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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, 1999
                                       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 0.22%, Due 2000.
Extendible Notes, Series B, LIBOR plus 0.60%, Due 2000.
Extendible Notes, Series C, LIBOR plus 0.40%, Due 2001.

The aggregate market value of the Common Stock of Public Service Enterprise
Group Incorporated held by non-affiliates as of January 31, 2000 was
$7,439,341,868 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, 2000
           -----                                 -------------------------------
Common Stock, without par value                             216,417,218

                       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 18, 2000, which definitive
                    Proxy Statement is expected to be filed with the Securities
                    and Exchange Commission on or about March 1, 2000, as
                    specified herein.

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<PAGE>

COMMISSION      REGISTRANT, STATE OF INCORPORATION,            I.R.S. EMPLOYER
FILE NUMBER       ADDRESS, AND TELEPHONE NUMBER               IDENTIFICATION NO.
-----------   ---------------------------------------         ------------------
  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

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

                                                       NAME OF EACH EXCHANGE
TITLE OF EACH CLASS         TITLE OF EACH CLASS         ON WHICH REGISTERED
--------------------    ----------------------------   ----------------------
Cumulative Preferred    First and Refunding Mortgage
Stock $100 par value    Bonds Series Due:
Series:
       4.08%
       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

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|

As of January 31, 2000, 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
                                                                           ----
PART I
------
Item 1.    Business........................................................  2
           General.........................................................  2
           Risk Factors....................................................  3
           Competitive Environment.........................................  4
           Regulatory Issues...............................................  4
           Customers....................................................... 10
           PSE&G/Power..................................................... 11
           Energy Holdings................................................. 17
           Employee Relations.............................................. 18
           Segment Information............................................. 19
           Environmental Matters........................................... 19
Item 2.    Properties...................................................... 22
Item 3.    Legal Proceedings............................................... 26
Item 4.    Submission of Matters to a Vote of Security Holders............. 29

PART II
-------
Item 5.    Market for Registrant's Common Equity and Related
           Stockholder Matters............................................. 30
Item 6.    Selected Financial Data......................................... 31
Item 7.    Management's Discussion and Analysis of Financial
           Condition and Results of Operations............................. 33
           PSEG............................................................ 33
           Corporate Structure............................................. 33
           Overview of 1999 and Future Outlook............................. 33
           Results of Operations........................................... 36
           Liquidity and Capital Resources................................. 42
           External Financings............................................. 47
           Qualitative and Quantitative Disclosures About Market Risk...... 49
           Foreign Operations.............................................. 50
           Year 2000 Readiness............................................. 50
           Accounting Issues............................................... 51
           PSE&G........................................................... 51
           Forward Looking Statements...................................... 51
Item 7A.   Qualitative and Quantitative Disclosures About Market Risk...... 52
Item 8.    Financial Statements and Supplementary Data..................... 52
           Consolidated Financial Statements............................... 53
           Notes to Consolidated Financial Statements...................... 64
           Financial Statement Responsibility..............................103
           Independent Auditors' Reports...................................105
Item 9.    Changes in and Disagreements With Accountants on
           Accounting and Financial Disclosure.............................107

PART III
--------
Item 10.   Directors and Executive Officers of the Registrants.............108
Item 11.   Executive Compensation..........................................110
Item 12.   Security Ownership of Certain Beneficial Owners
           and Management..................................................114
Item 13.   Certain Relationships and Related Transactions..................115

PART IV
-------
Item 14.   Exhibits, Financial Statement Schedules and Reports
           on Form 8-K.....................................................116
           Schedule II--Valuation and Qualifying Accounts..................118
           Signatures......................................................119
           Exhibit Index...................................................121


                                       i
<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 three principal direct wholly-owned operating subsidiaries:
Public Service Electric and Gas Company (PSE&G), PSEG Power LLC (Power) and PSEG
Energy Holdings Inc. (Energy Holdings). In November 1999, PSEG formed PSEG
Services Corporation (Services) to provide management and administrative
services to PSEG and its subsidiaries.

                            PSEG ORGANIZATIONAL CHART

                                ---------------
                                      PSEG
                                ---------------
                                        |
      -------------------------------------------------------------------
      |                    |                    |                       |
---------------     ---------------       ---------------        ---------------
    PSE&G          _     Power          _ Energy Holdings           Services
---------------   | ---------------    |  ---------------        ---------------
                  |                    |
                  | ---------------    |  -------------------
                  |-    Fossil         |-       Global
                  | ---------------    |  -------------------
                  |                    |
                  | ---------------    |  -------------------
                  |-    Nuclear        |-       Resources
                  | ---------------    |  -------------------
                  |                    |
                  | ---------------    |  -------------------
                   -     ER&T           - Energy Technologies
                    ---------------       -------------------

      PSE&G

      PSE&G is a New Jersey corporation with its principal executive offices at
80 Park Plaza, Newark, New Jersey 07102. PSE&G 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. Upon the final resolution of appeals of certain
regulatory orders issued by the New Jersey Board of Public Utilities (BPU) under
the New Jersey Energy Master Plan Proceedings, as more fully discussed below,
PSE&G expects to transfer its generation-related assets to Power. PSE&G will
continue to own and operate its transmission and distribution businesses as a
public utility.

      More information on the New Jersey Energy Master Plan proceedings can be
found in Regulatory Issues. Within this report, the results of operations of the
generation business have been included within PSE&G since PSE&G continued to own
and operate the generation-related assets throughout 1999.

      Currently, 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. As of December 31,
1999, PSE&G provided service to approximately 1.9 million electric customers and
approximately 1.6 million gas customers. 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


                                       2
<PAGE>

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's load
requirements are almost evenly split among residential, commercial and
industrial customers. 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.

      POWER

      Power and its subsidiaries were formed in 1999 to acquire, own and operate
the electric generation-related assets of PSE&G pursuant to the terms of the
Final Decision and Order (Final Order) issued August 24, 1999 by the BPU under
the New Jersey Energy Master Plan and the New Jersey Electric Discount and
Energy Competition Act (Energy Competition Act). Through its subsidiaries, Power
will provide energy and capacity to PSE&G under a full requirements contract
through the end of July 2002 and will also market electricity, natural gas,
capacity and ancillary services throughout the Eastern United States. Power has
three direct wholly-owned subsidiaries: PSEG Fossil LLC (Fossil), PSEG Nuclear
LLC (Nuclear) and PSEG Energy Resources & Trade LLC (ER&T). As noted previously,
the results of operation of the generation business in 1999 have been reported
within PSE&G in this report.

      ENERGY HOLDINGS

      Energy Holdings is the parent of three energy-related lines of business
through its wholly-owned subsidiaries: PSEG Global Inc. (Global), which
develops, acquires, owns and operates electric generation and distribution
facilities and engages in power production and distribution, including wholesale
and retail sales of electricity, in selected domestic and international markets;
PSEG Resources Inc. (Resources), which invests in energy-related financial
transactions and manages a diversified portfolio of investments; and PSEG Energy
Technologies Inc. (Energy Technologies), an energy management company that
constructs, operates and maintains heating, ventilating and air conditioning
(HVAC) systems for, and provides energy-related engineering, consulting and
mechanical contracting services to, industrial and commercial customers in the
Northeastern and Middle Atlantic United States.

      Energy Holdings also has a finance subsidiary, PSEG Capital Corporation
(PSEG Capital), which provides privately-placed debt financing to Energy
Holdings' operating subsidiaries on the basis of a minimum net worth maintenance
agreement with PSEG. Energy Holdings is also the parent of Enterprise Group
Development Corporation (EGDC), a nonresidential real estate property management
business and has been conducting a controlled exit from the real estate business
since 1993.

RISK FACTORS

      PSEG and its subsidiaries 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 Regulatory Issues);
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 Regulatory Issues); the ability to economically and safely operate power
generation facilities in accordance with regulatory requirements (see Electric
Supply and Capacity); increased capital investments attributable to
environmental regulations (see Environmental Matters); 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 production and gas
supply activities, transmission and distribution systems, including commodity
price fluctuations, volatility and credit risk from counterparties; limited
control of minority investments; seasonality; purchasing electricity at higher
prices than provided in the basic generation service rates approved by the BPU;
replacing basic generation service revenues after the transition period expires
in 2003; sufficient insurance coverages; managing foreign investments and
electric generation and distribution operations in locations outside of the
traditional utility service territory (see Foreign Operations of MD&A);
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); and debt and equity market concerns associated with
these issues.


                                       3
<PAGE>

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 well underway in New Jersey and in other states in the Northeast
and across the United States. The deregulation and restructuring of the nation's
energy markets, the unbundling of energy and related services, the diverse
strategies within the industry related to holding, buying or selling generation
capacity and the anticipated resulting industry consolidation will have a
profound effect on PSEG and its subsidiaries, providing them with new
opportunities and exposing them to new risks (see Overview of 1999 and Future
Outlook of MD&A).

      PSE&G / POWER

      In response to the opening of the New Jersey electric generation market to
competition, a variety of electric generators and retail energy marketers have
begun operating in New Jersey and are competitors of PSE&G and Power. As of
December 31, 1999, several third party suppliers (TPS) participated in the New
Jersey electric generation market and gained approximately 5% of the customer
load traditionally served by PSE&G. As the competitive market matures, the loss
of customer load is likely to increase.

      As PSE&G loses customers served under the basic generation service (BGS)
obligation, Power will seek to replace those lost revenues by selling generation
into the wholesale marketplace. Power's success as a competitive generator will
be due in part to the extent it can produce power at rates lower than the BGS
contract and prevailing market prices. There is virtually no financial impact on
PSE&G's transmission and distribution business due to customers choosing an
alternate electric or gas supplier. For further information on regulatory
changes, see Regulatory Issues.

      ENERGY HOLDINGS

      Energy Holdings and its subsidiaries are subject to substantial
competition in the United States as well as in the international markets from
independent power producers, domestic and multi-national utility generators,
fuel supply companies, engineering companies, equipment manufacturers and
affiliates of other industrial companies. Restructuring of worldwide energy
markets, including the privatization of government-owned utilities and the sale
of utility-owned assets, is creating opportunities for, and substantial
competition from, well-capitalized entities which may adversely affect Energy
Holdings' ability to make investments on favorable terms and achieve its growth
objectives. Resources faces competition from numerous well-capitalized
investment and finance company affiliates of banks, utilities and industrial
companies. Energy Technologies faces substantial competition from energy
marketers, utilities and their affiliates and HVAC and mechanical contractors.
For additional information, see Energy Holdings.

REGULATORY ISSUES

      STATE REGULATION

      As a New Jersey public utility, PSE&G has been 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, reporting requirements and affiliate standards.
Additionally, PSEG and its subsidiaries are subject to the rules and regulations
of the New Jersey Department of Environmental Protection (NJDEP) and the New
Jersey Department of Transportation.


                                       4
<PAGE>

      FEDERAL REGULATION

      PSEG and certain of its subsidiaries' domestic operations 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. Global's investments include
exempt wholesale generators (EWGs) and foreign utility companies (FUCOs) under
PUHCA. Failure to maintain status of these plants as EWGs or FUCOs could subject
PSEG and its subsidiaries to regulation under PUHCA.

      The Public Utility Regulatory Policy Act (PURPA) provides to qualifying
facilities (QFs) certain exemptions from Federal and state laws and regulations,
including organizational, rate and financial regulation. Global's investments
include QFs under PURPA. If any of the domestic plants in which Global has an
interest lose their QF status or if amendments to PURPA are enacted that
substantially reduce the benefits currently afforded QFs, PSEG could lose its
exemption under PUHCA unless such generation plant was able to qualify for EWG
status.

     In addition, actions of PSEG, PSE&G, Power, Resources, Global or Energy
Technologies could cause PSEG, and its subsidiaries, to be no longer exempt from
regulation under PUHCA. If PSEG were no longer exempt from PUHCA, PSEG and its
subsidiaries would be subject to additional regulation by the SEC with respect
to their financing and investing activities, including the amount and type of
non-utility investments. PSEG believes, however, that this would not have a
material adverse affect on PSEG and its subsidiaries.

      Construction, operation and decommissioning 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. PSE&G is also subject to
the rules and regulation of the Federal Environmental Protection Agency (EPA),
U.S. Department of Transportation (DOT) and U.S. Department of Energy (DOE).
Additionally, Global is subject to the rules and regulations of the EPA, DOT and
DOE in the operation of its domestic generation facilities. For information on
environmental regulation, see Environmental Matters.

      PSE&G
      -----
      NEW JERSEY ENERGY MASTER PLAN PROCEEDINGS AND RELATED ORDERS

      In January 1999, the State Legislature passed the Energy Competition Act
which was signed into law on February 9, 1999. Following the passage of the
Energy Competition Act, the BPU rendered its summary decision relating to
PSE&G's rate unbundling, stranded costs and restructuring proceedings (Summary
Order) on April 21, 1999 and subsequently issued its Final Order in these
matters on August 24, 1999. The Energy Competition Act and the related BPU
proceedings are referred to herein as the Energy Master Plan Proceedings. For
discussion of the extraordinary charge to earnings recorded as a result of the
deregulation of PSE&G's generation business, see Note 3. Extraordinary Charge
and Other Accounting Impacts of Deregulation of Notes to Consolidated Financial
Statements (Notes). 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. Following the
restructuring of the energy industry, PSE&G's distribution business and
transmission business will continue to be regulated by the BPU and FERC,
respectively.

      THE FINAL ORDER PROVIDED FOR THE FOLLOWING:
      -------------------------------------------
      TRANSITION PERIOD

      o     A four-year transition period from August 1, 1999 through July 31,
            2003. During this transition period, rates for services provided by
            PSE&G are capped for all electric customers.


                                       5
<PAGE>

      RATE REDUCTIONS

      o     In addition, through July 2003, electric customers will receive the
            following rate reductions from those rates in effect on July 31,
            1999:

                               Effective Date        Amount of Rate Reduction
                               --------------        ------------------------
                              August 1, 1999:        5%
               At the time of securitization:        increasing to 7% (minimum)
                              August 1, 2001:        increasing to 9% (minimum)
                              August 1, 2002:        increasing to 13.9% average
                                                     (10% off rates in effect in
                                                     April 1997)

            The BPU conditioned the second and third incremental rate reductions
            upon implementation of securitization (which has been delayed by the
            appeals discussed below). The BPU further determined that the final
            aggregate rate reduction of 13.9% on August 1, 2002 is required by
            the Energy Competition Act and is not contingent on the
            implementation of securitization.

      SHOPPING CREDITS

      o     Shopping credits (credits which a customer electing a new supplier
            of electricity will receive from PSE&G) have been established for
            the transition period and include the cost of energy, capacity,
            transmission, ancillary services, losses, taxes and a retail adder.
            The average overall credits will be as follows:

                        1999:       4.95 cents per kilowatt hour (kWh)
                        2000:       5.03 cents per kWh
                        2001:       5.06 cents per kWh
                        2002:       5.10 cents per kWh
                        2003:       5.10 cents per kWh

      STRANDED COSTS

      o     The BPU concluded that PSE&G should be provided the opportunity to
            recover up to $2.94 billion (net of tax) of its generation-related
            stranded costs, through securitization of $2.4 billion (discussed
            below) and an opportunity to recover up to $540 million (net of tax)
            of its unsecuritized generation-related stranded costs on a present
            value basis. The $540 million is subject to recovery by various
            means, including an explicit market transition charge (MTC).

      o     PSE&G was directed to use the overrecovered balance in the Levelized
            Energy Adjustment Clause (LEAC) as of July 31, 1999 as a mitigation
            tool for stranded cost recovery associated with non-utility
            generation (NUG) contracts. PSE&G applied the overrecovery as a
            credit to the starting deferred balance of the non-utility
            generation market transition charge (NTC) to offset future above
            market costs and/or contract buyouts otherwise recoverable from
            ratepayers.

      SECURITIZATION

      o     The BPU determined that it would issue an irrevocable Bondable
            Stranded Costs Rate Order (Finance Order) upon PSE&G's request
            providing for the issuance of up to $2.525 billion of transition
            bonds, with a scheduled amortization upon issuance of 15 years,
            representing $2.4 billion of generation-related stranded costs (net
            of tax) and an estimated $125 million of transaction costs. A
            transition bond charge will be collected from all existing and
            future electric customers via a single per kWh "wires charge"
            subject to adjustment at least annually.

      o     The BPU determined that the taxes related to securitization, which
            reflect the grossed up revenue requirements associated with the $2.4
            billion in generation-related stranded costs (net of tax) being
            securitized, are recoverable stranded costs. The BPU determined that
            such taxes should not be collected


                                       6
<PAGE>

            through the transition bond charge; rather, such taxes will be
            collected via a separate MTC. The duration of this separate MTC is
            to be identical to the duration of the transition bond charge.

      o     The net proceeds of securitization are required to be used to
            refinance or retire certain of PSE&G debt and/or equity in a manner
            that will not substantially alter PSE&G's overall capital structure.

      SALE OF GENERATION-RELATED ASSETS

      o     The BPU directed PSE&G to sell its generation plants to an affiliate
            of PSEG for $2.443 billion plus the net book value of other
            generation-related assets and liabilities transferred at the time of
            sale, such as fuel and materials and supplies. When the transaction
            is completed, PSE&G and Power will record the difference between the
            net book value of the generation plants and the $2.443 billion of
            sale proceeds as an increase and decrease to contributed capital,
            respectively.

      o     The BPU further directed that any gains resulting from any
            subsequent sale of the generation-related assets to a third party
            which occurs before August 1, 2004 must be shared equally between
            ratepayers and shareholders. For further discussion, see
            Generation-Related Asset Sale to Power.

      BASIC GENERATION SERVICE

      o     PSE&G is obligated to provide BGS to customers who do not choose
            another electric supplier and to serve as the supplier of last
            resort to all customers. PSE&G will contract with ER&T to provide
            the energy and capacity required to meet its BGS and Off-Tariff Rate
            Agreements (OTRA) obligations for the first three years of retail
            choice (see Generation-Related Asset Sale to Power). PSEG, PSE&G and
            Power are prohibited from promoting such service as a competitive
            alternative to other electricity suppliers and marketers. The
            contract to provide capacity and energy for BGS will be
            competitively bid for the year beginning August 1, 2002 and
            thereafter. Any payments to PSE&G resulting from the BGS supply
            contract being bid out will be applied to the deferred societal
            benefit costs balance for purposes of establishing the societal
            benefit clause (SBC) rate in the year beginning August 1, 2003.

      SOCIETAL BENEFIT CLAUSE AND NON-UTILITY GENERATION MARKET TRANSITION
      CLAUSE

      o     Societal benefit costs and stranded costs associated with NUG
            contracts will be collected through separate charges. Both charges
            will remain constant throughout the four-year transition period and
            PSE&G will use deferral accounting, including interest on any
            over/underrecoveries. The charges will be reset annually thereafter.
            The NTC charge will be initially set at the 1999 level of $183
            million annually. Any NUG contract buyouts will also be charged to
            the NTC and will be subject to deferral accounting. The SBC will
            include costs related to: 1) social programs which include the
            universal service fund; 2) nuclear plant decommissioning; 3) demand
            side management (DSM) programs (see Other Regulatory Issues); 4)
            manufactured gas plant remediation; and 5) consumer education.

      ELECTRIC DISTRIBUTION DEPRECIATION

      o     PSE&G was directed by the BPU to record a regulatory liability by
            reducing its depreciation reserve for its electric distribution
            assets by $569 million. This regulatory liability will be amortized
            over the period from January 1, 2000 to July 31, 2003.

      INVESTMENT TAX CREDITS (ITC)

      o     The BPU directed PSE&G to seek a private letter ruling from the
            Internal Revenue Service (IRS) to determine if the ITC included in
            the impairment write-down of generation assets, which amounted to
            $235 million, can be credited to customers without violating the tax
            normalization rules of the Internal Revenue Code. If the IRS's
            private letter ruling determines that the ITC could be passed on to
            PSE&G's customers without violating the IRS's normalization rules,
            then in the fourth year of the transition period, the BPU will
            consider any action which it may deem appropriate regarding the
            treatment of the ITC, giving


                                       7
<PAGE>

            consideration to the issues resolved in the Final Order and other
            relevant matters. PSE&G accounted for the ITC as a reduction to the
            extraordinary charge recorded in 1999. An adverse resolution to this
            matter would result in an additional extraordinary charge to income
            up to the amount of the ITC, which would likely have a material
            adverse impact on PSEG's and PSE&G's financial condition, results of
            operations and net cash flows. However, based on PSE&G's analysis,
            an adverse outcome does not appear to be likely.

      SECURITIZATION FILING AND FINANCE ORDER

      On September 17, 1999, the BPU issued its Finance Order to authorize,
among other things, the imposition of a non-bypassable transition bond charge on
PSE&G's customers; the sale of PSE&G's property right in such charge to a
bankruptcy-remote financing entity; the issuance and sale of $2.525 billion of
transition bonds by such entity as consideration for such property right,
including an estimated $125 million of transaction costs; and the application by
PSE&G of the transition bond proceeds to retire outstanding debt and/or equity.

      PSE&G Transition Funding LLC, a wholly owned subsidiary of PSE&G, was
created to issue such transition bonds. Assuming a favorable decision on the
appeals discussed below, PSEG and PSE&G expect such sale of transition bonds and
the receipt of proceeds in 2000.

      APPEALS

      In October and November 1999, two appeals of the BPU's Final Order and two
appeals of the Finance Order were filed in the Appellate Division of the New
Jersey Superior Court on behalf of several customers. The Court granted PSE&G's
requests to accelerate the appeals and ordered that the matters be consolidated.
All briefs have been filed and oral arguments on the consolidated matters have
been set for March 8, 2000. While PSEG and PSE&G believe that the appeals are
without merit, no assurances can be given at this time as to the timing or
outcome of these proceedings. Accordingly, neither PSEG nor PSE&G are able to
predict whether such appeals will have a material adverse effect on their
financial condition, results of operations or net cash flows.

      GENERATION-RELATED ASSET SALE TO POWER

      It is anticipated that Power will acquire and manage PSE&G's electric
generation-related assets. The appeal which has been filed challenging the Final
Order has delayed this transaction. PSEG and PSE&G expect such sale will occur
later in 2000, upon a favorable conclusion of the appeal process.

     Certain regulatory approvals are required prior to the sale of the
generation-related assets to Power. Power has made the necessary filings and is
awaiting final approval from the NJDEP to transfer certain liabilities and the
PPUC to transfer PSE&G's assets in Pennsylvania. Additionally, in October 1999,
Nuclear and Fossil filed with the FERC for EWG status. In September 1999, FERC
approved PSE&G's proposed sale of its generating units to Power and its
subsidiaries, conditionally accepted a number of other agreements between Power
and certain counterparties and directed Power to make amendments to its filing
clarifying certain other proposals. In February 2000, NRC approval was gained to
transfer PSE&G's nuclear licenses to Nuclear, conditioned upon BPU approval.

      METERING, BILLING AND ACCOUNT SERVICES

      In accordance with the Energy Competition Act, the BPU has initiated a
proceeding to determine the timeline and extent to which metering, billing and
customer services may become competitive services. To accomplish this, the BPU
conducted a series of workshops in 1999 to define the issues and functions that
must be considered when it evaluates the issue of competition for these
services. A formal proceeding is expected to begin in early 2000.

      GENERIC ISSUES

      In 1999, the BPU issued a series of interim orders that decided generic
issues related to the deregulation of the electric and gas industries in New
Jersey. These orders addressed environmental disclosure standards, energy
aggregation program standards, anti-slamming standards, retail choice consumer
protection standards and licensing and registration standards applicable to all
energy service providers.

      In February 2000, the BPU orally approved affiliate standards and fair
competition standards which apply to transactions between a public utility and
its affiliates which provide, or offer, competitive services to retail customers
in New Jersey. The official version of these standards will be attached to a BPU
order adopting the standards.


                                       8
<PAGE>

      GAS UNBUNDLING

      The Energy Competition Act also required that all customers have the
ability to choose a competitive gas supplier by January 1, 2000. On April 30,
1999, PSE&G submitted its required gas unbundling compliance filing to the BPU.
On January 10, 2000, the BPU verbally approved PSE&G's stipulation regarding its
gas unbundling filing with certain modifications. The main features of the gas
unbundling are:

      o     The development of a SBC to recover specific costs including, social
            programs, DSM, Remediation Adjustment Clause (RAC) and consumer
            education.

      o     The development of a Realignment Adjustment Charge to recover lost
            revenues incurred by PSE&G (subject to certain criteria) as a result
            of customers switching from commodity service to transportation
            service.

      o     The reallocation of approximately $40 million from transportation
            rates to commodity and balancing rates.

      o     An incentive of approximately 0.9 cents per therm for all customers
            who leave PSE&G to shop with a TPS. An additional incentive of 1.4
            cents per therm for residential customers who leave PSE&G to shop
            with a TPS.

      o     PSE&G must propose a daily delivery option to the current monthly
            based balancing mechanism to be in place prior to the next winter
            season.

      OTHER REGULATORY ISSUES

      ENERGY EFFICIENCY AND RENEWABLE ENERGY (FORMERLY 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 programs on equal regulatory footing with supply
side or energy production investments. The Energy Competition Act requires the
continuation of these energy efficiency programs and the initiation of renewable
energy programs, the costs of which are to be recovered through an SBC charge on
all electric and gas customers' bills. On June 9, 1999, the BPU initiated the
Comprehensive Resource Analysis (CRA) proceeding causing a comprehensive
resource analysis of energy programs to be undertaken including the reevaluation
of existing DSM programs and the incorporation of new energy efficiency and
renewable energy programs. Key to the CRA proceeding is the determination of the
appropriate level of funding for energy efficiency and renewable energy programs
on a statewide basis. Hearings were conducted in November 1999 and a record was
established that would permit the BPU to render decisions for each New Jersey
utility in lieu of settlements, if necessary. PSE&G filed its proposed CRA plan
with the BPU on August 23, 1999.

      On October 1, 1999, the BPU approved the PSE&G 1999 Interim Demand Side
Management Plan which was filed in June 1998. This Plan was proposed as an
interim plan to facilitate the continuation of DSM programs until replaced by
the energy efficiency and renewable energy programs anticipated to be approved
in the CRA proceeding.

      NON-UTILITY GENERATION BUYDOWN

      Under Federal and State regulations, utilities were required to enter into
long-term power purchase agreements with NUGs at prices which have subsequently
proven to be above market. PSE&G is seeking to restructure certain of its BPU
approved contracts with NUGs, which were estimated to be $1.6 billion above
assumed future market prices. In July 1999, PSE&G announced an agreement to
amend one such NUG contract, yielding a cost reduction of up to $100 million
over the remaining 20 years of the contract. In September 1999, the agreement
was approved by the BPU and the costs to restructure this contract will be
recovered through the NTC.

      TAX SHARING AGREEMENT

      The issue of PSEG sharing the benefits of consolidated tax savings with
PSE&G or its customers 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


                                       9
<PAGE>

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 consolidated tax savings in future
proceedings.

      ENERGY HOLDINGS

      Energy Holdings is not subject to direct regulation by the BPU, except for
reporting requirements, affiliate standards and power purchase agreements.

      However, as a result of the 1992 focused audit of PSEG's non-utility
businesses (Focused Audit), PSEG agreed, among other things, that it would not
permit the non-utility assets of Energy Holdings to exceed 20% of PSEG's
consolidated assets without prior notice to the BPU and that it would make a
good faith effort to eliminate its net worth maintenance agreement with PSEG
Capital by 2003. At December 31, 1999, such assets were approximately 22% of
PSEG's consolidated assets and PSEG Capital's outstanding debt was $630 million,
with maturities through 2003. For additional information, see Liquidity and
Capital Resources of MD&A.

      INTERNATIONAL REGULATION

      Energy Holdings' foreign distribution companies are subject to varying
amounts of regulation in the countries in which they operate. Global's electric
and gas distribution facilities in South America are rate-regulated enterprises.
Rates charged to customers are established by governmental authorities and are
currently sufficient to cover all operating costs and provide a fair return.
Energy Holdings can give no assurances that future rates will be established at
levels sufficient to cover such costs, provide a return on its investment or
generate adequate cash flow to pay principal and interest on its debt or to
enable it to comply with the terms of debt agreements. Global's Latin American
facilities are also subject to quality of service standards. Global intends to
implement capital improvement budgets which will attempt to meet these
standards. Failure to meet required standards would result in penalties which
are not expected to have a material impact on these investments, although no
assurances can be given. Certain generation projects are also subject to rate
regulation. Global is also subject to foreign environmental rules and
regulations.

CUSTOMERS

      PSE&G

       As of December 31, 1999, PSE&G provided service to approximately 1.9
million electric customers and 1.6 million gas customers. For the year ended
December 31, 1999, PSE&G's operating revenues aggregated $5.89 billion, of which
71% was from its electric operations and 29% 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. PSE&G does not rely upon a single customer or group of
customers for a significant portion of its revenues. For a breakdown of electric
revenues between the generation, energy resources and trade and transmission and
distribution businesses of PSE&G, see Note 16. Financial Information by Business
Segments of Notes.

      POWER

       Power will sell generation and capacity to PSE&G through the BGS
contract, into the wholesale power market (including PJM Interconnection, L.L.C.
(PJM) and other power pools) and through bilateral contracts. It is expected
that, in the near term, PSE&G will be Power's most significant customer in that
under the BGS contract, Power is obligated to supply all of PSE&G's energy and
capacity requirements through July 31, 2002. For the period beginning August 1,
2002 and thereafter, the BGS contract will be bid out by PSE&G. If Power is not
the successful bidder, Power will have to replace lost revenues from the BGS
contract by entering into other bilateral supply contracts and selling into the
wholesale power markets.


                                       10
<PAGE>

      ENERGY HOLDINGS

       GLOBAL

       Through its ownership interests in six distribution companies, Global
provides electricity to over 2.7 million customers in Brazil, Argentina, Peru
and Chile. Also, through its ownership interests in 19 operating generating
projects in the United States, Asia and South America totaling 2,002 megawatts
(MW) (535 MW, net), Global sells energy, capacity and ancillary services to a
number of customers through purchase power agreements (PPAs) as well as into the
wholesale power marketplace.

       RESOURCES

       Resources primarily makes passive investments in energy related projects.
Current investments include leveraged leases, leveraged buyout (LBO) Funds,
limited partnerships and securities. Resources has no customers.

       ENERGY TECHNOLOGIES

       Energy Technologies provides energy-related services for industrial and
commercial customers in the Northeastern and Middle Atlantic United States.
Energy Technologies currently provides such services to approximately 13,000
customers.

PSE&G / POWER

ELECTRIC SUPPLY AND CAPACITY

     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 PSEG. Power will seek to pursue growth opportunities through
expansion of its capacity, acquisitions, in whole or in part, of existing fossil
plants and formation of partnerships with independent power producers in the
region. Power will employ a disciplined approach to growth (see Note 11.
Commitments and Contingent Liabilities of Notes). Power's growth strategy is
designed to increase its generating portfolio 3,000 MW to 5,000 MW over the next
five years. As Power continues to acquire generating capacity in the region,
Power will utilize its wholesale marketing, trading and risk management
capabilities, together with its growing asset base, to expand its wholesale
marketing and trading volume.

      Once the anticipated sale of PSE&G's generation-related assets to Power is
complete in 2000, the supply of electricity for PSE&G will continue to be
provided by Power under a BGS contract through, at least, July 31, 2002. Power's
supply of electricity will come from owned capacity and purchases from power
pools, such as PJM, and through bilateral contract arrangements.

      ELECTRIC GENERATING CAPACITY

       Fuel sources for the generating assets are split among natural gas (33%),
nuclear (28%), coal (20%), fuel oil (17%) and pumped storage (2%) on a capacity
basis. This generating asset portfolio represents a strategic mix among all
market segments consisting of 35% base load, 36% load following and 29% peaking
units. The capacity available at any time may be less than the installed
capacity because of temporary outages for inspection, maintenance, repairs,
legal and regulatory requirements including environmental constraints or
unforeseen circumstances. The maximum one-hour demand (peak load), which PSE&G
experienced in 1999, which is also the all time peak load, was 9,804 MW, which
occurred on July 6, 1999, when the day's output was 199,127 megawatt-hours (mWh)
of electricity. For additional information, see Item 2.
Properties--PSE&G--Electric Generation Properties.


                                       11
<PAGE>

      PSE&G's demand for electricity will come from PSE&G's retail customers to
whom PSE&G will continue to provide basic generation service. PSE&G expects to
be able to continue to meet the demand for electricity on its system through its
contract with Power. 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 and assure adequate supply of electricity. PSE&G's output, as shown
under Electric Fuel Supply and Disposal, reflects significant amounts of
purchased power. Electricity is purchased from other sources for various
reasons, including those times when demand exceeds available capacity or when it
is more economic to purchase then generate.

      As of April 1, 1999, FERC lifted the requirement that bids for electric
energy offered for sale in the PJM interchange energy market not exceed the
variable cost of producing such energy. However, transactions that are bid into
the PJM pool are now capped at $1,000 per mWh.

     All power providers are paid the locational marginal price (LMP) set
through power providers' bids. The LMP will be higher in congested areas
reflecting the price bids of those higher cost generating units that are
dispatched to supply demand and alleviate the transmission constraint.
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. Since the LEAC was discontinued as of August 1, 1999, to the
extent PSEG's generation business provides less energy than required to supply
PSE&G's BGS and OTRA customers, the lifting of such caps would present
additional risks with respect to the difference between the cost of such
purchases and the BGS rate. Transmission constraints have and will affect energy
pricing when the PJM system is congested. For further discussion of price
volatility of electricity, see Qualitative and Quantitative Disclosures About
Market Risk.

      On June 7, 1999, the FERC issued an Order establishing procedures for the
interconnection of new generation projects in PJM. Pursuant to the FERC-approved
queuing process contained in the proposal, PSE&G has established a favorable
position in the queue for its planned generation capacity expansion projects.
The June 7, 1999 FERC Order has been appealed by other parties to the D.C.
Circuit Court of Appeals. PSE&G cannot predict the outcome of this appeal.

      On December 29, 1999, PJM filed amendments to its Tariff and to the
Operating Agreement to provide interconnection customers that have cost
responsibility for the construction of transmission facilities or upgrades
necessary to accommodate their interconnection requests with rights to
Incremental Fixed Transmission Rights and to set forth the process for assigning
such rights. Incremental Fixed Transmission Rights are created by the addition
of new transmission facilities or upgrades resulting from accommodation of an
Interconnection Request. At this time the FERC has not yet issued a decision
related to this filing.

      On December 15, 1999, FERC promulgated a Final Rule ("Order 2000") in the
Regional Transmission Organization ("RTO") rulemaking proceeding, which had been
instituted on May 12, 1999. The provisions of Order 2000 are for the most part,
very similar to those of the proposed rulemaking. It appears that the current
structure and procedures of the PJM Independent System Operator are largely in
compliance with the requirements of Order 2000. Order 2000 does not permit
transmission owners such as PSE&G to file for changes in rate design for
transmission service, but it does allow transmission owners to establish their
own revenue requirements. PSE&G has filed a request for rehearing of certain
provisions of Order 2000, and it is expected that other entities may file
requests as well. The ultimate outcome of such requests, and possible court
challenges to Order 2000, cannot be predicted.


                                       12
<PAGE>

      OTHER POWER MARKETS

     Recently, PSE&G has become an active participant in the wholesale
electricity markets in each of the two other Independent System Operator
organizations in the eastern United States, the New York ISO and the ISO New
England.

     A major step in establishing a multi-pool diversity was achieved on October
6, 1999 when Power reached an agreement to acquire Niagara Mohawk Power
Corporation's Albany Steam Station located in New York. PSE&G is actively
following the development of the New York ISO.

NUCLEAR OPERATIONS

      PSE&G has an ownership interest in five nuclear generating units and
operates three of them, the Salem Nuclear Generating Station, Units 1 and 2
(Salem 1 and 2), and the Hope Creek Nuclear Generating Station (Hope Creek).
PECO Energy Company (PECO Energy) operates the Peach Bottom Atomic Power Station
Units 2 and 3 (Peach Bottom 2 and 3). Operation of nuclear generating units
involves continuous close regulation by the NRC. Such regulation involves
testing, evaluation and modification of all aspects of plant operation in light
of NRC safety and environmental requirements. Continuous demonstrations to the
NRC that plant operations meet requirements are also necessary. The NRC has the
ultimate authority to determine whether any nuclear generating unit may operate.
For 1999, PSE&G's nuclear units achieved an average capacity factor of
approximately 87%.

      Refueling outages, which have been reduced in duration due to operating
efficiencies, are expected to last for approximately five to six weeks and are
scheduled for Salem 2, Hope Creek and Peach Bottom 2 in 2000. Salem 1 and 2
completed their latest planned refueling and maintenance outages in October and
May 1999, respectively; Hope Creek completed its latest planned refueling and
maintenance outage in March 1999; and Peach Bottom 3 completed a scheduled
refueling and maintenance outage in October 1999.

      Historically, planned outages of nuclear units caused PSE&G to incur
replacement energy costs of approximately $4 million to $6 million per month for
a Salem or Peach Bottom unit or $8 million to $10 million per month for Hope
Creek. These costs vary greatly depending upon the time of year an outage occurs
since times of higher demand will cause prices to rise significantly. Over the
past few years, price volatility has increased due to the evolving energy
commodity market place. Commensurate with the discontinuation of the LEAC, the
difference between energy revenues and energy costs impact earnings. To mitigate
this risk, ER&T enters into contracts to hedge anticipated demand (see
Qualitative and Quantitative Disclosures About Market Risk in MD&A for further
discussion).

      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 Delmarva
Power & Light Company (DP&L)--7.41%. In March 1998, ACE and DP&L merged to
become Conectiv. In September 1999, Power entered into a contract to purchase
Conectiv's interest in Salem. Once the sale of this interest is complete, PSEG
will own 57.41% of Salem (see Note 11. Commitments and Contingent Liabilities of
Notes). Each Salem unit represents approximately 5% of PSE&G's installed
electric generating capacity. For 1999, Salem achieved an average capacity
factor of approximately 82%.

      For certain litigation relating to Salem, see Item 3. Legal Proceedings.
For information on the operating performance standard applicable to Salem, see
Note 11. Commitments and Contingent Liabilities of Notes. For discussion of the
lawsuit by PSE&G and the other co-owners of Salem seeking to recover damages for
the costs of replacing the steam generators at Salem 1 and 2, see Item 3. Legal
Proceedings. For discussion of the 1994 NJPDES permit related to Salem and its
operations, see Water Pollution Control.


                                       13
<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
Conectiv, which owns the remaining 5%. In September 1999, Power entered into a
contract to purchase Conectiv's interest in Hope Creek. Once the sale of this
interest is complete, PSEG will own 100% of Hope Creek (see Note 11. Commitments
and Contingent Liabilities of Notes). Hope Creek represents approximately 10% of
PSE&G's installed electric generating capacity. For 1999, Hope Creek achieved an
average capacity factor of approximately 85%.

      PEACH BOTTOM

      Peach Bottom consists of two 1,093 MW BWRs located 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%. Power and PECO Energy have each contracted to purchase one-half of
Conectiv's interest in Peach Bottom. Once the sale of this interest is complete,
PSEG and PECO Energy will each own 50% of Peach Bottom (see Note 11. Commitments
and Contingent Liabilities of Notes). Each Peach Bottom unit represents
approximately 5% of PSE&G's installed electric generating capacity. For 1999,
Peach Bottom achieved an average capacity factor of approximately 94%.

      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 each year. The
Energy Master Plan continues this treatment. Also, Power will receive the
portion of Conectiv's Nuclear Decommissioning Trust (NDT) Fund related to the
additional interests in Salem, Hope Creek and Peach Bottom units being
purchased. For information concerning nuclear decommissioning costs and the
Energy Master Plan Proceedings, see Regulatory Issues and Note 12. PSE&G Nuclear
Decommissioning of Notes.

ELECTRIC FUEL SUPPLY AND DISPOSAL

     The following table indicates PSE&G's mWh output by source of energy in
1999 and the estimated output by PSE&G / Power for 2000. In addition, PSE&G will
purchase power under various NOG contracts and sell such power into the
wholesale market with the costs and proceeds applied to the NTC.

                                                  ACTUAL         ESTIMATED
SOURCE                                             1999          2000 (A)
------------------------------------------    --------------     ---------
Nuclear:
      New Jersey facilities...............          32%             43%
      Pennsylvania facilities.............          18%             20%
Fossil:
      Coal:
      New Jersey facilities...............          11%             14%
      Pennsylvania facilities.............          13%             16%
      Natural Gas.........................           6%              6%
      Oil(B) .............................          --               1%
Net PJM Interchange and Purchases
From Utilities and NUGs                             20%              --
                                              --------------     ---------
            Total ........................         100%            100%
                                              ==============     =========

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

(B)   Oil generation for 1999 was less than 1%.


                                       14
<PAGE>

      NUCLEAR FUEL

      PSE&G has several long-term contracts with uranium ore operators,
converters, enrichers and fabricators to meet the currently projected fuel
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 11. Commitments
and Contingent Liabilities of Notes.

      COAL

      Approximately 50% and 35% of PSE&G's coal supply for its New Jersey
facilities is obtained under contracts which expire on December 31, 2000 and
December 31, 2001, respectively. The balance of the supply is contracted
annually from various suppliers, 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 Sithe
Energies, Inc. 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 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 adequate natural gas supplies.

      OIL

      PSE&G uses residual oil in its conventional fossil-fired, steam-electric
units which is purchased in the spot market. 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 adequate 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 with utilities operating nuclear power
plants for transportation and ultimate disposal of the spent fuel and mandated
that the nuclear utilities contribute to a Nuclear Waste Fund at a rate of one
mill per kWh of nuclear generation, subject to such escalation as may be
required to assure full cost recovery by the Federal government. In addition, a
one-time payment was made to the DOE for permanently discharged spent fuels
irradiated prior to 1983. Payments made to the DOE for disposal costs are based
on nuclear generation and are included in Electric Energy Costs in the
Statements of Income. Until August 1, 1999, these costs were recovered through
the LEAC. Thereafter, PSE&G and Power bear the risks of nuclear fuel disposal
costs.

      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. 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 12. PSE&G Nuclear Decommissioning of Notes.

      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 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


                                       15
<PAGE>

Creek pool is also fully racked and it is expected to provide storage capacity
until 2008, 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 is
constructing an on-site dry storage facility at Peach Bottom which it has
advised is expected to be operational in 2000 to provide additional storage
capacity.

      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. 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 any damage recovery or the ultimate
availability of a facility.

      URANIUM ENRICHMENT DECONTAMINATION AND DECOMMISSIONING FUND

      In accordance with the National Energy Policy Act of 1992 (EPAct),
domestic utilities that own nuclear generating stations are required to pay 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. Under this legislation, PSE&G's obligation for the nuclear
generating stations in which it has an interest is $72 million (adjusted for
inflation). Since 1993, PSE&G has paid $37 million, resulting in a balance due
of $35 million. PSE&G believes that it should not be subject to collection of
any such fund payments under EPAct. Along with other nuclear generator owners,
PSE&G has filed suit in the U.S. Court of Claims and in the U.S. District Court,
Southern District of NY to recover these costs.

      LOW LEVEL RADIOACTIVE WASTE (LLRW)

      As a by-product of their operations, nuclear generating units 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.

      PSE&G, through its affiliation with the Northeast Compact Commission, is
currently in negotiations with a task force established by South Carolina to
ensure access to the Barnwell LLRW disposal facility, which is the primary
disposal site used by PSE&G. Both PSE&G and PECO Energy have on-site LLRW
storage facilities for Peach Bottom, Salem and Hope Creek which has the capacity
for at least five years of temporary storage.

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.


                                       16
<PAGE>

      As of December 31, 1999, the daily gas capacity of PSE&G was as follows:

      TYPE OF GAS                                           THERMS PER DAY
      ----------------------------------------       ---------------------------
      Natural gas.............................                 22,630,990
      Liquefied petroleum gas.................                  2,200,000
      Refinery/landfill gas...................                    323,000
                                                               ----------
              Total...........................                 25,153,990
                                                               ==========

      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 1999 was 3.9 billion therms. Included in this amount is 1.1
billion therms of gas delivered to customers under PSE&G's transportation
tariffs and individual cogeneration contracts. During 1999, PSE&G purchased
approximately 3.3 billion therms of gas for its combined gas and electric
operations directly from natural gas producers and marketers. These supplies
were transported to New Jersey by four interstate pipeline suppliers.

      The majority of PSE&G's gas transportation and supply contracts expire at
various times over the next 10 years. 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 750 million therms. PSE&G does not presently
anticipate any difficulty in obtaining adequate supplies of natural gas.

      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
gas when compared to levels included in base rates. 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 Regulatory Issues--Gas
Unbundling.

      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.

      PSE&G was able to meet all of the demands of its firm customers during the
1998-1999 winter season and expects to continue to meet such energy-related
demands of its firm customers during the 1999-2000 and 2000-2001 winter seasons.
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 and the availability of feedstocks for the production
of supplements to its natural gas supply.

ENERGY HOLDINGS

      GLOBAL

      Global develops, acquires, owns and operates electric generation and
distribution facilities and engages in power production and distribution,
including wholesale and retail sales of electricity, in selected domestic and
international markets. Global has ownership interests in 19 operating generation
projects totaling 2,002 MW (535 MW net) located in the United States, Argentina,
China and Venezuela. Global has ownership interests in 18 projects totaling
4,832 MW (2,252 MW net) in construction or advanced development that are located
in the United States, Argentina, Venezuela, India, Tunisia, China, Italy and
Poland. Of Global's generation projects in operation, construction or advanced
development, 1,292 MW net or 46% are located in the United States. Global is
actively involved, through its joint ventures, in managing the operations of
eight operating generation projects and will be actively involved in managing
the operations of five of the projects in construction or advanced development.
Global owns interests in six distribution companies which, as of December 31,
1999, totaled approximately 68% of Global's assets, providing electricity to
approximately 2.7 million customers in Argentina, Brazil, Chile and Peru.


                                       17
<PAGE>

      Deregulation and privatization of energy markets, as well as growth in
electricity demand throughout the world, have provided the opportunity for
Global to expand the scope of its operations. Global has concentrated its
development activities in markets in which it believes most of the new worldwide
electric generating capacity will be installed in the next five years: China,
India, the Middle East, Latin America and selected regions in the United States.
Global has established a presence in these high growth markets which allows it
to access and better evaluate potential investment opportunities. Prior to
proceeding with a particular investment, Global's strategy is to conduct a
multi-faceted analysis of the resident country, potential partners and
transaction economics. Initially, countries are evaluated to assess the social,
political, economic and regulatory environment. To mitigate certain risks,
Global next seeks to identify partners with complementary skills and
capabilities. Global then focuses on projects which may present potential
synergies with existing projects or future investments. As a result, Global has
developed or acquired interests in electric generation and/or distribution
facilities in the United States, Argentina, Brazil, Chile, Peru, Venezuela, and
China.

     Global expects that most of its new generation investments will be in the
international markets. Of Global's total net equity interest in projects in
operation, construction or advanced development, approximately 50% sell, or are
expected to sell, output pursuant to long-term power purchase agreements. The
remaining projects operate, or will operate, on a merchant basis. Global
believes that it has adequate fuel supplies and transmission access and capacity
for its generation projects. For a listing of Global's projects, see Item 2.
Properties.

      RESOURCES

      Resources provides energy infrastructure financing in developed countries.
Resources invests in energy-related financial transactions and manages a
diversified portfolio of more than 60 investments including leveraged leases,
leveraged buyout (LBO) funds, limited partnerships and marketable securities. As
of December 31, 1999, Resources had approximately $1.8 billion invested in
leveraged leases representing approximately 84% of Resources' assets.
Approximately 79% of these leveraged leases are with lessees that have
investment grade credit ratings. Leveraged leases of energy-related plant and
equipment totaled approximately $1.3 billion or 72% of the lease portfolio and
62% of Resources assets. The remainder of Resources' portfolio is further
diversified across a wide spectrum of asset types and business sectors,
including leveraged leases of aircraft, railcars, real estate and industrial
equipment, limited partnership interests in project finance transactions, LBO
and venture funds and marketable securities.

      Worldwide deregulation of energy markets is also creating investment
opportunities for Resources. As energy assets are privatized or sold, purchasers
require significant amounts of acquisition capital. In addition to traditional
bank and debt financing, leveraged leases provide purchasers with a source of
funding for such acquisitions. Resources, as an experienced participant in the
leveraged lease financing market for energy assets, is actively pursuing
domestic and international opportunities to invest in these highly structured
transactions. Resources has invested in 15 energy-related leveraged lease
transactions since 1997. When evaluating leveraged lease investments, Resources
focuses on mitigating credit risk while eliminating operating and currency risk.
Resources seeks to invest in transactions where its expertise and understanding
of the inherent risks and operating characteristics of energy assets provide a
competitive advantage. Resources expects to continue to concentrate its
investment activity on energy-related financial transactions.

      ENERGY TECHNOLOGIES

      Energy Technologies is an energy management company that constructs,
operates and maintains HVAC systems for, and provides energy-related
engineering, consulting and mechanical contracting services to, industrial and
commercial customers in the Northeastern and Middle Atlantic United States.
Energy Technologies was established in 1997 and as of December 31, 1999 had
assets of approximately $249 million.

      Deregulation of the domestic electric and gas utility industries is
presenting opportunities for Energy Technologies in the energy services business
in the Northeastern and Middle Atlantic United States. Since its formation,
Energy Technologies has acquired nine companies involved in the engineering,
construction, installation, operation and maintenance of energy equipment and
HVAC systems. Energy Technologies plans to grow its existing operations and
utilize the recently acquired companies to deliver expanded energy-related
services and products, including gas and electricity, to existing and new
customers.

EMPLOYEE RELATIONS

      PSEG has no employees. In December 1999, certain employees of PSE&G were
transferred to Power and Services. As of December 31, 1999, PSE&G had 5,974
employees, Power had 3,081 employees, Energy Holdings had 1,656 employees and
Services had 1,180 employees. With respect to transferred employees, the
impacted union groups agreed that the collective bargaining agreements
established with PSE&G would remain in effect until their


                                       18
<PAGE>

scheduled expiration. These six-year collective bargaining agreements with all
of PSE&G's, Power's and Services' union groups, representing 6,195 employees,
expire on April 30, 2002. Energy Holdings has various agreements with union
groups representing 903 employees. PSE&G, Power, Services and Energy Holdings
believe that they maintain satisfactory relationships with their employees.

      For information concerning employee pension plans and other postretirement
benefits, see Note 14. Pension, Other Postretirement Benefit and Savings Plans
of Notes.

SEGMENT INFORMATION

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

ENVIRONMENTAL MATTERS

      Federal, regional, state and local authorities regulate the environmental
impacts of the operations of PSEG and its subsidiaries. Global has ownership
interests in facilities, including operating power plants and distribution
companies and power plants under construction or in development, which are
subject to similar regulation not only in the United States, but in numerous
other countries as well. Areas of regulation include air quality, water quality,
site remediation, land use, waste disposal, aesthetics and other matters.
Generators of hazardous substances potentially face joint and several liability,
without regard to fault, when they fail to manage these materials properly and
when they are required to clean up property affected by the production and
discharge of such substances.

      Compliance with environmental requirements has caused PSEG and its
subsidiaries to modify the day-to-day operation of their facilities, to
participate in the cleanup of various properties that have been contaminated,
and to modify, supplement and replace existing equipment and facilities. During
1999, PSE&G expended approximately $17 million for capital related expenditures
to improve the environment and comply with laws and regulations and estimates
that it will expend approximately $21 million, $22 million and $11 million in
the years 2000 through 2002, respectively, for such purposes. Such amounts are
included in estimates of construction expenditures (see MD&A--Liquidity and
Capital Resources).

      AIR POLLUTION CONTROL

      Federal, state, and local air pollution laws (such as the Federal Clean
Air Act (CAA) and the New Jersey Air Pollution Control Act), and the regulations
implementing those laws, require controls of emissions from sources of air
pollution, as well as recordkeeping, reporting and permit requirements.

      To reduce emissions of sulfur dioxide (SO2), the CAA sets a cap on total
emissions of SO2 from affected units, and allocates SO2 "allowances" (each
allowance authorizes the emission of one ton of SO2) to those units. Generating
units needing to cover emissions above their allocations can buy allowances from
sources that have excess allowances. Similarly, to reduce emissions of nitrogen
oxides (NOx), which contribute to the formation of smog, Northeastern states and
the District of Columbia have set a cap on total emissions of NOx from affected
units, and allocated NOx allowances (with each allowance authorizing the
emission of one ton of NOx) to those units. The allowances can be bought and
sold through a regional trading program similar to the trading of SO2
allowances. In 2003, the cap will be reduced to limit NOx emissions further.

      To comply with the SO2 and NOx requirements, affected units may choose one
or more strategies, including installing air pollution control technologies,
changing or limiting operations, changing fuels or obtaining additional
allowances. At this time, PSE&G does not expect that it will incur material
expenditures to continue complying with the SO2 program. PSEG's current analysis
leads it to believe that the potential costs for purchasing additional NOx
allowances will also not be material through December 31, 2002. In 2003, when
the NOx cap is reduced, 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.

      On September 24, 1998, EPA issued regulations (commonly known as the "SIP
Call") requiring the 22 states in the eastern half of the United States to make
significant NOx emission reductions by 2003 and to subsequently cap


                                       19
<PAGE>

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 PSE&G's New Jersey facilities nor change the capacity availability
from these facilities. The impact on PSE&G's 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
adopted. On May 25, 1999, a federal court partially stayed the implementation of
the SIP Call, potentially delaying the reduction of NOx emissions outside the
region and continuing the adverse impact of those emissions on New Jersey's air
quality. The court has not yet made a decision on the merits of the case.

      On December 1, 1999, the EPA proposed to approve New Jersey's plan to
attain the ozone National Ambient Air Quality Standards. That approval is
contingent on New Jersey reducing emissions of smog-forming chemicals (including
NOx) by an additional 4% to 5% in order to attain the standard by the deadlines
set in the Clean Air Act. New Jersey has committed to make these reductions, and
must choose which measures it will use to achieve them by October 1, 2001. New
Jersey and other states may seek to implement a wide variety of measures
including reductions in the regional cap, further reductions in the size of the
NOx emission cap and other measures that could affect electric generating units
and other equipment operated by PSE&G.

      EPA adopted a new air quality standard in July 1997 for fine particulate
matter. To attain the fine particulate matter standard, states may require
further 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. The timing of these actions is uncertain due to a federal
court decision that overturned the new standard.

      Under the CAA, states must require each major facility to obtain a
facility-wide operating permit. 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 2004 are included in PSE&G's estimate of
construction expenditures (see Construction and Capital Requirements).

      On November 3, 1999, the federal government announced the filing of
lawsuits by several states against seven companies operating power plants in the
Midwest and Southeast, charging that 32 coal-fired plants in ten states violated
the New Source Review requirements of the CAA. Various environmental and public
interest organizations have given notice of their intent to file similar
lawsuits. The federal government is seeking to order these companies to install
the best available air pollution control technology at the affected plants and
to pay monetary penalties of up to $27,500 for each day of continued violation.
At this time, no facility owned or operated by PSE&G has received notice of New
Source Review violation or notice of an intent to file a lawsuit alleging
violation of New Source Review requirements.

      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 surface waters through the issuance of National
Pollutant Discharge Elimination System (NPDES) permits. Certain PSEG facilities
are directly regulated by NJPDES permits.

      The NJPDES permit renewal application for PSE&G's Hudson Station, a 983 MW
coal-fired fossil plant, is in the process of being reviewed by the NJDEP. As
part of that renewal, the NJDEP has requested updated information 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 proposed certain modifications to the intake
structure and 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 the FWPCA 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).


                                       20
<PAGE>

      NJDEP has advised PSE&G that it is reviewing a renewal application for
Mercer Station, a 648 MW coal fired fossil plant and in connection with that
renewal, will be reexamining the effects of Mercer Station's cooling water
system pursuant to the FWPCA. PSE&G will submit updated demonstrations to the
NJDEP in December 2000. It is not possible to predict the outcome of such
review.

      PSE&G is implementing the 1994 NJPDES permit issued for Salem which
requires, among other things, water intake screen modifications and wetlands
restoration. Under the 1994 permit, which remains in effect until such time as a
renewed 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 based upon the timely submission of a renewal filing. On March 4,
1999, PSE&G filed a timely and comprehensive application for the renewal of
Salem's NJDEP permit which included updated FWPCA demonstrations as well as a
demonstration of the implementation of the Special Conditions of the 1994 NJPDES
permit and their biological efficacy. NJDEP is reviewing this application.

      If the NJDEP or the EPA were to impose a requirement at Salem, Hudson or
Mercer, or at other PSE&G generating stations, that closed cycle cooling be
implemented, or that material operating restrictions be imposed, the continued
operation of the station would need to be reassessed. PSE&G believes that the
current operations of its stations are in compliance with the FWPCA and will
vigorously pursue its applications to continue operations of its generating
stations with present cooling water intake structures. The EPA, as a result of
litigation by environmental groups, is conducting a rulemaking under the FWPCA
that may result in the establishment of regulatory guidance on material issues
with respect to the FWPCA permitting decisions, such as guidance on
determinations of adverse environmental impact and best technology available.
The rulemaking may impact NJDEP determinations with respect to PSE&G's permit
renewal applications.

      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 and the continued operation
of the station's cooling water system for an additional five years. The Revised
Docket provided that the authorization would expire September 27, 2000 absent
review of the Docket on or before August 31, 1999 and renewal by the DRBC. PSE&G
filed a preliminary information submission with DRBC during April 1999 and the
DRBC commenced its review of the matter in the second quarter of 1999. The
DRBC modified the Revised Docket to provide that it shall remain in effect until
six months after the NJDEP acts on PSE&G's application for renewal of Salem's
NJPDES Permit, or at a later date established by the DRBC.

      While it is impossible to predict the timing and/or outcome of the review
of these applications in respect of the Hudson, Mercer and Salem generating
stations, 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.

      CONTROL OF HAZARDOUS SUBSTANCES

      PSE&G MANUFACTURED GAS PLANT REMEDIATION PROGRAM

      For information regarding PSE&G's Manufactured Gas Plant Remediation
Program, see Note 11. Commitments and Contingent Liabilities of Notes.

      HAZARDOUS SUBSTANCES

      Certain Federal and state laws authorize the EPA and the 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 11. Commitments and Contingent Liabilities of Notes. For a
discussion of remediation/clean-up actions involving PSE&G, see Item 3. Legal
Proceedings.

      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 the
Federal Comprehensive Environmental Response, Compensation and Liability Act of
1980 (CERCLA) and that, to date, at least thirteen corporations, including
PSE&G, may be potentially liable for performing required remedial actions to
address potential environmental pollution at the Passaic River "facility." In a
separate matter, PSE&G and certain of its predecessors operated industrial
facilities at properties within the Passaic River "facility," including the
former Harrison Gas Plant and Essex Generating Station. PSE&G cannot predict
what action, if any, the EPA or any third party may take against PSE&G with
respect to these matters, or in such event, what costs PSE&G may incur to
address any such claims. However, such costs may be material.

      PSE&G's anticipated sale of generation-related assets to PSEG Power may
trigger the requirements of the New Jersey Industrial Site Recovery Act (ISRA).
ISRA requires that before any transfer of an industrial establishment


                                       21
<PAGE>

can be made, the interested parties shall remediate or cause to be remediated
potential site environmental concerns in accordance with NJDEP requirements.
Certain of the generation-related assets being sold are industrial
establishments as defined by ISRA. In October 1999, PSE&G filed a request with
the NJDEP for a determination that the sale involves a transfer to an affiliate
and, as such, is not a covered transaction under ISRA. In the second quarter of
1999, PSE&G recorded a $53 million liability related to these obligations (see
Note 3. Extraordinary Charge and Other Accounting Impacts of Deregulation of
Notes).

      Other liabilities associated with environmental remediation include
Natural Resource Damages. 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. 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.

ITEM 2. PROPERTIES

PSE&G

      PSE&G's First and Refunding Mortgage (Mortgage), securing the bonds issued
thereunder, constitutes a direct first mortgage lien on substantially all of
PSE&G's 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 11. 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.


                                       22
<PAGE>

      ELECTRIC GENERATION PROPERTIES

      As of December 31, 1999, PSE&G's share of installed generating capacity
was 10,287 MW, as shown in the following table:

<TABLE>
<CAPTION>
                                                                                    INSTALLED       PRINCIPAL
NAME AND LOCATION                                                                 CAPACITY (MW)     FUELS USED
---------------------------------------------------------------------------       -------------    ------------
Steam:
<S>                                                                                     <C>          <C>
      Hudson, Jersey City, NJ........................................                      991       Coal/Gas
      Mercer, Hamilton, NJ...........................................                      648       Coal/Gas
      Sewaren, Woodbridge Twp., NJ...................................                      453       Gas/Oil
      Linden, Linden, NJ.............................................                      424         Oil
      Keystone, Shelocta, PA--22.84%(A)..............................                      388         Coal
      Conemaugh, New Florence, PA--22.50%(A).........................                      382         Coal
      Kearny, Kearny, NJ.............................................                      300         Oil
                                                                                  -------------
            Total Steam..............................................                    3,586
                                                                                  -------------
Nuclear:  (Capacity calculated in accordance with industry
          maximum dependable capability standards)
      Hope Creek, Lower Alloways Creek, NJ 95%(A)....................                      979       Nuclear
      Salem 1, Lower Alloways Creek, NJ 42.59%(A)....................                      471       Nuclear
      Salem 2, Lower Alloways Creek, NJ 42.59%(A)....................                      471       Nuclear
      Peach Bottom 2, Peach Bottom, PA 42.49%(A).....................                      465       Nuclear
      Peach Bottom 3, Peach Bottom, PA 42.49%(A).....................                      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%(A)......................                       16         Oil
                                                                                  -------------
            Total Combustion Turbine.................................                    2,724
                                                                                  -------------
Internal Combustion:
      Conemaugh, New Florence, PA--22.50%(A).........................                        3         Oil
      Keystone, Shelocta, PA--22.84%(A)..............................                        3         Oil
                                                                                  -------------
            Total Internal Combustion................................                        6
                                                                                  -------------
Pumped Storage:
      Yards Creek, Blairstown, NJ--50%(A)(B).........................                      200
                                                                                  -------------
            Total PSE&G..............................................                   10,287
                                                                                  =============
</TABLE>

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

(B)   Excludes energy for pumping and synchronous condensers.


                                       23
<PAGE>

      In addition to the generating facilities in New Jersey and Pennsylvania as
indicated in the table above, as of December 31, 1999, PSE&G owned 41 switching
and/or generating stations with an aggregate installed capacity of 30,417,670
kilovolt-amperes and 223 substations with an aggregate installed capacity of
7,396,000 kilovolt-amperes. In addition, six substations having an aggregate
installed capacity of 108,000 kilovolt-amperes were operated on leased property.
All of these facilities are located in New Jersey. It is anticipated that all of
these properties, as well as related assets of these properties, will be sold to
Power in accordance with the BPU's Final Order.

      ELECTRIC TRANSMISSION AND DISTRIBUTION PROPERTIES

      As of December 31, 1999, PSE&G's transmission and distribution system
included approximately 155,766 circuit miles, of which approximately 38,945
miles were underground, and approximately 812,697 poles, of which approximately
539,880 poles were jointly owned. Approximately 99% of this property is located
in New Jersey.

      In addition, as of December 31, 1999, PSE&G owned four electric
distribution headquarters and five subheadquarters in four operating divisions
all located in New Jersey.

      GAS DISTRIBUTION PROPERTIES

      As of December 31, 1999, 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, 1999, PSE&G owned and operated approximately 16,377
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.


                                       24
<PAGE>

ENERGY HOLDINGS

     As of December 31, 1999, Global had interests in the following generation
and distribution facilities:

       GENERATION FACILITIES
<TABLE>
<CAPTION>
                                                                                                           NET EQUITY
                                                                                           GLOBAL'S        INTEREST IN
                                                                              TOTAL        OWNERSHIP          TOTAL
                                  LOCATION         PRIMARY FUEL                 MW         INTEREST            MW
                                  ------------------------------------------------------------------------------------
OPERATING POWER PLANTS
UNITED STATES
<S>                               <C>              <C>                        <C>             <C>             <C>
Eagle Point                          NJ            Natural gas                  225           50%             113
Kalaeloa                             HI            Oil                          180           49%              88
GWF
      Bay Area I                     CA            Petroleum coke                21           50%              10
      Bay Area II                    CA            Petroleum coke                21           50%              10
      Bay Area III                   CA            Petroleum coke                21           50%              10
      Bay Area IV                    CA            Petroleum coke                21           50%              10
      Bay Area V                     CA            Petroleum coke                21           50%              10
Hanford                              CA            Petroleum coke                27           50%              14
Tracy                                CA            Biomass                       21           35%               7
Bridgewater                          NH            Biomass                       16           40%               7
SEGS III                             CA            Solar                         30            9%               3
Kennebec                             ME            Hydro                         15           16%               2
Conemaugh                            PA            Hydro                         15           50%               8
                                                                            -------                       -------
        Sub-Total United States                                                 634                           292
INTERNATIONAL
CTSN                              Argentina        Coal/Natural gas/Oil         650           19%             124
MPC
      Jingyuan - Units 5 and 6      China          Coal                         600           15%              90
      Jinqiao (Thermal Energy)      China          Coal/Oil                     N/A           30%             N/A
      Tongzhou                      China          Coal                          30           40%              12
      Zuojiang - Units 1 and 2      China          Hydro                         48           30%              14
TGM                               Venezuela        Natural gas                   40            9%               3
                                                                            -------                       -------
        Sub-Total International                                               1,368                           243
                                                                            -------                       -------
        Sub-Total Operating Power Plants                                      2,002                           535

<CAPTION>
                                                                                                                        IN SERVICE
                                                                                                                           DATE
                                                                                                                           ----
Power Plants in Construction or Advanced Development
<S>                               <C>              <C>                        <C>             <C>             <C>          <C>
Turboven

      Maracay                     Venezuela        Natural Gas                   60           50%              30          2000
      Cagua                       Venezuela        Natural Gas                   60           50%              30          2000
      Valencia                    Venezuela        Natural Gas                   80           50%              40          2001
MPC
      Zuojiang - Unit 3             China          Hydro                         24           30%               7          2000
      Shanghai BFG                  China          Blast furnace gas             50           16%               8          2000
      Fushi                         China          Hydro                         54           35%              19          2000
      Nantong                       China          Coal                          24           46%              11          2000
Texas Independent Energy, L.P.
      Guadalupe                     Texas          Natural Gas                1,000           50%             500          2000
      Odessa                        Texas          Natural Gas                1,000           50%             500          2001
Prisma 2000
      Crotone                       Italy          Biomass                       20           70%              14          2001
      Bando                         Italy          Biomass                       20           70%              14          2001
      Strongoli                     Italy          Biomass                       40           70%              28          2002
      Porto Empedocle               Italy          Biomass                       24           70%              17          2002
Parana                            Argentina        Natural gas                  830           33%             274          2001
Rades                              Tunisia         Natural gas                  471           35%             165          2001
PPN                                 India          Naphtha/Natural gas          330           20%              66          2001
Tri-Sakthi                          India          Coal                         525           63%             331          2003
Chorzow                            Poland          Coal                         220           90%             198          2003
                                                                            -------                       -------
        Sub-Total Construction or Advanced Development                        4,832                         2,252
                                                                            -------                       -------
        TOTAL                                                                 6,834                         2,787
                                                                            =======                       =======
</TABLE>


                                       25
<PAGE>

      DISTRIBUTION OPERATIONS

                                              Number of      Global's Ownership
                           Location           Customers          Interest
                          ------------------------------------------------------
EDEN                      Argentina            270,000             30%
EDES                      Argentina            130,000             30%
EDELAP                    Argentina            290,000             30%
Rio Grande Energia          Brazil             940,000             31%
Chilquinta Energia          Chile              410,000             50%
Luz del Sur                  Peru              690,000             43%
                                             ---------
                                             2,730,000
                                             =========

      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.

      ENERGY HOLDINGS

      Energy Holdings does not own any real property. Energy Holdings subleases
office space for its corporate headquarters at 80 Park Plaza, Newark, New Jersey
from PSE&G. Energy Holdings' subsidiaries also lease office space at various
locations throughout the world to support business activities. Energy Holdings
maintains adequate insurance coverage for properties in which its subsidiaries
have an equity interest, subject to certain exceptions, to the extent such
property is usually insured and insurance is available at a reasonable cost.

ITEM 3. LEGAL PROCEEDINGS

      As previously disclosed, by complaints filed in 1995 and 1996, shareholder
derivative actions on behalf of PSEG shareholders were commenced by purported
shareholders against certain directors and officers. The four complaints
generally sought 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. By decision dated July 28, 1999, the Court granted the defendants'
motions for summary judgment dismissing all four derivative actions. The
plaintiffs have appealed in all these actions. PSEG cannot predict the outcome
of these appeals. Public Service Enterprise Group Inc. by G. E. Stricklin,
derivatively v. E. James Ferland, et. al., Superior Court of New Jersey,
Chancery Division, Essex County, Docket No. C-160-96. Dr. Steven Fink and Dr.
David Friedman, P.C. Profit Sharing Plan, derivatively, 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 one of the purported
shareholders of PSEG who instituted one of the December 1995 shareholder
derivative complaints discussed above, alleging that the 1996, 1997 and 1998
proxy statements provided to shareholders of PSEG were false and misleading. The
court has dismissed all of the plaintiff's claims in this action. No appeal has
been filed by the plaintiff and the time for filing any such appeal has expired.
G.E. Stricklin v. E. James Ferland, et al., United States District Court for the
Eastern District of Pennsylvania, Civil Action No. 98-3279.


                                       26
<PAGE>

      A complaint dated April 19, 1999 was received by PSEG naming as defendants
the current directors of PSEG, and naming PSEG as a nominal defendant, from the
same purported shareholder of PSEG who instituted the June 1998 proxy
litigation, alleging that the 1999 proxy statement provided to shareholders of
PSEG was 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 PSEG's nuclear
operations and (iii) the derivative litigation described above. The complaint
sought to have the 1999 proxy statement declared to be in violation of law, to
set aside the election of directors of PSEG and the ratification of the
selection of Deloitte & Touche LLP as PSEG's auditors at the 1999 annual
shareholder meeting, 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 the matter, which should
include as nominees for election as directors persons having no previous
relationship with PSEG or the current directors, and other relief. On August 2,
1999, the Court issued an order granting the defendants' motion to dismiss this
complaint. Plaintiff has filed a Notice of Appeal. PSEG cannot predict the
outcome of this appeal. G. E. Stricklin v. I. Lerner, et. al., United States
District Court for the Eastern District of Pennsylvania. Civil Action No.
99-1950.

      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.
In April 1996, Westinghouse filed an answer and $2.5 million counter claim for
unpaid work related to services at Salem. On January 27, 2000, the parties to
this matter reached a settlement under which the co-owners will receive certain
consideration from Westinghouse, including discounts on the purchase of certain
goods and services.

      In October 1997, PSE&G filed a Petition with the BPU (Docket No.
GM97100758) seeking approval 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. In
December 1997, one of the affected interstate pipeline companies 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 filing. In February 1998, FERC ruled in favor of the
interstate pipeline company (Texas Eastern Transmission Corporation, Docket No.
RP98.83-000). In April 1998, FERC denied PSE&G's request for a rehearing. In
June 1998, PSE&G filed a petition for review of FERC's order with the U.S. Court
of Appeals, District of Columbia Circuit. The matter is being held in abeyance
pending settlement negotiations between the parties.

      See information on the following regulatory proceedings at the pages
indicated:

      (1)   Pages 5, 33, 64, and 69. 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)   Pages 8, 34, and 69. Appeals of the BPUs Final Order and Finance
            Order in the Energy Master Plan Proceedings.

      (3)   Pages 20 and 21. Administrative proceedings before the NJDEP under
            the FWPCA for certain electric generating stations.

      (4)   Page 84. Generic proceeding before the BPU relating to recovery of
            capacity costs associated with power purchases from cogenerators,
            Docket No. EX93060255.

                                       27
<PAGE>


      (5)   Page 85. Investigation and additional investigation by the U.S.
            Environmental Protection Agency (EPA) regarding the Passaic River
            site.

      In addition, see the following environmental related matters involving
governmental authorities. 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 their financial condition, results
of operations and net cash flows.

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

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

      (3)   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.

      (4)   Claim by EPA, Region III, under CERCLA with respect to a Cottman
            Avenue Superfund Site, a former non-ferrous scrap reclamation
            facility located in Philadelphia, Pennsylvania, owned and formerly
            operated by Metal Bank of America, Inc. PSE&G, other utilities and
            other companies are alleged to be liable for contamination at the
            site and PSE&G has been named as a potentially responsible party. A
            Pre-Design Investigative Report was submitted to EPA on January 21,
            2000, which presents several alternatives for implementation of an
            EPA selected remediation remedy. Dependent upon the EPA's approval
            of the proposed remedy implementation alternatives, the costs of
            remedy implementation are estimated to range from $14 million to $24
            million. PSE&G's share of the remedy implementation costs are
            estimated between $4 million and $8 million.

            Additionally, with respect to this site, the 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.

      (5)   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.

      (6)   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 seeking 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.

      (7)   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


                                       28
<PAGE>

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

      (8)   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.

      (9)   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.

      (10)  See Pages 21 and 84 regarding PSE&G's MGP Remediation Program.

      (11)  One Argentine electric distribution company in which Global has an
            interest has been notified by its health and safety regulation
            relating to a claim regarding alleged PCB contamination at one of
            its sites. Clean up costs are estimated at approximately $100,000
            and the distribution company is subject to penalties of
            approximately $1 million. Global has a 30% interest in this company.

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

      PSEG and PSE&G, inapplicable.


                                       29
<PAGE>

                                     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.
As of December 31, 1999, there were 134,877 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
------------                                  ----           ---       ---------

1999:
   First Quarter.........................    $40 3/8       $36 1/2       $.54
   Second Quarter........................     42 5/8        37 1/2        .54
   Third Quarter.........................     42            37 1/16       .54
   Fourth Quarter........................     40            32            .54

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

      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 7. Schedule of Consolidated Capital Stock and Other Securities
of Notes.


                                       30
<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,
                                                     -----------------------------------------------------
                                                       1999        1998      1997       1996       1995
                                                     --------    --------   --------   --------   --------
                                                            (MILLIONS OF DOLLARS, WHERE APPLICABLE)

<S>                                                  <C>         <C>        <C>        <C>        <C>
Total Operating Revenues .........................   $  6,497    $  6,010   $  6,177   $  6,106   $  5,942
                                                     ========    ========   ========   ========   ========

Income from Continuing Operations ................   $    723    $    644   $    560   $    588   $    627
Income from Discontinued Operations (A) ..........         --          --         --         24         35
                                                     --------    --------   --------   --------   --------
Income Before Extraordinary Item .................        723         644        560        612        662
Extraordinary Item (B) ...........................       (804)         --         --         --         --
                                                     --------    --------   --------   --------   --------
Net Income (Loss) ................................   $    (81)   $    644   $    560   $    612   $    662
                                                     ========    ========   ========   ========   ========

Earnings per Average Share (Basic and Diluted):
    From Continuing Operations ...................   $   3.29    $   2.79   $   2.41   $   2.42   $   2.57
    From Discontinued Operations (A) .............         --          --         --        .10        .14
                                                     --------    --------   --------   --------   --------
    Before Extraordinary Item ....................       3.29        2.79       2.41       2.52       2.71
    Extraordinary Item (B) .......................      (3.66)         --         --         --         --
                                                     --------    --------   --------   --------   --------
       Total Earnings per Average Share ..........   $  (0.37)   $   2.79   $   2.41   $   2.52   $   2.71
                                                     ========    ========   ========   ========   ========

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

As of December 31:
    Total Assets .................................   $ 19,015    $ 17,991   $ 17,979   $ 16,795   $ 16,706
    Long-Term Liabilities:
       Long-Term Debt ............................   $  4,575    $  4,763   $  4,885   $  4,580   $  5,190
       Other Noncurrent Liabilities ..............   $  2,131    $    764   $    609   $    544   $    469

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

Ratio of Earnings to Fixed Charges plus Preferred
    Securities Dividend Requirements (C) .........       3.09        2.86       2.55       2.68       2.78
</TABLE>

(A)   On July 31, 1996, Energy Holdings sold Energy Development Corporation
      (EDC). As a result, Consolidated Financial Statements previously issued
      were restated to give effect to the classification of EDC as discontinued
      operations.

(B)   See Note 3. Extraordinary Charge and Other Accounting Impacts of
      Deregulation of Notes.

(C)   Excludes income and expenses from discontinued operations and
      Extraordinary Item.


                                       31
<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,
                                                        -----------------------------------------------------
                                                          1999        1998      1997       1996       1995
                                                        --------    --------   --------   --------   --------
                                                                (MILLIONS OF DOLLARS, WHERE APPLICABLE)

<S>                                                     <C>         <C>        <C>        <C>        <C>
Total Operating Revenues ............................   $  5,890    $  5,568   $  5,833   $  5,803   $  5,692
                                                        ========    ========   ========   ========   ========
Income Before Extraordinary Item ....................   $    653    $    602   $    528   $    535   $    617
Extraordinary Item (A) ..............................       (804)         --         --         --         --
                                                        --------    --------   --------   --------   --------
Net Income (Loss) ...................................   $   (151)   $    602   $    528   $    535   $    617
                                                        ========    ========   ========   ========   ========

As of December 31:
    Total Assets ....................................   $ 14,724    $ 14,669   $ 14,844   $ 14,700   $ 14,477
    Long-Term Liabilities:
       Long-Term Debt ...............................   $  3,099    $  4,045   $  4,127   $  4,107   $  4,586
       Other Noncurrent Liabilities .................   $  2,104    $    741   $    586   $    536   $    464

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

Ratio of Earnings to Fixed Charges (B) ..............       3.58        3.27       2.74       2.83       3.25
Ratio of Earnings to Fixed Charges plus Preferred
    Securities Dividend Requirements (B) ............       3.46        3.15       2.64       2.62       2.77
</TABLE>

(A)   See Note 3. Extraordinary Charge and Other Accounting Impacts of
      Deregulation of Notes.

(B)   Excludes extraordinary item.


                                       32
<PAGE>

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 three principal direct wholly-owned operating subsidiaries:
Public Service Electric and Gas Company (PSE&G), PSEG Power LLC (Power) and PSEG
Energy Holdings Inc. (Energy Holdings). In 1999, PSEG formed PSEG Services
Corporation (Services) to provide management and administrative services to PSEG
and its subsidiaries.

      PSE&G is an operating public utility providing electric and gas service in
certain areas within the State of New Jersey. Following the anticipated sale of
its generation-related assets to Power, PSE&G will continue to own and operate
its transmission and distribution businesses. Within this discussion, the
results of operations of the generation business for 1999 have been included
within PSE&G since PSE&G continued to own and operate the generation-related
assets throughout the year.

      Power and its subsidiaries were formed in 1999 to acquire, own and operate
the electric generation-related assets of PSE&G pursuant to the Final Decision
and Order (Final Order) issued by the New Jersey Board of Public Utilities (BPU)
under the New Jersey Energy Master Plan Proceedings. Through its subsidiaries,
Power will provide energy and capacity to PSE&G under certain contracts and
market electricity, natural gas, capacity and ancillary services throughout the
Eastern United States. Power has three direct wholly-owned subsidiaries: PSEG
Fossil LLC (Fossil), PSEG Nuclear LLC (Nuclear) and PSEG Energy Resources &
Trade LLC (ER&T).

     Energy Holdings is the parent of three energy-related lines of business
through its wholly-owned subsidiaries: PSEG Global Inc. (Global), which
develops, acquires, owns and operates electric generation and distribution
facilities and engages in power production and distribution, including wholesale
and retail sales of electricity, in selected domestic and international markets;
PSEG Resources Inc. (Resources), which invests in energy-related financial
transactions and manages a diversified portfolio of investments including
leveraged leases, leveraged buyout (LBO) funds, limited partnerships and
marketable securities; and PSEG Energy Technologies Inc. (Energy Technologies),
an energy management company that constructs, operates and maintains heating,
ventilating and air conditioning (HVAC) systems for, and provides energy-related
engineering, consulting and mechanical contracting services to, industrial and
commercial customers in the Northeastern and Middle Atlantic United States.
Energy Holdings also has a finance subsidiary, 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. Energy Holdings is also the parent of
Enterprise Group Development Corporation (EGDC), a nonresidential real estate
property management business and has been conducting a controlled exit from the
real estate business since 1993.

OVERVIEW OF 1999 AND FUTURE OUTLOOK

      The electric and gas utility industries in the United States and around
the world continue to experience significant change. Deregulation,
restructuring, privatization and consolidation are creating opportunities and
risks for PSEG, PSE&G, Power and Energy Holdings. At the same time, competitive
pressures are increasing.

      Following the passage of the Energy Competition Act, the BPU rendered its
summary decision relating to PSE&G's rate unbundling, stranded costs and
restructuring proceedings (Summary Order) and subsequently issued its Final
Order in these matters. The New Jersey Electric Discount and Energy Competition
(Energy Competition


                                       33
<PAGE>

Act), the BPU's Summary Order and Final Order and the related BPU proceedings
are referred to as the Energy Master Plan Proceedings. These proceedings opened
the New Jersey energy markets to competition by allowing all New Jersey retail
electric customers to select their electric supplier commencing August 1, 1999
and all New Jersey retail gas customers to select their gas supplier commencing
January 1, 2000.

      In October and November 1999, appeals of the Final Order and of the BPU's
order approving PSE&G's petition relating to the proposed securitization
transaction for an irrevocable Bondable Stranded Costs Rate Order (Finance
Order) were filed in the Appellate Division of the New Jersey Superior Court on
behalf of several customers. While PSEG and PSE&G believe that the appeals are
without merit, no assurances can be given at this time as to the timing or
outcome of these proceedings. Accordingly, neither PSEG nor PSE&G are able to
predict whether such appeals will have a material adverse effect on their
financial condition, results of operations or cash flows.

      As a result of the Summary Order, PSE&G concluded that it no longer met
the requirements of Statement of Financial Accounting Standards (SFAS) 71,
"Accounting for the Effects of Certain Types of Regulation" (SFAS 71), for the
electric generation portion of its business. As a result, PSE&G recorded an
extraordinary charge to earnings of $804 million, net of tax, which reflects the
impairment of PSE&G's electric generation-related assets calculated in
accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" (SFAS 121). In addition to the
impairment of PSE&G's electric generating stations, the extraordinary charge
consisted of various accounting adjustments to reflect the absence of cost of
service regulation in the electric generation portion of the business in the
future. The adjustments primarily related to materials and supplies, general
plant items and liabilities for certain contractual and environmental
obligations.

      For further discussion of the Energy Master Plan Proceedings, including
the appeals, the related extraordinary charge to earnings and securitization,
see Note 2. Regulatory Issues and Note 3. Extraordinary Charge and Other
Accounting Impacts of Deregulation of Notes and Liquidity and Capital Resources.

      As set forth in the Final Order, PSE&G has been directed to sell all of
its electric generation-related assets and all associated rights and liabilities
to a separate corporate entity to be owned by PSEG. The Final Order specifies a
purchase price of $2.443 billion plus the book value of PSE&G's other
generation-related assets, including materials, supplies and fuel. As a result,
PSEG organized Power to acquire and manage PSE&G's electric generation-related
assets. Assuming a favorable outcome of the appeals, PSEG and PSE&G expect that
the transfer of such assets will occur later in 2000. Prior to the execution of
such transfer, Power must obtain approval from the New Jersey Department of
Environmental Protection (NJDEP) to transfer certain liabilities and the
Pennsylvania Public Utility Commission (PPUC) to transfer PSE&G's assets in
Pennsylvania. In September 1999, the Federal Energy Regulatory Commission (FERC)
approved PSE&G's proposed sale of its generating units to Power. In December
1999, FERC approved exempt wholesale generator (EWG) status for Fossil and
Nuclear. In February 2000, the Nuclear Regulatory Commission (NRC) gave approval
to transfer PSE&G's nuclear licenses to Nuclear, conditioned upon BPU approval.

      The Final Order requires PSE&G to provide, through July 31, 2002, basic
generation service (BGS) for all customers who do not select a different
supplier. PSE&G is also required to provide BGS for customers whose third party
suppliers (TPS) are not able to satisfy their obligations. Once the
generation-related asset sale to Power is complete, pursuant to a contractual
relationship, Power will provide PSE&G with the energy and capacity required to
meet its BGS and off-tariff rate agreement (OTRA) obligations. BGS will be
competitively bid for the year beginning August 1, 2002 and thereafter.

      PSE&G's earnings and, following the anticipated sale of generation-related
sale to Power, Power's earnings, will be exposed to the risks of the competitive
wholesale electricity market to the extent that Power has to purchase energy
and/or capacity or generate energy to meet its obligations to supply power to
PSE&G at market prices or costs, respectively, which approach or exceed the BGS
contract rate. To mitigate this risk, Power's policy will be to use derivatives,
consistent with its business plans and prudent practices and build and purchase
additional capacity in the PJM and surrounding regions. This risk will be
further mitigated due to customer migration from BGS to TPS. Power will also
participate in the competitive wholesale electricity market for other items such
as energy, capacity and ancillary services.


                                       34
<PAGE>

      The Energy Master Plan Proceedings have dramatically reshaped the utility
industry in New Jersey and have directly affected how PSEG will conduct
business, and therefore, its financial prospects in the future. PSEG has
realigned its organizational structure to address the competitive environment
brought about by the deregulation of the electric generation industry in New
Jersey and the Northeast. PSEG has been engaged in the competitive energy
business for a number of years through certain of its unregulated subsidiaries;
however, competitive businesses now constitute a much larger portion of PSEG's
activities. It is expected that by July 31, 2003, the end of the transition
period under the Energy Master Plan Proceedings, PSEG's unregulated subsidiaries
(Energy Holdings and Power) will contribute between 65% and 75% of PSEG's
earnings as compared to 1999 when PSE&G comprised approximately 90% of PSEG's
earnings, excluding the extraordinary charge. Additionally, PSEG will be more
dependent on cash flows generated from its unregulated operations for its
capital needs. As the unregulated portion of the business continues to grow,
financial risks and rewards will be greater, financial requirements will change
and the volatility of earnings and cash flows will increase.

      In 1999, PSE&G's operations were highlighted by the commencement of the
transition into a competitive, deregulated environment. This included the
discontinuation of SFAS 71 for the electric generation portion of PSE&G's
business, the start of customer choice, the implementation of the initial 5%
electric rate reduction and changes to customers' bills.

      In 1999, Energy Holdings continued to implement its strategy to develop
its business through international expansion as Global made its first
investments in Europe with a major stake in several generation projects in Italy
and plans to build a combined heat-power facility in Poland. Global also
continued its growth in Latin America through the acquisition of a majority
interest in electric distribution companies in Chile and Peru and completing
financing for a power plant in Argentina. Additionally, Global acquired a
majority stake in a generation facility in India and is building two 1,000
megawatt (MW) plants in Texas. Resources also continued its investment strategy
with its investments in several leveraged leases on energy-related assets.

      Going forward, PSEG expects to continue to pursue its strategies to grow
its family of energy-related businesses as well as consider opportunities for
expansion through business combinations. More emphasis will be placed on finding
opportunities for expansion outside of its traditional utility services and
markets. Power's business strategy is to size its fleet of generation assets to
take advantage of market opportunities in the Northeast U.S., while seeking to
increase its value and manage commodity price risk through its wholesale trading
activity. PSE&G's transmission and distribution objective is to provide
cost-effective, high quality, reliable service. PSEG has positioned Energy
Holdings as a major part of its planned growth strategy. In order to achieve
this strategy, Global will focus on generation and distribution investments
within targeted high-growth regions of the worldwide energy market. Resources
will utilize its market access, industry knowledge and transaction structuring
capabilities to expand its energy-related financial investment portfolio. Energy
Technologies will continue to provide HVAC contracting and other energy-related
services to industrial and commercial customers in the Northeastern and Middle
Atlantic United States.

      To the extent that the discussion that follows reports on business
conducted under full monopoly regulation of the utility businesses, it must be
understood that such businesses have changed due to the deregulation of the
electric generation and natural gas commodity sales businesses. Past results are
not an indication of future business prospects or financial results.


                                       35
<PAGE>

RESULTS OF OPERATIONS

                                            EARNINGS (LOSSES)
                                      ----------------------------
                                               YEAR ENDED
                                              DECEMBER 31,
                                      ----------------------------
                                      1999        1998       1997
                                      -----       -----      -----
                                          (MILLIONS OF DOLLARS)

PSE&G, Before Extraordinary Item      $ 644       $ 593      $ 513
PSE&G Extraordinary Item               (804)         --         --
                                      -----       -----      -----
      Total PSE&G                      (160)        593        513
Energy Holdings                          83          51         47
PSEG*                                    (4)         --         --
                                      -----       -----      -----
      Total PSEG                      $ (81)      $ 644      $ 560
                                      =====       =====      =====

                                   CONTRIBUTION TO EARNINGS PER SHARE
                                            (BASIC AND DILUTED)
                                      ----------------------------
                                               YEAR ENDED
                                               DECEMBER 31,
                                      ----------------------------
                                      1999        1998       1997
                                      -----       -----      -----

PSE&G, Before Extraordinary Item      $2.93       $2.57      $2.21
PSE&G Extraordinary Item              (3.66)         --         --
                                      -----       -----      -----
      Total PSE&G                     (0.73)       2.57       2.21
Energy Holdings                        0.38        0.22       0.20
PSEG*                                 (0.02)         --         --
                                      -----       -----      -----
      Total PSEG                      $(0.37)     $2.79      $2.41
                                      =====       =====      =====

      * Interest on certain financing transactions.

      In 1999, PSE&G recorded an extraordinary charge to earnings of $804
million, net of tax, as a result of the BPU's Summary Order in the Energy Master
Plan Proceedings. For further discussion, see Note 3. Extraordinary Charge and
Other Accounting Impacts of Deregulation of Notes. Excluding that extraordinary
charge, basic and diluted earnings per share of Common Stock were $3.29 in 1999,
representing an increase of $0.50 per share, or 18% from 1998.

      Excluding the extraordinary charge, PSE&G's contribution to earnings per
share of Common Stock in 1999 increased $0.36 from 1998, including $0.14 of
accretion as a result of PSEG's stock repurchase program. This increase was
primarily due to increased sales of gas and electricity resulting from favorable
weather conditions in 1999 augmented by positive economic factors in New Jersey
and profits realized from wholesale energy activities. In addition,
generation-related depreciation expenses were lower for a portion of 1999 as a
result of the SFAS 121 impairment write-down, partially offset by changes in
depreciation and capitalization policies stemming from the discontinuation of
SFAS 71. The increase in earnings was also partially offset by the 5% electric
rate reduction, beginning August 1, 1999, associated with the BPU's Final Order,
coupled with higher operating and maintenance expenses, including higher
transmission, distribution and wholesale energy costs, than those incurred in
1998.

      Energy Holdings' contribution to earnings per share of Common Stock in
1999 increased $0.16 from 1998 primarily due to the better overall performance
of Resources, Global and Energy Technologies and $0.02 of accretion due to
PSEG's stock repurchase program. The improvements were attributable largely to
Resources which benefited from an upturn in the equity markets as compared to
1998. In addition, Energy Holdings' results reflect Global's gain from the sale
of its interest in a co-generation facility partially offset by impairment
write-downs of other investments in Global's portfolio.

      PSE&G's contribution to earnings per share of Common Stock in 1998
increased $0.36 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


                                       36
<PAGE>

third quarter of 1998 and wholesale power activities of PSE&G. These increases
were partially offset by lower gas sales in 1998 due to mild winter weather
during the 1998 heating seasons.

      Energy Holdings' contribution to earnings per share in 1998 increased
$0.02 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.

      PSE&G -- REVENUES

      The presentation of revenues on the Consolidated Statements of Income has
changed effective August 1, 1999, due to the change in regulation as required by
the Final Order. PSE&G's generation business has been deregulated and, starting
August 1, 1999, earns revenues by providing the energy and capacity necessary to
meet PSE&G's BGS obligations as well as through sales of wholesale energy,
capacity and ancillary services. PSE&G's transmission and distribution
businesses remain regulated and will continue to earn revenues based on its
approved tariffs under which it provides transmission and distribution services
for its residential, commercial and industrial customers in New Jersey. The
rates charged for transmission and distribution are regulated by FERC and the
BPU, respectively. Revenues are also generated from a variety of other
activities such as sundry sales, wholesale transmission services and other
miscellaneous services. For more information, see Note 1. Organization, Basis of
Presentation and Summary of Significant Accounting Policies and Note 2.
Regulatory Issues of Notes. Because historical information is not available for
the Electric Generation and Electric Transmission and Distribution Revenues,
variances in Electric Revenues will be discussed in the aggregate. For estimates
of historical Electric Generation and Electric Transmission and Distribution
Revenues, see Note 16. Financial Information by Business Segments of Notes.

      Certain of the below listed year-to-year variances did not impact earnings
as there was an offsetting variance in expense. To the extent fuel revenue and
expense flowed through the Electric Levelized Energy Adjustment Clause (LEAC)
through July 31, 1999, the Levelized Gas Adjustment Clause (LGAC), the Societal
Benefits Clause (SBC) or the non-utility generation market transition charge
(NTC) mechanisms, variances in certain revenues and expenses offset and thus had
no effect on earnings. These include base fuel revenues through July 31, 1999,
demand side management (DSM) revenue and Remediation Adjustment Charge (RAC)
revenue. On August 1, 1999, the LEAC mechanism was eliminated as a result of the
Final Order. This is likely to increase earnings volatility since PSE&G and
Power now bear the full risks and rewards of changes in nuclear and fossil
generating fuel costs and replacement power costs. See Note 2. Regulatory Issues
and Note 4. Regulatory Assets and Liabilities of Notes for a discussion of LEAC,
LGAC, SBC, NTC, RAC and DSM and their status under the Energy Master Plan
Proceedings.

      ELECTRIC

      Revenues increased $164 million or 4% in 1999 as compared to 1998
primarily due to favorable weather conditions in 1999 augmented by positive
economic factors in New Jersey. These factors increased both generation and
transmission and distribution revenues; however, the increase in generation
revenues was partially offset by the 5% rate reduction, effective on August 1,
1999, which decreased generation revenues by approximately $80 million through
December 31, 1999. The increase was also due to stronger profits realized from
wholesale energy activities than in 1998. Also, higher DSM revenues in 1999 than
in 1998 contributed to increased distribution revenues.

      Customers selecting a third party supplier (TPS) will result in lower BGS
revenues. However, it also creates the opportunity for the generation business
to mitigate the price risk of the BGS contract and to sell available energy and
capacity into the wholesale market. The degree to which net generation revenues
will be impacted will depend on the volume of sales and the amount by which
market prices vary from prices under the BGS contract.

      Electric revenues increased $113 million or 3% in 1998 as compared to
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 13. Income Taxes
of Notes. Collection of New Jersey Gross Receipts and Franchise Tax (NJGRT) was
reflected in revenue and expense in prior


                                       37
<PAGE>

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.

      GAS

      Revenues increased $158 million or 10% in 1999 as compared to 1998. The
increase was primarily due to increased revenues from gas service contracts and
higher sales to large commercial and industrial customers than in 1998.
Additionally, more favorable weather in 1999 contributed to the increases. The
potential loss of residential customers due to the opening of competition in
2000 could reduce future revenues.

      Gas revenues decreased $378 million or 20% in 1998 as compared to 1997.
The decrease in 1998 is primarily due to lower therm sales resulting from milder
winter weather in 1998 and energy tax reform (see Note 13. Income Taxes of
Notes).

      PSE&G -- EXPENSES

      ELECTRIC ENERGY COSTS

      Electric Energy Costs increased $13 million or 1% in 1999 as compared to
1998. The increase was primarily due to an increase in electric sales volumes
due to hot summer weather in 1999. Beginning in August 1999, lower prices for
power purchases helped to offset the increase.

      Electric Energy Costs increased $36 million or 4% in 1998 as compared to
1997. This increase 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.

      Due to the elimination of the LEAC on August 1, 1999, these historical
trends can not be considered an indication of future Electric Energy Costs.
Given the elimination of the LEAC, the lifting of the requirements that electric
energy offered for sale in the PJM not exceed the variable cost of producing
such energy (capped at $1,000 per megawatt-hour), the absence of a PJM price cap
in situations involving emergency purchases and the potential for plant outages,
price movements could have a material impact on PSEG's and PSE&G's financial
condition, results of operations or net cash flows.

      GAS COSTS

      Gas Costs increased $68 million or 7% in 1999 as compared to 1998 due to
higher sales to large commercial and industrial customers and increased sales of
gas resulting from colder weather in the first and second quarters of 1999 than
in 1998.

      Gas Costs decreased $131 million or 12% in 1998 as compared to 1997. This
decrease 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 $188 million or 14% in 1999 as
compared to 1998. The increase was primarily due to the change in the
capitalization policy for PSE&G's electric generation business (see Note 1.
Organization, Basis of Presentation and Summary of Significant Accounting
Policies of Notes) and higher costs related to wholesale power activities. The
change in capitalization policy will result in significant increases in future
Operation and Maintenance expenses associated with the electric generation
business. This increase in Operation and Maintenance expense was $57 million
during 1999 (commencing with the change in policy effective April 1, 1999).
These increases will be partially offset in the future by lower depreciation
expense due to the lower level of generation-related capitalized costs.


                                       38
<PAGE>

      In addition, there were higher information technology costs, including
costs related to Year 2000 readiness, and higher material and outside services
costs in 1999 attributable to several factors, including restoration work
required in the wake of Tropical Storm Floyd and the flooding and damage it
caused. Also contributing to the increase were higher costs associated with the
preparation for deregulation and higher DSM recovery of previously deferred
expenses in 1999 than in 1998.

      Operation and Maintenance expense increased $78 million or 6% in 1998 as
compared to 1997. This increase 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.
Through July 31, 1999, DSM costs were recoverable through the demand side
adjustment factor of the LEAC and recorded in both expense and revenue and
therefore, had no direct effect on earnings.

      DEPRECIATION AND AMORTIZATION

      Depreciation and Amortization expense decreased $120 million or 18% in
1999 as compared to 1998 and increased $42 million or 7% in 1998 as compared to
1997. The 1999 decrease was due to lower net book value balances of PSE&G's
generation-related assets which were reduced as a result of the impairment
write-down recorded pursuant to SFAS 121. These decreases were partially offset
by higher depreciation rates for generation-related assets beginning April 1,
1999 due to the change in depreciation policy for generation-related assets and
by higher depreciation expense related to capital additions to the transmission
and distribution business.

      Despite the higher depreciation rates for generation-related assets, the
net decrease in generation-related depreciation expense will continue due to the
reduced asset balances. Additionally, beginning in 2000, electric distribution
asset-related depreciation will be further reduced due to the amortization of
the excess electric distribution depreciation reserve over the period from
January 1, 2000 to July 31, 2003. See Note 4. Regulatory Assets and Liabilities
of Notes for a discussion of the amortization schedule. Once the securitization
transaction is complete, the regulatory asset recorded for PSE&G's stranded
costs will be amortized with such amortization expense partially offsetting
these decreases.

      INCOME TAXES

      Income Taxes increased $106 million or 26% in 1999 as compared to 1998.
The increase is primarily due to higher pre-tax operating income.

      Income Taxes increased $148 million or 58% in 1998 as compared to 1997.
This increase was primarily due to the addition 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
13. Income Taxes of Notes.

      TAXES OTHER THAN INCOME TAXES

      Taxes Other Than Income Taxes include the Transitional Energy Facility
Assessment (TEFA) and the New Jersey Gross Receipts and Franchise Tax (NJGRT).
Taxes Other Than Income Taxes decreased $14 million or 7% in 1999 as compared to
1998 and $398 million or 66% in 1998 as compared to 1997. The 1999 decrease is
due to New Jersey energy tax reform and the five-year phase out of the TEFA
commencing in January 1999. For 1998, the amount represents TEFA unit-based
taxes while the 1998 amount represents NJGRT unit-based taxes. The TEFA unit tax
rates are approximately 30% of the NJGRT unit tax rates. See Note 13. Income
Taxes of Notes for other impacts of New Jersey energy tax reform.


                                       39
<PAGE>

      SETTLEMENT OF SALEM LITIGATION

      In January and February 1997, the settlement of litigation by the
co-owners of Salem against PSE&G related to the 1995 shutdown of Salem Nuclear
Station which reduced Other Income and Deductions by $82 million, or $53
million, net of tax, was recorded. For a further discussion of the Salem
settlement, see Note 11. Commitments and Contingent Liabilities of Notes.

      ENERGY HOLDINGS -- EARNINGS (LOSSES)

                                                    YEAR ENDED DECEMBER 31,
                                                 -----------------------------
                                                 1999        1998        1997
                                                 -----       -----       -----
                                                    (MILLIONS OF DOLLARS)
EARNINGS BEFORE INTEREST, TAXES AND
    PREFERRED DIVIDENDS:
      Resources                                  $ 169       $ 135       $ 134
      Global                                       117          72          46
      Energy Technologies                           (8)        (15)        (25)
      Other                                         (7)         (3)         (9)
                                                 -----       -----       -----
          Sub-total                                271         189         146
INTEREST, TAXES AND PREFERRED DIVIDENDS           (188)       (138)        (99)
                                                 -----       -----       -----
EARNINGS                                         $  83       $  51       $  47
                                                 =====       =====       =====

      Energy Holdings' earnings in 1999 were $83 million, an increase of $32
million compared to 1998. The increase in Energy Holdings' earnings was
primarily due to the better overall performance of Resources, Global and Energy
Technologies. The improvements were attributable largely to Resources which
benefited from an upturn in the equities markets as compared to 1998 and
additionally from income from new capital leases. In addition, Energy Holdings'
results reflect Global's gain from the sale of its interest in a co-generation
facility and income from new investments in distribution assets in Chile and
Peru, partially offset by write-downs of other investments in Global's portfolio
and by higher expenses associated with project development. Energy Technologies'
losses narrowed due to higher revenues from recent acquisition activities
partially offset by higher operating expenses.

      Energy Holdings' earnings in 1998 were $51 million, a $4 million increase
as compared to 1997. This increase in Energy Holdings' earnings was primarily
attributed to PSEG Resources due to the strong overall performance of its
investment portfolio. Although Global's 1998 operating earnings increased due to
the investments made in three Latin American distribution companies in 1997, the
increase was more than offset by the negative impact of the loss on the sale of
its investment in an electric generating facility located in Colombia and higher
financing costs due to investing activities.

      ENERGY HOLDINGS -- REVENUES

      Revenues increased $167 million from $440 million to $607 million in 1999
as compared to 1998. The increase was due to an increase of $34 million at
Resources due to higher income from financial investments and higher income from
new capital lease investments, a $115 million increase in revenues at Energy
Technologies due to the addition of revenues from acquisitions of various HVAC
companies in 1999 and a $18 million increase in revenues at Global primarily due
to improvement in revenues from domestic generation assets as well as the
addition of revenues from the distribution companies in Chile and Peru acquired
in June 1999. Global's revenue includes its share of the net income from joint
ventures recorded under the equity method of accounting (see Note 1.
Organization, Basis of Presentation and Summary of Significant Accounting
Policies of Notes).

      Revenues increased $98 million from $342 million to $440 million in 1998
as compared to 1997. This increase was primarily due to an increase in revenues
at Energy Technologies of $67 million from the acquisition of a mechanical
contracting firm which added $58 million in revenue. In addition, Global's
revenues increased $33 million due to the addition of revenue from investments
made in three Latin American distribution companies in 1997.

      Global is a 50% partner in six generating facilities in California.
Beginning in 2000, revenue from these facilities will be reduced due to lower
energy prices to be paid by the purchaser under the energy contracts


                                       40
<PAGE>

associated with the plants. Four of the facilities in which Global has an
interest will change from fixed energy pricing by December 31, 2000, with the
remainder changing in 2001. Global's share of annual income before income taxes
from these facilities is projected to decrease by approximately $30 million to
$35 million when all such contracts reflect the lower energy pricing. Global's
projects in operation, construction and development are expected to offset this
revenue shortfall; however, no assurances of that result can be given.

      ENERGY HOLDINGS -- EXPENSES

      OPERATION AND MAINTENANCE

      Operation and Maintenance expense increased $120 million from $249 million
to $369 million in 1999 as compared to 1998. The increase was primarily due to
higher operating expenses from the entities acquired by Energy Technologies in
1999 and, to a lesser degree, by higher development expenses at Global.

      Operation and Maintenance expense increased $53 million from $196 million
to $249 million in 1998 as compared to 1997. The increase was primarily due to
the acquisition of a mechanical contracting firm by Energy Technologies in
January 1998 which added $55 million in operating expenses.

      INTEREST EXPENSE AND PREFERRED DIVIDENDS

       Interest Expense and Preferred Dividends increased $10 million from $110
million to $120 million in 1999 as compared to 1998. The increase was
primarily due to financing 1999 investment and acquisition activities.

      Interest Expense and Preferred Dividends increased $37 million from $73
million to $110 million in 1998 as compared to 1997. The increase was
primarily due to financing 1998 investment and acquisition activities.

      INCOME TAXES

      Income Taxes increased $39 million from $30 million to $69 million in 1999
as compared to 1998. The increase was primarily due to higher pre-tax income
for the year ended December 31, 1999.

      Income Taxes increased $4 million from $26 million to $30 million in 1998
as compared to 1997. The increase was primarily due to higher pre-tax income
for the year ended December 31, 1998.

      ENERGY HOLDINGS -- OTHER INCOME (LOSS)

      Other Income increased $34 million from a loss of $1 million to income of
$33 million in 1999 as compared to 1998 and decreased $2 million to a loss of $1
million in 1998 from income of $1 million in 1997. The 1999 increases were
primarily due to a gain on the sale of Global's interest in a co-generation
facility as discussed above, partially offset by write-downs on other
investments, as discussed below.

      In the third quarter of 1999, Global completed a comprehensive review of
its existing assets and development activities focusing on rationalizing the
portfolio to ensure efficient capital deployment. Global's management has
decided that it will not commit additional resources to its investments in
Thailand and the Philippines and will focus its current Asian development
activities in China. As a result, Global recorded an $8 million write-down, net
of tax, to adjust the carrying value of such assets to net realizable value. In
addition, the projected substantial decline in revenue, discussed above, related
to energy contracts for six generation facilities in California resulted in a
$19 million write-down, net of tax, of Global's equity investment in such
facilities.

      PSEG -- PREFERRED SECURITIES DIVIDEND REQUIREMENTS OF SUBSIDIARIES

      Preferred Securities Dividend Requirements increased $14 million or 18% in
1999 as compared to 1998 and $21 million or 36% in 1998 as compared to 1997. The
increases were due to the issuance of trust preferred securities in aggregate
principal amount of $525 million in January, June and July 1998.


                                       41
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

      PSEG AND PSE&G

      PSEG is a holding company and, as such, has no operations of its own. The
following discussion of PSEG's liquidity and capital resources is on a
consolidated basis, noting the uses and contributions of PSEG's two direct
operating subsidiaries in operation in 1999, PSE&G and Energy Holdings. In 2000,
Power is expected to be an operating subsidiary which will impact PSEG's
liquidity and capital resources.

      As of December 31, 1999, PSEG's capital structure consisted of 40.9%
common equity, 46.8% long-term debt and 12.3% preferred stock and other
preferred securities. 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. As of December 31, 1999, PSE&G's capital structure consisted of
49.8% common equity, 41.1% long-term debt and 9.1% preferred stock and other
preferred securities. As of December 31, 1998, PSE&G's capital structure
consisted of 49.0% common equity, 43.6% long-term debt and 7.4% preferred stock
and other preferred securities.

      On September 17, 1999, the BPU issued its Finance Order which authorized,
among other things, the imposition of a non-bypassable transition bond charge on
PSE&G's customers; the sale of PSE&G's property right in such charge created by
the Energy Competition Act to a bankruptcy-remote financing entity; the issuance
and sale of $2.525 billion of transition bonds by such entity as consideration
for such property right, including an estimated $125 million of transaction
costs; and the application by PSE&G of the transition bond proceeds to retire
outstanding debt and/or equity. Assuming a favorable outcome of the previously
discussed appeals, PSEG and PSE&G expect such sale of transition bonds and the
receipt of proceeds in 2000.

      For a discussion of the pending appeals of the Final Order and the Finance
Order, see Overview of 1999 and Future Outlook and Note 2. Regulatory Issues of
Notes.

      Both the right of PSE&G to receive the bondable transition charge pursuant
to the securitization transaction and the proceeds from the transfer of its
generation-related assets to Power are property subject to the lien of PSE&G's
First and Refunding Mortgage (Mortgage). All such property will be released from
the lien of the Mortgage at the time of sale. In accordance with the provisions
of the Mortgage, the net proceeds from the sale of such released property will
be deposited with the Trustee.

      The Mortgage authorizes PSE&G to exercise one or more of the following
options as to the application of proceeds of such released property, at its sole
discretion:

      1.    Withdraw funds for corporate use by utilizing additions and
            improvements. (Option 1)

      2.    Direct the Trustee to invest the proceeds in U.S. Government
            Securities. (Option 2)

      3.    Direct the Trustee to purchase its Mortgage Bonds at the lowest
            prices obtainable, at or below par value. If the Trustee is unable
            to purchase sufficient Mortgage Bonds to exhaust such proceeds
            deposited with it, the balance may be applied on a pro rata basis
            towards the redemption of eligible series of Mortgage Bonds
            outstanding at par. (Option 3)

      At December 31, 1999, PSE&G had a total of $3.727 billion of Mortgage
Bonds outstanding, of which $2.935 billion are taxable registered Mortgage Bonds
subject to the special redemption provisions outlined in Option 3 (Redeemable
Bonds). $623 million of these Redeemable Bonds are scheduled to mature within
twelve months. $777 million of the Mortgage Bonds outstanding are tax-exempt
Pollution Control Bonds and $15 million are two series of taxable coupon
Mortgage Bonds due 2037 (Coupon Bonds). Neither the Pollution Control Bonds nor
the Coupon Bonds are subject to the special redemption provisions outlined in
Option 3.

      PSE&G has not yet made a final decision as to the amount and the manner in
which it will retire or redeem its Mortgage Bonds. Such a decision will be made
on or about the time the proceeds from securitization and the sale of the
generation-related assets to Power are deposited with the Trustee, on the basis
of market conditions and other


                                       42
<PAGE>

factors existing at that time. However, based on current information, a likely
utilization of the options available to PSE&G, as noted above, could be as
follows:

      A.    Withdraw $2.4 billion of net proceeds from securitization under
            Option 1, above. These proceeds would be used to:

            i.    Tender for all Coupon Bonds;
            ii.   Redeem $123.5 million of Pollution Control Bonds now
                  redeemable;
            iii.  Retire up to an additional $100 million of Redeemable Bonds
                  through various means, such as maturities, open market
                  purchases and make-whole calls;
            iv.   Reduce PSE&G's short-term debt; and
            v.    Reduce PSE&G common and/or preferred equity with the balance
                  of proceeds, if any.

      B.    Apply proceeds ($2.4 billion to $2.8 billion) from the
            generation-related asset sale to Power under Option 3 against any
            remaining taxable Mortgage Bonds outstanding.

      As previously reported, in anticipation of securitization, PSEG's Board of
Directors has authorized the repurchase of up to an aggregate of 30 million
shares of Common Stock in the open market. At December 31, 1999, PSEG had
repurchased approximately 15.8 million shares of Common Stock, at a cost of
approximately $607 million, under this authorization. The repurchased shares
have been held as treasury stock or used for other corporate purposes. In
December 1999, PSEG entered into a Forward Purchase Agreement with an
intermediary, who has purchased and held shares on behalf of PSEG. The
repurchase of these shares will not be reflected on PSEG's balance sheet until
settlement of the transaction which is expected in the second quarter of 2000.
Market conditions and the availability of alternative investments will dictate
if and when more shares of Common Stock will be repurchased under this
authorization.

      Going forward, cash generated from PSE&G's regulated business is expected
to provide the majority of the funds for PSE&G's business needs. Following
Power's initial external financing, Power's capital needs will be dictated by
its growth strategy and will be funded with cash generated from operations.
Energy Holdings' growth will be funded through external financings, equity
infusions from PSEG and cash generated from operations.

      Dividend payments on Common Stock were $2.16 per share and totaled
approximately $474 million and $499 million during the years ended December 31,
1999 and 1998, respectively. PSEG has not increased its dividend rate in eight
years in order to retain additional capital for reinvestment and to reduce its
payout ratio as earnings grow. 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 paid common stock dividends of $629 million and $503 million to PSEG
during the years ended December 31, 1999 and 1998, respectively. These amounts
were used to fund PSEG's Common Stock dividends, and in 1999, to support a
portion of PSEG's stock repurchase program.

      PSEG believes that it will have adequate earnings and cash flow in the
future from PSE&G and Power to maintain dividends at the current level. However,
the amounts and dates of such dividends on Common Stock declared in the future
will necessarily be dependent upon PSEG's future earnings, cash flows, financial
requirements and other factors. Earnings and cash flows required to support the
dividend will become more volatile as PSEG's business changes from one that is
principally regulated to one that is principally competitive.

      PSEG and PSE&G have each issued Deferrable Interest Subordinated
Debentures in connection with the issuance of their respective tax deductible
preferred securities. If payments on those Deferrable Interest Subordinated
Debentures are deferred, or PSEG or PSE&G defaults on the applicable indenture
related thereto or its guarantee thereof, neither PSEG nor PSE&G may pay any
dividends on its common or preferred stock until such default is cured.
Currently, there has been no deferral nor default.

      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, provided
that: (1) PSEG would not permit Energy Holdings' non-utility investments to
exceed 20% of PSEG's consolidated assets without prior notice to the BPU; (2)
the PSE&G Board of Directors would provide an annual certification that the
business and financing plans of Energy Holdings will not


                                       43
<PAGE>

adversely affect PSE&G; (3) PSEG would (a) limit debt supported by the minimum
net worth maintenance agreement between PSEG and PSEG Capital Corporation (PSEG
Capital) to $650 million and (b) make a good-faith effort to eliminate such
support by April 2003; and (4) Energy Holdings would pay PSE&G an affiliation
fee of up to $2 million a year to be applied by PSE&G to reduce utility rates.

      As a result of the final outcome and the accounting impacts resulting from
the deregulation of the electric generation business in New Jersey, PSEG and
PSE&G do not believe that the Focused Audit provision requiring notification to
the BPU if PSEG's non-utility assets exceed 20% of its consolidated assets (such
investments at December 31, 1999 were approximately 22% of PSEG's consolidated
assets) remains appropriate and believe that modifications will be required. The
Final Order addressed the Focused Audit, noting that PSEG's non-regulated assets
would likely exceed 20% of total PSEG assets once the utility's generating
assets were sold to a non-regulated subsidiary and directed PSE&G to file a
petition with the BPU to maintain the existing regulatory parameters or to
propose modifications to the Focused Audit order no later than the end of the
first quarter of 2000. The Final Order also recognized that, due to significant
changes in the industry and, in particular, PSEG's corporate structure as a
result of the Final Order, modifications to or relief from the Focused Audit
might be warranted. For discussion of the Energy Master Plan Proceedings, see
Overview of 1999 and Future Outlook and Note 2. Regulatory Issues of Notes.

      Regulatory oversight by the BPU to ensure that there is no harm to utility
customers from PSEG's non-utility investments is expected to continue. PSEG and
PSE&G believe that these issues will be satisfactorily resolved, although no
assurances can be given. In addition, if PSEG were no longer exempt under the
Public Utility Holding Company Act (PUHCA), PSEG and its subsidiaries would be
subject to additional regulation by the SEC with respect to financing and
investing activities, including the amount and type of non-utility investments.
PSEG believes, however, that this would not have a material adverse impact on
PSEG and its subsidiaries.

      ENERGY HOLDINGS

      As noted above, it is expected that Global and Resources will provide
earnings and cash flow for long-term growth for Energy Holdings and PSEG.
Resources' investments are designed to produce immediate earnings and cash flow
that enable Global and Energy Technologies to focus on longer investment
horizons.

      Energy Holdings plans to continue the growth of Global and Resources
through further investments made by these subsidiaries. Energy Holdings will
assess the growth prospects and opportunities for Energy Technologies before
committing additional capital. Investing activity in 2000 will be subject to
periodic review and revision and may vary depending on the opportunities
presented. During the next five years, Energy Holdings' will need significant
capital to fund its planned growth. Factors affecting actual expenditures and
investments include availability of capital and suitable investment
opportunities, market volatility and economic trends. 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.

      In June 1999, PSEG contributed approximately $200 million of additional
equity to Energy Holdings, which was used by Energy Holdings to pay down
short-term debt that was used to acquire its interest in the Chilean and
Peruvian distribution companies.

      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.

      It is Global's policy to limit its financial exposure to each project and
to mitigate development and operating risk, including fuel and foreign currency
exposure, through contracts. In addition, the project loan agreements are
structured on a non-recourse basis. Further, Global structures project financing
so that a default under one project's loan agreement will have no effect on the
loan agreements of other projects or the debt of 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 reasonable interest rates may affect PSEG's and
Energy Holdings' financial condition, results of operations and cash flows.


                                       44
<PAGE>

      GLOBAL

      In August 1999, Global sold its 50% partnership interest in a 137 MW
gas-fired combined-cycle co-generation facility in Newark, New Jersey and
received net cash proceeds of approximately $70 million resulting in an
after-tax gain of approximately $40 million.

      In June 1999, Global and a partner acquired 90% of a Chilean distribution
company, which at the time owned a 37% interest in a distribution company in
Peru, together providing electric and gas service to approximately one million
customers. The acquisition was made in a 50/50 joint venture arrangement.
Global's equity investment was approximately $268 million, including fees and
closing costs. In addition, Global's portion of the acquisition was financed
with $160 million of debt that is non-recourse to Global, Energy Holdings and
PSEG, which is consolidated on the Global balance sheet. Global and its partner
later acquired additional interests in the Peruvian and Chilean distribution
companies resulting in total combined ownership shares of approximately 85% and
99%, respectively. Global's investment in connection with the additional
Peruvian distribution company acquisition was approximately $108 million.

      RESOURCES

      In 1999, Resources, through the sale of a portion of its equity interests
in an LBO fund, the early buy-outs of three leveraged leases and the sale of its
interest in a limited partnership, received cash proceeds totaling approximately
$235 million resulting in an after-tax gain of approximately $38 million.

      In 1999, Resources invested approximately $380 million in six leveraged
lease transactions of energy-related assets: gas distribution networks in the
Netherlands, cogeneration plants in Germany, a generation facility in the United
States and a liquefied natural gas storage facility in the United States.

      ENERGY TECHNOLOGIES

      During 1999, Energy Technologies acquired six mechanical, HVAC and
building service contractors in New Jersey, Rhode Island and Virginia for a
total cost of approximately $63 million, including debt assumed.

      CAPITAL REQUIREMENTS

      PSE&G (INCLUDING POWER)

      PSE&G has substantial commitments as part of its ongoing construction
program. PSE&G's construction program is continuously reviewed and periodically
revised as a result of changes in economic conditions, revised load forecasts,
business strategies, site changes, cost escalations under construction
contracts, requirements of regulatory authorities and laws, the timing of and
amount of electric and gas transmission and/or distribution rate changes and the
ability of PSE&G to raise necessary capital.

      In 2000, Power announced that it will construct a 500 MW natural
gas-fired, combined-cycle electric generating plant at Bergen generating station
at a cost of approximately $290 million with completion expected in June 2002.
Power will also install four new combustion turbines at Burlington generating
station and two new combustion turbines at Linden generating station, adding 186
MW and 164 MW, respectively of electric generating capacity, at a cost of
approximately $155 million. The new combustion turbines are expected to be
installed and operational by July 2000.

      On October 6, 1999, Power announced an agreement with Niagara Mohawk Power
Corporation (Niagara Mohawk), to purchase its 400 MW oil and gas-fired electric
generating station in Albany, New York (Albany Steam Station) for $47.5 million.
On September 30, 1999, Power announced that it has signed an agreement to
acquire all of Conectiv's interests in the Salem Nuclear Generating Station
(Salem) and the Hope Creek Nuclear Generating Station (Hope Creek) and half of
Conectiv's interest in the Peach Bottom Atomic Power Station (Peach Bottom),
totaling 544 MW for an aggregate purchase price of $15.4 million plus the net
book value of nuclear fuel at closing. For further discussion, see Note 11.
Commitments and Contingent Liabilities of Notes.

      For the years ended December 31, 1999, 1998 and 1997, PSE&G had plant
additions of $468 million, $547 million and $557 million, respectively,
including Allowance for Funds Used During Construction (AFDC) and capitalized
interest of $7 million, $12 million and $15


                                       45
<PAGE>

million, respectively. The 1999 decrease is primarily due to PSE&G's
capitalization policy change for the electric generation portion of its
business. See Note 1. Organization, Basis of Presentation and Summary of
Significant Accounting Policies of Notes for further discussion regarding the
capitalization policy change.

      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 $20 million, $10 million and $28
million for the cost of plant removal (net of salvage) in 1999, 1998 and 1997,
respectively. Projected construction and investment expenditures for PSE&G from
2000 to 2004 range from approximately $350 million to $400 million per year,
excluding AFDC and capitalized interest. Power's projected construction and
investment expenditures, excluding AFDC and capitalized interest, for 2000 and
2001 are approximately $440 million and $285 million, respectively. From 2002 to
2004, Power's projected expenditures range from approximately $130 million to
$160 million per year. 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
and the expansion of existing generation sites and acquisition of other
generation sites as discussed above.

      ENERGY HOLDINGS

      During 1999, Energy Holdings' subsidiaries made investments totaling
approximately $963 million. These investments include acquisitions and other
investments made by Global, Resources and Energy Technologies. Projected
investment expenditures for 2000 to 2004 are approximately $700 million per
year, comprised of investments in generation and distribution facilities and
projects and leveraged lease transactions. Energy Holdings has approximately
$175 million of debt principal payments due in 2000 which are expected to be
refinanced or funded through existing credit facilities and operating cash flow.
These expenditures could be partially offset by investment liquidations.

      GLOBAL

      In February 2000, Global and a partner closed on project financing of $329
million for a 1,000 MW gas-fired combined-cycle electric generation facility to
be located near Odessa, Texas. The total cost of the facility is estimated to be
approximately $528 million, of which Global's investment, including loans and
guarantees, is estimated at $190 million.

      In November 1999, Global announced that it plans to build a combined heat
and power plant of 220 MW of electricity and 500 MW of thermal energy capacity
utilizing circulating fluidized bed technology in Poland. Total project cost is
estimated at $320 million with commercial operation targeted for the first
quarter of 2003.

      In October 1999, Global closed on the acquisition of a 70% interest in a
power project development company in Italy specializing in renewable energy. The
company currently has approximately 550 MW of power projects either in
development or under construction. Global's acquisition and equity investment
requirements over the next two years are expected to be approximately $80
million.

      In August 1999, Global and its partners closed project financing for a 471
MW gas-fired combined-cycle electric generating facility in Rades, Tunisia.
Construction of the facility is expected to be completed in the summer of 2001
at a total cost of approximately $261 million. Upon completion, the facility is
expected to qualify as a foreign utility company (FUCO). Global's equity
investment for its 35% interest is expected to be approximately $27 million
including contingencies.

      In June 1999, Global and a partner closed the project financing for an 830
MW gas-fired combined-cycle electric generating facility to be constructed in
San Nicolas, Argentina. The new facility will be adjacent to an existing 650 MW
facility also owned by Global and its partner. Construction began in August 1999
and is expected to be completed by 2001 at a total cost of approximately $448
million. Global's equity investment for its 33% interest, including
contingencies, is expected to be approximately $86 million.

      In May 1999, Global acquired a 63% equity interest in a company which is
developing a 525 MW coal-fired electric generating facility to be constructed in
Ennore, Tamil Nadu, India. Upon scheduled completion in 2003, Global will be the
operator of the plant. The total project cost is expected to be approximately
$633 million, of


                                       46
<PAGE>

which Global's maximum equity investment, including contingencies, is expected
to be approximately $180 million. Global plans to close financing for this
project and commence construction in the second quarter of 2000.

      In April 1999, Global and a partner entered into a joint venture agreement
to develop, construct and operate a 1,000 MW gas-fired combined-cycle electric
generating facility in Guadalupe County in south central Texas. 500 MW of this
facility is expected to be operational in late 2000 and is expected to qualify
as an EWG. Global's maximum equity investment for its 50% interest is expected
to be approximately $193 million, including loans and guarantees. In October
1999, Global closed on a $312 million non-recourse project financing, consisting
of a $260 million term loan and $52 million in letter of credit facilities for
the Guadalupe facility. At the completion of construction (approximately fifteen
months), the loan will convert to a five-year term loan.

      Also in April 1999, Global and a partner announced the formation of a
joint venture to construct and operate up to three gas-fired electric generating
facilities with total installed capacity of 200 MW and associated distribution
systems to serve, under contract, industrial customers in Venezuela. Global
expects the first two facilities, which are in construction, to be operational
in 2000. The total cost of these facilities is expected to be approximately $140
million and Global's equity investment, including contingencies, for its 50%
interest, is expected to be approximately $70 million. Global has been advised
that litigation has been instituted against it by a Venezuelan state-owned
electricity company, alleging that operation of one of the facilities would
damage the state-owned company's installations and that the facility does not
meet certain Venezuelan legal requirements. On February 4, 2000, the Superior
Court in Maracay, Venezuela issued an injunction prohibiting the start-up of the
plant. Global believes that all legal requirements have been met and has been
advised that the appeal of this decision is likely to be heard by the Supreme
Court of Venezuela, and a decision is expected to be rendered within 30 days of
the appeal. Settlement discussions are underway. Global cannot predict the
outcome of this matter, however, a final decision preventing operation of the
facility involved could affect the ability to complete and operate the other two
facilities.

      RESOURCES

      In January and February 2000, Resources invested $73 million in two
leveraged lease transactions including a gas distribution system in the
Netherlands and an electric power plant in the United States.

EXTERNAL FINANCINGS

      The changes in the utility industry are attracting increased attention
from bond rating agencies which regularly assess business and financial matters
including how utility companies are meeting competition. Given the changes in
the industry and the anticipated use of securitization, attention and scrutiny
of PSEG's, PSE&G's, Power's and Energy Holdings' competitive strategies by
rating agencies will likely continue. These changes could affect the bond
ratings, cost of capital and market prices of their respective securities. 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 Liquidity and Capital Resources.

      PSEG, PSE&G, Power and Energy Holdings are analyzing their future capital
and financing needs in light of securitization, the anticipated sale of
generation-related assets to Power and their business strategies. However, it is
expected that following completion of securitization and the generation-related
asset sale, PSE&G will refinance a portion of its debt and reduce its equity
level, which will not substantially alter its existing capitalization ratios.

      PSEG

      At December 31, 1999 and 1998, PSEG had a committed $150 million revolving
credit facility which expires in December 2002. At December 31, 1999, PSEG had
$120 million outstanding under this revolving credit facility. On September 8,
1999, PSEG entered into an uncommitted line of credit with a bank for an
unlimited amount. At December 31, 1999, PSEG had $25 million outstanding under
this line of credit.

      In November 1998, PSEG issued $100 million of Extendible Notes, Series A,
due November 22, 2000. These Notes were automatically tendered to the
remarketing agent for remarketing in February 2000. The interest rate through
maturity is at the three-month London Interbank Offered Rate (LIBOR) plus 0.22%,
reset quarterly.


                                       47
<PAGE>

      Also in November 1998, PSEG issued $175 million of Extendible Notes,
Series B, due November 22, 2000. These Notes were automatically tendered to the
remarketing agent for remarketing in November 1999. The interest rate is at the
three-month LIBOR plus 0.60%, reset quarterly. These Notes will be automatically
tendered to the remarketing agent for remarketing in May 2000.

      In June 1999, PSEG issued $300 million of Extendible Notes, Series C, due
June 15, 2001 with interest at the three-month LIBOR plus 0.40%, reset
quarterly. These Notes will be automatically tendered to the remarketing agent
for remarketing in March 2000. PSEG used the net proceeds to make an equity
investment in Energy Holdings and to reimburse its treasury for expenditures
made to repurchase shares of its Common Stock.

      PSE&G

      In addition to the petition filed with the BPU to effectuate the
securitization transaction, PSE&G will need to file petitions with the BPU for
authorization for any additional debt financing needed. PSE&G is currently
evaluating the potential uses of the proceeds of securitization (see Liquidity
and Capital Resources).

      Under its Mortgage, PSE&G may issue new First and Refunding Mortgage Bonds
against previous additions and improvements and/or retired Mortgage 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, 1999, the Mortgage would
permit up to $3.9 billion aggregate principal amount of new Mortgage Bonds to be
issued against previous additions and improvements, the level of which will be
impacted by the actions ultimately taken in connection with securitization and
the sale of generation-related assets to Power. At December 31, 1999, PSE&G's
Mortgage coverage ratio was 4.8:1. 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.

      On July 1, 1999, $100 million of PSE&G's 8.750% Bonds, Series Z, matured.
On November 12, 1999, PSE&G redeemed its $2.990 million of 6.9% Pollution
Control Bonds, Series C, due September 1, 2009. Also, during 1999, PSE&G
purchased $319 million of its Mortgage Bonds in the open market. On February 1,
2000, $100 million of PSE&G's 7.625% Bonds, Series II, matured.

      To provide liquidity for its commercial paper program, PSE&G has an $850
million revolving credit agreement expiring in June 2000 and a $650 million
revolving credit agreement expiring in June 2002 with a group of commercial
banks, which provide for borrowings of up to one year. On December 31, 1999,
there were no borrowings outstanding under these credit agreements.

      The BPU has authorized PSE&G to issue and have outstanding at any one time
through January 2, 2001, not more than $2.0 billion of short-term obligations,
consisting of commercial paper and other unsecured borrowings from banks and
other lenders. PSE&G has several uncommitted lines of credit with banks. On
December 31, 1999, PSE&G had $1.407 billion of short-term debt outstanding,
including $90 million borrowed against its uncommitted bank lines of credit.

      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, 1999, Fuelco had commercial paper of $73
million outstanding. Once the purchase of PSE&G's generation-related assets is
completed, it is anticipated that Fuelco's commercial paper program will be
discontinued and financing of Peach Bottom nuclear fuel will be funded through
Power.

      ENERGY HOLDINGS

      In February 2000, Energy Holdings issued $300 million of 9.125% Senior
Notes due February 2004. The proceeds were used for the repayment of short-term
debt. Energy Holdings plans to file a registration statement with the SEC
relating to an exchange offer for, or the resale of, these Senior Notes later in
2000.

      Also in February 2000, Energy Holdings closed on a $190 million letter of
credit facility to support a future equity investment in a generation project in
Texas.


                                       48
<PAGE>

      In October 1999, Energy Holdings issued $400 million of 10.0% Senior Notes
due October 2009. The proceeds were used for the repayment of short-term debt
outstanding under revolving credit facilities. Borrowings under the revolving
credit facilities were used to finance investments and acquisitions and for
general corporate purposes. In January 2000, Energy Holdings filed a
registration statement with the SEC relating to an exchange offer for these
Senior Notes. At December 31, 1999, Energy Holdings had total debt outstanding
of $1.7 billion, including debt at PSEG Capital as discussed below and
consolidated debt that is non-recourse to PSEG, Energy Holdings and Global.

      In September 1999, Energy Holdings closed on a $150 million letter of
credit facility to support a future equity investment in a generation project in
Texas.

      In May 1999, Energy Holdings closed on two separate revolving credit
facilities, with a syndicate of banks, a $165 million, 364-day revolving credit
facility and a $495 million, five-year revolving credit and letter of credit
facility. At December 31, 1999, Energy Holdings had $351 million outstanding
under existing revolving credit facilities totaling $660 million. The facilities
replaced existing revolving credit facilities at Enterprise Capital Funding
Corporation (Funding), a financing subsidiary of Energy Holdings, totaling $450
million. Since May 1999, Funding has not been used as a financing vehicle for
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 by April 2003. 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. Energy Holdings believes it is capable of
eliminating PSEG support of PSEG Capital debt within the time period set forth
in the Focused Audit.

      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. In March and June 1999, PSEG Capital issued $252
million of 6.25% MTNs due May 2003 and $35 million of 6.73% MTNs due June 2001,
respectively. The proceeds were used to repay $100 million of PSEG Capital MTNs
which matured in February 1999 and $35 million which matured in May 1999 and to
reduce Energy Holdings' short-term debt. At December 31, 1999, PSEG Capital had
total debt outstanding of $630 million, all of which was comprised of MTNs with
maturities between 2000 and 2003.

      Compliance with applicable financial covenants will depend upon Energy
Holdings' future financial position and levels of earnings and cash flow, as to
which no assurances can be given. In addition, Energy Holdings' ability to
continue to grow its business will depend to a significant degree on PSEG's
ability to access capital and Energy Holdings' ability to obtain additional
financing beyond current levels.

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, pollution credits, 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 comprised of executive officers which utilizes
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 PSEG and its
subsidiaries. In the event of non-performance or non-payment by a major
counterparty, there may be a material adverse impact on PSEG's and its
subsidiaries' financial condition, results of operations or net cash


                                       49
<PAGE>

flows. For discussion of interest rates and Energy Holdings' commodity-related
instruments, equity securities and foreign currency risks, see Note 9. Financial
Instruments and Risk Management of Notes.

      COMMODITY-RELATED INSTRUMENTS -- PSE&G (INCLUDING POWER)

      The availability and price of energy commodities are subject to
fluctuations from factors such as weather, environmental policies, changes in
supply and demand and state and Federal regulatory policies. 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 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 and financial contracts.
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 95%
confidence level over a one-week time horizon at December 31, 1999 was
approximately $3 million, compared to the December 31, 1998 level of $4 million.
PSE&G's calculated value-at-risk represents an estimate of the potential change
in the value of its portfolio of physical and financial derivative instruments.
These estimates, however, are not necessarily indicative of actual results,
which may differ due to the fact that actual market rate fluctuations may differ
from forecasted fluctuations and due to the fact that the portfolio of hedging
instruments may change over the holding period.

      As discussed in Results of Operations, PSE&G's wholesale power activities
positively impacted the results of operations for each year since their
inclusion in 1997. Certain other generators and power marketers 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.

      Given the absence of a PJM price cap in situations involving emergency
purchases and the potential for plant outages, extreme price movements can occur
and could have a material impact on PSEG's, PSE&G's and Power's financial
condition, results of operations and net cash flows. For discussion of changes
in the pricing of electric energy offered for sale in the PJM interchange energy
market, see PJM Interconnection, L.L.C.

FOREIGN OPERATIONS

      In accordance with their growth strategies, Global and Resources have
approximately $1.4 billion and $1.0 billion, respectively, of international
investments. For a discussion of foreign currency risk, see Note 9. Financial
Instruments and Risk Management of Notes.

YEAR 2000 READINESS

      Many of PSEG's and its subsidiaries' systems, which include information
technology applications, plant control and telecommunications infrastructure
systems, were modified due to computer program limitations in recognizing dates
beyond 1999. PSEG has had a formal project in place since 1997 to address Year
2000 issues. All mission critical systems were ready before January 1, 2000.
PSEG's and its subsidiaries' Year 2000 preparations allowed for a smooth
transition into the new millennium. PSEG and its subsidiaries did not experience
any major problems or Year 2000-related service interruptions as their systems
rolled over from 1999 to 2000. PSEG and its subsidiaries expect most material
Year 2000 compliance problems would have arisen on or immediately after January
1, 2000. To date, PSEG and its subsidiaries are not aware of any material Year
2000-related problems associated with their internal systems or software or with
the software and systems of their vendors, distributors or suppliers. It is
possible, however, that further Year 2000-related problems may arise. For
example, the date February 29, 2000 could potentially present further problems.
Based on testing of their systems for Year 2000 problems and pending a
successful rollover from February 29, 2000 to March 1, 2000, PSEG and its
subsidiaries do not expect future problems to arise related to the Year 2000.


                                       50
<PAGE>

      PSEG and its subsidiaries, including their domestic and international
investments, have no outstanding litigation relating to Year 2000 issues. The
likelihood of future Year 2000-related liabilities cannot be determined at this
time.

      PSEG's and its subsidiaries' total cost related to Year 2000 readiness was
approximately $67 million, which was incurred from 1997 through 1999. $32
million was incurred in 1999, $27 million was incurred in 1998 and $8 million
was incurred in 1997. A portion of these costs was not incremental to PSEG or
its subsidiaries, but rather, represented a redeployment of existing
personnel/resources. PSEG and its subsidiaries expect that expenses related to
remediating any remaining noncompliant non-critical systems will not be
material.

ACCOUNTING ISSUES

      For a discussion of significant accounting matters including SFAS 71; SFAS
121; Emerging Issues Task Force (EITF) Issue No. 97-4, "Deregulation of the
Pricing of Electricity-Issues Related to the Application of FASB Statements No.
71 and No. 101" (EITF 97-4); SFAS 101, "Regulated Enterprises-Accounting for the
Discontinuation of Application of FASB Statement No. 71" (SFAS 101); changes in
capitalization, depreciation and asset retirement policies; discontinuation of
deferral accounting for fuel revenues and expenses; and EITF 98-10, "Accounting
for Energy Trading and Risk Management Activities" (EITF 98-10); see Note 1.
Organization, Basis of Presentation and Summary of Significant Accounting
Policies of Notes.

      For a discussion of the impact of new accounting pronouncements including
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133) and SFAS 137, "Accounting for Derivative Instruments and Hedging Activities
- Deferral of the Effective Date of FASB Statement No. 133" (SFAS 137), see Note
19. Accounting Matters 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: Overview of 1999 and Future Outlook; Results of
Operations; Liquidity and Capital Resources; External Financings; Foreign
Operations; Year 2000 Readiness and Accounting Issues.

FORWARD LOOKING STATEMENTS

      Except for the historical information contained herein, certain of the
matters discussed in this report constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are subject to risks and uncertainties which could
cause actual results to differ materially from those anticipated. 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", "intend", "estimate", "believe", "expect", "plan",
"hypothetical", "potential", variations of such words and similar expressions
are intended to identify forward-looking statements. 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 following review
of factors 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 Private Securities Litigation Reform Act of 1995.

      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 and the establishment of a
competitive energy marketplace for products and services; managing rapidly
changing wholesale energy trading operations in conjunction with electricity and
gas production, transmission and distribution systems; managing foreign
investments and electric generation and distribution operations 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 PSE&G service


                                       51
<PAGE>

territory; ability to complete development or acquisition of current and future
investments; partner and counterparty risk; exposure to market price
fluctuations and volatility of fuel and power supply, power output, marketable
securities, among others; ability to obtain adequate and timely rate relief,
cost recovery, and other necessary regulatory approvals; ability to obtain
securitization proceeds; Federal, state and foreign regulatory actions;
regulatory oversight with respect to utility and non-utility affiliate relations
and activities; operating restrictions, increased cost and construction delays
attributable to environmental regulations; nuclear decommissioning and the
availability of 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 debt and
equity market concerns associated with these issues.

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, Basis of Presentation 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


                                       52
<PAGE>

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

<TABLE>
<CAPTION>
                                                     FOR THE YEARS ENDED DECEMBER 31,
                                                   -----------------------------------
                                                     1999          1998         1997
                                                   ---------    ---------    ---------
<S>                                                <C>          <C>          <C>
OPERATING REVENUES
     Electric Revenues *
       Bundled                                     $   2,480    $   4,009    $   3,896
       Generation                                      1,005           --           --
       Transmission and Distribution                     688           --           --
                                                   ---------    ---------    ---------
         Total Electric Revenues                       4,173        4,009        3,896
     Gas Distribution                                  1,717        1,559        1,937
     Other                                               607          442          344
                                                   ---------    ---------    ---------
         Total Operating Revenues                      6,497        6,010        6,177
                                                   ---------    ---------    ---------
OPERATING EXPENSES
     Electric Energy Costs                               972          960          911
     Gas Costs                                         1,107        1,034        1,175
     Operation and Maintenance                         1,849        1,547        1,405
     Depreciation and Amortization                       536          660          630
     Taxes Other Than Income Taxes                       196          205          605
                                                   ---------    ---------    ---------
           Total Operating Expenses                    4,660        4,406        4,726
                                                   ---------    ---------    ---------
OPERATING INCOME                                       1,837        1,604        1,451
Other Income and Deductions                               33           18          (16)
Settlement of Salem Litigation                            --           --          (82)
Interest Expense                                        (490)        (470)        (450)
Preferred Securities Dividend Requirements               (94)         (80)         (59)
                                                   ---------    ---------    ---------
INCOME BEFORE INCOME TAXES AND
  EXTRAORDINARY ITEM                                   1,286        1,072          844
Income Taxes                                            (563)        (428)        (284)
                                                   ---------    ---------    ---------
INCOME BEFORE EXTRAORDINARY ITEM                         723          644          560
Extraordinary Item (Net of Tax of $345)                 (804)          --           --
                                                   ---------    ---------    ---------
 NET INCOME (LOSS)                                 $     (81)   $     644    $     560
                                                   =========    =========    =========

WEIGHTED AVERAGE COMMON SHARES
    OUTSTANDING (000's)                              219,814      230,974      231,986
                                                   =========    =========    =========

EARNINGS (LOSSES) PER SHARE (BASIC AND DILUTED):
Income Before Extraordinary Item                   $    3.29    $    2.79    $    2.41
Extraordinary Item (Net of Tax)                        (3.66)          --           --
                                                   ---------    ---------    ---------
Net Income (Loss)                                  $   (0.37)   $    2.79    $    2.41
                                                   =========    =========    =========

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

*     Note: Bundled revenues were recorded based on the bundled rates in effect
      through 7/31/99. Commencing with the unbundling of rates on 8/1/99,
      revenues are disaggregated between Generation Revenue and Transmission and
      Distribution Revenue.

      See Notes to Consolidated Financial Statements.


                                       53
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                   DECEMBER 31,
                                                                              --------------------
                                                                                1999        1998
                                                                              --------    --------
<S>                                                                           <C>         <C>
CURRENT ASSETS
  Cash and Cash Equivalents                                                   $    259    $    139
  Accounts Receivable:
    Customer Accounts Receivable                                                   646         506
    Other Accounts Receivable                                                      371         205
    Allowance for Doubtful Accounts                                                (40)        (38)
  Unbilled Revenues                                                                241         255
  Fuel                                                                             311         331
  Materials and Supplies, net of  valuation reserves - 1999, $11; 1998, $12        130         167
  Prepayments                                                                       53          61
  Miscellaneous Current Assets                                                      72          35
                                                                              --------    --------
       Total Current Assets                                                      2,043       1,661
                                                                              --------    --------

PROPERTY, PLANT AND EQUIPMENT
  Electric - Generation                                                          2,510       9,942
  Electric - Transmission and Distribution                                       5,093       4,953
  Gas - Distribution                                                             3,019       2,882
  Other                                                                            534         550
                                                                              --------    --------
       Total                                                                    11,156      18,327
  Accumulated depreciation and amortization                                     (4,078)     (7,392)
                                                                              --------    --------
       Net Property, Plant and Equipment                                         7,078      10,935
                                                                              --------    --------

NONCURRENT ASSETS
 Regulatory Assets                                                               5,041       1,579
 Long-Term Investments, net of accumulated amortization
     and net of valuation allowances - 1999, $65; 1998, $46                      3,848       3,029
 Nuclear Decommissioning Fund                                                      631         524
 Other Special Funds                                                               148         125
 Other Noncurrent Assets,  net of accumulated amortization -
    1999, $12; 1998, $8                                                            226         138
                                                                              --------    --------
       Total Noncurrent Assets                                                   9,894       5,395
                                                                              --------    --------

TOTAL                                                                         $ 19,015    $ 17,991
                                                                              ========    ========
</TABLE>

See Notes to Consolidated Financial Statements.


                                       54
<PAGE>

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

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                               --------------------
                                                                 1999        1998
                                                               --------    --------
<S>                                                            <C>         <C>
CURRENT LIABILITIES
  Long-Term Debt Due Within One Year                           $  1,073    $    418
  Commercial Paper and Loans                                      1,972       1,056
  Accounts Payable                                                  738         684
  Other                                                             394         299
                                                               --------    --------
       Total Current Liabilities                                  4,177       2,457
                                                               --------    --------

NONCURRENT LIABILITIES
  Deferred Income Taxes and ITC                                   2,928       3,701
  Regulatory Liability - Excess Depreciation Reserve                569          --
  Nuclear Decommissioning                                           491          --
  OPEB Costs                                                        390         344
  Other                                                             681         420
                                                               --------    --------
       Total Noncurrent Liabilities                               5,059       4,465
                                                               --------    --------

COMMITMENTS AND CONTINGENT LIABILITIES                               --          --
                                                               --------    --------

CAPITALIZATION:
  LONG-TERM DEBT                                                  4,575       4,763
                                                               --------    --------

  SUBSIDIARIES' PREFERRED SECURITIES:
    Preferred Stock Without Mandatory Redemption                     95          95
    Preferred Stock With Mandatory Redemption                        75          75
    Guaranteed Preferred Beneficial Interest in Subordinated
     Debentures                                                   1,038       1,038
                                                               --------    --------
       Total Subsidiaries' Preferred Securities                   1,208       1,208
                                                               --------    --------

  COMMON STOCKHOLDERS' EQUITY:
    Common Stock, issued; 231,957,608 shares                      3,604       3,603
    Treasury Stock, at cost; 1999 - 15,540,390 shares,
       1998 - 5,314,100 shares                                     (597)       (207)
    Retained Earnings                                             1,193       1,748
    Accumulated Other Comprehensive Income (Loss)                  (204)        (46)
                                                               --------    --------
       Total Common Stockholders' Equity                          3,996       5,098
                                                               --------    --------
            Total Capitalization                                  9,779      11,069
                                                               --------    --------
TOTAL                                                          $ 19,015    $ 17,991
                                                               ========    ========
</TABLE>

See Notes to Consolidated Financial Statements.


                                       55
<PAGE>

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

<TABLE>
<CAPTION>
                                                                     FOR THE YEARS ENDED DECEMBER 31,
                                                                     --------------------------------
                                                                        1999       1998       1997
                                                                      -------    -------    -------
<S>                                                                   <C>        <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income (loss)                                                   $   (81)   $   644    $   560
  Adjustments to reconcile net income (loss) to net cash flows from
   operating activities:
    Extraordinary Loss - net of tax                                       804         --         --
    Depreciation and Amortization                                         536        660        630
    Amortization of Nuclear Fuel                                           92         93         60
    Recovery of Electric Energy and Gas Costs - net                        61        132          9
    Provision for Deferred Income Taxes and ITC - net                    (215)       (55)        22
    Investment Distributions                                              134         73         73
    Equity Income from Partnerships                                       (53)       (39)       (39)
    Gains on Investments                                                  (63)       (40)       (40)
    Leasing Activities                                                      6        (20)        71
    Net Changes in certain current assets and liabilities:
       Accounts Receivable and Unbilled Revenues                         (236)       113       (111)
       Inventory - Fuel and Materials and Supplies                          9        (46)         9
       Prepayments                                                          8        (12)        17
       Accounts Payable                                                    57        (34)        99
       Provision for Rate Refund                                           --         --        (80)
       Other Current Assets and Liabilities                                59        (63)       (63)
    Other                                                                 114         93        (33)
                                                                      -------    -------    -------
       Net Cash Provided By Operating Activities                        1,232      1,499      1,184
                                                                      -------    -------    -------
CASH FLOWS FROM INVESTING ACTIVITIES
  Additions to Property, Plant and Equipment,
      excluding Capitalized Interest and AFDC                            (582)      (531)      (536)
  Net Change in Long-Term Investments                                    (980)       (92)    (1,078)
  Contribution to Decommissioning Funds and Other Special Funds           (70)      (115)       (63)
  Other                                                                    --        (10)       (94)
                                                                      -------    -------    -------
       Net Cash Used In Investing Activities                           (1,632)      (748)    (1,771)
                                                                      -------    -------    -------
CASH FLOWS FROM FINANCING ACTIVITIES
  Net Change in Short-Term Debt                                           916       (431)       879
  Issuance of Long-Term Debt                                            1,143        525        785
  Redemption/Purchase of Long-Term Debt                                  (676)      (557)      (700)
  Issuance of Preferred Securities                                         --        525         95
  Redemption of Preferred Stock                                            --         --        (94)
  Purchase of Treasury Stock                                             (400)      (207)        --
  Retirement of Common Stock                                               --         --        (43)
  Cash Dividends Paid on Common Stock                                    (474)      (499)      (501)
  Other                                                                    11        (51)       (29)
                                                                      -------    -------    -------
       Net Cash Provided By (Used In) Financing Activities                520       (695)       392
                                                                      -------    -------    -------
Net Change In Cash And Cash Equivalents                                   120         56       (195)
Cash And Cash Equivalents At Beginning Of Period                          139         83        278
                                                                      -------    -------    -------
Cash And Cash Equivalents At End Of Period                            $   259    $   139    $    83
                                                                      =======    =======    =======

Income Taxes Paid                                                     $   534    $   426    $   170
Interest Paid                                                         $   494    $   469    $   416
</TABLE>

See Notes to Consolidated Financial Statements.


                                       56
<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 (LOSS)   TOTAL
                                                            --------------    ------------------   --------  -------------  -------
                                                            SHS.    AMOUNT       SHS.     AMOUNT
                                                            ----    ------       ----     ------
<S>                                                         <C>    <C>            <C>    <C>        <C>        <C>          <C>
BALANCE AS OF JANUARY 1, 1997                               234    $ 3,627         --         --    $ 1,586         --      $ 5,213
    Net Income                                               --         --         --         --        560         --          560
    Other Comprehensive Income (Loss), net of tax:
    Currency Translation Adjustment, net of tax of $(2)      --         --         --         --         --        (15)         (15)
                                                                                                                            -------
        Other Comprehensive Income (Loss)                    --         --         --         --         --         --          (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 (Loss), 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 (Loss)                    --         --         --         --         --         --          (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
                                                            --------------    ------------------   --------  -------------  -------
    Net Income (Loss)                                        --         --         --         --        (81)        --          (81)
    Other Comprehensive Income (Loss), net of tax:
    Currency Translation Adjustment, net of tax of $(17)     --         --         --         --         --       (158)        (158)
                                                                                                                            -------
        Other Comprehensive Income (Loss)                    --         --         --         --         --         --         (158)
                                                                                                                            -------
    Comprehensive Income (Loss)                              --         --         --         --         --         --         (239)
    Cash Dividends on Common Stock                           --         --         --         --       (474)        --         (474)
    Purchase of Treasury Stock                               --         --        (11)      (400)        --         --         (400)
    Other                                                    --          1         --         10         --         --           11
                                                            --------------    ------------------   --------  -------------  -------
BALANCE AS OF DECEMBER 31, 1999                             232    $ 3,604        (16)   $  (597)   $ 1,193    $  (204)     $ 3,996
                                                            ==============    ==================   ========  =============  =======
</TABLE>

See Notes to Consolidated Financial Statements.


                                       57
<PAGE>

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

                                               FOR THE YEARS ENDED DECEMBER 31,
                                               --------------------------------
                                                  1999       1998       1997
                                                -------    -------    -------
OPERATING REVENUES
     Electric Revenues *
       Bundled                                  $ 2,480    $ 4,009    $ 3,896
       Generation                                 1,005         --         --
       Transmission and Distribution                688         --         --
                                                -------    -------    -------
         Total Electric Revenues                  4,173      4,009      3,896
     Gas Distribution                             1,717      1,559      1,937
                                                -------    -------    -------
         Total Operating Revenues                 5,890      5,568      5,833
                                                -------    -------    -------
OPERATING EXPENSES
     Electric Energy Costs                          958        945        909
     Gas Costs                                    1,038        970      1,101
     Operation and Maintenance                    1,573      1,385      1,307
     Depreciation and Amortization                  529        649        607
     Taxes Other Than Income Taxes                  194        208        606
                                                -------    -------    -------
           Total Operating Expenses               4,292      4,157      4,530
                                                -------    -------    -------
OPERATING INCOME                                  1,598      1,411      1,303
Other Income and Deductions                          (2)        17        (13)
Settlement of Salem Litigation                       --         --        (82)
Interest Expense                                   (387)      (378)      (380)
Preferred Securities Dividend Requirements          (46)       (44)       (44)
                                                -------    -------    -------
INCOME BEFORE INCOME TAXES AND
  EXTRAORDINARY ITEM                              1,163      1,006        784
Income Taxes                                       (510)      (404)      (256)
                                                -------    -------    -------
INCOME BEFORE EXTRAORDINARY ITEM                    653        602        528
Extraordinary Item (Net of Tax of $345)            (804)        --         --
                                                -------    -------    -------
NET INCOME (LOSS)                                  (151)       602        528
Preferred Stock Dividend Requirement                 (9)        (9)       (15)
                                                -------    -------    -------
EARNINGS (LOSSES) AVAILABLE TO
 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED   $  (160)   $   593    $   513
                                                =======    =======    =======

*     Note: Bundled revenues were recorded based on the bundled rates in effect
      through 7/31/99. Commencing with the unbundling of rates on 8/1/99,
      revenues are disaggregated between Generation Revenue and Transmission and
      Distribution Revenue.

      See Notes to Consolidated Financial Statements.


                                       59
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                  DECEMBER 31,
                                                                              --------------------
                                                                                1999        1998
                                                                              --------    --------
<S>                                                                           <C>         <C>
CURRENT ASSETS
  Cash and Cash Equivalents                                                   $    173    $     42
  Accounts Receivable:
    Customer Accounts Receivable                                                   529         451
    Other Accounts Receivable                                                      313         178
    Allowance for Doubtful Accounts                                                (35)        (34)
  Unbilled Revenues                                                                241         255
  Fuel                                                                             308         331
  Materials and Supplies, net of  valuation reserves - 1999, $11; 1998, $12        130         165
  Prepayments                                                                       48          52
  Miscellaneous Current Assets                                                      36          32
                                                                              --------    --------
       Total Current Assets                                                      1,743       1,472
                                                                              --------    --------

PROPERTY, PLANT AND EQUIPMENT
  Electric - Generation                                                          2,439       9,942
  Electric - Transmission and Distribution                                       5,093       4,953
  Gas - Distribution                                                             3,019       2,882
  Other                                                                            457         460
                                                                              --------    --------
       Total                                                                    11,008      18,237
  Accumulated depreciation and amortization                                     (4,046)     (7,361)
                                                                              --------    --------
       Net Property, Plant and Equipment                                         6,962      10,876
                                                                              --------    --------

NONCURRENT ASSETS
 Regulatory Assets                                                               5,041       1,579
 Long-Term Investments                                                              99          65
 Nuclear Decommissioning Fund                                                      631         524
 Other Special Funds                                                               148         125
 Other Noncurrent Assets                                                           100          28
                                                                              --------    --------
       Total Noncurrent Assets                                                   6,019       2,321
                                                                              --------    --------

TOTAL                                                                         $ 14,724    $ 14,669
                                                                              ========    ========
</TABLE>

See Notes to Consolidated Financial Statements.


                                       60
<PAGE>

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

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                               --------------------
                                                                 1999        1998
                                                               --------    --------
<S>                                                            <C>         <C>
CURRENT LIABILITIES
  Long-Term Debt Due Within One Year                           $    623    $    100
  Commercial Paper and Loans                                      1,475         850
  Accounts Payable                                                  676         611
  Other                                                             281         253
                                                               --------    --------
       Total Current Liabilities                                  3,055       1,814
                                                               --------    --------

NONCURRENT LIABILITIES
  Deferred Income Taxes and ITC                                   2,032       2,846
  Regulatory Liability - Excess Depreciation Reserve                569          --
  Nuclear Decommissioning                                           491          --
  OPEB Costs                                                        390         344
  Other                                                             654         397
                                                               --------    --------
       Total Noncurrent Liabilities                               4,136       3,587
                                                               --------    --------

COMMITMENTS AND CONTINGENT LIABILITIES                               --          --
                                                               --------    --------

CAPITALIZATION:
  LONG-TERM DEBT                                                  3,099       4,045
                                                               --------    --------

  PREFERRED SECURITIES:
   Preferred Stock Without Mandatory Redemption                      95          95
   Preferred Stock With Mandatory Redemption                         75          75
   Subsidiaries' Preferred Securities:
    Guaranteed Preferred Beneficial Interest in Subordinated
     Debentures                                                     513         513
                                                               --------    --------
       Total Preferred Securities                                   683         683
                                                               --------    --------

  COMMON STOCKHOLDER'S EQUITY:
    Common Stock, issued; 132,450,344 shares                      2,563       2,563
    Contributed Capital                                             594         594
    Retained Earnings                                               597       1,386
    Accumulated Other Comprehensive Income (Loss)                    (3)         (3)
                                                               --------    --------
       Total Common Stockholder's Equity                          3,751       4,540
                                                               --------    --------
            Total Capitalization                                  7,533       9,268
                                                               --------    --------
TOTAL                                                          $ 14,724    $ 14,669
                                                               ========    ========
</TABLE>

See Notes to Consolidated Financial Statements.


                                       61
<PAGE>

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

<TABLE>
<CAPTION>
                                                                     FOR THE YEARS ENDED DECEMBER 31,
                                                                     --------------------------------
                                                                       1999       1998       1997
                                                                      -------    -------    -------
<S>                                                                   <C>        <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income (loss)                                                   $  (151)   $   602    $   528
  Adjustments to reconcile net income (loss) to net cash flows from
   operating activities:
    Extraordinary Loss - net of tax                                       804         --         --
    Depreciation and Amortization                                         529        649        607
    Amortization of Nuclear Fuel                                           92         93         60
    Recovery of Electric Energy and Gas Costs - net                        61        132          9
    Provision for Deferred Income Taxes and ITC - net                    (181)       (41)        20
    Net Changes in certain current assets and liabilities:
       Accounts Receivable and Unbilled Revenues                         (198)        77        (39)
       Inventory - Fuel and Materials and Supplies                         10        (44)         9
       Prepayments                                                          4         (8)       (14)
       Accounts Payable                                                    68         15        (28)
       Provision for Rate Refund                                           --         --        (80)
       Other Current Assets and Liabilities                                25         26        (37)
    Other                                                                  87         80        (22)
                                                                      -------    -------    -------
       Net Cash Provided By Operating Activities                        1,150      1,581      1,013
                                                                      -------    -------    -------
CASH FLOWS FROM INVESTING ACTIVITIES
  Additions to Property, Plant and Equipment,
      excluding Capitalized Interest and AFDC                            (479)      (535)      (542)
  Contribution to Decommissioning Funds and Other Special Funds           (70)      (115)       (62)
  Other                                                                   (34)       (35)       (99)
                                                                      -------    -------    -------
       Net Cash Used In Investing Activities                             (583)      (685)      (703)
                                                                      -------    -------    -------
CASH FLOWS FROM FINANCING ACTIVITIES
  Net Change in Short-Term Debt                                           625       (256)       498
  Issuance of Long-Term Debt                                               --        250        288
  Redemption/Purchase of Long-Term Debt                                  (423)      (350)      (574)
  Issuance of Preferred Securities                                         --         --         95
  Redemption of Preferred Stock                                            --         --        (94)
  Cash Dividends Paid on Common Stock                                    (629)      (503)      (523)
  Other                                                                    (9)       (12)       (29)
                                                                      -------    -------    -------
       Net Cash Used In Financing Activities                             (436)      (871)      (339)
                                                                      -------    -------    -------
Net Change In Cash And Cash Equivalents                                   131         25        (29)
Cash And Cash Equivalents At Beginning Of Period                           42         17         46
                                                                      -------    -------    -------
Cash And Cash Equivalents At End Of Period                            $   173    $    42    $    17
                                                                      =======    =======    =======

Income Taxes Paid                                                     $   537    $   410    $   259
Interest Paid                                                         $   409    $   386    $   357
</TABLE>

See Notes to Consolidated Financial Statements.


                                       62
<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         LOSS            TOTAL
                                                           ------      ------------     --------    -------------       -------
<S>                                                       <C>            <C>            <C>             <C>             <C>
BALANCE AS OF JANUARY 1, 1997                             $ 2,563        $   594        $ 1,309              --         $ 4,466
    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          1,296              --           4,453
                                                          -------        -------        -------         -------         -------
    Net Income                                                 --             --            602              --             602
    Other Comprehensive Income (Loss), net of tax:
    Pension Adjustment, net of tax of $(2)                     --             --             --              (3)             (3)
                                                                                                                        -------
        Other Comprehensive Income (Loss)                      --             --             --              --              (3)
                                                                                                                        -------
    Comprehensive Income                                       --             --             --              --             599
                                                                                                                        -------
    Cash Dividends on Common Stock                             --             --           (503)             --            (503)
    Cash Dividends on Preferred Stock                          --             --             (9)             --              (9)
                                                          -------        -------        -------         -------         -------
BALANCE AS OF DECEMBER 31, 1998                             2,563            594          1,386              (3)          4,540
                                                          -------        -------        -------         -------         -------
    Net Income (Loss)                                          --             --           (151)             --            (151)
    Other Comprehensive Income (Loss)                          --             --             --              --              --
                                                                                                                        -------
    Comprehensive Income (Loss)                                --             --             --              --            (151)
                                                                                                                        -------
    Cash Dividends on Common Stock                             --             --           (629)             --            (629)
    Cash Dividends on Preferred Stock                          --             --             (9)             --              (9)
                                                          -------        -------        -------         -------         -------
BALANCE AS OF DECEMBER 31, 1999                           $ 2,563        $   594        $   597         $    (3)        $ 3,751
                                                          =======        =======        =======         =======         =======
</TABLE>

See Notes to Consolidated Financial Statements.


                                       63
<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. ORGANIZATION, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
        ACCOUNTING POLICIES

ORGANIZATION

      PSEG has three principal direct wholly-owned operating subsidiaries:
Public Service Electric and Gas Company (PSE&G), PSEG Power LLC (Power) and PSEG
Energy Holdings Inc. (Energy Holdings). In 1999, PSEG formed PSEG Services
Corporation (Services) to provide management and administrative services to PSEG
and its subsidiaries.

      PSE&G is an operating public utility providing electric and gas service
within certain areas in the State of New Jersey. Power was formed in 1999 and is
anticipated to be the owner and operator of PSEG's generation business once the
sale of PSE&G's generation-related assets is completed in 2000. Power and its
subsidiaries were established to acquire, own and operate the electric
generation-related assets of PSE&G pursuant to the Final Decision and Order
(Final Order) issued August 24, 1999 by the New Jersey Board of Public Utilities
(BPU) under the New Jersey Energy Master Plan Proceedings and the New Jersey
Electric Discount and Energy Competition Act (Energy Competition Act). After the
sale of its generation-related assets to Power, PSE&G will continue to own and
operate its transmission and distribution businesses.

      Energy Holdings is the parent of three energy-related lines of business
through its wholly-owned subsidiaries: PSEG Global Inc. (Global), which
develops, acquires, owns and operates electric generation and distribution
facilities in selected domestic and international markets; PSEG Resources Inc.
(Resources), which invests in energy-related financial transactions; and PSEG
Energy Technologies Inc. (Energy Technologies), an energy management company.

      Energy Holdings also has a finance subsidiary, PSEG Capital Corporation
(PSEG Capital), which provides privately-placed debt financing to Energy
Holdings' operating subsidiaries on the basis of a minimum net worth maintenance
agreement with PSEG. Energy Holdings is also the parent of Enterprise Group
Development Corporation (EGDC), a nonresidential real estate development and
investment business and has been conducting a controlled exit from this business
since 1993.

BASIS OF PRESENTATION

      Effective August 1, 1999, the presentation of revenues in the Consolidated
Statements of Income has changed, due to the deregulation of the electric
generation business by the BPU in PSE&G's rate unbundling, stranded costs and
restructuring proceedings. Effective with that date, electric rates charged to
customers have been unbundled and the generation, transmission, distribution and
other components of the total rate have become separate charges. As a result,
the presentation of revenues has also changed. PSE&G's generation business earns
revenues by providing the energy and capacity to meet PSE&G's basic generation
service (BGS) obligation. Generation revenues are also produced by a variety of
wholesale energy and capacity sales and sales of other ancillary services.
PSE&G's transmission and distribution businesses remain rate regulated and will
continue to earn revenues based on PSE&G's regulated rate tariffs under which
PSE&G provides transmission and distribution services for its residential,
commercial and industrial customers in New Jersey. The rates charged for
transmission and distribution are regulated by the Federal Energy Regulatory
Commission (FERC) and the BPU, respectively. Transmission and distribution
revenues are also generated from a variety of other activities such as sundry
sales, the appliance service business, wholesale transmission services and other
miscellaneous services. Revenues earned prior to August 1, 1999 continue to be
presented as Bundled Electric revenues on the Consolidated Statements of Income
as they were earned based upon bundled electric rates prior to the deregulation
of PSE&G's generation business. For more information on deregulation and PSE&G's
rate unbundling, stranded costs and restructuring proceedings, including the
BPU's Final Order, see Note 2. Regulatory Issues.


                                       64
<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

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 BPU and the FERC. As a result, PSE&G maintains its accounts
for its regulated operations 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 the transmission and
distribution portion of 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 economic effects of regulation. As a result, a regulated
utility is required to 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
future rates. 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 is charged or credited to income unless
recovery mechanisms are approved by the regulator. PSE&G's transmission and
distribution businesses continue to meet the requirements for application of
SFAS 71.

      Effective April 1, 1999, PSE&G discontinued the application of SFAS 71 for
the electric generation portion of its business. PSE&G calculated an
extraordinary charge consistent with the requirements of Emerging Issues Task
Force (EITF) Issue No. 97-4, "Deregulation of the Pricing of Electricity -
Issues Related to the Application of FASB Statements No. 71 and No. 101" (EITF
97-4) and SFAS 101, "Regulated Enterprises--Accounting for the Discontinuation
of Application of FASB Statement No. 71" (SFAS 101). The portion of the
extraordinary charge related to an impairment of long-lived assets was
calculated in accordance with SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121). The
discontinuation of the application of SFAS 71 had a material impact on PSEG's
and PSE&G's financial condition and results of operations. For further
discussion, see Note 2. Regulatory Issues and Note 3. Extraordinary Charge and
Other Accounting Impacts of Deregulation.

      In concert with the discontinuation of SFAS 71, PSE&G revised a number of
accounting policies related to its electric generation business. Under the
revised capitalization policy, PSE&G will only capitalize costs which increase
the capacity or extend the life of an existing generation-related asset,
represent a newly acquired or constructed asset or represent the replacement of
a retired asset. Under the revised depreciation policy, PSE&G will calculate
depreciation consistent with revised asset lives determined by PSE&G policy
rather than using depreciation rates prescribed by the BPU in rate proceedings.
Finally, under the revised asset retirement policy, when a generation-related
asset is retired, the remaining net carrying amount will be included in the
determination of net earnings.

      CONSOLIDATION

      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. 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. All significant intercompany accounts and
transactions are eliminated in consolidation.

      RECLASSIFICATIONS

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


                                       65
<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

      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 FERC
regulations, PSE&G's 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. For PSEG's unregulated
businesses, gains and losses on reacquired debt are 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.

      PLANT, PROPERTY AND EQUIPMENT -- PSE&G

      For PSE&G's regulated transmission and distribution businesses, additions
to plant, property and equipment 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.

      For its unregulated generation business, PSE&G only capitalizes costs
which increase the capacity or extend the life of an existing asset, represent a
newly acquired or constructed asset or represent the replacement of a retired
asset. Also, under its revised asset retirement policy, the portion of future
retirements which have not been fully depreciated will impact earnings for
PSE&G's generation business.

      DEPRECIATION AND AMORTIZATION

      For PSE&G's regulated transmission and distribution businesses,
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 3.52%, 3.52% and 3.53%
in 1999, 1998 and 1997, respectively. PSE&G has certain regulatory assets and
liabilities resulting from the use of a level of depreciation expense in the
ratemaking process that differs from the amount that is recorded under GAAP for
non-regulated companies.

      For its generation operations, under the revised depreciation policy,
PSE&G will calculate depreciation consistent with revised asset lives determined
by PSE&G policy rather than using depreciation rates prescribed by the BPU in
rate proceedings.

      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.

      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.


                                       66
<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

      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. Effective August 1, 1999, these
costs are recovered through the distribution rates established under the Final
Order.

      ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFDC) -- PSE&G

      For PSE&G's regulated operations, 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
1999, 1998 and 1997 were 5.29%, 6.06% and 5.71%, respectively. Effective April
1, 1999, PSEG no longer calculates AFDC for the electric generation portion of
its business.

      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.

      Prior to August 1, 1999, fuel revenue and expense flowed through the
Electric Levelized Energy Adjustment Clause (LEAC) mechanism and variances in
fuel revenues and expenses were subject to deferral accounting and had no direct
effect on earnings. The fuel component of the LEAC rate was frozen for 1997 and
1998 as part of the BPU's Order dated December 31, 1996 and PSE&G bore all risks
associated with fuel prices. Due to the discontinuation of the LEAC mechanism on
August 1, 1999, earnings volatility will increase since the unregulated electric
generation portion of PSEG's business ceased to follow deferral accounting.
PSE&G and Power now bear the full risks and rewards of changes in nuclear and
fossil generating fuel costs and replacement power costs.

      Under the LEAC and the Levelized Gas Adjustment Clause (LGAC), any LEAC
and 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 represented 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. For discussion of the status of the LEAC and the LGAC,
see Note 4. Regulatory Assets and Liabilities.

      MATERIALS AND SUPPLIES AND NUCLEAR FUEL-PSE&G

      For PSE&G's regulated operations, materials and supplies are carried on
the books at cost in accordance with rate based regulation. The carrying value
of the materials and supplies and nuclear fuel for PSE&G's generation operations
is valued at lower of cost or market.

      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, PSE&G uses natural gas futures and
swaps to manage the price risk associated with gas supply to customers.


                                       67
<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

      Effective January 1, 1999, PSEG and PSE&G adopted EITF 98-10, "Accounting
for Contracts Involved in Energy Trading and Risk Management Activities" (EITF
98-10). 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 or footnotes. Previously, the gains and losses associated
with these contracts were recorded upon settlement. The adoption of EITF 98-10
did not have a material impact on the financial condition, results of operations
or net cash flows of PSEG or PSE&G.

      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.

      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 when the related asset or liability is realized or settled.
Gains and losses related to qualifying hedges of firm commitments or anticipated
transactions also are deferred and recognized in income 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
New Jersey Gross Receipts and Franchise Taxes (NJGRT), see Note 13. Income
Taxes.

      CAPITAL LEASES AS LESSEE -- PSE&G

      The Consolidated Balance Sheets include assets and related obligations
applicable to capital leases under which the entity 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.


                                       68
<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

      IMPAIRMENT OF LONG-LIVED ASSETS

      SFAS 121 requires review for possible impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Upon deregulation, PSE&G evaluated the recoverability of its
assets and recorded an extraordinary, non-cash charge to earnings. For the
impact of the application of SFAS 121, see Note 3. Extraordinary Charge and
Other Accounting Impacts of Deregulation.

NOTE 2. REGULATORY ISSUES

NEW JERSEY ENERGY MASTER PLAN PROCEEDINGS AND RELATED ORDERS

      In January 1999, the State Legislature passed the Energy Competition Act
which was signed into law by the Governor on February 9, 1999. Following the
passage of the Energy Competition Act, the BPU rendered its summary decision
relating to PSE&G's rate unbundling, stranded costs and restructuring
proceedings (Summary Order) on April 21, 1999 and subsequently issued its Final
Order in these matters on August 24, 1999. The Energy Competition Act and the
related BPU proceedings are hereinafter defined as the Energy Master Plan
Proceedings. For discussion of the extraordinary charge to earnings recorded as
a result of the deregulation of PSE&G's generation business, see Note 3.
Extraordinary Charge and Other Accounting Impacts of Deregulation. 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.

      As a result of this restructuring of the energy industry, the distribution
business will remain regulated by the BPU, the transmission business will remain
regulated by the FERC and electric generation has become a competitive business.

      In October and November 1999, two appeals of the Final Order and two
appeals of the BPU's order approving PSE&G's petition relating to the proposed
securitization transaction for an irrevocable Bondable Stranded Costs Rate Order
(Finance Order) were filed in the Appellate Division of the New Jersey Superior
Court on behalf of several customers. The Court granted PSE&G's requests to
accelerate the appeals and ordered that the matters be consolidated. All briefs
have been filed and oral argument on the consolidated matters has been set for
March 8, 2000. While PSEG and PSE&G believe that the appeals are without merit,
no assurances can be given at this time as to the timing or outcome of these
proceedings. Accordingly, neither PSEG nor PSE&G are able to predict whether
such appeals will have a material adverse effect on their financial condition,
results of operations or net cash flows.

NOTE 3. EXTRAORDINARY CHARGE AND OTHER ACCOUNTING IMPACTS OF DEREGULATION

      In accordance with EITF 97-4, PSE&G determined that SFAS 71 was no longer
applicable to the electric generation portion of its business as of April 1999.
Therefore, PSE&G recorded an extraordinary charge to earnings of $804 million
(net of tax). PSE&G accounted for this charge consistent with the requirements
of SFAS 101.

      The extraordinary charge recorded in 1999 consisted primarily of the
write-down of PSE&G's nuclear and fossil generating stations in accordance with
SFAS 121. PSE&G performed a discounted cash flow analysis on a unit-by-unit
basis to determine the amount of the impairment. As a result of this impairment
analysis, the net book value of the generating stations was reduced by
approximately $5.0 billion (pre-tax) or approximately $3.1 billion (net of tax).
This amount was offset by the creation of a $4.057 billion (pre-tax), or $2.4
billion (net of tax)


                                       69
<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

regulatory asset related to the future receipt of securitization proceeds, as
provided for in the Summary Order and affirmed in the Final Order.

      In addition to the impairment of PSE&G's electric generating stations, the
extraordinary charge consisted of various accounting adjustments to reflect the
absence of cost of service regulation in the electric generation portion of the
business in the future. The adjustments primarily related to materials and
supplies, general plant items and liabilities for certain contractual and
environmental obligations.

      In its Final Order, the BPU directed PSE&G to seek a private letter ruling
from the Internal Revenue Service (IRS) to determine if the $235 million of
investment tax credits (ITC), which were used to offset the extraordinary
charge, can be credited to customers without violating the tax normalization
rules of the Internal Revenue Code. An adverse resolution to this matter would
result in an additional extraordinary charge to income up to the amount of the
ITC, which would have a material adverse impact on PSEG's and PSE&G's financial
condition, results of operations and cash flows, however, based on PSE&G's
analysis, an adverse outcome does not appear to be likely.

      Other accounting impacts of the discontinuation of SFAS 71 included
reclassifying the Accrued Nuclear Decommissioning Reserve and the Accrued Cost
of Removal for generation-related assets from Accumulated Depreciation to
Long-Term Liabilities. In accordance with the Final Order, PSE&G also
reclassified a $569 million excess depreciation reserve related to PSE&G's
electric distribution assets from Accumulated Depreciation to a Regulatory
Liability. Such amount will be amortized in accordance with the terms of the
Final Order over the period from January 1, 2000 to July 31, 2003.

NOTE 4. REGULATORY ASSETS AND LIABILITIES

      At December 31, 1999 and December 31, 1998, respectively, PSEG and PSE&G
had deferred the following regulatory assets and liabilities on the Consolidated
Balance Sheets:

<TABLE>
<CAPTION>
                                                            DECEMBER 31,    DECEMBER 31,
                                                            ------------    ------------
                                                               1999            1998
                                                            ------------    ------------
                                                               (MILLIONS OF DOLLARS)
<S>                                                           <C>             <C>
REGULATORY ASSETS
Regulatory Asset--Stranded Costs .......................      $4,057          $   --
SFAS 109 Income Taxes ..................................         286             704
OPEB Costs .............................................         237             270
Regulatory Asset--Societal Benefits Charges (SBC) ......         130              --
Demand Side Management Costs ...........................           7             150
Environmental Costs ....................................          94             139
Unamortized Loss on Reacquired Debt and Debt Expense ...         117             135
Underrecovered Gas Costs ...............................          --              35
Other ..................................................         113             146
                                                              ------          ------
     Total Regulatory Assets ...........................      $5,041          $1,579
                                                              ======          ======
REGULATORY LIABILITIES
Regulatory Liability--Excess Depreciation Reserve ......      $  569          $   --
Regulatory Liability--NTC ..............................          20              --
Overrecovered Gas Costs ................................          15              --
Overrecovered Electric Energy Costs ....................          --              39
Other Stranded Cost Recovery Offsets ...................          --               4
                                                              ------          ------
     Total Regulatory Liabilities ......................      $  604          $   43
                                                              ======          ======
</TABLE>

      REGULATORY ASSET -- STRANDED COSTS: PSE&G has recorded this regulatory
asset to reflect the future revenues which will be collected via the
securitization transition charge which was authorized by the Final Order.


                                       70
<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

      SFAS 109 INCOME TAXES: This amount represents the regulatory asset related
to the recognition of deferred income taxes arising from the implementation of
SFAS 109, "Accounting for Income Taxes" (SFAS 109). Due to the discontinuation
of SFAS 71 for the electric generation portion of PSE&G's business, the deferred
taxes related to these assets have been reduced and included in the
determination of the Extraordinary Item.

      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. See Note 14.
Pension, Other Postretirement Benefit and Savings Plans for additional
information.

      REGULATORY ASSET -- SBC: The SBC includes costs related to: 1) social
programs which include the universal service fund; 2) nuclear plant
decommissioning; 3) demand side management (DSM) programs 4) manufactured gas
plant remediation; and 5) consumer education. Before creation of the SBC, the
electric DSM and manufactured gas plant remediation costs were included in DSM
and Environmental Costs, respectively, as listed above.

      DEMAND SIDE MANAGEMENT COSTS: Recoveries of DSM/conservation costs
(related to BPU-approved programs) are determined by the BPU. Electric DSM costs
are included in the SBC balance at December 31, 1999.

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

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

      OTHER: Includes Decontamination and Decommissioning Costs, Plant and
Regulatory Study Costs, Repair Allowance Tax Deficiencies and Interest, Property
Abandonments and Oil and Gas Property Write-Down.

      REGULATORY LIABILITY -- EXCESS DEPRECIATION RESERVE: As required by the
BPU, PSE&G reduced its depreciation reserve for its electric distribution assets
by $569 million and recorded such amount as a regulatory liability to be
amortized over the period from January 1, 2000 to July 31, 2003. In 2000 and
2001, $125 million will be amortized each year. In 2002 and 2003, $135 million
and $184 million will be amortized, respectively.

      REGULATORY LIABILITY -- NON-UTILITY GENERATION MARKET TRANSITION CHARGE
(NTC): Clause established to account for above market costs related to
non-utility generation contracts. The charge for the stranded NTC recovery will
be initially set at the 1999 level of $183 million annually. Any Non-utility
Generator (NUG) contract costs and/or buyouts will also be charged to the NTC
and will be subject to deferral accounting. Proceeds from the sale of the energy
and capacity purchased under these NUG contracts will also be credited to this
account.

      REGULATORY LIABILITY -- OVERRECOVERED ELECTRIC ENERGY COSTS: As provided
by the BPU in the Final Order, PSE&G continued to follow deferral accounting
treatment for the LEAC through July 31, 1999. At July 31, 1999, Overrecovered
Electric Energy Costs were $59 million. Pursuant to the Final Order, the
overrecovered balance as of July 31, 1999 was applied as a credit to the
starting deferred balance of the NTC.


                                       71
<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 5. LONG-TERM INVESTMENTS

      Long-Term Investments are primarily those of Energy Holdings.

                                                           DECEMBER 31,
                                                        ------------------
                                                         1999        1998
                                                        ------      ------
                                                       (MILLIONS OF DOLLARS)
      Leveraged Leases ...........................      $1,765      $1,396
      Partnerships:
             General Partnerships ................          60          77
             Limited Partnerships ................         437         526
                                                        ------      ------
                   Total .........................         497         603
                                                        ------      ------

      Corporate Joint Ventures ...................       1,427         874
      Securities .................................          14          25
      Other Investments ..........................         145         131
                                                        ------      ------
                   Total Long-Term Investments ...      $3,848      $3,029
                                                        ======      ======

      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.

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

      Other Investments relate primarily to Energy Technologies' investment in
DSM projects and had balances of approximately $60 million and $73 million at
December 31, 1999 and 1998, respectively.

NOTE 6. LEASING ACTIVITIES

AS LESSOR

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

                                    DECEMBER 31, 1999       DECEMBER 31, 1998
                                  ---------------------    ---------------------
                                  (MILLIONS OF DOLLARS)    (MILLIONS OF DOLLARS)

                                       LEVERAGED                 LEVERAGED
                                         LEASES                   LEASES
                                       ----------               ----------
Lease rents receivable ............     $ 2,643                  $ 1,924
Estimated residual value ..........         660                      665
                                        -------                  -------
                                          3,303                    2,589
Unearned and deferred income ......      (1,538)                  (1,193)
                                        -------                  -------
       Total investments ..........       1,765                    1,396
Valuation Allowances ..............          (6)                      (7)
Deferred taxes ....................        (844)                    (731)
                                        -------                  -------
       Net investments ............     $   915                  $   658
                                        =======                  =======


                                       72
<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 7. SCHEDULE OF CONSOLIDATED CAPITAL STOCK AND OTHER SECURITIES

<TABLE>
<CAPTION>
                                                                                           CURRENT
                                                                                          REDEMPTION
                                                                          OUTSTANDING        PRICE     DECEMBER 31,    DECEMBER 31,
                                                                            SHARES         PER SHARE      1999             1998
                                                                          -----------     ----------   ------------    ------------
                                                                                                          (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, 1999, 216,417,218 shares and at December 31, 1998,
  226,643,508 shares                                                                                      $3,007          $3,396

  PSEG Preferred Securities (B)
     PSEG Quarterly Guaranteed Preferred Beneficial Interest in
     PSEG's Subordinated Debentures (D) (E) (G)
        7.44%............................................................   9,000,000           --          $225            $225
        Floating Rate....................................................     150,000           --           150             150
        7 1/4%...........................................................   6,000,000           --           150             150
                                                                                                        --------        --------
        Total Quarterly Guaranteed Preferred Beneficial Interest in
        PSEG's Subordinated Debentures...................................                                   $525            $525
                                                                                                        ========        ========
  PSE&G Preferred Securities
  PSE&G Cumulative Preferred Stock (C) without Mandatory
  Redemption (D) (E) $100 par value series
        4.08%............................................................     146,221         103.00         $15             $15
        4.18%............................................................     116,958         103.00          12              12
        4.30%............................................................     149,478         102.75          15              15
        5.05%............................................................     104,002         103.00          10              10
        5.28%............................................................     117,864         103.00          12              12
        6.92%............................................................     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) (F)
        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)
        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)   In anticipation of securitization of PSE&G's stranded costs afforded by
      the Energy Competition Act, the Board of Directors of PSEG authorized the
      repurchase of up to 30 million shares of its common stock (Common Stock).
      Under the authorization, repurchases were made in the open market at the
      discretion of PSEG. At December 31, 1999, PSEG had repurchased
      approximately 15.8 million shares of Common Stock at a cost of
      approximately $607 million, under this authorization. The repurchased
      shares have been held as treasury stock or used for other corporate
      purposes.


                                       73
<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

      Total authorized and unissued shares include 7,302,488 shares of Common
      Stock reserved for issuance through PSEG's Dividend Reinvestment and Stock
      Purchase Plan and various employee benefit plans. In 1999 and 1998, no
      shares of 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, 1999, 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, 1999 and 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.

      At December 31, 1999 and 1998, the annual dividend requirement and
      embedded dividend rate for PSE&G's Preferred Stock without mandatory
      redemption was $10,886,758 and 5.18%, respectively, and for PSE&G's
      Preferred Stock with mandatory redemption was $4,477,500 and 6.02%,
      respectively.

      At December 31, 1999 and 1998, 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%, respectively.

      At December 31, 1999 and 1998, 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%, respectively.

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

(F)   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.

(G)   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 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.


                                       74
<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 8. SCHEDULE OF CONSOLIDATED DEBT

<TABLE>
<CAPTION>
                                                                                                   DECEMBER 31,
LONG-TERM                                                                             ----------------------------------------
INTEREST RATES                                                   MATURITY                  1999                    1998
                                                                 -----------------    ----------------        ----------------
                                                                                               (MILLIONS OF DOLLARS)
<S>                                                              <C>                        <C>                       <C>
PSEG
Extendible Notes (A)
LIBOR plus 0.22% - 0.60%                                         2000............             $275                      $275
LIBOR plus 0.40%                                                 2001............              300                        --
                                                                                      ----------------        ----------------
     Principal Amount Outstanding (C)............................................              575                        --
Amounts Due Within One Year (D)..................................................             (275)                       --
                                                                                      ----------------        ----------------
     Total Long-Term Debt of PSEG (H)............................................             $300                      $275
                                                                                      ================        ================
PSE&G
First and Refunding Mortgage Bonds (B)
8.75%                                                            1999............             $ --                      $100
6.00%-7.625%                                                     2000............              623                       635
7.875%                                                           2001............              100                       100
6.125%                                                           2002............              257                       300
6.875%-8.875%                                                    2003............              300                       300
6.50%                                                            2004............              286                        --
6.25%-9.125%                                                     2005-2007.......              385                       750
6.80%-6.90%                                                      2008-2012.......               --                         3
Variable                                                         2008-2012.......               66                        66
6.75%-7.375%                                                     2013-2017.......              330                       375
6.45%-9.25%                                                      2018-2022.......              139                       139
Variable                                                         2018-2022.......               14                        14
5.20%-7.50%                                                      2023-2027.......              434                       573
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.......               39                        41
                                                                                      ----------------        ----------------
    Total First and Refunding Mortgage Bonds.....................................            3,726                     4,149
                                                                                      ----------------        ----------------
Unsecured Bonds
Variable                                                         2027............               19                        19
                                                                                      ----------------        ----------------
    Total Unsecured Bonds........................................................               19                        19
                                                                                      ----------------        ----------------
Principal Amount Outstanding (C).................................................            3,745                     4,168
Amounts Due Within One Year (D)..................................................             (623)                     (100)
Net Unamortized Discount.........................................................              (23)                      (23)
                                                                                      ----------------        ----------------
    Total Long-Term Debt of PSE&G (E)............................................           $3,099                    $4,045
                                                                                      ================        ================
</TABLE>


                                       75
<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

<TABLE>
<CAPTION>
                                                                                                   DECEMBER 31,
                                                                                       ------------------------------------------
                                                                      MATURITY               1999                     1998
                                                                  ----------------     -----------------       ------------------
<S>                                                               <C>                         <C>                        <C>
ENERGY HOLDINGS
Senior Notes
10%                                                               2009............              $400                        $--
Net Unamortized Discount..........................................................                (4)                        --
                                                                                       -----------------       ------------------
                                                                                                 396                         --
                                                                                       -----------------       ------------------
PSEG CAPITAL (F)
Medium-Term Notes
8.95%-9.93%                                                       1999............                --                        155
6.54%                                                             2000............                78                         78
6.74%                                                             2001............               135                        135
6.73%                                                             2001............                35                         --
6.80%-7.00%                                                       2002............               130                        130
6.25%                                                             2003............               252                         --
                                                                                       -----------------       ------------------
Principal Amount Outstanding (C)..................................................               630                        498
Amounts Due Within One Year (D)...................................................               (78)                      (155)
Net Unamortized Discount..........................................................                (2)                        (2)
                                                                                       -----------------       ------------------
    Total Long-Term Debt of PSEG Capital..........................................               550                        341
                                                                                       -----------------       ------------------
ENTERPRISE CAPITAL FUNDING CORPORATION
7.58%                                                             1999............                --                         45
                                                                                       -----------------       ------------------
Principal Amount Outstanding (C)..................................................                --                         45
Amounts Due Within One Year (D)...................................................                --                        (45)
                                                                                       -----------------       ------------------
    Total Long-Term Debt of Funding...............................................                --                         --
                                                                                       -----------------       ------------------
GLOBAL (G)
Non-recourse Debt
7.721% - Bank Loan                                               1999.............                --                         87
11.08%-Bank Loan                                                 2000.............                67                         --
13.73%  and 13.23%, respectively- Bank Loan                      2000-2002........                90                        123
9.04% - Bank Loan                                                2001.............                85                         --
9.42% - Bank Loan                                                2001-2003........                28                         --
9.42% - Bank Loan                                                2001-2004........                47                         --
14.00% - Minority Interest Loan                                  2027.............                10                         10
                                                                                       -----------------       ------------------
Principal Amount Outstanding (C)..................................................               327                        220
Amounts Due Within One Year (D)...................................................               (97)                      (118)
                                                                                       -----------------       ------------------
       Total Long-Term Debt of Global.............................................               230                        102
                                                                                       -----------------       ------------------
       Total Long-Term Debt of Energy Holdings....................................            $1,176                       $443
                                                                                       =================       ==================
          Consolidated Long-Term Debt.............................................            $4,575                     $4,763
                                                                                       =================       ==================
</TABLE>

(A)   In June 1999, PSEG issued $300 million of Extendible Notes, Series C, due
      June 15, 2001 with interest at LIBOR plus 0.40%, reset quarterly, which
      will be automatically tendered to the remarketing agent for remarketing on
      March 15, 2000. At December 31, 1999, the interest rates on Series A, B
      and C were 6.00%, 6.03% and 5.65%, respectively.

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

      During 1999, PSE&G purchased on the open market $319 million of its
      Mortgage Bonds. In July 1999, $100 million of PSE&G's 8.34% Bonds, Series
      Z, matured.

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

(D)   The aggregate principal amounts of mandatory requirements for sinking
      funds and maturities for each of the five years following December 31,
      1999 are as follows:


                                       76
<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

<TABLE>
<CAPTION>
                              SINKING
                               FUNDS                               MATURITIES
                              ---------   ---------------------------------------------------------------
                                                                       PSEG
                YEAR            GLOBAL        PSEG         PSE&G      CAPITAL    GLOBAL         TOTAL
          ---------------    ----------   ----------  -------------  --------   ---------    ------------
           <S>                      <C>        <C>          <C>         <C>           <C>          <C>
           2000.........            $30        $275         $623        $78           $67          $1,073
           2001.........             41         300          100        170            85             696
           2002.........             45          --          257        130            --             432
           2003.........             29          --          300        252            --             581
           2004.........             20          --          286         --            --             306
                             ----------   ---------   -------------  --------   -----------  -------------
                                   $165        $575       $1,566       $630          $152          $3,088
                             ==========   =========   =============  ========   ===========  =============
</TABLE>

(A)   At December 31, 1999 and 1998, PSE&G's annual interest requirement on
      long-term debt was $254 million and $282 million, of which $246 million
      and $274 million, respectively, was the requirement for Mortgage Bonds.
      The embedded interest cost on long-term debt on such dates was 7.34% and
      7.35%, respectively. The embedded interest cost on long-term debt due
      within one year at December 31, 1999 was 7.78%.

(B)   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.

(C)   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 three consolidated subsidiaries which have equity investments in
      distribution facilities in Argentina, Brazil, Chile and Peru. Global's
      capital at risk on the projects is limited to its original equity
      investment. The non-recourse debt appears as long-term debt and long-term
      investments in PSEG's consolidated balance sheets.

(D)   At December 31, 1999 and 1998, PSEG's annual interest requirement on
      long-term debt was $409 million and $365 million, of which $246 million
      and $274 million, respectively, was the requirement for Extendible Notes.
      The embedded interest cost on long-term debt on such dates was 7.59% and
      7.32%, respectively.

SHORT-TERM (COMMERCIAL PAPER AND BANK LOANS)

PSEG

      At December 31, 1999, PSEG had a committed $150 million revolving credit
facility which expires in December 2002. On September 8, 1999, PSEG entered into
an uncommitted line of credit with a bank for an unlimited amount. At December
31, 1999, PSEG had $145 million outstanding under these facilities. The
weighted-average, short-term debt rate of PSEG was 6.7%, 5.6% and 6.2% for the
years ended December 31, 1999, 1998 and 1997, respectively.

PSE&G

<TABLE>
<CAPTION>
                                                                               1999            1998           1997
                                                                               ----            ----           ----
                                                                                     (MILLIONS OF DOLLARS)
<S>                                                                           <C>              <C>          <C>
Principal amount outstanding at year end, primarily commercial paper.......   $1,475           $850         $1,106
Weighted average interest rate for short-term debt at year end.............     6.56%          5.91%          6.07%
</TABLE>


                                       77
<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

      PSE&G has authorization from the BPU to issue and have outstanding not
more than $2.0 billion of its short-term obligations at any one time, consisting
of commercial paper and other unsecured borrowings from banks and other lenders.
This authorization expires January 2, 2001.

      PSE&G has a $1.5 billion commercial paper program (Program) supported by
an $850 million revolving credit agreement expiring in June 2000 and a $650
million revolving credit agreement expiring in June 2002 with a group of
commercial banks. As of December 31, 1999 and 1998, PSE&G had $1.407 billion and
$655 million, respectively, outstanding under the Program, which amounts are
included in the table above. As of December 31, 1999, there was no debt
outstanding under the revolving credit agreements.

      On September 9, 1999, PSE&G entered into an uncommitted line of credit
with a bank for an unlimited amount. PSE&G also had additional uncommitted lines
of credit totaling $70 million provided to primarily support short-term
borrowings. As of December 31, 1999, PSE&G had $90 million outstanding under
these lines of credit which 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, 1999,
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, 1999, Fuelco had commercial paper of $73 million
outstanding under the commercial paper program, which amounts are included in
the table above. As of December 31, 1999, 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, 1999, no amounts were
outstanding under such arrangements.

ENERGY HOLDINGS

<TABLE>
<CAPTION>
                                                                           1999           1998           1997
                                                                           ----           ----           ----
                                                                                 (MILLIONS OF DOLLARS)
<S>                                                                        <C>            <C>            <C>
Principal amount outstanding at year end..............................     $351           $206           $306
Weighted average interest rate for short-term debt at year end........     7.60%          6.46%          6.92%
</TABLE>

      In 1999, Energy Holdings closed on two separate senior revolving credit
facilities. These facilities, a $495 million, five year revolving credit and
letter of credit facility and a $165 million, 364 day revolving credit facility,
replaced credit facilities at Funding totaling $450 million which expired in
1999. As of December 31, 1999, there was $351 million outstanding under these
facilities, which is included in the table above.

NOTE 9. 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.


                                       78
<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

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 December 31, 1999 and December 31, 1998, respectively. Note
that certain future events in connection with securitization and the anticipated
sale by PSE&G of generation-related assets to Power will trigger certain
redemption features of certain PSE&G mortgage bonds.

<TABLE>
<CAPTION>
                                                                DECEMBER 31, 1999      DECEMBER 31, 1998
                                                                ------------------    -------------------
                                                                CARRYING    FAIR      CARRYING     FAIR
                                                                 AMOUNT     VALUE      AMOUNT      VALUE
                                                                --------   -------    --------    -------
                                                                         (MILLIONS OF DOLLARS)
<S>                                                               <C>        <C>        <C>        <C>
Long-Term Debt (A):
       PSEG ................................................       $575       $574       $275       $275
       Energy Holdings .....................................      1,351      1,346        761        769
       PSE&G ...............................................      3,722      3,658      4,145      4,389
Preferred Securities Subject to Mandatory Redemption:
       PSE&G Cumulative Preferred Securities ...............         75         67         75         77
       Monthly Guaranteed Preferred Beneficial Interest in
          PSE&G's Subordinated Debentures ..................        210        200        210        213
       Quarterly Guaranteed Preferred Beneficial Interest in
          PSE&G's Subordinated Debentures ..................        303        277        303        315
       Quarterly Guaranteed Preferred Beneficial Interest in
          PSEG's Subordinated Debentures ...................        525        420        525        518
</TABLE>

(A)   Includes current maturities. Includes interest rate swaps with notional
      amounts of of $34 million and $150 million for Energy Holdings and PSEG,
      respectively, for the year ended December 31, 1999 and interest rate swaps
      with notional amounts of $44 million and $150 million for Energy Holdings
      and PSEG, respectively, for the period ended December 31, 1998.

      Global has $67 million of project debt that is non-recourse to PSEG,
      Global and Energy Holdings associated with investments in Argentina that
      were refinanced in June 1999 for a term of one year. An interest rate swap
      was entered into which effectively converts 50% of the floating rate
      obligation into a fixed rate obligation. The interest rate differential to
      be received or paid under the agreement is recorded over the life of the
      agreement as an adjustment to interest expense. The pricing on the loan is
      indexed to the London Interbank Offered Rate (LIBOR).

COMMODITY-RELATED INSTRUMENTS -- PSE&G (INCLUDING POWER)

      At December 31, 1999 and December 31, 1998, PSE&G held or issued commodity
and financial instruments that reduce exposure to price 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 uses futures, forwards, swaps and options to manage and hedge
price risk related to these market exposures.

      At December 31, 1999, PSE&G had outstanding commodity financial
instruments with a notional contract quantity of 36.1 million megawatt-hours
(mWh) of electricity and 25.5 million MMBTU (million British thermal units) of
natural gas. 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. Notional amounts are indicative only of
the volume of activity and are not a measure of market risk.


                                       79
<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

      As discussed in Note 1. Organization, Basis of Presentation and Summary of
Significant Accounting Policies, PSE&G implemented EITF 98-10 effective January
1, 1999. As a result, PSE&G's energy trading contracts have been marked to
market and gains and losses from such contracts were included in earnings. PSE&G
recorded $42 million and $23 million of gains in the years ended December 31,
1999 and 1998, respectively.

COMMODITY-RELATED INSTRUMENTS -- ENERGY HOLDINGS

      Energy Technologies' policy is to enter into natural gas and electricity
futures contracts and forward purchases to lock in prices related to future
fixed sales commitments. Whenever possible, Energy Technologies attempts to be
100% hedged on its electric and gas sales positions. During the years ended
December 31, 1999 and 1998, Energy Technologies entered into futures contracts
to buy natural gas and electricity related to fixed-price sales commitments.
Energy Technologies had 64% and 90% of its fixed price natural gas sales
commitments hedged and 85% and 63% of its fixed price electric commodity sales
commitments hedged at December 31, 1999 and 1998, respectively. As of December
31, 1999 and 1998, Energy Technologies had net unrealized losses of
approximately $0.1 million and $5.0 million, respectively, related to its
electric and gas hedges.

CREDIT RISK

      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.

EQUITY SECURITIES -- ENERGY HOLDINGS

      Resources directly and indirectly has investments in equity securities.
Resources carries its investments in equity securities at their approximate fair
value. 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 liquidity and market
volatility factors, where appropriate. The aggregate fair values of such
investments which had available market prices at December 31, 1999 and 1998 were
$131 million and $204 million, respectively. The decrease in fair value was
primarily due to the sale of certain investments during 1999. The potential
change in fair value resulting from a hypothetical 10% change in quoted market
prices of these investments amounted to $11 million at December 31, 1999 and $17
million at December 31, 1998.

FOREIGN CURRENCIES -- ENERGY HOLDINGS

      In accordance with their growth strategies, Global and Resources have made
international investments of approximately $1.4 billion and $1.0 billion,
respectively.

      Resources' international investments are primarily leveraged leases of
assets located in Australia, the Netherlands and the United Kingdom with
associated revenues denominated in U.S. dollars and, therefore, not subject to
foreign currency risk.

      Global's international investments are primarily in projects that generate
or distribute electricity in Argentina, Brazil, Chile, China, India, Peru and
Venezuela. Investing in foreign countries involves certain risks. Economic
conditions that result in higher comparative rates of inflation in foreign
countries likely result in declining values in such countries' currencies. As
currencies fluctuate against the U.S. dollar, there is a corresponding change in
Global's investment value in terms of the U.S. dollar. Such change is reflected
as an increase or decrease in other comprehensive income, a separate component
of stockholders' equity. Cumulatively, net foreign currency


                                       80
<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

devaluations have reduced the reported amount of PSEG's total stockholders'
equity by $200 million, $170 million of which was caused by the devaluation of
the Brazilian Real, for the year ended December 31, 1999.

      In January 1999, Brazil abandoned its managed devaluation strategy and
allowed its currency, the Real, to float against other currencies. As of
December 31, 1999, the Real had devalued approximately 33% against the U.S.
dollar since December 31, 1998, affecting the carrying value of Global's
investment in a Brazilian distribution company. For additional information, see
Note 16. Financial Information by Business Segments.

      Higher comparative rates of inflation in foreign economies also means that
borrowing costs in local currency will be higher than in the United States. When
warranted, Global has financed certain foreign investments with U.S. dollar
denominated debt. While less costly to service in terms of U.S. dollars, such
debt is exposed to currency risk because a devaluation would cause repayment to
be more expensive in local currency terms since more units of local currency
would be required to repay the debt. Dollar denominated debt was incurred by
Global in Argentina, Chile and Peru to finance the acquisition of interests in
rate regulated distribution entities. These entities may be able to recover
higher costs incurred as a result of a devaluation specifically through the
terms of the concession agreement or as a pass through of higher inflation costs
in rates over time, although no assurances can be given that this will occur. In
evaluating its investment decisions, Global considers the social, economic,
political and currency risks associated with each potential project; and, if
warranted, assumes a certain level of currency devaluation when making its
investment decisions. In Argentina, the currency is pegged 1:1 with the U.S.
dollar and a legislative act is required to de-couple the currency from the
dollar.

      Global had consolidated project debt totaling $90 million as of December
31, 1999 associated with Global's investment in a Brazilian distribution company
that is non-recourse to Global, Energy Holdings and PSEG. The debt is
denominated in the Brazilian Real and is indexed to a basket of currencies,
approximately 50% of which is the U.S. dollar. Global is subject to foreign
currency exchange rate risk as a result of exchange rate movements between the
indexed foreign currencies and Real and between the Real and the U.S. dollar.
Exchange rate changes ultimately impact the debt level outstanding in the
reporting currency and result in foreign currency gains or losses. Gains or
losses resulting from such exchange rate movements are included in other income
for the period and amounted to gains of $2 million and a loss of $3 million for
the years ended December 31, 1999 and 1998, respectively.

      Although Global generally seeks to structure power purchase contracts and
other project revenue agreements to provide for payments to be made in, or
indexed to, U.S. dollars or a currency freely convertible into U.S. dollars, its
ability to do so in all cases may be limited. As Energy Holdings continues to
invest internationally, the financial statements of PSEG will be increasingly
affected by changes in the global economy. PSEG cannot predict foreign currency
exchange rate movements and, therefore, cannot predict the impact of such
movements on PSEG's financial condition, results of operations or net cash
flows.

INTEREST RATES

      PSEG, PSE&G and Energy Holdings are subject to the risk of fluctuating
interest rates in the normal course of business. Their policy is to manage
interest rate risk through the use of fixed rate debt, floating rate debt and
interest rate swaps. As of December 31, 1999, a hypothetical 10% change in
market interest rates would result in a $5 million, $14 million and $3 million
change in annual interest costs related to short-term and floating rate debt at
PSEG, PSE&G and Energy Holdings, respectively.

      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 issued in June 1998. The Floating Rate Capital
Securities were issued 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 hedges the underlying debt for 10 years at an effective rate of 7.2%.


                                       81
<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NUCLEAR DECOMMISSIONING TRUST FUNDS

      Contributions made into the Nuclear Decommissioning Trust Funds are
invested in debt and equity securities. These marketable debt and equity
securities are recorded at $631 million which approximates their fair market
value. Those securities have exposure to market price risk. The potential change
in fair value resulting from a hypothetical 10% change in quoted market prices
of these securities amounts to $63 million. PSE&G anticipates transferring the
ownership of the Nuclear Decommissioning Trust Funds to Power with the transfer
of the generation-related assets to Power.

NOTE 10. CASH AND CASH EQUIVALENTS

      The December 31, 1999 and 1998 balances consist primarily of working funds
and highly liquid marketable securities (commercial paper and money market
funds) with a maturity of three months or less.

NOTE 11. 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)                $9.1
Nuclear Liability (Excess Layer):
      Price-Anderson Act..................................          9,338.1  (B)               233.6
                                                                   --------                   ------
            Nuclear Liability Total.......................         $9,538.1  (C)              $242.7
                                                                   ========                   ======

Property Damage (Primary Layer):
      Nuclear Electric Insurance Limited (NEIL) Primary
            (Salem/Hope Creek/Peach Bottom)...............           $500.0                    $10.3
Property Damage (Excess Layer):
      NEIL II (Salem/Hope Creek/Peach Bottom).............          2,250.0                     10.7
                                                                   --------                    -----
      Property Damage Total (Per Site)....................         $2,750.0                    $21.0
                                                                   ========                    =====

Replacement Power:
      NEIL I (Salem and Peach Bottom).....................         $  202.8  (D)               $5.8
      NEIL I (Hope Creek).................................            449.5                     3.1
                                                                   --------                    ----
            Replacement Power Total ......................         $  652.3                    $8.9
                                                                   ========                    ====
</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 Industry Credit
      Rating Plan (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


                                       82
<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

      five years. The last adjustment was effective as of August 20, 1998. This
      retrospective program is in excess over the Public and Nuclear Worker
      Liability primary layers.

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

(D)   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.

      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 $9.5 billion. All utilities owning a nuclear
reactor, including PSE&G, have provided for this exposure through a combination
of private insurance and mandatory participation in a financial protection pool
as established by the Price-Anderson Act. Under the Price-Anderson Act, each
party with an ownership interest in a nuclear reactor can be assessed its share
of $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 $9.1 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, Nuclear
Electric Insurance Limited (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.

PENDING ASSET PURCHASES

      PSEG has entered into contracts to purchase combustion turbines to expand
capacity at certain generating sites. PSEG's commitment under these contracts is
approximately $392 million to be expended through December 2001. Through
December 31, 1999, payments of approximately $91 million were made under these
contracts.

      On October 6, 1999, Power announced an agreement with Niagara Mohawk Power
Corporation (Niagara Mohawk) to purchase its 400 MW oil and gas-fired electric
generating station in Albany, New York (Albany Steam Station) for $47.5 million.
Payment of Power's obligation under such agreement has been guaranteed by PSEG.
Niagara Mohawk could also receive up to an additional $11.5 million if Power
chooses to pursue redevelopment of the Albany Steam Station. Under a transition
power supply contract in place through September 2003, Niagara Mohawk will
purchase electricity from Power at prices consistent with those established in
Niagara Mohawk's regulatory agreement with the New York Public Service
Commission (NYPSC). The purchase is subject to approval by the NYPSC and Federal
agencies including FERC. Power expects to complete the transaction in 2000.


                                       83
<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

      On September 30, 1999, Power announced that it has signed an agreement to
acquire all of Conectiv's interests in Salem and Hope Creek and half of
Conectiv's interest in Peach Bottom for an aggregate purchase price of $15.4
million plus the net book value of nuclear fuel at closing. Payment of Power's
obligation under such agreement has been guaranteed by PSEG. Conectiv is the
parent of Atlantic City Electric Company (ACE) and Delmarva Power & Light
Company (DP&L). Power will purchase Conectiv's 14.82% interest (328 MW) in
Salem, Conectiv's 5% interest (52 MW) in Hope Creek and half of Conectiv's
15.02% interest (164 MW) in Peach Bottom. Once completed, PSEG would own a
57.41% interest (1,270 MW) in Salem, a 100% interest (1,031 MW) in Hope Creek
and a 50% interest (1,094 MW) in Peach Bottom. The purchases are subject to
approval by the BPU, the Delaware Public Service Commission, the Maryland Public
Service Commission, the Pennsylvania Public Utility Commission (PPUC) and
Federal agencies including the NRC and FERC. Power expects to complete the
purchases in 2000.

NUCLEAR OPERATING PERFORMANCE STANDARD (OPS)

     As part of the May 1997 settlement of litigation, PECO Energy, DP&L and
PSE&G, three of the co-owners of Salem and Peach Bottom, 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 ACE) 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%. The average capacity factors for the 1998-1999 period
were 75%, 81%, 87% and 89% for Salem 1, Salem 2, Peach Bottom 2 and Peach Bottom
3, respectively. 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.

     As noted above, Power has announced that it has signed an agreement to
acquire all of Conectiv's interests in Salem and Hope Creek and half of
Conectiv's interest in Peach Bottom. Once the purchases are completed, DP&L will
no longer have an interest in the OPS agreement.

HAZARDOUS WASTE

     The New Jersey Department of Environmental Protection (NJDEP) regulations
concerning site investigation and remediation 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
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 situated on surface water
bodies. PSE&G and predecessor companies owned and/or operated certain facilities
situated on surface water bodies, certain of which are currently the subject of
remedial activities. The financial impact of these regulations on these projects
is not currently estimable. PSE&G does not anticipate that the compliance with
these regulations will have a material adverse effect on its financial position,
results of operations or net cash flows.

PSE&G MANUFACTURED GAS PLANT REMEDIATION PROGRAM

      Since 1988, 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 conditions 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 long-term costs 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. The Energy
Competition Act provides for the continuation of RAC programs. The Final Order
provides for the recovery of costs for this remediation effort through the SBC.


                                       84
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                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

      Net of recoveries, costs incurred through December 31, 1999 for the
Remediation Program amounted to $94 million. In addition, at December 31, 1999,
PSE&G's estimated liability for remediation costs through 2002 aggregated $62
million. Expenditures beyond 2002 cannot be reasonably estimated.

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 the
Federal Comprehensive Environmental Response, Compensation and Liability Act of
1980 (CERCLA) and that, to date, at least thirteen corporations, including
PSE&G, may be potentially liable for performing required remedial actions to
address potential environmental pollution at the Passaic River "facility". In a
separate matter, PSE&G and certain of its predecessors operated industrial
facilities at properties within the Passaic River "facility", including the
former Harrison Gas Plant and Essex Generating Station. PSE&G cannot predict
what action, if any, the EPA or any third party may take against PSE&G with
respect to these matters, or in such event, what costs PSE&G may incur to
address any such claims. However, such costs may be material.

NOTE 12. PSE&G NUCLEAR DECOMMISSIONING

      PSE&G has an ownership interest in five nuclear units. 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. 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 $29.6 million of such
costs are to be collected through PSE&G's base rates and the LEAC. Per the Final
Order, such costs will now be collected through the SBC, since the LEAC was
discontinued on July 31, 1999. As of December 31, 1999 and 1998, PSE&G had
contributed $338 million and $303 million, respectively, into independent,
external, qualified and non-qualified nuclear decommissioning trust funds. The
fair market value of these funds as of December 31, 1999 and 1998 was $631
million and $542 million, respectively.

NOTE 13. INCOME TAXES

      The 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


                                       85
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                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

year's phase out of the TEFA. Effective January 1, 2000, revised rates became
effective which reflect two 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 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, 1999 and
1998. On December 23, 1999, the BPU issued an order implementing TEFA reductions
and other rate adjustments. This order mandates PSE&G to implement a permanent
base rate reduction of $1.3 million to reflect the gas cash working capital
impact of energy tax reform act and a one time credit of $2.7 million in 2000 to
reflect the gas cash working capital reduction defined in 1999 and 1998, with
interest.

      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>
                                                               1999       1998       1997
                                                             -------    -------    -------
                                                                 (MILLIONS OF DOLLARS)
<S>                                                             <C>        <C>        <C>
Net Income (Loss) ........................................      $(81)      $644       $560
     Extraordinary Item (Net of Tax of $345) .............       804         --         --
                                                             -------    -------    -------
Net Income before Extraordinary Item .....................       723        644        560
Preferred securities (net) ...............................         9          9         15
                                                             -------    -------    -------
              Subtotal ...................................       732        653        575
                                                             -------    -------    -------
Income taxes:
    Operating income:
       Federal - Current .................................       398        336        160
                   Deferred (A) ..........................        63          4        139
                   ITC ...................................       (12)       (21)       (20)
                                                             -------    -------    -------
                        Total Federal ....................       449        319        279
                                                             -------    -------    -------
       State - Current ...................................       132        121          4
                Deferred (A) .............................       (13)        (9)         3
                                                             -------    -------    -------
                        Total State ......................       119        112          7
                                                             -------    -------    -------
       Foreign - Current .................................        --         --         --
                   Deferred (A) ..........................        (5)        (3)        (2)
                                                             -------    -------    -------
                        Total Foreign ....................        (5)        (3)        (2)
                                                             -------    -------    -------

                                                             -------    -------    -------
              Total included in operating income .........       563        428        284
                                                             -------    -------    -------
Pretax income ............................................    $1,295     $1,081       $859
                                                             =======    =======    =======
</TABLE>


                                       86
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                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

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

<TABLE>
<CAPTION>
                                                                                1999      1998      1997
                                                                               -----     -----     -----
                                                                                 (MILLIONS OF DOLLARS)
<S>                                                                             <C>       <C>       <C>
Tax computed at the statutory rate .........................................    $453      $378      $301
Increase (decrease) attributable to flow through of certain tax adjustments:
       Depreciation ........................................................      35        23        27
       Amortization of investment tax credits ..............................     (12)      (21)      (20)
       New Jersey Corporate Business Tax ...................................      84        63         2
       Other ...............................................................       3       (15)      (26)
                                                                               -----     -----     -----
              Subtotal .....................................................     110        50       (17)
                                                                               -----     -----     -----
              Total income tax provisions ..................................    $563      $428      $284
                                                                               =====     =====     =====
Effective income tax rate ..................................................    43.5%     39.6%     33.1%
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                1999      1998      1997
                                                                               -----     -----     -----
                                                                                 (MILLIONS OF DOLLARS)
<S>                                                                             <C>       <C>       <C>
Deferred Credits:
       Additional tax depreciation and amortization ........................    $(17)     $(33)      $34
       Leasing Activities ..................................................      94        39       114
       Conservation Costs ..................................................      29        36        27
       Deferred Fuel Costs--net ............................................     (19)      (60)      (32)
       Pension Cost ........................................................     (34)       26         8
       New Jersey Corporate Business Tax ...................................     (13)       (5)       --
       Severance Pay .......................................................       8        --         3
       Other ...............................................................      (3)      (11)      (14)
                                                                               -----     -----     -----
              Total ........................................................     $45       $(8)     $140
                                                                               =====     =====     =====
</TABLE>

      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,
1999, PSE&G had a deferred tax liability and an offsetting regulatory asset of
$286 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%. During 1999, PSE&G's
accumulated deferred income tax liability was reduced, reflecting the impact of
the impairment writedown of the book basis of PSE&G's generating facilities.
This was offset by the establishment of a deferred tax liability representing
the future taxes payable applicable to the recovery of the stranded costs.


                                       87
<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

      The following is an analysis of deferred income taxes:

                                                             DECEMBER 31,
                                                          -----------------
                                                           1999       1998
                                                          ------     ------
                                                         (MILLIONS OF DOLLARS)
DEFERRED INCOME TAXES
Assets:
    Current (net) ....................................       $33        $30
                                                          ------     ------
    Non-current:
       Unrecovered Investment Tax Credits ............        23        110
       Nuclear Decommissioning .......................        26         26
       Construction Period Interest and Taxes ........        13         13
       Deferred Electric Energy and Gas Costs ........        18         --
       New Jersey Corporate Business Tax .............       493         15
       Vacation Pay ..................................         6          6
       Development Fees ..............................        16         16
       Foreign Currency Translation ..................        22          5
       Other .........................................        14         30
                                                          ------     ------
              Total Non-current ......................       631        221
                                                          ------     ------
              Total Assets ...........................       664        251
                                                          ------     ------
Liabilities:
    Non-current:
       Plant Related Items ...........................       655      2,212
       Securitization-EMP ............................     1,657         --
       Leasing Activities ............................       797        702
       Partnership Activities ........................       118        154
       Conservation Costs ............................        95         75
       Hope Creek O&M Costs ..........................        --         19
       Unamortized Debt Expense ......................        39         45
       Taxes Recoverable Through Future Rates (net) ..        87        242
       Other .........................................        36        181
                                                          ------     ------
              Total Non-current ......................     3,484      3,630
                                                          ------     ------
              Total Liabilities ......................     3,484      3,630
                                                          ------     ------
Summary -- Accumulated Deferred Income Taxes
    Net Current Assets ...............................        33         30
    Net Non-current Liability ........................     2,853      3,409
                                                          ------     ------
          Total ......................................    $2,820     $3,379
                                                          ======     ======


                                       88
<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 14. PENSION, OTHER POSTRETIREMENT BENEFIT AND SAVINGS PLANS

PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
                                                                                     OTHER POSTRETIREMENT
                                                                  PENSION BENEFITS        BENEFITS (A)
                                                                  ----------------   --------------------
(MILLIONS OF DOLLARS)                                              1999       1998       1999      1998
---------------------------------------------------------------------------------------------------------
<S>                                                              <C>        <C>        <C>        <C>
CHANGE IN BENEFIT OBLIGATION
     Benefit Obligation at Beginning of Year                     $ 2,488    $ 2,123    $   782    $   724
     Service Cost                                                     68         60         13         15
     Interest Cost                                                   163        158         51         56
     Actuarial (Gain)/Loss                                          (195)       287       (120)        16
     Benefits Paid                                                  (140)      (140)       (35)       (29)
                                                                 -------    -------    -------    -------
     Benefit Obligation at End of Year                             2,384      2,488        691        782
                                                                 -------    -------    -------    -------

CHANGE IN PLAN ASSETS
     Fair Value of Assets at Beginning of Year                     2,223      1,959         13         --
     Actual Return on Plan Assets (Net of Expenses)                  368        249          4          1
     Employer Contributions                                           75        155         47         41
     Benefits Paid                                                  (140)      (140)       (35)       (29)
                                                                 -------    -------    -------    -------
     Fair Value of Assets at End of Year                           2,526      2,223         29         13
                                                                 -------    -------    -------    -------

RECONCILIATION OF FUNDED STATUS
     Funded Status                                                   142       (265)      (662)      (769)
     Unrecognized Net
          Transition Obligation                                       29         37        368        398
          Prior Service Cost                                         120        134         27         30
          (Gain)/Loss                                               (155)       212       (128)        (9)
                                                                 -------    -------    -------    -------
     Net Amount Recognized                                       $   136    $   118    $  (395)      (350)
                                                                 =======    =======    =======    =======

AMOUNTS RECOGNIZED IN STATEMENT OF FINANCIAL POSITION
         Prepaid Benefit Cost                                        152        129         --         --
          Accrued Benefit Cost                                       (44)       (42)      (395)      (350)
          Intangible Asset                                            23         26        N/A        N/A
          Accumulated Other Comprehensive Income                       5          5        N/A        N/A
                                                                 -------    -------    -------    -------
     Net Amount Recognized                                       $   136    $   118    $  (395)   $  (350)
                                                                 =======    =======    =======    =======

SEPARATE DISCLOSURE FOR PENSION PLANS WITH ACCUMULATED BENEFIT
OBLIGATION IN EXCESS OF PLAN ASSETS:
     Projected Benefit Obligation at End of Year                 $    52    $    49
     Accumulated Benefit Obligation at End of Year               $    44    $    42
     Fair Value of Assets at End of Year                         $    --    $    --
</TABLE>


                                       89
<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
                                                                                                      OTHER
                                                                                                  POSTRETIREMENT
                                                                             PENSION BENEFITS      BENEFITS (A)
                                                                             ----------------    ---------------
                                                                              1999      1998      1999      1998
                                                                             -----     -----     -----     -----
<S>                                                                          <C>       <C>       <C>       <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
    Service Cost                                                             $  68     $  60     $  13     $  15
    Interest Cost                                                              163       158        52        56
    Expected Return on Plan Assets                                            (197)     (176)       (2)       --
    Amortization of Net
         Transition Obligation                                                   8         8        30        30
         Prior Service Cost                                                     14        14         2         2
         (Gain)/Loss                                                             1        --        (3)       (1)
                                                                             -----     -----     -----     -----
    Net Periodic Benefit Cost                                                $  57     $  64     $  92     $ 102
                                                                             =====     =====     =====     =====

COMPONENTS OF TOTAL BENEFIT EXPENSE
    Net Periodic Benefit Cost                                                $  57     $  64     $  92     $ 102
    Effect of Regulatory Asset                                                  --        --        19        19
    Total Benefit Expense Including Effect of Regulatory
                                                                             -----     -----     -----     -----
       Asset                                                                 $  57     $  64     $ 111     $ 121
                                                                             =====     =====     =====     =====

COMPONENTS OF OTHER COMPREHENSIVE INCOME
    Decrease in Intangible Asset                                             $   3     $  (1)
    Increase in Additional Minimum Liability                                    (4)       (4)
                                                                             -----     -----
    Other Comprehensive Income                                               $  (1)    $  (5)      N/A       N/A
                                                                             -----     -----

WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31
    Discount Rate                                                             7.50%     6.75%     7.50%     6.75%
    Expected Return on Plan Assets                                            9.00%     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                                                                     11.00%    11.50%
              Ultimate Rate                                                                       5.00%     5.00%
              Year Ultimate Rate Reached                                                          2011      2011
         Post-65 Medical Costs
              Immediate Rate                                                                      7.00%     7.50%
              Ultimate Rate                                                                       5.00%     5.00%
              Year Ultimate Rate Reached                                                          2003      2003
         Dental Costs
              Immediate Rate                                                                      5.00%     5.50%
              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     $   5
         Postretirement Benefit Obligation                                                       $  46     $  60
    Effect of a 1% Decrease On
         Total of Service Cost and Interest Cost                                                 $  (4)    $  (4)
         Postretirement Benefit Obligation                                                       $ (39)    $ (51)
</TABLE>

(A)   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


                                       90
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                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

      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 1999 were
      $111 million, including $19 million of amortization. At December 31, 1999,
      the amount of the unfunded liability was $663 million.

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 1999, $12 million was funded, as allowed.
Remaining OPEB costs will not be funded in an external trust, as mandated by the
BPU.

      In October 1999, PSE&G created deferred assets and liabilities associated
with the payment and collection of co-owner related OPEB costs. Such costs will
be amortized over the remainder of the twenty-year period, in accordance with
SFAS 106. Any impairment to such costs as a result of the Conectiv asset
purchase will be recognized in Power's financial statements in 2000. No
assurances for recovery of such assets and liabilities can be given.

401K PLANS

      PSEG sponsors two defined contribution plans. Represented employees of
PSE&G, Power and Services are eligible for participation in the PSEG Employee
Savings Plan (Savings Plan), while non represented employees of PSE&G, Power,
Energy Holdings and Services are eligible for participation in the PSEG Thrift
and Tax-Deferred Savings Plan (Thrift Plan). These plans are 401(k) plans to
which eligible employees may contribute up to 25% of their compensation.
Employee contributions up to 7% for Savings Plan participants and up to 8% for
Thrift Plan participants are matched with employer contributions of cash or PSEG
common stock equal to 50% of such employee contributions related to employee
contributions. Employer contributions, related to participant contributions in
excess of 5% and up to 7%, are made in shares of PSEG common stock for Savings
Plan participants. Employer contributions, related to participant contributions
in excess of 6% and up to 8%, are made in shares of PSEG common stock for Thrift
Plan participants. PSEG billed its subsidiary companies for their portions of
employer contributions. The amount expensed for the matching provision of the
plans was approximately $21 million, $14 million and $15 million in 1999, 1998
and 1997, respectively.

NOTE 15. 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 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 1999, there were no options granted in tandem
with performance units and dividend equivalent rights and in 1998, there were
4,600 options granted in tandem with performance units and dividend equivalent
rights. No compensation cost has been recognized for fixed stock option grants
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 "Accounting for
Stock-Based Compensation," there would have been a charge to PSEG's net income
of approximately $1.8 million, $0.4 million and $0.1 million in 1999, 1998 and
1997, respectively, with a $(0.01) impact on earnings per share in 1999 and no
impact on earnings per share in 1998 and 1997.


                                       91
<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

      PSEG's Long Term Incentive Plan (LTP) 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. 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. 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 LTP originally provided for the issuance of up to 500,000 options to
purchase shares of common stock and was subsequently amended to increase the
amount to 5,000,000. At December 31, 1999, there were 2,270,700 options
available for future grants under the LTP.

      Since the LTP's inception, PSEG has purchased shares on the open market to
meet the exercise of stock options. The difference between the cost of the
shares (generally 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, 1999 are summarized as follows:

<TABLE>
<CAPTION>
                                             1999                             1998                            1997
                                  ---------------------------      ---------------------------      ---------------------------
                                                    WEIGHTED                         WEIGHTED                         WEIGHTED
                                                    AVERAGE                          AVERAGE                          AVERAGE
                                                    EXERCISE                         EXERCISE                         EXERCISE
                                    OPTIONS          PRICE           OPTIONS          PRICE           OPTIONS           PRICE
                                  ---------------------------      ---------------------------      ---------------------------
<S>                                <C>                 <C>            <C>               <C>             <C>              <C>
Beginning of year                  1,243,800           $36.01         430,300           $29.26          84,000           $29.38
Granted                            1,367,000            33.13         841,600            39.16         371,000            29.36
Exercised                            (44,167)           30.37         (28,100)           26.76         (21,500)           31.38
Canceled                              (4,750)           28.01              --               --          (3,200)           28.70
                                  ----------       ----------      ----------       ----------      ----------       ----------
End of year                        2,561,883            34.60       1,243,800            36.01         430,300            29.26
                                  ----------       ----------      ----------       ----------      ----------       ----------
Exercisable at end of year           412,738           $35.07         100,963           $29.47           6,000           $26.45
                                  ----------       ----------      ----------       ----------      ----------       ----------
                                  ---------------------------------------------------------------------------------------------
Weighted average fair value of
options granted during the year                         $4.20                            $4.83                            $3.60
                                                   ==========                       ==========                       ==========
</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 1999, 1998 and 1997,
respectively: expected volatility of 21.45%, 21.41% and 17.15%, risk free
interest rates of 6.16%, 4.48% and 5.14%, expected lives of 4 years, 4 years and
3.75 years, respectively. Additional weighted averages assumptions include for
grants in 1999, 1998 and 1997 a dividend yield of 0% with respect to the
dividend equivalent feature of the tandem grants. There was a dividend yield of
6.52% in 1999, 5.51% in 1998 and 7.31% in 1997 on the non-tandem grants.


                                       92
<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

      The following table provides information about options outstanding at
December 31, 1999:

<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, 1999    CONTRACTUAL LIFE      PRICE         DECEMBER 31, 1999      PRICE
---------------------------------------------------------------------        ------------------------------
  <S>                       <C>             <C>               <C>                      <C>          <C>
  $24.00-$30.00               363,283       7.81 years        $29.34                   179,069      $29.57
  $30.01-$35.00             1,371,600       9.94 years         33.13                        --          --
  $35.01-$40.00               827,000       8.93 years         39.31                   233,669       39.31
---------------------------------------------------------------------        ------------------------------
  $24.00-$40.00             2,561,883       9.30 years        $34.60                   412,738      $35.07
---------------------------------------------------------------------        ------------------------------
</TABLE>

      In June 1998, the Committee granted 150,000 shares of restricted common
stock to a key executive. 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, 1999 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, 600 shares of common stock, increased from 300
shares per year 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 has 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 1999, 1998 and 1997, employees purchased 98,099, 102,387 and
144,377 shares at an average price of $38.21, $36.36 and $26.39 per share,
respectively. At December 31, 1999, 1,191,681 shares were available for future
issuance under this plan.

STOCK REPURCHASE PROGRAM

      The PSEG Board of Directors has authorized the repurchase of up to 30
million shares of its common stock from time to time, subject to market
conditions and other relevant factors affecting PSEG. Share repurchases are
planned when market and business conditions are deemed favorable. The
repurchased shares have been held as treasury stock or used for corporate
purposes. As of December 31, 1999, PSEG had repurchased 15.8 million shares at a
cost of approximately $607 million.

      In December 1999, PSEG entered into a Forward Purchase Agreement with an
intermediary, who has purchased and held shares on behalf of PSEG. These shares
will not be reflected on PSEG's balance sheet until settlement of the
transaction which is expected in the second quarter of 2000. Market conditions
and the availability of alternative investments will dictate if and when more
shares of Common Stock will be repurchased under this authorization.


                                       93
<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 16. FINANCIAL INFORMATION BY BUSINESS SEGMENTS

BASIS OF ORGANIZATION

      The reportable segments disclosed herein were determined based on a
variety of factors including the regulatory environment of each of PSEG's lines
of business and the types of products and services offered. Effective with the
unbundling of PSE&G's rates on August 1, 1999 and the deregulation of the
electric generation portion of PSE&G's business, the basis of segment reporting
has changed beginning with the third quarter of 1999. The generation and energy
trading portions of PSE&G's business are now separate reportable segments,
whereas they previously had been part of the Electric segment. Note that
estimates have been used to separate historical, pre-August 1, 1999, electric
segment data into the Generation, Energy Resources and Trade and Transmission
and Distribution segments of PSE&G's business.

      GENERATION

      The generation segment of PSE&G's business earns revenue through the sale
of its energy and capacity. This segment consists of the power plants that will
be sold to Power.

      ENERGY RESOURCES AND TRADE

      The Energy Resources and Trade segment of PSE&G's business earns revenues
through sales of wholesale energy, capacity sales and other ancillary services.

      TRANSMISSION AND DISTRIBUTION (T&D)

      This segment represents regulated utility services provided by PSE&G. The
electric transmission and electric and gas distribution segment of PSE&G's
business generates revenue from its tariffs under which it provides electric
transmission and electric and gas distribution services to residential,
commercial and industrial customers in New Jersey. The rates charged for
electric transmission are regulated by FERC while the rates charged for electric
and gas distribution are regulated by the BPU. Revenues are also generated from
a variety of other activities such as sundry sales, the appliance service
business, wholesale transmission services and other miscellaneous services.

      RESOURCES

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

      GLOBAL

      Global earns revenues from its investment in and operation of projects in
the generation and distribution of energy, both domestically and
internationally.

      OTHER

      PSEG's other activities generate revenues from Energy Technologies and
Enterprise Group Development Corporation (EGDC). Energy Technologies is an
energy management company that constructs, operates and maintains HVAC systems
for, and provides energy-related engineering, consulting and mechanical
contracting services to, industrial and commercial customers in the Northeastern
and Middle Atlantic United States. EGDC, which has been conducting a controlled
exit from the real estate business since 1993, earns revenues from its
nonresidential real estate property management business. Other activities also
include amounts applicable to PSEG and Energy Holdings, excluding Resources and
Global.


                                       94
<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

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

<TABLE>
<CAPTION>
                                                            ENERGY
                                                           RESOURCES                                                   CONSOLIDATED
                                             GENERATION    AND TRADE     T & D    RESOURCES      GLOBAL         OTHER      TOTAL
                                             ----------    ---------     -----    ---------      ------         -----  ------------
                                                                                (MILLIONS OF DOLLARS)
<S>                                              <C>             <C>    <C>            <C>          <C>          <C>         <C>
FOR THE YEAR ENDED DECEMBER 31, 1999:
Total Operating Revenues .................       $2,618          $76    $3,196         $179         $141         $286        $6,497
Depreciation and Amortization ............          224           --       305            1            1            5           536
Interest Income ..........................           --           --        12            1           --            2            15
Net Interest Charges .....................          203           --       184           46           48            9           490
Operating Income Before Income Taxes .....          521           56       586          123           69          (69)        1,286
Income Taxes .............................          213           23       274           50           24          (21)          563
Net income from equity method subsidiaries           --           --        --           78          129           --           207
Segment Income before Extraordinary Item .          308           33       312           66           28          (24)          723
Extraordinary Item (A) ...................       (3,204)          --     2,400           --           --           --          (804)
Segment Net Income (Loss) ................       (2,896)          33     2,712           66           28          (24)          (81)

AS OF DECEMBER 31, 1999:
Total Assets (A) .........................       $2,583         $313   $11,828       $2,096       $1,715         $480       $19,015
Investments in equity method subsidiaries            --           --        --          279        1,635           10         1,924
Gross Additions to Long-Lived Assets .....          202           --       277           --            1           99           579

FOR THE YEAR ENDED DECEMBER 31, 1998:
Total Operating Revenues .................       $2,524          $50    $2,994         $145         $124         $173        $6,010
Depreciation and Amortization ............          381           --       268            2            1            8           660
Interest Income ..........................           --           --        20            9            1            2            32
Net Interest Charges .....................          204           --       174           49           41            2           470
Operating Income Before Income Taxes .....          364           41       601           86           31          (51)        1,072
Income Taxes .............................          145           16       243           27           12          (15)          428
Net income from equity method subsidiaries           --           --        --           35          114           --           149
Segment Net Income (Loss) ................          219           25       358           56            7          (21)          644

AS OF DECEMBER 31, 1998:
Total Assets .............................       $7,881         $164    $6,624       $1,809       $1,124         $389       $17,991
Investments in equity method subsidiaries            --           --        --          383        1,059           34         1,475
Gross Additions to Long-Lived Assets .....          265           --       270           --           --            8           545

FOR THE YEAR ENDED DECEMBER 31, 1997:
Total Operating Revenues .................       $2,529          $23    $3,281         $144          $91         $109        $6,177
Depreciation and Amortization ............          360           --       247            1            2           20           630
Interest Income ..........................           --           --        14            4           --            3            21
Net Interest Charges .....................          211           --       169           46           22            2           450
Operating Income Before Income Taxes .....          292           18       474           88           24          (52)          844
Income Taxes .............................          101            6       149           29           10          (11)          284
Net income from equity method subsidiaries           --           --        --           49           78           --           127
Segment Net Income (Loss) ................          191           12       325           59           14          (41)          560

AS OF DECEMBER 31, 1997:
Total Assets .............................       $8,069         $114    $6,661       $1,616       $1,170         $349       $17,979
Investments in equity method subsidiaries            --           --        --          407        1,125           34         1,560
Gross Additions to Long-Lived Assets .....          166           --       376           --           --            6           548
</TABLE>

(A)   See Note 3. Extraordinary Charge and Other Accounting Impacts of
      Deregulation for discussion of the extraordinary charge recorded by the
      Generation segment and the related regulatory asset for securitization
      recorded by the T&D segment.


                                       95
<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

      Geographic information for PSEG is disclosed below. The foreign
investments and operations noted below were made through Energy Holdings. PSE&G
does not have foreign investments or operations.

<TABLE>
<CAPTION>
                                                       REVENUES (1)                          IDENTIFIABLE ASSETS
                                              ------------------------------          ------------------------------------
                                                       YEAR ENDED
                                                       DECEMBER 31,                    DECEMBER 31,         DECEMBER 31,
                                              ------------------------------          --------------     -----------------
                                                  1999              1998                   1999                 1998
                                              ------------      ------------          --------------     -----------------
                                                  (Millions of Dollars)                      (Millions of Dollars)
<S>                                               <C>               <C>                    <C>                   <C>
United States............................         $6,348            $5,901                 $16,595               $16,388
Foreign Countries (2)....................            149               109                   2,420                 1,603
                                              ------------      ------------          --------------     -----------------
      Total..............................         $6,497            $6,010                 $19,015               $17,991
                                              ============      ============          ==============     =================

Identifiable investments in foreign countries include:
        Argentina                                                                             $356                  $304
        Brazil (3)                                                                            $330                  $480
        Chile and Peru                                                                        $520                  $ --
        Netherlands                                                                           $623                  $400
</TABLE>

--------------------------------------------------------------------------------

(1)   Revenues are attributed to countries based on the locations of the
      investments. Global's revenue includes its share of the net income from
      joint ventures recorded under the equity method of accounting.

(2)   Total assets are net of foreign currency translation adjustment of $(222)
      million (pre-tax) as of December 31, 1999 and $(48) million (pre-tax) as
      of December 31, 1998.

(3)   Amount is net of foreign currency translation adjustment of $(189) million
      (pre-tax) as of December 31, 1999 and $(43) million (pre-tax) as of
      December 31, 1998.

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

                                                           DECEMBER 31,
                                                 -------------------------------
                                                  1999        1998        1997
                                                 -------     -------     -------
                                                     (MILLIONS OF DOLLARS)
Property, Plant and Equipment
    Electric Plant in Service:
       Fossil Production (A) ................     $1,628      $2,802      $1,840
       Nuclear Production (A) ...............        110       6,246       6,162
       Transmission .........................      1,169       1,200       1,163
       Distribution .........................      3,862       3,545       3,315
       Other ................................         --         276       1,212
                                                 -------     -------     -------
              Total Electric Plant in Service      6,769      14,069      13,692
                                                 -------     -------     -------
    Gas Plant in Service:
       Transmission .........................         --          69          67
       Distribution .........................      3,019       2,608       2,472
       Other ................................         --         170         158
                                                 -------     -------     -------
              Total Gas Plant in Service ....      3,019       2,847       2,697
                                                 -------     -------     -------
    Common Plant in Service:
       Capital Leases .......................         59          59          59
       General ..............................        363         519         499
                                                 -------     -------     -------
              Total Common Plant in Service .        422         578         558
                                                 -------     -------     -------
                    Total ...................    $10,210     $17,494     $16,947
                                                 =======     =======     =======

(A)   See Note 3. Extraordinary Charge and Other Accounting Impacts of
      Deregulation for discussion of the extraordinary charge recorded by the
      Generation segment and the related regulatory asset for securitization
      recorded by the T&D segment.


                                       96
<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 17. JOINTLY OWNED FACILITIES -- PROPERTY, PLANT AND EQUIPMENT

      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, 1999
                                                 ----------------------------------------------------------------
                                                    OWNERSHIP     PLANT IN        ACCUMULATED       PLANT UNDER
                                                    INTEREST      SERVICE         DEPRECIATION      CONSTRUCTION
                                                    ---------     --------        ------------      ------------
                                                                        (MILLIONS OF DOLLARS)
<S>                                                  <C>            <C>                <C>               <C>
Coal Generating
       Conemaugh...............................       22.50%        $198               $56               $--
       Keystone................................       22.84%         122                42                --
Nuclear Generating
       Peach Bottom............................       42.49%          23                12                --
       Salem...................................       42.59%         797               679                --
       Hope Creek..............................       95.00%         763               652                --
       Nuclear Support Facilities..............      Various          15                 2                --
Pumped Storage Facilities
       Yards Creek.............................       50.00%          28                10                --
Transmission Facilities........................      Various          95                31                --
Merrill Creek Reservoir........................       13.91%           2                --                --
Linden SNG Plant...............................       90.00%          16                14                --
</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,
                                      ------------------      -------------------      -------------------      ------------------
                                       1999        1998        1999         1998        1999         1998        1999        1998
                                      ------      ------      ------       ------      ------       ------      ------      ------
                                                                      (MILLIONS WHERE APPLICABLE)
<S>                                   <C>         <C>         <C>          <C>         <C>          <C>         <C>         <C>
Operating Revenues .............      $1,795      $1,659      $1,436       $1,362      $1,606       $1,439      $1,660      $1,550
Operating Income ...............         461         449         437          341         503          450         436         364
Income before Extraordinary Item         188         191         181          122         221          180         133         151
Extraordinary Item .............          --          --        (790)          --         (14)          --          --          --
Net Income .....................         188         191        (609)         122         207          180         133         151
Earnings per Share
   (Basic and Diluted) .........        0.85        0.82       (2.77)        0.53        0.95         0.78        0.61        0.66
Weighted Average Common
   Shares and Potential
   Dilutive Effect of Stock
   Options Outstanding .........         223         232         220          232         219          232         218         228
</TABLE>


                                       97
<PAGE>

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONCLUDED

NOTE 19. ACCOUNTING MATTERS

      In June 1999, the FASB issued SFAS 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133" (SFAS 137) to defer the effective date of SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133) for
one year. Consequently, SFAS 133 will now be effective for all fiscal quarters
beginning after January 1, 2001. The FASB also decided to defer by one year the
transition date regarding embedded derivatives in SFAS 133.

      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.


                                       98
<PAGE>

                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, Basis of Presentation and Summary of Significant
               Accounting Policies
      Note  2. Regulatory Issues
      Note  3. Extraordinary Charge and Other Accounting Impacts of Deregulation
      Note  4. Regulatory Assets and Liabilities
      Note  5. Long-Term Investments
      Note  6. Leasing Activities--As Lessee
      Note  7. Schedule of Consolidated Capital Stock and Other Securities
      Note  8. Schedule of Consolidated Debt
      Note  9. Financial Instruments and Risk Management
      Note 11. Commitments and Contingent Liabilities
      Note 12. PSE&G Nuclear Decommissioning
      Note 13. Income Taxes
      Note 14. Pension, Other Postretirement Benefit and Savings Plans
      Note 15. Stock Options, Stock Purchase Plan and Stock Repurchase Program
      Note 16. Financial Information by Business Segments
      Note 17. Jointly Owned Facilities--Utility Plant
      Note 19. Accounting Matters

NOTE 1. ORGANIZATION, BASIS OF PRESENTATION 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, 1999, 1998 and
1997, there were 132,450,344 shares outstanding, with an aggregate book value of
$2.6 billion.

NOTE 10. CASH AND CASH EQUIVALENTS

      The December 31, 1999 and 1998 balances consist primarily of working
funds.


                                       99
<PAGE>

                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

NOTE 13. 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>
                                                                 1999         1998         1997
                                                               -------      -------      -------
                                                                     (MILLIONS OF DOLLARS)
<S>                                                             <C>          <C>            <C>
Net Income (Loss) ........................................       $(151)        $602         $528
     Extraordinary Item (Net of Tax of $345) .............         804           --           --
                                                               -------      -------      -------
Net Income before Extraordinary Item .....................         653          602          528
                                                               -------      -------      -------
Income taxes:
    Operating income:
       Federal - Current .................................         425          342          266
                   Deferred (A) ..........................          (1)         (24)           7
                   ITC ...................................         (11)         (20)         (19)
                                                               -------      -------      -------
                        Total Federal ....................         413          298          254
                                                               -------      -------      -------
       State - Current ...................................         109          118            2
                Deferred (A) .............................         (12)         (12)          --
                                                               -------      -------      -------
                        Total State ......................          97          106            2
                                                               -------      -------      -------
              Total included in operating income .........         510          404          256
                                                               -------      -------      -------
Pretax income ............................................      $1,163       $1,006         $784
                                                               =======      =======      =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                  1999        1998        1997
                                                                                 -----       -----       -----
                                                                                   (MILLIONS OF DOLLARS)
<S>                                                                              <C>         <C>         <C>
Tax computed at the statutory rate .........................................      $407        $352        $274
Increase (decrease) attributable to flow through of certain tax adjustments:
       Depreciation ........................................................        35          23          21
       Amortization of investment tax credits ..............................       (11)        (20)        (19)
       New Jersey Corporate Business Tax ...................................        68          59          --
       Other ...............................................................        11         (10)        (20)
                                                                                 -----       -----       -----
              Subtotal .....................................................       103          52         (18)
                                                                                 -----       -----       -----
              Total income tax provisions ..................................      $510        $404        $256
                                                                                 =====       =====       =====
Effective income tax rate ..................................................     43.9%       40.2%       32.7%
</TABLE>

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


                                      100
<PAGE>

                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

                                                       1999      1998      1997
                                                       ----      ----      ----
                                                         (MILLIONS OF DOLLARS)
Deferred Credits:
       Additional tax depreciation and amortization     $18      $(28)     $(12)
       Conservation Costs .........................      29        36        27
       Deferred Fuel Costs--net ...................     (19)      (60)       (4)
       Pension Cost ...............................     (34)       26         8
       New Jersey Corporate Business Tax ..........     (12)       (8)       --
       Severance Pay ..............................       8        --        --
       Other ......................................      (3)       (2)      (12)
                                                       ----      ----      ----
              Total ...............................    $(13)     $(36)       $7
                                                       ====      ====      ====

SFAS 109

       The following is an analysis of deferred income taxes:

                                                           DECEMBER 31,
                                                      ---------------------
                                                         1999       1998
                                                        ------     ------
                                                      (MILLIONS OF DOLLARS)
DEFERRED INCOME TAXES
Assets:
    Current (net) .................................        $33        $30
    Non-current:
       Unrecovered Investment Tax Credits .........         23        110
       Nuclear Decommissioning ....................         26         26
       Construction Period Interest and Taxes .....         13         13
       Deferred Electric Energy & Gas Costs .......         18         --
       New Jersey Corporate Business Tax ..........        493         15
       Vacation Pay ...............................          6          6
       Other ......................................         --         17
                                                        ------     ------
          Total Non-current .......................        579        187
                                                        ------     ------
          Total Assets ............................        612        217
                                                        ------     ------
Liabilities:
    Non-current:
       Plant Related Items ........................        654      2,212
       Future Stranded Cost Recovery ..............      1,657         --
       Conservation Costs .........................         95         75
       Hope Creek O&M Costs .......................         --         19
       Unamortized Debt Expense ...................         39         45
       Taxes Recoverable Through Future Rates (Net)         87        242
       Other ......................................         13        127
                                                        ------     ------
          Total Non-current .......................      2,545      2,720
                                                        ------     ------
          Total Liabilities .......................      2,545      2,720
                                                        ------     ------
Summary--Deferred Income Taxes
    Net Current Assets ............................         33         30
    Net Non-current Liability .....................      1,966      2,533
                                                        ------     ------
          Total ...................................     $1,933     $2,503
                                                        ======     ======

      The balance of Federal income tax payable by (receivable from) PSE&G to
PSEG was $19 million and $9 million as of December 31, 1999 and December 31,
1998, respectively.


                                      101
<PAGE>

                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONCLUDED

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,
                                      ------------------      -------------------      -------------------      ------------------
                                       1999        1998        1999         1998        1999         1998        1999        1998
                                      ------      ------      ------       ------      ------       ------      ------      ------
                                                                         (MILLIONS OF DOLLARS)
<S>                                   <C>         <C>         <C>          <C>         <C>          <C>         <C>         <C>
Operating Revenues .............      $1,666      $1,514      $1,297       $1,252      $1,458       $1,409      $1,469      $1,393
Operating Income ...............         406         374         369          287         463          474         360         276
Income before Extraordinary Item         172         157         157          111         205          217         119         117
Extraordinary Item .............          --          --        (790)          --         (14)          --          --          --
Net Income .....................         172         157        (633)         111         191          217         119         117
Earnings Available to
   PSEG ........................         169         155        (635)         108         189          215         117         115
</TABLE>


                                      102
<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 Services 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, 1999, the
corporation's system of internal accounting controls was 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 11, 2000


                                      103
<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 of Services 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, 1999, the corporation's system of internal
accounting controls was 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 11, 2000


                                      104
<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, 1999 and 1998, 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, 1999. 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 audit 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 the Company as of December 31,
1999 and 1998, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1999, 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.

      As discussed in Note 1 to the consolidated financial statements, the
Company discontinued application of Statement of Financial Accounting Standards
No. 71, Accounting for the Effects of Certain Types of Regulation, for the
electric generation portion of its business effective April 1, 1999.

      We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheets of the Company as of December 31,
1997, 1996, and 1995, and the related consolidated statements of income, common
stockholders' equity and cash flows for the years ended 1996 and 1995 (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, 1999 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 11, 2000


                                      105
<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, 1999 and
1998, 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, 1999. 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 audit 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 the Company as of December 31,
1999 and 1998, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1999, 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.

      As discussed in Note 1 to the consolidated financial statements, the
Company discontinued application of Statement of Financial Accounting Standards
No. 71, Accounting for the Effects of Certain Types of Regulation, for the
electric generation portion of its business effective April 1, 1999.

      We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheets of the Company as of December 31,
1997, 1996, and 1995, and the related consolidated statements of income, common
stockholder's equity and cash flows for the years ended 1996 and 1995 (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, 1999 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 11, 2000


                                      106
<PAGE>

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

      PSEG and PSE&G, none.


                                      107
<PAGE>

                                    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 18, 2000, 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 1, 2000 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 18, 2000, 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 55. 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 58. 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. Chairman of the Board and
Chief Executive Officer of Power since June 1999. Director of Foster Wheeler
Corporation and The HSB Group, Inc.

      CONRAD K. HARPER has been a director since May 1997. Age 59. 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 69. Was previously a
director from 1981 to February 1988. Director of PSEG. 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., VI Technologies, Inc. and Covance
Inc.

      MARILYN M. PFALTZ has been a director since 1998 and was a Director of
Energy Holdings from 1989 to 1998. Age 67. 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 69. 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.


                                      108
<PAGE>

EXECUTIVE OFFICERS OF THE REGISTRANTS

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

       Lawrence R. Codey, President and Chief Operating Officer of PSE&G and a
member of the Boards of Directors of PSEG and PSE&G, has announced that he will
retire on February 29, 2000. Alfred C. Koeppe, currently Senior Vice
President-Corporate Services and External Affairs of PSE&G, will succeed Mr.
Codey as President and Chief Operating Officer at that time.

<TABLE>
<CAPTION>
====================================================================================================================================
                               AGE                                                              EFFECTIVE DATE
NAME                           DECEMBER 31, 1999    OFFICE                                      FIRST ELECTED TO PRESENT POSITION
------------------------------------------------------------------------------------------------------------------------------------
<S>                            <C>                  <C>                                         <C>
E. James Ferland               57                   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              55                   President and Chief Operating Officer       September 1991 to present
                                                    (PSE&G)

------------------------------------------------------------------------------------------------------------------------------------
Robert C. Murray               54                   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.       48                   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)

------------------------------------------------------------------------------------------------------------------------------------
Alfred C. Koeppe               53                   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
------------------------------------------------------------------------------------------------------------------------------------
R. Edwin Selover               54                   Vice President and General Counsel          April 1988 to present
                                                    (PSEG)

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


                                      109
<PAGE>

<TABLE>
<CAPTION>
====================================================================================================================================
                               AGE                                                              EFFECTIVE DATE
NAME                           DECEMBER 31, 1999    OFFICE                                      FIRST ELECTED TO PRESENT POSITION
------------------------------------------------------------------------------------------------------------------------------------
<S>                            <C>                  <C>                                         <C>
Frank Cassidy                  52                   President                                   July 1999 to present
                                                    (Power)

                                                    President                                   November 1996 to June 1999
                                                    (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)

------------------------------------------------------------------------------------------------------------------------------------
Patricia A. Rado               57                   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 18, 2000 which definitive Proxy
Statement is expected to be filed with the Securities and Exchange Commission on
or about March 1, 2000 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,
1999 is set forth below. Amounts shown were paid or awarded for all services
rendered to PSEG and its subsidiaries and affiliates including PSE&G.

--------------------------------------------------------------------------------
                           SUMMARY COMPENSATION TABLE
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                       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>
E. James Ferland.....................  1999     815,000       733,500              0       215,000     304,720        29,292
Chairman of the Board and Chief        1998     762,070       621,400      5,184,375 (5)   150,000      92,684        28,647
Executive Officer of PSE&G             1997     712,261       425,200              0       118,000     108,702        15,747

Lawrence R. Codey....................  1999     480,000       288,000              0       100,000     140,640         8,283
President and Chief Operating          1998     455,250       274,200              0        75,000      44,744         7,408
Officer of PSE&G (6)                   1997     435,327       249,400              0        59,200      50,325         6,530

Robert C. Murray.....................  1999     390,000       234,000              0        75,000      93,760         4,802
Executive Vice President - Finance     1998     373,564       225,000              0        50,000      31,960         4,962
of PSE&G                               1997     345,671       154,900              0        32,000      36,234         5,260

R. Edwin Selover.....................  1999     310,000       162,800              0        35,000      65,632        12,828
Senior Vice President and General      1998     293,871       154,900              0        25,000      22,372        19,210
Counsel of PSE&G                       1997     278,928       117,900              0        14,300      26,169         9,065

Frank Cassidy........................  1999     302,500       195,000              0       100,000      70,320         4,004
President and Chief Operating          1998     273,000       117,600              0        35,000      23,970         4,109
Officer of Power                       1997     249,000        50,800                       20,500           0         4,256
</TABLE>


                                      110
<PAGE>

(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 1999 and 1998, all options
      granted were non-tandem. For 1997 of the options granted to Messrs.
      Ferland, Codey, Murray, Selover and Cassidy, respectively, 100,000;
      50,000; 25,000; 10,000 and 15,000 were non-tandem and 18,000; 9,200;
      7,000; 4,300 and 5,500 were tandem. 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              SELOVER            CASSIDY
                ---------------     ---------------    ----------------    ---------------     ----------------
                THRIFT     MICP     THRIFT     MICP    THRIFT      MICP    THRIFT      MICP    THRIFT      MICP
                 ($)       ($)       ($)        ($)      ($)        ($)      ($)        ($)      ($)        ($)
                ------     ----     ------     ----    ------      ----    ------      ----    ------      ----
<S>             <C>       <C>       <C>         <C>     <C>         <C>     <C>         <C>     <C>         <C>
1999.......     4,801         0     6,218         0     4,802         0     4,802         0     4,004         0
1998.......     4,801       383     4,802       241     4,805       157     4,806       112     4,003       106
1997.......     4,801     1,122     4,802       657     4,802       458     4,802       325     4,001       255
</TABLE>

      In addition, 1999, 1998 and 1997 amounts include for Mr. Ferland $24,491,
      $23,463 and $9,824, for Mr. Codey $2,065, $2,365 and $1,071 and for Mr.
      Selover $8,026, $14,292 and $3,938, respectively, representing earnings
      credited on compensation deferred under PSE&G's Deferred Compensation Plan
      in excess of 120% of the applicable Federal long-term interest rate as
      prescribed under Section 1274(d) of the Internal Revenue Code. Prior to
      January 1, 2000, under PSE&G's Deferred Compensation Plan, interest is
      paid at prime rate plus 1/2%, adjusted quarterly. Effective January 1,
      2000, the Plan was amended to permit participants to select from among
      four additional investment options for compensation that is deferred.

(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. Codey will retire effective February 29, 2000.

--------------------------------------------------------------------------------
                    OPTION GRANTS IN LAST FISCAL YEAR (1999)
--------------------------------------------------------------------------------

<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        ($/SH)           DATE       PRESENT VALUE ($) (2)
-------------------------------------------------------------------------------------------------------------------
<S>                             <C>                <C>           <C>             <C>                <C>
E. James Ferland .......        215,000(1)         15.8          33.1250         12/21/09           761,100
Lawrence R. Codey ......        100,000(1)          7.3          33.1250         12/21/09           354,000
Robert C. Murray .......         75,000(1)          5.5          33.1250         12/21/09           265,500
R. Edwin Selover .......         35,000(1)          2.6          33.1250         12/21/09           123,900
Frank Cassidy ..........        100,000(1)          7.3          33.1250         12/21/09           354,000
</TABLE>


                                      111
<PAGE>

(1)   Granted under LTIP not in tandem with performance units and dividend
      equivalents, with exercisability commencing December 21, 2000, December
      21, 2001 and December 21, 2002, respectively, with respect to one-third of
      the options at each such date.

(2)   Determined using the Black-Scholes model, incorporating the following
      material assumptions and adjustments: (a) exercise price of $33.1250,
      equal to the fair market value of the underlying PSEG Common Stock on the
      date of grant; (b) an option term of ten years on all grants; (c) interest
      rate of 6.28% that represent the interest rate on U.S. Treasury securities
      on the date of grant with a maturity date corresponding to that of the
      option terms; (d) volatility of 19.01% calculated using daily PSEG Common
      Stock prices for the one-year period prior to the grant date; (e) dividend
      yield of 6.52% and (f) reductions of approximately 7.79% to reflect the
      probability of forfeiture due to termination prior to vesting, and
      approximately 5.49% 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 (1999)
                  AND FISCAL YEAR END OPTION VALUES (12/31/99)
--------------------------------------------------------------------------------

<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...............           6,500       49,969        116,680         366,320           350,017           647,795
Lawrence R. Codey..............           3,000       23,062         58,340         175,860           175,009           312,679
Robert C. Murray...............           2,000       13,750         33,337         123,663            87,502           212,873
R. Edwin Selover...............           1,400       10,762         16,002          59,298            40,064           102,623
Frank Cassidy..................           1,500       11,156         21,670         133,830            52,505           228,714
</TABLE>

(1)   Does not reflect any options granted and/or exercised after year end
      (12/31/99). 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 (12/31/99).
      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 awarded
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


                                      112
<PAGE>

"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.

      In 1999, PSE&G entered into an Employment Agreement with Mr. Codey, which
provided for the granting of ten additional years of credited service for
retirement purposes if Mr. Codey remains employed by PSE&G through February 28,
2000. The Agreement also provided that if PSEG or PSE&G so requests, Mr. Codey
shall provide consulting services to PSEG during the period of twenty-four
months following termination of employment at a rate to be agreed. The Agreement
provided that Mr. Codey is prohibited from competing with or recruiting
employees from PSE&G or its subsidiaries or affiliates for two years after
termination of employment. Violation of these provisions requires a forfeiture
of the additional retirement benefit provided by the Agreement. Mr. Codey will
retire on February 29, 2000.

      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.

       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 1999 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 or PSE&G. Each committee
Chair receives 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 600 shares
of restricted stock for each year of service as a director. Such shares held by
each non-employee director are included in the table 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.


                                      113
<PAGE>

      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.

      ------------------------------------------------------------------------
                                 PENSION PLAN TABLE
      ------------------------------------------------------------------------

                                        LENGTH OF SERVICE
      AVERAGE FINAL    -------------------------------------------------------
       COMPENSATION     30 YEARS      35 YEARS       40 YEARS        45 YEARS
      --------------   ----------    ----------    -----------     -----------
           $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
          1,400,000      840,000       910,000        980,000       1,050,000
          1,500,000      900,000       975,000      1,050,000       1,125,000

      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, Murray, Selover and Cassidy will have accrued approximately 48, 41, 43
and 48 years of credited service, respectively, as of age 65. Mr. Codey will
retire on February 29,2000 with 37 years of credited service.

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 18, 2000 which definitive Proxy Statement is
expected to be filed with the Securities and Exchange Commission on or about
March 1, 2000 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, 2000. 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.


                                      114
<PAGE>

<TABLE>
<CAPTION>
                                                                           AMOUNT AND NATURE OF
      NAME                                                                 BENEFICIAL OWNERSHIP
      ----------------------------------------------------------------     --------------------
      <S>                                                                        <C>
      Frank Cassidy...................................................           160,317(1)
      Lawrence Codey..................................................           252,756(2)
      E. James Ferland................................................           699,227(3)
      Conrad K. Harper................................................             1,843
      Irwin Lerner....................................................            12,630
      Robert C. Murray................................................           171,475(4)
      Marilyn M. Pfaltz...............................................             9,618
      Forrest J. Remick...............................................             4,079
      R. Edwin Selover................................................            82,391(5)
      All directors and executive officers as a group (11 persons)....         1,545,761(6)
</TABLE>

(1)   Includes the equivalent of 1,600 shares held under PSE&G Thrift and
      Tax-Deferred Savings Plan. Includes options to purchase 153,000 shares,
      21,670 of which are currently exercisable.

(2)   Includes the equivalent of 45 shares held under PSE&G Thrift and
      Tax-Deferred Savings Plan. Includes options to purchase 230,000 shares,
      58,340 of which are currently exercisable.

(3)   Includes the equivalent of 12,180 shares held under PSE&G Thrift and
      Tax-Deferred Savings Plan. Includes options to purchase 475,000 shares,
      116,680 of which are currently exercisable. Includes 150,000 shares of
      restricted stock, which vest as described in the Summary Compensation
      Table Note 5.

(4)   Includes the equivalent of 1,475 shares held under PSE&G Thrift and
      Tax-Deferred Savings Plan. Includes options to purchase 154,000 shares,
      33,337 of which are currently exercisable.

(5)   Includes options to purchase 72,500 shares, 15,002 of which are currently
      exercisable.

(6)   Includes the equivalent of 21,095 shares held under PSE&G Thrift and
      Tax-Deferred Savings Plan. Includes options to purchase 1,220,600 shares,
      of which 262,698 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 18, 2000, which definitive Proxy
Statement is expected to be filed with the Securities and Exchange Commission on
or about March 1, 2000. Such information set forth under such heading is
incorporated herein by this reference thereto.

PSE&G

      None.


                                      115
<PAGE>

                                     PART IV

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

(A)   Financial Statements:

      a.    PSEG Consolidated Statements of Income for the years ended December
            31, 1999, 1998 and 1997 on page 53.

            PSEG Consolidated Balance Sheets for the years ended December 31,
            1999 and 1998 on pages 54 and 55.

            PSEG Consolidated Statements of Cash Flows for the years ended
            December 31, 1999, 1998 and 1997 on page 56.

            PSEG Statements of Common Stockholders' Equity for the years ended
            December 31, 1999, 1998 and 1997 on page 57.

            PSEG Notes to Consolidated Financial Statements on pages 64 through
            98.

      b.    PSE&G Consolidated Statements of Income for the years ended December
            31, 1999, 1998 and 1997 on page 59.

            PSE&G Consolidated Balance Sheets for the years ended December 31,
            1999 and 1998 on pages 60 and 61.

            PSE&G Consolidated Statements of Cash Flows for the years ended
            December 31, 1999, 1998 and 1997 on page 62.

            PSE&G Statements of Common Stockholder's Equity for the years ended
            December 31, 1999, 1998 and 1997 on page 63.

            PSE&G Notes to Consolidated Financial Statements on pages 99 through
            102.

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

      a.    PSEG Financial Statement Schedules:

            Schedule II--Valuation and Qualifying Accounts for each of the three
            years in the period ended December 31, 1999 (page 118).

      b.    PSE&G Financial Statement Schedules:

            Schedule II--Valuation and Qualifying Accounts for each of the three
            years in the period ended December 31, 1999 (page 118).

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


                                      116
<PAGE>

(C)   The following exhibits are filed herewith:

      (1)   PSEG:

            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(7): Management Incentive Compensation Plan
            Exhibit 10a(18) Employment Agreement with Lawrence R. Codey dated
            November 17, 1999
            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 121 through 129.)

      (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(7): Management Incentive Compensation Plan
            Exhibit 10a(13): Employment Agreement with Lawrence R. Codey dated
            November 17, 1999
            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 129 through 135.)

(D)   The following reports on Form 8-K were filed by the registrant(s) named
      below during the last quarter of 1999 and the 2000 period covered by this
      report under Item 5:

            REGISTRANT         DATE OF REPORT         ITEMS REPORTED
            -----------        --------------         --------------
           PSEG and PSE&G      October 14, 1999       Items 5 and 7


                                      117
<PAGE>

                                                                     SCHEDULE II

                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
               YEARS ENDED DECEMBER 31, 1999 -- DECEMBER 31, 1997

<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>
1999:
Allowance for Doubtful Accounts..............           $38          $40                  $--       $38(A)            $40
Discount on Property Abandonments............             1           --                   --         1(B)             --
Materials and Supplies Valuation Reserve.....            12           41                   --        42(C)             11
Other Valuation Allowances...................            11           11                   --        --                22

1998:
Allowance for Doubtful Accounts..............           $41          $40                  $--       $43(A)            $38
Discount on Property Abandonments............             2           --                   --         1(B)              1
Materials and Supplies 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
Materials and Supplies Valuation Reserve.....            16           --                   --         4                12
Other Valuation Allowances...................            10            5                   --        --                15
</TABLE>

(A)   Accounts Receivable/Investments written off.
(B)   Amortization of discount to income.
(C)   Inventory written off

                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
               YEARS ENDED DECEMBER 31, 1999 -- DECEMBER 31, 1997

<TABLE>
<CAPTION>
                                                 COLUMN B                 COLUMN C           COLUMN D      COLUMN E
                                              -------------  -----------------------------  -----------   -----------
                                                                      ADDITIONS
                                                             -----------------------------
                                               BALANCE AT    CHARGED TO      CHARGED TO                   BALANCE AT
                                              BEGINNING OF    COST AND     OTHER ACCOUNTS-  DEDUCTIONS-     END OF
DESCRIPTION                                      PERIOD       EXPENSES        DESCRIBE       DESCRIBE       PERIOD
--------------------------------------------- -------------  -----------------------------  -----------   -----------
                                                                     (MILLIONS OF DOLLARS)
<S>                                                    <C>          <C>               <C>      <C>                <C>
1999:
Allowance for Doubtful Accounts..............          $34          $40               $--      $39(A)             $35
Discount on Property Abandonments............            1           --                --        1(B)              --
Materials and Supplies Valuation Reserve.....           12           41                --       42(C)              11

1998:
Allowance for Doubtful Accounts..............          $33          $39               $--      $38(A)             $34
Discount on Property Abandonments............            2           --                --        1(B)               1
Materials and Supplies Valuation Reserve.....           12           --                --       --                 12

1997:
Allowance for Doubtful Accounts..............          $40          $42               $--      $49(A)             $33
Discount on Property Abandonments............            4           --                --        2(B)               2
Materials and Supplies Valuation Reserve.....           16           --                --        4                 12
</TABLE>

(A)   Accounts Receivable/Investments written off.
(B)   Amortization of discount to income.
(C)   Inventory written off.


                                      118
<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 25, 2000

      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 25, 2000
----------------------   President and Chief Executive
   E. JAMES FERLAND      Officer and Director
                         (Principal Executive Officer)

   ROBERT C. MURRAY      Vice President and Chief              February 25, 2000
----------------------   Financial Officer (Principal
   ROBERT C. MURRAY      Financial Officer)

   PATRICIA A. RADO      Vice President and Controller         February 25, 2000
----------------------   (Principal Accounting Officer)
   PATRICIA A. RADO

   LAWRENCE R. CODEY     Director                              February 25, 2000
----------------------
   LAWRENCE R. CODEY

    ERNEST H. DREW       Director                              February 25, 2000
----------------------
    ERNEST H. DREW

  T. J. DERMOT DUNPHY    Director                              February 25, 2000
----------------------
  T. J. DERMOT DUNPHY

 RAYMOND V. GILMARTIN    Director                              February 25, 2000
----------------------
 RAYMOND V. GILMARTIN

   CONRAD K. HARPER      Director                              February 25, 2000
----------------------
   CONRAD K. HARPER

     IRWIN LERNER        Director                              February 25, 2000
----------------------
     IRWIN LERNER

   MARILYN M. PFALTZ     Director                              February 25, 2000
----------------------
   MARILYN M. PFALTZ

   FORREST J. REMICK     Director                              February 25, 2000
----------------------
   FORREST J. REMICK

   RICHARD J. SWIFT      Director                              February 25, 2000
----------------------
   RICHARD J. SWIFT


                                      119
<PAGE>

                                   SIGNATURES

      PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.

                                        PUBLIC SERVICE ELECTRIC AND GAS COMPANY

                                        By            E. JAMES FERLAND
                                          -------------------------------------
                                                      E. JAMES FERLAND
                                                   CHAIRMAN OF THE BOARD
                                                AND CHIEF EXECUTIVE OFFICER

Date: February 25, 2000

      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 25, 2000
-----------------------  Executive Officer and Director
   E. JAMES FERLAND      (Principal Executive Officer)


   ROBERT C. MURRAY      Executive Vice President--Finance    February 25, 2000
-----------------------  (Principal Financial Officer)
   ROBERT C. MURRAY

   PATRICIA A. RADO      Vice President and Controller        February 25, 2000
-----------------------  (Principal Accounting Officer)
   PATRICIA A. RADO

   LAWRENCE R. CODEY     Director                             February 25, 2000
-----------------------
   LAWRENCE R. CODEY

   CONRAD K. HARPER      Director                             February 25, 2000
-----------------------
   CONRAD K. HARPER

     IRWIN LERNER        Director                             February 25, 2000
-----------------------
     IRWIN LERNER

  MARILYN M. PFALTZ      Director                             February 25, 2000
-----------------------
  MARILYN M. PFALTZ

   FORREST J. REMICK     Director                             February 25, 2000
-----------------------
   FORREST J. REMICK


                                      120
<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.


                                      121
<PAGE>

<TABLE>
<CAPTION>
                              PSEG
--------------------------------------------------------------------
                         EXHIBIT NUMBER
--------------------------------------------------------------------
                                     PREVIOUS FILING
        THIS        ------------------------------------------------
       FILING       COMMISSION         EXCHANGES
       ------       ----------         ---------
       <S>          <C>     <C>        <C>    <C>                    <C>
         3a         (o)     3a         (o)    3a                     Certificate of Incorporation Public Service Enterprise
                                                                     Group Incorporated

         3b         (e)     3b         (e)    3b                     By-Laws of Public Service Enterprise
                                              4/11/88                Group Incorporated

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

         3d         (f)                (f)                           Trust Agreements for Enterprise Capital Trust I and III
                            12/24/97

         3e         (d)     3          (d)    3                      Amended and Restated Trust Agreement for Enterprise Capital
                            8/14/98           8/14/98                Trust II

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


                                      122
<PAGE>

<TABLE>
<CAPTION>
                              PSEG
--------------------------------------------------------------------
                         EXHIBIT NUMBER
--------------------------------------------------------------------
                                    PREVIOUS FILING
       THIS        -------------------------------------------------
      FILING       COMMISSION          EXCHANGES
      ------       ----------          ---------
      <S>         <C>   <C>            <C>    <C>                    <C>
      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
</TABLE>


                                      123
<PAGE>

<TABLE>
<CAPTION>
                              PSEG
--------------------------------------------------------------------
                         EXHIBIT NUMBER
--------------------------------------------------------------------
                                     PREVIOUS FILING
      THIS       ---------------------------------------------------
     FILING      COMMISSION            EXCHANGES
     ------      ----------            ---------
     <S>         <C>    <C>            <C>   <C>                     <C>
     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
</TABLE>


                                      124
<PAGE>

<TABLE>
<CAPTION>
                              PSEG
--------------------------------------------------------------------
                         EXHIBIT NUMBER
--------------------------------------------------------------------
                                     PREVIOUS FILING
      THIS       ---------------------------------------------------
     FILING      COMMISSION            EXCHANGES
     ------      ----------            ---------
     <S>         <C>    <C>            <C>   <C>                     <C>
     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
</TABLE>


                                      125
<PAGE>

<TABLE>
<CAPTION>
                              PSEG
--------------------------------------------------------------------
                         EXHIBIT NUMBER
--------------------------------------------------------------------
                                     PREVIOUS FILING
      THIS       ---------------------------------------------------
     FILING      COMMISSION            EXCHANGES
     ------      ----------            ---------
     <S>         <C>    <C>            <C>   <C>                     <C>
     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
</TABLE>


                                      126
<PAGE>

<TABLE>
<CAPTION>
                              PSEG
--------------------------------------------------------------------
                         EXHIBIT NUMBER
--------------------------------------------------------------------
                                     PREVIOUS FILING
      THIS       ---------------------------------------------------
     FILING      COMMISSION            EXCHANGES
     ------      ----------            ---------
     <S>         <C>    <C>            <C>   <C>                     <C>
     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 PSE&G and The Chase Manhattan Bank
                        12/1/93              12/1/93                 (National Association), as Trustee, providing for Secured
                                                                     Medium-Term Notes dated July 1, 1993

      4c(1)      (c)                   (c)                           Indenture between PSE&G and First Union National Bank, National
                        2/23/95              2/23/95                 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 PSE&G and First Fidelity Bank,
                        9/11/95              9/11/95                 National Association (now known as First Union National Bank),
                 (d)    4d (2)         (d)   4d (2)                  as Trustee, dated September 1, 1995 providing for Deferrable
                        5/13/98              5/13/98                 Interest Subordinated Debentures, Series B (relating to Monthly
                                                                     Preferred Securities)

      4d(1)      (d)    4e (1)         (d)   4e(1)                   Indenture between PSE&G and First Union National Bank, as
                        5/13/98              5/13/98                 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 PSE&G and First Union National
                        5/13/98              5/13/98                 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 Service Enterprise Group Incorporated
                        5/13/98              5/13/98                 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 to Indenture dated as of January
                        8/14/98              8/14/98                 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 to Indenture dated as of January
                        8/14/98              8/14/98                 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
</TABLE>


                                       127
<PAGE>

<TABLE>
<CAPTION>
                              PSEG
--------------------------------------------------------------------
                         EXHIBIT NUMBER
--------------------------------------------------------------------
                                     PREVIOUS FILING
      THIS       ---------------------------------------------------
     FILING      COMMISSION            EXCHANGES
     ------      ----------            ---------
     <S>         <C>    <C>            <C>   <C>                     <C>
     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)      (e)    10a(6)         (e)   10a(6)                  Long-Term Incentive Plan
                        2/22/99              2/22/99

     10a(7)                                                          Management Incentive Compensation Plan

     10a(8)      (d)    10             (d)   10                      Employment Agreement with E. James Ferland, dated June 16, 1998
                        8/14/98              8/14/98

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

    10a(9)(i)    (c)    10a(9)(i)      (c)   10a(9)(i)               Amendment to Letter Agreement with Robert C. Murray dated
                        2/23/98              2/23/98                 January 6, 1998

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

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

     10a(12)     (e)    10a(14)        (e)   10a(14)                 Directors' Stock Plan
                        2/22/99              2/22/99

     10a(13)     (c)    10a(16)        (c)   10a(16)                 Letter Agreement with Harold W. Keiser dated January 5, 1998
                        2/23/98              2/23/98

     10a(14)     (e)    10a(16)        (e)   10a(16)                 Global Deferred Compensation Plan
                        2/22/99              2/22/99

     10a(15)     (e)    10a(17)        (e)   10a(17)                 Global Executive Incentive Compensation Plan
                        2/22/99              2/22/99

     10a(16)     (e)    10a(20)        (e)   10a(20)                 Energy Technologies Executive Incentive Compensation Plan
                        2/22/99              2/22/99

     10a(17)     (e)    10a(22)        (e)   10a(22)                 Resources Annual Incentive Compensation Plan
                        2/22/99              2/22/99

     10a(18)                                                         Employment Agreement with Lawrence R. Codey, dated
                                                                     November 17, 1999

       11                                                            Inapplicable

       12                                                            Computation of Ratios of Earnings to Fixed Charges

       13                                                            Inapplicable

       16                                                            Inapplicable

       18                                                            Inapplicable

       21                                                            Subsidiaries of the Registrant
</TABLE>


                                      128
<PAGE>

<TABLE>
<CAPTION>
                              PSEG
--------------------------------------------------------------------
                         EXHIBIT NUMBER
--------------------------------------------------------------------
                                     PREVIOUS FILING
      THIS       ---------------------------------------------------
     FILING      COMMISSION            EXCHANGES
     ------      ----------            ---------
     <S>         <C>    <C>            <C>   <C>                     <C>
       22                                                            Inapplicable

       23                                                            Independent Auditors' Consent

       24                                                            Inapplicable

       27                                                            Financial Data Schedule

       28                                                            Inapplicable

       99                                                            Inapplicable

<CAPTION>
                              PSE&G
--------------------------------------------------------------------
                         EXHIBIT NUMBER
--------------------------------------------------------------------
                                     PREVIOUS FILING
      THIS       ---------------------------------------------------
     FILING      COMMISSION            EXCHANGES
     ------      ----------            ---------
      <S>        <C>    <C>            <C>   <C>                     <C>
      3a(1)      (b)    3a             (b)   3a                      Restated Certificate of Incorporation of PSE&G
                        8/28/86              8/29/86

      3a(2)      (c)    3a(2)          (c)   3a(2)                   Certificate of Amendment of Certificate of Restated Certificate
                                             4/10/87                 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 Restated Certificate of
                        2/3/94               2/14/94                 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 Restated Certificate of
                        2/3/94               2/14/94                 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 Restated Certificate of
                        2/3/94               2/14/94                 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 Fidelity Union Trust Company, (now
                                             2/18/81                 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
</TABLE>


                                       129
<PAGE>

<TABLE>
<CAPTION>
                              PSE&G
--------------------------------------------------------------------
                         EXHIBIT NUMBER
--------------------------------------------------------------------
                                     PREVIOUS FILING
      THIS       ---------------------------------------------------
     FILING      COMMISSION            EXCHANGES
     ------      ----------            ---------
      <S>        <C>    <C>            <C>   <C>                     <C>
      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
</TABLE>


                                      130
<PAGE>

<TABLE>
<CAPTION>
                              PSE&G
--------------------------------------------------------------------
                         EXHIBIT NUMBER
--------------------------------------------------------------------
                                     PREVIOUS FILING
      THIS       ---------------------------------------------------
     FILING      COMMISSION            EXCHANGES
     ------      ----------            ---------
     <S>         <C>    <C>            <C>   <C>                     <C>
     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
</TABLE>


                                      131
<PAGE>

<TABLE>
<CAPTION>
                              PSE&G
--------------------------------------------------------------------
                         EXHIBIT NUMBER
--------------------------------------------------------------------
                                     PREVIOUS FILING
      THIS       ---------------------------------------------------
     FILING      COMMISSION            EXCHANGES
     ------      ----------            ---------
     <S>         <C>    <C>            <C>   <C>                     <C>
     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
</TABLE>


                                      132
<PAGE>

<TABLE>
<CAPTION>
                              PSE&G
--------------------------------------------------------------------
                         EXHIBIT NUMBER
--------------------------------------------------------------------
                                     PREVIOUS FILING
      THIS       ---------------------------------------------------
     FILING      COMMISSION            EXCHANGES
     ------      ----------            ---------
     <S>         <C>    <C>            <C>     <C>                   <C>
     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
</TABLE>


                                      133
<PAGE>

<TABLE>
<CAPTION>
                              PSE&G
--------------------------------------------------------------------
                         EXHIBIT NUMBER
--------------------------------------------------------------------
                                     PREVIOUS FILING
      THIS       ---------------------------------------------------
     FILING      COMMISSION            EXCHANGES
     ------      ----------            ---------
     <S>         <C>    <C>            <C>     <C>                   <C>
     4a(88)      (d)    4              (d)     4                     June 1, 1994
                        11/8/94                12/2/94

     4a(89)      (d)    4              (d)     4                     August 1, 1994
                        11/8/94                12/2/94

     4a(90)      (d)    4              (d)     4                     October 1, 1994 (No. 1)
                        11/8/94                12/2/94

     4a(91)      (d)    4              (d)     4                     October 1, 1994 (No. 2)
                        11/8/94                12/2/94

     4a(92)      (a)    4              (a)     4                     January 1, 1996 (No.1)
                         1/26/96               1/26/96

     4a(93)      (a)    4              (a)     4                     January 1, 1996 (No. 2)
                        1/26/96                1/26/96

     4a(94)      (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 PSE&G and Chase Manhattan Bank
                        12/1/93                12/1/93               (National Association), as Trustee, providing for Secured
                                                                     Medium-Term Notes dated July 1, 1993

      4c(1)      (b)                   (c)                           Indenture between PSE&G and First Fidelity Bank, National
                        2/23/95                2/23/95               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,
                                                                     National Association (now known as First Union National Bank),
                 (d)    4d(2)          (d)     4d(2)                 as Trustee, dated September 1, 1995 providing for Deferrable
                        5/13/98                5/13/98               Interest Subordinated Debentures, Series B (relating to Monthly
                                                                     Preferred Securities)

      4d(1)      (d)    4e(1)          (d)     4e(1)                 Indenture between PSE&G and First Union National Bank, as
                        5/13/98                5/13/98               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 PSE&G and First Union National
                        5/13/98                5/13/98               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
</TABLE>


                                       134
<PAGE>

<TABLE>
<CAPTION>
                              PSE&G
--------------------------------------------------------------------
                         EXHIBIT NUMBER
--------------------------------------------------------------------
                                     PREVIOUS FILING
      THIS       ---------------------------------------------------
     FILING      COMMISSION            EXCHANGES
     ------      ----------            ---------
     <S>         <C>    <C>            <C>     <C>                   <C>
     10a(6)      (e)    10a(6)         (e)     10a(6)                Long-Term Incentive Plan
                        2/22/99                2/22/99

     10a(7)                                                          Management Incentive Compensation Plan

     10a(8)      (d)    10             (d)     10                    Employment Agreement with E. James Ferland, dated June 16, 1998
                        8/14/98                8/14/98

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

    10a(9)(i)    (c)    10a(9)(i)      (c)     10a(9)(i)             Amendment to Letter Agreement with Robert C. Murray dated
                        2/23/98                2/23/98               January 6, 1998

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

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

     10a(12)     (e)    10a(14)        (e)     10a(14)               Directors' Stock Plan
                        2/22/99                2/22/99

     10a(13)                                                         Employment Agreement with Lawrence R. Codey, dated
                                                                     November 17, 1999

       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
</TABLE>


                                      135