINUING OPERATIONS

      Energy Holdings' income from continuing operations was $49 million, a $2
million increase from 1997. Energy Holdings' earnings were primarily those of
PSEG Resources due to the strong overall performance of its investment
portfolio, including leveraged leases, limited partnerships, leveraged buyout
funds and marketable securities. Global's 1998 earnings were negatively impacted
by the loss on the sale of its investment in an electric generating facility
located in Colombia. Global's 1999 earnings will be negatively impacted as a
result of the recent economic developments in Brazil, including the devaluation
of its currency, however, at present, this is not expected to have a material
adverse effect on the results of operations for PSEG. For further discussion,
see Foreign Operations and Note 20. Subsequent Events of Notes.

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

      DISCONTINUED OPERATIONS

      EDC was sold on July 31, 1996. Income related to EDC operations was $11
million in 1996. Additionally, a gain of $13 million was recorded on the sale in
1996. For a discussion of discontinued operations, see Note 16. Discontinued
Operations.

LIQUIDITY AND CAPITAL RESOURCES

      PSEG AND PSE&G

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


                                       41
<PAGE>

      Cash generated from PSE&G's operations is expected to continue to provide
the major source of funds for PSE&G's operating needs. Energy Holdings' growth
will be funded through external financings and cash generated from operations.
PSEG's cash and cash equivalents totaled $140 million at the end of 1998
compared with $83 million at the end of 1997.

      PSEG and PSE&G believe that the deregulation of the utility industry will
impact the sources and uses of cash in 1999 and beyond. Securitization as
proposed in PSE&G's Energy Master Plan proposal and authorized in the Energy
Competition Act will change the sources of cash flows. The cash received by
PSE&G from the net proceeds of securitization is required by the Energy
Competition Act to be applied to reduce outstanding debt and equity of the
utility. The outcome of the Energy Master Plan Proceedings could have a material
impact on the cash flows of PSEG and PSE&G. For further discussion of
securitization, see Note 2. Regulatory Issues of Notes.

      On September 15, 1998, in anticipation of securitization of PSE&G's
stranded costs afforded by the then proposed Energy Competition Act, the Board
of Directors of PSEG authorized the repurchase of up to 10 million shares of
Common Stock. Under the authorization, repurchases were made in the open market
at the discretion of PSEG. The repurchased shares have been held as treasury
stock. At December 31, 1998, PSEG had repurchased approximately 5.3 million
shares of Common Stock at a cost of $207 million, under this authorization. As
of February 8, 1999, PSEG had repurchased a total of 10 million shares at a cost
of approximately $391 million under this program. On February 16, 1999, the
Board of Directors of PSEG authorized the expansion of the repurchase program up
to an aggregate of 20 million shares under substantially the same terms and
conditions as the program which began in September 1998.

      Dividend payments on Common Stock were $2.16 per share and totaled $499
million for the year ended December 31, 1998. Amounts and dates of such
dividends on Common Stock as may be declared in the future will necessarily be
dependent upon PSEG's future earnings, cash flows, financial requirements, the
outcome of the Energy Master Plan Proceedings (see Note 2. Regulatory Issues and
Note 3. Regulatory Assets and Liabilities of Notes), the receipt of dividend
payments from its subsidiaries and other factors. Since 1986, PSE&G has made
regular cash payments to PSEG 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.
PSE&G has not increased its dividend rates in seven years in order to retain
additional capital for reinvestment and to reduce its payout ratio.

      PSE&G paid common stock dividends of $503 million and $523 million to PSEG
during the years ended December 31, 1998 and 1997, respectively. Changes in
PSE&G's financial condition that could result from the Energy Master Plan
Proceedings could have a material adverse effect on the ability to maintain the
dividend at such level. For discussion of the Energy Master Plan Proceedings,
see Note 2. Regulatory Issues of Notes. Due to the growth in Energy Holdings
investment activities, no dividends on Energy Holdings' common stock were paid
in 1998 or are anticipated for 1999. From 1992 through 1996, Energy Holdings
made regular cash payments to PSEG in the form of dividends on outstanding
shares of Energy Holdings' common stock.

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

      As shown on the Consolidated Statements of Cash Flows, net cash provided
by operating activities totaled $1.422 billion in 1998, up from $1.095 billion
in 1997. The major contributor in 1998 was net income of $644 million, which
included $669 million of non-cash deductions for depreciation and amortization.

      Net 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.

      Net cash used in investing activities totaled $712 million in 1998, down
from $1.614 billion in 1997. The primary use of such cash in 1998 was for
utility plant additions, excluding Allowance for Funds Used During Construction
(AFDC), of


                                       42
<PAGE>

$535 million at PSE&G. Additionally there was a net increase in long-term
investments of $58 million, including Resources' net increase in investments of
$136 million, partially offset by Global's net decrease in investments primarily
from the sale of investments in generation and co-generation companies of $47
million, and contributions made by PSE&G to the pension and nuclear
decommissioning trust funds of $115 million.

      Net cash used in investing activities totaled $1.614 billion in 1997, up
from $9 million in 1996. The primary use of such cash in 1997 was a net increase
in long-term investments of $914 million, including Global's investments in
distribution and generation companies of $852 million, Resources' 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.

      Net cash used in financing activities was $653 million in 1998 as compared
to $323 million of cash provided by financing activities in 1997. Major uses of
such cash in 1998 were a decrease in short-term debt by PSE&G of $256 million,
Energy Holdings of $61 million and PSEG of $75 million, the payment of dividends
on Common Stock of $499 million and the purchase of Common Stock of $207
million. These uses were partially funded by cash provided by the issuance of
preferred securities by PSEG's Enterprise Capital Trust I, II and III of $525
million. PSE&G's long-term debt (primarily Mortgage Bonds) decreased $99 million
in 1998 while Energy Holdings' long-term debt decreased $208 million. PSEG's
long-term debt at the holding company level increased $275 million in 1998 due
to the issuance of Extendible Notes.

      Net 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, Energy Holdings of $267 million and PSEG of $75 million, primarily used
to fund certain scheduled long-term debt maturities, Global'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 Energy Holdings' long-term debt increased $372
million.

      As of December 31, 1998, PSEG's capital structure consisted of 46.1%
common equity, 43.0% long-term debt and 10.9% preferred securities. The capital
structure as of December 31, 1997 consisted of 48.4% common equity, 45.3%
long-term debt and 6.3% preferred securities.

      As a result of the 1992 focused audit of PSEG's non-utility businesses
(Focused Audit), the BPU approved a plan which, among other things, provides
that: (1) PSEG will not permit Energy Holdings' non-utility investments to
exceed 20% of PSEG's consolidated assets without prior notice to the BPU (such
investments at December 31, 1998 were approximately 17% of assets); (2) the
PSE&G Board of Directors will provide an annual certification that the business
and financing plans of Energy Holdings will not adversely affect PSE&G; (3) PSEG
will (a) limit debt supported by the minimum net worth maintenance agreement
between PSEG and PSEG Capital to $650 million and (b) make a good-faith effort
to eliminate such support over a six to ten year period from April 1993; and (4)
Energy Holdings will 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. PSEG
and Energy Holdings 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 PSEG's intent that Energy Holdings and its subsidiaries be
its long-term growth vehicles, financing requirements connected with the
continued growth of Energy Holdings, changes to the utility industry expected
from the final outcome of the Energy Master Plan Proceedings and potential
accounting impacts resulting from the deregulation of the generation of
electricity and the unbundling of the utility business, modifications will be
required to certain of the restrictions agreed to by PSEG with the BPU in
response to the Focused Audit. Inability to achieve satisfactory resolution of
these matters could impact the future relative size and financing of Energy
Holdings and accordingly, PSEG's future prospects, including financial
condition, results of operations and net cash flows. For discussion of the
Energy Master Plan Proceedings and potential impacts see Note 2. Regulatory
Issues and Note 3. Regulatory Assets and Liabilities of Notes.


                                       43
<PAGE>

      ENERGY HOLDINGS

      As noted above, Global, Resources and Energy Technologies are expected to
provide long-term growth for Energy Holdings and PSEG. Resources' investments
are designed to produce immediate earnings and cash flows, which enable Global
and Energy Technologies to focus on longer-term growth. During the next five
years, Energy Holdings' capital requirements are expected to be provided from
additional debt financing and operating cash flows. A significant portion of
Global's growth is expected to occur internationally due to the current and
anticipated growth in electric capacity required in certain regions of the
world. Resources will continue its focus on investments related to energy
infrastructure. Energy Technologies is expected to expand upon the current
energy related services being provided to industrial and commercial customers.

      Energy Holdings' cash provided by (used in) operating, investing and
financing activities was as follows:

<TABLE>
<CAPTION>
                                                      1998           1997            1996
                                                  ------------   ------------   ------------
                                                           (MILLIONS OF DOLLARS)
<S>                                                   <C>             <C>           <C>   
Operating Activities:
   Global....................................          $(26)           $(9)            $9
   Resources.................................            23            130            164
   Energy Technologies.......................           (25)            --             --
   Other.....................................            (5)           (23)           (16)
                                                  ------------   ------------   ------------
   Continuing Operations.....................           (33)            98            157
   EDC.......................................            --             --             78
                                                  ------------   ------------   ------------
       Total Operating Activities............          $(33)           $98           $235
                                                  ============   ============   ============
Investing Activities:
   Global....................................           $47          $(852)           $(8)
   Resources.................................          (136)           (97)             2
   Energy Technologies.......................           (40)            --             --
   Other.....................................            30             (2)            12
                                                  ------------   ------------   ------------
   Continuing Operations.....................           (99)          (951)             6
   EDC.......................................            --             --            653
                                                  ------------   ------------   ------------
       Total Investing Activities............          $(99)         $(951)          $659
                                                  ============   ============   ============
Financing Activities:
   Debt......................................         $(287)          $638          $(380)
   Preferred Equity (A)......................           416             78           (369)
                                                  ------------   ------------   ------------
       Total Financing Activities............          $129           $716          $(749)
                                                  ============   ============   ============
</TABLE>

      (A)   Preferred stock issued internally to PSEG by Energy Holdings.

      For a discussion of the source of Energy Holdings' funds, see External
Financings. Over the next several years, Energy Holdings 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 PSEG's and Energy
Holdings' financial condition, results of operations and net cash flows. As of
December 31, 1998, 1997 and 1996, Energy Holdings' embedded cost of debt of its
finance subsidiaries was approximately 7.4%, 8.2% and 8.9%, respectively. Energy
Holdings' finance subsidiaries did not provide any additional long-term debt
financing during 1998.

      In January, June and July 1998, PSEG invested $217 million, $147 million
and $145 million, respectively, in Energy Holdings which issued to PSEG like
amounts of its 5.01%, 4.80% and 4.875% Cumulative Preferred Stock and made
additional equity investments in Global and Resources. PSEG funded its
additional investment in Energy Holdings through the sale of tax deductible
preferred securities, issued by Enterprise Capital Trust I, II and III, special
purpose statutory business trusts controlled by PSEG, representing Guaranteed
Preferred Beneficial Interests in PSEG's Debentures.


                                       44



<PAGE>


      CAPITAL REQUIREMENTS

      Capital resources and capital requirements will be affected by the outcome
of the Energy Master Plan Proceedings. For a discussion of the potential impact
of the Energy Master Plan Proceedings on PSE&G's future prospects, including
financial condition, results of operations and net cash flows, see Note 2.
Regulatory Issues and Note 3. Regulatory Assets and Liabilities of Notes.

      PSE&G

      PSE&G had utility plant additions of $547 million, $557 million and $603
million for 1998, 1997 and 1996, respectively, including AFDC of $12 million,
$15 million and $17 million, respectively. Construction expenditures were
related to improvements in PSE&G's existing power plants (including the
replacement of Salem 1 steam generators in 1997 and acquisition of nuclear
fuel), transmission and distribution system, gas system and common facilities.
PSE&G also expended $10 million, $28 million and $34 million for the cost of
plant removal (net of salvage) in 1998, 1997 and 1996, respectively.
Construction expenditures from 1999 through 2003 are expected to aggregate $2.8
billion, excluding 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. Decision with regard to these improvements will depend, in part,
upon the outcome of the Energy Master Plan Proceedings.

      Dependent upon the outcome of the Energy Master Plan Proceedings, PSE&G
expects that it will be able to internally generate the majority 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,
with the balance to be provided by issuance of debt to replace maturities. For
discussion of the Energy Master Plan Proceedings and their potential impacts and
potential contingent liabilities, see Note 2. Regulatory Issues and Note 10.
Commitments and Contingent Liabilities of Notes.

      ENERGY HOLDINGS

      GLOBAL

      In May 1998, Global sold its 50% interests in two domestic cogeneration
plants, resulting in proceeds to Energy Holdings of approximately $70 million.
In July 1998, Global sold its 5% interest in a domestic cogeneration plant and
in August 1998, sold its 50% interest in a natural gas-fired generating station
in Colombia for aggregate proceeds of approximately $70 million. The aggregate
proceeds of all 1998 sales of $140 million approximated book value.

      In November 1998, Global acquired a 30% interest in an Argentine electric
distribution company serving a population of 750,000 in the northeast corner of
the Province of Buenos Aires at a cost of approximately $60 million. In December
1998, Global acquired a 20% equity share of a 330 megawatt power plant to be
constructed in India, for which Global will be the operations and maintenance
contractor.

      RESOURCES

      In the first quarter of 1998, Resources received proceeds of $120 million
from investment liquidations resulting from the exercise of an early buyout
option by the lessee in a leveraged lease and from sales of investments held in
leveraged buyout and venture capital partnerships.

      In March 1998, Resources entered into a leveraged lease of a natural gas
distribution network in the Netherlands and, in April 1998, acquired a lease of
a domestic gas-fired steam electric generating station. The aggregate amount of
these investments was approximately $132 million. In July 1998, Resources
purchased a 33.3% interest in a leveraged lease of a natural gas-fired
generating station in the United Kingdom for approximately $40 million and in
September 1998, purchased a 100% interest in a leveraged lease of several gas
distribution networks in the Netherlands for approximately $45 million. In
December 1998, Resources closed on an additional investment in a gas
distribution network leveraged lease in the Netherlands for approximately $34
million.

      ENERGY TECHNOLOGIES

      Energy Technologies continued to implement its growth strategy in the
regional energy service arena through its acquisition of two mechanical service
contractors and by participating in the deregulating energy markets in the
Northeast.


                                       45
<PAGE>

      EGDC

      In June 1998, EGDC continued its controlled exit from the real estate
business and sold its 75% interest in one of its properties for approximately $5
million, which approximated book value.

CONSTRUCTION AND CAPITAL REQUIREMENTS FORECAST

<TABLE>
<CAPTION>
                                                         1999       2000       2001      2002       2003       TOTAL
                                                      ---------  ---------  ---------  --------  ----------  ---------
                                                                          (MILLIONS OF DOLLARS)
<S>                                                    <C>        <C>        <C>       <C>         <C>        <C>   
Construction and Investment Requirements
(Estimate):
   PSE&G..........................................       $572       $591       $576      $558        $544     $2,841
   Energy Holdings................................        359        263        233       152         260      1,267
                                                      ---------  ---------  ---------  --------  ----------  ---------
   Total Construction and Investment Requirements.        931        854        809       710         804      4,108
                                                      ---------  ---------  ---------  --------  ----------  ---------
Mandatory Retirement of Debt:
   PSEG...........................................        --         275        --        --          --         275
   PSE&G..........................................        100        635        100       300         300      1,435
   Energy Holdings................................        318        109        166       160         --         753
                                                      ---------  ---------  ---------  --------  ----------  ---------
   Total Retirement of Debt.......................        418      1,019        266       460         300      2,463
                                                      ---------  ---------  ---------  --------  ----------  ---------
     Total Capital Requirements..................      $1,349     $1,873     $1,075    $1,170      $1,104     $6,571
                                                      =========  =========  =========  ========  ==========  =========
</TABLE>

      The projected effect of securitization, as included in PSE&G's Energy
Master Plan proposal, is not included in the above forecast. For discussion of
securitization and the Energy Master Plan Proceedings, see Note 2. Regulatory
Issues of Notes.

EXTERNAL FINANCINGS

      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 changes in the industry and the potential use of
securitization, attention and scrutiny of PSE&G's competitive strategies by
rating agencies will likely continue. These changes could result in changes to
PSEG's and PSE&G's bond ratings and significantly alter the capital structures
of both PSEG and PSE&G.

      In addition, the impact of the use of securitization proceeds, capital
structure changes and other actions which might be taken by PSEG and PSE&G in
connection with energy industry restructuring is likely to affect the market
prices of their respective securities. For discussion of the use of proceeds of
securitization see Note 2. Regulatory Issues of Notes.

      PSEG

      At December 31, 1998, PSEG had a committed $150 million revolving credit
facility which expires in December 2002. At December 31, 1998, PSEG had no debt
outstanding under this revolving credit facility. At December 31, 1998 and 1997,
PSEG had a $25 million and a $75 million uncommitted line of credit,
respectively, with a bank. At December 31, 1998, PSEG had no debt outstanding
under this line of credit.

      In January 1998, Enterprise Capital Trust I, a special purpose statutory
business trust controlled by PSEG, issued $225 million of 7.44% Trust Originated
Preferred Securities (Guaranteed Preferred Beneficial Interest in PSEG's
Debentures). In June 1998, Enterprise Capital Trust II, a special purpose
statutory business trust controlled by PSEG, issued $150 million of Floating
Rate Capital Securities, Series B at three-month London Interbank Offered Rate
(LIBOR) plus 1.22% reset quarterly. At the time of issuance, PSEG's floating
rate obligation under its debentures was swapped for a fixed rate payment
resulting in an effective rate of 7.2%. For more detail, see Note 8. Financial
Instruments and Risk Management of Notes. In July 1998, Enterprise Capital Trust
III, a special purpose statutory business trust controlled by PSEG, issued $150
million of its 7.25% Trust Originated Preferred Securities, Series C. Proceeds
of these issues were loaned to PSEG and are evidenced by its deferrable interest
subordinated debentures. PSEG used the proceeds of these issues to make $509
million 


                                       46
<PAGE>

preferred equity investments in Energy Holdings. The debentures and their
related indentures constitute a full and unconditional guarantee by PSEG of the
preferred securities issued by the trusts. If, and for as long as, payments on
PSEG's debentures have been deferred, or PSEG has defaulted on the indentures
related thereto or its guarantee thereof, PSEG may not pay any dividends on its
Common Stock. For a discussion of dividends, see Liquidity and Capital Resources
-- PSEG.

      In November 1998, PSEG issued $275 million of Extendible Notes in two
series, $100 million principal amount of Series A with interest at LIBOR plus
0.75%, reset quarterly, and automatically tendered to the remarketing agent for
remarketing on May 24, 1999 and $175 million principal amount of Series B with
interest at LIBOR plus 0.78%, reset quarterly, and automatically tendered to the
remarketing agent for remarketing on November 22, 1999. PSEG used the net
proceeds of these issuances to repurchase shares of its Common Stock and to
reimburse its treasury for expenditures made for that purpose.

      As previously disclosed, PSEG and PSE&G have issued a total of
approximately $525 million and $513 million, respectively, of deferrable
interest subordinated debentures which are treated as debt to the issuer for
Federal income tax purposes and as preferred equity for financial accounting and
rating agency purposes. In a case not involving PSEG or PSE&G, the Internal
Revenue Service (IRS) had proposed to disallow interest deductions claimed by
Enron Corp. (Enron) on two issues of similar long-term subordinated debentures
and brought that issue to litigation. Although in December 1998, the IRS
conceded this issue in the Enron litigation, there can be no assurance as to
whether the IRS nevertheless will not seek to disallow the deductions that PSEG
and PSE&G have taken and will claim for interest paid on such debentures. The
annualized interest expense for these debentures for PSEG and PSE&G together is
approximately $83 million. In total for 1994 through 1997, PSEG and PSE&G
claimed approximately $89 million in interest deductions for these debentures,
which equates to approximately $31 million in tax benefits. If challenged by the
IRS, PSEG and PSE&G would expect to vigorously defend the deductibility of the
interest payments taken as deductions on previously filed Federal tax returns.
In the event of the occurrence of a Tax Event as defined in the respective
debenture indentures, such as the receipt of an opinion of counsel that there is
a more than insubstantial risk that interest payable on the debentures will not
be tax deductible, PSEG and PSE&G have the right to redeem the preferred
securities and issue the debentures to the preferred securities holders or to
refinance such obligations as allowed in the respective debenture indentures.

      PSE&G

      PSE&G has filed with the BPU for approval, which it expects to obtain, to
opportunistically refinance essentially all of its long-term debt through
January 4, 2000. 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 calculated in
accordance with its Mortgage is at least 2:1. As of December 31, 1998, the
Mortgage would permit up to $3.6 billion aggregate principal amount of new Bonds
to be issued against previous additions and improvements. At December 31, 1998,
PSE&G's Mortgage coverage ratio was 3.98:1. PSE&G expects to apply for and
receive necessary BPU authorization for external financings to meet its
requirements over the next five years, as needed.

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

      In April 1998, $8 million of PSE&G's 7.50% Bonds, Series OO, were
purchased in the open market. On August 3, 1998, the remaining outstanding $234
million of the 7.50% Series OO Bonds were redeemed.

      In May 1998, PSE&G sold $250 million of its Bonds, Remarketable Series YY,
due 2023, Mandatorily Tendered 2008. The Series YY Bonds bear interest at the
rate of 6.375% per annum until May 1, 2008. PSE&G also entered into a
Remarketing Agreement with a third party that granted the third party the option
to call and remarket the Series YY Bonds on May 1, 2008 for the remaining term
of the Series YY Bonds. If not called by the third party, the Bonds must be put
by the holders to PSE&G. The proceeds of the sale were used primarily to redeem
PSE&G's 7.50% Series OO Bonds.

      On July 1, 1998, $18 million of PSE&G's 6% Debenture Bonds matured.

      To provide liquidity for its commercial paper program, PSE&G has a $650
million revolving credit agreement expiring in June 1999, which PSE&G expects to
be able to renew, and a $650 million revolving credit agreement expiring


                                       47
<PAGE>

in June 2002 with a group of commercial banks, which provide for borrowings of
up to one year. On December 31, 1998, 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 4, 2000, not more than $1.5 billion of short-term obligations,
consisting of commercial paper and other unsecured borrowings from banks and
other lenders. On December 31, 1998, PSE&G had $770 million of short-term debt
outstanding, including $115 million borrowed against its uncommitted bank lines
of credit which lines of credit totaled $150 million as of December 31, 1998.

      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, 1998, Fuelco had commercial paper of $80
million outstanding.

      ENERGY HOLDINGS

      The minimum net worth maintenance agreement between PSEG Capital and PSEG
provides, among other things, that PSEG (1) maintain its ownership, directly or
indirectly, of all outstanding common stock of PSEG Capital, (2) cause PSEG
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 PSEG Capital in order
to permit it to pay its debt obligations. In 1993, PSEG agreed with the BPU to
make a good-faith effort to eliminate such PSEG support within six to ten years.
Effective January 31, 1995, PSEG Capital notified the BPU of its intention not
to have more than $650 million of debt outstanding at any time. PSEG Capital has
a $650 million Medium Term Note (MTN) program which provides for the
private-placement of MTNs without registration. PSEG Capital's assets consist
principally of demand notes of Global and Resources. Intercompany borrowing
rates are established based upon PSEG Capital's cost of funds. At December 31,
1998, PSEG Capital had total debt outstanding of $498 million, all of which were
comprised of MTNs. On February 16, 1999, PSEG Capital issued $252 million of
6.25% MTNs due May 2003. The proceeds were used to repay $100 million of PSEG
Capital MTNs which matured February 16, 1999 and to reduce Energy Holdings'
short-term debt. At February 16, 1999, total debt outstanding under the MTN
program was $650 million.

      As of December 31, 1998, Funding had $150 million and $300 million
revolving credit facilities with two groups of banks which expire in July and
November 1999, respectively. Funding expects to be able to renew both credit
facilities. 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 Resources and Global and their subsidiaries on the basis
of an unconditional guaranty from Energy Holdings, but without direct support
from PSEG. As of December 31, 1998, Funding had $251 million of total debt
outstanding, including $45 million of privately-placed Senior Notes which mature
in March 1999.

      For a discussion of the non-recourse debt of Global, a wholly-owned
subsidiary of Energy Holdings, see Note 7. Schedule of Consolidated Debt of
Notes.

      Energy Holdings, Global and Resources are subject to restrictive business
and financial covenants contained in existing debt agreements. Energy Holdings
is required to maintain a debt to equity ratio of no more than 2.00:1 and a
twelve-months earnings before interest and taxes to interest (EBIT) coverage
ratio of at least 1.50:1. As of December 31, 1998 and 1997, Energy Holdings had
consolidated debt to equity ratios of 0.89:1 and 1.80:1, respectively, and for
the years ended December 31, 1998, 1997 and 1996, EBIT coverage ratios, as
defined to exclude the effects of EGDC and the gain on the sale of EDC, of
2.10:1, 2.20:1 and 2.45:1, respectively. The 1998 debt to equity ratio decreased
primarily due to the equity investment by PSEG of $509 million, evidenced by the
like amount of preferred stock issued by Energy Holdings to PSEG. 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,
Energy Holdings' ability to continue to grow its business will depend to a
significant degree on PSEG's and Energy Holdings' ability to obtain additional
financing beyond current levels.

                                       48


<PAGE>

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

      The market risk inherent in PSEG'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. PSEG's policy is to use derivatives to manage risk
consistent with its business plans and prudent practices. PSEG has a Risk
Management Committee made up of executive officers and an independent risk
oversight function to ensure compliance with corporate policies and prudent risk
management practices.

      PSEG is exposed to credit losses in the event of non-performance or
non-payment by counterparties. PSEG also has a credit management process which
is used to assess, monitor and mitigate counterparty exposure for PSE&G and
Energy Holdings. In the event of nonperformance or nonpayment by a major
counterparty, there may be a material adverse impact on PSEG's and PSE&G's
financial condition, results of operations and net cash flows.

      COMMODITIES--PSE&G

      The availability and price of energy commodities are subject to
fluctuations from factors such as weather, environmental policies, changes in
supply and demand, state and Federal regulatory policies and other events. To
reduce price risk caused by market fluctuations, PSE&G enters into derivative
contracts, including forwards, futures, swaps and options with approved
counterparties, to hedge its anticipated demand. These contracts, in conjunction
with owned electric generating capacity and physical gas supply contracts, are
designed to cover estimated electric and gas customer commitments.

      PSE&G currently has levelized energy adjustment clauses in its rate
structure in place for both electricity (LEAC) and natural gas (LGAC). These
clauses were established to minimize the impact of major commodity price swings
on customer prices. They also reduce the risk to PSE&G by permitting PSE&G to
defer price increases and decreases until regulatory treatment can be
determined. In accordance with the December 31st Order, PSE&G is utilizing
deferred accounting for electricity supply costs, however, overrecoveries during
the LEAC period will be used to mitigate stranded costs to be determined in the
Energy Master Plan Proceedings while underrecoveries will be recognized in
results of operations. PSE&G's proposal in the BPU's restructuring proceedings
would cap basic tariff rates for seven years and discontinue the LEAC upon
commencement of customer choice. For discussion of the levelized energy
adjustment clauses, see Note 2. Regulatory Issues of Notes.

      During the summer of 1998, the eastern electricity commodity markets
experienced severe volatility resulting from extremely hot weather and electric
capacity and energy shortages in the Midwest. Certain electric power marketers
defaulted, ultimately resulting in their bankruptcy. FERC issued a report on
September 22, 1998 addressing the causes of these severe price movements in the
summer of 1998. The report focused on the activity in the Midwest where the most
extreme movements resulted causing surrounding pools to experience higher than
expected prices and volatilities The report concluded that "the particular
combination of factors that led to the June event was quite unusual." The report
stated further, "This combination of factors was not typical, is not likely to
recur, and is not representative of how wholesale electricity markets usually
work. However, price increases and decreases may be expected in the future
depending upon the balance of demand and supply." PSE&G cannot predict whether
similar events that may lead to extreme price movements will occur again. Given
the impending regulatory change and the dissolution of the LEAC, the absence of
a PJM price cap in situations involving emergency purchases, and the potential
for plant outages, extreme price movements could have a material impact on
PSE&G's financial condition, results of operations and net cash flows.

      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%
confidence level and assuming a one week horizon at December 31, 1998 was
approximately $4 million, compared to the December 31, 1997 level of $7 million,
due to a reduction in net exposure during volatile months. 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.


                                       49
<PAGE>

      As discussed in Results of Operations, wholesale power activities at PSE&G
positively impacted the results of operations for 1998. Certain other utilities
and power marketers have experienced significant losses in their wholesale power
operations during that period. These losses were primarily attributable to
extreme market volatility, counterparty defaults and unavailability of
generation.

      COMMODITIES--ENERGY HOLDINGS

      During 1998, Energy Technologies entered into futures contracts to buy
natural gas related to fixed-price natural gas sales commitments. Such contracts
hedged approximately 90% of its fixed price sales commitments at December 31,
1998. As of December 31, 1998, Energy Technologies had a net unrealized hedge
loss of $5 million.

      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 $524 million with a fair market value of $542 million
at December 31, 1998 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 $54 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. Under the Energy Master Plan Proceedings, it is
expected that the recovery of these investments will be continued as part of the
societal benefits charge, as to which no assurances can be given.

      EQUITY SECURITIES--ENERGY HOLDINGS

      Resources has investments in equity securities and partnerships, in which
Resources is a limited partner, which invest in equity securities. Resources
carries its investments in equity securities at their approximate fair value as
of the reporting date. Consequently, the carrying value of these investments is
affected by changes in the fair value of the underlying securities. Fair value
is determined by adjusting the market value of the securities for liquidation
and market volatility factors, where appropriate. The aggregate amount of such
investments which have available market prices at December 31, 1998 and 1997 are
recorded at fair value of $204 million and $185 million, respectively, and have
exposure to price risk. A sensitivity analysis has been prepared to estimate
Energy Holdings' 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 $17 million.

      INTEREST RATES--PSEG

      PSEG is subject to the risk of fluctuating interest rates in the normal
course of business. PSEG's policy is to manage interest rates through the use of
interest rate swaps and fixed and floating rate debt. As of December 31, 1998, a
hypothetical 10% change in market interest rates would result in a $2 million
change in interest costs related to floating rate debt, in addition to that
noted in Interest Rates--PSE&G and Interest Rates--Energy Holdings below.

      PSEG entered into an interest rate swap on June 26, 1998 to hedge
Enterprise Capital Trust II's $150 million of Floating Rate Capital Securities,
Series B, due 2028, which were sold to a group of institutional investors in
June 1998. The Floating Rate Capital Securities were offered to institutional
investors at an annual rate equal to three-month LIBOR plus 1.22%, reset
quarterly. Enterprise Capital Trust II is a special purpose statutory business
trust controlled by PSEG. The basis for both the interest rate swap and the
Floating Rate Capital Securities is the quarterly LIBOR. This interest rate swap
effectively hedges the underlying debt for 10 years at an effective rate of
7.2%.

      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 expects to
receive BPU approval to issue long-term debt for opportunistic refinancing
purposes. Additionally, PSE&G would also use interest rate swap instruments to
hedge interest 


                                       50
<PAGE>

rate risk, when appropriate. As of December 31, 1998, a hypothetical 10% change
in market interest rates would result in a $6 million change in interest costs
related to short-term and floating rate debt.

      INTEREST RATES--ENERGY HOLDINGS

      Energy Holdings is subject to the risk of fluctuating interest rates in
the normal course of business. Energy Holdings' policy is to manage interest
rates through the use of fixed rate debt, floating rate debt and interest rate
swaps. As of December 31, 1998, a hypothetical 10% change in market interest
rates would result in a $3 million change in interest costs related to
short-term and floating rate debt.

      In June 1997, an indirect subsidiary of Global entered into an interest
rate swap on 50% of its floating rate borrowings of $87 million. The basis for
the interest rate swap is six month LIBOR. The interest rate swap effectively
hedges the underlying debt through its scheduled maturity in May 1999 at the
current effective rate of 7.76%. 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.

      FOREIGN CURRENCIES--ENERGY HOLDINGS

      Global had consolidated non-recourse debt of $123 million as of December
31, 1998 which is denominated in the Brazilian Real 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 and between the Brazilian
Real and the U.S. Dollar. 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 (losses)/gains resulting from such exchange rate changes are
included in determining net income for the period and amounted to $(3) million
and $1 million for the years ended December 31, 1998 and 1997, respectively. For
more information on foreign operations and the devaluation of foreign
currencies, see below and Note 20. Subsequent Events of Notes.

FOREIGN OPERATIONS

      In accordance with their growth strategies, Global and Resources have made
approximately $919 million and $691 million, respectively, of international
investments. These investments represent 9% of PSEG's consolidated assets and
contribute 2% of consolidated revenues. Resources investments are primarily in
leveraged leases in the Netherlands and the United Kingdom with associated
revenues denominated in U.S. dollars, and, therefore bear no foreign currency
risk. Global's investments are primarily in projects that generate or distribute
electricity in Brazil, Argentina and China. As a primary vehicle for PSEG's
growth, Global is expected to continue to invest in competitive power markets.
Where possible, Global structures its investments to manage the risk associated
with project development, including foreign currency devaluation and
fluctuations. PSEG has evaluated the current economic conditions in these
regions and has determined that its investments have not been impaired. Net
foreign currency devaluations, caused primarily by the Brazilian Real, have
reduced Global's total assets by $43 million as of December 31, 1998 with an
offsetting charge to cumulative foreign currency translation adjustment (a
separate component of stockholders' equity).

      In January 1999, Brazil abandoned its managed devaluation strategy and
allowed its currency, the Real, to float against other currencies. As of January
31, 1999, the Real has devalued approximately 40% against the U.S. dollar since
December 31, 1998. Based on the December 31, 1998 Brazilian investment balance
of $482 million, there was a 40% devaluation as of January 31, 1999 which
resulted in a charge of $172 million to cumulative foreign currency translation
adjustment (a separate component of stockholders' equity). PSEG cannot predict
to what extent, if any, further devaluation may occur, and, therefore, cannot
predict the impact of potential devaluation of currencies on PSEG's results of
operations, financial condition and net cash flows. However, assuming no further
significant devaluation, PSEG does not expect this to have a material adverse
effect on its 1999 results of operations, financial condition or net cash flows.
For additional information, see Note 20. Subsequent Events and Note 15.
Financial Information by Business Segment of Notes. As PSEG increases its
international investments, the financial statements of PSEG will be increasingly
affected by changes in the global economy.


                                       51

<PAGE>


YEAR 2000 READINESS DISCLOSURE

      Many of PSEG's and PSE&G's systems, which include information technology
applications, plant control and telecommunications infrastructure systems, must
be modified due to computer program limitations in recognizing dates beyond
1999. PSEG and PSE&G have had a formal project in place since 1997 to address
Year 2000 issues. Based upon project progress to date, all mission critical
systems are expected to be ready by January 1, 2000. Future progress is
dependent on a wide number of variables, including the continued availability of
trained resources and vendors meeting commitments to PSEG and PSE&G.

      YEAR 2000 READINESS STATUS

      PSEG and PSE&G have established a three-phase program to achieve Year 2000
readiness. The initial phase (Inventory) identifies systems having potential
Year 2000 issues and sets priorities for assessing and remediating those
systems. The second phase (Assessment) determines whether systems are
digital/date sensitive and the extent of date related issues. The third phase
(Remediation/Testing) repairs programming code, upgrades or replaces systems and
validates that code repairs were implemented as intended.

      PSEG's and PSE&G's Year 2000 readiness program addresses issues relating
to three principal types of systems:

      o     Information technology systems, which include such business
            applications as the customer information, administrative and "back
            office" systems.

      o     Process control and monitoring systems, which include embedded
            devices as well as real time systems such as energy management
            systems (EMS) and the supervisory control systems for gas and
            electric (SCADA).

      o     Infrastructure systems, which include such devices as servers,
            routers, etc.

      Inventory is more than 99% complete for all information technology,
infrastructure and process control/monitoring systems. Substantial Assessment
work has been completed on the information technology, infrastructure systems
and process control systems. Remediation/Testing is in progress on information
technology, process control and infrastructure systems.

      PSEG and PSE&G have completed required Year 2000 readiness work for more
than 80% of their critical systems by the end of 1998. The work required by the
remaining critical systems is expected to be completed by July 1999, except for
certain systems operated by PSE&G's nuclear operations, as discussed below. By
the end of 1999, a majority of PSEG's and PSE&G's non-critical systems are also
expected to be Year 2000 ready with the remainder of such non-critical systems
to be ready in 2000. Energy Holdings and its subsidiaries have essentially
completed Inventory on all systems impacted by Year 2000 readiness issues and
substantial Assessment work has been completed on such systems.
Remediation/Testing is expected to be completed in 1999 on all such systems.

      As previously reported, on May 11, 1998, the NRC issued a Generic Letter
requiring submission of a written response within 90 days of that date
indicating whether or not nuclear plant operators have pursued and continue to
pursue Year 2000 programs and addressing the programs' scope, assessment
process, plans for corrective actions, quality assurance measures, contingency
plans and regulatory compliance. Additionally, the Generic Letter required
submission of a written response upon completion of the operators' Year 2000
program or no later than July 1, 1999 confirming that their facilities are Year
2000 ready, or will be Year 2000 ready, by 2000 with regard to compliance with
the terms and conditions of their licenses and NRC regulations. On July 23,
1998, PSE&G provided its written response to the first requirement noted above,
outlining for the NRC its nuclear operations' Year 2000 program and indicating
that planned implementation will allow PSE&G's nuclear operations to be Year
2000 ready and in compliance with the terms and conditions of its licenses and
NRC regulation by January 1, 2000. As of December 31, 1998, PSE&G's nuclear
operations' Year 2000 effort is on schedule to have all mission critical systems
ready by January 1, 2000. Additionally, at a meeting held on September 29, 1998,
PECO informed PSE&G that Peach Bottom's Year 2000 effort is on schedule to meet
the July 1999 NRC response schedule. During the week of October 26, 1998, the
NRC conducted an audit of the nuclear operations' Hope Creek Year 2000 Project.
The audit report states that the nuclear operations' Year 2000 project plan is
comprehensive and is receiving the appropriate management support and oversight.


                                       52
<PAGE>

      PSEG and PSE&G are continuing to work with their supplier base to assess
the Year 2000 readiness status of vendors who provide critical materials and
services (key vendors). Sufficient information has not yet been received from
all key vendors to confirm their preparedness for Year 2000. PSEG and PSE&G are
aggressively pursuing the key vendors who have been unresponsive. However, PSEG
and PSE&G are not yet able to determine whether all of their key vendors will be
able to meet Year 2000 requirements. Failure of key vendors to meet these
requirements could result in material adverse impacts to PSEG's and PSE&G's
operations, financial condition, results of operations and net cash flows.

      YEAR 2000 COSTS

      For a discussion of Year 2000 Costs, see Note 10. Commitments and
Contingent Liabilities of Notes.

      YEAR 2000 RISKS

      The North American Electric Reliability Council (NERC) has been asked by
the Department of Energy (DOE) to lead national efforts for electric utility
industry Year 2000 readiness. In its report issued in September 1998, NERC
evaluated potential risks for the industry from both an impact and probability
basis. PSEG's and PSE&G's internal analyses of the risks posed by the Year 2000
are consistent with the risk assessment prepared by NERC. PSEG and PSE&G expect
that the Year 2000 project (specifically remediation and contingency planning
efforts) will mitigate these risks and allow PSEG and PSE&G to meet their
fiduciary, regulatory and safety commitments.

      The following risks defined by NERC were assumed only for the purpose of
planning and preparing for operations. None of the risks identified in this plan
are predictions of Year 2000 events:

<TABLE>
<CAPTION>
====================================================================================================
                                                                       NERC              NERC
                                                                    PROBABILITY         IMPACT
                     NERC DEFINED SCENARIO                         FOR INDUSTRY      FOR INDUSTRY
----------------------------------------------------------------------------------------------------
<S>                                                                   <C>               <C>
Loss of generation                                                     High              High
----------------------------------------------------------------------------------------------------
Loss of EMS, SCADA Systems                                             High              High
----------------------------------------------------------------------------------------------------
Loss of leased communications lines                                    High              High
----------------------------------------------------------------------------------------------------
Generation Restart/Loss of Load/Unusual load                           High              Low
----------------------------------------------------------------------------------------------------
Environmental control or monitoring                                   Medium            Medium
----------------------------------------------------------------------------------------------------
Loss of internal communications                                       Medium            Medium
----------------------------------------------------------------------------------------------------
Loss of gas or oil supply                                             Medium             High
----------------------------------------------------------------------------------------------------
Sabotage                                                              Medium             High
----------------------------------------------------------------------------------------------------
Distribution system failure/DC Tie Failure/Under-frequency or           Low              High
under-frequency voltage load shed failure/Loss of system 
protection/Loss of transmission/Loss of security coordinator
functions                                                               
----------------------------------------------------------------------------------------------------
Voltage control device failure                                          Low              High
----------------------------------------------------------------------------------------------------
Loss of control center access                                           Low             Medium
----------------------------------------------------------------------------------------------------
Loss of coal                                                            Low             Medium
----------------------------------------------------------------------------------------------------
Operating Personnel/Generation and Transmission Information             Low              Low
Sharing System (OASIS) Failure/Loss of non-critical operating
data/DSM failure/Supplies                                               
====================================================================================================
</TABLE>

      PSEG's and PSE&G's efforts have focused on reducing the "High" and
"Medium" probability scenarios and mitigating the effects of "High" and "Medium"
impacts.

      PSEG and PSE&G have identified some and will continue working to determine
the most reasonably likely, worst case scenarios arising from Year 2000
readiness issues. Such scenarios may include, among others, significant
reductions in key customers' power needs due to their own Year 2000 readiness
issues or temporary disruption of service from the effect of disruptions caused
by other entities whose electrical systems are connected to PSE&G's through PJM.
The results of such analysis will depend, in part, on the results of information
currently being obtained from key vendors as to their Year 2000 readiness and
the readiness of PJM and trading partners, among others.


                                       53
<PAGE>

      PSEG and PSE&G have no outstanding litigation relating to Year 2000
issues. The likelihood of future Year 2000 related liabilities cannot be
determined at this time. PSEG and PSE&G have not been subject to specific or
general Year 2000 regulatory action, other than responding to inquiries from
regulatory bodies such as the BPU and the NRC.

      CONTINGENCY PLANS

      PSEG and PSE&G are developing contingency plans in accordance with NERC
and NRC guidelines. The cornerstone of the guidance is to use a "defense in
depth" strategy by creating multiple defense barriers to reduce the risk of
catastrophic results to extremely small probability levels. Other areas covered
by NERC and PSEG's and PSE&G's responses include:

================================================================================
GUIDANCE                                   PSEG'S AND PSE&G'S CONTINGENCY PLAN  
--------------------------------------------------------------------------------
Identify and fix known Year 2000           PSEG and PSE&G have focused their    
problems.                                  resources on the remediation of      
                                           non-compliant systems.               
--------------------------------------------------------------------------------
Identify most probable and credible        PSEG and PSE&G are currently 
worst case scenarios.                      evaluating.
--------------------------------------------------------------------------------
Plan for the probable, prepare for the     PSEG and PSE&G will develop special  
worst. Develop special operating           procedures and will conduct both     
procedures, conduct training and system    internal drills and participate in   
wide drills.                               industry efforts.                    
--------------------------------------------------------------------------------
Operate systems in a precautionary         PSEG & PSE&G are working with the    
posture during critical Year 2000          Mid-Atlantic Area Council (MAAC) and 
periods. This may include reducing         with PJM for detailed planning.      
voluntary bulk transfers, ensuring that    
adequate generation facilities are in
service and increasing staffing.
================================================================================

      The nature of contingency plans will include 1) using existing redundant
assets, such as PSE&G's mix of generating assets; 2) leveraging existing
business continuity plans, such as storm preparedness plans; 3) using manual
work-arounds; 4) using rapid-reaction teams and 5) development of risk
mitigation approaches to reduce overall dependency on vendors. PSEG and PSE&G's
emerging strategy calls for the deployment of these plans in the following
manner (using risk scenarios shown above that NERC evaluated to have a high
probability and a high impact):

================================================================================
             SCENARIO                               INITIAL PLAN
--------------------------------------------------------------------------------
Loss of generation                      Use existing redundant assets. Have
                                        available a varied mix of generating
                                        assets, with sufficient reserve
                                        capacity, to ensure that if certain
                                        stations are unable to function, the
                                        reserve can meet generating needs.
--------------------------------------------------------------------------------
Loss of EMS, SCADA Systems              Use manual work-arounds and rapid
                                        reaction teams.
--------------------------------------------------------------------------------
Loss of leased communications lines     Use existing redundant assets such as
                                        existing radio and back-up
                                        communications systems.
================================================================================

      PSEG and PSE&G have adopted NERC's timetable, guidelines and detailed
requirements for developing these contingency plans. The planning process is an
iterative one. PSEG and PSE&G have completed their preliminary contingency
plans. The second version of their contingency plans will be completed by June
30, 1999, consistent with NERC's timetable. PSEG and PSE&G will participate,
with internal drills to be completed beforehand, in NERC's industry-coordinated
Year 2000 readiness drills on April 8-9, 1999 and September 8-9, 1999. PSEG and
PSE&G will evaluate plan updates, as needed, from September 1999 through January
2000.

      PSEG and PSE&G expect that with completion of the Year 2000 project and
implementation of programs from SAP America, Inc. (SAP), the possibility of
significant interruptions of normal operations should be reduced. However, if
PSEG, PSE&G, their domestic and international subsidiaries, the other members of
PJM, PJM trading partners supplying power through PJM or PSEG's or PSE&G's
critical vendors and/or customers are unable to meet the Year 2000 deadline,
such inability could have a material adverse impact on PSEG's and PSE&G's
operations, financial condition, results of operations and net cash flows.


                                       54


<PAGE>


RATE MATTERS

      For discussions of the Energy Master Plan Proceedings, 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. Regulatory Issues of Notes.

ACCOUNTING ISSUES

      For a discussion of significant accounting policies, including those
regarding regulation of PSE&G such as 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 and Note 19. Accounting Matters of Notes.

IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS

      For a discussion of the impact of new accounting pronouncements including
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133), Emerging Issues Task Force (EITF) Issues 98-10, "Accounting for Energy
Trading and Risk Management Activities" (EITF 98-10), Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" (SOP 98-1) and SOP 98-5, "Reporting on the Costs of Start-Up
Activities" (SOP 98-5), see Note 19. Accounting Matters of Notes.

SITE RESTORATIONS AND OTHER ENVIRONMENTAL COSTS

      For discussion of potential environmental and other remediation costs, see
Note 10. Commitments and Contingent Liabilities of Notes.

PSE&G

      The information required by this item is incorporated herein by reference
to the following portions of PSEG'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 1998 and Future Outlook;
Results of Operations; Liquidity and Capital Resources; External Financings;
Qualitative and Quantitative Disclosures About Market Risk; Foreign Operations;
Year 2000 Readiness Disclosure; Rate Matters; Accounting Issues; Impact of New
Accounting Pronouncements and Site Restorations and Other Environmental Costs.


                                       55
<PAGE>

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; managing rapidly changing energy trading operations in conjunction
with electricity and gas production, transmission and distribution systems;
managing foreign investments and electric generation and distribution operation
in locations outside of the traditional utility service territory; political and
foreign currency risks; an increasingly competitive energy marketplace; sales
retention and growth potential in a mature service territory and a need to
reduce operating and capital costs; ability to obtain adequate and timely rate
relief, cost recovery, including stranded costs, and other necessary regulatory
approvals; Federal and state regulatory actions; costs of construction; Year
2000 issues; 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; the ability to economically and safely operate nuclear facilities in
accordance with regulatory requirements; environmental concerns; and market risk
and credit market concerns. PSEG 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 PSEG 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 disclosures 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


                                       56
<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                        CONSOLIDATED STATEMENTS OF INCOME
                  (MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                              FOR THE YEARS ENDED DECEMBER 31,
                                                                            -----------------------------------
                                                                              1998         1997         1996
                                                                            ---------    ---------    ---------
<S>                                                                         <C>          <C>          <C>      
OPERATING REVENUES
      Electric                                                              $   4,031    $   3,918    $   3,944
      Gas                                                                       1,559        1,937        1,881
      Nonutility Activities                                                       341          245          216
                                                                            ---------    ---------    ---------
        Total Operating Revenues                                                5,931        6,100        6,041
                                                                            ---------    ---------    ---------

OPERATING EXPENSES
Net Interchanged Power and Fuel for Electric Generation                           945          909          919
Gas Purchased                                                                     970        1,101        1,118
Operation and Maintenance                                                       1,501        1,364        1,371
Depreciation and Amortization                                                     669          630          607
Taxes (Note 12)
      Income Taxes                                                                420          334          295
      Transitional Energy Facility Assessment/New  Jersey
        Gross Receipts Taxes                                                      171          576          598
      Other                                                                        69           71           76
                                                                            ---------    ---------    ---------
        Total Operating Expenses                                                4,745        4,985        4,984
                                                                            ---------    ---------    ---------

OPERATING INCOME                                                                1,186        1,115        1,057
                                                                            ---------    ---------    ---------

OTHER INCOME AND DEDUCTIONS
      Settlement of Salem Litigation - Net of Applicable
         Taxes of $29                                                              --          (53)          --
      Other - net                                                                   6            7           (2)
                                                                            ---------    ---------    ---------
        Total Other Income and Deductions                                           6          (46)          (2)
                                                                            ---------    ---------    ---------

INCOME BEFORE INTEREST CHARGES AND
      DIVIDENDS ON PREFERRED SECURITIES                                         1,192        1,069        1,055
                                                                            ---------    ---------    ---------

INTEREST CHARGES  AND PREFERRED SECURITIES
      DIVIDENDS
      Interest Expense (Note 7)                                                   481          470          453
      Allowance for Funds Used During Construction -
        Debt and Capitalized Interest                                             (13)         (20)         (18)
      Preferred Securities Dividend Requirements of Subsidiaries (Note 6)          80           56           50
      Net Loss (Gain) on Preferred Stock Redemptions (Note 6)                      --            3          (18)
                                                                            ---------    ---------    ---------
        Total Interest Charges and Preferred Securities Dividends                 548          509          467
                                                                            ---------    ---------    ---------

INCOME FROM CONTINUING OPERATIONS                                                 644          560          588

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

NET INCOME                                                                  $     644    $     560    $     612
                                                                            =========    =========    =========

WEIGHTED  AVERAGE COMMON SHARES AND
      POTENTIAL DILUTIVE EFFECT OF STOCK OPTIONS
        OUTSTANDING (000's)                                                   230,974      231,986      242,401

EARNINGS PER SHARE (Basic and Diluted)
      Income From Continuing Operations                                     $    2.79    $    2.41    $    2.42
      Income From Discontinued Operations                                          --           --         0.04
      Gain on Sale of Discontinued Operations                                      --           --         0.06
                                                                            ---------    ---------    ---------

        TOTAL EARNINGS PER SHARE                                            $    2.79    $    2.41    $    2.52
                                                                            =========    =========    =========

DIVIDENDS PAID PER SHARE OF COMMON STOCK                                    $    2.16    $    2.16    $    2.16
                                                                            =========    =========    =========
</TABLE>

      See Notes to Consolidated Financial Statements.
<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                           CONSOLIDATED BALANCE SHEETS
                                     ASSETS
                              (MILLIONS OF DOLLARS)

<TABLE>
<CAPTION>
                                                                              DECEMBER 31,
                                                                        -----------------------
                                                                           1998         1997
                                                                        ----------   ----------
<S>                                                                     <C>          <C>       
UTILITY PLANT - Original cost
 Electric                                                               $   14,069   $   13,692
 Gas                                                                         2,847        2,697
 Common                                                                        578          558
                                                                        ----------   ----------
   Total                                                                    17,494       16,947
 Less: Accumulated depreciation and amortization                             7,048        6,463
                                                                        ----------   ----------
   Net                                                                      10,446       10,484
 Nuclear Fuel in Service, net of accumulated amortization -
  1998, $312; 1997, $302                                                       187          216
                                                                        ----------   ----------
   Net Utility Plant in Service                                             10,633       10,700
 Construction Work in Progress, including Nuclear Fuel in
 Process - 1998, $72; 1997, $60                                                219          326
 Plant Held for Future Use                                                      24           24
                                                                        ----------   ----------
   Net Utility Plant                                                        10,876       11,050
                                                                        ----------   ----------
INVESTMENTS AND OTHER NONCURRENT ASSETS
 Long-Term Investments, net of amortization - 1998, $28; 1997,
  $21, and net of valuation allowances - 1998, $18; 1997, $23                3,034        2,873
 Nuclear Decommissioning and Other Special Funds                               649          492
 Other Noncurrent Assets, net of amortization - 1998, $29; 1997, $16,
  and net of valuation allowances - 1998, $10; 1997, $7                        150          167
                                                                        ----------   ----------
   Total Investments and Other Noncurrent Assets                             3,833        3,532
                                                                        ----------   ----------
CURRENT ASSETS
 Cash and Cash Equivalents                                                     140           83
 Accounts Receivable:
  Customer Accounts Receivable                                                 506          520
  Other Accounts Receivable                                                    219          293
  Less: Allowance for Doubtful Accounts                                         38           41
 Unbilled Revenues                                                             255          270
 Fuel, at average cost                                                         331          310
 Materials and Supplies, at average cost, net of inventory valuation
  reserves - 1998, $12; 1997, $12                                              148          142
 Miscellaneous Current Assets                                                   93           86
                                                                        ----------   ----------
   Total Current Assets                                                      1,654        1,663
                                                                        ----------   ----------
DEFERRED DEBITS (Note 3)

 SFAS 109 Income Taxes                                                         704          725
 OPEB Costs                                                                    270          289
 Demand Side Management Costs                                                  150          116
 Environmental Costs                                                           139          122
 Unamortized Loss on Reacquired Debt and Debt Expense                          135          136
 Electric Energy and Gas Costs                                                  35          167
 Other                                                                         201          143
                                                                        -----------------------
   Total Deferred Debits                                                     1,634        1,698
                                                                        ----------   ----------
TOTAL                                                                   $   17,997   $   17,943
                                                                        ==========   ==========
</TABLE>

See Notes to Consolidated Financial Statements.
<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                           CONSOLIDATED BALANCE SHEETS
                         CAPITALIZATION AND LIABILITIES
                              (MILLIONS OF DOLLARS)

<TABLE>
<CAPTION>
                                                                        DECEMBER 31,
                                                                -------------------------
                                                                   1998           1997
                                                                ----------     ----------
<S>                                                             <C>            <C>       
CAPITALIZATION
  Common Stockholders' Equity:
    Common Stock, issued; 231,957,608 shares                    $    3,603     $    3,603
    Treasury Stock, at cost; 5,314,100 shares                         (207)            --
    Retained Earnings                                                1,748          1,623
    Accumulated Other Comprehensive Income                             (46)           (15)
                                                                ----------     ----------
       Total Common Stockholders' Equity                             5,098          5,211
  Subsidiaries' Preferred Securities:
    Preferred Stock Without Mandatory Redemption                        95             95
    Preferred Stock With Mandatory Redemption                           75             75
    Guaranteed Preferred Beneficial Interest in Subordinated
       Debentures (Note 6)                                           1,038            513
  Long-Term Debt                                                     4,763          4,873
                                                                ----------     ----------
       Total Capitalization                                         11,069         10,767
                                                                ----------     ----------
OTHER LONG-TERM LIABILITIES
  Accrued OPEB                                                         344            289
  Decontamination and Decommissioning Costs                             39             43
  Environmental Costs  (Note 10)                                        84             73
  Capital Lease Obligations                                             50             52
                                                                ----------     ----------
       Total Other Long-Term Liabilities                               517            457
                                                                ----------     ----------
CURRENT LIABILITIES
  Long-Term Debt due within one year                                   418            340
  Commercial Paper and Loans                                         1,056          1,448
  Accounts Payable                                                     655            686
  Other                                                                329            353
                                                                ----------     ----------
       Total Current Liabilities                                     2,458          2,827
                                                                ----------     ----------
DEFERRED CREDITS
  Income Taxes                                                       3,384          3,394
  Investment Tax Credits                                               322            343
  Other                                                                247            155
                                                                ----------     ----------
       Total Deferred Credits                                        3,953          3,892
                                                                ----------     ----------
COMMITMENTS AND CONTINGENT LIABILITIES  (Note 10)                       --             --
                                                                ----------     ----------
TOTAL                                                           $   17,997     $   17,943
                                                                ==========     ==========
</TABLE>

See Notes to Consolidated Financial Statements.
<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (MILLIONS OF DOLLARS)

<TABLE>
<CAPTION>
                                                                                     FOR THE YEARS ENDED
                                                                                         DECEMBER 31,
                                                                           ----------------------------------------
                                                                              1998           1997           1996
                                                                           ----------     ----------     ----------
<S>                                                                        <C>            <C>            <C>       
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                                               $      644     $      560     $      612
  Adjustments to reconcile net income to net cash flows from
   operating activities:
    Depreciation and Amortization                                                 669            630            607
    Amortization of Nuclear Fuel                                                   94             60             60
    Recovery (Deferral) of Electric Energy and Gas Costs - net                    132              9             (5)
    Unrealized Gains on Investments - net                                         (51)           (56)            (7)
    Proceeds from Leasing Activities                                              (20)            71             89
    Changes in certain current assets and liabilities:
     Net change in Accounts Receivable and Unbilled Revenues                      100            (95)           (12)
     Net change in Inventory - Fuel and Materials and Supplies                    (27)             9            (64)
     Net change in Prepayments                                                    (13)           (15)             6
     Net change in Accounts Payable                                               (31)           (11)            60
     Net change in Provision for Rate Refund                                       --            (80)            75
     Net change in Other Current Assets and Liabilities                           (18)            (7)            11
    Other                                                                         (57)            20            (16)
    Net cash provided by operating activities - Discontinued Operations            --             --             54
                                                                           ----------     ----------     ----------
       Net Cash Provided By Operating Activities                                1,422          1,095          1,470
                                                                           ----------     ----------     ----------
CASH FLOWS FROM INVESTING ACTIVITIES
  Additions to Utility Plant, excluding AFDC                                     (535)          (542)          (586)
  Net change in Long-Term Investments                                             (58)          (914)             5
  Contribution to Decommissioning Funds and Other Special Funds                  (115)           (63)           (29)
  Other                                                                            (4)           (95)           (52)
  Net Proceeds from Sale of Discontinued Operations                                --             --            704
  Change in Net Assets - Discontinued Operations                                   --             --            (51)
                                                                           ----------     ----------     ----------
       Net Cash Used In Investing Activities                                     (712)        (1,614)            (9)
                                                                           ----------     ----------     ----------
CASH FLOWS FROM FINANCING ACTIVITIES
  Net change in Short-Term Debt                                                  (392)           810             71
  Issuance of Long-Term Debt                                                      525            785            374
  Redemption of Long-Term Debt                                                   (557)          (700)          (808)
  Redemption of Preferred Stock                                                    --            (94)          (212)
  Issuance of Preferred Securities                                                525             95            208
  Purchase of Treasury Stock                                                     (207)            --             --
  Retirement of Common Stock                                                       --            (43)          (307)
  Cash Dividends Paid on Common Stock                                            (499)          (501)          (523)
  Other                                                                           (48)           (29)           (47)
                                                                           ----------     ----------     ----------
       Net Cash (Used In) Provided By Financing Activities                       (653)           323         (1,244)
                                                                           ----------     ----------     ----------
Net Change In Cash And Cash Equivalents                                            57           (196)           217
Cash And Cash Equivalents At Beginning Of Year                                     83            279             62
                                                                           ----------     ----------     ----------
Cash And Cash Equivalents At End Of Year                                   $      140     $       83     $      279
                                                                           ==========     ==========     ==========

Income Taxes Paid                                                          $      426     $      170     $      157
Interest Paid                                                              $      469     $      416     $      463
</TABLE>

See Notes to Consolidated Financial Statements.
<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
                                   (MILLIONS)

<TABLE>
<CAPTION>
                                                                                                             ACCUMULATED    
                                                                                                                OTHER       
                                                                COMMON             TREASURY      RETAINED   COMPREHENSIVE  
                                                                 STOCK               STOCK       EARNINGS       INCOME      TOTAL
                                                            ---------------  -----------------   --------   -------------  -------
                                                             SHS.   AMOUNT       SHS.   AMOUNT                             
                                                             ----   ------       ----   ------                             
<S>                                                          <C>   <C>       <C>       <C>        <C>          <C>         <C>
BALANCE AS OF JANUARY 1, 1996                                245   $ 3,801        --   $    --    $ 1,637      $    --     $ 5,438
    Net Income                                                --        --        --        --        612           --         612
        Other Comprehensive Income                            --        --        --        --         --           --          --
                                                                                                                           -------
    Comprehensive Income                                      --        --        --        --         --           --         612
                                                                                                                           -------
    Cash Dividends on Common Stock                            --        --        --        --       (523)          --        (523)
    Retirement of Common Stock                               (11)     (174)       --        --       (133)          --        (307)
    Preferred Securities Issuance Expenses                    --        --        --        --         (7)          --          (7)
                                                            ---------------  -----------------   --------   -------------  -------
BALANCE AS OF DECEMBER 31, 1996                              234     3,627        --        --      1,586           --       5,213
                                                            ---------------  -----------------   --------   -------------  -------
    Net Income                                                --        --        --        --        560           --         560
    Other Comprehensive Income, net of tax:                                                                                
    Currency Translation Adjustment, net of tax of $(2)       --        --        --        --         --          (15)        (15)
                                                                                                                           -------
        Other Comprehensive Income                            --        --        --        --         --           --         (15)
                                                                                                                           -------
    Comprehensive Income                                      --        --        --        --         --           --         545
                                                                                                                           -------
    Cash Dividends on Common Stock                            --        --        --        --       (501)          --        (501)
    Retirement of Common Stock                                (2)      (24)       --        --        (19)          --         (43)
    Preferred Securities Issuance Expenses                    --        --        --        --         (3)          --          (3)
                                                            ---------------  -----------------   --------   -------------  -------
BALANCE AS OF DECEMBER 31, 1997                              232     3,603        --        --      1,623          (15)      5,211
                                                            ---------------  -----------------   --------   -------------  -------
    Net Income                                                --        --        --        --        644           --         644
    Other Comprehensive Income, net of tax:                                                                                
    Pension Plan Additional                                                                                                
      Minimum Liability, net of tax of $(2)                   --        --        --        --         --           (3)         (3)
    Currency Translation Adjustment, net of tax of $(3)       --        --        --        --         --          (28)        (28)
                                                                                                                           -------
        Other Comprehensive Income                            --        --        --        --         --           --         (31)
                                                                                                                           -------
    Comprehensive Income                                      --        --        --        --         --           --         613
                                                                                                                           -------
    Cash Dividends on Common Stock                            --        --        --        --       (499)          --        (499)
    Purchase of Treasury Stock                                --        --        (5)     (207)        --           --        (207)
    Restricted Stock Award                                    --        --        --        --         (5)          --          (5)
    Preferred Securities Issuance Expenses                    --        --        --        --        (15)          --         (15)
                                                            ---------------  -----------------   --------   -------------  -------
BALANCE AS OF DECEMBER 31, 1998                              232   $ 3,603        (5)  $  (207)   $ 1,748      $   (46)    $ 5,098
                                                            ===============  =================   ========   =============  =======
</TABLE>

Note:  The ability of PSEG to declare and pay dividends is contingent upon its
       receipt of dividends from its subsidiaries. PSE&G, PSEG'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 indentures 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, 1998, 1997 and 1996 was $10
       million. There are no restrictions on Energy Holding's retained earnings.

See Notes to Consolidated Financial Statements.
<PAGE>

                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                        CONSOLIDATED STATEMENTS OF INCOME
                              (MILLIONS OF DOLLARS)

<TABLE>
<CAPTION>
                                                                                      FOR THE YEARS ENDED DECEMBER 31,
                                                                                ----------------------------------------------
                                                                                   1998              1997              1996
                                                                                ----------        ----------        ----------
<S>                                                                             <C>               <C>               <C>       
OPERATING REVENUES
      Electric                                                                  $    4,031        $    3,918        $    3,944
      Gas                                                                            1,559             1,937             1,881
                                                                                ----------        ----------        ----------
             Total Operating Revenues                                                5,590             5,855             5,825
                                                                                ----------        ----------        ----------

OPERATING EXPENSES
Net Interchanged Power and Fuel for Electric Generation                                945               909               919
Gas Purchased                                                                          970             1,101             1,118
Operation and Maintenance                                                            1,357             1,276             1,299
Depreciation and Amortization                                                          658               616               604
Taxes (Note 12)
      Income Taxes                                                                     398               307               265
      Transitional Energy Facility Assessment/New Jersey
        Gross Receipts Taxes                                                           171               576               598
      Other                                                                             72                72                75
                                                                                ----------        ----------        ----------
             Total Operating Expenses                                                4,571             4,857             4,878
                                                                                ----------        ----------        ----------

OPERATING INCOME                                                                     1,019               998               947
                                                                                ----------        ----------        ----------

OTHER INCOME AND DEDUCTIONS
      Settlement of Salem Litigation - Net of  Applicable
        Taxes of $29                                                                    --               (53)               --
      Other - net                                                                        8                 7                (2)
                                                                                ----------        ----------        ----------
           Total Other Income and Deductions                                             8               (46)               (2)
                                                                                ----------        ----------        ----------

INCOME BEFORE INTEREST CHARGES AND
  DIVIDENDS ON PREFERRED SECURITIES                                                  1,027               952               945
                                                                                ----------        ----------        ----------

INTEREST CHARGES AND PREFERRED SECURITIES DIVIDENDS
      Interest Expense (Note 7)                                                        390               395               399
      Allowance for Funds Used During Construction - Debt                              (12)              (15)              (17)
      Preferred Securities Dividend Requirements of Subsidiaries (Note 6)               45                44                28
                                                                                ----------        ----------        ----------
        Total Interest Charges and Preferred Securities Dividends                      423               424               410
                                                                                ----------        ----------        ----------

NET INCOME                                                                             604               528               535
                                                                                ----------        ----------        ----------

Preferred Stock Dividend Requirements (Note 6)                                           9                12                23
Net Loss (Gain) on Preferred Stock Redemptions (Note 6)                                 --                 3               (18)
                                                                                ----------        ----------        ----------

EARNINGS AVAILABLE TO PUBLIC SERVICE ENTERPRISE
  GROUP INCORPORATED                                                            $      595        $      513        $      530
                                                                                ==========        ==========        ==========
</TABLE>

           See Notes to Consolidated Financial Statements.
<PAGE>

                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                           CONSOLIDATED BALANCE SHEETS
                                     ASSETS
                              (MILLIONS OF DOLLARS)

<TABLE>
<CAPTION>
                                                                                   DECEMBER 31,
                                                                           ---------------------------
                                                                              1998             1997
                                                                           ----------       ----------
<S>                                                                        <C>              <C>       
UTILITY PLANT - Original cost
  Electric                                                                 $   14,069       $   13,692
  Gas                                                                           2,847            2,697
  Common                                                                          578              558
                                                                           ----------       ----------
       Total                                                                   17,494           16,947
  Less: Accumulated depreciation and amortization                               7,048            6,463
                                                                           ----------       ----------
       Net                                                                     10,446           10,484
  Nuclear Fuel in Service, net of accumulated amortization -
     1998, $312; 1997, $302                                                       187              216
                                                                           ----------       ----------
       Net Utility Plant in Service                                            10,633           10,700
  Construction Work in Progress, including Nuclear Fuel in
    Process - 1998, $72; 1997, $60                                                219              326
  Plant Held for Future Use                                                        24               24
                                                                           ----------       ----------
       Net Utility Plant                                                       10,876           11,050
                                                                           ----------       ----------
INVESTMENTS AND OTHER NONCURRENT ASSETS
  Long-Term Investments, net of amortization - 1998, $28; 1997, $21,
    and net of valuation allowances - 1998, $11; 1997, $15                        138              137
  Nuclear Decommissioning and Other Special Funds                                 649              492
  Other Noncurrent Assets, net of amortization - 1998, $1; 1997, $1                46               45
                                                                           ----------       ----------
       Total Investments and Other Noncurrent Assets                              833              674
                                                                           ----------       ----------
CURRENT ASSETS
  Cash and Cash Equivalents                                                        43               17
  Accounts Receivable:
    Customer Accounts Receivable                                                  460              488
    Other Accounts Receivable                                                     178              232
    Less: Allowance for Doubtful Accounts                                          38               41
  Unbilled Revenues                                                               255              270
  Fuel, at average cost                                                           331              310
  Materials and Supplies, at average cost, net of inventory
    valuation reserves - 1998, $12; 1997, $12                                     146              142
  Miscellaneous Current Assets                                                     84               81
                                                                           ----------       ----------
       Total Current Assets                                                     1,459            1,499
                                                                           ----------       ----------
DEFERRED DEBITS (Note 3)
  SFAS 109 Income Taxes                                                           704              725
  OPEB Costs                                                                      270              289
  Demand Side Management Costs                                                    150              116
  Environmental Costs                                                             139              122
  Unamortized Loss on Reacquired Debt and Debt Expense                            135              135
  Electric Energy and Gas Costs                                                    35              167
  Other                                                                           147              143
                                                                           ----------       ----------
       Total Deferred Debits                                                    1,580            1,697
                                                                           ----------       ----------
TOTAL                                                                      $   14,748       $   14,920
                                                                           ==========       ==========
</TABLE>

See Notes to Consolidated Financial Statements.
<PAGE>

                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                           CONSOLIDATED BALANCE SHEETS
                         CAPITALIZATION AND LIABILITIES
                              (MILLIONS OF DOLLARS)

<TABLE>
<CAPTION>
                                                                         DECEMBER 31,
                                                                 ----------------------------
                                                                    1998              1997
                                                                 ----------        ----------
<S>                                                              <C>               <C>       
CAPITALIZATION
 Common Stockholder's Equity:
  Common Stock, issued; 132,450,344 shares                       $    2,563        $    2,563
  Contributed Capital                                                   594               594
  Retained Earnings                                                   1,443             1,352
  Accumulated Other Comprehensive Income                                 (3)               --
                                                                 ----------        ----------
   Total Common Stockholder's Equity                                  4,597             4,509
 Preferred Stock Without Mandatory Redemption                            95                95
 Preferred Stock With Mandatory Redemption                               75                75
 Subsidiaries' Preferred Securities:
  Guaranteed Preferred Beneficial Interest in Subordinated
   Debentures (Note 6)                                                  513               513
 Long-Term Debt                                                       4,045             4,126
                                                                 ----------        ----------
   Total Capitalization                                               9,325             9,318
                                                                 ----------        ----------
OTHER LONG-TERM LIABILITIES
 Accrued OPEB                                                           344               289
 Decontamination and Decommissioning Costs                               39                43
 Environmental Costs (Note 10)                                           84                73
 Capital Lease Obligations                                               50                52
                                                                 ----------        ----------
   Total Other Long-Term Liabilities                                    517               457
                                                                 ----------        ----------
CURRENT LIABILITIES
 Long-Term Debt due within one year                                     100               118
 Commercial Paper and Loans                                             850             1,106
 Accounts Payable                                                       627               608
 Other                                                                  255               268
                                                                 ----------        ----------
   Total Current Liabilities                                          1,832             2,100
                                                                 ----------        ----------
DEFERRED CREDITS
 Income Taxes                                                         2,527             2,569
 Investment Tax Credits                                                 313               333
 Other                                                                  234               143
                                                                 ----------        ----------
   Total Deferred Credits                                             3,074             3,045
                                                                 ----------        ----------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 10)                         --                --
                                                                 ----------        ----------
TOTAL                                                            $   14,748        $   14,920
                                                                 ==========        ==========
</TABLE>

See Notes to Consolidated Financial Statements.
<PAGE>

                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (MILLIONS OF DOLLARS)

<TABLE>
<CAPTION>
                                                                                  FOR THE YEARS ENDED
                                                                                       DECEMBER 31,
                                                                      ----------------------------------------------
                                                                         1998              1997              1996
                                                                      ----------        ----------        ----------
<S>                                                                   <C>               <C>               <C>       
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                                          $      604        $      528        $      535
  Adjustments to reconcile net income to net cash flows from
   operating activities:
    Depreciation and Amortization                                            658               616               604
    Amortization of Nuclear Fuel                                              94                60                60
    Recovery (Deferral) of Electric Energy and Gas Costs - net               132                 9                (5)
    Changes in certain current assets and liabilities:
     Net change in Accounts Receivable and Unbilled Revenues                  94               (64)                7
     Net change in Inventory - Fuel and Materials and Supplies               (25)                9               (64)
     Net change in Prepayments                                                (8)              (15)                5
     Net change in Accounts Payable                                           19               (19)               67
     Net change in Provision for Rate Refund                                  --               (80)               75
     Net change in Other Current Assets and Liabilities                       (8)               (6)               (8)
    Other                                                                      5               (30)              (37)
                                                                      ----------        ----------        ----------
       Net Cash Provided By Operating Activities                           1,565             1,008             1,239
                                                                      ----------        ----------        ----------
CASH FLOWS FROM INVESTING ACTIVITIES
  Additions to Utility Plant, excluding AFDC                                (535)             (542)             (586)
  Contribution to Decommissioning Funds and Other Special Funds             (115)              (62)              (29)
  Other                                                                      (21)              (67)              (49)
                                                                      ----------        ----------        ----------
       Net Cash Used In Investing Activities                                (671)             (671)             (664)
                                                                      ----------        ----------        ----------
CASH FLOWS FROM FINANCING ACTIVITIES
  Net change in Short-Term Debt                                             (256)              468                71
  Issuance of Long-Term Debt                                                 250               288               374
  Redemption of Long-Term Debt                                              (349)             (575)             (429)
  Redemption of Preferred Stock                                               --               (94)             (212)
  Issuance of Preferred Securities                                            --                95               208
  Cash Dividends Paid                                                       (513)             (535)             (547)
  Other                                                                       --               (15)              (25)
                                                                      ----------        ----------        ----------
       Net Cash Used In Financing Activities                                (868)             (368)             (560)
                                                                      ----------        ----------        ----------
Net Change In Cash And Cash Equivalents                                       26               (31)               15
Cash And Cash Equivalents At Beginning Of Year                                17                48                33
                                                                      ----------        ----------        ----------
Cash And Cash Equivalents At End Of Year                              $       43        $       17        $       48
                                                                      ==========        ==========        ==========

Income Taxes Paid                                                     $      410        $      259        $      254
Interest Paid                                                         $      386        $      357        $      392
</TABLE>

See Notes to Consolidated Financial Statements.
<PAGE>

                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
             CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
                              (MILLIONS OF DOLLARS)

<TABLE>
<CAPTION>
                                                                                                     ACCUMULATED
                                                                  CONTRIBUTED                          OTHER
                                                   COMMON         CAPITAL FROM       RETAINED       COMPREHENSIVE
                                                    STOCK             PSEG           EARNINGS           INCOME             TOTAL
                                                  ----------       ----------       ----------        ----------        ----------
<S>                                               <C>              <C>              <C>               <C>               <C>       
BALANCE AS OF JANUARY 1, 1996                     $    2,563       $      594       $    1,366        $       --        $    4,523
    Net Income                                            --               --              535                --               535
        Other Comprehensive Income                        --               --               --                --                --
                                                                                                                        ----------
    Comprehensive Income                                  --               --               --                --               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
        Other Comprehensive Income                        --               --               --                --                --
                                                                                                                        ----------
    Comprehensive Income                                  --               --               --                --               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
                                                  ----------       ----------       ----------        ----------        ----------
    Net Income                                            --               --              604                --               604
    Other Comprehensive Income, net of tax:
    Pension Plan Additional Minimum
      Liability, net of tax of $(2)                       --               --               --                (3)               (3)
                                                                                                                        ----------
        Other Comprehensive Income                        --               --               --                --                (3)
                                                                                                                        ----------
    Comprehensive Income                                  --               --               --                --               601
                                                                                                                        ----------
    Cash Dividends on Common Stock                        --               --             (503)               --              (503)
    Cash Dividends on Preferred Stock                     --               --              (10)               --               (10)
                                                  ----------       ----------       ----------        ----------        ----------
BALANCE AS OF DECEMBER 31, 1998                   $    2,563       $      594       $    1,443        $       (3)       $    4,597
                                                  ==========       ==========       ==========        ==========        ==========
</TABLE>

Note:  The ability of PSEG to declare and pay dividends is contingent upon its
       receipt of dividends from its subsidiaries. PSE&G, PSEG'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 indentures 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, 1998, 1997 and 1996 was $10
       million. There are no restrictions on Energy Holding's retained earnings.

See Notes to Consolidated Financial Statements.
<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

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

      Energy Holdings is the parent of PSEG's non-utility businesses: PSEG
Global Inc. (Global), formerly Community Energy Alternatives Incorporated, an
investor in and developer and operator of projects in the generation and
distribution of energy, including cogeneration and independent power production
(IPP) facilities, electric distribution companies, exempt wholesale generators
(EWGs) and foreign utility companies (FUCOs); PSEG Resources Inc. (Resources),
formerly Public Service Resources Corporation, which has made primarily passive
investments; PSEG Energy Technologies Inc. (Energy Technologies), formerly
Energis Resources, 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. Energy
Holdings also has two finance subsidiaries: PSEG Capital Corporation (PSEG
Capital), which provides privately-placed debt financing to Energy Holdings'
operating subsidiaries, except Energy Technologies, on the basis of a minimum
net worth maintenance agreement with PSEG and Enterprise Capital Funding
Corporation (Funding), which provides privately-placed debt financing to
Resources, Global and their subsidiaries, which debt is guaranteed by Energy
Holdings, but without direct support from PSEG. EGDC has been conducting a
controlled exit from the real estate business since 1993. In July 1996, Energy
Holdings sold Energy Development Corporation (EDC), an oil and gas subsidiary.
For more information on EDC, see Note 16. Discontinued Operations.

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 and recoveries, which will be amortized over various
future 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 unless recovery mechanisms are approved by the
BPU. PSE&G continues to meet the requirements for application of SFAS 71.

      However, once the BPU issues an order with respect to PSE&G in the New
Jersey Energy Master Plan (Energy Master Plan) Proceedings, currently scheduled
for March 31, 1999, it is expected that PSE&G will no longer meet the
requirements for application of SFAS 71 for its then deregulated operations. See
Note 2. Regulatory Issues and Note 19. Accounting Matters for further discussion
of deregulation and the potential accounting impacts caused by deregulation.


                                       68
<PAGE>

      CONSOLIDATION POLICY

      The consolidated financial statements include the accounts of PSEG and its
subsidiaries. PSEG 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 PSEG 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.

      RECLASSIFICATIONS

      Certain reclassifications of prior period data have been made to conform
with the current presentation.

      UNAMORTIZED LOSS ON REACQUIRED DEBT AND DEBT EXPENSE

      Bond issuance costs and associated premiums and discounts are generally
amortized over the life of the debt issuance. In accordance with Federal Energy
Regulatory Commission (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.

      Upon deregulation, gains and losses on reacquired debt associated with the
deregulated portion of PSE&G's operations will be reflected in the statement of
operations as incurred. Gains and losses on reacquired debt associated with
PSE&G's regulated operations will continue to be deferred and amortized to
interest expense over the period approved for ratemaking purposes.

      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. Upon
deregulation, PSE&G will record a gain or loss on the retirement, sale or
disposal of assets in the deregulated portion of its business.

      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 1998, 1997
and 1996.

      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 (GAAP) for
non-regulated companies. Upon issuance of a BPU order, PSE&G will no longer
calculate depreciation in accordance with BPU guidance for the deregulated
portion of PSE&G's business. Depreciation for those assets will be calculated
based on estimated plant lives rather than regulatory guidance. PSE&G cannot
presently quantify what the financial statement impact might 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 PSEG and PSE&G
could be material.

      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.


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      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.

      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 1998, 1997 and 1996 were
6.06 %, 5.71% and 5.83%, respectively. Upon deregulation, PSE&G will no longer
calculate AFDC for the deregulated portion of PSE&G's business. Interest (cost
of debt only) related to capital projects for generation projects will be
capitalized in accordance with SFAS No. 34, "Capitalization of Interest Cost."

      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 BPU's Order dated December 31, 1996 (December 31st Order)
and PSE&G bore all risks associated with fuel prices.

      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 PJM
Interconnection, L.L.C. (PJM) market clearing price. Effective April 1, 1998,
PJM, as independent system operator (ISO), replaced the PJM uniform market
clearing price with locational marginal pricing (LMP) for determining the market
clearing pricing to energy providers. For discussion of the current and proposed
status of the LEAC and the LGAC, see Note 2. Regulatory Issues and Note 3.
Regulatory Assets and Liabilities.

      INVENTORY--MATERIALS AND SUPPLIES AND NUCLEAR FUEL

      Inventory is carried on the books at cost in accordance with rate based
regulation. When portions of PSE&G's business become deregulated, the carrying
value of its inventory for its unregulated operations will be valued at a lower
of cost or market basis which could have a material adverse impact on PSEG's and
PSE&G's financial position, results of operations and net cash flows to the
extent that any write downs are not recovered through regulatory mechanisms
approved by the BPU.

      COMMODITY CONTRACTS--PSE&G

      PSE&G engages in electricity and natural gas commodity forwards, futures,
swaps and options purchases and sales with counterparties to manage exposure to
electricity and natural gas price risk. Certain contracts, in conjunction with
owned electric generating capacity, are designed to provide for estimated
electric customer commitments. Similarly, 


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PSE&G uses natural gas futures and swaps to manage the price risk associated
with gas supply to customers. PSE&G's accounting policy for these contracts is
to recognize the gains and losses in income upon settlement of the contracts.

      PSE&G also enters into forwards, futures, swaps and options that are not
used to manage price risk exposure for commitments to customers. As these are
considered to be trading contracts, PSE&G's accounting policy has been to mark
the contracts to market and record unrealized gains and losses in income. These
contracts 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.

      For discussion of SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities" (SFAS 133), and Emerging Issues Task Force Issue No. 98-10,
"Accounting for Energy Trading and Risk Management Activities" (EITF 98-10), see
Note 19. Accounting Matters.

      FINANCIAL INSTRUMENTS--ENERGY HOLDINGS

      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.

      EQUITY INVESTMENTS--ENERGY HOLDINGS

      Resources carries its investments in equity securities at their
approximate fair market values as of the reporting date.

      FOREIGN CURRENCY TRANSLATION/TRANSACTIONS--ENERGY HOLDINGS

      The assets and liabilities of Energy Holdings' 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
normal operating 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

      PSEG and its subsidiaries file a consolidated Federal income tax return
and income taxes are allocated to PSEG'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. For discussion of energy tax reform and its impact on
NJGRT, see Note 12. Income Taxes.

      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. Beginning with the plan year 1997, the funding policy 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.

      In 1993, PSEG 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, also referred to as other postretirement benefits (OPEB), be charged
to income during the years in which employees render 


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<PAGE>

service. PSE&G deferred a portion of these costs as a regulatory asset from 1993
until 1997 when a BPU order was received stipulating that current rates were
sufficient to recover such costs. Therefore, on January 1, 1998, PSE&G began
amortizing its regulatory asset for OPEB over 15 years and recording the annual
SFAS 106 OPEB cost. In 1998, PSE&G began funding its annual OPEB obligation in
an external trust to the maximum extent allowable under Section 401(h) of the
Internal Revenue Code.

      CAPITAL LEASES 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.

      IMPAIRMENT OF LONG-LIVED ASSETS

      On January 1, 1996, PSEG 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 PSEG or PSE&G. However, future developments in the electric and
gas industries could have a material impact on the carrying value of certain
investments. Upon deregulation, PSE&G will reevaluate the potential impairment
of its assets which may result in recording an extraordinary, non-cash charge to
earnings that could have a material adverse impact on PSEG's and PSE&G's
financial condition and results of operations to the extent that any impairments
are not recovered through regulatory mechanisms approved by the BPU.

      EARNINGS PER SHARE

      In February 1997, the FASB issued SFAS No. 128, "Earnings per Share",
which was 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. PSEG 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, 1998, 1997 and 1996.

NOTE 2. REGULATORY ISSUES

NEW JERSEY ENERGY MASTER PLAN PROCEEDINGS

      In 1998 and continuing into 1999, energy industry restructuring continued
to advance in New Jersey. In 1998, evidentiary hearings related to PSE&G's
proposal in connection with the BPU's New Jersey Energy Master Plan were
completed and the Office of Administrative Law filed its decision providing its
recommendations on such proposal with the BPU. In January 1999, the State
Legislature passed the New Jersey Electric Discount and Competition Act (Energy
Competition Act) which was signed into law by the Governor on February 9, 1999.
The Energy Competition Act and the related BPU proceedings are hereinafter
defined as the Energy Master Plan Proceedings. Among other things, the Energy
Competition Act provides that all New Jersey retail electric customers may
select their electric supplier commencing August 1, 1999 and all New Jersey
retail gas customers may select their gas suppliers commencing January 1, 2000,
thus fully opening the New Jersey energy markets to customer choice and
competition.

      The Energy Competition Act provides the BPU requisite authority to
implement certain aspects of retail electric and gas competition in New Jersey.
The BPU is currently engaged in proceedings to implement the Energy Competition
Act, the result of which will fundamentally change the electric and gas
industries in New Jersey by, among other things, introducing retail competition
to replace the monopoly position of regulated public utilities, potentially
requiring or resulting in the separation or sale of utilities' electric
generation assets and establishing a number of generic rules related to
deregulation, including governing regulated utilities' relationships with their
affiliates.


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      Under the Energy Competition Act, the distribution business will remain
regulated by the BPU. Transmission will remain regulated by the FERC. With
deregulation, electric generation will be a competitive business. Succeeding as
a competitive generator will depend on many factors such as fuel cost,
production costs including labor cost, environmental constraints and related
expenses, transmission availability and rates, marketing ability and quality of
service, among others. The outcome of these proceedings will have a profound
effect on PSEG and PSE&G.

      On February 11, 1999, the BPU adopted a schedule for the resolution of
each New Jersey electric utility's filings for rate unbundling, stranded cost
and restructuring proceedings. With respect to PSE&G, the BPU indicated that it
is encouraging the parties to the case to undertake discussions in an attempt to
reach consensus on the litigated issues in the rate unbundling, stranded cost
and, on limited issues, the restructuring proceedings. The BPU further indicated
that, in lieu of a negotiated settlement of the case among the parties, it has
scheduled a final vote on the PSE&G filing at its March 31, 1999 agenda meeting.
To that end, the BPU has set a deadline of March 3, 1999 for the submission of
any negotiated settlement.

      Shortly thereafter, the BPU is expected to issue a series of orders that
will decide generic issues related to deregulation of the industry in the
State (e.g., affiliate standards). The BPU has yet to set a timetable related to
a gas restructuring order. Once the March 31, 1999 BPU Order is issued, PSE&G
will no longer meet the requirements of SFAS 71 for the electric generation
portion of its business. While PSE&G cannot predict the outcome of the Energy
Master Plan Proceedings, when PSE&G discontinues the application of SFAS 71 and
if full recovery were not probable through recovery mechanisms approved by the
BPU, there could be an extraordinary, non-cash charge to operations that could
be material to the financial position and results of operations of PSEG and
PSE&G. See Note 19. Accounting Matters for further discussion of the potential
accounting impacts caused by deregulation.

      THE ENERGY COMPETITION ACT

      Key features of the Energy Competition Act, as passed, include:

      o     Competitive choice for electric service will begin on August 1,
            1999. Competitive choice for gas service must be fully implemented
            by December 31, 1999. For further discussion of gas competition, see
            Gas Unbundling.

      o     Mandates that an electric rate reduction of at least 10%, phased in
            over a period of up to thirty-six months, will be provided to
            consumers. The rate reduction will be based on the level of rates in
            effect as of April 30, 1997. Rates must be reduced by no less than
            5% effective August 1, 1999. When coupled with reductions from the
            1998 change in New Jersey energy taxes, the total rate reductions
            for consumers could total 16%, not including an additional 3.5%
            reduction due to an interim DSM rate increase.

      o     Authorizes "shopping credits" or discounts for customers that switch
            from their current electric utility supplier to encourage
            competition.

      o     Utilities have an opportunity to recover stranded costs associated
            with generation assets through a market transition charge (MTC) that
            could last up to eight years. Costs associated with above-market
            power purchase contracts with other utilities and with non-utility
            generators (NUGs) will be recovered over the remaining life of those
            contracts. Mitigation by the utility of its stranded costs, to the
            extent possible, is required.

      o     Securitization is limited to 75% of utility generation-related
            stranded costs. Transition bonds with a maximum scheduled
            amortization of 15 years can be issued if the proceeds are used to
            recover eligible stranded costs. Power purchase contracts can also
            be securitized in an effort to buy out or buy down contracts.

      o     On or after the starting date of implementation of retail choice,
            the BPU may require functional separation of a utility's
            non-competitive business functions from its competitive electric
            generation service and require that those competitive services be
            provided by a related competitive business segment of a public
            utility holding company. The related competitive business segment of
            the public utility holding company will not be subject to regulation
            under New Jersey utility law but may be subject to FERC regulation.


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<PAGE>

      o     While the Energy Competition Act does not mandate divestiture of
            electric generation assets, it gives the BPU the right to examine
            market conditions and requires divestiture if the BPU finds market
            power would impede development of competition.

      o     Competitive services may be offered by a public utility or a
            competitive business segment of a public utility only with the
            written approval of the BPU. Tariffs for competitive services will
            be required and subject to review and approval by the BPU. The
            competitive business segment must not adversely impact the ability
            of the utility to offer non-competitive services to customers in a
            safe, adequate and proper manner. The price for services must not be
            less than the fully allocated cost of providing such services.
            Cross-subsidization is prohibited and standards for affiliate
            relationships will be established. The BPU will be required to apply
            50% of the net revenues earned from competitive services offered by
            an electric public utility as an offset to stranded costs or a
            reduction of rates for the period of time that the utility collects
            transition bond charges.

      o     Utility holding companies are permitted to offer competitive
            electric generation service to existing utility retail customers
            subject to affiliate relations standards to be established by the
            BPU. A utility holding company's competitive business entity
            utilizing utility assets, including personnel and equipment other
            than the delivery network or certain shared corporate overhead or
            administrative services, to provide competitive services is subject
            to a 50% sharing of net revenues from such services. Unless the
            utility ratepayers receive full market value for the use of such
            utility assets pursuant to a contract between the parties filed with
            the BPU, those revenues will be used to offset transition charges
            and/or distribution rates for a period of time.

      o     The BPU is required to initiate a proceeding and adopt interim
            technical standards to ensure the safety, reliability and accuracy
            of metering equipment provided to electric and gas customers. The
            BPU is required to issue an order providing customers the
            opportunity to choose a supplier for some or all customer services
            (such as metering and billing) not later than one year from the
            start of retail competition. Until that time, customers are given
            the option with affirmative consent to receive two bills, one from
            the utility and one from the supplier.

      o     The BPU is required to adopt interim consumer protection standards
            for electric and gas suppliers to prevent slamming, protect customer
            privacy and provide customers necessary information to make informed
            decisions.

      o     Simultaneously with the implementation of retail choice, the BPU may
            permit recovery of certain costs through a Societal Benefits Charge
            which would be a component of rates for all retail customers. These
            costs will include social programs for which rate recovery was
            approved prior to April 30, 1997; nuclear decommissioning costs;
            demand side management program costs, manufactured gas plant clean
            up costs and potentially the cost of a statewide consumer education
            program. The BPU is authorized to use the existing funds for social
            programs to create a universal service fund for low income energy
            assistance.

      o     Utilities will serve customers for at least three years as the
            energy provider of last resort, providing basic electric generation
            and gas services. The BPU is required to decide, no later than three
            years after the start of retail choice, whether to allow other,
            non-utility, suppliers to offer basic generation service on a
            competitive basis.

      o     Businesses, cities, towns and counties are able to aggregate their
            own power demands and other energy needs for which marketers may bid
            to serve. Customers will control their inclusion in any such group.
            Aggregation by municipalities to serve residents and businesses
            within those municipalities can also begin at the start of retail
            choice.

      o     Electric suppliers must disclose information about fuels used to
            generate the electricity that they sell and emissions from their
            portfolio of electricity suppliers on customers' bills or in
            marketing materials. The BPU and New Jersey Department of
            Environmental Protection (NJDEP) may adopt an emission control
            portfolio standard for all retail suppliers if the BPU finds that a
            standard is necessary to meet Clean Air Act rules and that regional
            and Federal actions would not achieve compliance with those rules,
            or if two other states using the PJM power pool comprising 40% of
            the retail electric usage in PJM adopt such standards.

      STRANDED COSTS


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      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. In its
initial proposal, PSE&G had 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.

      To the extent that any portion of its stranded costs are not probable of
recovery upon the conclusion of the Energy Master Plan Proceedings, and thus
ineligible for deferral as a regulatory asset under Statement of Financial
Accounting Standards (SFAS) 71, "Accounting for the Effects of Certain Types of
Regulation" (SFAS 71), PSE&G would incur an extraordinary, non-cash charge to
income that could be material to the financial position and results of
operations of PSEG and PSE&G. For additional discussion related to the Energy
Master Plan Proceedings, see Note 3. Regulatory Assets and Liabilities.

      Recoverability of these costs is largely dependent on the order to be
issued by the BPU at the conclusion of the Energy Master Plan Proceedings. PSE&G
has proposed to securitize $2.5 billion of these costs, with the remainder to be
recovered through a market transition charge during a proposed transition period
of seven years. In addition, PSE&G is seeking to negotiate the restructuring of
certain of its BPU approved contracts with Non-utility Generators (NUGs), which,
in PSE&G's initial proposal, were estimated to be $1.6 billion above assumed
future market prices. These costs are being recovered through the LEAC and are
expected to continue to be recovered through successor mechanisms to be
determined by the outcome of the Energy Master Plan Proceedings as to which no
assurances can be given. PSEG and PSE&G cannot predict the outcome of these
proceedings. However, such proceedings could have a material adverse effect on
PSEG's and PSE&G's financial condition, results of operations and net cash flows
and could adversely affect the carrying values of PSEG's and PSE&G's assets and
the ability to declare dividends on PSEG's common stock.

      SECURITIZATION

      In accordance with the provisions of the Energy Competition Act, it is
expected that the BPU will issue an order authorizing securitization of up to
75% of PSE&G's generation-related stranded costs. Securitization is a
refinancing technique, whereby the interest and principal payments on the
securitized debt which is issued will be serviced by an irrevocable,
non-bypassable charge to utility customers. The Energy Competition Act provides
that net proceeds from any authorized securitization of a utility's stranded
costs must be used to reduce that utility's debt and equity.

      Dependent upon market conditions and the level of securitization
authorized by the BPU in the Energy Master Plan Proceedings, PSE&G may use a
number of alternatives to reduce its debt and equity, including the redemption,
tender or purchase of its outstanding Mortgage Bonds and preferred stock.
In anticipation of an application of the use of proceeds of securitization,
PSEG has been engaged in a program to repurchase its Common Stock, as 
discussed below.

      Since the Energy Master Plan Proceedings are still in progress, PSE&G
cannot predict the extent to which regulators will allow the use of such
securitization for recovery of stranded costs. PSE&G's decision as to the manner
in which the proceeds of securitization will be utilized to reduce debt and
equity is dependent upon the BPU's decision in the Energy Master Plan
Proceedings. The decision of the BPU required in this matter could have a
material adverse effect on PSEG's and PSE&G's financial condition, results of
operations and net cash flows. The use of securitization proceeds to reduce debt
and equity is likely to affect the market prices of the related securities.
Additionally, the use of securitization could impact PSEG's and PSE&G's bond
ratings and the cost of other debt for PSEG and PSE&G.

      On September 15, 1998, in anticipation of securitization of PSE&G's
stranded costs afforded by the then proposed Energy Competition Act, the Board
of Directors of PSEG authorized the repurchase of up to 10 million shares of its
Common Stock. Under the authorization, repurchases were made in the open market
at the discretion of


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PSEG. The repurchased shares have been held as treasury stock. At December 31,
1998, PSEG had repurchased approximately 5.3 million shares of Common Stock at a
cost of approximately $207 million, under this authorization. As of February 8,
1999, PSEG had repurchased a total of 10 million shares at a cost of
approximately $391 million under this program.

      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
proposed 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.

      ADMINISTRATIVE LAW JUDGE'S RECOMMENDATIONS

      Previously, in connection with its Energy Master Plan Proceedings, the BPU
requested the Office of Administrative Law to hold evidentiary hearings
regarding stranded costs and unbundling issues. Hearings were held before an
Administrative Law Judge (ALJ) and on August 17, 1998, the ALJ filed his
decision providing its recommendations to the BPU. The BPU can adopt, reject or
modify the ALJ's recommendations in its decision on PSE&G's proposal which was
filed as part of these proceedings. PSE&G cannot predict the extent to which the
BPU will rely on the ALJ's decision in evaluating PSE&G's proposal. The ALJ's
decision on PSE&G's competition and rate proposal:

      o     Recommended the adoption of PSE&G's request to securitize up to $2.5
            billion of its after-tax stranded costs through the issuance of
            revenue bonds, which would mature over a 15 year period.

      o     Recommended the recovery of $1.6 billion of PSE&G's above-market
            price contracts to purchase power from non-utility generators
            (NUGs).

      o     Recommended a rate cut of between 10% and 12%, exclusive of the
            impact of energy tax reform.

      o     Supported PSE&G's request for a seven year transition period. PSE&G
            had proposed a transition period of seven years, starting on the
            effective date of the BPU's final decision in these proceedings,
            with basic tariff rates capped during that seven year period. During
            the transition period, PSE&G would maintain responsibility for
            system reliability of energy and capacity supply.

      o     Accepted PSE&G's approach/methodology of quantifying stranded costs
            without quantifying the amount of such costs.

      o     Recommended a review of PSE&G's actual electric fuel costs, which
            would apply any potential savings from the elimination of the
            Electric Levelized Energy Adjustment Clause (LEAC) to mitigate
            stranded costs.

      o     Supported PSE&G's Societal Benefits Clause proposal, but proposed to
            exclude non-utility generators (NUG) costs from the Societal
            Benefits Clause. A separate NUG charge would be created.

      o     Recommended adding an amount, known as a "retail adder," to the
            proposed market-based energy credit on customers' bills to give
            customers who choose another energy supplier credits for more than
            the market price for power.

      On October 2, 1998, PSE&G filed exceptions to the ALJ's decision. These
exceptions addressed issues identified in the ALJ's decision including the
validity of capital additions made by PSE&G after the conclusion of its 1992
base rate case, the relevance of PSE&G's methodology regarding stranded costs,
mitigation strategies, the adoption of securitization and the unbundling of
costs and rates. Other parties to the proceeding have also filed exceptions to
the ALJ's decision. PSE&G filed its reply exceptions to the other parties'
exceptions to the ALJ's decision on October 30, 1998.


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      Hearings at the BPU addressing other restructuring issues such as market
power, functional separation and consumer protection concluded on May 28, 1998.
Briefs have been filed by the parties in these hearings. As previously
discussed, these generic issues are expected to be decided shortly after the
March 31, 1999 BPU Order.

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 PSEG 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 continued in
base rates without being subject to further refund and PSE&G assumed 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)
did not apply to PSE&G from January 1, 1996 through December 31, 1998. In
addition, the energy component of PSE&G's LEAC was fixed at its then existing
level with no increase to customers until at least January 1999 with PSE&G
responsible for all risks associated with fuel prices. Any underrecovered or
overrecovered LEAC balance existing on December 31, 1998 would not be considered
in any LEAC review subsequent to that date. Any overrecovery at that date would
be applied to reduce any potential stranded costs and any underrecovered balance
will be charged to income in the period identified. For an update on the current
status of the LEAC, see Note 3. Regulatory Assets and Liabilities.

      The December 31st Order provided 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 without
any change in the current energy component of the LEAC charge. This balance was
fully recovered and the overrecovery of $39 million at December 31, 1998 is
being carried as a regulatory liability to offset stranded costs.

      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 committed to developing a
computer system which has been developed to assist low income residents in
identifying government and community programs from which they would be eligible
to receive benefits.

      On November 10, 1998, the BPU requested PSE&G to identify its intention
with regard to a new LEAC filing before the BPU, in accordance with the December
31st Order. On November 20, 1998, PSE&G responded and addressed the issue 


                                       77
<PAGE>

of a new LEAC by stating that it intends to follow its Energy Master Plan
filing, wherein it proposed to discontinue the LEAC effective with the
commencement of retail electric competition. PSE&G intends to continue the
utilization of deferred accounting for the LEAC until commencement of customer
choice. Assuming that retail access will commence on or about August 1, 1999, as
mandated in the Energy Competition Act, any overrecovery that exists as of that
date would be utilized as an offset to the proposed $3.9 billion of stranded
costs. As of December 31, 1998, PSE&G established a deferred regulatory
liability in the amount of $39 million which represents an overrecovery of LEAC
fuel costs, to be applied as an offset to stranded costs.

ELECTRIC LEVELIZED ENERGY ADJUSTMENT CLAUSE (LEAC)/DEMAND SIDE ADJUSTMENT FACTOR
(DSAF)

      As discussed above, the December 31st Order fixed the energy component of
the LEAC as of December 31, 1996. 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. For further discussion, see Note 3. Regulatory Assets and
Liabilities and Note 11. PSE&G Nuclear Decommissioning.

      On February 24, 1997, PSE&G requested an annualized increase of $151.8
million in the DSAF component of the LEAC effective for the period from May 1997
through December 1998, representing an increase on a typical residential bill of
approximately 3.5%. The request included recovery of electric 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. On April 1, 1998, the BPU approved $150.8 million of PSE&G's
requested increase. This increase was effective for service rendered on or after
April 3, 1998. The Division of the Ratepayer Advocate has appealed the BPU's
order, seeking to overturn the BPU's decision. Initial Briefs on Appeal were
filed on October 14, 1998. PSE&G cannot predict the outcome of that appeal. If
such an appeal is successful, there could be a material adverse impact on PSEG's
and PSE&G's financial condition, results of operations and net cash flows.

      At December 31, 1998, PSE&G had an underrecovered balance, including
interest, of approximately $150 million related to these programs. Such amount
is included in Deferred Debits on PSE&G's balance sheet.

      PSE&G's most recent DSM Resource Plan (1995 Plan) was approved by the BPU
in 1995 and was designed to encourage investment in energy-saving DSM
activities. BPU approval of the 1995 Plan included a requirement to file the
next DSM Plan by July 1, 1997. In April of 1997 PSE&G filed a request with the
BPU to extend the 1995 Plan for one year and to defer filing the next DSM Plan
until July 1, 1998, which requests were granted with the condition that the Core
Programs would continue until the next DSM Plan was approved. The BPU further
directed that PSE&G also extend existing project acceptance and in-service
deadline dates by one year. On June 29, 1998, PSE&G filed with the BPU the 1999
Interim Demand Side Management Plan which included Core programs and the
Standard Offer, and hearings on the filing were conducted. No action has been
taken by the BPU leaving no mechanism open at this time for the accepting of new
Standard Offer project proposals. It is anticipated that there will be BPU
action on the 1999 Interim Plan in the near future, but PSE&G cannot predict the
outcome of such action.

      The Energy Competition Act provides for the continued ability to recover
costs related to the DSM programs through a societal benefits charge initially
set at the level in rates for DSM cost recovery in place on February 9, 1999.
Within the subsequent twelve months, the BPU is required to complete a statewide
comprehensive resource analysis of energy efficiency and renewable energy
programs and determine the appropriate level of funding for each utility based
on this analysis. PSEG and PSE&G cannot predict the final outcome of DSM and
other mandated societal costs recovery under the Energy Master Plan Proceedings.
Inability to recover such amounts could have a material adverse impact on PSEG's
and PSE&G's financial condition, results of operations and net cash flows. For
further discussion of the potential impact on PSEG and PSE&G of the Energy
Master Plan Proceedings, see New Jersey Energy Master Plan Proceedings.

LEVELIZED GAS ADJUSTMENT CLAUSE (LGAC)

      On July 10, 1998, PSE&G filed a motion with the BPU requesting a $27
million annual increase in its LGAC for the period October 1, 1998 to September
30, 1999, representing an increase on a typical residential bill of
approximately 2.8%. Also included in the revised LGAC rate is an increase in the
Remediation Adjustment Clause (RAC) component, a decrease in the Demand Side
Adjustment Factor (DSAF) and a request to change, on a monthly basis, the
over/under collection 


                                       78
<PAGE>

component of the LGAC rate for residential customers. On October 15, 1998,
PSE&G, BPU Staff and the Ratepayer Advocate executed an Interim Stipulation
which allows the filed LGAC rates to become effective, subject to refund. On
November 4, 1998, the BPU approved an Order adopting the Interim Stipulation.

      On December 22, 1998, the Board approved a Final Stipulation in the LGAC
which provided for the following:

      1)    All previously approved interim rates became final.

      2)    All margins (prospectively) from PSE&G's participation in the New
            Jersey Natural Gas Company (New Jersey Natural) residential
            unbundling pilot program were to be returned 100% to PSE&G's firm
            gas customers.

      3)    PSE&G was allowed to hedge up to 115bcf (approximately 80%) of its
            residential gas supply through physical or financial transactions,
            with a limit on the financial transactions of 75% of the total to be
            hedged.

      4)    The LGAC rate can now be changed (increased or decreased) monthly,
            within certain limits, during November through April to reflect
            changes in the projected over/under collection.

      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 provided 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.
On June 26, 1998, an Order was executed by the BPU making the terms of the
interim Stipulation final, without modification.

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.

      On July 10, 1998, PSE&G filed a motion before the BPU requesting a $1.5
million annual increase in its RAC for the period August 1, 1997 to July 31,
1998, representing an increase on a typical residential bill of approximately
0.03%. On November 4, 1998, the BPU issued an Order approving the rate increase
on an interim basis, subject to refund. On December 22, 1998, the BPU approved
the rate increase on a final basis.

      The Energy Competition Act provides for the continued ability to recover
costs related to the Remediation Program through a societal benefits charge. No
assurances can be given as to the outcome of the Energy Master Plan Proceedings.

CONSOLIDATED TAX BENEFITS

      In a case affecting another utility in which neither PSEG 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 PSEG 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 PSEG's revenues, net income or net cash flows. In addition, an
unfavorable resolution may adversely impact PSEG's non-utility investment
strategy. PSEG 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 PSEG 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 PSEG nor PSE&G is able to
predict what action, if any, the BPU may take concerning consolidation of tax
benefits in future rate proceedings.


                                       79
<PAGE>

POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (OPEB)

      On October 21, 1998, the BPU ordered PSE&G to fund in an external trust
its annual OPEB obligation to the maximum extent allowable under Section 401(h)
of the Internal Revenue Code. For 1998, the amount funded was $12 million.
Remaining OPEB costs will not be funded in an external trust.

OTHER REGULATORY ISSUES

      NON-UTILITY GENERATION BUYDOWN

      PSE&G is seeking to restructure certain of its BPU approved contracts with
NUGs, which are estimated to be $1.6 billion above assumed future market prices.
Under Federal and State regulations, utilities have been required to enter into
long-term power purchase agreements with NUGs at prices which have subsequently
proven to be above market. In June 1998, PSE&G and the Union County Utilities
Authority (UCUA) announced an agreement to amend their Power Purchase and
Interconnection Agreement and in July 1998, the BPU approved this amendment.
Under this amendment, PSE&G has paid UCUA a lump sum amount of $7.75 million in
exchange for a $15.6 million savings to ratepayers on a net present value basis.
The payment of $7.75 million by PSE&G is being recovered through the LEAC and is
expected to continue to be recovered through successor mechanisms to be
determined by the outcome of the Energy Master Plan Proceedings as to which no
assurances can be given.

      ORDER ADOPTING AUCTION STANDARDS

      On June 16, 1998, the BPU adopted standards applicable to the auction
processes being used by two other New Jersey utilities to divest themselves of
certain of their generating plants by sale to unrelated entities. At this time,
PSEG's strategy is to retain its generation assets. The BPU order adopting these
auction standards indicated that the standards would be reviewed and possibly
modified if deemed appropriate. Should PSE&G decide or be required to sell its
generation assets, PSE&G would determine at such time whether to seek such
review or modification.

      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. The Energy
Competition Act does not require that on-site generators pay any fees equivalent
to the societal benefits charge or recovery of utility stranded costs (market
transition charge or transition bond charges) provided that the energy load
served by the on-site generators does not reduce the utility's distributed
kilowatt hours below 92.5% of the kilowatt hours distributed by the utility in
1999. If that trigger is exceeded, then on-site generators will pay such
charges. PSE&G cannot predict the impact this may have on its financial
condition, results of operations and net cash flows.

      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 and require PSE&G to deliver such gas to the
customer's facility. Under the Energy Competition Act, utilities are required to
offer all of their customers the choice to buy the gas commodity from alternate
suppliers by December 31, 1999. The Energy Competition Act also applies similar
rules to the gas industry as to the electric industry addressing affiliate
relations, consumer protections, among others.

      To date, approximately 17,700 commercial and industrial customers, of
approximately 180,000 such customers eligible, have elected to utilize unbundled
gas service. PSE&G cannot predict, in light of restructuring and with the
changes in the law affecting the gross receipts and franchise tax which became
effective on January 1, 1998, whether additional customers will use this
service. 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).

      In April 1997, the BPU approved PSE&G's proposal for a residential gas
unbundling pilot program (SelectGas), which allowed approximately 65,000
residential natural gas customers, out of a total of 1.4 million residential gas
customers, to participate in the competitive marketplace effective May 1, 1997.
On April 30, 1998, PSE&G filed a report with the BPU 


                                       80
<PAGE>

on SelectGas and proposed refinements for a permanent residential gas unbundling
program (SelectGas Plus). Under SelectGas Plus, as proposed, a total of 300,000
residential customers would be permitted to choose their gas supplier on a
first-come, first-served basis. This expanded program would commence sixty days
after a BPU order authorizing this program. PSE&G's proposal would permit its
remaining residential customers to choose their gas supplier by July 1, 1999 or
such alternate date as may be established by the BPU. On December 22, 1998,
PSE&G, the BPU and the Ratepayer Advocate executed an Interim Stipulation for
Phase I of PSE&G's Residential Gas Transportation Program (Program). In
accordance with the Interim Stipulation, residential customers would not be
eligible to register (sign-up) for the Program until 60 days after the BPU's
Energy Master Plan Proceedings written order. The Interim Stipulation mandates
that residential customers who return to PSE&G's bundled sales service after a
designated period would be served gas which is market- priced under PSE&G's
Market Price Gas Service (MPGS) tariff.

      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
1,700 former residential gas customers of New Jersey Natural.

      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. PSEG's indirect subsidiary, Energy
Technologies, provides non-utility gas marketing services operating in New
Jersey and several other states.

      NEW JERSEY GROSS RECEIPTS AND FRANCHISE TAX (NJGRT) REFORM

      For a discussion of New Jersey energy tax reform and its impact on the
NJGRT, see Note 12. Income Taxes.

NOTE 3. REGULATORY ASSETS AND LIABILITIES

      Regulatory assets and liabilities are recorded in accordance with the
provisions of 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 are being 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. Through
1998 and into 1999, PSE&G continues to meet the requirements for application of
SFAS 71. Once the BPU issues its March 31, 1999 order in the Energy Master Plan
Proceedings, PSE&G will no longer meet the requirements for application of SFAS
71 for its then deregulated operations. It is expected that the existing
regulatory assets, listed below, will continue in the regulated portion of
PSE&G's business and will continue to be subject to SFAS 71.

      At December 31, 1998 and 1997, PSE&G had deferred the following regulatory
assets and liabilities on the Consolidated Balance Sheets:

                                                  DECEMBER 31,
                                            -----------------------
                                               1998         1997
                                            ----------   ----------
REGULATORY ASSETS                            (MILLIONS OF DOLLARS) 

SFAS 109 Income Taxes                       $      704   $      725
OPEB Costs                                         270          289
Demand Side Management Costs                       150          116
Environmental Costs                                139          122
Unamortized Loss on Reacquired Debt and
Debt Expense                                       135          135
Decontamination and Decommissioning Costs           39           43
Underrecovered Gas Costs                            35           76
Plant and Regulatory Study Costs                    32           34
Repair Allowance Tax Deficiencies and
  Interest                                          26           --
Property Abandonments                               21           37
Oil and Gas Property Write-Down                     21           26


                                       81
<PAGE>

Underrecovered Electric Energy Costs                --           91
Other                                                7           --
                                            ----------   ----------
Total Regulatory Assets                     $    1,579   $    1,694
                                            ==========   ==========
REGULATORY LIABILITIES
Overrecovered Electric Energy Costs         $       39   $       --
Other Stranded Cost Recovery Offsets                 4           --
                                            ----------   ----------
Total Regulatory Liabilities                $       43   $       --
                                            ==========   ==========


UNAMORTIZED LOSS ON REACQUIRED DEBT AND DEBT EXPENSE: Represents bond issuance
costs, premiums, discounts and losses on reacquired long-term debt.

OPEB COSTS: Includes costs associated with adoption of SFAS 106 which were
deferred in accordance with EITF Issue 92-12. Beginning January 1, 1998, PSE&G
commenced the amortization of the regulatory asset over 15 years.

ENVIRONMENTAL COSTS: Represents environmental costs which are probable of
recovery in future rates.

UNDERRECOVERED ELECTRIC ENERGY COSTS/OVERRECOVERED ELECTRIC ENERGY COSTS: PSE&G
had 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. At December 31, 1998, PSE&G has fully recovered its December
31, 1996 underrecovered LEAC balance. The LEAC is in an overrecovered position
of $39 million at December 31, 1998. This overrecovered amount will be used to
offset stranded costs per the BPU's December 31st Order in the Salem settlement.
PSE&G continues to follow deferred accounting treatment for the LEAC until the
BPU rules on PSE&G's Energy Master Plan proposal. The potential discontinuance
of the LEAC which may result from the Energy Master Plan Proceedings may cause
increased earnings volatility since PSE&G will bear the full risks and rewards
of changes in nuclear and fossil generating fuel costs and replacement power
costs. No assurances can be given as to the outcome of the New Jersey Energy
Master Plan Proceedings.

SFAS 109 INCOME TAXES: Represents regulatory asset related to the implementation
of SFAS 109, "Accounting for Income Taxes" in 1993. For further discussion
including flow-through impacts, see Note 12. Income Taxes.

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, 1998 and 1997, respectively, reflects
underrecovered/(overrecovered) costs as follows:


                                       82
<PAGE>

                               DECEMBER 31,
                          --------------------
                            1998        1997
                          --------    --------
                          (MILLIONS OF DOLLARS)
Deferred DSM (Including
  Interest)--Electric     $    151    $    122
Deferred DSM (Including
  Interest)--Gas                (1)         (6)
                          --------    --------
    Total                 $    150    $    116
                          ========    ========

DECONTAMINATION AND DECOMMISSIONING COSTS: Represents amounts related to
decontamination and decommissioning at Federal government sites which are
probable of recovery in future rates.

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.

REPAIR ALLOWANCE TAX DEFICIENCIES AND INTEREST: Represents Federal income tax
deficiencies and interest thereon applicable to deductions under the repair
allowance provisions of the Internal Revenue Code, disallowed upon IRS audit.
The BPU has allowed recovery of these costs in rates.

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%.

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 Energy Holdings.

                                                 DECEMBER 31,
                                           -----------------------
                                              1998         1997
                                           ----------   ----------
                                            (MILLIONS OF DOLLARS)
Lease Agreements (see Note 5 
   Leasing Activities):
   Leveraged Leases .....................  $    1,393   $    1,143
   Direct and Other Financing Leases ....          --            4
                                           ----------   ----------
      Total .............................       1,393        1,147
                                           ----------   ----------
Partnerships:
   General Partnerships .................          72          142
   Limited Partnerships .................         522          534
                                           ----------   ----------
      Total .............................         594          676
                                           ----------   ----------

Corporate Joint Ventures ................         879          885
Securities ..............................          21           28
Other Investments .......................         147          137
                                           ----------   ----------
      Total Long-Term Investments .......  $    3,034   $    2,873
                                           ==========   ==========

      Resources' 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.


                                       83
<PAGE>

      Partnership investments and corporate joint ventures are those of
Resources, Global and EGDC.

      Other Investments, above, relate primarily to Public Service Conservation
Resources Corporation (PSCRC), which at December 31, 1998 was a wholly-owned
subsidiary of PSE&G. On January 1, 1999, PSCRC was transferred to Energy
Technologies, a wholly-owned subsidiary of Energy Holdings. PSCRC's investment
in DSM projects had balances at December 31, 1998 and 1997 of approximately $72
million and $84 million, respectively.

NOTE 5. LEASING ACTIVITIES

AS LESSOR

      Resources' net investments in leveraged leases are composed of the
following elements:

                                    DECEMBER 31, 1998      DECEMBER 31, 1997
                                  ---------------------  ---------------------
                                  (MILLIONS OF DOLLARS)  (MILLIONS OF DOLLARS)

                                        LEVERAGED              LEVERAGED
                                          LEASES                 LEASES
                                        ----------             ----------
Lease rents receivable ............     $    1,921             $    1,498
Estimated residual value ..........            665                    635
                                        ----------             ----------
                                             2,586                  2,133
Unearned and deferred income ......         (1,193)                  (990)
                                        ----------             ----------
    Total investments . ...........          1,393                  1,143
Deferred taxes ....................           (731)                  (670)
                                        ----------             ----------
    Net investments ...............     $      662             $      473
                                        ==========             ==========

   Resources' other capital leases are with various regional, state and city
authorities for transportation equipment and aggregated $0 million and $4
million as of December 31, 1998 and 1997, respectively.


                                       84
<PAGE>

NOTE 6. SCHEDULE OF CONSOLIDATED CAPITAL STOCK AND OTHER SECURITIES

<TABLE>
<CAPTION>
                                                                                   CURRENT
                                                                                  REDEMPTION
                                                               OUTSTANDING           PRICE        DECEMBER 31,      DECEMBER 31,
                                                                  SHARES           PER SHARE          1998              1997
                                                               -----------        ----------      ------------      ------------
                                                                                                       (MILLIONS OF DOLLARS)
<S>                                                              <C>                <C>                 <C>               <C>
PSEG Common Stock (no par) (A)
   Authorized 500,000,000 shares; issued and
   outstanding at December 31, 1998, 226,643,508
   shares; at December 31, 1997, 231,957,608 shares
   and at December 31, 1996, 233,470,291 shares ........                                                $3,396            $3,603

PSEG Preferred Securities (B)
   PSEG Quarterly Guaranteed Preferred Beneficial
   Interest in PSEG's Subordinated Debentures
   (D) (E) (G) (I)
     7.44%   ...........................................         9,000,000                --              $225               $--
     Floating Rate .....................................           150,000                --               150                --
     7 1/4%   ..........................................         6,000,000                --               150                --
                                                                                                  ------------      ------------
     Total Quarterly Guaranteed Preferred Beneficial
     Interest in PSEG's Subordinated Debentures ........                                                  $525               $--
                                                                                                  ============      ============
PSE&G Preferred Securities
   PSE&G Cumulative Preferred Stock (C) without
   Mandatory Redemption (D) $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
     6.92%  ............................................           160,711                --                16                16
   $25 par value series
     6.75%  ............................................           600,000                --                15                15
                                                                                                  ============      ============
   Total Preferred Stock without Mandatory Redemption ..                                                   $95               $95
                                                                                                  ============      ============
     With Mandatory Redemption (D) (E) $100
     par value series
     5.97%  ............................................           750,000            102.99               $75               $75
                                                                                                  ============      ============
   Total Preferred Stock with Mandatory Redemption .....                                                   $75               $75
                                                                                                  ============      ============
   PSE&G Monthly Guaranteed Preferred Beneficial
   Interest in PSE&G's Subordinated Debentures
   (D) (E) (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
                                                                                                  ============      ============
   PSE&G Quarterly Guaranteed Preferred Beneficial
   Interest in PSE&G's Subordinated Debentures
   (D) (E) (F) (H)
     8.625%     ........................................         8,320,000                --              $208              $208
     8.125%     ........................................         3,800,000                --                95                95
                                                                                                  ------------      ------------
     Total Quarterly Guaranteed Preferred Beneficial
     Interest in PSE&G's Subordinated Debentures .......                                                  $303              $303
                                                                                                  ============      ============
</TABLE>

(A)   On September 15, 1998, in anticipation of securitization of PSE&G's
      stranded costs afforded by the Energy Competition Act and the ALJ's
      decision, the Board of Directors of PSEG authorized the repurchase of up
      to 10 million shares of its common stock (Common Stock). Under the
      authorization, repurchases were made in the open market at the discretion
      of PSEG. The repurchased shares have been held as treasury stock. At
      December 31, 1998, PSEG had repurchased 5,314,100 shares of Common Stock
      at a cost of approximately $207 million, under this authorization. As of
      February 8, 1999, PSEG had repurchased a total of 10 million shares at a
      cost of approximately $391 million under this program.

      In July 1996, PSEG 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.


                                       85
<PAGE>

      Total authorized and unissued shares include 7,302,488 shares of PSEG
      Common Stock reserved for issuance through PSEG's Dividend Reinvestment
      and Stock Purchase Plan and various employee benefit plans. In 1998 and
      1997, no shares of PSEG Common Stock were issued or sold through these
      plans.

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

(C)   At December 31, 1998, 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, 1998 and 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, 1998 and 1997, 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 5.50% and $18,862,500 and 6.04%, respectively.

      At December 31, 1998 and 1997, 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 5.18% and $25,658,750 and 5.70%, respectively.

      At December 31, 1998, the annual dividend requirement of PSEG's Trust
      Preferred Securities (Guaranteed Preferred Beneficial Interest in PSEG's
      Subordinated Debentures) and their embedded costs were $38,433,000 and
      4.91%, respectively. There were no Trust Preferred Securities at PSEG at
      December 31, 1997.

(E)   For information concerning fair value of financial instruments, see Note
      8. Financial Instruments and Risk Management.

(F)   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.

(G)   In January 1998, Enterprise Capital Trust I issued $225 million of 7.44%
      Quarterly Guaranteed Preferred Beneficial Interest in PSEG's Subordinated
      Debentures. In June 1998, Enterprise Capital Trust II issued $150 million
      of Floating Rate Capital Securities with a Quarterly Guaranteed Preferred
      Beneficial Interest in PSEG's Subordinated Debentures. The Floating Rate
      Capital Securities were offered to Institutional Investors at an annual
      rate equal to 3-month LIBOR plus 1.22%, determined quarterly. PSEG entered
      into an interest rate swap agreement which effectively fixes the rate on
      this issue for 10 years at 7.2%. In July 1998, Enterprise Capital Trust
      III issued $150 million of 7.25% Quarterly Guaranteed Preferred Beneficial
      Interest in PSEG'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 loaned 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.

(I)   Enterprise Capital Trust I, Enterprise Capital Trust II and Enterprise
      Capital Trust III were formed and are controlled by PSEG for the purpose
      of issuing Quarterly Trust Preferred Securities (Quarterly Guaranteed
      Preferred 


                                       86
<PAGE>

      Beneficial Interest in PSEG's Subordinated Debentures). The proceeds were
      loaned to PSEG and are evidenced by PSEG's Deferrable Interest
      Subordinated Debentures. If and for as long as payments on PSEG's
      Deferrable Interest Subordinated Debentures have been deferred, or PSEG
      has defaulted on the indentures related thereto or its guarantees thereof,
      PSEG may not pay any dividends on its common and preferred stock. The
      Subordinated Debentures and the indentures constitute a full and
      unconditional guarantee by PSEG of the Preferred Securities issued by the
      trusts.

NOTE 7. SCHEDULE OF CONSOLIDATED DEBT

<TABLE>
<CAPTION>
LONG-TERM                                                                         DECEMBER 31,
                                                                         -------------------------------
INTEREST RATES                                            MATURITY           1998              1997
--------------                                           -----------     ------------     --------------
                                                                             (MILLIONS OF DOLLARS)
<S>                                                      <C>                <C>                 <C>
PSEG
Extendible Notes (A)
LIBOR plus 0.75% - 0.78%                                 2000.......          $275                $--
                                                                         ------------     --------------
     Total Long-Term Debt of PSEG...................................          $275                $--
                                                                         ============     ==============
PSE&G
First and Refunding Mortgage Bonds (B)
6.00%                                                    1998.......           $--               $100
8.75%                                                    1999.......           100                100
6.00%-7.625%                                             2000.......           635                635
7.875%                                                   2001.......           100                100
6.125%                                                   2002.......           300                300
6.875%-8.875%                                            2003.......           300                300
6.25%-9.125%                                             2004-2007..           750                750
6.80%-6.90%                                              2008-2012..             3                  3
Variable                                                 2008-2012..            66                 66
6.75%-7.375%                                             2013-2017..           375                375
6.45%-9.25%                                              2018-2022..           139                139
Variable                                                 2018-2022..            14                 14
5.20%-7.50%                                              2023-2027..           573                568
5.45%-6.55%                                              2028-2032..           499                499
Variable                                                 2028-2032..            25                 25
5.00%-8.00%                                              2033-2037..           160                160
Medium-Term Notes
8.10%-8.16%                                              2008-2012..            60                 60
7.04%                                                    2018-2022..             9                  9
7.15%-7.18%                                              2023-2027..            41                 41
                                                                         ------------     --------------
   Total First and Refunding Mortgage Bonds.........................         4,149              4,244
                                                                         ------------     --------------
Unsecured Bonds (C)
6.00%                                                    1998.......            --                 18
Variable                                                 2027.......            19                 19
                                                                         ------------     --------------
   Total Unsecured Bonds............................................            19                 37
                                                                         ------------     --------------
Principal Amount Outstanding (D)....................................         4,168              4,281
Amounts Due Within One Year (E).....................................          (100)              (118)
Net Unamortized Discount............................................           (23)               (37)
                                                                         ------------     --------------
   Total Long-Term Debt of PSE&G (F)................................        $4,045             $4,126
                                                                         ============     ==============
ENERGY HOLDINGS
PSEG CAPITAL
Senior Notes (G)
9.875%--10.05%                                           1998.......           $--                $38
Medium-Term Notes
9.00%                                                    1998.......            --                 75
8.95%-9.93%                                              1999.......           155                155
6.54%                                                    2000.......            78                 78
6.74%                                                    2001.......           135                135
6.80%-7.00%                                              2002.......           130                130
                                                                         ------------     --------------
Principal Amount Outstanding (D)....................................           498                611
Amounts Due Within One Year (E).....................................          (155)              (113)
Net Unamortized Discount............................................            (2)                (2)
                                                                         ------------     --------------
   Total Long-Term Debt of PSEG Capital.............................           341                496
                                                                         ------------     --------------
FUNDING (H)
9.95%                                                    1998.......            --                 83
7.58%                                                    1999.......            45                 45
                                                                         ------------     --------------
Principal Amount Outstanding (D)....................................            45                128
</TABLE>


                                       87
<PAGE>

<TABLE>
<S>                                                      <C>                 <C>                <C> 
Amounts Due Within One Year (E).....................................           (45)               (83)
                                                                         ------------     --------------
   Total Long-Term Debt of Funding..................................            --                 45
                                                                         ------------     --------------
GLOBAL
Non-recourse Debt (I)
7.721% - Bank Loan                                       1999.......            87                 87
13.23% - Bank Loan                                       2002.......           123                135
14.00% - Minority Interest Loan                          2027.......            10                 10
                                                                         ------------     --------------
Principal Amount Outstanding (D)....................................            220               232
Amounts Due Within One Year.........................................          (118)               (26)
                                                                         ------------     --------------
     Total Long-Term Debt of Global.................................            102               206
                                                                         ------------     --------------
     Total Long-Term Debt of Energy Holdings........................           $443              $747
                                                                         ============     ==============
        Consolidated Long-Term Debt (J).............................         $4,763            $4,873
                                                                         ============     ==============
</TABLE>

(A)   In November 1998, PSEG issued Series A and B of Extendible Notes due
      November 2000 totaling $275 million. Series A in the amount of $100
      million pays interest at LIBOR plus 0.75%, reset quarterly, and will be
      automatically tendered to the remarketing agent for remarketing on May 24,
      1999. Series B in the amount of $175 million pays interest at LIBOR plus
      0.78%, reset quarterly, and will be automatically tendered to the
      remarketing agent for remarketing on November 22, 1999. At December 31,
      1998, the interest rates on Series A and B were 6.00% and 6.03%,
      respectively.

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

      During 1998, PSE&G reacquired on the open market $242 million of its 7.50%
      Series OO First and Refunding Mortgage Bonds (Bonds). In May 1998, PSE&G
      issued $250 million of its 6.375% Remarketable Series YY Bonds due 2023,
      Mandatorily Tendered 2008. PSE&G also entered into a Remarketing Agreement
      with a third party that granted the third party the option to call and
      remarket the Series YY Bonds on May 1, 2008 for the remaining term of the
      Series YY Bonds. In January 1998, $100 million of PSE&G's 6.00% Bonds,
      Series NN, matured.

(C)   On July 1, 1998, $18 million of PSE&G's 6% Unsecured Bonds matured.

(D)   For information concerning fair value of financial instruments, see Note
      8. Financial Instruments and Risk Management.

(E)   The aggregate principal amounts of mandatory requirements for sinking
      funds and maturities for each of the five years following December 31,
      1998 are as follows:

<TABLE>
<CAPTION>
                  SINKING
                   FUNDS                                      MATURITIES
                   -----       ----------------------------------------------------------------------------
                                                         PSEG
    YEAR           GLOBAL        PSEG        PSE&G      CAPITAL       FUNDING        GLOBAL         TOTAL
------------     ----------    ---------  ----------- ------------  ------------  ------------  -----------
<S>                   <C>          <C>       <C>            <C>            <C>           <C>        <C>
1999........           $31           --        $100         $155           $45           $87          $418
2000........            31         $275         635           78            --            --         1,019
2001........            31           --         100          135            --            --           266
2002........            30           --         300          130            --            --           460
2003........            --           --         300           --            --            --           300
                               ---------  ------------------------  ------------  ------------  -----------
                      $123         $275      $1,435         $498           $45           $87        $2,463
                               =========  ========================  ============  ============  ===========
</TABLE>

(F)   At December 31, 1998 and 1997, PSE&G's annual interest requirement on
      long-term debt was $282 million and $291 million, of which $274 million
      and $283 million, respectively, was the requirement for Bonds. The
      embedded interest cost on long-term debt on such dates was 7.35% and
      7.44%, respectively. The embedded interest cost on long-term debt due
      within one year at December 31, 1998 was 8.83%.

(G)   PSEG Capital has provided up to $750 million debt financing for Energy
      Holdings' businesses, except Energy Technologies, on the basis of a net
      worth maintenance agreement with PSEG. Effective January 31, 1995, PSEG
      Capital has limited its borrowings to no more than $650 million.


                                       88
<PAGE>

(H)   Funding provides debt financing for Resources, Global and their
      subsidiaries on the basis of an unconditional guarantee from Energy
      Holdings.

(I)   Global's projects are generally financed with non-recourse debt at the
      project level, with the balance in the form of equity investments by the
      partners in the project. The non-recourse debt shown in the above table is
      that of two consolidated subsidiaries which have equity investments in
      distribution facilities in Argentina and Brazil. Global's capital at risk
      on the projects is limited to its original equity investment. The
      non-recourse debt, through the process of consolidation, appears as
      long-term debt and long-term investments in PSEG's consolidated balance
      sheets.

(J)   At December 31, 1998 and 1997, the annual interest requirement on
      long-term debt was $365 million and $378 million, of which $274 million
      and $283 million, respectively, was the requirement for Bonds. The
      embedded interest cost on long-term debt on such dates was 7.32% and
      7.64%, respectively.

      PSEG

      At December 31, 1998, PSEG had a committed $150 million revolving credit
facility which expires in December 2002. At December 31, 1998 and 1997, PSEG had
a $25 million and $75 million uncommitted line of credit, respectively, with a
bank. At December 31, 1998, PSEG had no debt outstanding under these facilities.
The weighted-average, short-term debt rate of PSEG was 5.6%, 6.2% and 5.7% for
the years ended December 31, 1998, 1997 and 1996, respectively.

      PSE&G

<TABLE>
<CAPTION>
                                                                                 1998         1997       1996
                                                                                 ----         ----       ----
                                                                                     (MILLIONS OF DOLLARS)
<S>                                                                              <C>        <C>          <C> 
Principal amount outstanding at year end, primarily commercial paper.......      $850       $1,106       $638
Weighted average interest rate for short-term debt at year end.............      5.91%        6.07%      5.70%
</TABLE>

      PSE&G has authorization from the BPU to issue and have outstanding not
more than $1.5 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 4, 2000.

      PSE&G has a $1.3 billion commercial paper program (Program) supported by a
$650 million revolving credit agreement expiring in June 1999 and a $650 million
revolving credit agreement expiring in June 2002 with a group of commercial
banks. As of December 31, 1998 and 1997, PSE&G had $655 million and $952
million, respectively, outstanding under the Program, which amounts are included
in the table above. As of December 31, 1998, there was no debt outstanding under
the revolving credit agreements.

      PSE&G has $150 million in uncommitted lines of credit facilities extended
by a number of banks to primarily support short-term borrowings, of which $115
million was outstanding on December 31, 1998 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, 1998,
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, 1998 and 1997, Fuelco had commercial paper of
$80 million outstanding under the commercial paper program, which amounts are
included in the table above. As of December 31, 1998, there was no debt
outstanding under the revolving credit facility.

      Pursuant to the BPU's authorization of long-term debt, 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, 1998, no amounts were
outstanding under such arrangements.


                                       89
<PAGE>

      ENERGY HOLDINGS

<TABLE>
<CAPTION>
                                                                                 1998         1997       1996
                                                                                 ----         ----       ----
                                                                                     (MILLIONS OF DOLLARS)
<S>                                                                              <C>          <C>        <C>
Principal amount outstanding at year end...................................      $206         $267       $--
Weighted average interest rate for short-term debt at year end.............      6.46%        6.92%       --
</TABLE>

      Funding has a $300 million credit facility expiring in July 1999 and a
$150 million revolving credit agreement expiring in November 1999. As of
December 31, 1998, there was $206 million outstanding under these facilities,
which is included in the table above.

NOTE 8. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

      PSEG's operations give rise to exposure to market risks from changes in
commodity prices, interest rates, foreign currency exchange rates and securities
prices. PSEG's policy is to use derivative financial instruments for the purpose
of managing market risk consistent with its business plans and prudent business
practices.

      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 1998 and 1997, respectively. Note that certain
events, in connection with the Energy Master Plan Proceedings could trigger
certain redemption features of certain PSE&G mortgage bonds which is not
reflected in the fair value estimations below, see Note 2. Regulatory Issues.

<TABLE>
<CAPTION>
                                                                                     DECEMBER 31,
                                                            -------------------------------------------------------------
                                                                       1998                            1997
                                                            ---------------------------  --------------------------------
                                                              CARRYING        FAIR          CARRYING           FAIR
                                                               AMOUNT         VALUE          AMOUNT            VALUE
                                                            ------------- -------------  ---------------  ---------------
                                                                               (MILLIONS OF DOLLARS)
<S>                                                               <C>           <C>              <C>              <C>  
Long-Term Debt (A):
     PSEG..................................................        $275          $275              $--              $--
     Energy Holdings.......................................         762           769              969              978
     PSE&G.................................................       4,145         4,389            4,244            4,389
Preferred Securities Subject to Mandatory Redemption:
     PSE&G Cumulative Preferred Securities.................          75            77               75               78
     Monthly Guaranteed Preferred Beneficial Interest in
        PSE&G's Subordinated Debentures....................         210           213              210              221
     Quarterly Guaranteed Preferred Beneficial Interest in
        PSE&G's Subordinated Debentures....................         303           315              303              316
     Quarterly Guaranteed Preferred Beneficial Interest in
        PSEG's Subordinated Debentures.....................         525           518               --               --
</TABLE>

(A)   Includes current maturities and interest rate swaps of $44 million and
      $150 million for Energy Holdings and PSEG, respectively, for the period
      ended December 31, 1998. Includes current maturities and an interest rate
      swap of $44 million for Energy Holdings for the period ended December 31,
      1997.


                                       90
<PAGE>

      Global had consolidated non-recourse debt of $123 million as of December
      31, 1998 which is denominated in the Brazilian Real 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
      and between the Brazilian Real and the U.S. Dollar. 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 (losses)/gains resulting from
      such exchange rate changes are included in determining net income for the
      period and amounted to $(3) million and $1 million for the years ended
      December 31, 1998 and 1997, respectively. For more information on foreign
      operations and the devaluation of foreign currencies, see Note 20.
      Subsequent Events.

      COMMODITY INSTRUMENTS--PSE&G

      At December 31, 1998 and 1997, PSE&G held or issued instruments that
reduce exposure to market fluctuations from factors such as weather,
environmental policies, changes in demand, changes in supply, state and Federal
regulatory policies and other events. These instruments, in conjunction with
owned electric generating capacity and physical gas supply contracts, are
designed to cover estimated electric and gas customer commitments. PSE&G
currently has levelized energy adjustment clauses, LEAC and LGAC, in place for
both electricity and natural gas pursuant to BPU orders. These clauses were
established to minimize the impact of major commodity price swings on energy
cost to customers. 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 net
purchased power at the locational marginal price. PSE&G uses futures, forwards,
swaps and options to manage and hedge price risk related to these market
exposures.

      Energy commodity futures involve the buying or selling of electricity and
natural gas at a fixed price under the provisions of exchange regulations.
Energy commodity forwards involve the buying or selling of electricity and
natural gas at non-standardized terms that result from direct negotiation
between the buyer and the seller. Swap agreements require PSE&G to receive or
make payment based on the difference between a specified price and the actual
price of the underlying commodity. Energy commodity options provide the right,
but not the requirement, to buy or sell energy-related commodities at a fixed
price. PSE&G uses these instruments to manage commodity price risk.

      At December 31, 1998, PSE&G had outstanding commodity financial
instruments with a notional contract quantity of 1.6 million MWH of electricity
and 65.2 million MMBTU of natural gas. At December 31, 1997, PSE&G had
outstanding commodity financial instruments with a notional contract quantity of
0.9 million MWH of electricity and 3.7 million MMBTU of natural gas. Notional
amounts are indicative only of the volume of activity and are not a measure of
market risk. At December 31, 1998 and 1997, PSE&G had current unrecognized net
gains of $5 million and $3 million, respectively, related to commodity
instruments.

      NATURAL GAS HEDGING--ENERGY HOLDINGS

      As of December 31, 1998 and 1997, Energy Technologies had outstanding
futures contracts to buy natural gas related to fixed-price natural gas sales
commitments. Such contracts hedged approximately 90% and 97% of its fixed price
sales commitments at December 31, 1998 and 1997, respectively. As of December
31, 1998 and 1997, Energy Technologies had a net unrealized hedge loss of $5
million and $2 million, respectively.

      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 of
$524 million and $459 million approximates the fair market value as of December
31, 1998 and 1997, respectively.


                                       91
<PAGE>

      EQUITY SECURITIES--ENERGY HOLDINGS

      Resources, a wholly-owned subsidiary of Energy Holdings, has investments
in equity securities and partnerships, in which Resources is a limited partner,
which invest in equity securities. Resources carries its investments in equity
securities at their approximate fair value as of the reporting date.
Consequently, the carrying value of these investments is affected by changes in
the fair value of the underlying securities. Fair value is determined by
adjusting the market value of the securities for liquidation and market
volatility factors, where appropriate. The aggregate amount of such investments
which have available market prices at December 31, 1998 and 1997 are recorded at
fair value of $204 million and $185 million, respectively, and have exposure to
market price risk. A sensitivity analysis has been prepared to estimate Energy
Holdings' 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 $17 million.

      INTEREST RATE SWAPS--PSEG AND ENERGY HOLDINGS

      PSEG entered into an interest rate swap on June 26, 1998 to hedge
Enterprise Capital Trust II's $150 million of Floating Rate Capital Securities,
Series B, due 2028. Enterprise Capital Trust II is a special purpose statutory
business trust controlled by PSEG. The basis for both the interest rate swap and
the Floating Rate Capital Securities is the quarterly London Interbank Offered
Rate (LIBOR). This interest rate swap effectively hedges the underlying debt for
10 years at an effective rate of 7.2%.

      In June 1997, an indirect subsidiary of Global entered into an interest
rate swap on 50% of its floating rate borrowings of $87 million. The basis for
the interest rate swap is six month LIBOR. The interest rate swap effectively
hedges the underlying debt through its scheduled maturity in May 1999 at the
current effective rate of 7.76%. 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.

      CREDIT RISK--PSE&G AND ENERGY HOLDINGS

      Credit risk relates to the risk of loss that PSEG would incur as a result
of nonperformance by counterparties, pursuant to the terms of their contractual
obligations. PSEG has established credit policies that it believes significantly
minimizes PSEG's exposure to credit risk. These policies include an evaluation
of potential counterparties' financial condition (including credit rating),
collateral requirements under certain circumstances and the use of standardized
agreements, which may allow for the netting of positive and negative exposures
associated with a single counterparty.

NOTE 9. CASH AND CASH EQUIVALENTS

      The December 31, 1998 and 1997 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.


                                       92
<PAGE>

NOTE 10. COMMITMENTS AND CONTINGENT LIABILITIES

NUCLEAR INSURANCE COVERAGES AND ASSESSMENTS

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

<TABLE>
<CAPTION>
                                                                                                    PSE&G MAXIMUM
TYPE AND SOURCE OF COVERAGES                                 TOTAL SITE COVERAGES                    ASSESSMENTS
----------------------------                                 --------------------                    -----------
                                                                               (MILLIONS OF DOLLARS)
<S>                                                                <C>                                  <C>   
Public and Nuclear Worker Liability (Primary Layer):
     American Nuclear Insurers............................           $200.0 (A)                           $8.0
Nuclear Liability (Excess Layer):                                                 
     Price-Anderson Act...................................         $9,514.8 (B)                         $233.6
                                                                   --------                             ------
         Nuclear Liability Total..........................         $9,714.8 (C)                         $241.6
                                                                   ========                             ======
                                                                                  
Property Damage (Primary Layer):                                                  
     Nuclear Electric Insurance Limited (NEIL) Primary                            
         (Salem/Hope Creek/Peach Bottom)..................           $500.0                              $11.6
Property Damage (Excess Layer):                                                   
     NEIL II (Salem/Hope Creek/Peach Bottom)..............         $2,250.0                              $10.0
                                                                   --------                              -----
     Property Damage Total (Per Site).....................         $2,750.0                              $21.6
                                                                   ========                              =====
                                                                                  
Replacement Power:                                                                
     NEIL Primary (Primary Layer at all sites)............            $21.0 (D)                           N/A
     NEIL I (Excess Layer at Salem and Peach Bottom)......           $202.8 (E)                           $5.9
     NEIL I (Excess Layer at Hope Creek)..................           $449.5                               $3.1
                                                                                                          ----
         Replacement Power Total (Hope Creek).............              See (F)                           $9.0
                                                                                                          ====
</TABLE>

(A)   The primary limit for Public Liability is a per site aggregate limit with
      no potential for assessment. The Nuclear Worker Liability represents the
      potential liability from workers claiming exposure to the hazard of
      nuclear radiation. This coverage is subject to an industry aggregate
      limit, includes annual automatic reinstatement if the ICRP Reserve Fund
      exceeds $400 million, and has an assessment potential under former
      canceled policies.

(B)   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, 1998. This retrospective program
      is excess over the Public and Nuclear Worker Liability primary layers.

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

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

(E)   Salem and Peach Bottom have an aggregate indemnity limit based on a weekly
      indemnity of $1.5 million for 52 weeks followed by 80% of the weekly
      indemnity for 104 weeks. Hope Creek has an aggregate indemnity limit based
      on a weekly indemnity of $3.3 million for 52 weeks followed by 80% of the
      weekly indemnity for 104 weeks.

(F)   Combined aggregate limit of NEIL Primary and NEIL I coverages available
      for Hope Creek is $470.5 million. For Salem and Peach Bottom the combined
      aggregate limits are $223.8 million.

      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 $9.7 billion. All utilities owning a nuclear
reactor, including PSE&G, have provided for this exposure through a combination
of private insurance 


                                       93
<PAGE>

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 their share of $88.1 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 $233.6
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 decision by the U.S. Supreme Court, not involving PSE&G, has
held that the Price-Anderson Act did not preclude awards based on state law
claims for punitive damages.

      PSE&G is a member of an industry mutual insurance company, NEIL. NEIL
provides the primary property and decontamination liability insurance at
Salem/Hope Creek and Peach Bottom. NEIL also provides excess property insurance
through its decontamination liability, decommissioning liability, and excess
property policy and replacement power coverage through its business interruption
and/or extra expense policy. NEIL 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.

NUCLEAR OPERATING PERFORMANCE STANDARD (OPS)

      PECO Energy Company (PECO Energy), Delmarva Power & Light Company (DP&L)
and PSE&G, three of the co-owners of the Salem Nuclear Generating Station Units
1 and 2 (Salem) and the Peach Bottom Atomic Power Station Units 2 and 3 (Peach
Bottom), have agreed to an OPS through December 31, 2011 for Salem and through
December 31, 2007 for Peach Bottom. Under the OPS, the station operator is
required to make payments to the non-operating owners (excluding Atlantic City
Electric Company) commencing in January 2001 if the three-year historical
average net maximum dependable capacity factor for that station, calculated as
of December 31 of each year commencing with December 31, 2000, falls below 40%.
Any such payment is limited to a maximum of $25 million per year. 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.

YEAR 2000

      Many of PSEG's and PSE&G's systems, which include information technology
applications, plant control and telecommunications infrastructure systems, must
be modified due to computer program limitations in recognizing dates beyond
1999. Management estimates the total cost related to Year 2000 readiness will
approximate $83 million, to be incurred from 1997 through 2001, of which $8
million was incurred in 1997, $27 million was incurred in 1998 and approximately
$36 million is expected to be incurred in 1999. A portion of these costs is not
likely to be incremental to PSEG or PSE&G, but rather, represents a redeployment
of existing personnel/resources.

      The schedule to replace certain systems was accelerated for Year 2000
purposes. Analysis is continuing and costs identified to date are approximately
$5 million, which are not included in the estimates above. Additionally, PSE&G
is installing programs (SAP) from SAP America, Inc. to replace certain major
business systems. SAP America, Inc. has represented that SAP is Year 2000
compliant, and thus, installation of SAP will eliminate the need to modify those
business systems for Year 2000 compliance. The phased implementation of SAP is
scheduled to be completed by January 1, 2000. The cost of implementing SAP is
not included in the above cost estimates since SAP implementation has not been
accelerated for Year 2000 purposes.

      If PSEG, PSE&G, their domestic and international subsidiaries, other
members of the PJM Interconnection, L.L.C. (PJM), PJM trading partners supplying
power through PJM or PSEG's or PSE&G's critical vendors and/or customers are
unable to meet the Year 2000 deadline, such inability could have a material
adverse impact on PSEG's and PSE&G's operations, financial condition, results of
operations and net cash flows.


                                       94
<PAGE>

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. The outcome of the Energy Master
Plan Proceedings and the use of alternative sources of generation may impact
PSE&G's construction program. For discussion of the Energy Master Plan
Proceedings, see Note 2. Regulatory Issues.

      PSE&G's construction expenditures are expected to aggregate approximately
$2.8 billion during the years 1999 through 2003, which includes $414 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 generate the majority of funds necessary to satisfy its
construction expenditures over this period, assuming adequate and timely
recovery of costs which may be impacted by the outcome of the Energy Master Plan
Proceedings, 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 1999 through
2003.

SITE RESTORATIONS AND OTHER ENVIRONMENTAL COSTS

      It is difficult to estimate the future financial impact of environmental
laws, including potential liabilities. PSEG and PSE&G accrue environmental
liabilities 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.

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. Based on current information, except as discussed below with respect to
its manufactured gas plant Remediation Program, PSEG and PSE&G do not expect its
expenditures for any such site, individually or all such current sites in the
aggregate, 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. 


                                       95
<PAGE>

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 a 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 PSEG's and PSE&G's
financial condition, results of operations and net cash flows.

      Costs incurred through December 31, 1998 for the Remediation Program
amounted to $139 million. In addition, at December 31, 1998, PSE&G's estimated
liability for remediation costs through 2001 aggregated $84 million.
Expenditures beyond 2001 cannot be reasonably estimated.

      The Energy Competition Act provides for the continuation of RAC programs.
The recovery of costs for RAC is to be through a societal benefits charge. No
assurances can be given as to the outcome of the Energy Master Plan Proceedings
(see Note 2. Regulatory Issues).

AIR POLLUTION CONTROL

      In June 1998, NJDEP adopted regulations implementing a memorandum of
understanding among 11 Northeastern states and the District of Columbia,
establishing a regional plan for reducing nitrogen oxide (NOx) emissions from
utility and large industrial boilers. The extent of investment in control
technologies, operational changes and purchases of allowances required to comply
with these regulations will be directly related to the number of allowances
PSE&G receives. PSE&G expects to receive a preliminary allocation of allowances
in March 1999 and the final allocation is expected to be determined in
accordance with the NJDEP regulations in November 1999 which is subsequent to
the May 1, 1999 through September 30, 1999 period governed by the regulations.
PSE&G has attempted to minimize the uncertainty associated with the timing of
the allocation by purchasing allowances, upgrading control technologies and
estimating the expected allocation with as much precision as is practicable
using available data. However PSE&G's present analysis leads it to believe that
the potential costs for purchasing additional NOx budget allowances should not
exceed a total of $10 million through December 31, 2002. Expenditures associated
with installing control technology could result in an additional $72 million.
However, PSE&G is currently analyzing alternatives which could substantially
reduce the necessity of capital improvements.

PASSAIC RIVER SITE

      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, to date, at least thirteen corporations 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 $35
million to date in connection with the implementation of required remedial
actions for the site. Future costs for prospective remedial actions may be
material to PSE&G.

      In a separate matter, 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 


                                       96
<PAGE>

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 may be material.

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 the Energy Competition Act provides that the
societal benefits charge will be utilized to collect the necessary funding for
nuclear decommissioning, no assurances can be given as to the outcome of the
Energy Master Plan Proceedings. At December 31, 1998 and 1997, the accumulated
provision for depreciation and amortization included reserves for nuclear
decommissioning for PSE&G's nuclear units of $465 million and $428 million,
respectively. As of December 31, 1998 and 1997, PSE&G had contributed $303
million and $279 million, respectively, into independent, external, qualified
and non-qualified nuclear decommissioning trust funds. The fair market value of
these funds as of December 31, 1998 and 1997 was $542 million and $458 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 PSEG's and PSE&G's financial condition, results of operations and net
cash flows.


                                       97
<PAGE>

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 $32 million, resulting in a
balance due of $38 million. PSE&G has collected the expenditures incurred to
date as part of underrecovered electric energy costs and anticipates recovery of
such costs through a future regulatory mechanism. PSE&G believes that it should
not be subject to collection of any such fund payments under EPAct. It has filed
suit in the U.S. Court of Claims and petitioned the U.S. District Court,
Southern District of NY to recover these costs.

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 Net Interchanged Power and Fuel for Electric
Generation in the Statements of Income. Until the start of retail competition
pursuant to the Energy Competition Act, these costs are being recovered through
the LEAC. Thereafter, PSE&G will bear the risks of nuclear fuel disposal costs.
See Note 2. Regulatory Issues for the Energy Master Plan Proceedings and the
potential impact on the LEAC.

      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. In 1998, legislation which would have the DOE establish a
centralized interim spent fuel storage facility was introduced in Congress.
However, Congress ultimately elected not to consider this legislation, and
whether or not similar legislation will be considered in the future is unknown.
In litigation brought by PSE&G, 40 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.
In May 1998 the court denied a petition to order DOE to begin spent fuel
acceptance immediately and declare that the utilities are allowed to escrow
their Nuclear Waste Fund fees until DOE begins spent fuel acceptance. Following
this decision, DOE offered a proposal to settle issues related to its failure to
meet its obligation, which the utilities unanimously rejected. PSE&G is
continuing to work 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. Some utilities have initiated litigation
against DOE to recover damages and this option, among others, is currently being
considered by PSE&G. No assurances can be given as to the ultimate availability
of a facility.

NOTE 12. INCOME TAXES

      The New Jersey Gross Receipts and Franchise Tax (NJGRT) was eliminated
effective January 1, 1998 and replaced with a combination of the New Jersey
Corporate Business Tax which is a State income tax, the State sales and use tax
and a Transitional Energy Facility Assessment (TEFA), with no material impact on
the financial condition, results of operations and net cash flows of PSEG and
PSE&G. The TEFA, which is collected from customers, will be phased out over five
years. The corresponding phase out and reduction in rates will cause no material
impact on PSEG and PSE&G. While under NJGRT, PSE&G was subject to an effective
state tax on unit sales equal to approximately 13% of receipts. As a result of
such tax reform, after the phase out of the TEFA, the effective state tax rate
applicable to PSE&G will have been substantially reduced, putting PSE&G on a
more level playing field with competitors. Interim rates were implemented with
regard to the new tax structure effective with service rendered on and after
January 1, 1998. The BPU completed its administrative review of the filings of
all New Jersey utilities and approved permanent rates for 1998 on July 13, 1998
in a final Order. Effective January 1, 1999, revised rates became effective
which reflect one year's phase out of the TEFA.

      On September 18, 1998 and October 15, 1998, PSE&G filed with the BPU
additional information necessary to 1) reconcile its NJGRT collections to its
liability through April 1998, 2) reflect the impact of cash working capital and
net 


                                       98
<PAGE>

negative deferred State income taxes on a separate electric and gas basis and 3)
provide actual and estimated tax collected and tax liability through December
31, 1998. On December 16, 1998, the BPU issued an "Order Implementing 1999
'TEFA' Reductions and Other Rate Adjustments." This order mandates PSE&G to
recognize the cash working capital impact on a separate electric and gas basis
and defer such impact as deferred balance sheet credits with interest. In
accordance with the order, PSE&G deferred $1.3 million at December 31, 1998. The
Order also requires the BPU Staff to perform audits of New Jersey energy
utilities for NJGRT tax payments and collections. The results of such audits are
to be reported to the BPU for further action. PSE&G does not expect these
adjustments, if any, to have a material impact on its financial condition,
results of operations and net cash flows.

      A reconciliation of reported Net Income with pretax income and of 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>
                                                                              1998             1997             1996
                                                                           ----------       ----------       ----------
                                                                               (MILLIONS OF DOLLARS)
<S>                                                                            <C>                <C>              <C> 
Net Income ..........................................................            $644             $560             $612
Preferred securities (net) ..........................................               9               15                5
Discontinued Operations .............................................              --               --              (24)
                                                                           ----------       ----------       ----------
          Subtotal ..................................................             653              575              593
                                                                           ----------       ----------       ----------
Income taxes:
   Operating income:
     Current provision-Federal and State ............................             441              187              127
     Provision for deferred income taxes--net(A)-Federal and State ..              --              167              189
     Investment tax credits--net ....................................             (21)             (20)             (21)
                                                                           ----------       ----------       ----------
          Total included in operating income ........................             420              334              295
Miscellaneous other income:
     Current provision-Federal and State ............................               8              (24)               1
     Provision for deferred income taxes(A)-Federal and State .......              (1)              --               --
     SFAS 90 deferred income taxes(A) ...............................               1                1                2
                                                                           ----------       ----------       ----------
          Total income tax provisions ...............................             428              311              298
                                                                           ----------       ----------       ----------
Pretax income .......................................................          $1,081             $886             $891
                                                                           ==========       ==========       ==========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                       1998            1997            1996
                                                                                     --------        --------        --------
                                                                                                (MILLIONS OF DOLLARS)
<S>                                                                                      <C>             <C>             <C> 
Tax computed at the statutory rate ............................................          $378            $310            $312
Increase (decrease) attributable to flow through of certain tax adjustments:
     Depreciation .............................................................            23              27              11
     Amortization of investment tax credits ...................................           (21)            (20)            (22)
     New Jersey Corporate Business Tax ........................................            63               2               2
     Other ....................................................................           (15)             (8)             (5)
                                                                                     --------        --------        --------
          Subtotal ............................................................            50               1             (14)
                                                                                     --------        --------        --------
          Total income tax provisions .........................................          $428            $311            $298
                                                                                     ========        ========        ========
Effective income tax rate .....................................................          39.6%           35.1%           33.4%
</TABLE>

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


                                       99
<PAGE>

<TABLE>
<CAPTION>
                                                             1998           1997           1996
                                                           --------       --------       --------
                                                                   (MILLIONS OF DOLLARS)
Deferred Credits:
<S>                                                            <C>             <C>            <C>
     Additional tax depreciation and amortization ...          $(33)           $34            $39
     Leasing Activities .............................            39            114            136
     Conservation Costs .............................            36             27             15
     Deferred Fuel Costs--net .......................           (60)            (4)             6
     Pension Cost ...................................            26              8              3
     New Jersey Corporate Business Tax ..............            (5)             3              2
     Other ..........................................            (3)           (14)           (10)
                                                           --------       --------       --------
          Total .....................................           $--           $168           $191
                                                           ========       ========       ========
</TABLE>

      Between the years 1987 and 1994, PSEG'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. PSEG
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.

      PSEG 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,
1998, PSE&G had a deferred tax liability and an offsetting regulatory asset of
$704 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%.

      The following is an analysis of deferred income taxes:

                                                            DECEMBER 31,
                                                       ----------------------
                                                         1998          1997
                                                       --------      --------
DEFERRED INCOME TAXES                                   (MILLIONS OF DOLLARS)
Assets:
   Current (net) ................................           $30           $25
                                                       --------      --------
   Non-current:
     Unrecovered Investment Tax Credits .........           110           117
     Nuclear Decommissioning ....................            27            33
     Construction Period Interest and Taxes .....            13            15
     New Jersey Corporate Business Tax ..........            15            --
     Vacation Pay ...............................             6             7
     Development Fees ...........................            15            14
     Other ......................................            32            27
                                                       --------      --------
          Total Non-current .....................           218           213
                                                       --------      --------
          Total Assets ..........................           248           238
                                                       --------      --------
Liabilities:
   Non-current:
     Plant Related Items ........................         2,180         2,246
     Leasing Activities .........................           702           667
     Partnership Activities .....................           155           159
     Conservation Costs .........................            75            39
     Hope Creek O&M Costs .......................            19            21
     Deferred Electric Energy and Gas Costs .....            --            60
     Unamortized Debt Expense ...................            45            44
     Taxes Recoverable Through Future Rates (net)           242           249
     Other ......................................           184           122
                                                       --------      --------
          Total Non-current .....................         3,602         3,607
                                                       --------      --------
          Total Liabilities .....................         3,602         3,607
                                                       --------      --------
Summary -- Accumulated Deferred Income Taxes


                                      100
<PAGE>

   Net Current Assets ...........................            30            25
   Net Non-current Liability ....................         3,384         3,394
                                                       --------      --------
        Total ...................................        $3,354        $3,369
                                                       ========      ========

NOTE 13. PENSION, OTHER POSTRETIREMENT BENEFIT AND SAVINGS PLANS

      In February 1998, the FASB issued SFAS 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" (SFAS 132), which is effective for
financial statements for periods beginning after December 15, 1997. This
statement revises and standardizes disclosure requirements for pension and other
postretirement benefit plans but does not change the measurement or recognition
of those plans. Since SFAS 132 solely revises disclosure requirements, the
adoption of SFAS 132 did not have a material impact on the financial condition,
results of operations and net cash flows of PSEG and PSE&G. The disclosures
required by SFAS 132 are below.

PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS

<TABLE>
<CAPTION>
                                                                PENSION BENEFITS (B)         OTHER POSTRETIREMENT BENEFITS (C)
                                                           -----------------------------     ---------------------------------
(MILLIONS OF DOLLARS)                                         1998               1997             1998               1997
                                                           ----------         ----------       ----------         ----------
<S>                                                        <C>                <C>              <C>                <C>       
CHANGE IN BENEFIT OBLIGATION                                                                                  
    Benefit Obligation at Beginning of Year                $    2,123         $    2,065       $      724         $      734
    Service Cost                                                   60                 54               15                 12
    Interest Cost                                                 158                150               56                 54
    Special Termination Benefits (A)                               --                  2               --                 --
    Actuarial (Gain)/Loss                                         287                (11)              16                (43)
    Benefits Paid                                                (140)              (137)             (29)               (33)
                                                           ----------         ----------       ----------         ----------
    Benefit Obligation at End of Year                           2,488              2,123              782                724
                                                           ----------         ----------       ----------         ----------
                                                                                                              
CHANGE IN PLAN ASSETS                                                                                         
    Fair Value of Assets at Beginning of Year                   1,959              1,687               --                 --
    Actual Return on Plan Assets (Net of Expenses)                249                296                1                 --
    Employer Contributions                                        155                113               41                 33
    Benefits Paid                                                (140)              (137)             (29)               (33)
                                                           ----------         ----------       ----------         ----------
    Fair Value of Assets at End of Year                         2,223              1,959               13                 --
                                                           ----------         ----------       ----------         ----------
                                                                                                              
RECONCILIATION OF FUNDED STATUS                                                                               
    Funded Status                                                (265)              (164)            (769)              (724)
    Unrecognized Net                                                                                          
         Transition Obligation                                     37                 45              398                429
         Prior Service Cost                                       134                148               30                 32
         (Gain)/Loss                                              212                 (2)              (9)               (26)
                                                           ----------         ----------       ----------         ----------
    Net Amount Recognized                                  $      118         $       27       $     (350)        $     (289)
                                                           ==========         ==========       ==========         ==========
                                                                                                              
AMOUNTS RECOGNIZED IN STATEMENT OF FINANCIAL POSITION                                                         
        Prepaid Benefit Cost                                      129                 33               --                 --
         Accrued Benefit Cost                                     (42)               (34)            (350)              (289)
         Intangible Asset                                          26                 28               --                 --
         Accumulated Other Comprehensive Income                     5                 --               --                 --
                                                           ----------         ----------       ----------         ----------
    Net Amount Recognized                                  $      118         $       27       $     (350)        $     (289)
                                                           ==========         ==========       ==========         ==========
                                                                                                            
SEPARATE DISCLOSURE FOR PENSION PLANS WITH
ACCUMULATED BENEFIT OBLIGATION IN EXCESS OF PLAN
ASSETS
    :Projected Benefit Obligation at End of Year           $       49       $       39
    Accumulated Benefit Obligation at End of Year                  42               35
    Fair Value of Assets at End of Year                    $       --       $        1
</TABLE>


                                      101
<PAGE>

<TABLE>
<CAPTION>
                                                               PENSION BENEFITS (B)         OTHER POSTRETIREMENT BENEFITS (C)
                                                           -----------------------------       -----------------------------
                                                              1998               1997             1998               1997
                                                           ----------         ----------       ----------         ----------
<S>                                                        <C>                <C>              <C>                <C>       
COMPONENTS OF NET PERIODIC BENEFIT COST
   Service Cost                                            $       60         $       54       $       15         $       12
   Interest Cost                                                  158                150               56                 54
   Expected Return on Plan Assets                                (176)              (151)              --                 --
   Amortization of Net
        Transition Obligation                                       8                  8               30                 30
        Prior Service Cost                                         14                 14                2                  2
        (Gain)/Loss                                                --                 --               (1)                (2)
                                                           ----------         ----------       ----------         ----------
   Net Periodic Benefit Cost                               $       64         $       75       $      102         $       96
                                                           ==========         ==========       ==========         ==========

COMPONENTS OF TOTAL BENEFIT EXPENSE
   Net Periodic Benefit Cost                               $       64         $       75       $      102         $       96
   Additional Expense Under FAS 88 Due to Special
       Termination Benefits (A)                                    --                  2               --                 --
                                                           ----------         ----------       ----------         ----------
   Total Benefit Expense Before Effect of Regulatory
        Asset                                              $       64         $       77       $      102         $       96
                                                           ----------         ----------       ----------         ----------
   Effect of Regulatory Asset                                      --                 --               19                (63)
                                                           ----------         ----------       ----------         ----------
   Total Benefit Expense Including Effect of
   Regulatory
        Asset                                              $       64         $       77       $      121         $       33
                                                           ==========         ==========       ==========         ==========

COMPONENTS OF OTHER COMPREHENSIVE INCOME
   Decrease in Intangible Asset                            $       (1)        $       --                                    
   Increase in Additional Minimum Liability                        (4)                --                                    
                                                           ----------         ----------                                    
   Other Comprehensive Income                              $       (5)        $       --                                    
                                                           ----------         ----------                                    

WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31
   Discount Rate                                                 6.75%              7.25%            6.75%              7.25%
   Expected Return on Plan Assets                                9.00%              9.00%            9.00%                --
   Rate of Compensation Increase                                 4.69%              4.69%            4.69%              4.69%
   Rate of Increase in Health Benefit Costs
           Administrative Expense                                                                    5.00%              5.00%
        Pre-65 Medical Costs
             Immediate Rate                                                                         11.50%             12.00%
             Ultimate Rate                                                                           5.00%              5.00%
             Year Ultimate Rate Reached                                                              2011               2011
        Post-65 Medical Costs
             Immediate Rate                                                                          7.50%              8.00%
             Ultimate Rate                                                                           5.00%              5.00%
             Year Ultimate Rate Reached                                                              2003               2003
        Dental Costs
             Immediate Rate                                                                          5.50%              6.00%
             Ultimate Rate                                                                           5.00%              5.00%
             Year Ultimate Rate Reached                                                              1999               1999

EFFECT OF A CHANGE IN THE ASSUMED RATE OF INCREASE IN HEALTH BENEFIT COSTS
   Effect of a 1% Increase On
        Total of Service Cost and Interest Cost                                                         5                  6
        Postretirement Benefit Obligation                                                              60                 57
   Effect of a 1% Decrease On
        Total of Service Cost and Interest Cost                                                        (4)      (not available)
        Postretirement Benefit Obligation                                                             (51)      (not available)
</TABLE>

      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 


                                      102
<PAGE>

      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.

(B)   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.

(C)   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. 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 began amortizing the
      regulatory asset over 15 years beginning January 1, 1998. Also effective
      January 1, 1998, PSE&G began recording the annual SFAS 106 OPEB cost. OPEB
      costs during 1998 were $121 million, including $19 million of
      amortization. At December 31, 1998, the amount of the unfunded liability
      was $769 million.

      Also, on October 21, 1998, the BPU ordered PSE&G to fund in an external
      trust its annual OPEB obligation to the maximum extent allowable under
      Section 401(h) of the Internal Revenue Code. In 1998, $12 million was
      funded, as allowed. Remaining OPEB costs will not be funded in an external
      trust, as mandated by the BPU.

SAVINGS PLANS

      PSE&G sponsors two defined contribution plans. Represented employees of
PSE&G and Energy Holdings are eligible for participation in the PSE&G Employee
Savings Plan while all other employees of PSE&G and Energy Holdings are eligible
for participation in the PSE&G Thrift and Tax-Deferred Savings Plan. The two
principal defined contribution plans are PSE&G sponsored 401(k) plans to which
eligible employees may contribute up to 25% of their compensation. Employee
contributions up to 7% for represented employees and up to 8% for all other
employees are matched with employer contributions of cash or PSEG common stock
equal to 50% of such employee contributions. Employer contributions in excess of
5% and up to 7% are made in shares of PSEG common stock for represented
employees. Employer contributions in excess of 6% and up to 8% are made in
shares of PSEG common stock for all other employees. PSE&G billed Energy
Holdings for its portion of employer contributions. The amount expensed for the
matching provision of the plans was approximately $14 million, $15 million and
$14 million in 1998, 1997 and 1996, respectively.

NOTE 14. STOCK OPTIONS, STOCK PURCHASE PLAN AND STOCK REPURCHASE PROGRAM

STOCK OPTIONS

      PSEG and PSE&G apply APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations in accounting for its stock-based
compensation plans, which are described below. Accordingly, compensation expense
has been recognized for performance units and dividend equivalent rights issued
in tandem with an equal number of options under its fixed stock option grants.
Performance units and dividend equivalents provide cash payments, dependent upon
future financial performance of PSEG in comparison to other companies and
dividend payments by PSEG, to assist recipients in exercising options granted.
Prior to 1997, all options were granted in tandem with performance units and
dividend equivalent rights. In 1998 and 1997, there were 4,600 and 93,500
options, respectively, granted in tandem with performance units and dividend
equivalent rights. No compensation cost has been recognized for its fixed stock
option grants other than those previously described since the exercise price of
the stock options equals the market price of the underlying stock on the date of
grant. Had compensation costs for its stock option grants been determined based
on the fair value at the grant dates for awards under these plans in accordance
with SFAS No. 123 


                                      103
<PAGE>

"Accounting for Stock-Based Compensation," there would have been a charge to
PSEG's net income of approximately $0.4 million and $0.1 million in 1998 and
1997 respectively, with no impact on earnings per share.

      In 1989, PSEG adopted a plan (Long Term Incentive Plan) under which
non-qualified options to acquire shares of common stock may be granted to
officers and other key employees selected by the Organization and Compensation
Committee of PSEG's Board of Directors, the plan's administrative committee (the
"Committee"). Payment by option holders upon exercise of an option may be made
in cash or, with the consent of the Committee, by delivering previously acquired
shares of PSEG common stock or surrendering other vested options. In instances
where an optionee tenders shares acquired from a grant previously exercised that
were held for a period of less than six months, an expense will be recorded for
the difference between the fair market value at exercise date and the option
price. (To date, no such transaction has occurred.) Options are exercisable over
a period of time designated by the Committee (but not prior to one year from the
date of grant) and are subject to such other terms and conditions as the
Committee determines. Vesting schedules may be accelerated upon the occurrence
of certain events, such as a change in control. Options may not be transferred
during the lifetime of a holder.

      The Long Term Incentive Plan originally provided for the issuance of up to
500,000 shares of common stock and was subsequently amended to increase the
amount to 5,000,000. At December 31, 1998, there were 3,637,700 shares available
for future grants under the Long Term Incentive Plan.

      Since the Long Term Incentive Plan's inception, PSEG has delivered
treasury shares upon the exercise of stock options. The difference between the
cost of the treasury shares (purchased on the date of exercise) and the exercise
price of the options has been reflected in Stockholder's Equity except where
otherwise discussed.

      Changes in common shares under option for the three fiscal years in the
period ended December 31, 1998 are summarized as follows:

<TABLE>
<CAPTION>
                                             1998                               1997                                1996
                                 ----------------------------       ----------------------------       ----------------------------
                                                 WEIGHTED                           WEIGHTED                           WEIGHTED
                                                  AVERAGE                            AVERAGE                            AVERAGE
                                   SHARES      EXERCISE PRICE         SHARES      EXERCISE PRICE         SHARES      EXERCISE PRICE
                                 ----------------------------       ----------------------------       ----------------------------
<S>                               <C>              <C>                 <C>            <C>                 <C>            <C>       
Beginning of year                   430,300        $    29.26           84,000        $    29.38           77,200        $    29.15
Granted                             841,600             39.16          371,000             29.36           28,700             30.88
Exercised                           (28,100)            26.76          (21,500)            31.38          (21,900)            30.56
Canceled                                 --                --           (3,200)            28.70               --                --
                                 ----------        ----------       ----------        ----------       ----------        ----------
End of year                       1,243,800             36.01          430,300             29.26           84,000             29.38
                                 ----------        ----------       ----------        ----------       ----------        ----------
Exercisable at end of year          100,963        $    29.47            6,000        $    26.45            6,000        $    26.45
                                 ----------        ----------       ----------        ----------       ----------        ----------
                                 --------------------------------------------------------------------------------------------------
Weighted average fair
value of options granted
during the year                                    $     4.83                         $     3.60                         $     6.71
                                                   ==========                         ==========                         ==========
</TABLE>

      For this purpose, the fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants in 1998, 1997 and 1996,
respectively: expected volatility of 21.41%, 17.15% and 12.92%, risk free
interest rates of 4.48%, 5.14% and 5.28%, expected lives of 4 years, 3.75 years
and 3.75 years. Additional weighted averages assumptions include for grants in
1998, 1997 and 1996 a dividend yield of 0% with respect to the dividend
equivalent feature of the tandem grants. There was a dividend yield of 5.51% in
1998 and 7.31% in 1997 on the non-tandem grants. There were no non-tandem grants
issued in 1996.


                                      104
<PAGE>

      The following table provides information about options outstanding at
December 31, 1998:

<TABLE>
<CAPTION>
                         OPTIONS OUTSTANDING                                       OPTIONS EXERCISABLE
-----------------------------------------------------------------------   -------------------------------------
                                       WEIGHTED           WEIGHTED                             WEIGHTED
                                       AVERAGE            AVERAGE                              AVERAGE
RANGE OF           OUTSTANDING AT      REMAINING          EXERCISE         EXERCISABLE AT      EXERCISE
EXERCISE PRICES    DECEMBER 31, 1998   CONTRACTUAL LIFE   PRICE            DECEMBER 31, 1998   PRICE
-----------------------------------------------------------------------   -------------------------------------
<S>                        <C>               <C>                <C>                  <C>                <C>   
  $24.00-$30.00              384,900         8.78 years         $29.34               100,963            $29.47
  $30.01-$35.00               31,900         7.24 years          31.04                  --                --
  $35.01-$40.00              827,000         9.93 years          39.31                  --                --
-----------------------------------------------------------------------   -------------------------------------
  $24.00-$40.00            1,243,800         9.50 years         $36.01               100,963            $29.47
-----------------------------------------------------------------------   -------------------------------------
</TABLE>

      In June 1998, the Committee granted 150,000 shares of common stock to a
key executive. As of December 31, 1998 all of the shares remained outstanding.
These shares are subject to restrictions on transfer and subject to risk of
forfeiture until earned by continued employment. The shares vest on a staggered
schedule beginning on March 31, 2002 and become fully vested on March 31, 2005.
The unearned compensation related to this restricted stock grant as of December
31, 1998 is approximately $5 million and is included in retained earnings on the
consolidated balance sheets.

      PSEG's Stock Plan for Outside Directors provides non-employee directors,
as part of their annual retainer, 300 shares of common stock, which will be
increased to 600 shares beginning in 1999. With certain exceptions, the
restrictions on the stock provide that the shares are subject to forfeiture if
the individual ceases to be a director at any time prior to the Annual Meeting
of Stockholders following his or her 70th birthday. These shares are recorded as
compensation expense in the consolidated statements of income.

STOCK PURCHASE PLAN

      PSEG and PSE&G have an employee stock purchase plan for all eligible
employees. Under the plan, shares of the common stock may be purchased at 95% of
the fair market value. Employees may purchase shares having a value not
exceeding 10% of their base pay. During 1998, 1997 and 1996, employees purchased
102,387, 144,377 and 153,810 shares at an average price of $36.36, $26.39 and
$27.24 per share, respectively. At December 31, 1998, 1,289,780 shares were
available for future issuance under this plan.

STOCK REPURCHASE PROGRAM

      In September 1998, PSEG announced a stock repurchase program whereby the
Board of Directors authorized the repurchase of up to 10 million shares of its
common stock from time to time, subject to market conditions and other relevant
factors affecting PSEG and PSE&G. Share repurchases are planned when market and
business conditions are deemed favorable. The repurchased shares have been held
as treasury stock. As of December 31, 1998, PSEG had repurchased 5,314,100
shares at a cost of approximately $207 million. As of February 8, 1999, PSEG had
repurchased a total of 10 million shares at a cost of approximately $391 million
under this program.

NOTE 15. FINANCIAL INFORMATION BY BUSINESS SEGMENTS

      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. 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. Since SFAS 131 solely revises disclosure requirements, the adoption
of SFAS 131 did not have a material impact on the financial condition, results
of operations and net cash flows of PSEG or PSE&G. The disclosure under SFAS 131
is below.


                                      105
<PAGE>

      BASIS OF ORGANIZATION

      The reportable segments disclosed herein were determined based on a
variety of factors including the regulatory environment and the types of
products and services offered. With the transition into a deregulated
environment, it is likely that this basis of organization will change.

      ELECTRIC

      The electric segment of PSE&G's business generates revenue from its
bundled tariff rates under which it provides generation, transmission and
distribution energy services for its residential, commercial and industrial
customers in New Jersey. Revenues are also generated from a variety of wholesale
energy sales and other ancillary and miscellaneous services.

      GAS

      The gas segment of PSE&G's business generates revenue from its bundled
tariff rates under which it provides for the sale and distribution of gas to its
residential, commercial and industrial customers. Revenues are also generated
from a variety of other activities such as capacity sales, off-system sales,
sundry sales and other miscellaneous services.

      RESOURCES

      Resources receives revenues from its passive investments including
leveraged leases, limited partnerships, leveraged buyout funds and marketable
securities.

      OTHER NON-UTILITY

      PSEG's non-utility activities, other than Resources, generate revenues
from Global, Energy Technologies and EGDC. Global receives revenues from its
investment, development and operation of projects in the generation and
distribution of energy both domestically and internationally. Energy
Technologies receives revenues from a variety of energy related services to
industrial and commercial customers. EGDC receives revenues from its
nonresidential real estate development and investment business.


                                      106
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                        OTHER
                                                                                     NON-UTILITY    CONSOLIDATED
(MILLIONS OF DOLLARS)                                   ELECTRIC           GAS        RESOURCES    ACTIVITIES (A)      TOTAL
                                                        ----------------------------------------------------------------------
<S>                                                     <C>             <C>            <C>            <C>             <C>     
For the Year Ended December 31, 1998:
    Total Operating Revenues ....................       $  4,031        $  1,559       $    145       $    196        $  5,931
    Depreciation, Depletion and Amortization ....            565              93              1             10             669
    Interest Income .............................             19               1              9              3              32
    Net Interest Charges ........................            353              70             49             76             548
    Income Taxes ................................            359              39             27             (5)            420
    Net income from equity method subsidiaries ..             --              --             35            114             149
    Operating Income Before Income Taxes ........          1,257             159             86            104           1,606
    Segment Net Income (Loss) ...................       $    552        $     52       $     56       $    (16)       $    644
                                                        ========        ========       ========       ========        ========

As of December 31, 1998:
    Total Assets ................................       $ 12,266        $  2,482       $  1,809       $  1,440        $ 17,997
    Investments in equity method subsidiaries ...             --              --            383            143             526
    Gross Additions to Long-Lived Assets ........       $    383        $    152       $     --       $     10        $    545
                                                        ========        ========       ========       ========        ========

For the Year Ended December 31, 1997:
    Total Operating Revenues ....................       $  3,918        $  1,937       $    144       $    101        $  6,100
    Depreciation, Depletion and Amortization ....            531              85              1             13             630
    Interest Income .............................             13               1              4              3              21
    Net Interest Charges ........................            345              79             46             39             509
    Income Taxes ................................            224              84             29             (1)            336
    Net income from equity method subsidiaries ..             --              --             49             79             128
    Extraordinary items .........................            (53)             --             --             --             (53)
    Operating Income Before Income Taxes ........            978             328             88             56           1,450
    Segment Net Income (Loss) ...................       $    361        $    167       $     59       $    (27)       $    560
                                                        ========        ========       ========       ========        ========

As of December 31, 1997:
    Total Assets ................................       $ 12,448        $  2,472       $  1,616       $  1,407        $ 17,943
    Investments in equity method subsidiaries ...             --              --            407            274             681
    Gross Additions to Long-Lived Assets ........       $    395        $    147       $     --       $      6        $    548
                                                        ========        ========       ========       ========        ========

For the Year Ended December 31, 1996:
    Total Operating Revenues ....................       $  3,944        $  1,881       $    143       $     73        $  6,041
    Depreciation, Depletion and Amortization ....            517              87              2              1             607
    Interest Income .............................              4               1             11              4              20
    Net Interest Charges ........................            321              89             43             14             467
    Income Taxes ................................            217              48             28              2             295
    Net income from equity method subsidiaries ..             --              --             73             48             121
    Operating Income Before Income Taxes ........            978             234             85             55           1,352
    Segment Net Income ..........................       $    438        $     97       $     57       $     20        $    612
                                                        ========        ========       ========       ========        ========

As of December 31, 1996:
    Total Assets ................................       $ 12,406        $  2,393       $  1,443       $    673        $ 16,915
    Investments in equity method subsidiaries ...             --              --            408            225             633
    Gross Additions to Long-Lived Assets ........       $    463        $    123       $     --       $      3        $    589
                                                        ========        ========       ========       ========        ========
</TABLE>

(A)   Other Non-utility Activities include amounts applicable to PSEG, the
      parent corporation, and Energy Holdings, excluding Resources.


                                      107
<PAGE>

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

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                   --------------------------------------------
                                                      1998             1997             1996
                                                   ----------       ----------       ----------
                                                              (MILLIONS OF DOLLARS)
<S>                                                <C>              <C>              <C>       
Utility Plant--Original Cost
   Electric Plant in Service:
     Fossil Production .....................       $    2,802       $    1,840       $    1,843
     Nuclear Production ....................            6,246            6,162            6,001
     Transmission ..........................            1,200            1,163            1,146
     Distribution ..........................            3,545            3,315            3,171
     Other .................................              276            1,212            1,153
                                                   ----------       ----------       ----------
          Total Electric Plant in Service ..           14,069           13,692           13,314
                                                   ----------       ----------       ----------
   Gas Plant in Service:
     Transmission ..........................               69               67               67
     Distribution ..........................            2,608            2,472            2,358
     Other .................................              170              158              131
                                                   ----------       ----------       ----------
          Total Gas Plant in Service .......            2,847            2,697            2,556
                                                   ----------       ----------       ----------
   Common Plant in Service:
     Capital Leases ........................               59               59               59
     General ...............................              519              499              471
                                                   ----------       ----------       ----------
          Total Common Plant in Service ....              578              558              530
                                                   ----------       ----------       ----------
               Total .......................       $   17,494       $   16,947       $   16,400
                                                   ==========       ==========       ==========
</TABLE>

      Geographic Information for PSEG is disclosed below. PSE&G does not have
foreign investments or operations.

                                                IDENTIFIABLE
                               REVENUES (1)        ASSETS
                                ----------       ----------
United States                   $    5,831       $   16,387
Foreign Countries                      100            1,610
                                ----------       ----------
              Total             $    5,931       $   17,997
                                ==========       ==========

Identifiable Assets from Foreign Countries include amounts from:
      Argentina                                                          $307
      Brazil (2)                                                          482
      Netherlands                                                         400

(1)   Revenues are attributed to countries based on the locations of the
      investments.

(2)   Amount is net of foreign currency translation adjustment of $39 million.

NOTE 16. DISCONTINUED OPERATIONS

      On July 31, 1996, Energy Holdings 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.


                                      108
<PAGE>

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

                                               (7 MONTHS)     
                                               ----------     
                                                  1996
                                                  ----
                                         (MILLIONS OF DOLLARS)
                                         
Revenues ...............................        $ 128
Operating income .......................           24
Earnings before income taxes ...........            9
Income taxes ...........................           (2)
Net income .............................           11

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.

<TABLE>
<CAPTION>
                                                          PLANT--DECEMBER 31, 1998
                                      -------------------------------------------------------------
                                       OWNERSHIP     PLANT IN       ACCUMULATED       PLANT UNDER
                                        INTEREST      SERVICE       DEPRECIATION      CONSTRUCTION
                                      ------------  ------------   ---------------   --------------
                                                         (MILLIONS OF DOLLARS)
<S>                                     <C>             <C>             <C>                <C>
Coal Generating
     Conemaugh....................       22.50%          $199             $56              $2
     Keystone.....................       22.84%           124              44               3
Nuclear Generating
     Peach Bottom.................       42.49%           808             395              28
     Salem........................       42.59%         1,255             483              12
     Hope Creek...................       95.00%         4,144           1,439              26
     Nuclear Support Facilities...      Various           201              52               7
Pumped Storage Facilities
     Yards Creek..................       50.00%            28              11               4
Transmission Facilities...........      Various           124              43              --
Merrill Creek Reservoir...........       13.91%            37              17              --
Linden SNG Plant..................       90.00%            16              23              --
</TABLE>

NOTE 18. SELECTED QUARTERLY DATA (UNAUDITED)

      The information shown below, in the opinion of PSEG, 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,
                            --------------------     ---------------------    --------------------    ---------------------
                              1998        1997         1998         1997        1998        1997        1998         1997
                            --------    --------     --------     --------    --------    --------    --------     --------
                                                              (MILLIONS WHERE APPLICABLE)
<S>                          <C>         <C>          <C>          <C>         <C>         <C>         <C>          <C>   
Operating Revenues.........  $1,632      $1,701       $1,348       $1,308      $1,425      $1,448      $1,526       $1,643
Operating Income...........     318         309          251          219         312         301         305          286
Net Income.................     191         140          122           91         180         176         151          153
Earnings per Share
  (Basic and Diluted)......    0.82        0.60         0.53         0.39        0.78        0.76        0.66         0.66
Weighted Average Common
  Shares and Potential
  Dilutive Effect of Stock
  Options Outstanding.....      232         232          232          232         232         232         228          232
</TABLE>


                                      109
<PAGE>

NOTE 19. ACCOUNTING MATTERS

      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. This
authoritative pronouncement will dictate the timing for the accounting for the
outcome of the Energy Master Plan Proceedings.

      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 of these accounting standards to PSEG and PSE&G will be
determined based on the outcome of the Energy Master Plan Proceedings. Under
PSE&G's proposal and the Energy Competition Act, 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 Proceedings on PSEG's and PSE&G's future financial condition,
results of operations and net cash flows. However, depending on regulatory
actions taken in New Jersey with respect to electric utility deregulation, there
could be a material adverse effect on such results.

      In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133), which is effective for financial
statements for all fiscal quarters of fiscal years beginning after June 15,
1999. SFAS 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires an entity to recognize all
derivatives, within the scope of this statement, as assets or liabilities on the
balance sheet at fair value. Also, derivatives that are not hedges must be
adjusted to fair value through income. If a derivative is a hedge, changes in
the fair value of the derivative will either be offset against the change in
fair value of the hedged asset, liability or firm commitment through earnings or
be recognized in other comprehensive income until the hedged item is recognized
in earnings, depending on the nature of the hedge. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
PSEG and PSE&G are currently evaluating the impact of SFAS 133.

      In November 1998, the EITF issued EITF 98-10, "Accounting for Contracts
Involved in Energy Trading and Risk Management Activities." EITF 98-10 is
effective for financial statements issued for fiscal years beginning after
December 15, 1998. EITF 98-10 requires that energy trading contracts be marked
to market with gains and losses included in earnings and separately disclosed in
the financial statements and footnotes. The EITF described indicators that
should be considered in determining whether an identifiable operation enters
into contracts that would fall under the scope of this issue. PSE&G has
determined that EITF 98-10 does apply to its operations and will be adopted in
January 1999. The impact of applying EITF 98-10 is not expected to have a
material adverse impact on the financial condition, results of operations and
net cash flows of PSEG and PSE&G.

      In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" (SOP 98-1), which is
effective for financial statements for fiscal years beginning after December 15,
1998. SOP 98-1 provides criteria for capitalizing certain internal-use software
costs. The adoption of SOP 98-1 is not expected to have a material impact on the
financial condition, results of operations and net cash flows of PSEG and PSE&G.


                                      110
<PAGE>

      In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities" (SOP 98-5), which is effective for financial
statements for fiscal years beginning after December 15, 1998. SOP 98-5 requires
the expensing of the costs of start-up activities as incurred. Additionally,
previously capitalized start-up costs must be written off as a Cumulative Effect
of a Change in Accounting Principle. The adoption of SOP 98-5 is not expected to
have a material impact on the financial condition, results of operations and net
cash flows of PSEG and PSE&G.

NOTE 20. SUBSEQUENT EVENTS

      On January 1, 1999, the outstanding stock of PSCRC was dividended by PSE&G
to PSEG, which contributed such stock indirectly to Energy Technologies as an
additional equity investment. PSCRC had earnings/(losses) of $2 million, $0.2
million and $(9) million for the years ended December 31, 1998, 1997 and 1996,
respectively. At December 31, 1998 and 1997, PSCRC had assets of $89 million and
$117 million, respectively. Future earnings and assets will be reflected in the
consolidated financial statements of Energy Technologies, Energy Holdings and
PSEG.

      In January 1999, Brazil abandoned its managed devaluation strategy and
allowed its currency, the Real, to float against other currencies. As of January
31, 1999, the Real has devalued approximately 40% against the U.S. dollar since
December 31, 1998. Based on the December 31, 1998 Brazilian investment balance
of $482 million, there was a 40% devaluation as of January 31, 1999 which
resulted in a charge of $172 million to cumulative foreign currency translation
adjustment (a separate component of stockholders' equity). PSEG cannot predict
to what extent, if any, further devaluation may occur, and, therefore, cannot
predict the impact of potential devaluation of currencies on PSEG's results of
operations, financial condition and net cash flows. However, assuming no further
significant devaluation, PSEG does not expect this to have a material adverse
effect on its 1999 results of operations, financial condition or net cash flows.
For additional information, see Note 15. Financial Information by Business
Segment. As PSEG increases its international investments, the financial
statements of PSEG will be increasingly affected by changes in the global
economy.

PSE&G

      Except as modified below, the Notes to Consolidated Financial Statements
of PSEG 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.  Regulatory Issues
     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 and Risk Management
     Note 10.  Commitments and Contingent Liabilities
     Note 11.  PSE&G Nuclear Decommissioning
     Note 12.  Income Taxes
     Note 13.  Pension, Other Postretirement Benefit and Savings Plans
     Note 14.  Stock Options, Stock Purchase Plan and Stock Repurchase Program
     Note 15.  Financial Information by Business Segments
     Note 17.  Jointly Owned Facilities--Utility Plant
     Note 19.  Accounting Matters
     Note 20.  Subsequent Events


                                      111
<PAGE>

NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      PSEG 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, 1998, 1997 and
1996, 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, 1998 and 1997 balances consist primarily of working
funds.


                                      112
<PAGE>

NOTE 12. INCOME TAXES

      A reconciliation of reported Net Income with pretax income and of 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>
                                                                              1998            1997            1996
                                                                           ----------      ----------      ----------
                                                                                       (MILLIONS OF DOLLARS)
<S>                                                                            <C>               <C>             <C> 
Net Income ...........................................................           $604            $528            $535
                                                                           ----------      ----------      ----------
Income taxes:
   Operating income:
     Current provision-Federal and State .............................            453             292             241
     Provision for deferred income taxes--net(A)-Federal and State ...            (35)             34              43
     Investment tax credits--net .....................................            (20)            (19)            (19)
                                                                           ----------      --------------------------
     Total included in operating income ..............................            398             307             265
Miscellaneous other income:
     Current provision-Federal and State .............................              8             (24)              1
     Provision for deferred income taxes(A)-Federal and State ........             (1)             --              --
     SFAS 90 deferred income taxes(A) ................................              1               1               2
                                                                           ----------      ----------      ----------
          Total income tax provisions ................................            406             284             268
                                                                           ----------      ----------      ----------
Pretax income ........................................................         $1,010            $812            $803
                                                                           ----------      ----------      ----------
</TABLE>

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

<TABLE>
<CAPTION>
                                                                              1998            1997            1996
                                                                           ----------      ----------      ----------
                                                                                      (MILLIONS OF DOLLARS)
<S>                                                                              <C>             <C>             <C> 
Tax computed at the statutory rate ...................................           $354            $284            $281
                                                                           ----------      ----------      ----------
Increase (decrease) attributable to flow through of certain tax
adjustments:
     Depreciation ....................................................             23              27              11
     Amortization of investment tax credits ..........................            (20)            (19)            (19)
     New Jersey Corporate Business Tax ...............................             59              --              --
     Other ...........................................................            (10)             (8)             (5)
                                                                           ----------      ----------      ----------
          Subtotal ...................................................             52              --             (13)
                                                                           ----------      ----------      ----------
          Total income tax provisions ................................           $406            $284            $268
                                                                           ==========      ==========      ==========
Effective income tax rate ............................................           40.2%           35.0%           33.3%
</TABLE>

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

<TABLE>
<CAPTION>
                                                                              1998            1997            1996
                                                                           ----------      ----------      ----------
                                                                                      (MILLIONS OF DOLLARS)
<S>                                                                              <C>              <C>             <C>
Deferred Credits:
     Additional tax depreciation and amortization ....................           $(28)            $16             $31
     Conservation Costs ..............................................             36              27              15
     Deferred Fuel Costs--net ........................................            (60)             (4)              6
     Pension Cost ....................................................             26               8               3
     New Jersey Corporate Business Tax ...............................             (8)             --              --
     Other ...........................................................             (1)            (12)            (10)
                                                                           ----------      ----------      ----------
          Total ......................................................           $(35)            $35             $45
                                                                           ==========      ==========      ==========
</TABLE>


                                      113
<PAGE>

SFAS 109

      The following is an analysis of deferred income taxes:

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                            -------------------------
                                                               1998           1997
                                                            ----------     ----------
DEFERRED INCOME TAXES                                         (MILLIONS OF DOLLARS)
<S>                                                             <C>            <C>
Assets:
   Current (net) ......................................            $30            $25
   Non-current:
     Unrecovered Investment Tax Credits ...............            110            117
     Nuclear Decommissioning ..........................             27             33
     Construction Period Interest and Taxes ...........             13             15
     New Jersey Corporate Business Tax ................             15             --
     Vacation Pay .....................................              6              7
     Other ............................................             22             17
                                                            ----------     ----------
        Total Non-current .............................            193            189
                                                            ----------     ----------
        Total Assets ..................................            223            214
                                                            ----------     ----------
Liabilities:
   Non-current:
     Plant Related Items ..............................          2,212          2,246
     Conservation Costs ...............................             75             39
     Hope Creek O&M Costs .............................             19             21
     Deferred Electric Energy & Gas Costs .............             --             60
     Unamortized Debt Expense .........................             45             44
     Taxes Recoverable Through Future Rates (Net) .....            242            249
     Other ............................................            127             99
                                                            ----------     ----------
        Total Non-current .............................          2,720          2,758
                                                            ----------     ----------
        Total Liabilities .............................          2,720          2,758
                                                            ----------     ----------
Summary--Deferred Income Taxes
   Net Current Assets .................................             30             25
   Net Non-current Liability ..........................          2,527          2,569
                                                            ----------     ----------
        Total .........................................         $2,497         $2,544
                                                            ==========     ==========
</TABLE>

      The balance of Federal income tax payable by (receivable from) PSE&G to
PSEG was $9 million and $5 million as of December 31, 1998 and December 31,
1997, 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,
                              -----------------     -----------------     -----------------     -----------------
                               1998       1997       1998       1997       1998       1997       1998       1997
                              ------     ------     ------     ------     ------     ------     ------     ------
<S>                           <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>   
                                                            (MILLIONS OF DOLLARS)
Operating Revenues ......     $1,519     $1,662     $1,258     $1,255     $1,416     $1,377     $1,397     $1,561
Operating Income ........        259        292        208        195        321        264        231        247
Net Income ..............        157        140        111         87        217        159        119        142
Earnings Available to
  PSEG ..................        155        136        109         81        215        157        116        139
</TABLE>


                                      114
<PAGE>

                    FINANCIAL STATEMENT RESPONSIBILITY--PSEG

      Management of PSEG is responsible for the preparation, integrity and
objectivity of the consolidated financial statements and related notes of PSEG.
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 PSEG'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 PSEG'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 PSEG 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, 1998, the
Corporation's system of internal accounting controls is adequate to accomplish
the objectives discussed herein.

      The Board of Directors of PSEG carries out its responsibility of financial
overview through its Audit Committee, which presently consists of five directors
who are not employees of PSEG 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 12, 1999


                                      115
<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, 1998, 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 PSEG, which presently consists of five
directors who are not employees of PSE&G or any of its affiliates. The PSEG
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 12, 1999


                                      116
<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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998 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, 1996,
1995, and 1994, and the related consolidated statements of income, common
stockholders' equity and cash flows for the years ended December 31, 1995 and
1994 (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, 1998 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 12, 1999


                                      117
<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, 1998 and
1997, 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, 1998. 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, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998 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, 1996,
1995, and 1994, and the related consolidated statements of income, common
stockholder's equity and cash flows for the years ended December 31, 1995 and
1994 (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, 1998 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 12, 1999


                                      118
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

      PSEG and PSE&G, none.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS

DIRECTORS OF THE REGISTRANTS

      PSEG

      The information required by Item 10 of Form 10-K with respect to present
directors who are nominees for election as directors at PSEG's Annual Meeting of
Stockholders to be held on April 20, 1999, and directors whose terms will
continue beyond the meeting, is set forth under the heading "Election of
Directors" in PSEG'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 2, 1999 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 20, 1999, 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 54. Member of
Executive Committee. Has been President and Chief Operating Officer of PSE&G
since 1991. Director of PSEG. Director of Sealed Air Corporation, The Trust
Company of New Jersey, United Water Resources Inc. and Horizon Blue Cross Blue
Shield of New Jersey.

      E. JAMES FERLAND has been a director since 1986. Age 57. Chairman of
Executive Committee. Chairman of the Board, President and Chief Executive
Officer of PSEG 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 Energy Holdings since June 1989. Director of PSEG and of
Energy Holdings. Director of Foster Wheeler Corporation and The HSB Group, Inc.

      CONRAD K. HARPER has been a director since May 1997. Age 58. Director of
PSEG. 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 68. Member of Executive
Committee. Was previously a director from 1981 to February 1988. Director of
PSEG. Retired. Until retirement was Chairman, Board of Directors of Hoffmann-La
Roche Inc., Nutley, New Jersey (prescription pharmaceuticals, vitamins and fine
chemicals, and diagnostic products and services) from January 1993 to September
1993 and President and Chief Executive Officer from 1980 to December 1992.
Director of Humana Inc., AXYS Pharmaceuticals, Inc., Medarex, Inc., Covance Inc.
and V.I. Technologies, Inc.

      MARILYN M. PFALTZ has been a director since 1998 and was a Director of
Energy Holdings from 1989 to 1998. Age 66. Director of PSEG. Has been a partner
of P and R Associates, Summit, New Jersey (communication specialists), since
1968. Director of AAA National Association and Beacon Trust Company.

      FORREST J. REMICK has been a director since 1995. Age 68. Director of
PSEG. 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.


                                      119
<PAGE>

EXECUTIVE OFFICERS OF THE REGISTRANTS

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

<TABLE>
<CAPTION>
                                    AGE                                                             EFFECTIVE DATE
NAME                         DECEMBER 31, 1998                   OFFICE                    FIRST ELECTED TO PRESENT POSITION
--------------------------   -----------------   -------------------------------------   -----------------------------------
<S>                                 <C>          <C>                                     <C>
E. James Ferland..........          56           Chairman of the Board, President and    July 1986 to present
                                                 Chief Executive Officer (PSEG)

                                                 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 (Energy Holdings)

Lawrence R. Codey.........          54           President and Chief Operating Officer   September 1991 to present
                                                 (PSE&G)

Robert C. Murray..........          53           Vice President and Chief Financial      January 1992 to present
                                                 Officer (PSEG)

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

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

Robert J. Dougherty, Jr...          47           President and Chief Operating Officer   January 1997 to present
                                                 (Energy Holdings)

                                                 President (Enterprise Ventures and      February 1995 to December 1996
                                                 Services Corporation)

                                                 Senior Vice President--Electric         September 1991 to February 1995
                                                 (PSE&G)

Harold W. Keiser..........          55           Chief Nuclear Officer & President--     May 1998 to present
                                                 Nuclear Business Unit (PSE&G)

                                                 Executive Vice President--Nuclear       January 1998 to April 1998
                                                 Business Unit (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

R. Edwin Selover..........          53           Vice President and General Counsel      April 1988 to present
                                                 (PSEG)

                                                 Senior Vice President and General       January 1988 to present
                                                 Counsel (PSE&G)
</TABLE>


                                      120
<PAGE>

<TABLE>
<CAPTION>
                                    AGE                                                             EFFECTIVE DATE
NAME                         DECEMBER 31, 1998                   OFFICE                    FIRST ELECTED TO PRESENT POSITION
--------------------------   -----------------   -------------------------------------   -----------------------------------
<S>                                 <C>          <C>                                     <C>

Alfred C. Koeppe............        52           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

Frank Cassidy..............         51           President                               November 1996 to present
                                                 (Energy Technologies)

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

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

Eileen A. Moran.............        44           President (Resources)                   May 1990 to present

                                                 President (EGDC)                        January 1997 to present

Michael J. Thomson..........        40           President (Global)                      January 1997 to present

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

                                                 Senior Vice President (Global)          July 1993 to February 1994

Patricia A. Rado...........         56           Vice President and Controller           April 1993 to present
                                                 (PSEG)

                                                 Vice President and Controller           April 1993 to present
                                                 (PSE&G)
</TABLE>

ITEM 11. EXECUTIVE COMPENSATION

PSEG

      The information required by Item 11 of Form 10-K is set forth under the
heading "Executive Compensation" in PSEG's definitive Proxy Statement for the
Annual Meeting of Stockholders to be held April 20 1999 which definitive Proxy
Statement is expected to be filed with the Securities and Exchange Commission on
or about March 2, 1999 and such information set forth under such heading is
incorporated herein by this reference thereto.

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,
1998 is set forth below. Amounts shown were paid or awarded for all services
rendered to PSEG and its subsidiaries and affiliates including PSE&G.


                                      121
<PAGE>

<TABLE>
<CAPTION>
                                                  SUMMARY COMPENSATION TABLE
                                                                                                 LONG TERM COMPENSATION
                                                                                 --------------------------------------------------
                                                     ANNUAL COMPENSATION                   AWARDS            PAYOUTS
                                                 ----------------------------    -----------------------------------
                                                                 BONUS/ANNUAL                                  LTIP     ALL OTHER
                                                    SALARY         INCENTIVE      RESTRICTED      OPTIONS    PAYOUTS   COMPENSATION
NAME AND PRINCIPAL POSITION               YEAR         $          AWARD($)(1)      STOCK ($)      (#)(2)      ($)(3)      ($)(4)
---------------------------------------   ----      -------      ------------    ------------     -------    -------   ------------
<S>                                       <C>       <C>             <C>          <C>       <C>    <C>         <C>         <C>   
E. James Ferland.......................   1998      762,070         621,400      5,184,375 (5)    150,000     92,684      28,647
Chairman of the Board and Chief           1997      712,261         425,200              0        118,000    108,702      15,747
Executive Officer of PSE&G                1996      712,261         279,811              0          6,500    168,084      10,994
                                                                                               
Lawrence R. Codey......................   1998      455,250         274,200              0         75,000     44,744       5,043
President and Chief Operating             1997      435,327         249,400              0         59,200     50,325       5,459
Officer of PSE&G                          1996      435,327         141,968              0          3,000     81,144       5,934
                                                                                               
Robert C. Murray.......................   1998      373,564         225,000              0         50,000     31,960       4,962
Executive Vice President - Finance        1997      345,671         154,900              0         32,000     36,234       5,260
of PSE&G                                  1996      332,721          83,887              0          2,000     57,960       5,248
                                                                                               
Harold W. Keiser.......................   1998      308,047         155,400              0         37,500          0       5,888
Chief Nuclear Officer and President                                                            
Nuclear Business Unit of PSE&G (6)                                                             
                                                                                               
R. Edwin Selover.......................   1998      293,871         154,900              0         25,000     22,372      19,210
Senior Vice President and General         1997      278,928         117,900              0         14,300     26,169       9,065
Counsel of PSE&G                          1996      268,967          59,828              0          1,400     40,572       7,172
</TABLE>

(1)   Amount awarded in given year was earned under Management Incentive
      Compensation Plan (MICP) and determined in following year based on
      individual performance and financial and operating performance of PSEG and
      PSE&G, including comparison to other companies.

(2)   All grants of options to purchase shares of PSEG Common Stock were made
      under the Long-Term Incentive Plan (LTIP). For 1998, all options granted
      were non-tandem (as described below) except for 2,500 options granted to
      Mr. Keiser. For 1997, 100,000; 50,000; 25,000 and 10,000 were non-tandem
      and 18,000; 9,200; 7,000 and 4,300 of the options granted to Messrs.
      Ferland, Codey, Murray, and Selover, respectively, were tandem. For 1996,
      all options granted were in tandem with performance units and dividend
      equivalents. Tandem grants are made with an equal number of performance
      units and dividend equivalents which may provide cash payments, dependent
      upon future financial performance of PSEG in comparison to other companies
      and dividend payments by PSEG, to assist recipients in exercising options
      granted. The tandem 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. Non-tandem grants are made
      without 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.

(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               KEISER             SELOVER
                           --------------     ----------------      ---------------      --------------      --------------
                           THRIFT    MICP     THRIFT     MICP       THRIFT     MICP      THRIFT    MICP      THRIFT    MICP
                             ($)     ($)        ($)      ($)          ($)       ($)        ($)      ($)       ($)      ($)
                           ------   -----     ------     -----      ------     ----      ------    ----      -----    -----
<S>                         <C>       <C>      <C>         <C>       <C>        <C>       <C>       <C>      <C>        <C>
1998.....................   4,801     383      4,802       241       4,805      157       5,888       0      4,806      112
1997.....................   4,801   1,122      4,802       657       4,802      458          --      --      4,802      325
1996.....................   4,150   2,861      4,502     1,432       4,502      746          --      --      4,502    1,272
</TABLE>

      In addition, 1998, 1997 and 1996 amounts include for Mr. Ferland $23,463,
      $9,824 and $3,983 and for Mr. Selover $14,292, $3,938 and $1,398,
      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) 


                                      122
<PAGE>

      of the Internal Revenue Code. Under PSE&G's Deferred Compensation Plan,
      interest is paid at prime rate plus 1/2%, adjusted quarterly.

(5)   Value as of original grant date, based on the closing price on the New
      York Stock Exchange on June 16, 1998, with respect to an award to Mr.
      Ferland of 150,000 shares of restricted stock, of which 60,000 shares vest
      in 2002; 20,000 shares vest in 2003; 30,000 shares vest in 2004 and 40,000
      shares vest in 2005. Dividends on the entire grant are paid in cash from
      the date of grant.

(6)   Mr. Keiser was first employed in January 1998.

                                       OPTION GRANTS IN LAST FISCAL YEAR (1998)

<TABLE>
<CAPTION>
                                  NUMBER OF        % OF TOTAL
                                  SECURITIES         OPTIONS
                                  UNDERLYING        GRANTED TO       EXERCISE OR
                                   OPTIONS         EMPLOYEES IN      BASE PRICE      EXPIRATION           GRANT DATE
NAME                               GRANTED          FISCAL YEAR        ($/SH)           DATE        PRESENT VALUE ($) (4)
------------------------------    ----------       ------------      -----------     ----------     ---------------------
<S>                               <C>                   <C>            <C>            <C>                  <C>    
E. James Ferland..............    150,000(1)            17.8           39.3125        12/03/08             657,000
                                                                                                          
Lawrence R. Codey.............     75,000(1)             8.9           39.3125        12/03/08             328,500
                                                                                                          
Robert C. Murray..............     50,000(1)             5.9           39.3125        12/03/08             219,000
                                                                                                          
Harold W. Keiser..............     25,000(1)             3.0           39.3125        12/03/08             109,500
                                   10,000(2)             1.2           29.5625         1/20/08              34,800
                                    2,500(3)             0.3           31.5625         1/21/08              25,325
                                                                                                          
R. Edwin Selover..............     25,000(1)             3.0           39.3125        12/03/08             109,500
</TABLE>

(1)   Granted under LTIP not in tandem with performance units and dividend
      equivalents, with exercisability commencing December 3, 1999, December 3,
      2000 and December 3, 2001, respectively, with respect to one-third of the
      options at each such date.

(2)   Granted under LTIP in tandem with equal number of 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.

(3)   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 PSEG in comparison to other companies and
      dividend payments by PSEG, 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.

(4)   Determined using the Black-Scholes model, incorporating the following
      material assumptions and adjustments for the grants expiring January 20,
      2008, January 21, 2008 and December 3, 2008, respectively: (a) exercise
      prices of $29.5625, $31.5625 and $39.3125, equal to the fair market value
      of the underlying PSEG Common Stock on the date of grant (or as of
      December 16, 1997 for the grant expiring January 20, 2008), to replicate
      grants previously given to other executive officers for similar
      performance periods; (b) an option term of ten years on all grants; (c)
      interest rates of 5.54%, 5.81% and 4.65% that represent the interest rates
      on U.S. Treasury securities on the dates of grant (or December 16, 1997
      for the grant (expiring January 20, 2008) with a maturity date
      corresponding to that of the option terms; (d) volatilities of 19.12%,
      19.12% and 20.17% calculated using daily PSEG 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 (expiring
      January 21, 2008) since dividend payments accrue while the option is held;
      (f) dividend yields of 6.84% and 5.49% on the non-tandem (expiring January
      20, 2008 and December 3, 2008); and (g) reductions of approximately 7.8%
      and 7.82% for the non-tandem and 11.53% for the tandem grants,
      respectively, to reflect the probability of forfeiture due to termination
      prior to vesting, and approximately 2.4%, 20% and 6.23% for the grants


                                      123
<PAGE>

      expiring January 20, 2008, January 21, 2008 and December 3, 2008,
      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 PSEG Common Stock at the time of any
      such exercise and thus are dependent upon future performance of PSEG
      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.

           AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR (1998) AND
                    FISCAL YEAR END OPTION VALUES (12/31/98)

<TABLE>
<CAPTION>
                                                                                                   VALUE OF UNEXERCISED
                                                                   NUMBER OF UNEXERCISED           IN-THE-MONEY OPTIONS
                                                                  OPTIONS AT FY-END(#)(1)             AT FY-END($)(3)
                                                               ----------------------------    ----------------------------
                                       SHARES
                                      ACQUIRED       VALUE  
                                     ON EXERCISE   REALIZED    EXERCISABLE    UNEXERCISABLE    EXERCISABLE    UNEXERCISABLE
NAME                                   (#)(1)       ($)(2)         (#)             (#)             ($)             ($)
---------------------------------    ----------------------    ----------------------------    ----------------------------
<S>                                      <C>        <C>           <C>            <C>             <C>            <C>      
E. James Ferland.................        5,800      63,075        33,340         241,160         347,986        1,061,576
Lawrence R. Codey................        2,800      18,375        17,370         120,530         185,018          530,982
Robert C. Murray.................        2,000      21,875         8,335          75,665          86,997          305,441
Harold W. Keiser.................            0           0         3,334          34,166          34,799          107,858
R. Edwin Selover.................        1,400       8,525         4,334          37,366          45,049          147,908
</TABLE>

(1)   Does not reflect any options granted and/or exercised after year end
      (12/31/98). 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 PSEG
      Common Stock on date of exercise.

(3)   Represents difference between market price of PSEG Common Stock and the
      respective exercise prices of the options at fiscal year end (12/31/98).
      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 PSEG Common Stock at the time of any such exercise and
      thus are dependent upon future performance of PSEG Common Stock.

EMPLOYMENT CONTRACTS AND ARRANGEMENTS

      PSEG has entered into an employment agreement dated as of June 16, 1998
with Mr. Ferland covering his employment as Chief Executive Officer through
March 31, 2005. Under the Agreement, Mr. Ferland has agreed not to retire prior
to March 31, 2002, but may retire thereafter. The Agreement provides that Mr.
Ferland will be re-nominated for election as a Director during his employment
under the Agreement. The Agreement provides that Mr. Ferland's base salary,
target annual incentive bonus and long term incentive bonus will be determined
based on compensation practices for CEO's of similar companies and that his
annual salary will not be reduced during the term of the Agreement and awards
him 150,000 shares of restricted PSEG Stock, of which 60,000 shares vest 2002;
20,000 shares vest in 2003; 30,000 shares vest in 2004 and 40,000 shares vest in
2005. Any non-vested shares are forfeited upon his retirement unless the Board
of Directors, in its discretion, determines to make payment. The Agreement
provides for the granting of 22 years of pension credit for Mr. Ferland's prior
service, which was awarded at the time of his employment. The Agreement further
provides that if Mr. Ferland is terminated without "Cause" or resigns for "Good
Reason" (as those terms are defined in the Agreement) during the term of the
Agreement, the entire stock award becomes vested, he will be paid a benefit of
two times base salary and target bonus and welfare benefits will be continued
for two years unless sooner employed. In the event such a termination occurs
after a "Change in Control" (as defined), the payment to Mr. Ferland becomes
three times the sum of salary and target bonus, continuation of welfare benefits
for three years unless sooner reemployed, payment of the net present value
providing three years additional service under PSEG's retirement plans, and a
gross-up for excise taxes on any termination payments due under the Internal
Revenue Code. The Agreement provides that Mr. Ferland is prohibited from
competing with or recruiting employees from PSEG or its subsidiaries of
affiliates for two years after termination of employment. Violation of these
provisions requires a forfeiture of a portion of the restricted stock grant and
certain other benefits.


                                      124
<PAGE>

      The principal remaining applicable terms of an employment agreement
entered into with Mr. Murray at the time of his employment, as modified in 1998,
provide for the grant of additional years of credited service for retirement
purposes in light of allied work experience of five years after completion of
five years of employment, and up to seventeen years after completion of
approximately nine years of employment.

      The principal remaining applicable terms of an employment agreement
entered into with Mr. Keiser at the time of his employment provide that his
salary may not be decreased during the first five years of employment, if
discharged without cause during such period, he will be paid his salary for a
twelve-month period or the remainder of the five year period, whichever is less,
and the grant of twenty years of additional credited service for retirement
purposes after completion of five years of employment, in light of allied work
experience.

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 PSEG. Hence, during 1998 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 PSEG 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 PSEG, PSE&G or Energy Holdings.
Beginning in 1999, each committee Chair will receive an additional annual
retainer of $3,000. Each of the directors of PSE&G is also a director of PSEG.
No additional retainer is paid for service as a director of PSE&G. Fifty percent
of the annual retainer is paid in PSEG Common Stock.

      PSEG also maintains a Stock Plan for Outside Directors pursuant to which
directors who are not employees of PSEG or its subsidiaries receive 300 shares
of restricted stock for each year of service as a director. Beginning in 1999,
this amount will be increased to 600 shares annually. Such shares held by each
non-employee director are included in the table in Item 12 below 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 after a "Change in Control"
as defined in the Plan or if the director were to die in office. PSEG 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.


                                      125
<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
    1,300,000     780,000         845,000       910,000       975,000
                                            
      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, Keiser and Selover will have accrued approximately 48,
41, 41, 30 and 43 years of credited service, respectively, as of age 65.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

PSEG

      The information required by Item 12 of Form 10-K with respect to
directors, executive officers and certain beneficial owners is set forth under
the heading 'Security Ownership of Directors, Management and Certain Beneficial
Owners' in PSEG's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held April 20, 1999 which definitive Proxy Statement is
expected to be filed with the Securities and Exchange Commission on or about
March 2, 1999 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, PSEG, 80 Park Plaza, P.O. Box
1171, Newark, New Jersey.

      The following table sets forth beneficial ownership of PSEG Common Stock,
including options, by the directors and executive officers named below as of
January 31, 1999. None of these amounts exceed 1% of the PSEG Common Stock
outstanding at such date. No director or executive officer owns any PSE&G
Preferred Stock of any class.


                                      126
<PAGE>

                                                          AMOUNT AND NATURE OF
NAME                                                      BENEFICIAL OWNERSHIP
--------------------------------------------------------  --------------------
Lawrence R. Codey.......................................         155,816 (1)
E. James Ferland........................................         483,578 (2)
Conrad K. Harper........................................             940
Harold W. Keiser........................................          37,512 (3)
Irwin Lerner............................................          11,359
Robert C. Murray........................................          96,322 (4)
Marilyn M. Pfaltz.......................................           8,473
Forrest J. Remick.......................................           2,838
R. Edwin Selover........................................          50,691 (5)
All directors and executive officers (11) as a group....         905,686 (6)

(1)   Includes the equivalent of 5 shares held under PSE&G Thrift and
      Tax-Deferred Savings Plan. Includes options to purchase 137,200 shares,
      16,670 of which are currently exercisable.

(2)   Includes the equivalent of 11,531 shares held under PSE&G Thrift and
      Tax-Deferred Savings Plan. Includes options to purchase 274,500 shares,
      33,340 of which are currently exercisable. Includes 150,000 shares of
      restricted stock, which vest as described in the Summary Compensation
      Table Note 5.

(3)   Includes the equivalent of 12 shares held under PSE&G Thrift and
      Tax-Deferred Savings Plan. Includes options to purchase 37,500 shares,
      3,334 of which are currently exercisable.

(4)   Includes the equivalent of 1,322 shares held under PSE&G Thrift and
      Tax-Deferred Savings Plan. Includes options to purchase 84,000 shares,
      8,335 of which are currently exercisable.

(5)   Includes options to purchase 41,700 shares, of which 4,334 are currently
      exercisable.

(6)   Includes the equivalent of 18,163 shares held under PSE&G Thrift and
      Tax-Deferred Savings Plan. Includes options to purchase 625,700 shares, of
      which 69,407 are currently exercisable.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

PSEG

      The information required by Item 13 of Form 10-K is set forth under the
heading "Executive Compensation" in PSEG's definitive Proxy Statement for the
Annual Meeting of Stockholders to be held April 20, 1999, which definitive Proxy
Statement is expected to be filed with the Securities and Exchange Commission on
or about March 2, 1999. Such information set forth under such heading is
incorporated herein by this reference thereto.

PSE&G

      None.


                                      127
<PAGE>

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(A)   Financial Statements:

      (1)   PSEG Consolidated Statements of Income for the years ended December
            31, 1998, 1997, and 1996, on page 57.

            PSEG Consolidated Balance Sheets for the years ended December 31,
            1998 and 1997, on pages 58 and 59.

            PSEG Consolidated Statements of Cash Flows for the years ended
            December 31, 1998, 1997, and 1996 on page 60.

            PSEG Statements of Common Stockholders' Equity for the years ended
            December 31, 1998, 1997, and 1996 on page 61.

            PSEG Notes to Consolidated Financial Statements on pages 68 through
            111.

      (2)   PSE&G Consolidated Statements of Income for the years ended December
            31, 1998, 1997, and 1996, on page 63.

            PSE&G Consolidated Balance Sheets for the years ended December 31,
            1998 and 1997, on pages 64 and 65.

            PSE&G Consolidated Statements of Cash Flows for the years ended
            December 31, 1998, 1997, and 1996 on page 66.

            PSE&G Statements of Common Stockholder's Equity for the years ended
            December 31, 1998, 1997, and 1996 on page 67.

            PSE&G Notes to Consolidated Financial Statements on pages 111
            through 114.

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

      (1)   PSEG Financial Statement Schedules:

            Schedule II--Valuation and Qualifying Accounts for each of the three
            years in the period ended December 31, 1998 (page 130).

      (2)   PSE&G Financial Statement Schedules:

            Schedule II--Valuation and Qualifying Accounts for each of the three
            years in the period ended December 31, 1998 (page 130).

            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)   PSEG:

            Exhibit 4f Indenture dated as of November 1, 1998 between Public
            Service Enterprise Group Incorporated and First Union National Bank
            providing for the issuance of Senior Debt Securities
            Exhibit 10a(1) Directors' Deferred Compensation Plan 
            Exhibit 10a(2) Deferred Compensation Plan for Certain Employees 


                                      128
<PAGE>

            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(14) Directors' Stock Plan 
            Exhibit 10a(16) Global Deferred Compensation Plan
            Exhibit 10a(17) Global Executive Incentive Compensation Plan 
            Exhibit 10a(18) Energy Holdings Management Incentive Compensation 
            Plan 
            Exhibit 10a(19) Energy Holdings Deferred Compensation Plan 
            Exhibit 10a(20) Energy Technologies Executive Incentive Compensation
            Plan
            Exhibit 10a(21) Energy Holdings Limited Supplemental Benefits Plan 
            for Certain Employees 
            Exhibit 10a(22) Resources Annual Incentive Compensation Plan 
            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 135 through 143.)

      (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(14) Directors' Stock Plan 
            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 143 through 149.)

(D)   The following reports on Form 8-K were filed by the registrant(s) named
      below during the last quarter of 1998 and the 1999 period covered by this
      report under Item 5:

      REGISTRANT              DATE OF REPORT                ITEM REPORTED
      ----------              --------------                -------------

         None.


                                      129
<PAGE>

                                                                     SCHEDULE II

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
               YEARS ENDED DECEMBER 31, 1998 -- DECEMBER 31, 1996

<TABLE>
<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>
1998:                                                                                        
Allowance for Doubtful Accounts..............       $41            $40            $--            $43 (A)         $38
Discount on Property Abandonments............         2             --             --              1 (B)           1
Inventory Valuation Reserve..................        12             --             --             --              12
Other Valuation Allowances...................        15              1             --              5              11
                                                                                                 
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              5             --             --              15
                                                                                                 
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
</TABLE>

(A)   Accounts Receivable/Investments written off. 

(B)   Amortization of discount to income.

                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
               YEARS ENDED DECEMBER 31, 1998 -- DECEMBER 31, 1996

<TABLE>
<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>
1998:
Allowance for Doubtful Accounts..............       $41            $40            $--            $43 (A)         $38
Discount on Property Abandonments............         2             --             --              1 (B)           1
Inventory Valuation Reserve..................        12             --             --             --              12
Other Valuation Allowances...................        15              1             --              5              11
                                                                                                
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              5             --              --             15
                                                                                                
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
</TABLE>

(A)   Accounts Receivable/Investments written off.

(B)   Amortization of discount to income.


                                      130
<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 22, 1999

      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 22, 1999
---------------------  President and Chief Executive   
  E. JAMES FERLAND     Officer and Director (Principal 
                       Executive Officer)              


  ROBERT C. MURRAY     Vice President and Chief Financial     February 22, 1999
---------------------  Officer (Principal Financial Officer)
  ROBERT C. MURRAY     


  PATRICIA A. RADO     Vice President and Controller          February 22, 1999
---------------------  (Principal Accounting Officer)
  PATRICIA A. RADO     


  LAWRENCE R. CODEY    Director                               February 22, 1999
---------------------  
  LAWRENCE R. CODEY


   ERNEST H. DREW      Director                               February 22, 1999
---------------------  
   ERNEST H. DREW


 T. J. DERMOT DUNPHY   Director                               February 22, 1999
---------------------
 T. J. DERMOT DUNPHY


RAYMOND V. GILMARTIN   Director                               February 22, 1999
---------------------  
RAYMOND V. GILMARTIN


  CONRAD K. HARPER     Director                               February 22, 1999
---------------------  
  CONRAD K. HARPER


    IRWIN LERNER       Director                               February 22, 1999
---------------------  
    IRWIN LERNER


  MARILYN M. PFALTZ    Director                               February 22, 1999
---------------------  
  MARILYN M. PFALTZ


  FORREST J. REMICK    Director                               February 22, 1999
---------------------  
  FORREST J. REMICK


  RICHARD J. SWIFT     Director                               February 22, 1999
---------------------  
  RICHARD J. SWIFT


   JOSH S. WESTON      Director                               February 22, 1999
---------------------  
   JOSH S. WESTON


                                      131
<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 22, 1999

      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 22, 1999
---------------------  Executive Officer and Director
  E. JAMES FERLAND     (Principal Executive Officer) 
                       


  ROBERT C. MURRAY     Executive Vice President--Finance      February 22, 1999
---------------------  (Principal Financial Officer)
  ROBERT C. MURRAY     


  PATRICIA A. RADO     Vice President and Controller          February 22, 1999
---------------------  (Principal Accounting Officer)
  PATRICIA A. RADO     


  LAWRENCE R. CODEY    Director                               February 22, 1999
---------------------  
  LAWRENCE R. CODEY


   CONRAD K. HARPER    Director                               February 22, 1999
---------------------  
   CONRAD K. HARPER


     IRWIN LERNER      Director                               February 22, 1999
---------------------  
     IRWIN LERNER

  MARILYN M. PFALTZ    Director                               February 22, 1999
---------------------  
  MARILYN M. PFALTZ

  FORREST J. REMICK    Director                               February 22, 1999
---------------------  
  FORREST J. REMICK


                                      132
<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 PSEG 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.


                                      133
<PAGE>

                      PSEG
--------------------------------------------------
                 EXHIBIT NUMBER
--------------------------------------------------
                         PREVIOUS FILING
     THIS      -----------------------------------
    FILING     COMMISSION     EXCHANGES
    ------     ----------     ---------
      3a       (o)   3a       (o)  3a             Certificate of Incorporation
                                                  Public Service Enterprise
                                                  Group Incorporated
                              
      3b       (e)   3b       (e)  3b             By-Laws of Public Service 
                                   4/11/88        Enterprise Group Incorporated
                              
      3c       (e)   3c       (e)  3c             Certificate of Amendment of 
                                   4/11/88        Certificate of Incorporation 
                                                  of Public Service Enterprise 
                                                  Group
                              
      3d       (f)            (f)                 Trust Agreements for 
                     12/24/97                     Enterprise Capital Trust I and
                                                  III
                              
                              
      3e       (d)   3        (d)  3              Amended and Restated Trust 
                     8/14/98       8/14/98        Agreement for Enterprise 
                                                  Capital Trust II
                              
    4a(1)      (f)   B-1      (c)  4b(1)          Incorporated, effective April 
                                   2/18/81        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


                                      134
<PAGE>

                      PSEG
--------------------------------------------------
                 EXHIBIT NUMBER
--------------------------------------------------
                         PREVIOUS FILING
     THIS      -----------------------------------
    FILING     COMMISSION     EXCHANGES
    ------     ----------     ---------
    4a(15)     (k)   2b(15)   (c)  4b(15)         September 1, 1960
                                   2/18/81
                     
    4a(16)     (k)   2b(16)   (c)  4b(16)         August 1, 1962
                                   2/18/81
                     
    4a(17)     (k)   2b(17)   (c)  4b(17)         June 1, 1963
                                   2/18/81
                     
    4a(18)     (k)   2b(18)   (c)  4b(18)         September 1, 1964
                                   2/18/81
                     
    4a(19)     (k)   2b(19)   (c)  4b(19)         September 1, 1965
                                   2/18/81
                     
                     
    4a(20)     (k)   2b(20)   (c)  4b(20)         June 1, 1967
                                   2/18/81
                     
    4a(21)     (k)   2b(21)   (c)  4b(21)         June 1, 1968
                                   2/18/81
                     
    4a(22)     (k)   2b(22)   (c)  4b(22)         April 1, 1969
                                   2/18/81
                     
    4a(23)     (k)   2b(23)   (c)  4b(23)         March 1, 1970
                                   2/18/81
                     
    4a(24)     (k)   2b(24)   (c)  4b(24)         May 15, 1971
                                   2/18/81
                     
    4a(25)     (k)   2b(25)   (c)  4b(25)         November 15, 1971
                                   2/18/81
                     
    4a(26)     (k)   2b(26)   (c)  4b(26)         April 1, 1972
                                   2/18/81
                     
    4a(27)     (a)   2        (c)  4b(27)         March 1, 1974
                     3/29/74       2/18/81
                     
    4a(28)     (a)   2        (c)  4b(28)         October 1, 1974
                     10/11/74      2/18/81
                     
    4a(29)     (a)   2        (c)  4b(29)         April 1, 1976
                     4/6/76        2/18/81
                     
    4a(30)     (a)   2        (c)  4b(30)         September 1, 1976
                     9/16/76       2/18/81
                     
    4a(31)     (k)   2b(31)   (c)  4b(31)         October 1, 1976
                                   2/18/81
                     
    4a(32)     (a)   2        (c)  4b(32)         June 1, 1977
                     6/29/77       2/18/81
                     
    4a(33)     (l)   2b(33)   (c)  4b(33)         September 1, 1977
                                   2/18/81


                                      135
<PAGE>

                      PSEG
--------------------------------------------------
                 EXHIBIT NUMBER
--------------------------------------------------
                         PREVIOUS FILING
     THIS      -----------------------------------
    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


                                      136
<PAGE>

                      PSEG
--------------------------------------------------
                 EXHIBIT NUMBER
--------------------------------------------------
                         PREVIOUS FILING
     THIS      -----------------------------------
    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


                                      137
<PAGE>

                      PSEG
--------------------------------------------------
                 EXHIBIT NUMBER
--------------------------------------------------
                         PREVIOUS FILING
     THIS      -----------------------------------
    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       


                                      138
<PAGE>

                      PSEG
--------------------------------------------------
                 EXHIBIT NUMBER
--------------------------------------------------
                         PREVIOUS FILING
     THIS      -----------------------------------
    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

    4a(96)     (a)   4        (a)   4             May 1, 1998
                     5/15/98        5/15/98

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

    4c(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                       

    4c(2)      (a)            (a)                 Supplemental Indenture between
                     9/11/95       9/11/95        PSE&G and First Fidelity Bank,
               (d)   4d (2)   (d)  4d (2)         National Association (now     
                     5/13/98       5/13/98        known as First Union National 
                                                  Bank), as Trustee, dated      
                                                  September 1, 1995 providing   
                                                  for Deferrable Interest       
                                                  Subordinated Debentures,      
                                                  Series B (relating to Monthly 
                                                  Preferred Securities)         

    4d(1)      (d)   4e (1)   (d)  4e (2)         Indenture between PSE&G and   
                     5/13/98       5/13/98        First Union National Bank, as 
                                                  Trustee, dated June 1, 1996   
                                                  providing for Deferrable      
                                                  Interest Subordinated         
                                                  Debentures in Series (relating
                                                  to Quarterly Preferred        
                                                  Securities)                   

    4d(2)      (d)   4e(2)    (d)  4e(2)          Supplemental Indenture between
                     5/13/98       5/13/98        PSE&G and First Union National
                                                  Bank, as Trustee, dated       
                                                  February 1, 1997 providing for
                                                  Deferrable Interest           
                                                  Subordinated Debentures,      
                                                  Series B (relating to         
                                                  Quarterly Preferred           
                                                  Securities)                   

    4e(1)      (d)   4f       (d)  4f             Indenture between Public      
                     5/13/98       5/13/98        Service Enterprise Group      
                                                  Incorporated and First Union  
                                                  National Bank, as Trustee,    
                                                  dated January 1, 1998         
                                                  providing for Deferrable      
                                                  Interest Subordinated         
                                                  Debentures in Series (relating
                                                  to Quarterly Preferred        
                                                  Securities)                   

    4e(2)      (d)   4a       (d)  4a             First Supplemental Indenture  
                     8/14/98       8/14/98        to Indenture dated as of      
                                                  January 1, 1998 between Public
                                                  Service Enterprise Group      
                                                  Incorporated and First Union  
                                                  National Bank, as Trustee,    
                                                  dated June 1, 1998 providing  
                                                  for the issuance of Floating  
                                                  Rate Deferrable Interest      
                                                  Subordinated Debentures,      
                                                  Series B (relating to Trust   
                                                  Preferred Securities)         

    4e(3)      (d)   4b       (d)  4b             Second Supplemental Indenture 
                     8/14/98       8/14/98        to Indenture dated as of      
                                                  January 1, 1998 between Public
                                                  Service Enterprise Group      
                                                  Incorporated and First Union  
                                                  National Bank, as Trustee,    
                                                  dated July 1, 1998 providing  
                                                  for the issuance of Deferrable
                                                  Interest Subordinated         
                                                  Debentures, Series C (relating
                                                  to Trust Preferred Securities)

      4f                                          Indenture dated as of November
                                                  1, 1998 between Public Service
                                                  Enterprise Group Incorporated 
                                                  and First Union National Bank 
                                                  providing for the issuance of 
                                                  Senior Debt Securities        

      9                                           Inapplicable


                                      139
<PAGE>

                      PSEG
--------------------------------------------------
                 EXHIBIT NUMBER
--------------------------------------------------
                         PREVIOUS FILING
     THIS      -----------------------------------
    FILING     COMMISSION      EXCHANGES          
    ------     ----------      ---------
    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)     (e)   10a(20)   (e)  10a(20)       Management Incentive 
                     2/26/97        2/26/97       Compensation Plan
                               
    10a(8)     (d)   10        (d)  10            Employment Agreement with E. 
                     8/14/98        8/14/98       James Ferland, dated June 16, 
                                                  1998
                               
    10a(9)     (c)   10a(15)   (c)  10a(15)       Letter Agreement with Robert 
                     2/10/93        2/11/93       C. Murray dated December 17, 
                                                  1991
                               
    10a(9)(i)  (c)   10a(9)(i) (c)  10a(9)(i)     Amendment to Letter Agreement 
                     2/23/98        2/23/98       with Robert C. Murray dated 
                                                  January 6, 1998
                               
    10a(10)    (c)   10a(14)   (c)  10a(14)       Letter Agreement with Patricia
                     2/26/94        3/9/94        A. Rado dated March 24, 1993
                               
    10a(11)    (d)   10a(15)   (d)  10a(15)       Letter Agreement with Louis 
                     8/14/95        8/14/95       F. Storz dated July 7, 1995
                               
    10a(12)    (d)   10a(16)   (d)  10a(16)       Letter Agreement with Elbert 
                     8/14/95        8/14/95       C. Simpson dated May 31, 1995
                               
    10a(13)    (d)   10a(17)   (d)  10a(17)       Letter Agreement with Alfred 
                     11/14/95       11/14/95      C. Koeppe dated August 23, 
                                                  1995
                              

                                      140
<PAGE>

                      PSEG
--------------------------------------------------
                 EXHIBIT NUMBER
--------------------------------------------------
                         PREVIOUS FILING
     THIS      -----------------------------------
    FILING     COMMISSION     EXCHANGES
    ------     ----------     ---------
    10a(14)                                       Directors' Stock Plan
   
    10a(15)    (c)   10a(16)  (c)  10a(16)        Letter Agreement with Harold 
                     2/23/98       2/23/98        W. Keiser dated January 5, 
                                                  1998
   
    10a(16)                                       Global Deferred Compensation 
                                                  Plan
   
    10a(17)                                       Global Executive Incentive 
                                                  Compensation Plan

    10a(18)                                       Energy Holdings Management 
                                                  Incentive Compensation Plan

    10a(19)                                       Energy Holdings Deferred 
                                                  Compensation Plan

    10a(20)                                       Energy Technologies Executive 
                                                  Incentive Compensation Plan
   
    10a(21)                                       Energy Holdings Limited 
                                                  Supplemental Benefits Plan for
                                                  Certain Employees
   
    10a(22)                                       Resources Annual Incentive 
                                                  Compensation Plan
   
       11                                         Inapplicable
   
       12                                         Computation of Ratios of 
                                                  Earnings to Fixed Charges
   
       13                                         Inapplicable
   
       16                                         Inapplicable

       18                                         Inapplicable
       21                                         Subsidiaries of the Registrant
   
       22                                         Inapplicable
   
       23                                         Independent Auditors' Consent


                                      141
<PAGE>

                      PSEG
--------------------------------------------------
                 EXHIBIT NUMBER
--------------------------------------------------
                         PREVIOUS FILING
     THIS      -----------------------------------
    FILING     COMMISSION     EXCHANGES
    ------     ----------     ---------
      24                                          Inapplicable

      27                                          Financial Data Schedule

      28                                          Inapplicable

      99                                          Inapplicable

                      PSE&G
--------------------------------------------------
                 EXHIBIT NUMBER
--------------------------------------------------
                         PREVIOUS FILING
     THIS      -----------------------------------
    FILING     COMMISSION     EXCHANGES
    ------     ----------     ---------
    3a(1)      (b)   3a       (b)  3a             Restated Certificate of 
                     8/28/86       8/29/86        Incorporation of PSE&G

    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       (a)            (a)                 Copy of By-Laws of PSE&G
                     2/23/95       2/23/95

    4a(1)      (f)   B-1      (c)  4b(1)          Indenture between PSE&G and
                                   2/18/81        Fidelity Union Trust Company,
                                                  2/18/81 (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


                                      142
<PAGE>

                      PSE&G
--------------------------------------------------
                 EXHIBIT NUMBER
--------------------------------------------------
                         PREVIOUS FILING
     THIS      -----------------------------------
    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


                                      143
<PAGE>

                      PSE&G
--------------------------------------------------
                 EXHIBIT NUMBER
--------------------------------------------------
                         PREVIOUS FILING
     THIS      -----------------------------------
    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


                                      144
<PAGE>

                      PSE&G
--------------------------------------------------
                 EXHIBIT NUMBER
--------------------------------------------------
                         PREVIOUS FILING
     THIS      -----------------------------------
    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     
                                              

                                      145
<PAGE>

                      PSE&G
--------------------------------------------------
                 EXHIBIT NUMBER
--------------------------------------------------
                         PREVIOUS FILING
     THIS      -----------------------------------
    FILING     COMMISSION     EXCHANGES
    ------     ----------     ---------
    4a(66)     (a)   4        (a)  4              November 1, 1991 (No. 2)
                     12/2/91       12/3/91

    4a(67)     (a)   4        (a)  4              November 1, 1991 (No. 3)
                     12/2/91       12/3/91

    4a(68)     (a)   4        (a)  4              February 1, 1992 (No. 1)
                     2/27/92       2/28/92

    4a(69)     (a)   4        (a)  4              February 1, 1992 (No. 2)
                     2/27/92       2/28/92

    4a(70)     (a)   4        (a)  4              June 1, 1992 (No. 1)
                     6/17/92       6/11/92

    4a(71)     (a)   4        (a)  4              June 1, 1992 (No. 2)
                     6/17/92       6/11/92

    4a(72)     (a)   4        (a)  4              June 1, 1992 (No. 3)
                     6/17/92       6/11/92

    4a(73)     (a)   4        (a)  4              January 1, 1993 (No. 1)
                     2/2/93        2/2/93

    4a(74)     (a)   4        (a)  4              January 1, 1993 (No. 2)
                     2/2/93        2/2/93

    4a(75)     (a)   4        (a)  4              March 1, 1993
                     3/17/93       3/18/93

    4a(76)     (b)   4        (a)  4              May 1, 1993
                     5/27/93       5/28/93

    4a(77)     (a)   4        (a)  4              May 1, 1993 (No. 2)
                     5/25/93       5/25/93

    4a(78)     (a)   4        (a)  4              May 1, 1993 (No. 3)
                     5/25/93       5/25/93

    4a(79)     (b)   4        (b)  4              July 1, 1993
                     12/1/93       12/1/93

    4a(80)     (a)   4        (a)  4              August 1, 1993
                     8/3/93        8/3/93

    4a(81)     (b)   4        (b)  4              September 1, 1993
                     12/1/93       12/1/93

    4a(82)     (a)   4        (a)  4              September 1, 1993 (No. 2)
                     12/1/93       12/1/93

    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


                                      146
<PAGE>

                      PSE&G
--------------------------------------------------
                 EXHIBIT NUMBER
--------------------------------------------------
                         PREVIOUS FILING
     THIS      -----------------------------------
    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

    4a(96)     (a)   4        (a)  4              May 1, 1998
                     5/15/98       5/15/98

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

    4c(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

    4c(2)      (a)   4b(5)    (a)  4b(5)          Supplemental Indenture between
                                                  PSE&G and First Fidelity Bank,
               (d)   4d(2)    (d)  4d(2)          National Association (now     
                     5/13/98       5/13/98        known as First Union National 
                                                  Bank), as Trustee, dated      
                                                  September 1, 1995 providing   
                                                  for Deferrable Interest       
                                                  Subordinated Debentures,      
                                                  Series B (relating to Monthly 
                                                  Preferred Securities)         

    4d(1)      (d)   4e(1)    (d)  4e(1)          Indenture between PSE&G and
                     5/13/98       5/13/98        First Union National Bank, as
                                                  Trustee, dated June 1, 1996
                                                  providing for Deferrable
                                                  Interest Subordinated
                                                  Debentures in Series (relating
                                                  to Quarterly Preferred
                                                  Securities)

    4d(2)      (d)   4e(2)    (d)  4e(2)          Supplemental Indenture between
                     5/13/98       5/13/98        PSE&G and First Union National
                                                  Bank, as Trustee, dated
                                                  February 1, 1997 providing for
                                                  Deferrable Interest
                                                  Subordinated Debentures,
                                                  Series B (relating to
                                                  Quarterly Preferred
                                                  Securities)

    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


                                      147
<PAGE>

                      PSE&G
--------------------------------------------------
                 EXHIBIT NUMBER
--------------------------------------------------
                         PREVIOUS FILING
     THIS      -----------------------------------
    FILING     COMMISSION      EXCHANGES
    ------     ----------      ---------
    10a(6)                                        Long-Term Incentive Plan


    10a(7)     (c)   10a(20)   (c)   10a(20)      Management Incentive 
                     2/26/97         2/26/97      Compensation Plan
                               
    10a(8)     (d)   10        (d)   10           Employment Agreement with E. 
                     8/14/98         8/14/98      James Ferland, dated June 16, 
                                                  1998
                               
    10a(9)     (c)   10a(12)   (c)   10a(12)      Letter Agreement with Robert 
                     2/10/93         2/11/93      C. Murray dated December 17, 
                                                  1991

    10a(9)(i)  (c)   10a(9)(i) (c)   10a(9)(i)    Amendment to Letter Agreement 
                     2/23/98         2/23/98      with Robert C. Murray dated
                                                  January 6, 1998
                               
    10a(10)    (c)   10a(13)   (c)   10a(13)      Letter Agreement with Patricia
                     2/26/94         3/9/94       A. Rado dated March 24, 1993
                               
    10a(11)    (d)   10a(15)   (d)   10a(15)      Letter Agreement with Louis F.
                     8/14/95         8/14/95      Storz dated July 7, 1995
                               
    10a(12)    (d)   10a(16)   (d)   10a(16)      Letter Agreement with Elbert 
                     8/14/95         8/14/95      C. Simpson dated May 31, 1995
                               
    10a(13)    (d)   10a(17)   (d)   10a(17)      Letter Agreement with Alfred 
                     11/14/95        11/14/95     C. Koeppe dated August 23, 
                                                  1995
                               
    10a(14)                                       Directors' Stock Plan
                               
                               
    10a(15)    (c)   10a(16)   (c)   10a(16)      Letter Agreement with Harold 
                     2/23/98         2/23/98      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


                                      148
<PAGE>

                                GLOSSARY OF 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
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
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
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
DRBC...................  Delaware River Basin Commission
DSAF...................  Demand Side Adjustment Factor
DSM....................  Demand Side Management
Eagle Point............  PSEG Eagle Point, Inc.
EBIT...................  Earnings before interest and taxes
EDC....................  Energy Development Corporation
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"
EITF 98-10.............  Emerging Issues Task Force, Issue No. 98-10 "Accounting
                         for Energy Trading and Risk Management Activities"
Energy Holdings........  PSEG Energy Holdings Inc.
Energy Technologies....  PSEG Energy Technologies Inc.
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
FUCO...................  Foreign Utility Company


                                      149
<PAGE>

                        GLOSSARY OF TERMS -- (CONTINUED)

TERM                     MEANING
----                     -------

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.................  PSEG Global Inc.
Global Site............  Global Landfill Site in Old Bridge Township, Middlesex 
                         County, New Jersey
Hope Creek.............  Hope Creek Nuclear Generating Station
HWCS Project...........  Hydrogen Water Chemistry System
ICTC...................  Interim Competitive Transition Charge
IPP....................  Independent Power Producers
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
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
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


                                      150
<PAGE>

                        GLOSSARY OF 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....................  PJM Interconnection, L.L.C.
PJM Board..............  An independent, 7-Member Board of Managers responsible 
                         for supervision of PJM operations
PPG....................  PPG Industries, Inc.
PPUC...................  Pennsylvania Public Utility Commission
PRPs...................  Potentially Responsible Parties
PSCRC..................  Public Service Conservation Resources Corporation
PSE&G..................  Public Service Electric and Gas Company
PSEG...................  Public Service Enterprise Group Incorporated
PSEG Capital...........  PSEG Capital Corporation
PSETC..................  Public Service Energy Trading Company
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
Resources..............  PSEG Resources Inc.
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"


                                      151
<PAGE>

                        GLOSSARY OF TERMS -- (CONTINUED)

TERM                     MEANING
----                     -------

SFAS 131...............  Statement of Financial Accounting Standards No. 131, 
                         "Disclosures about Segments of an Enterprise and 
                         Related Information"
SFAS 132...............  Statement of Financial Accounting Standards No. 132,  
                         "Employers' Disclosures about Pensions and Other 
                         Postretirement Benefits--an  amendment of FASB
                         Statements No. 87, 88, and 106"
SFAS 133...............  Statement of Financial Accounting Standards No. 133, 
                         "Accounting for Derivative Instruments and Hedging 
                         Activities"
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


                                      152