---

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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

(Mark One)|X|  ANNUAL REPORT PURSUANT TO SECTION
  13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2002

OR

|_|TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
  OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from ________ to ________

|CommissionFile Number |  | Registrants, State
      of Incorporation,Address, and Telephone Number                                                                                            |  | I.R.S. EmployerIdentification No.
|--------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------------
|                      |  |                                                                                                                                                                    |  |                                  
|001-09120             |  | PUBLIC SERVICE
      ENTERPRISE GROUP INCORPORATED(A New Jersey Corporation)80 Park PlazaP.O. Box 1171Newark, New Jersey 07101-1171973 430-7000http://www.pseg.com |  | 22-2625848                       
|                      |  |                                                                                                                                                                    |  |                                  
|001-00973             |  | PUBLIC SERVICE
      ELECTRIC AND GAS COMPANY(A New Jersey Corporation)80 Park Plaza, P.O. Box 570Newark, New Jersey 07101-0570973 430-7000http://www.pseg.com     |  | 22-1212800                       
|                      |  |                                                                                                                                                                    |  |                                  
|000-49614             |  | PSEG POWER LLC(A Delaware Limited Liability Company)80 Park Plaza  T25Newark, New Jersey 07102-4194973 430-7000http://www.pseg.com                                |  | 22-3663480                       
|                      |  |                                                                                                                                                                    |  |                                  
|000-32503             |  | PSEG ENERGY HOLDINGS
      LLC(A New Jersey Limited Liability Company)80 Park Plaza T22Newark, New Jersey 07102-4194973 456-3581http://www.pseg.com               |  | 22-2983750                       

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


|Registrant                  |  | Title of Each Class                  |       | Title of Each
      Class                 |        | Name of Each Exchange
      On Which Registered
|--------------------------- |  | ------------------------------------ | ----- | ----------------------------------------- | ------ | -----------------------------------------------
|                            |  |                                      |       |                                           |        |                                                
|Public Service Enterprise   |  | Common Stock without
      par value |       |                                           |        |                                                
|Group Incorporated          |  |                                      |       |                                           |        |                                                
|                            |  |                                      |       |                                           |        |                                                
|Public Service Electric and |  | Cumulative Preferred
      Stock     |       | First and Refunding
      Mortgage Bonds: |        |                                                
|Gas Company                 |  | $100 par value
      Series:         |       |                                           | Series | Due                                            
|                            |  |                                      | 4.08% |                                           | 9 1/8% |                                                
|                            |  |                                      | 4.18% |                                           | 9 1/4% |                                                
|                            |  |                                      | 4.30% |                                           | 8 7/8% |                                                
|                            |  |                                      | 5.05% |                                           | 6 7/8% |                                                
|                            |  |                                      | 5.28% |                                           | 6 1/2% |                                                
|                            |  |                                      |       |                                           | 7%     |                                                
|                            |  |                                      |       |                                           | 7 3/8% |                                                
|                            |  |                                      |       |                                           | 6 3/4% |                                                
|                            |  |                                      |       |                                           | 6 3/4% |                                                
|                            |  |                                      |       |                                           | 6 1/4% |                                                
|                            |  |                                      |       |                                           | 6 3/8% |                                                
|                            |  |                                      |       |                                           | 8%     |                                                
|                            |  |                                      |       |                                           | 5%     |                                                
|                            |  |                                      |       |                                           |        |                                                
|PSEG Power LLC              |  | NONE                                 |       |                                           | NONE   |                                                
|                            |  |                                      |       |                                           |        |                                                
|PSEG Energy Holdings LLC    |  | NONE                                 |       |                                           | NONE   |                                                

---



Participating Equity Preference Securities (consisting
  of a Purchase Contract and a Preferred Trust Security of PSEG Funding Trust
  I (Registrant) and registered on the New York Stock Exhange.

Trust Originated Preferred Securities (Guaranteed
  Preferred Beneficial Interest in PSEGs Debentures), $25 par value at 8.75%,
  issued by PSEG Funding Trust II (Registrant) and registered on the New York
  Stock Exchange.

Monthly Income Preferred Securities (Guaranteed
  Preferred Beneficial Interest in PSE&Gs Subordinated Debenture), $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 8.125%, issued by PSE&G Capital Trust II (Registrant) and
  registered on the New York Stock Exchange.

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

|Registrant                                         | Title of Class                                                                     
|-------------------------------------------------- | -----------------------------------------------------------------------------------
|                                                   |                                                                                    
|                                                   |                                                                                    
|Public Service Enterprise
      Group Incorporated | 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%.                                                    
|                                                   |                                                                                    
|                                                   | 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).                                                    
|                                                   |                                                                                    
|Public Service Electric and
      Gas Company      | 6.92% Cumulative Preferred Stock
      $100 par value                              
|                                                   | Medium-Term Notes, Series A                                                        
|                                                   |                                                                                    
|PSEG Power LLC                                     | Limited Liability Company Membership
      Interest                                
|                                                   |                                                                                    
|PSEG Energy Holdings LLC                           | Limited Liability Company Membership
      Interest                                

The aggregate market value of the Common Stock of
  Public Service Enterprise Group Incorporated as of June 28, 2002 was $8,947,292,512
  based upon the New York Stock Exchange Composite Transaction closing price.
  The aggregate market value of the Common Stock of Public Service Enterprise
  Group Incorporated held by non-affiliates as of January 31, 2003 was $7,949,509,112
  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, 2003
|------------------------------- | -------------------------------------
|                                |                                      
|Common Stock, without par value | 225,326,222                          

PSEG Power LLC and PSEG Energy Holdings LLC are
  wholly-owned subsidiaries of Public Service Enterprise Group Incorporated and
  meet the conditions set forth in General Instruction I (1) (a) and (b) of Form
  10-K and are filing their respective Annual Reports on Form 10-K with the reduced
  disclosure format authorized by General Instruction I.

As of January 31, 2003, 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.

> 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|
>     Indicate by check mark whether any registrant
>       is an accelerated filer (as defined in Rule 12b-2 of the Act).Yes
>       |X|   No |_|
>     DOCUMENTS INCORPORATED BY
>       REFERENCE

|Part of Form 10-K of Public Service Enterprise Group Incorporated |  | Documents Incorporated by Reference                                                                                           
|----------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------
|                                                                  |  |                                                                                                                               
|III                                                               |  | Portions of the definitive Proxy Statement for
      the Annual Meeting of Stockholders of Public Service Enterprise Group    
|                                                                  |  | Incorporated to be held April 15, 2003, which
      definitive Proxy Statement is expected to be filed with the Securities and
|                                                                  |  | Exchange Commission on or about March 7, 2003,
      as specified herein.                                                     

---



|         | TABLE OF CONTENTS                                                                           |      | 
|-------- | ------------------------------------------------------------------------------------------- | ---- | 
|         |                                                                                             |      | 
|         |                                                                                             | Page
|         |                                                                                             |     
|PART I   |                                                                                             |     
|Item 1.  | Business                                                                                    | 1    | 
|         | General                                                                                     | 1    | 
|         | Competitive Environment                                                                     | 11   | 
|         | Regulatory Issues                                                                           | 12   | 
|         | Customers                                                                                   | 18   | 
|         | Employee Relations                                                                          | 19   | 
|         | Segment Information                                                                         | 19   | 
|         | Environmental Matters                                                                       | 19   | 
|Item 2.  | Properties                                                                                  | 26   | 
|Item 3.  | Legal Proceedings                                                                           | 38   | 
|Item 4.  | Submission of Matters to a Vote
      of Security Holders                                   | 40   | 
|         |                                                                                             |      | 
|PART II  |                                                                                             |     
|Item 5.  | Market for Registrants Common
      Equity and Related Stockholder Matters                 | 41   | 
|Item 6.  | Selected Financial Data                                                                     | 42   | 
|Item 7.  | Managements Discussion and
      Analysis of Financial Condition and Results of Operations | 44   | 
|         | Overview of 2002 and Future Outlook                                                         | 44   | 
|         | Results of Operations                                                                       | 51   | 
|         | Liquidity and Capital Resources                                                             | 65   | 
|         | Capital Requirements                                                                        | 72   | 
|         | Accounting Issues                                                                           | 75   | 
|         | Forward Looking Statements                                                                  | 82   | 
|Item 7A. | Qualitative and Quantitative Disclosures
      About Market Risk                            | 84   | 
|Item 8.  | Financial Statements and Supplementary
      Data                                           | 90   | 
|         | Financial Statement Responsibility                                                          | 91   | 
|         | Independent Auditors Report                                                                | 95   | 
|         | Consolidated Financial Statements                                                           | 99   | 
|         | Notes to Consolidated Financial
      Statements                                            | 118  | 
|Item 9.  | Changes in and Disagreements With
      Accountants on Accounting and Financial Disclosure  | 193  | 
|         |                                                                                             |      | 
|PART III |                                                                                             |     
|Item 10. | Directors and Executive Officers                                                            | 193  | 
|Item 11. | Executive Compensation                                                                      | 197  | 
|Item 12. | Security Ownership of Certain Beneficial
      Owners and Management                        | 202  | 
|Item 13. | Certain Relationships and Related
      Transactions                                        | 203  | 
|Item 14. | Disclosure Controls and Procedures                                                          | 204  | 
|         |                                                                                             |      | 
|PART IV  |                                                                                             |     
|Item 15. | Exhibits, Financial Statement Schedules
      and Reports on Form 8-K                       | 213  | 
|         | Schedule IIValuation and
      Qualifying Accounts                                         | 215  | 
|         | Signatures                                                                                  | 217  | 
|         | Exhibit Index                                                                               | 221  | 

i

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PART I

This
  combined Form 10-K is separately filed by Public Service Enterprise Group Incorporated
  (PSEG), Public Service Electric and Gas Company (PSE&G), PSEG Power LLC
  (Power) and PSEG Energy Holdings LLC (Energy Holdings). Information contained
  herein relating to any individual company is filed by such company on its own
  behalf. PSE&G, Power and Energy Holdings each make representations only
  as to itself and its subsidiaries and makes no other representations whatsoever as to any other company.

ITEM 1. BUSINESS

GENERAL

PSEG, PSE&G, Power and Energy Holdings

PSEG, incorporated
  under the laws of the State of New Jersey on July 25, 1985, with its principal executive offices
  located at 80 Park Plaza, Newark, New Jersey 07102, is an exempt public utility
  holding company under the Public Utility Holding Company Act of 1935 (PUHCA).

PSEG has four principal
  direct wholly-owned subsidiaries: PSE&G, Power, Energy Holdings and PSEG
  Services Corporation (Services). The following organization chart shows PSEG
  and its principal subsidiaries, as well as the principal operating subsidiaries
  of Power: PSEG Fossil LLC (Fossil), PSEG Nuclear LLC (Nuclear) and PSEG Energy
  Resources & Trade LLC (ER&T); and of Energy Holdings: PSEG Global Inc.
  (Global) and PSEG Resources LLC (Resources):



The
  regulatory structure which has historically governed the electric and gas utility
  industries in the United States has changed dramatically in recent years and
  continues to be in transition. Deregulation is essentially complete in New Jersey
  and is complete or underway in certain other states in the Northeast and across
  the United States (US). States have acted independently to deregulate the electric
  and gas utility industries. Experience in deregulating California, with energy
  shortages, high costs and financial difficulties of utilities and high profile
  bankruptcies have caused some states to re-evaluate and, in some cases, stop
  the move toward deregulation. 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, building, buying or selling generation
  capacity and the anticipated resulting industry consolidation have had, and
  are likely to continue to have, a profound effect on PSEG and its subsidiaries,
  providing it with new opportunities and exposing it to new risks. For further
  information, see Item 7. Managements Discussion and Analysis of Financial
  Condition and Results of Operation (MD&A)  Overview of 2002 and Future
  Outlook.

1

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The National Energy
  Policy Act of 1992 (Energy Policy Act) laid the groundwork for competition in
  the wholesale electricity markets in the United States. This legislation expanded
  the Federal Energy Regulatory Commissions (FERC) authority to order electric
  utilities to open their transmission systems to allow third-party suppliers
  to transmit, or wheel, electricity over their lines. In 1996, FERC
  initiated regulatory actions that resulted in expanded access to transmission
  lines, providing eligible third-party wholesale marketers clear transmission
  access. These actions have afforded power marketers, merchant generators, Exempt
  Wholesale Generators (EWGs) and utilities the opportunity to compete actively
  in wholesale energy markets, and afforded consumers the right to choose their
  energy suppliers.

Worldwide energy
  industry deregulation, restructuring, privatization and consolidation are creating
  opportunities and risks for PSEG, PSE&G, Power and Energy Holdings. Over
  recent years, PSEG has realigned its organizational structure to address the
  competitive environment brought about by the deregulation of the electric generation
  industry and has transitioned from primarily being a regulated New Jersey utility
  to operating as a competitive energy company with operations primarily in the
  Northeastern US and in other select domestic and international markets. 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. As of December 31, 2002, Power, PSE&G, and
  Energy Holdings comprised approximately 27%, 48% and 27% of PSEGs consolidated
  assets and contributed approximately 60%, 26% and 18% of PSEGs results, excluding certain charges.
  For additional information, see Item 7. MD&A  Overview of 2002 and
  Future Outlook.

PSE&G and Power

Following the enactment
  of the New Jersey Electric Discount and Energy Competition Act, as amended (Energy
  Competition Act), the New Jersey Board of Public Utilities (BPU) rendered its
  Final Decision and Order (Final Order) in 1999 relating to PSE&Gs
  rate unbundling, stranded costs and restructuring proceedings providing, among
  other things, for the transfer to an affiliate of all of PSE&Gs electric
  generation facilities, plant and equipment for $2.4 billion and all other related
  property, including materials, supplies and fuel at the net book value thereof,
  together with associated rights and liabilities. PSE&G, pursuant to the
  Final Order, transferred its electric generating facilities and wholesale power
  contracts to Power and its subsidiaries in August 2000 for $2.8 billion.

Subsequently, Power
  entered into a BPU approved fixed price requirements contract (Basic Generation
  Service (BGS) contract) to supply all of PSE&Gs load requirement for
  its electric customers not choosing an alternative supplier, which terminated
  on July 31, 2002, under which Power sold energy directly to PSE&G which
  in turn sold this energy to its customers. Subsequent to July 31, 2002, Power
  primarily sells its energy and capacity to third parties that supply New Jerseys
  electric distribution companies (EDCs) participating in the BPU approved BGS
  auctions in New Jersey. PSE&G purchases the energy required to meet its
  customers needs from third party suppliers through such auction process.

BGS Supply

PSE&G is required
  to determine BGS suppliers by competitive bid in accordance with BPU requirements.
  In February 2002, an internet auction was held to determine who would supply
  BGS to PSE&G and the other three BPU regulated New Jersey electric utility
  companies for the period August 1, 2002 to July 31, 2003. As conditions of qualification
  to participate in this auction, energy suppliers agreed to execute the BGS Master
  Service Agreement and provide required security bonds within two days of BPU
  Certification of auction results, in addition to satisfying BPU credit worthiness
  requirements.

In February 2002 the
  BPU approved the BGS auction results and PSE&G secured contracts from a
  number of suppliers for its expected peak load of 9,600 MW through 96 notional
  tranches of 100 MW each. Under these contracts, the suppliers have the full
  load serving responsibility and bear the risks of volatility in energy prices
  due to various factors such as changes in weather, seasonality and transmission
  constraints. Subsequently, certain BGS suppliers experienced adverse credit
  issues and therefore, these suppliers assigned contracts to other parties. Under
  the BPU approved supply contracts, PSE&G is paying $.0511 per kWh to obtain
  electricity for BGS customers for the period from August 1, 2002 to July 31,
  2003. Customers will continue to pay below-market regulated rates (BGS shopping
  credit) for this one-year period. Under PSE&Gs current rate structure,
  the difference is being

2

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deferred and is expected to be recovered with interest
  through a future securitization. PSE&G estimates that the underrecovery
  relating to the BGS for the one-year period ending July 31, 2003 will amount
  to approximately $241 million.

As a result of the
  initial New Jersey BGS auction, Power contracted to provide energy to the direct
  suppliers of New Jersey electric utilities, including PSE&G, commencing
  August 1, 2002. Subsequently, a portion of the contracts with those bidders
  was reassigned to Power. Therefore, for a limited portion of the New Jersey
  retail load, Power will be a direct supplier to one utility, although this utility
  is not PSE&G.

New Jerseys EDCs,
  including PSE&G, will provide two types of BGS service beginning in August
  2003. The BPU authorized two concurrent auctions of New Jerseys Basic
  Generation Service which were held in February 2003. The first was a general
  auction to procure approximately 15,500 MW of supply for ten-month and 34-month
  periods for smaller commercial and residential customers at seasonally-adjusted
  fixed prices. The other auction was held to procure approximately 2,600 MW of
  supply for larger customers for a 10-month period at hourly market prices. In
  total, the EDCs sought and obtained over 18,000 MW of combined full-requirements
  electric service. In February 2003, the BPU approved the auction results and
  PSE&G secured contracts from a number of suppliers to meet its requirements.
  Under the contracts, PSE&G is paying $.05386 and $.05560 per kWh for the
  ten-month tranche and 34-month tranche, respectively, to obtain electricity
  for customers for the periods beginning August 1, 2003.

Power was a participant
  in the BGS auction held in February 2003. Power entered into hourly energy price
  contracts to be a direct supplier of certain large customers for a ten-month
  period beginning August 1, 2003. Power also entered into contracts with third
  parties who are direct suppliers of New Jerseys EDCs. Through these seasonally-adjusted
  fixed price contracts, Power will indirectly serve New Jerseys smaller
  commercial and residential customers for ten-month and 34-month periods beginning
  August 1, 2003. Power believes that its obligations under these contracts are
  reasonably balanced by its available supply.

BGSS

On April 17, 2002,
  the BPU issued the Final Order approving the transfer of PSE&Gs gas
  supply business. Pursuant to such order, in May 2002, PSE&G transferred
  its gas supply contracts and gas inventory to Power for approximately $183 million
  and similarly, entered into a requirements contract with Power under which Power
  sells gas supply services directly to PSE&G needed to meet PSE&Gs
  Basic Gas Supply Service (BGSS) requirements. The contract term ends March 31,
  2004, after which PSE&G has a three-year renewal option. As part of the
  agreement, PSE&G is providing Power the use of its peak shaving facilities
  at cost.

On May 1, 2002, the
  New Jersey Ratepayer Advocate filed a motion for the reconsideration of the
  BPUs approval of the gas contract transfer. On October 31, 2002, the BPU
  issued an order denying the motion for reconsideration, except for the issue
  of valuation. The BPU retains the right to review the valuation of the contracts
  transferred if FERC modifies the capacity release rules prior to the contract
  expirations.

PSE&G

PSE&G is a New
  Jersey corporation, incorporated on July 25, 1924, 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 transmission and distribution of electric energy and gas service in New
  Jersey. PSE&G continues to own and operate its electric and gas transmission
  and distribution business. PSE&G Transition Funding LLC (Transition Funding),
  a bankruptcy remote subsidiary of PSE&G, was formed solely to issue $2.525
  billion principal amount of transition bonds in connection with the securitization
  of $2.4 billion of PSE&Gs approved stranded costs approved for recovery
  by the BPU under the Energy Competition Act.

PSE&G supplies
  electric and gas service in areas of New Jersey in which approximately 5.5 million
  people, about 70% of the States population, reside. PSE&Gs electric
  and gas service area is a corridor of approximately 2,600 square miles running
  diagonally across New Jersey from Bergen County in the northeast to an area
  below the city of Camden in the southwest. The greater portion of this area
  is served with both electricity and gas, but some parts are served with electricity
  only and other parts with gas only. This heavily populated, commercialized and

3

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industrialized territory encompasses most of New
  Jerseys largest municipalities, including its six largest citiesNewark,
  Jersey City, Paterson, Elizabeth, Trenton and Camdenin addition to approximately
  300 suburban and rural communities. This service territory contains a diversified
  mix of commerce and industry, including major facilities of many corporations
  of national prominence. PSE&G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.

PSE&G distributes
  electric energy and gas to end-use customers within its designated service territory.
  All electric and gas customers in New Jersey have the ability to choose an electric
  energy and/or gas supplier. Pursuant to BPU requirements, PSE&G serves as
  the supplier of last resort for electric and gas customers within its service
  territory who do not choose an alternate supplier. PSE&G earns no margin
  on the commodity portion of its electric and gas sales. PSE&G earns margins
  through the transmission and distribution of electricity and gas. PSE&Gs
  revenues are based upon tariffs approved by the BPU and the FERC for these services.
  The demand for electric energy and gas by PSE&Gs customers is affected
  by customer conservation, economic conditions, weather and other factors not
  within its control. Rates for gas sold in interstate commerce are not subject
  to cost of service ratemaking but are subject to competitive pricing. See Regulatory
  Issues and Item 7. MD&A, for a further discussion of these matters.

Power

Power is a Delaware
  limited liability company, formed on June 16, 1999, with its principal executive offices at 80 Park Plaza,
  Newark, New Jersey 07102. Power is a multi-regional, independent wholesale energy
  supply company that integrates its generating asset operations with its wholesale
  energy, fuel supply, energy trading and marketing and risk management function
  with three principal direct wholly-owned subsidiaries: Nuclear, which owns and
  operates nuclear generating stations, Fossil, which develops, owns and operates
  domestic fossil generating stations and ER&T, which markets the capacity
  and production of Fossils and Nuclears stations and manages the
  commodity price risks or market risks related to generation. Powers subsidiary,
  PSEG Power Capital Investment Company (Power Capital), provides certain financing
  for Powers subsidiaries.

Powers target
  market, which it refers to as the Super Region, extends from Maine to the Carolinas
  and from the Atlantic Coast to Indiana, encompassing 36% of the nations power
  consumption. Power is the single largest power supplier in its primary market,
  the PJM Interconnection area, one of the nations largest and most well
  developed energy markets.

Powers generation
  portfolio consists of 13,055 MW of installed capacity which is diversified by
  fuel source and market segment. In addition, Power is currently constructing
  projects which are expected to increase capacity by over 2,900 MW through 2005,
  net of planned retirements. For additional information, see Item 2. Properties.

Power participates
  primarily in the PJM market, where the pricing of energy is based upon the locational
  marginal price (LMP) set through power providers bids. Because of transmission
  constraints, the LMP tends to be higher in congested areas reflecting the bid
  prices of the higher cost units that are dispatched to supply demand and alleviate
  transmission constraints when coordination is sufficient to satisfy demand within
  PJM. These bids are capped at $1,000 per megawatt-hour (MWh). In the event that
  available generation within PJM is insufficient to satisfy demand, PJM may institute
  emergency purchases from adjoining regions for which there is no price cap.

As Exempt Wholesale Generators (EWGs) under FERC,
  Powers subsidiaries do not directly serve any retail customers. Power
  uses its generation facilities primarily for the production of electricity for
  sale at the wholesale level. For a discussion of BGS Supply in New Jersey, see
  PSE&G and Power above.

4

---



Electric
  Fuel Supply

The following table
  indicates MWh output of Powers generating stations by source of energy
  in 2002 and the estimated MWh output by source for 2003:

|                              | Actual |   | Estimated
|----------------------------- | ------ | - | ---------
|Source                        | 2002   |   | 2003 (A) 
|                              |        |   |          
|Nuclear:                      |        |   |          
|New Jersey facilities         | 41     | % |          
|Pennsylvania
      facilities | 21     | % |          
|Fossil:                       |        |   |          
|Coal:                         |        |   |          
|New
      Jersey facilities   | 13     | % |          
|Pennsylvania
      facilities | 13     | % |          
|Connecticut
      facilities  |       |   |          
|Oil and Natural
      Gas:    |        |   |          
|New
      Jersey facilities   | 11     | % |          
|New
      York facilities     |       |   |          
|Connecticut
      facilities  |       |   |          
|Mid-West
      facilities     |       |   |          
|Pumped Storage                | 1      | % |          
|                              |        |   |          
|Total                         | 100    | % |          
|                              |        |   |          

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | (A) | No assurances can be
      given that actual 2003 output by source will match estimates.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --- | ----------------------------------------------------------------------------------------
|Fossil
      Fuel Supply                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Fossil
      has an ownership interest in twelve fossil generating stations in New Jersey,
      one fossil generating station in New York, two fossil generating stations
      in Connecticut and two fossil generating stations in Pennsylvania. Fossil
      is also in the process of constructing a fossil generating station in Ohio
      and another in Indiana. Fossil has an ownership interest in one hydroelectric
      pumped storage facility in New Jersey. For additional information, see Item
      2. Properties  Power  Electric Generation Properties.                                                                                                                                                                                                                                                                                                                  
|Fossil
      uses coal, natural gas and oil for electric generation. These fuels are
      purchased through various contracts and in the spot market. The majority
      of Powers fossil generating stations obtain their fuel supply from
      within the US. In order to minimize emissions levels, the Connecticut generating
      facilities use a specific type of coal which is obtained from Indonesia.
      Fossil does not anticipate any difficulties in obtaining adequate coal,
      natural gas and oil supplies for these facilities over the next several
      years, however, if the supply of coal from Indonesia or equivalent coal
      from other sources was not available for the Connecticut facilities, additional
      capital expenditures could be required to modify the existing plants. For
      additional information, see Item 2. Properties  Power.
|Nuclear
      Fuel Supply                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|Nuclear
      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) each owned 57.41% by Nuclear and 42.59% by Exelon Generation LLC
      (Exelon), and the Hope Creek Nuclear Generating Station (Hope Creek), 100%
      owned by Nuclear. Exelon operates the Peach Bottom Atomic Power Station
      Units 2 and 3 (Peach Bottom 2 and 3), each of which is 50% owned by Nuclear.
      For additional information, see Item 2. Properties.                                                                                                                                                                                                                                                                                                                                
|Power
      has several long-term purchase contracts with uranium suppliers, converters,
      enrichers and fabricators to meet the currently projected fuel requirements
      for Salem and Hope Creek. On average, Power has various multi-year requirements-based
      purchase commitments that total approximately $88 million per year to meet
      Salem and Hope Creek fuel needs. Power has been advised by Exelon that it
      has similar purchase contracts to satisfy the fuel requirements for Peach
      Bottom. Nuclear does not anticipate any difficulties in obtaining adequate
      fuel supplies for these facilities over the next several years.                                                                                                                                                                                                                   
|5                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

---



Gas Supply

As described
  above, Power sells gas to PSE&G. About 40% of the peak daily gas requirements
  are provided through firm transportation which is available every day of the
  year. The remainder comes from field storage, liquefied natural gas, seasonal
  purchases, contract peaking supply, propane and refinery/landfill gas. Following
  the gas contract transfer in May 2002, Power purchased gas for its gas operations
  directly from natural gas producers and marketers. These supplies were transported
  to New Jersey by four interstate pipeline suppliers.

Power has
  approximately 1.1 billion cubic feet per day of firm transportation capacity
  under contract to meet the primary needs of the gas consumers of PSE&G.
  In addition, Power supplements that supply with a total storage capacity of
  81 billion cubic feet that provides .94 billion cubic feet per day of gas during
  the winter season.

Power expects to meet
  the energy-related demands of its firm customers during the 2002-2003 and 2003-2004
  winter seasons. However, the sufficiency of supply could be affected by several
  factors not within Powers control, including curtailments of natural gas
  by its suppliers, the severity of the winter weather and the availability of
  feedstocks for the production of supplements to its natural gas supply. The
  adequacy of supply of all types of gas is affected by the nationwide availability
  of all sources of fuel for energy production.

ER&T

ER&T purchases
  all of the capacity and energy produced by Fossil and Nuclear. In conjunction
  with these purchases, ER&T uses commodity and financial instruments designed
  to cover estimated commitments for BGS and other bilateral contract agreements.
  ER&T also markets electricity, capacity, ancillary services and natural
  gas products on a wholesale basis throughout the Super Region. ER&T is a
  fully integrated wholesale energy marketing and trading organization that is
  active in the long-term and spot wholesale energy markets.

ER&Ts principal
  objectives are to sell and deliver physical power from Powers generating
  assets, reduce earnings volatility through hedging activities, manage gas supply
  and BGSS contracts, procure low cost fuel and natural gas supplies and produce
  net earnings from trading energy-related products around Powers physical
  assets. ER&T does not engage in the practice of simultaneous trading for
  the purpose of increasing trading volume or revenue (also known as round trips).
  Consistent with its business objectives, ER&T measures performance based
  on net earnings and overall team performance, not on volume or gross revenues.
  These are also the metrics used to measure performance under its incentive compensation
  programs. For further information, see Note 12. Risk Management of the Notes
  to the Consolidated Financial Statements (Notes).

Energy
  Holdings

Energy Holdings is
  a New Jersey limited liability company formed on October 31, 2002, which merged wth PSEG Energy Holdings Inc., which was incorporated on June 20, 1989. Energy Holdings
 principal executive offices are
  located at 80 Park Plaza, Newark, New Jersey 07102. Energy Holdings has two
  principal direct wholly-owned subsidiaries; Global and Resources. During the
  second quarter of 2002, Energy Holdings announced its intention to sell the
  businesses of PSEG Energy Technologies Inc. (Energy Technologies). See Note
  5. Discontinued Operations of the Notes.

Global and Resources
  have more than 100 financial and operating investments. Energy Holdings has
  pursued investment opportunities in the rapidly changing global energy markets,
  with Global focusing on the operating segments of the electric industries and
  Resources primarily making financial investments in these industries.

6

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Energy Holdings
  portfolio is diversified by number, type and geographic location of investments.
  As of December 31, 2002, assets were comprised of the following types:

|                                    | December
      31, 2002
|----------------------------------- | -----------------------
|                                    |                        
|Leveraged Leases (A)                | 42                     
|International Electric Facilities   | 20                     
|International Generation Plants     | 22                     
|Domestic Generation Plants          | 10                     
|Energy Services                     | 3                      
|Other Passive Financial Investments | 2                      
|Other                               | 1                      

(A) Leveraged Leases
  are primarily in energy related facilities and are discussed further under Resources.

The characteristics
  of each of these investment types are described in more detail below.

Global

Global is an independent
  power producer and distributor which develops, acquires, owns and operates electric
  generation, transmission and distribution facilities and is engaged in power
  production and distribution, including wholesale and retail sales of electricity,
  in selected domestic and international markets.

Global realized substantial
  growth prior to 2002, but has been faced with significant challenges as the
  electricity privatization model has experienced stress. These challenges include
  the Argentine economic, political and social crisis, recent issues in India,
  financial and political pressures in Brazil and Venezuela and the soft power
  market in Texas. A worldwide recession and a series of disruptive events have
  slowed privitization in many countries. See Item 7. MD&A  Overview of
  2002 and Future Outlook for further details.

Generally, Global has
  sought to minimize risk in the development and operation of its generation projects
  by selecting partners with complementary skills, structuring long-term power
  purchase contracts, arranging financing prior to the commencement of construction
  and contracting for adequate fuel supply. Historically, Globals operating
  affiliates have entered into long-term power purchase contracts, thereby selling
  the electricity produced for the majority of the project life. However, two
  plants in Texas and two plants in China operate as merchant plants without
  long-term power purchase contracts and a plant in Poland will likely do so as
  well. For a further discussion of the oversupply of energy in the Texas power market, see Item 7.
  MD&A  Future Outlook.

Fuel supply arrangements
  are designed to balance long-term supply needs with price considerations. Globals
  project affiliates generally utilize long-term contracts and spot market purchases.
  Energy Holdings believes that there are adequate fuel supplies for the anticipated
  needs of its generating projects. Energy Holdings also believes that transmission
  access and capacity are sufficient at this time for its generation projects.

Global, to the extent
  practical, attempts to limit its financial exposure associated with each project
  and to mitigate development risk, foreign currency exposure, interest rate risk
  and operating risk, including exposure to fuel costs, through contracts. For
  a further discussion of these risks, see Item 7A. Qualitative and Quantitative
  Disclosures About Market Risk. In addition, project loan agreements are generally
  structured on a non-recourse basis. Further, Global generally 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 Energy Holdings
  debt.

Global has ownership
  interests in 34 operating generation projects (excluding those in Argentina
  which were fully impaired in 2002) totaling 5,384 MW (2,476 MW net) and eight
  projects totaling 2,329 MW (1,042 MW net) in construction. Of Globals
  generation projects in operation or construction, 1,449 MW net or 41% are located
  in the United States. Global is actively involved, through its joint ventures,
  in managing the operations of 28 operating generation projects and will be actively
  involved in managing the operations of 6 projects in construction.

Global has invested
  in four distribution companies (excluding those in Argentina which were fully
  impaired in 2002) which serve approximately 2.9 million customers in Brazil,
  Chile and Peru. Global is actively involved in

7

---



managing the operations of these distribution companies
  in accordance with shareholder agreements and/or operating contracts. Rate-regulated
  distribution assets represented 37% of Globals assets, or $1.4 billion,
  as of December 31, 2002.

As of December 31,
  2002, Globals assets, which include consolidated projects and those accounted
  for under the equity method, and share of project MW, by region are as follows:

|                  | 2002       |       | MW
|----------------- | ---------- | ----- | --
|                  |           
|                  | (Millions) |       |   
|                  |            |       |   
|Generation        |            |       |   
|North America     | $          | 647   |   
|Latin America (1) |            | 359   |   
|Asia Pacific      |            | 148   |   
|Europe (2)        |            | 772   |   
|India (3)         |            | 200   |   
|                  |            |       |   
|Distribution      |            |       |   
|Latin America (1) |            | 1,391 |   
|                  |            |       |   
|Other             |            |       |   
|Other (4)         |            | 285   |   
|                  |           
|Total Assets      | $          | 3,802 |   
|                  |           

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | (1) | Investments in Argentina
      were fully impaired in 2002.                                                                   
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --- | ------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | (2) | Europe and Africa.                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | (3) | India and the Middle
      East. The Tanir Bavi Power Company Ltd. (Tanir Bavi) plant in India was
      sold in October 2002.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | (4) | Assets not allocated
      to a specific project, including corporate receivables.                                            
|For
      additional information, see Item 7. MD&A  Future Outlook.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Globals
      strategic focus has shifted to one of improving profitability for currently
      held investments, from one of significant growth. Near-term emphasis will
      be placed on liquidity and completing current projects. Global has developed
      or acquired interests in electric generation and/or distribution facilities
      in the United States, Brazil, Chile, China, India, Italy, Peru, Poland,
      Tunisia and Venezuela. In addition, projects are in construction in the
      United States, China, Italy, Oman, Poland, South Korea and Taiwan. While
      Energy Holdings still expects certain of its investments in Latin America
      to contribute significantly to its earnings in the future, the political
      and economic risks associated with this region could have a material adverse
      impact on its remaining investments in the region. See Item 7. MD&A
       Future Outlook for additional information.
|For
      a discussion of the asset impairments due to the Argentine economic, political
      and social crisis, see Note 13. Commitments and Contingent Liabilities and
      Note 4. Asset Impairments of the Notes. Also see Note 4. Asset Impairments
      and Note 5. Discontinued Operations of the Notes for a discussion of Globals
      sale of Tanir Bavi located in India.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|For
        additional information on Globals investments in generation and
        distribution facilities, see Item 2. Properties.
      Resources
      Resources invests
        in energy-related financial transactions and manages a diversified portfolio
        of assets, including leveraged leases, operating leases, leveraged buyout
        funds, limited partnerships and marketable securities. Also, the Demand
        Side Management (DSM) business previously managed by Energy Technologies
        was transferred                                                                                                                                                                                                                                                                                                                                                                                                                            
|8                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

---



to Resources as of December 31, 2002. Since it was
  established in 1985, Resources has grown its portfolio to include more than
  60 separate investments. Resources expects to curtail its investment activity
  in the near-term.

DSM revenues are earned
  principally from monthly payments received from utilities, which represent shared
  electricity savings from the installation of the energy efficient equipment.
  For further discussion of the transfer of DSM to Resources, see Note 22. Related-Party
  Transactions of the Notes.

The major components
  of Resources investment portfolio as a percent of its total assets as
  of December 31, 2002 were:

|                                  | As of December 31,
      2002
|--------------------------------- | -----------------------------
|                                  |                              
|                                  | Amount                       
|                                  |                              
|                                  | (Millions)                   
|Leveraged
      Leases            |                              
|Energy-Related                    |                              
|Foreign                           | $                            
|Domestic                          |                              
|Real
      Estate  Domestic      |                              
|Aircraft                          |                              
|Foreign                           |                              
|Domestic                          |                              
|Commuter
      Railcars  Foreign |                              
|Industrial
       Domestic       |                              
|                                  |                              
|Total
      Leveraged Leases, net |                              
|                                  |                              
|                                  |                              
|Limited Partnerships              |                              
|Leveraged
      Buyout Funds      |                              
|Other                             |                              
|                                  |                              
|Total
      Limited Partnerships  |                              
|                                  |                              
|                                  |                              
|Marketable
      Securities       |                              
|Other Investments                 |                              
|Owned Property                    |                              
|Current and
      Other Assets    |                              
|                                  |                              
|Total Resources
      Assets     | $                            
|                                  |                              

As of December 31,
  2002, no single investment represented more than 7.5% of Resources total
  assets.

Leveraged Lease
  Investments

Resources seeks a portfolio
  that provides a fixed rate of return, predictable income and cash flow and depreciation
  and amortization deductions for federal income tax purposes. Income on leveraged
  leases is recognized by a method which produces a constant rate of return on
  the outstanding net investment in the lease, net of the related deferred tax
  liability, in the years in which the net investment is positive. Any gains or
  losses incurred as a result of a lease termination are recorded as revenues
  as these events occur in the ordinary course of business of managing the investment
  portfolio.

In a leveraged lease,
  the lessor acquires an asset by investing equity representing approximately
  15% to 20% of the cost and incurring non-recourse lease debt for the balance.
  The lessor acquires economic and tax ownership of the asset and then leases
  it to the lessee for a period of time no greater than 80% of its remaining useful
  life. As the owner, the lessor is entitled to depreciate the asset under applicable
  federal and state tax guidelines. In addition, the lessor receives income from
  lease payments made by the lessee during the term of the lease and from tax
  receipts associated with interest and depreciation deductions with respect to
  the leased property. Lease rental payments are unconditional obligations of
  the lessee and are set at levels at least sufficient to service the non-recourse
  lease debt. The lessor is also entitled to any residual value associated with
  the leased asset at the end of the

9

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lease term. An evaluation of the after-tax cash
  flows to the lessor determines the return on the investment. Under generally
  accepted accounting principles, the lease investment is recorded on a net basis
  and income is recognized as a constant return on the net unrecovered investment.

Resources evaluates
  lease investment opportunities with respect to specific risk factors. Any future
  leveraged lease investments are expected to be made in energy-related assets.
  For further information relating to the curtailment of Energy Holdings
  investments in the near term, see Item 7. MD&A  Overview. The assumed
  residual value risk, if any, is analyzed and verified by third-parties at the
  time the investment is made. Credit risk is assessed and, if necessary, mitigated
  or eliminated through various structuring techniques, such as defeasance mechanisms
  and letters of credit. Resources does not take currency risk in its cross-border
  lease investments. Transactions are structured with rental payments denominated
  and payable in US Dollars. Resources, as a passive lessor or investor, does
  not take operating risk with respect to the assets it owns, so leases are structured
  with the lessee having an absolute obligation to make rental payments whether
  or not the assets operate. The assets subject to lease are an integral element
  in Resources overall security and collateral position. If such assets
  were to be impaired, the rate of return on a particular transaction could be
  affected. The operating characteristics and the business environment in which
  the assets operate are, therefore, important and must be understood and periodically
  evaluated. For this reason, Resources retains experts to conduct regular appraisals
  on the assets it owns and leases.

The ten largest lease
  investments for Resources as of December 31, 2002 were as follows:

|Investment    |  | Description                      |  | GrossInvestmentBalances as ofDecember 31,2002 |   | % ofResourcesTotalAssets
|------------- |  | -------------------------------- |  | --------------------------------------------- | - | -------------------------
|              |  |                                  |  |                                               |   |                          
|              |  |                                  |  | (Millions)                                    |   |                          
|Reliant       |  | Three generating stations        |  |                                               | $ | 221                      
|              |  | (Keystone, Conemaugh and         |  |                                               |   |                          
|              |  | Shawville)                       |  |                                               |   |                          
|EME           |  | Collins Electric Generation      |  |                                               |   | 185                      
|              |  | Station                          |  |                                               |   |                          
|Seminole      |  | Seminole Generation Station      |  |                                               |   | 175                      
|              |  | Unit #2                          |  |                                               |   |                          
|Dynegy        |  | Two electric generating stations |  |                                               |   | 172                      
|EME           |  | Two electric generating stations |  |                                               |   | 170                      
|              |  | (Powerton and Joliet)            |  |                                               |   |                          
|ENECO         |  | Gas distribution network         |  |                                               |   | 141                      
|              |  | (Netherlands)                    |  |                                               |   |                          
|Grand Gulf    |  | Nuclear generating station       |  |                                               |   | 131                      
|Merrill Creek |  | Merrill Creek Reservoir Project  |  |                                               |   | 129                      
|ESG           |  | Electric distributing system     |  |                                               |   | 108                      
|              |  | (Austria)                        |  |                                               |   |                          
|EZH           |  | Electric generating station      |  |                                               |   | 107                      
|              |  | (Netherlands)                    |  |                                               |   |                          
|              |  |                                  |  |                                               | $ | 1,539                    
|              |  |                                  |  |                                               |   |                          

For further details
  on leases, see Item 7A. Qualitative and Quantitative Disclosures About Market
  Risk-Credit Risk-Energy Holdings.

Energy Technologies

Energy Technologies
  is an energy management company whose primary objective was to construct, operate
  and maintain heating, ventilating and air conditioning (HVAC) systems for and
  provide energy-related engineering, consulting and mechanical contracting services
  to industrial and commercial customers in the Northeastern and

10

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Middle Atlantic United States. In June 2002, Energy
  Holdings adopted a plan to sell its interests in these HVAC/mechanical operating
  companies. The sale of these companies is expected to be completed by June 30,
  2003. For more details, see Note 5. Discontinued Operations of the Notes
  and Item 7. MD&A  Results of Operations  Discontinued Operations
   Energy Technologies.

Other Subsidiaries

Enterprise Group Development
  Corporation (EGDC), a commercial real estate property management business, has
  been conducting a controlled exit from the real estate business since 1993.
  EGDCs strategy is to preserve the value of its assets to allow for the
  controlled disposition of its properties as favorable sales opportunities arise.
  EGDC directly owns a 100% interest in two parcels of land available for development
  located in New Jersey totaling $19 million. One of these parcels is classified
  as Assets Held for Sale. EGDC also owns an 80% general partnership interest
  in four partnerships which own and operate two buildings and land in New Jersey
  totaling $15 million. EGDC also owns a 100% interest in development land located
  in Maryland valued at $12 million. Together, the 100% wholly-owned land and
  the 80% general partnership interests represent 72% of the total assets of EGDC.
  Additionally, EGDC owns a 50% partnership interest in development land located
  in Virginia. Total assets of EGDC as of December 31, 2002 and 2001 were $63
  million and $65 million, respectively.

PSEG Capital Corporation
  (PSEG Capital) has served as the financing vehicle, borrowing on the basis of
  a minimum net worth maintenance agreement with PSEG. As of December 31, 2002
  PSEG Capital had debt outstanding of $252 million, which matures in May 2003,
  at which time the program will be terminated. For additional information including
  certain restrictions relating to the BPU Focused Audit, see Item 7. MD&A
   Liquidity and Capital Resources.

Services

Services is a New Jersey
  Corporation with its principal executive offices at 80 Park Plaza, Newark, New
  Jersey 07102. Services provides management and administrative services to PSEG
  and its subsidiaries. These include accounting, legal, communications, human
  resources, information technology, treasury and financial, investor relations,
  stockholder services, real estate, insurance, risk management, tax, library
  and information services, security, corporate secretarial and certain planning,
  budgeting and forecasting services. Services charges PSEG, PSE&G, Power
  and Energy Holdings a fair market rate for services provided.

COMPETITIVE ENVIRONMENT

PSE&G

As a regulated monopoly,
  PSE&Gs electric and gas transmission and distribution business has
  minimal risks from competition. Also, there has been minimal financial impact
  on PSE&Gs transmission and distribution business due to customers
  choosing alternate electric or gas suppliers.

Power

Power primarily contracts
  to provide energy to the direct suppliers of New Jersey electric utilities.
  In recent years Power has expanded into other areas of its target market, the
  Super Region, with acquisitions in New York and Connecticut and development
  in the Midwest. As markets continue to evolve, several types of competitors
  have or will emerge in Powers target market. These competitors include
  merchant generators with or without trading capabilities, other utilities that
  have formed generation and/or trading affiliates, aggregators, wholesale power
  marketers or combinations thereof. These participants will compete with Power
  and one another buying and selling in wholesale power pools, entering into bilateral
  contracts and/or selling to aggregated retail customers. These participants
  can also be expected to adapt to changing market conditions, including developing
  new generating stations where a perceived capacity shortfall may exist. Power
  believes that its asset size and location, regional market knowledge and integrated
  functions will allow it to compete effectively in its selected markets. However,
  actions by developers, including Power, to build new generating stations has
  lead to an overbuild situation, causing energy and capacity prices to be depressed
  and possibly making some of its units uneconomical. The Midwest

11

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market is expected to have excess capacity due to
  recent additions, which will negatively impact the expected returns of Powers
  Lawrenceburg, Indiana and Waterford, Ohio facilities, presently under construction.

Additional legislation
  has been introduced within the last few years to further encourage competition
  at the retail level (often referred to as customer choice or retail access).
  No legislative proposal exists at the federal level. However, there is also
  a risk of re-regulation, if states decide to turn away from deregulation and
  allow regulated utilities to continue to own or reacquire and operate generating
  stations in a regulated and potentially uneconomical manner.

Powers
  businesses are also under competitive pressure due to technological advances in
  the power industry and increased efficiency in certain energy markets. It is
  possible that advances in technology will reduce the cost of alternative methods
  of producing electricity to a level that is competitive with that of most central
  station electric production.

Energy Holdings

Energy Holdings and
  its subsidiaries are subject to substantial competition in the US as well as
  in the international markets from independent power producers, domestic and
  multi-national utility generators, fuel supply companies, energy marketers,
  engineering companies, equipment manufacturers, well capitalized investment
  and finance companies and affiliates of other industrial companies. Energy Holdings
  faces competition from companies of all sizes, having varying levels of experience,
  financial and human capital and differing strategies. Competition can be based
  on a number of factors, including price, reliability of service, the ability
  of Energy Holdings customers to utilize other sources of energy and credit
  quality of lease investments and partners.

Many states and countries
  are considering or implementing different types of regulatory and privatization
  initiatives that are aimed specifically at increasing competition in the power
  industry. The increased competition that has resulted from some of these initiatives,
  combined with certain overbuild situations, has contributed to a reduction in
  electricity prices in some markets, and puts pressure on Energy Holdings and
  other electric utilities to lower costs. Achieving and maintaining a lower cost
  of production will be increasingly important to compete effectively in the energy
  business. In the Texas market, excess capacity has led to uneconomical energy pricing,
  negatively effecting two generating stations in Texas. For additional information
  regarding the Texas power market, see Item 7. MD&A  Future Outlook.

Energy Holdings
  businesses are also under competitive pressure due to technological advances in
  the power industry and increased efficiency in certain energy markets. It is
  possible that advances in technology will reduce the cost of alternative methods
  of producing electricity to a level that is competitive with that of most central
  station electric production.

REGULATORY ISSUES

State Regulation

PSEG, PSE&G, Power and Energy Holdings

Focused Audit

In 1992, the BPU conducted a
Focused Audit of the impact of PSEGs non-utility businesses, owned by Energy
Holdings, on PSE&G. Among other things, the BPU ordered that PSEG not permit
Energy Holdings investments to exceed 20% of PSEGs consolidated assets without
prior notice to the BPU. In the Final Order issued in 1999, the BPU noted 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
BPUs Focused Audit order might be warranted. PSE&G has notified the BPU that
PSEG will eliminate PSEG Capital debt by the end of the second quarter of 2003
and that it believes that the Final Order otherwise supercedes the requirements
of the Focused Audit. While, PSE&G and Energy Holdings believe that this issue
will be satisfactorily resolved, no assurances can be given.

Affiliate Standards

In February 2000,
  the BPU approved affiliate standards and fair competition standards which apply
  to transactions between a public utility and those of its affiliates that provide
  competitive services to retail customers in New Jersey. In March 2000, the BPU
  issued a written order related to these matters. PSE&G filed a compliance
  plan in June 2000 to describe the internal policy and procedures necessary to
  ensure compliance with such Affiliate Standards. On February 8, 2002 and March
  7, 2002, the BPU issued orders adopting the Competitive Service Audit reports
  on New Jerseys electric and gas utilities. The audit report generally
  concluded that PSE&G was in compliance with the BPUs affiliate standards.
  On July 1, 2002, PSE&G filed its Affiliate Standards compliance plan in
  accord with the BPUs regulations. Also in July 2002, the BPU commenced
  its next regular audit of the states electric and gas utilities
  competitive activities. The objectives of these audits are to assure that neither the utilities nor
their related competitive business segments enjoy an unfair competitive
advantage over their competitors and to assure that there is no form of
cross-subsidization of competitive services by utility operations or affiliates
with which they are associated. The audits will be guided by the BPUs Affiliate
Standards requirements. A report is expected to be issued in the first quarter
  of 2003. The outcome cannot be determined at this time.

PSEG, Power and Energy Holdings

PSEG, Power and Energy Holdings affiliates are not subject to direct regulation by the BPU,
  except potentially with respect to certain asset sales, transfers of control,
  reporting requirements and affiliate standards.

PSE&G

As a New Jersey public
  utility, PSE&G is subject to comprehensive regulation by the BPU including,
  among other matters, regulation of intrastate rates and service and the issuance
  and sale of securities. As a participant in the ownership of certain 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.

Electric Base
  Rate Case

On May 24, 2002, PSE&G
  filed an electric rate case with the BPU requesting an annual $250 million rate
  increase for its electric distribution business. The proposed rate increase
  includes $187 million of increased revenues relating to a $1.7 billion increase
  in PSE&Gs rate base, which is primarily due to the investment that
  PSE&G has made in its electric distribution facilities since its last rate
  case in 1992; $18 million in higher depreciation rates and $45 million to recover
  various other expenses, such as wages, fringe benefits and enhancements to security
  and reliability. The requested increase proposes a return on equity of 11.75%
  for PSE&Gs electric distribution business.

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The proposed rate increase would significantly
  impact PSE&Gs earnings and operating cash flows. The non-depreciation
  portion of the noticed rate increase ($232 million) would have a positive effect
  on PSE&Gs earnings and operating cash flows. The depreciation portion
  of the rate increase ($18 million) would have no impact on PSE&Gs
  earnings, as the increased operating cash flows would be offset by higher depreciation
  charges.

In October 2002, the
  New Jersey Ratepayer Advocate and other parties filed testimony, with the Ratepayer
  Advocate recommending rate relief of approximately $87 million. Included in
  the Ratepayer Advocates position is a 9.50% return on equity compared
  to PSE&Gs requested 11.75% (approximately $45 million), a reduction
  in electric distribution depreciation expenses (approximately $100 million),
  and numerous other adjustments to PSE&Gs filing. The BPU has consolidated
  PSE&Gs service company filing relating to the transfer of certain
  assets from PSE&G to Services and its Street Lighting Tariff filing, which
  adjusts tariff levels for electricity for certain street lights, into the base
  rate proceeding for disposition.

In accordance with
  BPUs Final Order implementing parts of the Energy Competition Act, PSE&G
  was required to provide temporary billing discounts in four steps totaling 13.9%
  during the four-year transition period ending July 31, 2003. The last step,
  a 4.9% decrease,took effect August 1, 2002. The combined effects of
  base rate relief, the BGS auction and amortization
  of various deferral balances, discussed below, is expected to yield rates comparable
  to those in effect at the beginning of the deregulation process.Neither PSEG nor PSE&G can predict the
  outcome of these rate proceedings at the current time. Discussions are continuing
  and hearings were held with an initial decision scheduled to be issued by May
  1, 2003. The new rates are proposed to be effective August 1, 2003, consistent
  with the Final Order.

Non-Utility
  Generation (NUG) Contract Amendments

In June 2002, PSE&G
  announced that it had amended its NUG power purchase agreements with El Paso
  Corporation (El Paso) for its Camden, Bayonne and Eagle Point cogeneration facilities.
  El Paso paid PSE&G $167 million for the amendment and agreed to provide
  specified amounts of electric energy and capacity to PSE&G at a fixed price
  and obtain this energy and capacity either from existing plants or in the open
  market. The amended agreement has been approved by the BPU.

Deferral Proceeding

In August 2002, PSE&G
  filed a petition proposing changes to two components of its rates, the Societal
  Benefits Clause (SBC) and the Non-Utility Generation Transition Charge (NTC).
  The proposed result, if adopted, will result in an annual reduction of revenues
  of approximately $122 million or approximately a 3.4% reduction in amounts paid
  by customers effective on August 1, 2003. The case has been transferred to the
  Office of Administrative Law and a pre-hearing conference was held October 24,
  2002. PSE&G cannot predict the outcome of this matter.

Deferral Audit

In September 2002,
  the BPU retained the services of two outside firms to conduct a review of New
  Jerseys electric utilities deferred costs for compliance with BPU
  mandates. Audit work has been completed and a final draft report was filed with
  the BPU on December 16, 2002, with PSEG responding on December 30, 2002. Formal
  comments on the final report are to be incorporated in the Deferral Proceedings,
  discussed above.

PSE&G believes
  that the final report will support its current practices and not impact its
  financial position or results of operations.

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Gas Base Rate
  Case and Commodity Charges

In January 2002, the
  BPU issued an order approving a settlement of PSE&Gs Gas Base Rate
  case under which PSE&G is receiving an additional $90 million of gas base
  rate revenues, approximately $8 million of which results from gas depreciation
  rate changes. This occurred simultaneously with PSE&Gs implementation
  of its previously approved Gas Cost Underrecovery Adjustment (GCUA) surcharge
  to recover the October 31, 2001 gas cost underrecovery balance of approximately
  $130 million over a three-year period with interest and with PSE&Gs
  reduction of its 2001-2003 Commodity Charges (formerly LGAC) by approximately
  $140 million. As a result of the settlement, PSE&G agreed not to request
  another gas base rate increase that would take effect prior to September 1,
  2004.

The $130 million rate
  increase relating to the recovery of the GCUA over three years has no impact
  on earnings, however it will increase operating cash flows in a normal business
  environment. The reduction in PSE&Gs 20012003 commodity charges
  relates to its residential customers and will have no impact on earnings and
  will decrease operating cash flows assuming current cost levels and a normal
  business environment.

BGSS Filing

In September 2002, PSE&G filed to increase
  its Residential BGSS Commodity Charge on November 1, 2002 to recover approximately
  $89 million in additional revenues ($82 million of which is associated with
  an underrecovered balance) or a 7.4% rate increase for the typical residential
  gas heating customer. On January 8, 2003, the BPU approved the increase on a
  provisional basis, to be effective immediately and the case has been transferred
  to the Office of Administrative Law for hearings.

BGSS Design

On December 18, 2002,
  the BPU approved BGSS Commodity filing procedure changes based upon the form
  of generic settlement negotiated by the parties. An annual filing will be made
  each year by June 1 for rate relief expected by October 1. That rate relief
  may be supplemented by two potential self-implementing rate increases to the
  maximum of 5% of the residential customers bill on December 1st and February
  1st. All increases will be reconciled in the annual filing. As a result of the
  delay in the implementation of the BGSS increase discussed above, PSE&G
  has filed for a 5% self-implementing rate increase to be effective on March
  1, 2003 which would reduce the expected underrecovery from $61 million to $37
  million. PSE&G cannot predict the outcome of this matter.

Federal Regulation

PSEG, PSE&G,
  Power and Energy Holdings

Public Utility
  Holding Company Act of 1935 (PUHCA)

PSEG has claimed
  an exemption from regulation by the Securities and Exchange Commission (SEC)
  as a registered holding company under the PUHCA, except for Section 9(a)(2),
  which relates to the acquisition of 5% or more of the voting securities of an
  electric or gas utility company. Fossil and Nuclear are (EWGs) and Globals

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investments include 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 by the SEC under PUHCA.

If PSEG were no longer
  exempt under 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 does not believe,
  however, that this would have a material adverse effect on it and its subsidiaries.

Other

PSE&Gs,
  Powers and Energy Holdings domestic operations are subject to regulation
  by FERC with respect to certain matters, including interstate sales and exchanges
  of electric transmission, capacity and energy. PSE&G, Fossil, Nuclear and
  Global are also subject to the rules and regulations of the US Environmental
  Protection Agency (EPA), the US Department of Transportation (DOT) and the US
  Department of Energy (DOE). For information on environmental regulation, see
  Environmental Matters.

FERC

Regional Transmission Organization (RTO) Orders

In July 2002, the United
  States Court of Appeals, D.C. Circuit, issued an opinion in favor of PSE&G
  and certain other utility petitioners, reversing a previous order of the FERC
  relating to the restructuring of PJM into an Independent System Operator (ISO).
  The court ruled thatFERC lacked authority to require the utility owners
  to give up certain statutory rights and should not have required a modification
  to the PJM ISO Agreement eliminating utility owners rights to file changes to
  rate design. The Court further noted that FERC lacked authority to require the
  utility owners to obtain approval of their withdrawal from the PJM ISO, finding
  that FERC had no jurisdiction to eliminate the withdrawal rights to which the
  utilities had agreed. Further, in ruling on a specific argument raised by PSE&G,
  the Court held that PSE&G did not have to modify a contract with Old Dominion
  Electric Cooperative to accommodate the PJM restructuring. See Note 13. Commitments
  and Contingent Liabilities of the Notes for additional information.

On remand, in December
  2002, FERC refused to disclaim jurisdiction over a transmission owners
  withdrawal from an ISO. In January 2003, PSE&G together with several of
  the transmission owners filed for rehearing of the FERC decision. The potential
  outcome of this rehearing could have implications for FERCs jurisdiction
  and authority to implement its standard market design, discussed below.

In January 2002, PJM
  and the Midwest ISO (MISO) announced that it had entered into negotiations to
  create a virtual uniform seamless market encompassing these two RTOs, shortly
  after the FERC granted RTO status to the MISO. PSE&G also is participating
  in a rate investigation by FERC into whether the regional through-and-out
  rates between MISO and PJM should be eliminated. The proceeding could
  result in lower rates paid by transmission customers. The impact of these developments
  on PSE&G, Power and Energy Holdings is uncertain because specific rules
  will not be known for some time and are subject to FERC approval, which cannot
  be assured.

In April 2002, PJM
  successfully implemented its PJM West expansion. Also, in December
  2002, several major utilities in the Midwest and mid-atlantic area petitioned
  FERC to become transmission owners within PJM. Implementation of this filing
  would more than double the size of the current PJM region and would result in
  a market encompassing more than 153,000 MW of generation capacity and more than
  128,000 MW of peak load. Portions of this expansion could become effective as
  early as Spring 2003 although a date for implementation cannot be determined
  with certainty even if the filing is accepted by FERC.

In December 2002, FERC granted full RTO status to
  PJM.

Standard Market Design

In July 2002, FERC
  issued a Notice of Proposed Rulemaking (NOPR) to create a Standard Market Design
  for the wholesale electricity markets in the United States. The NOPR seeks to
  improve the consistency of market rules

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throughout the country, including issues related
  to reliability, market power concerns, transmission, pricing, congestion, governance
  and other issues. If adopted, standard market design could significantly affect
  transmission and generation operations in the various markets in which PSE&G,
  Power and Energy Holdings operate.

Other

FERC issued an advance
  NOPR seeking comments to help form the basis for a proposed rule to standardize
  power-plant interconnection requirements to ease market entry for new generation
  facilities. As part of the rulemaking, FERC also will reconsider its policy
  addressing how transmission owners treat the cost of system upgrades necessary
  to accommodate new generation, potentially resulting in a new methodology. The
  ultimate outcome of this rulemaking and its impact upon PSEG, PSE&G, Power
  and Energy Holdings cannot be predicted.

PJM also filed an alternative
  proposal to standardize its generator interconnection agreement and procedures
  within PJM. FERC accepted this proposal, which is currently in effect in PJM.

In January 2003, FERC
  also proposed a new transmission pricing policy that would give rate incentives
  to engage in certain transactions, including transfer of control of transmission
  facilities to a FERC-approved RTO; and joining an RTO but maintaining independence
  from market participants. FERC also proposed to award an incentive
  for new transmission facilities that are found appropriate
  pursuant to an RTO transmission planning process. The ultimate outcome of this
  proposal and its impact upon PSEG, PSE&G, Power and Energy Holdings cannot
  be predicted.

Power

Nuclear Regulatory
  Commission (NRC)

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.

The NRC has issued
  orders to all nuclear power plants to implement compensatory security measures.
  Some of the requirements formalize a series of security measures that licensees
  had taken in response to advisories issued by the NRC in the aftermath of the
  September 11, 2001 terrorist attacks. Power has evaluated these orders for the
  Salem and Hope Creek facilities and does not expect the cost of implementation
  of the NRC measures to be material.

In accordance with
  NRC requirements, nuclear plants utilize various fire barrier systems to protect
  equipment necessary for the safe shutdown of the plant in the event of a fire.
  The NRC has identified certain issues at Salem and Power has made the majority
  of the necessary modifications to comply with these requirements, the cost of
  which was approximately $26 million for Power. Minor completion activities remain,
  the costs of which are not expected to be material.

Exelon has informed
  Power that, on July 3, 2001, an application was submitted to the NRC to renew
  the operating licenses for Peach Bottom 2 and 3. If approved, the current licenses
  would be extended by 20 years, to 2033 and 2034 for Peach Bottom 2 and 3, respectively.
  NRC review of the application is expected to take approximately two years.

In August 2002, the
  NRC issued a bulletin requiring that all operators of pressurized water reactor
  (PWR) nuclear unit submit certain information related to potential degradation
  of reactor vessel heads. In September 2002, Power provided the requested information
  for Salem. The response stated that a bare metal visual examination
  will be performed on the Salem reactor vessel heads during each units
  next refueling outage, in compliance with the bulletin. If repairs are determined
  to be necessary, it is estimated that the repair would extend the outage by
  approximately four weeks. Bare metal visual inspections for Salem 1 and 2 were
  completed during 2002 and no degradation of the reactor heads was observed.
  On February 11, 2003 the NRC issued an order to all operators of PWR units concerning
  reactor vessel head inspections. The order confirms the previous bulletins

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requirements of more intrusive and frequent future
  inspections, which apply to Salem 1 and 2. Powers Hope Creek nuclear unit
  and the Peach Bottom 2 and 3 are unaffected as they are Boiling Water Reactor
  nuclear units. Power cannot predict what other actions the NRC may take on this
  issue.

Foreign Regulation

Energy Holdings

Global

Globals electric
  distribution facilities in Latin America are rate-regulated enterprises. Rates
  charged to customers are established by governmental authorities and, excluding
  those rates at facilities in Argentina, which were fully impaired during 2002,
  are currently sufficient to cover all operating costs and provide a fair return
  in local currency terms. Global can give no assurances that future rates will
  be established at levels sufficient to cover such costs, provide a return on
  its investments or generate adequate cash flow to pay principal and interest
  on its debt or to enable it to comply with the terms of its debt agreements.

Brazil

Rio Grande Energia
  S.A. (RGE) is regulated by Agencia Nacional de Energia Eletrica (ANEEL), the
  national regulatory authority. ANEELs functions include granting and supervising
  electric utility concessions, approving electricity tariffs, issuing regulations
  and auditing distribution systems performance. The rate setting process
  for Brazilian distribution companies has two components, an annual adjustment
  which RGE applies for every April and which is embedded in the concession contract,
  and a rate revision which will be calculated for RGE in 2003 and every subsequent
  fifth year anniversary.

The current regulatory
  regime adjusts consumer electric tariffs based on a multiple-factor formula
  that includes recovery of wholesale inflation for previous periods, as well
  as an additional entitlement to pass through deferred US Dollar costs. This
  current regulatory structure would result in an increase of approximately 40%
  in the tariffs RGE would charge its customers starting in April 2003. ANEEL
  has issued a resolution indicating that new distribution tariffs will be calculated
  based on the replacement value of the electric utility companies assets,but has not yet determined the rate of return
  to be allowed on this asset base.In addition, current electric regulation also allows ANEEL to apply an additional
  upward or downward adjustment (known as the X Factor) to final tariff
  determinations in order to adjust expected financial returns on the replacement
  values of utility companies assets. The combination of these factors results
  in considerable uncertainty regarding future revenue and cash flow levels associated
  with Globals investment in RGE. No assurances can be given that 2003 tariff
  increases will be approved on a timely basis or at a sufficient level to support
  planned levels of revenues and cash flows. For additional information, see Item
  7. MD&A  Future Outlook.

ANEEL also monitors
  service quality by auditing the duration and frequency of outages, as well as
  several other performance measures. Global is implementing capital improvement
  budgets which attempt to meet the quality of service standards. Failure to meet
  required standards would result in penalties which, if assessed, would not be
  expected to have a material negative impact on RGEs results of operations,
  although no assurances can be given.

RGE is currently engaged
  in a dispute with ANEEL which is seeking to mandate a reduction in RGEs
  fixed asset base due to a pre-privatization review of Companhia Estadual de
  Energias (CEEE) asset base. This pre-privatization review was not brought
  to the attention of the bidders during the RGE privatization process. The result
  of such a decrease in RGEs fixed asset base would be a likely reduction
  in RGEs tariff of approximately $8 million during the next rate case as
  RGEs return on fixed assets would be above the accepted level. RGE is
  currently contesting the matter.

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Chile

Distribution companies
  in Chile, including Chilquinta Energia S.A. (Chilquinta) and Sociedad Austral
  de Electricidad S.A. (SAESA), are subject to rate regulation by the Comision
  Nacional de Energia (CNE), a national governmental regulatory authority. The
  Chilean regulatory framework has been in existence since 1982, with rates set
  every four years based on a model company. The tariff which distribution companies
  charge to regulated customers consists of two components: the actual cost of
  energy purchased plus an additional amount to compensate for the value added
  in distribution (DVA tariff). The DVA tariff considers allowed losses incurred
  in the distribution of electricity, administrative costs of providing service
  to customers, costs of maintaining and operating the distribution systems and
  an annual real return on investment of 6% to 14%, based on the replacement cost
  of distribution assets. Changes in electricity distribution companies
  cost of energy are passed through to customers, with no impact on the distributors
  margins (equal to the DVA tariff). Therefore, distributors, including SAESA
  and Chilquinta, are not affected by changes in the generation sector which affect
  prices.

The most recent tariff
  adjustments for SAESA and Chilquinta occurred in 2000. The next tariff review
  is scheduled for 2004. The DVA tariff index provides for monthly adjustments
  based on variations in certain economic indicators whenever the component costs
  increase by more than 3% over prior levels. This index provides inflation adjustments
  and indirect partial devaluation protection. The CNE concluded a profitability
  review of Chilean distribution companies in January 2002, with no resulting
  adverse effects to SAESA or Chilquintas tariff rates. The CNE is in the
  process of conducting its annual profitability reviews (similar to the one recently
  completed) which may result in material adverse effects on tariffs for SAESA
  and/or Chilquinta.

Chile has implemented
  service quality standards and penalties; however, specific regulations have
  not yet been published. Quality of service limits were published in Peru and
  distribution companies are subject to penalties if these standards are not met.
  Global is implementing capital improvement budgets which attempt to meet these
  quality of service standards. Failure to meet required standards could result
  in penalties, which, if assessed, are not expected to have a material impact
  on the distribution system, although no assurances can be given.

Peru

Distribution companies
  in Peru, including Globals facility, Luz del Sur, are subject to rate
  regulation by a national governmental regulatory authority. The Peruvian rate
  setting mechanism was established in 1992 and is similar to the Chilean system
  described above, except rates of return are between 8% and 16%. Rates are set
  every four years. The latest rate case was completed in 2001. The next regularly
  scheduled rate setting for Luz del Sur is in 2005.

CUSTOMERS

PSE&G

As of December 31,
  2002, PSE&G provided service to approximately 2.0 million electric customers
  and approximately 1.6 million gas customers. PSE&Gs 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.

Power

Power sells energy
  to the wholesale market in the Super Region, primarily in PJM. In the recent
  New Jersey BGS auction, Power entered into hourly energy price contracts to
  be a direct supplier of certain large customers and entered into contracts with
  third parties who are direct suppliers of New Jerseys EDCs.

Power currently has
  over 177 active trading counterparties, which have passed a rigorous credit
  analysis and contracting process. These include investor owned utilities, retail
  aggregators and marketers.

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Energy Holdings

Global

Global
  has ownership interests in four distribution companies (excluding those in Argentina
  which were fully impaired during 2002) which serve approximately 2.9 million
  customers and has developed or acquired interests in electric generation facilities
  which sell energy, capacity and ancillary services to numerous customers through
  power purchase agreements (PPAs) as well as into the wholesale market. For additional
  information on distribution customers, see Item 2. PropertiesEnergy HoldingsElectric
  Distribution Facilities.

EMPLOYEE RELATIONS

PSE&G,
  Power, Energy Holdings and Services believe that they maintain satisfactory
  relationships with their employees. For information concerning employee pension
  plans and other postretirement benefits, see Note 17. Pension, Other Postretirement
  Benefit and Savings Plans of the Notes.

PSE&G

As of December
  31, 2002, PSE&G had 6,376 employees. PSE&G has three-year collective
  bargaining agreements in place with four unions, representing 4,927 employees,
  which expire on April 30, 2005.

Power

As of December
  31, 2002, Power had 3,398 employees. Power has collective bargaining agreements,
  which expire on April 30, 2005, in place with three unions, representing 1,722
  employees (901 employees, or approximately 68% of the workforce in Fossil and
  821 employees, or approximately 44% of the workforce in Nuclear).

Energy Holdings

As of December
  31, 2002, Energy Holdings had 2,109 employees. Energy Holdings had a total of
  1,863 employees who are represented by various construction trade unions. Energy
  Technologies and its operating subsidiaries are parties to agreements with various
  trade unions through multi-employer associations.

Services

As of December
  31, 2002, Services had 1,028 employees, none of which are unionized.

SEGMENT INFORMATION

Financial
  information with respect to the business segments of PSEG, PSE&G, Power
  and Energy Holdings is set forth in Note 19. Financial Information by Business
  Segments of the Notes.

ENVIRONMENTAL MATTERS

PSEG, PSE&G, Power and Energy Holdings

Federal, regional,
  state and local authorities regulate the environmental impacts of PSEGs
  operations within the United States. Environmental impacts associated with PSEGs
  operations in foreign countries are governed by laws and regulations particular
  to the region, country, or locality where these operations are located. For
  both domestic and foreign operations, areas of regulation may include air quality,
  water quality, site remediation, land use, waste disposal, aesthetics, impact
  on global climate, and other matters.

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Power and Energy Holdings

Air Pollution Control

Federal air pollution
  laws, such as the Federal Clean Air Act (CAA) and the regulations implementing
  those laws, require controls of emissions from sources of air pollution and
  also impose record keeping, reporting and permit requirements. Facilities in
  the US that Power and Energy Holdings operate or in which they have an ownership
  interest are subject to these Federal requirements, as well as requirements
  established under state and local air pollution laws applicable where those
  facilities are located. Except as noted below, capital costs of complying with
  air pollution control requirements through 2004 are included in Powers
  estimate of construction expenditures in Item 7. MD&A.

Sulfur Dioxide
  (SO2)/Nitrogen Oxide (NOx)

To
  reduce emissions of SO2, the CAA sets a cap on total SO2emissions
  from affected units and allocates SO2 allowances (each
  allowance authorizes the emission of one ton of SO2) to those units.
  Generation units with emissions greater than their allocations can buy allowances
  from sources that have excess allowances. Similarly, to reduce emissions of
  NOx, 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 cap
  applies from May through September. The NOx allowances can be bought and sold
  through a regional trading program. In 2003, the cap will be reduced to limit
  NOx emissions further.

The EPA has 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
  from utility and industrial sources and subsequently cap these emissions. The
  EPA has delayed the implementation until May 31, 2004. The NOx reduction requirements
  are consistent with requirements already in place in New Jersey, New York, Connecticut
  and Pennsylvania, and therefore are not likely to have an additional impact
  on or change the capacity available from Powers existing facilities. New
  facilities that Power is developing in Ohio and Indiana will be subject to rules
  that those states are expected to promulgate to comply with the SIP Call.

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,
  Power does not expect to incur material expenditures to continue complying with
  the SO2 program. Beginning in 2003, the NOx cap will be reduced in
  New Jersey, New York, Pennsylvania, and other Northeastern states, which is
  expected to materially increase the cost of complying with the NOx program in
  those states. The extent of the increase across the region will depend upon
  a number of factors that may increase or decrease total NOx emissions from affected
  units, thus increasing or decreasing demand for a fixed supply of allowances.
  Power has been implementing measures to reduce NOx emissions at several of its
  units, which will reduce the impact of anticipated increases to the costs of
  allowances. For additional information regarding the costs of these credits,
  see Item 7. MD&A  Future Outlook.

In 1997, the EPA adopted
  a new air quality standard for fine particulate matter and a revised air quality
  standard for ozone. To attain the fine particulate matter standard, states may
  require further reductions in NOx and SO2. In 2002, the EPA announced
  that it would move forward with the process for identifying and designating
  areas of the United States that fail to meet the revised federal health standard
  for ozone or the new federal health standard for fine particulates. Designation
  of these areas is expected in 2004, with states expected to develop regulatory
  measures necessary to achieve and maintain the health standards thereafter.
  Additionally, similar NOx and SO2 reductions may be required to satisfy
  requirements of an EPA rule protecting visibility in many of the nations
  scenic areas, including some areas near Powers facilities. States or the
  federal government may require additional reductions in NOx emissions from electric
  generating facilities as part of an effort to achieve the revised ozone standard.

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**CO2
  Emissions**

In 2003, it is expected that the Kyoto Protocol
  will become effective. This treaty will require substantial reductions of CO2
  and certain other greenhouse gases between 2008 and 2012. Although the US does
  not intend to ratify the treaty, Energy Holdings assets in Europe will
  be affected by implementation of the Kyoto Protocol, although the specific impacts
  will depend upon the regulations adopted by the European Union (EU) and nations
  looking to accede to the EU, such as Poland. At this juncture, costs or benefits
  to Energy Holdings investments in Europe cannot be quantified with certainty.

On January 11,
  2002, Power announced a voluntary agreement that calls for a goal of reducing
  by December 31, 2005 the annual average CO2 emission rate of its
  fossil fuel fired electric generating units by 15% below the 1990 average annual
  CO2 emission rate of its New Jersey fossil fuel fired electric generating
  units. Fossil also made a $1.5 million grant to the New Jersey Department of
  Environmental Protection (NJDEP) to assist in the development of landfill gas
  projects and has pledged to make an additional grant equal to $1 per ton of
  CO2 emitted greater than the 15% goal, up to $1.5 million, if that
  reduction is not achieved.

There continues to
  be a debate within the US over the direction of domestic climate change policy.
  Congress is currently considering several bills that would impose mandatory
  limitation of CO2emissions for the domestic power generation sector,
  and several other states, primarily in the Northeastern US, are considering
  state-specific or regional legislation initiatives to stimulate CO2
  emission reductions in the electric utility industry.

Other Air Pollutants

The CAA directed the
  EPA to study potential public health impacts of hazardous air pollutants (HAPs)
  emitted from electric utility steam generating units. In December 2000, the
  EPA announced its intent to regulate HAP emissions from coal-fired and oil-fired
  steam units and to develop Maximum Achievable Control Technology (MACT) standards
  for these units. The EPA plans to propose the MACT standards by December 2003
  and promulgate a final rule by December 2004, with compliance to be required
  by December 2007.

Emissions of mercury
  appear to be a focus of EPA rule-making for regulating HAPs from
  coal and oil-fired steam units. Several northeastern states also have expressed
  an interest in regulating these emissions, including those states in which Power
  owns and operates generation units. The impact on Powers operations of
  federal or state regulation of these emissions is still unknown.

The EPA missed the
  May 2002 deadline for proposing HAPs regulations for combustion turbines,
  triggering a provision of the CAA that requires states to set HAPs limits
  on a case-by-case basis. In November 2002, the EPA proposed regulations for
  combustion turbines, with the stated goal of adopting final standards before
  companies would be required to fully engage the case-by-case standard setting
  process with their state environmental agencies. Power and Energy Holdings are
  currently assessing the impact of this rule proposal on their respective combustion
  turbines.

Power

Prevention
  of Significant Deterioration (PSD)/New Source Review (NSR)

In November 1999,
  the federal government announced the filing of lawsuits by several states against
  seven companies operating power plants in the Midwest and Southeast US, charging
  that 32 coal-fired plants in ten states violated the PSD/NSR requirements of
  the CAA. Generally, these regulations require major sources of certain air pollutants
  to obtain permits, install pollution control technology and obtain offsets in
  some circumstances when those sources undergo a major modification,
  as defined in the regulations. 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.

The EPA and the NJDEP
  issued a demand in March 2000 under the CAA requiring information to assess
  whether projects completed since 1978 at the Hudson and Mercer coal-fired units
  were implemented in accordance

21

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with applicable PSD/NSR regulations. Power completed
  its response to the information request in November 2000. In January 2002, Power
  reached an agreement with New Jersey and the federal governments to resolve
  allegations of noncompliance with federal and State of New Jersey PSD/NSR regulations.
  Under that agreement, over the course of 10 years, Power must install advanced
  air pollution controls that are designed to reduce emissions of NOx, SO2,
  particulate matter and mercury. The estimated cost of the program at the time
  of the settlement was $337 million to be incurred through 2011. Power also paid
  a $1.4 million civil penalty and has agreed to spend up to $6 million on supplemental
  environmental projects. The agreement resolving the NSR allegations concerning
  the Hudson and Mercer coal-fired units also resolved the dispute over Bergen
  2 regarding the applicability of PSD requirements and allowed construction of
  the unit to be completed and operation to commence.

Power has recently
  notified the EPA and the NJDEP that it is evaluating the continued operation
  of the Hudson coal unit beyond 2006, in light of changes in the energy and capacity
  markets and increases in the cost of pollution control equipment and other necessary
  modifications. A decision is expected to be made in 2003 as to the Hudson units
  continued operation. The related costs associated with these modification have
  not been included in Powers capital expenditure projections.

As previously noted,
  future environmental initiatives are expected to require reduced emissions of
  NOx, SO2, mercury, and possibly CO2 from electric generating
  facilities. The emission reductions to be achieved at the Hudson and Mercer
  coal units are expected to assist in complying with such future requirements.

Water Pollution Control

Power and Energy
  Holdings

The Federal Water
  Pollution Control Act (FWPCA) prohibits the discharge of pollutants to waters
  of the United States from point sources, except pursuant to a National Pollutant
  Discharge Elimination System (NPDES) permit issued by the EPA or by a state
  under a federally authorized state program. The FWPCA authorizes the imposition
  of technology-based and water quality-based effluent limits to regulate the
  discharge of pollutants into surface waters and ground waters. The EPA has delegated
  authority to a number of state agencies, including the NJDEP, to administer
  the NPDES program through state acts. The New Jersey Water Pollution Control
  Act (NJWPCA) authorizes the NJDEP to implement regulations and to administer
  the NPDES program with EPA oversight, and to issue and enforce New Jersey Pollutant
  Discharge Elimination System (NJPDES) permits. PSEG also has ownership interests
  in domestic facilities in other jurisdictions that have their own laws and implement
  regulations to regulate discharges to their surface waters and ground waters
  that directly regulate Powers facilities in these jurisdictions.

The EPA is conducting a rulemaking under FWPCA
  Section 316(b), which requires that cooling water intake structures reflect
  the best technology available (BTA) for minimizing adverse environmental
  impact. Phase I of the rule became effective on January 17, 2002. None
  of the projects that Power currently has under construction or in development
  is subject to the Phase I rule.

EPA published for public comment on April 9, 2002
  proposed draft Phase II rules covering large existing power plants and is expected
  to issue final rules by February 16, 2004. The draft regulations propose to
  establish three means of demonstrating
  that a facility has the best technology available at an intake. The content
  of the final Phase II rules cannot be predicted at this time, although it is
  reasonable to expect that the rule will apply to all of Powers steam electric
  and combined cycle units that use surface waters for cooling purposes. If the
  Phase II rules require retrofitting of cooling water intake structures at Powers
  existing facilities to meet the specific or performance criteria, identified
  as an option under the draft rule, the retrofit would result in material costs
  of compliance.

Power

Permit
  Renewals

In June 2001, the
  NJDEP issued a renewal permit for Salem, expiring in July 2006, allowing for
  the continued operation of Salem with its existing cooling water system. Relating
  to the implementation of the renewal permit,

22

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Power has also reached a settlement with the Delaware
  Department of Natural Resources and Environmental Control (DNREC). As part of
  this agreement, Power deposited approximately $6 million into an escrow account
  to be used for future costs related to this settlement.

The NJDEP is in the
  process of reviewing the NJPDES permit renewal application for Powers
  Hudson Station. The consultant hired by NJDEP recommended that the Hudson Station
  be retrofitted to operate with closed cycle cooling to address alleged adverse
  impacts associated with the thermal discharge and intake structure. Power prepared
  updated 316(a) and 316(b) demonstrations which proposed
  certain modifications to the intake structure and resubmitted these demonstrations
  to the NJDEP in 1998. Power 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, although no assurances can be given.

The NJDEP has advised
  Power that it is reviewing a NJPDES permit renewal application for the Mercer
  Station and, in connection with that renewal, will be reexamining the effects
  of the Mercer Stations cooling water system pursuant to FWPCA. Power has
  submitted updated 316(a) and 316(b) demonstrations to the NJDEP.

It is impossible to
  predict the timing and/or outcome of the review of these applications in respect
  of the Hudson and Mercer Generation Stations. An unfavorable outcome could have
  a material adverse effect on Powers financial position, results of operations
  and net cash flows. Power believes that the current operations of its stations
  are in compliance with FWPCA and will vigorously prosecute its applications
  to continue operations of its generating stations with present cooling water
  intake structures.

Capital costs of complying
  with water pollution control requirements through 2004 are included in Powers
  estimate of construction expenditures in Item 7. MD&A  Capital Requirements.

Control of Hazardous Substances

PSEG, PSE&G, Power and Energy Holdings

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. 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.

PSE&G and
  Power

Other liabilities
  associated with environmental remediation include natural resource damages.
  The Federal Comprehensive Environmental Response, Compensation and Liability
  Act of 1980 (CERCLA) and the New Jersey Spill Compensation and Control Act (Spill
  Act) authorize Federal and state trustees for natural resources to assess damages
  against persons who have discharged a hazardous substance, causing an injury
  to natural resources. Pursuant to the Spill Act, the NJDEP requires all persons
  conducting remediation to characterize injuries to natural resources
  and to address those injuries through restoration or damages. PSE&G and
  Power cannot assess the magnitude of the potential impact of this regulatory
  change. Although not currently estimable, these costs could be material.

Because of
  the nature of PSE&Gs and Powers businesses, 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 that contain
  constituents classified by Federal and state authorities as hazardous. For discussions
  of these hazardous substance issues and a discussion of potential liability
  for remedial action regarding the Passaic River, see Note 13. Commitments and
  Contingent Liabilities of the Notes. For a discussion of remediation/clean-up
  actions involving PSE&G and Power, see Item 3. Legal Proceedings.

Passaic
  River Site

The EPA has
  determined that a nine mile stretch of the Passaic River in the area of Newark,
  New Jersey is a facility within the meaning of that term under CERCLA
  and that, to date, at least thirteen corporations, including

23

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PSE&G, may be potentially liable for performing
  required remedial actions to address potential environmental pollution in the
  Passaic River facility.

In a separate
  matter, PSE&G and certain of its predecessors conducted industrial operations
  at properties within the Passaic River facility. The operations included one
  operating electric generating station, one former generating station, and four
  former MGPs. PSE&Gs costs to clean up former MGPs are recoverable
  from utility customers through the SBC. PSE&G has sold the site and obtained
  releases and indemnities for liabilities arising out of the site in connection
  with the sale. PSE&G cannot predict what action, if any, the EPA or any
  third party may take against PSE&G with respect to this matter, or in such
  event, what costs may be incurred to address any such claims. However, such
  costs may be material.

PSE&G

Spill
  Prevention Control and Countermeasure (SPCC)

In 1998, PSE&G
  evaluated SPCC Plan compliance at all of its SPCC substations and identified
  deficiencies. The necessary upgrades are now in the process of being made, the costs of
  which are not expected to be material. It
  is anticipated that these upgrades will take several years to complete. In July
  2002, the EPA amended its SPCC regulations to, among other things, confirm the
  regulations applicability to oil-filled electrical equipment.

Manufactured
  Gas Plant Remediation Program (MGP)

For information
  regarding PSE&Gs MGP, see Note 13. Commitments and Contingent Liabilities
  of the Notes.

Power

Hudson
  and Mercer Generation Stations

Approximately 150,000
  tons of fly ash generated by the Hudson and Mercer Generating Stations was taken
  by the ash marketer, that PSEG then worked with, and sold to the owner and operator
  of a clay mine. The operator of the clay mine used the fly ash as fill material
  to return the mine site to grade, without obtaining the necessary approvals
  from the NJDEP. Upon discovery of this use, PSEG terminated the services of
  this ash marketer and initiated discussions with NJDEP for the appropriate regulatory
  approvals to allow this material to remain at the site. Power expects that the
  NJDEP will likely require a clay cap and other engineering controls to ensure
  that the ash is isolated from the environment if the ash is left in place. The
  cost of resolving this matter will depend upon the results of the negotiations
  with the NJDEP and the property owner. Although the precise extent of liability
  is not currently estimable, it is not expected to be material.

Kearny
  Generation Station

A preliminary review
  of possible mercury contamination at the Kearny Station concluded that additional
  study and investigations are required. A Remedial Investigation (RI) was conducted
  and a report was submitted to the NJDEP in 1997. This report is currently under
  technical review. As currently issued, the RI Report found that the mercury
  at the site is stable and immobile and should be addressed at the time the Kearny
  Station is retired, which is expected in the next five years, dependent upon
  market conditions.

Uranium
  Enrichment Decontamination and Decommissioning Fund

In accordance with
  the Energy Policy Act (EPAct), domestic entities that own nuclear generating
  stations are required to pay into a decontamination and decommissioning fund,
  based on their past purchases of US government enrichment services. Since these
  amounts are being collected from PSE&Gs customers over a period of
  15 years, this obligation remained with PSE&G following the generation asset
  transfer to Power in 2000. PSE&Gs obligation for the nuclear generating
  stations in which it had an interest is $80 million (adjusted for inflation).
  As of December 31, 2002, PSE&G had paid $58 million, resulting in a balance
  due of $22 million. As of December 31, 2002, Power had a balance due of approximately
  $5 million, which related to interests in certain nuclear units Power purchased
  from Atlantic City Electric Company (ACE) and Delmarva Power and Light Company
  (DP&L).

24

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PSE&G and Power believe that they should not
  be subject to collection of any such fund payments under the EPAct. A number
  of nuclear generator owners filed
  in the US Court of Claims and in the US District Court, Southern District of
  New York to recover these costs. In July 2002, Power and PSE&G withdrew
  from the lawsuit without prejudice, due to an unfavorable decision against
  another nuclear generator owner in the lawsuit.

Power

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 the operators of nuclear power plants for transportation and ultimate disposal
  of the spent nuclear fuel. To pay for this service, the nuclear plant owners
  were required to contribute to a Nuclear Waste Fund at a rate of one mil ($0.001)
  per kWh of nuclear generation ($21 million for 2002), subject to such escalation
  as may be required to assure full cost recovery by the Federal government. Payments
  made to the DOE for disposal costs are based on nuclear generation and are included
  in Energy Costs in the Consolidated Statements of Operations.

Pursuant to NRC rules,
  spent nuclear fuel generated in any reactor can be stored in reactor facility
  storage pools or in independent spent fuel storage installations located at
  reactor or away-from-reactor sites for at least 30 years beyond the licensed
  life for reactor operation (which may include the term of a revised or renewed
  license). The availability of adequate spent fuel storage capacity is estimated
  through 2011 for Salem 1, 2015 for Salem 2 and 2007 for Hope Creek. Power presently
  expects to construct an on-site storage facility that would satisfy the spent
  fuel storage needs of both Salem and Hope Creek through the end of the license
  life. This construction will require certain regulatory approvals, the timely
  receipt of which cannot be assured. Exelon has advised Power that it has constructed
  an on-site dry storage facility at Peach Bottom that is now licensed and operational
  and can provide storage capacity through the end of the current licenses for
  the two Peach Bottom units. If a DOE disposal facility is not available for
  periods subsequent to the current license lives for Salem, Hope Creek and Peach Bottom,
  construction of additional storage facilities would be necessary.

Under the NWPA, the
  DOE was required to begin taking possession of the spent nuclear fuel by no
  later than 1998. The DOE has announced that it does not expect a facility to
  be available earlier than 2010. Exelon has advised Power that it had signed
  an agreement with the DOE applicable to Peach Bottom under which Exelon would
  be reimbursed for costs incurred resulting from the DOEs delay in accepting
  spent nuclear fuel. The agreement allows Exelon to reduce the charges paid to
  the Nuclear Waste Fund to reflect costs reasonably incurred due to the DOEs
  delay. Past and future expenditures associated with Peach Bottoms recently
  completed on-site dry storage facility would be eligible for this reduction
  in DOE fees. Under this agreement, Powers portion of Peach Bottoms
  Nuclear Waste Fund fees have been reduced by approximately $18 million through
  August 31, 2002, at which point the credits were fully utilized and covered
  the cost of Exelons storage facility.

In 2000, a group of
  eight utilities filed a petition against the DOE in the US Court of Appeal,
  for the Eleventh Circuit, seeking to set aside the receipt of credits by Exelon
  out of the Nuclear Waste Fund, as stipulated in the Peach Bottom agreement.
  On September 24, 2002, the US Court of Appeal, for the Eleventh Circuit, issued
  an opinion upholding the challenge by the petitioners regarding the settlement
  agreements compensation provisions. Under the terms of the agreement,
  DOE and Exelon Generation are required to meet and discuss alternative funding
  sources for the settlement credits. Initial meetings have occurred. The Eleventh
  Circuits opinion suggests that the federal judgment fund should be available
  as an alternate source. The agreement provides that if such negotiations are
  unsuccessful, the agreement will be null and void. Any payments required by
  us resulting from a disallowance of the previously reduced fees would be included
  in Energy Costs in the Consolidated Statements of Operations.

In September 2001,
  Nuclear filed a complaint in the US Court of Federal Claims seeking damages
  caused by the DOE not taking possession of spent nuclear fuel in 1998. No assurances
  can be given as to any damage recovery or the ultimate availability of a disposal
  facility.

25

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In October 2001, Nuclear
  filed a complaint in the US Court of Federal Claims, along with a number of
  other plaintiffs, seeking $28.2 million in relief from past overcharges by the
  DOE for enrichment services. No assurances can be given as to any claimed damage
  recovery.

In February 2002,
  President Bush announced that Yucca Mountain in Nevada would be the permanent
  disposal facility for nuclear wastes. On April 8, 2002, the Governor of Nevada
  submitted his veto to the siting decision. On July 9, 2002, Congress affirmed
  the Presidents decision. The DOE must still license and construct the
  facility. No assurances can be given regarding the final outcome of this matter,
  however it may be several years before a permanent disposal facility is available.

Low
  Level Radioactive Waste (LLRW)

As a by-product of
  their operations, nuclear generation 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. New Jersey, Connecticut and South Carolina have
  formed the Atlantic Compact, which gives New Jersey nuclear generators, including
  Power, continued access to the Barnwell LLRW disposal facility which is owned
  by South Carolina. Power believes that the Atlantic Compact will provide for
  adequate LLRW disposal for Salem and Hope Creek through the end of their current
  licenses, although no assurances can be given. Both Power and Exelon have on-site
  LLRW storage facilities for Peach Bottom, Salem and Hope Creek which have the
  capacity for at least five years of temporary storage for each facility.

Other

Power has reported
  to NRC and the NJDEP that it has detected the presence of tritium in three on-site
  groundwater monitoring wells in excess of the applicable analytical methods detection limit. Power is
  continuing to investigate the source as well as the extent of the contamination.
  At this time, it is not possible to determine whether the costs associated with
  the investigation and/or remediation, if any, would be material.

ITEM 2. PROPERTIES

PSEG

PSEG does
  not own any property. All property is owned by its subsidiaries.

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.

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.

PSE&G
  believes that it maintains adequate insurance coverage against loss or damage
  to its principal properties, subject to certain exceptions, to the extent such
  property is usually insured and insurance is available at a reasonable cost.

Electric Transmission and Distribution Properties

As of December
  31, 2002, PSE&Gs transmission and distribution system included approximately
  21,873 circuit miles, of which approximately 7,518 circuit miles were underground,
  and approximately 781,041 poles, of which approximately 536,260 poles were jointly
  owned. Approximately 99% of this property is located in New Jersey.

26

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In addition,
  as of December 31, 2002, PSE&G owned five electric distribution headquarters
  and four subheadquarters in four operating divisions, all located in New Jersey.

Gas Distribution Properties

As of December
  31, 2002, 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:

|Plant          |  | Location        |  | Daily Capacity(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, 2002, PSE&G owned and operated approximately 17,019 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, the pipeline companies owned portions of the metering and regulating
  facilities.

Office Buildings and Facilities

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

In addition
  to the facilities discussed above, as of December 31, 2002, PSE&G owned
  41 switching stations in New Jersey with an aggregate installed capacity of
  20,934 megavolt-amperes and 241 substations with an aggregate installed capacity
  of 7,503 megavolt-amperes. In addition, 5 substations in New Jersey having an
  aggregate installed capacity of 127 megavolt-amperes were operated on leased
  property.

Power

Power rents
  approximately 137,000 square feet of office space from PSE&G at its headquarters in Newark,
  New Jersey. Other leased properties include office, warehouse, classroom and
  storage space, primarily in New Jersey, used for system maintenance, procurement
  and materials management staff, training and storage.

Through a subsidiary,
  Power owns a 57.41% interest in approximately 12,000 acres of restored wetlands
  and conservation facilities in the Delaware River Estuary that was formed to
  acquire and own lands and other conservation facilities required to satisfy
  the condition of the NJPDES permit issued for Salem. Power also owns several
  other facilities, including the on-site Nuclear Administration and Processing
  Center buildings.

Power has an 13.91%
  ownership interest in the 650-acre Merrill Creek Reservoir in Warren County,
  New Jersey. The reservoir was constructed to store water for release to the
  Delaware River during periods of low flow. Merrill Creek is jointly owned by
  seven companies that have generation facilities along the Delaware River or
  its tributaries and use the river water in their operations. Power also owns
  the Maplewood Test Services in Maplewood, New Jersey and the Central Maintenance
  Shop at Sewaren, New Jersey.

27

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

As of December 31,
  2002, Powers share of installed generating capacity was 13,055 MW, as
  shown in the following table:

|                                          
|------------------------------------------
|                                          
|                                          
|                                          
|OPERATING POWER
      PLANTS              
|                                          
|Name                                      
|                                          
|Steam:                                    
|Hudson, Jersey City                       
|Mercer, Hamilton                          
|Sewaren, Woodbridge Twp.                  
|Linden, Linden (E)                        
|Keystone, Shelocta (A)                    
|Conemaugh, New Florence (A)               
|Kearny, Kearny (E)                        
|Bethlehem, Albany (E)                     
|Bridgeport Harbor, Bridgeport             
|                                          
|New Haven Harbor, New Haven               
|                                          
|Total Steam                               
|                                          
|Nuclear:                                  
|Hope Creek, Lower Alloways Creek          
|Salem 1 & 2, Lower Alloways
      Creek   
|Peach Bottom 2 & 3, Peach
      Bottom (B)
|                                          
|Total Nuclear                             
|                                          
|Combined Cycle:                           
|Bergen, Ridgefield                        
|Burlington, Burlington                    
|                                          
|Total Combined Cycle                      
|                                          
|Combustion Turbine:                       
|Essex, Newark                             
|Edison, Edison Township                   
|Kearny, Kearny                            
|Burlington, Burlington                    
|Linden, Linden                            
|Hudson, Jersey City                       
|Mercer, Hamilton                          
|Sewaren, Woodbridge Township              
|Bayonne, Bayonne                          
|Bergen, Ridgefield                        
|National Park, National Park              
|Kearny, Kearny                            
|Linden, Linden (E)                        
|Salem, Lower Alloways Creek               
|Bridgeport Harbor, Bridgeport             
|                                          
|Total Combustion Turbine                  
|                                          
|Internal Combustion:                      
|Conemaugh, New
      Florence(A)          
|Keystone, Shelocta (A)                    
|                                          
|Total Internal Combustion                 
|                                          
|Pumped Storage:                           
|Yards Creek,
      Blairstown(C)(D)       
|                                          
|Total Operating Generation Plants         
|                                          

|(A) | Operated by Reliant Resources                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|(B) | Operated by Exelon Generation LLC                                                                                                                             
|(C) | Operated by Jersey Central Power
      & Light Company                                                                                                        
|(D) | Excludes energy for pumping and
      synchronous condensers.                                                                                                 
|(E) | These assets are scheduled for
      retirement within the next three years, partially dependent upon new generation
      going into service discussed below.
|28 

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As of December 31,
  2002, Power had 4,037 MW of generating capacity in construction or advanced development, as shown in
  the following table:

|                                                          
|----------------------------------------------------------
|POWER PLANTS IN CONSTRUCTION
      OR ADVANCED DEVELOPMENT
|                                                          
|Name                                                      
|                                                          
|Combined Cycle:                                           
|Bethlehem                                                 
|Lawrenceburg                                              
|Waterford                                                 
|Linden                                                    
|                                                          
|Total Construction                                        
|                                                          
|                                                          
|                                                          
|Nuclear Uprates                                           
|                                                          
|Total Advanced Development                                
|                                                          

|Projected Capacity
      (2002-2005)          | TotalCapacity(MW)
|--------------------------------------------- | -----------------
|                                              |                  
|Total Owned Operating
      Generating Plants | 13,055           
|Under Construction                            | 3,898            
|Advanced Development                          | 139              
|Less: Planned Retirements                     | (1,127           
|                                              |                  
|Projected Capacity                            | 15,965           
|                                              |                  

Energy Holdings

Energy Holdings rents
  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 believes that it 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.

29

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Global has invested
  in the following generation facilities, which are in operation or under construction
  as of December 31, 2002:

|                                   
|-----------------------------------
|OPERATING POWER PLANTS             
|                                   
|Name                               
|                                   
|United States (A)                  
|                                   
|Texas Independent Energy           
|Guadalupe                          
|Odessa                             
|Kalaeloa                           
|GWF                                
|Bay Area
      I                   
|Bay Area
      II                  
|Bay Area
      III                 
|Bay Area
      IV                  
|Bay Area
      V                   
|Hanford                            
|GWF Energy:                        
|Hanford
       Peaker Plant       
|Henrietta
       Peaker Plant     
|SEGS III                           
|Tracy                              
|Bridgewater                        
|Conemaugh                          
|                                   
|Total
      United States:         
|                                   
|International(B)                   
|                                   
|MPC                                
|Jingyuan
       Units 5 and 6     
|Tongzhou                           
|Nantong                            
|Jinqiao
      (Thermal Energy)     
|Zuojiang
       Units 1, 2 and 3  
|Fushi
       Units 1, 2 and 3     
|Shanghai
      BFG                 
|Haian
      (Thermal Energy)       
|Huangshi
      Unit I              
|PPN                                
|Prisma (C)                         
|Crotone                            
|Bando
      DArgenta I            
|Electroandes                       
|Chorzow (Existing Facility)        
|Skawina CHP                        
|Turboven                           
|Maracay                            
|Cagua                              
|TGM                                
|Rades                              
|                                   
|Total
      International:         
|                                   
|Total
      Operating Power Plants:
|                                   

30

---



Global has invested
  in the following generation facilities which are under construction as of December
  31, 2002:

|                            
|----------------------------
|POWER PLANTS IN CONSTRUCTION
|                            
|Name                        
|                            
|United States               
|                            
|GWF Energy                  
|Tracy 
      Peaker Plant  
|                            
|International               
|                            
|MPC                         
|Huangshi
      Unit II      
|Yulchon                     
|Kuo Kuang                   
|Prisma (C)                  
|Strongoli                   
|Bando DArgenta
      II    
|Salalah                     
|Chorzow                     
|                            
|Total Construction:         
|                            
|TOTAL GENERATION FACILITIES:
|                            

|(A)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | In November 2002, Global sold its
      interest in the generating station, Kennebec (Maine) to United American
      Energy Corp.                                                                                           
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(B)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Tanir Bavi (India) was sold in
      October 2002 to GMR Vasavi Group. Also during 2002, assets in Argentina
      were fully impaired. See Note 4. Asset Impairments and Note 5. Discontinued
      Operations of the Notes.
|(C)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | All Prisma assets are currently
      held for sale.                                                                                                                                                                         
|Domestic Generation
        In Operation
      Texas Independent
        Energy, L.P. (TIE)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|In
      April 1999, Global and its partner, Panda Energy International, Inc., established
      TIE, a 50/50 joint venture, which owns
      and operates electric generation facilities in Guadalupe County in south
      central Texas (Guadalupe) and Odessa in western Texas (Odessa).                                                                                                                                                                                                                                                                                        
|Approximately
      37.5% of the Guadalupe plants total output for 2003 has been sold
      via bilateral power purchase agreements and the remainder will be sold in
      the Texas spot market. In 2002, the plant generated approximately $145 million
      of gross revenue.                                                                                                                                                                                                                                                                                                 
|Approximately
      9.6% of the Odessa plants total output for 2003 has been sold via
      bilateral power purchase agreements. The balance of the output will be sold
      on a spot or short-term basis into the Texas power market. In 2002, the
      plant generated approximately $161 million of gross revenue. For a discussion
      of the Texas power market, see Item 7. MD&A  Future Outlook.                                                                                                                                                                      
|Kalaeloa
      Globals
        partner in Kalaeloa is a power fund managed by Harbert Power. All of the
        electricity generated by the Kalaeloa power plant is sold to the Hawaiian
        Electric Company under a power purchase contract terminating in May 2016.
        Under a steam purchase and sale agreement expiring in May 2016, the Kalaeloa
        power plant supplies steam to Hawaiian Independent Refinery, Inc. In 2002,
        the plant generated approximately $108 million of gross revenue. The plant
        availability factor in 2002 was 99%.
|31                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

---



GWF Power Systems
  LP (GWF) and Hanford LP (Hanford)

Global and Harbert
  Power each own 50% of the GWF plants. Power purchase contracts for the plants
  net output are in place with Pacific Gas and Electric Company (PG&E) ending
  in 2020 and 2021. In 2002, the plants generated approximately $62 million of
  gross revenue. The average availability factor of the five plants in 2002 was
  95%.

Global and Harbert
  Power each own 50% of Hanford. A power purchase contract for the plants
  net output is in place with PG&E through 2011. The Hanford plant generated approximately $16 million
  of gross revenue in 2002 and had an availability factor of 97%.

In July 2001, GWF,
  Hanford and the Tracy biomass plant entered into an agreement with PG&E
  and amendments to their power purchase agreements with PG&E
  that contained the Public Utilities Commission of the State of California
  approved pricing for a term of five years commencing July 16, 2001.

Hanford
  and Henrietta Peaker Plants

In May 2001 GWF Energy
  LLC (GWF Energy), a 50/50 joint venture between Global and Harbinger GWF LLC
  (an affiliate of Harbert Power), entered into a 10-year power purchase agreement
  with the California Department of Water Resources (DWR) to provide 340 MW of
  electric capacity to California from three new natural gas-fired peaking plants.
  As of December 31, 2002, Globals ownership interest in this project was
  76%. Energy and capacity not scheduled by the DWR is available for sale by GWF
  Energy. Two of the plants, the Hanford and Henrietta Peaking plants, have commenced
  commercial operation, and had approximately $25 million and $22 million in gross
  revenue, respectively, during 2002.

For further information,
  see Note 13. Commitments and Contingent Liabilities of the Notes.

International Generation in Operation

Global owns interests
  in operating generation facilities in China, India, Italy, Peru, Poland, Tunisia
  and Venezuela. In October 2002, a settlement was reached between AES Corporation
  (AES) and Global under which Global will transfer its minority ownership interests
  in certain Argentine assets to AES. For more details, see Note 4. Asset Impairments
  of the Notes.

China

Meiya Power Company
  Limited (MPC)

Globals activities
  in China and surrounding countries are conducted through MPC, a joint venture
  with the Asian Infrastructure Fund (AIF) and Hydro Quebec International (HQI).

MPC is focused on developing,
  acquiring, owning and operating electric and thermal heat generation facilities
  in China, South Korea and Taiwan. MPC seeks to structure long-term power purchase
  contracts with its customers and to incorporate take-or-pay and minimum take
  provisions to support debt service and a specified equity return. Pricing terms
  for energy from its facilities generally include a base price and indexed adjustments
  to compensate for changes in inflation, foreign currency exchange rates up to
  the minimum equity return and laws affecting taxes, fees and required reserves.
  For cogeneration facilities, instead of selling the electricity through long-term
  power purchase contracts, MPC sells its output through an annually determined
  quota fixed in accordance with a predetermined formula which essentially determines
  the amount of electricity to be sold by reference to the amount of steam generated
  by the cogeneration facilities. The two cogeneration plants in Tongzhou and
  Nantong operate under this system. MPCs projects, either under construction
  or in operation, have obtained all the required approvals to enable issuance
  of a business license in their respective localities.

Minority investments
  held by Global in nine generation facilities located in China generated 2% of
  Globals total gross revenues in 2002.

32

---



India

PPN Power Generating
  Company Limited (PPN)

Global owns a 20%
  interest in PPN located in Tamil Nadu, India. Globals partners include
  Marubeni Corporation, with a 26% interest, El Paso Energy Corporation, with
  a 26% interest and the Reddy Group, with a 28% interest. PPN has entered into
  a power purchase contract for the sale of 100% of the output to the State Electricity
  Board of Tamil Nadu (TNEB) for 30 years, with an agreement to take-or-pay to
  a plant load factor (PLF) of 85%.

Peru

Empresa de Electricidad
  de los Andes S.A. (Electroandes)

Electroandes
  main assets include four hydroelectric facilities with a combined installed
  capacity of 183 MW and 460 miles of transmission lines located in the central
  Andean region (northeast of Lima). In addition, Electroandes has a temporary
  concession to develop two greenfield hydroelectric facilities totaling 180 MW
  and expansion projects on existing stations totaling 100 MW. These concessions
  expire in March 2003, but are renewable for two additional years. In 2002, 91%
  of Electroandes revenues were obtained through power purchase agreements with
  mining companies in the region. Electroandes generated approximately $45 million
  of gross revenue in 2002.

Venezuela

Turbogeneradores
  de Maracay (TGM)

Global, with a 9%
  interest, is in partnership with Corporacion Industrial de Energia (CIE), to
  own TGM. TGM sells all of the energy produced under contract to Manufacturas
  del Papel (MANPA), a paper manufacturing concern located in Maracay. MANPA and
  CIE have common controlling shareholders.

Turboven

The facilities in
  Cagua and Maracay are owned and operated by Turboven, an entity which is jointly
  owned by Global and CIE. To date, power purchase contracts have been entered
  into for the sale of approximately 70% of the output of Maracay and Cagua, to
  various industrial customers. The power purchase contracts are structured to
  provide energy only with minimum take provisions. Fuel costs are passed through
  directly to customers and the energy tariffs are calculated in US Dollars and
  paid in local currency. In 2002, the plants in Maracay and Cagua generated $20
  million of gross revenue.

Poland

Elcho

In October 2000, Global
  acquired a 55% economic interest in a combined thermal energy and power generation plant in Chorzow,
  in the Upper Silesia region of Poland, with Elektrownia Chorzow holding the
  remaining interest. As a part of the acquisition of the existing plant, Global
  obtained the rights to construct, and is constructing, a 220 MW electrical and
  500 MW thermal combined thermal energy and power plant in Chorzow. Global currently holds
  a 55% economic interest in Elektrocieplownia Chorzow Sp. z.o.o. (ELCHO), including
  both the old plant and the plant under construction, with the anticipation of
  expanding such interest to approximately 90% by 2003. Global intends to operate
  the existing plant until the new plant comes on line in late 2003. Polskie Sieci
  Elektroenergetyczne SA (PSE), the Polish power grid company, has signed a long-term
  power purchase agreement with ELCHO and it is planned for all of the power to
  be delivered into the local distribution system. During 2002, the existing plant
  generated approximately $21 million of gross revenue. As of December 31, 2002, Energy
Holdings investment exposure, including contingencies, was $80 million.

33

---



Skawina
  CHP Plant (Skawina)

During 2002, Global
  acquired a 50% interest in Skawina, a combined thermal energy and power generation, for $31
  million and will purchase additional shares in 2003 that will bring Globals
  aggregate interest in Skawina to approximately 65%. In addition, Global has
  an obligation to offer to purchase an additional 10% ownership from Skawinas
  employees in 2004 for a total potential ownership in Skawina of 75%. Skawina
  supplies electricity to three local distribution companies and heat mainly to
  the city of Krakow, under one-year contracts consistent with current practice
  in Poland. The sale is part of the Polish Governments energy privatization
  program. During 2002, the plant generated approximately $49 million of gross
  revenue. As of December 31, 2002, Energy Holdings, investment exposure, including contingencies, was $90 million.

Tunisia

Rades

Global and its partner
  Marubeni Corporation own 60% and 40%, respectively, of the Carthage Power facility
  in Rades, Tunisia for which Global is the operator. A 20-year power purchase
  contract has been entered into for the sale of 100% of the output to Societe
  Tunisienne dElectricite et du Gaz, the national utility. The tariff in
  the power purchase contract consists of a fixed capacity charge to cover debt
  and equity return as well as fixed and variable charges to cover fuel, operations
  and maintenance costs. Each tariff component will be paid in local currency
  (Dinars). Rades commenced operation in May 2002 and generated approximately $57 million
  of gross revenue in 2002.

Power Plants Under Construction

Global has eight projects
  in construction located in the United States, China, Italy, Oman, Poland, South
  Korea and Taiwan. All of these plants have obtained power purchase contracts
  for their output. The two projects under construction in Italy are currently
  held for sale.

United States

Tracy
  Peaker Plant

The Tracy Peaker
  Plant is under construction with a commercial operation date deadline of July
  1, 2003. Total project cost is expected to be $146 million. For additional information,
  see Note 13. Commitments and Contingent Liabilities of the Notes.

Oman

Salalah

In March 2001, Global,
  through Dhofar Power Company (DPCO), signed a 20-year concession with the government
  of Oman to privatize the electric system of Salalah. A consortium led by Global
  (81% ownership) and several major Omani investment groups owns DPCO. The project
  is expected to achieve commercial operation by April 2003. Total project cost
  is estimated at $256 million. Globals equity investment, including contingencies
  and equity guarantees, is expected to be approximately $97 million. As of December 31, 2002, Energy Holdings
  investment exposure, including contingencies, was $39 million.

Poland

Elcho

Globals 220
  MW (electrical) and 500 MW (thermal) facility will replace an existing 100 MW
  thermal energy and power generation facility. Globals economic interest in the project
  is currently 55%, with the anticipation of expanding such interest to approximately
  90% by the end of 2003, with the balance held by a local Polish company. Total
  project cost is estimated at $324 million. Globals equity investment,
  including contingencies, is not expected to exceed $105 million. The plant has
  a targeted commercial operation date in late 2003. PSE, the Polish power grid
  company, has entered into a 20-year power purchase agreement with ELCHO for
  100% of the electrical output. All

34

---



of the thermal energy will be sold to Przedsiebiorstwo
  Energetyki Cieplnej, the district heating company for a term of 20 years.

Taiwan

Kuo
  Kuang

Through MPC, Global
  owns a 17.5% indirect interest in a gas-fired combined-cycle electric generation
  facility under construction in Kuo Kuang, Taiwan. MPC has a 35% interest in
  Kuo Kuang and partners with two local Taiwanese companies, Chinese Petroleum
  Corporation and CTCI Corporation. Kuo Kuang has entered into a 25-year power
  purchase contract for the sale of 100% of its electric output to Taiwan Power
  Company, the national utility. The power purchase contract payments consist
  of a fixed capacity charge to cover debt and equity return as well as fixed
  and variable charges to cover fuel, operations and maintenance costs. The tariff
  will be paid in local currency. Kuo Kuang is expected to be in operation in
  2003, with a total cost of approximately $320 million. Globals equity
  investment, including contingencies, is expected to be approximately $20 million.

South Korea

Yulchon

Through MPC, Global
  owns a 50% indirect interest in Yulchon Generation Company, a gas-fired combined-cycle
  plant under construction in South Korea. Open cycle operation of the plant is
  scheduled for mid-2004, with conversion to combined-cycle operation scheduled
  for mid-2005. The power will be purchased by state-owned Korea Electric Power
  Company under a long-term power purchase contract. The total cost of the project
  is expected to be $301 million, and will be provided by debt funds from project
  finance sources and equity funds from MPC.

Electric Distribution Facilities

Global has
  invested in the following distribution facilities:

|Name               |  | Location |  | NumberofCustomers |  | GlobalsOwnershipInterest | 
|------------------ |  | -------- |  | ----------------- |  | ------------------------- | 
|                  
|                  
|                   |  |          |  |                   |  |                           | 
|Rio Grande Energia |  | Brazil   |  | 1,020,000         |  | 32%                       | 
|Chilquinta Energia |  | Chile    |  | 480,000           |  | 50%                       | 
|SAESA              |  | Chile    |  | 660,000           |  | 100%                      | 
|Luz del Sur        |  | Peru     |  | 720,000           |  | 44%                       | 
|                   |  |          |  |                   |  |                           | 
|Total              |  |          |  | 2,880,000         |  |                           | 
|                   |  |          |  |                   |  |                           | 

Brazil

Rio
  Grande Energia (RGE)

Together with VBC
  Energia, a consortium of Brazilian companies formed to invest in electric privatization,
  and Previ, the largest pension fund in Brazil, Global acquired RGE in 1997.
  Global is the named operator for the system. A shareholders agreement
  establishes corporate governance, voting rights and key financial provisions.
  Global has veto rights over certain actions, including approval of the annual
  budget and financing plan, executive officers, significant investments or acquisitions,
  sale or encumbrance of assets, establishment of guarantees, amendment of the
  concession agreement and dividend policies. Day-to-day operations are the responsibility
  of RGE, subject to partnership oversight. During 2001, VBC Energia and Previ
  transferred their shares to Companhia Paulista de Forcae Luz (CPFL), an electric
  distribution company in which each of VBC Energia and Previ have an interest.

35

---



RGE operates under
  a non-exclusive territorial concession agreement ending in 2027. The concession
  is non-exclusive in that the distribution system must provide large consumers
  the right to choose another provider of energy or to self-generate. Global does
  not believe this represents a substantial threat to the profitability of the
  distribution system in Brazil since the tariff structure provides the distribution
  system the opportunity to recover all costs associated with distribution service
  plus a return. RGE secures its energy supply through contractual agreements
  expiring between 2007 and 2020. RGE will also purchase 20% of its energy requirements
  through 2013 under the terms of contracts, which are denominated in US Dollars.
  During 2002, RGE generated $430 million in gross revenue.

See Note 4. Asset
  Impairments of the Notes for a discussion of the goodwill impairment recorded
  for RGE. For a discussion of the Brazilian regulatory environment, see Item
  1. Business  Regulatory Issues and Item 7. MD&A  Future Outlook.

Chile

Chilquinta
  Energia S.A. (Chilquinta) and Luz del Sur (LDS)

Global together with
  its partner, Sempra, jointly own 99.99% of the shares of Chilquinta, an energy
  distribution company with numerous energy holdings, based in Valparaiso, Chile.
  In addition, Global and Sempra jointly own 87.9% of LDS, which owns electric
  distribution facilities in Peru.

As equal partners,
  Global and Sempra share in the management of Chilquinta, however, Sempra has
  assumed lead operational responsibilities at Chilquinta, while Global has assumed
  lead operational responsibilities at LDS. The shareholders agreement gives
  Global important veto rights over major partnership decisions including dividend
  policy, budget approvals, management appointments and indebtedness.

In 2002, Chilquinta
  generated approximately $132 million in gross revenues. Chilquinta operates
  under a non-exclusive perpetual franchise within Chiles Region V which
  is located just north and west of Santiago. Global believes that direct competition
  for distribution customers would be uneconomical for potential competitors.
  LDS operates under an exclusive, perpetual franchise in the southern portion
  of the city of Lima and in an area just south of the city along the coast serving
  a population of approximately 3.2 million. In 2002, LDS generated gross revenues
  of approximately $312 million. Both Chilquinta and LDS purchase energy for distribution
  from generators in their respective markets on a contract basis.

For a discussion
  of the regulatory environment in Chile and Peru, see Item 1. Business  Regulatory
  Issues.

Sociedad
  Austral de Electricidad S.A. (SAESA)

In 2001, Global purchased
  a 99.9% equity in SAESA and its subsidiaries from Compañia de Petróleos
  de Chile S.A. (COPEC). The SAESA group of companies consists of four distribution
  companies and one transmission company that provide electric service to 390
  cities and towns over 900 miles between Bulnes in the VIII Region and Cochrane
  in the XI Region of southern Chile. Additionally, Global purchased from COPEC
  approximately 14% of Empresa Eléctrica de la Frontera S.A. (Frontel),
  not already owned by SAESA, to bring Globals total interest in Frontel
  to 95.5%.

Through its affiliated
  company Sistema de Transmission del Sur S.A. (STS), SAESA provides transmission
  services to electrical generation facilities that have power purchase arrangements
  with distributors in Regions VIII, IX and X and has current capacity of 673
  MVA.

SAESA also owns a
  50% interest in an Argentine distribution company, Empresa de Energia Rio Negro
  S.A. (EDERSA) which provides generation, transmission and distribution services
  to 66 communities in the Province of Rio Negro, which is located close to Argentinas
  principal oil and gas reserves and has more than 600,000 residents.

SAESA and its Chilean
  affiliates are organized and administered according to a centralized administrative
  structure designed to maximize operational synergies. In Argentina, EDERSA has
  its own independent administrative structure.

36

---



During 2002,
  SAESAs generated revenues of approximately $146 million, serving 660,000
  customers.

Argentina

EDEN,
  EDES and EDELAP

In October 2002, a
  settlement was reached under which Global will transfer its minority interest
  in the assets of Empresa Distribuidora de Energia Norte S.A. (EDEN), Empresa
  Distribuidora de Energia Norte S.A. (EDES) Empresa Distribuidora La Plata S.A.
  (EDELAP) and other investments to Globals partner, AES. For more details,
  see Note 4. Asset Impairments of the Notes.

EDEERSA

Global has an ownership
  interest in Empresa Distribuidora de Electricidad de Entre Rios S.A. (EDEERSA).
  As of June 30, 2002, Global determined that its investment in EDEERSA was completely
  impaired under Statement of Financial Accounting Standards (SFAS) No. 144. For
  a detailed discussion, see Note 4. Asset Impairments and Note 13. Commitments
  and Contingent Liabilities of the Notes.

37

---



|ITEM 3.   LEGAL
      PROCEEDINGS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|PSE&G                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|On November 15, 2001, Consolidated Edison, Inc. (Con Edison) filed a complaint against PSE&G with the Federal Energy Regulatory Commission (FERC) pursuant to
Section 206 of the Federal Power Act asserting that PSE&G had breached agreements covering 1,000 MW of transmission by curtailing service and failing to maintain sufficient system capacity to satisfy all of its service obligations. PSE&G
denied the allegations set forth in the complaint. While finding that Con Edisons presentation of evidence failed to demonstrate several of the allegations, on April 26, 2002, FERC found sufficient reason to set the complaint for hearing. An
initial decision issued by an administrative law judge in April 2002 upheld PSE&Gs claim that the contracts do not require the provision of firm transmission service to Con Edison but also accepted Con Edisons contentions
that PSE&G was obligated to provide service to Con Edison utilizing all the facilities comprising its electrical system including generation facilities and that PSE&G was financially responsible for out-of-merit, i.e.,
above-market, generation costs needed to effectuate the desired power flows. Following the Initial Decision, PSE&G and Con Edison engaged in extensive settlement discussions in an attempt to settle their differences. This attempt was
unsuccessful. On December 9, 2002, FERC issued a decision modifying the Initial Decision by finding that only 600 MW of the total 1,000 MW power transfers is required to be supported by out-of-merit generation. FERC also made a number of other
findings, on a preliminary basis, including favorable findings to PSE&G that power transfers should be measured on a net basis that considers the impacts of third party transactions and that PSE&Gs obligations should be
reduced to the extent that Con Edison has impaired PSE&Gs ability to perform under the contracts. FERC remanded a number of issues to the administrative law judge for additional hearings, mainly related to the development of protocols to
implement the findings of the December 9, 2002 order. In addition, issues related to Phase 2 of the complaint involving the past administration of the contracts and a claim that PSE&G improperly benefited from the purchase of hedging contracts
in New York, is also pending before the administrative law judge. Hearings are scheduled to commence on March 5, 2003 and an initial decision by the administrative law judge is required by April 29, 2003. The nature and cost of any remedy, which is
expected to be prospective only, cannot be predicted, but is not expected to be material. Docket No. EL02-23-000.
|Energy Holdings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|The
      Brazilian Consumer Association of Water and Energy has filed a lawsuit against
      RGE, the Brazilian distribution company of which Global is a 32% owner,
      and two other utilities, claiming that certain value added taxes and the
      residential tariffs that are being charged by such utilities to their respective
      customers are illegal. The plaintiff is seeking damages of approximately
      $505 million. In August 2002 the Public Treasury Court in Porto Alegre dismissed
      the case. The plaintiff filed a Notice of Appeal with the State
      Court of Appeals in November 2002. RGE believes that its collection of the
      tariffs and value added taxes are in compliance with applicable tax and
      utility laws and regulations. While it is the contention of RGE that the
      claims are without merit, and that it has valid defenses and potential third
      party claims, an adverse determination could have a material adverse effect
      on PSEGs and Energy Holdings financial condition, results of
      operations and net cash flows. Assobraee-Associacao
      Brasileira de Consumidores de Agua e Energia Eletrica v. Rio Grande Energia
      S/A RGE, CEEE and AES Sul, First Public Treasury Court/City of Porto
      Alegre. Proceeding No. 101214451.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|See information on the following proceedings at the pages indicated for PSEG and each of PSE&G, Power and Energy Holdings as noted:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
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|(5)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(6)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(7)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(8)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(9)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|38                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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|(10)                                                                                                                                                                                                                                                                                                                                                               | Pages 15. (PSE&G) FERC proceeding related to MISO and PJM                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(11)                                                                                                                                                                                                                                                                                                                                                               | Pages 17, 36 and 50. (Energy Holdings) Globals rate case in Brazil.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(12)                                                                                                                                                                                                                                                                                                                                                               | Pages 22 and 23. (Power and Energy Holdings) Administrative proceedings before the NJDEP under the FWPCA for certain electric generating stations.                                                                                                                                                                                                                                                                                                                                                                                                                
|(13)                                                                                                                                                                                                                                                                                                                                                               | Pages 25, 26 and 163. (Power) DOE not taking possession of spent nuclear fuel, Docket No. 01-551C.                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(14)                                                                                                                                                                                                                                                                                                                                                               | Pages 48 and 133. (Energy Holdings) AES termination of the Stock Purchase Agreement, relating to the sale of certain Argentine assets. New York State Supreme Court for New York County (Docket
No. 60155/2002) PSEG Global, et al vs. The AES Corporation, et al.                                                                                                                                                                                                                                                                                                
|(15)                                                                                                                                                                                                                                                                                                                                                               | Page 161. (PSE&G) PSE&Gs MGP Remediation Program.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(16)                                                                                                                                                                                                                                                                                                                                                               | Page 161. (PSE&G) Investigation and additional investigation by the EPA regarding the Passaic River site. Docket No. EX93060255.                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(17)                                                                                                                                                                                                                                                                                                                                                               | Page 164. (Energy Holdings) Complaint filed with the FERC addressing contract terms of certain Sellers of Energy and Capacity under Long-Term Contracts with the California Department of Water
Resources. Public Utilities Commission of the State of California v. Sellers of Long Term Contracts to the California Department of Water Resources FERC Docket No. EL02-60-000. California Electricity Oversight Board v. Sellers of Energy and Capacity
Under Long-Term Contracts with the California Department of Water Resources FERC Docket No. EL02-62-000.
|PSE&G and Power                                                                                                                                                                                                                                                                                                                                                   
|In addition, see the following environmental related matters involving governmental authorities. Based on current information, PSE&G and Power do not expect
expenditures for any such site, individually or all such current sites in the aggregate, to have a material effect on their respective financial condition, results of operations and net cash flows.
|                                                                                                                                                                                                                                                                                                                                                                   | (1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                   | (2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                   | (3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                   | (4)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|39                                                                                                                                                                                                                                                                                                                                                                

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|                             |                                                           | Report was submitted
      to the EPA in September of 2002. This document presents the design details
      that will implement the EPA selected remediation remedy. 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. The remedy itself and responsibility for the costs of its
      implementation are the subject of litigation currently venued in the United
      States District Court for the Eastern District of Pennsylvania entitled
      United States of America, et. al., v. Union Corporation, et. al., Civil
      Action No. 80-1589.                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|---------------------------- | --------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                             | (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 memorandum of agreement (MOA) with the NJDEP
      for the Klockner Road site pursuant to which PSE&G will conduct an RI/FS
      and remedial action, if warranted, of the site. Preliminary investigations
      indicated the potential presence of soil and groundwater contamination at
      the site.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                             | (6)                                                       | The NJDEP issued Directives
      to various entities, including PSE&G, seeking payment of NJDEPs
      anticipated costs of remedial action and of administrative oversight at
      the Combe Fill South Sanitary Landfill in Washington and Chester Townships,
      Morris County, New Jersey (Combe Site) and directing the respondents to
      arrange for the operation, maintenance and monitoring of the implemented
      remedial action or pay the NJDEPs future costs of these activities,
      estimated to be $39 million and prepare a work plan for the development
      and implementation of a Natural Resource Damage Restoration Plan. The NJDEP
      and The United States of America filed separate cost recovery actions pursuant
      to CERCLA and/or the Spill Act seeking recovery of site investigation and
      remediation response and administrative oversight costs. PSE&G was named
      defendant in the NJDEP cost recovery action and a named third party defendant
      in the contribution action filed in the United States lawsuit. All
      of the foregoing claims against PSE&G were resolved by settlement in
      2002.
|                             | (7)                                                       | 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. 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.                                                                                                                                                                                                                                                                                                                                                                                                                  
|                             | (8)                                                       | The New York State
      Department of Environmental Conservation (NYSDEC) has named PSE&G as
      one of many potentially responsible parties for contamination existing at
      the former Quanta Resources Site in Long Island City, New York. Waste oil
      storage, processing, management and disposal activities were conducted at
      the site from approximately 1960 to 1981. It is believed that waste oil
      from PSE&Gs facilities were taken to the Quanta Resources Site.
      NYSDEC has requested that the potentially responsible parties reimburse
      the state for the costs NYSDEC has expended at the site and to conduct an
      investigation and remediation of the site. Power, PSE&G and the other
      PRPs have executed an Order on Consent with NYSDEC for the investigation
      of the site and have entered an agreement among the PRPs for the sharing
      of the associated costs.                                                                                                                                                                                                                                          
|ITEM 4.                      | SUBMISSION OF MATTERS
      TO A VOTE OF SECURITY HOLDERS
|PSEG None.                 
|PSE&G None.                
|Power None.                
|Energy Holdings
      None.
|40                          

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PART II

|ITEM 5. | MARKET FOR REGISTRANTS
      COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|------- | ---------------------------------------------------------------------------

PSEG

PSEGs Common
  Stock is listed on the New York Stock Exchange, Inc. As of December 31, 2002,
  there were 114,473 holders of record.

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

|Common
      Stock |  | High |       | Low |   | DividendPer Share | 
|------------------ |  | ---- | ----- | --- | - | ----------------- | 
|                  
|                   |  |      |       |     |   |                   | 
|2002:              |  |      |       |     |   |                   | 
|First Quarter      |  | $    | 46.80 |     | $ | 40.46             | 
|Second Quarter     |  |      | 47.25 |     |   | 41.30             | 
|Third Quarter      |  |      | 43.50 |     |   | 28.00             | 
|Fourth Quarter     |  |      | 32.38 |     |   | 20.00             | 
|                   |  |      |       |     |   |                   | 
|2001:              |  |      |       |     |   |                   | 
|First Quarter      |  | $    | 48.50 |     | $ | 36.88             | 
|Second Quarter     |  |      | 51.55 |     |   | 41.80             | 
|Third Quarter      |  |      | 50.00 |     |   | 40.21             | 
|Fourth Quarter     |  |      | 44.20 |     |   | 38.70             | 

For additional information
  concerning dividend history, policy and potential preferred voting rights, restrictions
  on payment and common stock repurchase programs, see Item 7. MD&A  Liquidity
  and Capital Resources and Note 10. Schedule of Consolidated Capital Stock and
  Other Securities of the Notes.

PSE&G

All of the common stock of PSE&G is owned by PSEG.

Power

All of Powers
  outstanding limited liability company membership interests are owned by PSEG.

Energy Holdings

All of Energy Holdings
  outstanding limited liability company membership interests are owned by PSEG.

41

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ITEM 6.  SELECTED FINANCIAL DATA

PSEG

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

|                                                                                                         | Years Ended December
      31,     |      
|-------------------------------------------------------------------------------------------------------- | ---------------------------------- | -----
|                                                                                                         |                                    |      
|                                                                                                         | 2002                               |      
|                                                                                                         |                                    |      
|                                                                                                         | (Millions, where
      applicable)
|Total Operating Revenues                                                                                 | $                                  | 8,390
|                                                                                                         |                                    |      
|Income Before Discontinued Operations,                                                                   |                                    |      
|Extraordinary
      Item and Cumulative                                                                  |                                    |      
|Effect of a Change in Accounting Principle
      and Excluding                                           |                                    |      
|Losses from Argentine
      Investments                                                                  | $                                  | 786  
|                                                                                                         |                                    |      
|Income Before
      Discontinued Operations,                                                             |                                    |      
|Extraordinary
      Item and Cumulative                                                                  |                                    |      
|Effect
      of a Change in Accounting Principle                                                         | $                                  | 416  
|                                                                                                         |                                    |      
|Net Income (Loss)                                                                                        | $                                  | 245  
|                                                                                                         |                                    |      
|Earnings per
      Share (Basic and Diluted):                                                            |                                    |      
|                                                                                                         |                                    |      
|Before
      Discontinued Operations,                                                                    |                                    |      
|Extraordinary
      Item and Cumulative                                                                  |                                    |      
|Effect
      of a Change in Accounting Principle and Excluding                                           |                                    |      
|Losses
      from Argentine Investments                                                                  | $                                  | 3.76 
|                                                                                                         |                                    |      
|Before
      Discontinued Operations,                                                                    |                                    |      
|Extraordinary
      Item and Cumulative                                                                  |                                    |      
|Effect
      of a Change in Accounting Principle                                                         | $                                  | 1.99 
|                                                                                                         |                                    |      
|Net
      Income (Loss)                                                                                  | $                                  | 1.17 
|                                                                                                         |                                    |      
|Dividends Declared per Share                                                                             | $                                  | 2.16 
|                                                                                                         |                                    |      
|As of December 31:                                                                                       |                                    |      
|Total
      Assets                                                                                       | $25,742                            |      
|Long-Term
      Obligations (B)                                                                          | $11,044                            |      
|                                                                                                         |                                    |      
|Preferred Stock With Mandatory
      Redemption                                                          | $                                  | 460  
|                                                                                                         |                                    |      
|Monthly Guaranteed Preferred Beneficial
      Interest
       in PSE&Gs
      Subordinated Debentures   | $                                  | 60   
|                                                                                                         |                                    |      
|Quarterly Guaranteed Preferred
      Beneficial Interest
       in PSE&Gs
      Subordinated Debentures | $                                  | 95   
|                                                                                                         |                                    |      
|Quarterly Guaranteed Preferred
      Beneficial Interest
       in PSEGs
      Subordinated Debentures  | $                                  | 705  

|    |                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(A) | 2002 results exclude after-tax
      charges of $370 million, or $1.77 per share, related to losses from Energy
      Holdings Argentine investments. See MD&A  Results of Operations
      and Note 4. Asset Impairments of the Notes for further discussion.
|(B) | Includes amounts for capital lease obligations. Increase in debt partially related
      to $2.5 billion securitization transaction in 2001 and consolidation of
      non-recourse debt.                                                                       
|42 

---



PSE&G

The information presented
  below should be read in conjunction with Managements Discussion and Analysis
  of Financial Condition and Results of Operations (MD&A) and the Consolidated
  Financial Statements and Notes to the Consolidated Financial Statements.

|                                                                                                           | Years Ended December
      31,     |       
|---------------------------------------------------------------------------------------------------------- | ---------------------------------- | ------
|                                                                                                           |                                    |       
|                                                                                                           | 2002                               |       
|                                                                                                           |                                    |       
|                                                                                                           | (Millions, where
      applicable) |       
|Total Operating Revenues                                                                                   | $                                  | 5,919 
|Income Before Extraordinary Item                                                                           | $                                  | 205   
|Net Income (Loss)                                                                                          | $                                  | 205   
|                                                                                                           |                                    |       
|As of December 31:                                                                                         |                                    |       
|Total Assets                                                                                               | $                                  | 12,429
|Long-Term Obligations
      (A)                                                                            | $                                  | 4,890 
|                                                                                                           |                                    |       
|Preferred Stock With Mandatory
      Redemption                                                            | $                                  |      
|                                                                                                           |                                    |       
|Monthly Guaranteed
      Preferred Beneficial Interest in
         PSE&Gs Subordinated
      Debentures   | $                                  | 60    
|                                                                                                           |                                    |       
|Quarterly Guaranteed
      Preferred Beneficial Interest in
         PSE&Gs Subordinated
      Debentures | $                                  | 95    

|(A) | Includes amounts for capital lease obligations. Increase in debt related to the $2.5 billion
      securitization transaction in 2001.
|--- | --------------------------------------------------------------------------------------------------------------------------------------

POWER

Omitted pursuant
  to conditions set forth in General Instruction I of Form 10K.

ENERGY HOLDINGS

Omitted pursuant
  to conditions set forth in General Instruction I of Form 10K.

43

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|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS
      OFFINANCIAL CONDITION AND RESULTS
      OF OPERATIONS
      (MD&A)
|------- | -------------------------------------------------------------------------------------------------------------

This
  combined MD&A is separately filed by Public Service Enterprise Group Incorporated
  (PSEG), Public Service Electric and Gas Company (PSE&G), PSEG Power LLC
  (Power), and PSEG Energy Holdings LLC (Energy Holdings). Information contained
  herein relating to any individual company is filed by such company on its own
  behalf. PSE&G, Power and Energy Holdings each make representations only
  as to itself and make no other representations whatsoever as to any other company.

OVERVIEW OF 2002 AND FUTURE OUTLOOK

Overview

PSEG

PSEGs subsidiaries
  consist of a mix of energy-related businesses that together are designed to
  produce a balanced energy market strategy. Because the nature and risks of these
  businesses are different, and because they operate in different geographic locations,
  the combined entity is intended to produce consistent earnings growth in a manner
  that will mitigate the adverse financial effects of business losses or an economic
  downturn in any one sector or geographic region.

During 2002, PSEGs
  strategy to maintain a diverse portfolio of energy-related businesses helped
  it to achieve results from its ongoing operations that were well within the
  revised earnings guidance of $3.70 to $3.90 per share provided to investors
  in July 2002, and within 6% of the original earnings guidance provided at the
  beginning of 2002. Management believes that this portfolio approach will help
  to balance changes in the earnings profiles for PSEGs individual subsidiaries,
  providing a foundation for PSEGs earnings in 2003 and supporting PSEGs
  attempt to achieve its targeted long-term 7% annual growth rate as market conditions
  improve. However, even with this portfolio approach to the business, greater
  volatility in earnings and cash flows will occur due to the continuing evolution
  of the energy industry, both in the United States (US) and internationally.

Over recent years,
  PSEG has realigned its organizational structure to address the competitive environment
  brought about by the deregulation of the electric generation industry and has
  transitioned from primarily being a regulated New Jersey utility to operating
  as a competitive energy company with operations primarily in the Northeastern
  US and in other select domestic and international markets. 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. As of December 31, 2002, Power, PSE&G, and
  Energy Holdings comprised approximately 27%, 48% and 27% of PSEGs consolidated
  assets and contributed approximately 60%, 26% and 18% of PSEGs results
  for the year ended December 31, 2002, excluding the charges discussed below.

During 2002, the
  financial markets experienced significant pressures, particularly relating to
  increased credit and liquidity concerns in the energy industry. In response,
  PSEG took significant steps to strengthen its balance sheet. Early in 2002,
  PSEG began issuing approximately $80 million of common stock on an annual basis
  through its dividend reinvestment program. In September 2002, PSEG issued $460
  million of participating units. In the fourth quarter, PSEG issued $458 million
  of common stock and $180 million of preferred securities. Altogether, PSEG issued
  over $1.1 billion in equity and equity-linked securities since September 2002
  and used the proceeds primarily to reduce short-term debt. For further information
  regarding the issuances of these equity and equity-linked securities, see Note
  10. Schedule of Consolidated Capital Stock and Other Securities.

In addition to these
  equity issuances, PSEG took steps to significantly reduce its capital expenditures,
  which were at a peak in 2002. Early in 2002, PSEG announced that Energy Holdings
  is limiting future investments to contractual commitments, primarily those needed
  to complete the development of generating plants currently under construction,
  and recently revised the timeline for the completion of several of Powers
  generating station construction projects.

44

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The equity issuances
  and revised capital expenditure program discussed above enabled PSEG to accelerate
  its planned reduction of its leverage ratio in the fourth quarter. Going into
  2003, PSEGs leverage ratio was 0.61 to 1 as calculated under its credit
  agreements. This ratio included an after-tax charge in Other Comprehensive Income (OCI)
  of approximately $297 million related to its pension plan, the result of the
  accumulated benefit obligation of the pension exceeding the value of its pension
  assets.

PSE&G

PSE&G operates as an electric and gas public utility in New Jersey under cost-based regulation by the New Jersey Board of Public Utilities (BPU) for its distribution operations and by the
Federal Energy Regulatory Commission (FERC) for its electric transmission operations. As such, the earnings of PSE&G are largely determined by the regulation of its rates. PSE&G expects stable earnings and cash flows in the future as it
continues its transmission and distribution and sale of electric energy and gas service in New Jersey.

PSE&Gs success will be determined by its ability to maintain system reliability and safety, effectively manage costs and obtain timely and adequate rate relief. The risks from this
business generally relate to the regulatory treatment of the various rate and other issues by the BPU and the FERC. In 2002, PSE&G obtained a successful outcome to its gas base rate case, its first in ten years, transferred its gas supply
contracts and gas inventory to Power and filed for an increase in electric rates to be effective August 1, 2003. That will mark the end of PSE&Gs four-year transition period, completing its transition to a transmission and distribution
business.

Power

Power is focused
  on a generation market extending from Maine to the Carolinas and the Atlantic
  Coast to Indiana (Super Region). Powers strategy is to continue to market
  its capacity through Basic Generation Service (BGS) related contracts and other
  bilateral contracts in New Jersey and its target market. Utilizing a generation
  portfolio diversified by fuel source, technology and market segment, Power seeks
  to balance its generating capacity, fuel requirements and supply obligations
  through integrated energy marketing and trading, enhance its ability to produce
  low cost energy through continued strong nuclear operations and pursue modest
  growth based on market conditions. Power integrates its electric generation
  production with its wholesale energy marketing and trading activities and risk
  management function.

During 2002, record
  capacity factors at its nuclear facilities, coupled with Powers ability
  to use energy trading to manage the risk of its obligations, enabled Power to
  meet its fixed price demands under the BGS related contracts with economic supply.
  Power also added to its generating capacity in the Northeast and established
  a foothold in the New England Independent System Operator (ISO) through its
  acquisition of two power plants totaling approximately 1,000 MW. Also, Power
  enhanced its portfolio by becoming a gas commodity supplier to PSE&G under
  a Basic Gas Supply Service (BGSS) contract.

In response to low
  energy prices, Power has scaled back its new project anticipated growth, shifting
  its emphasis more towards potential acquisitions, and has adjusted its generating station construction
  schedules to better align with anticipated market prices.

Power entered into
  contracts for the period beginning August 1, 2002 and ending July 31, 2003 with
  various successful bidders in the New Jersey Basic Generation Service (BGS) Auction. Power was also a participant
  in the recent BGS auction held in February 2003. Power entered into hourly energy
  price contracts to be a direct supplier of certain large customers for a ten-month
  period beginning August 1, 2003 and expiring May 30, 2004. Power also entered
  into contracts with third parties who are direct suppliers of New Jerseys
  Electric Distribution Companies (EDCs). Through these seasonally-adjusted fixed
  price contracts, Power will indirectly serve New Jerseys smaller commercial
  and residential customers for ten-month and 34-month periods beginning August
  1, 2003 and expiring on May 30, 2004 and May 30, 2006, respectively. Power believes
  that its obligations under these contracts are reasonably balanced by its available
  supply.

45

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Energy Holdings

During 2002, a merger
  was consummated at Energy Holdings to change the form of the business from a
  corporation to a limited liability company. Energy Holdings succeeded to all
  the assets and liabilities of PSEG Energy Holdings Inc. in accordance with the
  New Jersey Limited Liability Company Act. As part of the reorganization, PSEG
  Resources Inc. became a wholly-owned subsidiary of PSEG Resources LLC (Resources), a newly formed
  New Jersey limited liability company. This reorganization was completed to further
  improve efficiencies within the tax reporting process.

Energy Holdings,
  through PSEG Global Inc. (Global), invests in, owns and operates generation
  and distribution facilities in select international and US markets. The generation
  plants sell power under long-term agreements as well as on a merchant basis
  while the distribution companies are rate-regulated enterprises. Through
  Resources, Energy Holdings invests in energy-related financial
  transactions, including leveraged leases, which are designed to produce predictable
  earnings at reasonable levels.

As a result of the
  worldwide economic downturn and the adverse development of several risks at
  certain of its investments, in 2002 Energy Holdings refocused its strategy from
  one of accelerated growth to one that places emphasis on increasing the efficiency
  and returns of its existing assets, and, going forward, intends to limit its
  spending to contractual commitments. In 2002, Energy Holdings recorded the financial
  impact of these events as it wrote-down its investment in Argentina, discontinued
  the operations of PSEG Energy Technologies Inc. (Energy Technologies) and a
  generating facility in India, and recorded goodwill impairment charges. Global
  will also selectively review its portfolio and seek to monetize, at reasonable
  values, investments which may no longer have a strategic fit. Resources has
  shifted its focus from new investments to monitoring its current investment
  portfolio, primarily energy-related leveraged leases. In 2002, the credit profile
  of several of the lessees deteriorated. In November 2002, Resources terminated
  its two lease transactions with affiliates of TXU-Europe, recovered its invested
  capital and recorded a modest gain on the termination. See Item 7A. Qualitative
  and Quantitative Disclosures About Market Risk  Credit Risk for further
  discussion.

Future Outlook

PSEG

PSEG develops a long-range
  growth target by building business plans and financial forecasts for each major
  business (PSE&G, Power, Global and Resources). These plans and forecasts
  incorporate specific, rather than generic, project investments. Key factors
  which influence the performance of each business, such as fuel input costs and
  forward power prices, are also incorporated. Sensitivity analyses are performed
  on the key variables that drive the businesses financial results in order
  to understand the impact of these assumptions on PSEGs projections. Once
  plans are in place, PSEG management monitors actual results and the key variables
  and updates the financial projections to reflect changes in the energy markets,
  the economy and global conditions. Management believes this monitoring and forecasting
  process enables it to alter operating and investment plans adequately and appropriately
  as conditions change.

Looking ahead, PSEG
  forecasts 2003 results of $3.70 to $3.90 per share for continuing operations,
  comparable to results for 2002, excluding losses from Argentine investments.
  This earnings per share guidance is expected to be achieved through results
  from PSEGs ongoing operations which is expected to offset the effects
  of the common equity issuance in November 2002 and the use of a more conservative
  financing structure as PSEG issued more costly common and preferred equity and
  fixed-rate debt to replace low cost commercial paper, discussed above. Subsequent
  to 2003, PSEG seeks to attain its 7% long-term annual growth rate target in
  earnings per share.

Several key assumptions
  in PSEGs 2003 business plan are: Power will continue to be successful
  in securing BGS-related contracts and managing its obligations under such contracts
  with available supply; PSE&G will have a successful outcome to its recently
  filed electric rate case seeking an approximately $250 million increase in electric
  rates beginning in August 2003 and benefit from more normal weather; Global,
  with significant cost-cutting measures in place and limited spending planned
  over the five year planning horizon, will experience improvements in earnings
  through its focus on increasing the return on its existing assets; and Resources,
  with less exposure to its investment in the KKR Associates L.P. (KKR) leveraged
  buyout funds, will continue to be a steady contributor to

46

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earnings and cash flows. In the later years of the business plan, PSEG expects energy and
capacity prices to increase as the current overbuild situation dissipates and reserve margins in the Pennsylvania  New Jersey  Maryland power pool (PJM), the Midwest and Texas return to more
reasonable levels.

During 2002, the energy segment of
the financial markets experienced
 significant volatility and, in the third quarter, the fair value of
 Power's and Energy Holdings' long term debt decreased significantly.  The
 fair value of Power's and Energy Holdings' long-term debt rebounded in the
 fourth quarter of 2002, returning to more reasonable levels.  PSEG's
 business plan assumes that the fair value of its securities and the
 securities of its subsidiaries will continue to be valued at reasonable
 levels, enabling PSEG continued access to capital over the long-term.
 However, even if volatility returns to the marketplace and the value of
 PSEG's securities or its subsidiaries' securities are negatively affected,
 PSEG believes that it has sufficient liquidity to continue meet its
 business plans.  PSEG's business plan also assumes a stable financial
 marketplace and a reasonable return on its pension plan funds and
Nuclear Decommissioning Trust (NDT) Funds which have total investments
  of approximately $3 billion. Changes in the value of these funds will affect
  PSEGs earnings, equity balance and the required amount of funding.

As a result of PSEGs
  forecasted operating cash flows and the changes in future capital expenditures,
  PSEG expects to have funds available to maintain its current dividend policy
  and have positive cash flow for each of the next five years. PSEG expects to
  use this free cash flow to continue to enhance its financial profile by reducing
  leverage. PSEG anticipates that its leverage ratio will decline modestly by
  the end of the year due capital expenditures being primarily funded with cash from operations,
  earnings for 2003 exceeding dividend requirements
  and also the required adoption of SFAS 143,
  Accounting for Asset Retirement Obligations (SFAS 143), which will
  benefit earnings, and therefore equity. The impact of SFAS 143 is not reflected
  in PSEGs 2003 earnings guidance and is expected to more than offset the
  pension related charge to equity discussed above in Overview.

Dividend
  payments on common stock for the year ended December 31, 2002 were $2.16 per
  share and totaled approximately $456 million. Although PSEG presently believes
  it will have adequate earnings and cash flow in the future from its subsidiaries
  to maintain common stock dividends at the current level, earnings and cash flows
  required to support the dividend will become more uncertain as its business
  continues to evolve. Future dividends declared will necessarily be dependent
  upon PSEGs future earnings, cash flows, financial requirements, alternate
  investment opportunities and other factors. PSEGs payout ratios were 58%
  in 2002 and 2001, excluding charges discussed above. PSEG would consider increasing
  the dividend if the payout ratio fell below 50% and could be sustained at that
  level.

PSE&G

PSE&Gs success will be dependent, in part, on its ability to obtain a reasonable and timely outcome to its recently filed electric rate case, as well as its ability to continue to
recover the regulatory assets it has deferred and the investments it plans to make in its electric and gas transmission and distribution systems. The proposed rate increase would significantly impact PSE&Gs earnings and operating cash
flows. The non-depreciation portion of the requested rate increase ($232 million) would have a positive effect on PSE&Gs earnings and operating cash flows. The depreciation portion of the requested rate increase ($18 million) would have no
impact on PSE&Gs earnings, as the increased operating cash flows would be offset by higher depreciation charges. The outcome of these matters cannot be predicted, but are expected to be material to PSE&G results of operations, financial
condition and net cash flows.

Power

A major risk of Powers business is that the competitive wholesale power prices that it is able to obtain are sufficient to provide a profit and sustain the value of its assets. It is also
subject to credit risk of the counterparties to whom it sells energy products, the successful operation of its generating facilities, fluctuations in market prices of energy and imbalances between obligations and available supply. Power is currently
constructing projects, which will increase capacity from approximately 13,000 MW to 16,000 MW, net of planned retirements through 2005.

Powers success
  as a BGS provider will depend, in part, on its ability to meet its obligations
  under its full requirements contracts with the BGS suppliers profitably. Power
  expects to accomplish this by producing energy from its own generation and/or
  energy purchases in the market. Power also enters into trading positions related
  to its generation assets and supply obligations. To the extent it does not hedge
  its obligations, whether long or short, Power will be subject to the risk of
  price fluctuations that could affect its future results, such as changes in
  the expected price of energy and capacity that Power sells into the market,
  increases in the price of energy purchased to meet its supply obligations, the
  cost of fuel to generate electricity, the cost of emission credits needed for environmental compliance, and the
  cost of congestion credits which are used by Power to transmit electricity and
  other factors. In addition, Power is subject to the risk of substandard operating
  performance of its fossil and nuclear generating units. To the extent there
  are unexpected outages at Powers generating facilities, changes in environmental
  or nuclear regulations or other factors that impact the production by such units
  or the ability to generate and transmit electricity in a cost effective manner,
  it may cost Power more to acquire or produce electricity. These risks can be
  exacerbated by, among other things, changes in demand in electricity usage,
  such as those due to extreme weather and economic conditions.

Powers future
  revenue stream is uncertain because Power cannot accurately predict revenues
  beyond the termination of the ten-month BGS contracts. However, this uncertainty
  has been partially mitigated by a portion of the BGS demand being contracted
  for a 34-month period. Also, certain of Powers new projects, such as its

47

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investments in the Lawrenceburg and Waterford projects under construction in Indiana and Ohio, the plants Power acquired in 2002 from Wisvest Corporation in Connecticut and its development of the Bethlehem Energy Center in
New York are also subject to the risk of changes in future energy prices as Power has not entered into forward sale contracts for the majority of the expected generation capacity of these facilities. Power also expects that capacity prices will
increase over its five year planning horizon as the overbuild situation in the Super Region dissipates as older, less efficient units are retired in the region.  Also, since the majority of Powers generation facilities are concentrated in the
Northeast region, changes in future energy supply and demand and energy-related prices in this region could materially affect Powers results. Also, changes in the rules and regulation of these markets by FERC, particularly changes in the rules
in the power pools in which Power conducts business and ability to maintain market based rates, could have an adverse impact on Powers results. Lastly, in accordance with the Final Decision and Order (Final Order),
issued by the BPU in 1999 relating to PSE&Gs rate unbundling, stranded costs
and restructuring proceedings,
Power will cease collection of Market Transition Charge (MTC) revenues at the end
of the transition period in 2003. Power expects MTC revenues will amount to approximately $115 million in 2003. As a result of these variables and risks, Power cannot predict the impact of these potential future changes on its forecasted results of operations, financial position or net cash flows; however, such impact could
be material.

In addition, Powers
  earnings projections assume that it will continue to optimize the value of its
  portfolio of generating assets and supply obligations through its energy trading
  operations. This will depend, in part, on Powers, as well as its counterparties,
  ability to maintain sufficient creditworthiness and to display a willingness
  to participate in energy trading activities at anticipated volumes. Potential
  changes in the mechanisms of conducting trading activity could positively or
  negatively affect trading volumes and liquidity in these energy trading markets
  compared to the assumptions of these factors embedded in Powers business
  plans. Power marks to market derivative instruments designated as trading activities
  and includes the resulting unrealized gains and losses in earnings. The vast
  majority of these contracts have terms of less than two years and are valued
  using market exchange prices and broker quotes. Energy trading provides the
  opportunity for greater returns, but it also is more risky than a regulated
  business and can be adversely impacted by fluctuating energy market prices and
  other factors. Power utilizes what it believes to be a conservative risk management
  strategy to minimize exposure to market and credit risk. For further information,
  see MD&A  Accounting Issues, Note 1. Organization and Summary of Significant
  Accounting Policies and Note 12. Risk Management of the Notes. As a result of
  these variables, Power cannot predict the impact of these potential future changes
  on its forecasted results of operations, financial position or net cash flows;
  however, such impact could be material.

Energy Holdings

Global
  will focus on improving the profitability of its generation and distribution
  investments. Resources, with recent investments and less exposure to its investment
  in the KKR leveraged buyout funds, expects to continue to be a steady contributor
  to earnings and cash flows.

Global

While Global realized
  substantial growth prior to 2002, significant challenges began developing during
  the fourth quarter of 2001 and continued into 2002. These challenges include
  the Argentine economic, political and social crisis, the soft power market in
  Texas, recent developments in India and the worldwide economic downturn. The
  financial effects of several of these challenges are behind Energy Holdings
  as a result of the charges recorded in 2002. Global has recently reached a settlement
  with The AES Corporation (AES) related to certain of Globals investments
  held for sale in Argentina. Similarly, Global has completed the sale of its
  investment in Tanir Bavi Power Company Private Ltd. (Tanir Bavi) in India at its reduced carrying value, receiving proceeds
  of approximately $45 million in October 2002. Global has refocused its strategy
  from one of accelerated growth to one that places emphasis on increasing the
  efficiency and returns of its existing assets and intends to limit its spending
  to contractual commitments. Global is also selectively reviewing its portfolio
  and will seek to monetize, at reasonable values, investments which may no longer
  have a strategic fit. As part of this review, Global recently entered into a
  memorandum of understanding to sell its interest in Prisma, a generation business
  in Italy, to its partners for approximately $69 million. The sale is expected
  to close in the first half of 2003, contingent upon successful project financing.

Energy Holdings
  success will be dependent, in part, on its ability to mitigate risks presented
  by its international strategy. The economic and political conditions in certain
  countries where Global has investments present risks that may be different than
  those found in the US including: unilateral renegotiation or nullification of
  existing contracts, changes in law or tax policy, interruption of business,
  risks of nationalization, expropriation, war and other factors.

48

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Operations in foreign countries also present risks associated with currency exchange and convertibility, inflation and repatriation of earnings. In some countries in which Global has interests, economic, political and monetary
conditions and other factors could affect Globals ability to convert its cash distributions to US Dollars or other freely convertible currencies. 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, US Dollars or a currency freely convertible into US Dollars, its ability to do so in all cases may be limited.

The international
  risks discussed above can potentially be magnified due to the volatility of
  foreign currencies. The foreign exchange rates of the Venezuelan Bolivar and
  Brazilian Real materially weakened in 2002 due to various political and economic
  factors. This resulted in a reduction in Globals investment and equity
  balances and resulted in comparatively lower contributions from Globals
  distribution investments in US Dollar terms. While Energy Holdings still expects
  certain of its investments in Latin America to contribute favorably to its
  earnings in the future, the political and economic risks associated with this
  region could have a material adverse impact on its remaining investments in
  the region.

The table below reflects
  Energy Holdings investment exposure in Latin American countries:

|          | Investment
      Exposure |     | Equity Exposure
|--------- | ------------------------- | --- | ---------------
|          |                           |     |                
|          | December 31,              |     | December 31,   
|          | **2002**                  |     | **2001**       
|          |                           |     |                
|          | (Millions)               
|Argentina | $                         |    |                
|Brazil    |                           | 436 |                
|Chile     |                           | 578 |                
|Peru      |                           | 454 |                
|Venezuela |                           | 51  |                

The investment exposure
  consists of Globals invested equity plus equity commitment guarantees.
  Equity exposure is equal
  to Globals investment net of foreign currency translation adjustments,
  reflected in OCI.

Venezuela

As of December 31,
  2002, Global had $49 million, or less than 1%, of its assets invested in the
  Turboven generation facilities in Maracay and Cagua, Venezuela. This project
  was fully funded by equity. Venezuela is undergoing a period of significant
  political instability, as participation in prolonged work stoppages and violent
  street protests have caused a drastic reduction in economic activity. Following
  its 45% decline against the US Dollar in 2002, the Venezuelan currency, the
  Bolivar, has declined further in value in 2003, and additional declines are
  possible. Turbovens earnings and cash flows are expected to be affected
  by the prospects of reduced economic activity and increased exchange rate volatility.
  Although Turbovens power purchase contracts are indexed to the US Dollar,
  the sharp decline in economic activity and in the exchange rate make the local
  sales price of Turbovens energy supplies less attractive to local manufacturers.
  Turbovens revenues have already declined and are expected to remain below
  previous levels due to weakening demand for the products manufactured by Turbovens
  customers, which includes a utility and certain industrial companies.

Brazil

As of December 31,
  2002, Global owns a 32% interest in Rio Grande Energia (RGE), a distribution company in Brazil. The
  carrying value of this investment as of December 31, 2002 was $211 million,
  net of pre-tax cumulative translation adjustments of $225 million. For a discussion
  of the impairment of a portion of the goodwill balance at RGE due to the adoption
  of SFAS No. 142 "Goodwill and Other Intangible Assets" (SFAS 142), see Note 2. New Accounting Standards of the Notes.

49

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The Brazilian economy
  is in a period of slowed growth that has resulted from the high public and private
  sector debt levels, as well as increased interest rates used by the Central Bank
  of Brazil to control rising inflation and to support the value of the Brazilian
  Real following its 34% decline in 2002.

In January 2003,
  a new government administration assumed office and has a stated goal of reducing
  the effect of currency devaluations and wholesale prices as inputs to final
  consumer prices for electricity. Additionally, the new administrations
  energy industry policy is to cancel future privatizations of state-owned energy
  companies and increase federal government control and coordination of energy
  industry policies previously controlled by state and regional entities.

The current regulatory
  regime adjusts consumer electric tariffs based on a multiple-factor formula
  that includes recovery of wholesale inflation for previous periods, as well as
  an additional entitlement to pass through deferred US Dollar costs. This current
  regulatory structure would result in an increase of approximately 40% in the
  tariffs RGE would charge its customers starting in April 2003. Failure to receive
  a reasonable tariff increase, unfavorable developments relating to potential
  changes in the regulatory structure and/or greater exertion of price controls
  by the Brazilian government could have a materially adverse impact on Energy
  Holdings ability to earn a reasonable return on its investment and could
  materially impact its ability to recover its investment balance, including a
  potential impairment. Other risk factors that could affect future revenues and
  cash flows from Energy Holdings investment in RGE are continued high interest
  rate levels, currency devaluation, extended recession and slow economic growth.

Texas

As of December 31,
  2002, Global had $222 million, net of derivative valuations, invested in a 50/50 joint venture which operates two
  1,000 MW gas-fired combined-cycle electric generating facilities in Texas, including
  approximately $73 million of loans earning an annual interest rate of 12%. The
  loan structure was put in place to provide Global with a preferential cash and
  earnings flow from the projects after third-party debt service. Losses from
  Texas Independent Energy L.P. (TIE) were greater than expected due to lower energy prices resulting from over-supply
  of energy in the Texas power market for the year ended December 31, 2002. Global
  expects this trend of lower energy prices to continue until the 2004-2005 time
  frame when market prices are expected to increase, as older less efficient plants
  in the Texas power market are expected to be retired and the demand for electricity
  is expected to increase. However, no assurances can be given as to the accuracy
  of these estimates.

Continued weakness
  in the Texas power market will put pressure on TIEs ability to meet financial
  covenants in its loan documents. Discussions are underway with the projects
  lenders to improve flexibility in meeting these covenants. Potential remedies
  may include modest additional equity investments by Global in the Texas facilities.
  Total project level non-recourse debt of $527 million at the Texas facilities is due
  over the next five years. These debt maturities include $210 million in 2006
  and $213 million in 2007. In the event the project-level debt cannot be repaid
  or refinanced at the project level, Global may consider certain alternatives
  including additional equity investments.

Resources

Over the longer term,
  Resources earnings and cash flow streams are dependent upon the availability
  of suitable transactions and its ability to continue to enter into these transactions.
  Based on current market conditions and Energy Holdings intent to limit capital
  expenditures, it is unlikely that Resources will make significant investments
  in the near term. Resources faces risks with regard to the creditworthiness
  of its counterparties, as well as the risk of a change in the current tax treatment
  of its investments in leveraged leases. The manifestation of either of these
  risks could cause a materially adverse effect on Energy Holdings strategy and its forecasted
  results of operations, financial position, and net cash flows. For discussion
  of the five counterparties to these leases, including Resources aggregate
  gross investment of $749 million, or $455 million, net of deferred taxes of $294 million, as of December
  31, 2002, with those who have been downgraded to below investment grade by at
  least one of the rating agencies, see Item 7A. Qualitative and Quantitative
  Disclosures about Market Risk.

50

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Energy Technologies
  is a business that principally constructs, installs, and maintains heating,
  ventilating and air conditioning (HVAC) equipment and related services. Energy
  Technologies is comprised of 11 HVAC and mechanical operating companies. In
  June 2002, Energy Holdings adopted a plan to sell its interests in the HVAC/mechanical
  operating companies which is expected to be completed
  by June 30, 2003. Also, the Demand Side Management (DSM) business previously
  conducted by Energy Technologies and which Energy Holdings decided to retain
  during the third quarter of 2002, was transferred to Resources as of December
  31, 2002.

RESULTS OF OPERATIONS

PSEG

PSEGs business
  consists of four reportable segments, which are Power, PSE&G, Global and
  Resources. The following is a discussion of the major year-to-year financial
  statement variances and follows the financial statement presentation as it relates
  to each of its segments.

PSEGs results
  of operations are primarily comprised of the results of operations of its operating
  subsidiaries, PSE&G, Power and Energy Holdings. For a more detailed discussion
  of the changes referenced for PSEG, see the applicable results of operations
  discussion for each respective subsidiary registrant.

Net income for the
  period ended December 31, 2002 was $245 million or $1.17 per share of common
  stock, both basic and diluted, based on approximately 209 million average shares
  outstanding. Excluding certain after-tax charges of $541 million or $2.59 per
  share for the year ending December 31, 2002, results were $786 million or $3.76
  per share. The charges relate to the asset impairment of investments in Argentina
  and losses from operations of those impaired assets, discontinued operations
  of Energy Technologies, and a generating facility in India, and goodwill impairment charges related to the adoption of SFAS 142.

|                                                                       | Earnings (Losses)             |    
|---------------------------------------------------------------------- | ----------------------------- | ---
|                                                                       |                               |    
|                                                                       | Year Ended December
      31, |    
|                                                                       |                               |    
|                                                                       | 2002                          |    
|                                                                       |                               |    
|                                                                       |                               |    
|Power                                                                  | $                             | 468
|PSE&G                                                                  |                               | 201
|Energy Holdings:                                                       |                               |    
|Resources                                                              |                               | 78 
|Global                                                                 | (302                          | )  
|Other
      (A)                                                        |                               | (8 
|Other (B)                                                              |                               | (21
|                                                                       |                               |    
|Subtotal                                                               |                               | 416
|                                                                       |                               |    
|Loss from Discontinued Operations,
         including Loss on Disposal |                               | (51
|Cumulative Effect of a Change inAccounting Principle (C)               | (120                          | )  
|                                                                       |                               |    
|Total PSEG Net Income                                                  | $                             | 245
|                                                                       |                               |    
|Total PSEG Excluding Charges (D)                                       | $                             | 786
|                                                                       |                               |    

51

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|                                                                             | Contribution
      to Earnings Per Share(Basic and Diluted) |     
|---------------------------------------------------------------------------- | ----------------------------------------------------------- | ----
|                                                                            
|                                                                             |                                                             |     
|                                                                             | Year Ended
      December 31,                               |     
|                                                                             |                                                             |     
|                                                                             | 2002                                                        |     
|                                                                             |                                                             |     
|Power                                                                        | $                                                           | 2.24
|PSE&G                                                                        |                                                             | 0.96
|Energy Holdings:                                                             |                                                             |     
|Resources                                                                    |                                                             | 0.37
|Global                                                                       | (1.44                                                       | )   
|Other
      (A)                                                              | (0.04                                                       | )   
|Other (B)                                                                    | (0.10                                                       | )   
|                                                                             |                                                             |     
|Subtotal                                                                     |                                                             | 1.99
|                                                                             |                                                             |     
|Loss from Discontinued
      Operations,
         including Loss on Disposal | (0.24                                                       | )   
|Cumulative Effect
      of a Change inAccounting Principle (C)               | (0.58                                                       | )   
|                                                                             |                                                             |     
|Total PSEG Net Income                                                        | $                                                           | 1.17
|                                                                             |                                                             |     
|Total PSEG Excluding Charges (D)                                             | $                                                           | 3.76
|                                                                             |                                                             |     

|    |                                                                                                                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(A) | Other activities include amounts
      specific to Energy Holdings, Energy Technologies, Enterprise Group Development
      Corporation (EGDC) and intercompany eliminations. Specific amounts include
      interest on certain financing transactions and certain other administrative
      and general expenses at Energy Holdings.
|(B) | Other activities include amounts
      specific to PSEG and intercompany eliminations. Specific amounts include
      interest on certain financing transactions and certain other administrative
      and general expenses at PSEG (parent company).                                                                                 
|(C) | Relates to the adoption of SFAS 142 in 2002 and the adoption of SFAS No.
      133 Accounting for Derivative Instruments and Hedging Activities
      (SFAS 133) in 2001.                                                                                                                                                            
|(D) | Amount for 2002 excludes after-tax
      charges presented in the summary table below of $541 million or $2.59 per
      share for the year ended December 31, 2002. For 2001 and 2000, these amounts
      reflect Income Before Discontinued Operations and Cumulative Effects of
      Changes in Accounting Principle.             
|52 

---



The after-tax charges relating to the items discussed above are summarized in the following table:

|                                                              | Year
        EndedDecember 31, 2002 |  
|------------------------------------------------------------- | ----------------------------------- | -
|                                                             
|                                                              |                                     |  
|                                                              | (Millions)                          |  
|                                                              |                                     |  
|Global                                                        |                                     |  
|                                                              |                                     |  
|Argentina  EDEERSA (A) and
      Assets Held for Sale to AES |                                     |  
|Write-down
      of Project Investments                       |                                     | $
|Goodwill
      impairment                                     |                                     |  
|                                                              |                                     |  
|Total
      Argentina                                         |                                     |  
|                                                              |                                     |  
|India  Tanir Bavi                                            |                                     |  
|Discontinued
      Operations                                 |                                     |  
|Goodwill
      impairment                                     |                                     |  
|                                                              |                                     |  
|Total
      Tanir Bavi                                        |                                     |  
|                                                              |                                     |  
|Brazil  RGE                                                  |                                     |  
|Goodwill
      impairment                                     |                                     |  
|                                                              |                                     |  
|Subtotal for
      Global                                     |                                     |  
|                                                              |                                     |  
|Energy Technologies                                           |                                     |  
|                                                              |                                     |  
|Discontinued
      Operations                                 |                                     |  
|Goodwill
      impairment                                     |                                     |  
|                                                              |                                     |  
|Subtotal Energy
      Technologies                            |                                     |  
|                                                              |                                     |  
|Total                                                         |                                     | $
|                                                              |                                     |  

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                         
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------
|(A)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Empresa Distribuidora de Electricidad
      de Entre Rios S.A. (EDEERSA)
|Excluding
      the charges discussed above, earnings for the year ended December 31, 2002
      were largely consistent with the prior year. This is primarily due to higher
      margins at Power due to its successful participation as an indirect supplier
      of energy to New Jerseys utilities resulting from the recent BGS auction. The BGS-related contracts, which went
      into effect on August 1, 2002 had a meaningful effect on PSEGs earnings,
      particularly during the fourth quarter when Power served its contractual
      obligations with low cost energy during the colder months. The strong performance
      of Powers nuclear generation facilities, which operated at a combined
      capacity factor of 94% during 2002, accounted for 60% of Powers generation
      output, providing low cost energy to meet its demand and delivering solid
      margins. PSE&G also improved earnings, due to stronger margins from
      gas rate relief, more favorable weather effects as compared to the prior
      year and a cost containment effort which reduced operating expenses during
      2002. These positive factors were offset by higher interest costs at PSEG,
      Power and Energy Holdings, the absence of certain tax benefits realized by PSE&G
      in 2001 and comparatively lower contributions from investments at Energy
      Holdings, particularly the loss of earnings from Energy Holdings Argentine
      investments, continued weakness in the Texas markets and a lower gain from
      the Eagle Point Cogeneration Partnership (Eagle Point) transactions.
|Basic
      and diluted earnings per share of PSEGs common stock (Common Stock)
      was $3.70 for the year ended December 31, 2001, an increase of $0.15 per
      share, or 4.2% from the comparable 2000 period, including $0.12 of accretion
      as a result of PSEGs stock repurchase program, discussed in Liquidity
      and Capital Resources. In addition, PSEGs increased earnings for 2001
      as compared to 2000 resulted from improved energy trading margins from Power,
      Globals withdrawal and sale of its interest in Eagle Point, acquisitions and expanded operations at Global,
      new leveraged lease investments at Resources and strong performance of Powers
      nuclear facilities. These increases more than offset the effects of unfavorable
      weather conditions at PSE&G, two BPU mandated 2% rate reductions effective
      in February 2001 and August 2001, which reduced Powers revenues and
      the effects of the securitization transaction that occurred on January 31,
      2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|53                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

---



PSEG

Operating Revenues

For the year ended
  December 31, 2002, Operating Revenues increased by $1.3 billion or 19%, due
  primarily to Powers BGS or commodity revenues subsequent to July 2002
  not being eliminated in consolidation by PSEG. Under the BGS contract, which
  terminated on July 31, 2002, Power sold energy directly
  to PSE&G, which in turn sold this energy to its customers. These revenues
  were properly recognized on each companys stand-alone financial statements
  and were eliminated when preparing PSEGs consolidated financial statements.
  For the new BGS contract period which began on August 1, 2002, Power entered into
  contracts with third parties who are direct suppliers of New Jerseys EDCs
  and PSE&G purchases the energy for its customers needs from such direct
  suppliers. Due to this change in the BGS model, these revenues are no longer
  intercompany revenues and therefore are not eliminated in consolidation. For
  the year ended December 31, 2002, PSEGs elimination related to intercompany
  BGS and MTC revenues decreased by approximately $798
  million as compared to 2001 due to this change. Also related to this change
  in the BGS model, PSE&G, in 2002, began selling energy purchased under non-utility
  generation (NUG) contracts, which it had previously sold to Power,
  to third parties. As a result, for the year ended December 31, 2002, PSEGs
  revenues related to NUG contracts increased by approximately $82 million.

The remaining increase
  was due primarily to a $516 million increase from Power primarily related to
  the new BGS related revenues from third party wholesale electric suppliers which
  went into effect August 1, 2002 and revenues from off-system gas sales, partially
  offset by lower MTC revenues and lower net trading revenues as discussed further
  under the Power segment discussion. Also contributing to the increase was a
  $111 million increase at Energy Holdings driven by higher electric revenues
  at Global, relating to acquisitions and projects going into operation and higher
  leveraged lease income at Resources, partially offset by lower investment earnings,
  as discussed below under Energy Holdings segment discussion. Additionally, increases
  were partially offset by a $172 million decrease in revenues from PSE&G
  primarily due to a decrease in gas distribution revenues, resulting partially
  from an average cost reduction of more than 10% in the cost of gas, in addition
  to other items discussed below under the PSE&G segment discussion.

Operating Revenues
  increased by $534 million or 8% for the year ended December 31, 2001 as compared
  to 2000 due to a $204 million increase at PSE&G, primarily due to increased
  gas distribution revenues due to higher gas costs experienced in 2001, discussed
  further below in PSE&G, a $177 million increase at Power, primarily due
  to increased BGS revenue which resulted from customers returning to PSE&G
  in 2001, discussed further below in the Power segment discussion, and a $166 million
  increase at Energy Holdings primarily due to revenues related to various majority-owned
  acquisitions and plants going into operation in 2001 at Global, the gain on
  the withdrawal and sale of Globals interest in Eagle Point and improved
  revenues from higher leveraged lease income from new leveraged lease transactions
  at Resources, partially offset by lower net investment gains at Resources and
  lower energy supply revenues, discussed further below under the Energy Holdings
  segment discussion.

Operating Expenses

Energy
  Costs

For the year ended December 31, 2002, as compared to the prior year, Energy Costs increased approximately $1.1 billion or 41% due primarily to the fact that PSE&G no longer purchases
electric energy directly from Power, as discussed above in Operating Revenues, but rather from third party wholesalers. In 2001, and through July 31, 2002, PSE&G incurred energy costs related to electric energy transactions between it and Power.
 Accordingly, these costs were properly recognized on each companys stand-alone financial statements and were eliminated when preparing PSEGs consolidated financial statements.  Amounts attributable to this change totaled $880 million
between the years ended December 31, 2002 and 2001.

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The remaining increase was due to a $352 million increase at Power primarily related to increased energy purchases and third party wholesale electric supplier contracts, discussed further below
in Power, and a $92 million increase at Energy Holdings, relating to acquisitions and projects going into operation at Global, discussed further below in Energy Holdings. These increases were partially offset by a $229 million decrease at PSE&G
due primarily to decreased gas costs which resulted from lower demand, discussed further below in PSE&G.

Energy Costs increased
  $251 million or 10% in 2001 as compared to 2000 due to a $91 million increase
  at Power, largely due to increased volumes under the BGS-related contracts,
  discussed further below in Power, and  increases at PSE&G,
  primarily due to a $167 million increase in gas costs related to increased demand and higher prices for gas, as discussed further
  below in PSE&G. These increases were partially offset by an $11 million
  decrease at Energy Holdings due to a decision to exit the energy supply business,
  partially offset by higher costs relating to acquisitions.

Operations
  and Maintenance

For
  the year ended December 31, 2002, Operations and Maintenance expense increased
  $55 million or 3% as compared to 2001 due primarily to increases caused by scheduled
  outages at certain of Powers electric generating stations, and an increase
  at Energy Holdings of $46 million, primarily due to costs associated with acquisitions
  and projects going into operation. This increase was partially offset by a $14
  million decrease at PSE&G primarily due to decreased labor and professional
  service costs and partially offset by higher DSM amortization, discussed further
  below in PSE&G, and other charges of $12 million at PSEG.

Operation and Maintenance
  expense increased $135 million or 8% in 2001 as compared to 2000 due primarily
  to increases of $56 million at PSE&G, partially relating to the deferral
  of costs incurred during 2000 in connection with deregulation that PSE&G
  expects to recover in future rates, $52 million of higher expenses at Power,
  primarily relating to projects going into operation during the second quarter
  of 2000, and a $29 million increase at Energy Holdings, primarily related to
  costs associated with acquisitions late in 2000 and during 2001.

Depreciation
  and Amortization

For
  the year ended December 31, 2002, Depreciation and Amortization increased $75
  million or 15% as compared to 2001, primarily due to increases of $39 million
  at PSE&G, mainly due to a full periods recognition of amortization
  of the regulatory asset related to stranded costs for securitization, $13 million
  at Power, primarily due to increases from Bergen 2 being placed into service
  in 2002 and the absence of a prior year reversal of cost of removal reserves
  in 2002, and $19 million at Energy Holdings, primarily related to costs associated
  with acquisitions and projects going into operation.

For the year ended
  December 31, 2001, Depreciation and Amortization increased $146 million or 42%
  as compared to 2000 primarily due to the amortization of the regulatory asset
  recorded for stranded costs, which commenced with the issuance of the transition
  bonds on January 31, 2001, and $10 million at Energy Holdings related to costs
  associated with acquisitions late in 2000 and during 2001. These increases were
  partially offset by a $41 million decrease at Power, primarily due to a reduction
  in the accrual for the estimated cost of removal of Powers generating
  stations. There was an additional increase of $13 million at PSEG primarily
  due to asset additions made in 2001.

Taxes
  Other Than Income Taxes

Taxes Other Than Income Taxes is comprised of the Transitional Energy Facility Assessment (TEFA) at PSE&G. Taxes Other Than Income Taxes increased $10 million or 8% in 2002 as compared to
2001. This increase was primarily due to a reduction of $7 million in the prior years TEFA recorded in 2001 and an increase of $3 million in the 2002 TEFA due to increased sales. Legislation enacted in January 2002 freezes the TEFA unit rate
surcharges at the 2001 levels through 2004 and then reduces the rates over the next three years, phasing out the TEFA by 2007.

Taxes Other Than Income Taxes decreased $14 million or 10% in 2001 as compared to 2000. This decrease was due primarily to a reduction of $7 million in the prior years TEFA recorded in
2001 and a reduction of $7 million from lower net taxable sales subject to the TEFA combined with a reduction in the TEFA rate.

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Other Deductions

For the year ended December 31, 2002, Other Deductions increased by $64 million as compared to 2001, primarily due to a $61 million increase in foreign currency transaction losses at Energy
Holdings.

For the year ended December 31, 2001, Other Deductions increased by $12 million as compared to 2001, primarily due to a $9 million increase in foreign currency transaction losses at Energy
Holdings.

Interest Expense

For
  the year ended December 31, 2002, Interest Expense increased $61 million or
  8% as compared to 2001 primarily due to higher amounts of debt outstanding at
  PSEG, Power and Energy Holdings used to support various projects and acquisitions
  and for other general corporate purposes, partially offset by decreases at PSE&G
  due to lower debt levels.

For the year ended
  December 31, 2001, Interest Expense increased $151 million or 26% as compared
  to 2000 due primarily to the securitization debt issued in January 2001 at PSE&G.
  The increases in Interest Expense were also due to generally higher levels of
  debt at PSEG, Power and Energy Holdings used to support various projects and
  acquisitions and for other general corporate purposes.

Preferred Securities
  Dividends

For the year ended December 31, 2002, Preferred Securities Dividends decreased approximately $15 million primarily due to PSE&Gs redemptions of $448 million of preferred securities in
March and June of 2001, partially offset by the issuance of $460 million of participating units and $180 million of trust preferred securities at PSEG in September 2002 and December 2002, respectively.

For the year ended December 31, 2001, Preferred Securities Dividends decreased approximately $22 million primarily due to PSE&Gs redemptions of $448 million of preferred securities in
March and June of 2001.

Income Taxes

For
  the year ended December 31, 2002, Income Taxes decreased $133 million or 35%
  as compared to 2001 primarily due to lower pre-tax income partially offset by
  adjustments in 2001 reflecting the conclusion of the 1994-96 IRS audit settlement
  and the actual filing of the 2000 tax return.

For the year ended
  December 31, 2001, Income Taxes decreased $115 million or 23% as compared to
  2000. The decrease was primarily due to lower pre-tax income, adjustments in
  2001 as a result of closing the audit for the 1994-1996 tax years and the actual
  filing of the tax return for 2000.

PSE&G

Operating Revenues

For the year ended
  December 31, 2002, PSE&Gs Operating Revenues decreased $172 million
  or 3%, primarily due to a decrease of $155 million in gas distribution revenues.
  This decrease was due to lower commodity revenues resulting from an average
  cost reduction of more than 10% in the cost of gas (approximately $125 million).
  Also contributing to the decrease were lower sales to interruptible customers
  resulting from the lower cost of gas (approximately $88 million) and lower off-system
  sales revenues (approximately $26 million). These decreases were partially offset
  by increased gas base rates and increased volumes, primarily due to residential
  usage driven by favorable weather conditions (approximately $75 million) and
  increased appliance service revenues (approximately $14 million). In addition,
  electric transmission and distribution revenues decreased $17 million, primarily
  due to a 4.9% rate reduction implemented in August 2002 under the Final Order
  and rate reductions in February and August 2001 totaling 4%, (approximately
  $123 million) which were recorded as reductions in MTC

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revenues. Also affecting 2002 performance were decreases in NUG sales at market prices (approximately $15 million), lower DSM sales due to revenue adjustments in 2001 (approximately $19 million) and lower fiber optic
revenues due to unfavorable market conditions (approximately $7 million). These were offset by increased BGS revenues, primarily due to customers returning to PSE&G from third party suppliers (approximately $104 million), and higher distribution
volumes for residential and commercial customers (approximately $37 million) due to favorable weather conditions.

For the year ended
  December 31, 2001, PSE&Gs Operating Revenues increased $204 million
  or 3%, primarily due to increased gas distribution revenues of $153 million
  due to higher gas costs experienced in 2001. Customer rates in all classes of
  business had increased in 2001 to recover a portion of the higher natural gas
  costs. The commercial and industrial classes fuel recovery rates vary monthly
  according to the market price of gas. The BPU also approved increases in the
  fuel component of the residential class rates of 16% in November 2000 and 2%
  for each month from December 2000 through July 2001. These increased revenues
  were partially offset by lower sales volumes in the fourth quarter of 2001 than
  the comparable period in 2000, primarily resulting from warmer weather. Also
  contributing to the higher revenues were increases in electric distribution
  and appliance service revenue (approximately $39 million) and increased electric
  commodity sales volumes (approximately $17 million) offset by rate reductions.
  The MTC tariff rate decreased 2% in February 2001, effective with the implementation
  of securitization. Effective August 1, 2001, PSE&G implemented another 2%
  rate reduction as required by the Final Order, which brought, at that time,
  the total rate decrease to 9% since August 1, 1999. These rate reductions amounted
  to approximately $100 million in 2001, an increase of approximately $40 million
  as compared to 2000, and were funded through the MTC component of rates, which,
  along with BGS revenues, was remitted to Power through Energy Costs.

Under the BGSS, BGS
  and Levelized Gas Adjustment Clause (LGAC in 2001), PSE&Gs electric and gas costs in excess of (or below)
  the amount included in current commodity rates, are probable of being recovered
  from (returned to) customers through future commodity rates. PSE&G defers (records) costs in excess of (or below) the amount included
  in current commodity rates. Therefore any increase or decrease in PSE&Gs
  electric and gas commodity revenue is offset by a corresponding increase or
  decrease in gas costs on the Consolidated Statements of Operations. PSE&Gs
  electric and gas commodity revenues consist of BGS revenues, MTC revenues, NUG
  revenues, gas firm commodity revenues and gas interruptible revenues.

Operating Expenses

Energy
  Costs

For the year ended December 31, 2002, PSE&Gs Energy Costs decreased $229 million or 6% due primarily to a decrease in gas costs of approximately $230 million which resulted from lower
commodity sales volumes (approximately $125 million), lower volumes from interruptible customers due to lower rates (approximately $88 million) and lower off-system sales volumes (approximately $18 million). Also contributing to the decrease were
lower electric costs due to the MTC rate reductions discussed above in Operating Revenues (approximately $123 million) and decreased NUG energy sales due to lower rates (approximately $15 million). Offsetting these decreases were increased electric
energy costs due to higher commodity sales volumes from customers returning from third party suppliers and a scheduled increase in the shopping credit (approximately $104 million) and higher amounts paid to Power relating to the amortization of the
excess electric distribution depreciation reserve, a component of MTC (approximately $30 million).

For the year ended
  December 31, 2001, Energy Costs increased $1.0 billion as compared to 2000 primarily
  due to higher electric energy costs (approximately
  $845 million) resulting from higher sales volumes  and from PSE&G purchasing electricity from Power subsequent
  to August 2000. Also contributing to the increased Energy Costs were increased
  gas costs primarily due to higher natural gas costs (approximately $167 million).
  The increase was partially offset by lower natural gas purchases due to lower
  sales volumes resulting from warmer weather in the fourth quarter of 2001 as
  compared to the same period in 2000. Due to the LGAC, gas costs are increased
  or decreased to offset a corresponding increase or decrease in fuel revenues
  with no impact on income.

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Operations and
  Maintenance

Operations and Maintenance
  expense decreased $14 million or 1% in 2002 as compared to 2001 primarily comprised
  of decreased labor costs (approximately $9 million), decreased use of professional
  and contract services (approximately $7 million), lower charges
  for administrative and general services (approximately $7 million) and lower
  equipment rental (approximately $8 million). These decreases were offset by
  increased DSM amortization (approximately $14 million) and increased miscellaneous
  accounts receivable reserves (approximately $3 million).

Operations and Maintenance
  expense decreased $301 million or 23% in 2001 as compared to 2000 primarily
  due to the elimination of $357 million in Operations and Maintenance expenses
  resulting from the transfer of the generation business to Power in August 2000.
  The decrease was partially offset by the deferral of costs incurred during 2000
  in connection with deregulation that PSE&G expects to recover in future
  rates.

Depreciation
  and Amortization

Depreciation and Amortization
  expense increased $39 million or 11% in 2002 as compared to 2001 primarily due
  to a full periods recognition of amortization of the regulatory asset
  related to stranded costs for securitization (approximately $37 million). Also
  contributing was an increase in depreciable fixed assets (approximately $13
  million) and higher depreciation expense recorded in accordance with increased
  gas base rates for plant assets (approximately $7 million). The increases were
  partially offset by higher amortization of the excess electric distribution
  depreciation reserve (approximately $22 million).

Depreciation and Amortization
  expense increased $84 million or 29% in 2001 as compared to 2000 primarily due
  to approximately $180 million of amortization of the regulatory asset recorded
  for stranded costs, which commenced with the issuance of the transition bonds
  on January 31, 2001. This increase was partially offset by the elimination of
  $77 million of Depreciation and Amortization expense resulting from the transfer
  of the generation business to Power in August 2000.

Taxes Other
  Than Income Taxes

Taxes Other Than Income
  Taxes increased $10 million or 8% in 2002 as compared to 2001. This increase
  was primarily due to a reduction of $7 million in the prior years TEFA
  recorded in 2001 and an increase of $3 million in the 2002 TEFA due to increased
  sales. Legislation enacted in January 2002 freezes the TEFA unit rate surcharges
  at the 2001 levels through 2004 and then reduces the rates over the next three
  years, phasing out the TEFA by 2007.

Taxes Other Than Income
  Taxes decreased $14 million or 10% in 2001 as compared to 2000. This decrease
  was due primarily to a reduction of $7 million in the prior years TEFA
  recorded in 2001 and a reduction of $7 million from lower net taxable sales
  subject to the TEFA combined with a reduction in the TEFA rate.

Other
  Income

Other Income decreased
  $83 million or 75% in 2002 as compared to 2001, due primarily to PSEGs
  settlement of an intercompany loan from PSE&G in 2001 (approximately $65
  million) and lower interest income on investments (approximately $16 million).
  This was offset by a gain on disposal of properties (approximately $6 million).

Other Income decreased
  $62 million or 36% in 2001 as compared to 2000, due primarily to PSE&Gs
  intercompany loans to PSEG and Power in 2001 (approximately $65 million) and
  decreased interest income (approximately $125 million). The intercompany loan
  was a step in PSE&Gs recapitalization as a result of the transfer
  of its generation business to Power. This was offset by lower gains on disposal
  of properties (approximately $3 million).

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Interest
  Expense

Interest Expense decreased
  $44 million or 10% for the year ended December 31, 2002 as compared to 2001,
  due to the redemption of short-term debt in the third quarter of 2001 and lower
  interest rates in 2002 (approximately $14 million), the redemption of a floating
  rate note in 2001 (approximately $8 million), the maturity of long-term debt
  (approximately $14 million), the repurchase of Pollution Control Bonds (approximately
  $3 million), the carrying costs on the deferred repair allowance (approximately
  $7 million) and NJ state accrued tax interest adjustments (approximately $2
  million). These decreases were partially offset by higher securitization bond
  interest expense (approximately $7 million) related to Transition Fundings
  securitization bonds.

Interest
  Expense increased $53 million or 13% in 2001 as compared to 2000 primarily due
  to interest of approximately $176 million on the bonds issued by Transition
  Funding on January 31, 2001. These were partially offset by $118 million in
  lower interest resulting from the reduction of short-term and long-term debt
  with the proceeds from the securitization bonds and the transfer of generation-related
  assets to Power.

Income
  Taxes

Income taxes increased
  $26 million or 29% for the year ended December 31, 2002 as compared to 2001
  primarily due to prior period tax adjustments recorded in 2001 reflecting the
  conclusion of the 1994-96 IRS audit settlement and the actual filing of the
  2000 tax return.

Income taxes decreased
  $318 million or 78% in 2001 as compared to 2000. These decreases were primarily
  due to lower operating income due to the transfer of the generation business
  in 2000. In addition, taxes decreased due to normal adjustments as a result
  of closing the 1994-96 IRS audit and upon filing the actual tax return for the
  year 2000.

Power

Operating
  Revenues

For
  the year ended December 31, 2002, Powers Operating Revenues increased
  $1.2 billion or 50% primarily due to the inclusion of $804 million of gas revenues
  relating to its BGSS contract and off-system gas sales resulting from the operations
  under the Gas Contracts transferred from PSE&G in May 2002. Also contributing
  to the increase was a $560 million increase in BGS related revenues, primarily
  due to the new BGS related revenues from third party wholesale electric suppliers
  which went into effect August 1, 2002 which was partially offset by lower MTC
  revenues of $98 million mostly due to a 4.9% rate reduction in August 2002 and
  two 2% rate reductions in August 2001 and February 2001. Also offsetting the
  increases were lower net trading revenues of approximately $83 million due to
  lower trading volumes and prices during 2002 as compared to 2001.

For
  the year ended December 31, 2001, Powers Operating Revenues increased
  $177 million or 8% primarily due to an increase of $180 million in BGS revenue
  which resulted from customers returning to PSE&G in 2001 from third party
  suppliers as wholesale market prices exceeded fixed BGS rates. At December
  31, 2001, third party suppliers were serving less than 1% of the customer load traditionally served
  by PSE&G as compared to the December 31, 2000 level of 10.5%. Also, net
  revenues from energy trading increased by $57 million or 78% for the year ended
  December 31, 2001. Partially offsetting this increase was a net $40 million
  decrease in MTC revenues, relating to two 2% rate reductions, discussed above,
  offset by a pre-tax charge to income related to the recognition of MTC revenues
  in 2000.

Operating
  Expenses

Energy
  Costs

For
  the year ended December 31, 2002, Powers energy costs increased $1.1 billion
  or 127% compared to 2001 primarily due to increased energy purchase volumes
  and third party wholesale electric supplier contracts of approximately $297
  million and $738 million of increased gas purchases to satisfy Powers
  BGSS contract with

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PSE&G. Also contributing to the increase were
  higher network transmission expenses of $102 million. These higher expenses
  were partially offset by a $67 million decrease in NUG purchases. Additionally,
  the record capacity factor of its nuclear units enabled Power to produce low
  cost generation for much of its supply needs.

For the year ended
  December 31, 2001, energy costs increased $91 million over the 2000 period.
  The increase was largely due to increased volumes under the BGS-related contracts.
  The higher volumes produced, coupled with increased fuel costs, mainly natural
  gas, contributed to the increase. These increases were partially offset by low
  cost generation from the continued strong performance of Powers nuclear
  generation facilities.

Operations
  and Maintenance

For the period ended
  December 31, 2002, Operations and Maintenance expense increased $35 million
  or 5% as compared to the same period in 2001 due primarily to increases caused
  by scheduled outage work at electric generating stations.

Operation and Maintenance
  expense increased $52 million or 8% in 2001 as compared to 2000. Contributing
  to the increase were higher expenses relating to projects going into operation
  during the second quarter of 2000.

Depreciation
  and Amortization

For the period ended
  December 31, 2002, Depreciation and Amortization expense increased $13 million
  or 14% as compared to the same period in 2001 due primarily to increases from
  Bergen 2 being placed into service in 2002 and the absence of a prior year reversal
  of cost of removal reserves in 2002.

Depreciation and Amortization
  expense decreased $41 million or 30% in 2001 as compared to 2000. The decrease
  was primarily due to a reduction in the accrual for the estimated cost of removal
  of Powers generating stations.

Interest Expense

Interest Expense decreased
  $21 million or 15% for the year ended December 31, 2002 from the comparable
  period in 2001 primarily due to improved financing rates and the repayment of
  intercompany notes, which resulted in a decrease in expense of $83 million.
  Offsetting these reductions were $94 million of increased interest expense associated
  with the issuance of the $2.4 billion of senior notes including $600 million
  issued in 2002, $124 million of pollution control bonds and increased non-recourse
  financing associated with Lawrenceburg and Waterford, offset by capitalized
  interest relating to various construction projects of $32 million.

Interest Expense decreased
  $55 million or 28% for the year ended December 31, 2001 from the comparable
  period in 2000 primarily due to the repayment of the $2.8 billion 14.2% promissory
  note to PSE&G, issued to finance the acquisition of PSE&Gs generation
  business.

Income Taxes

Income Taxes increased
  $63 million or 25% for the year ended December 31, 2002 as compared to 2001,
  and increased $42 million or 20% for the year ended December 31, 2001 as compared
  to 2000. The increases for both years were due primarily to increases in pre-tax
  income.

Energy Holdings

Operating Revenues

Energy Holdings
  revenues increased $111 million, or 17%, to $749 million in 2002 from $638 million
  in 2001. This increase was driven by higher electric revenues at Global and
  higher leveraged lease income at Resources, partially offset by lower investment
  earnings, as discussed below.

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Energy Holdings
  revenues increased $166 million, or 35%, to $638 million in 2001 from $472 million
  in 2000. Increases totaling $235 million at Global and Resources, described
  below, were partially offset by $67 million of lower Energy Supply Revenues,
  as Energy Holdings exited that business in 2000.

Global

For the year ended
  December 31, 2002, the operating revenues increase of $105 million or 27% at
  Global was due primarily to the acquisitions in the second half of 2001 of Sociedad Austral de Electricidad S.A. (SAESA)
  ($79 million), a Chilean distribution company and Empresa de Electricidad de los Andes S.A. (Electroandes) ($46 million),
  a Peruvian hydroelectric generation and transmission company. Globals
  operating revenues also increased $57 million due to the generation facility
  located in Rades, Tunisia commencing operation in the second quarter of 2002.
  Also contributing $49 million to the increase in revenues was Skawina CHP Plan (Skawina), a generation
  facility in Poland, in which Global purchased a majority ownership in the second
  quarter of 2002. Revenues increased at the GWF Power System LP (GWF) energy peaking plants by $20
  million as the Hanford and Henrietta Peaking Plants became operational in the
  second quarter of 2001 and 2002, respectively. Revenues further increased by
  $12 million due to improved earnings from RGE as new regulatory changes allowed
  RGE to recover from customers prior tariff charges previously expensed. Partially
  offsetting these increases was a decrease of $43 million at Empresa Distribuidora de Electricidad de Entre Rios S.A. (EDEERSA) due to the
  economic crisis in Argentina. Reduced earnings of $21 million at the GWF San
  Francisco Bay Area facilities and of $26 million at TIE, both as a result of
  lower energy prices in those markets, partially offset the revenue increases
  as well. Also partially offsetting the increase in revenues at Global were $31
  million of losses at Prisma, including operational losses and an impairment
  to reduce the investment to its net realizable value, net of $11 million of
  interest income on a Euro-denominated loan owed by the project. Prisma is currently
  held for sale to Globals partner in this joint venture, and the sale is
  expected to be completed in the first half of 2003. In addition, in 2001, Global
  recorded $75 million for the gain on the sale and withdrawal from the Eagle
  Point facility compared to the $47 million recorded for the withdrawal in 2002,
  resulting in a reduction of approximately $28 million.

For the year ended
  December 31, 2001, revenues in the Global segment increased $227 million primarily
  due to $128 million of revenues related to various majority-owned acquisitions
  and plants going into operation in 2001. Globals revenues also increased
  from the gain of $75 million on the withdrawal and sale of Globals interest
  in Eagle Point and was partially offset by a loss in equity earnings of $17
  million, which was recorded in 2000 and not recorded in 2001, as a result of
  the withdrawal. In addition, revenues benefited from an increase of $45 million
  in interest income related to certain loans and notes, and approximately $29
  million of increased revenues relating primarily to improved earnings of certain
  non-consolidated projects. These increases were partially offset by lower revenues
  due to a reduction in earnings related to the adverse effect of foreign currency
  exchange rate movements between the US Dollar and Brazilian Real.

Resources

Resources operating
  revenues increased $6 million for the year ended December 31, 2002, as compared
  to 2001, primarily due to an increase of $44 million from higher leveraged lease
  income. The increase was mostly offset by lower net investment gains (losses)
  of $39 million, of which $37 million resulted from other than temporary impairments
  of non-publicly traded equity securities within certain leveraged buyout funds
  and other investments, and $8 million resulted from a net decrease in the gains
  on the sale of properties subject to leveraged leases. For further discussion
  of other than temporary impairments, see Note 12. Risk Management  Equity
  Securities. There was also a net increase of $6 million associated with the
  change in the carrying value of publicly traded equity securities in certain
  leveraged buyout funds. The decreases in the values of the publicly traded equity
  securities in 2002 and 2001 were $10 million and $16 million, respectively.

Of the $44 million
  increase in leveraged lease income in 2002, $29 million resulted from a gain
  due to a recalculation of certain leveraged leases. A change in an essential
  assumption which affects the estimated total net income over the life of a leveraged
  lease requires a recalculation of the leveraged lease, from inception, using
  the revised information. The change in the net investment in the leveraged leases
  is recognized as a gain or loss in the year the assumption is changed. The change
  in assumption which occurred was related to a change in New Jersey tax rates
  applied in the leveraged lease calculations. This was due to the restructuring
  of Resources from a corporation to an LLC, which resulted in the ability to
  more efficiently match state tax expenses of an affiliate company with the state
  tax benefits associated with Resources lease portfolio. The remaining
  $15 million increase in leveraged lease income was due to additional investments
  in leveraged lease transactions in 2002 and 2001.

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Revenues in the Resources
  segment increased by $8 million in 2001 compared to 2000 primarily due to improved
  revenues of $45 million from higher leveraged lease income from new leveraged
  lease transactions that was partially offset by lower net investment gains of
  $37 million.

Operating Expenses

Operating expenses
  increased $647 million for the year ended December 31, 2002 as compared to the
  same period in 2001. These operating expenses include a $497 million charge
  associated with the write-down of all Argentine investments and certain loss
  contingencies.

Operating expenses,
  less expenses associated with the $497 million impairment of Globals Argentine
  investments, increased $141 million for the year-ended 2002 versus 2001 primarily
  due to operating expenses incurred at SAESA and Electroandes, two acquisitions
  that occurred in the second half of 2001.

For the year ended
  December 31, 2001, operating expenses increased $35 million as compared to the
  same period in 2000, primarily due to costs at Global increasing by $103 million
  due to energy costs of $55 million for plant acquisitions and other projects
  commencing operation in 2001, partially offsetting a decrease in the cost of
  energy sales as Energy Holdings exited the energy supply business in 2000.

Other
  Income

Other
  Income increased $19 million in 2002, as compared to 2001 primarily driven by
  $12 million of net derivative gains resulting from a gain at SAESA of $11 million,
  with no comparable amount in 2001, and a $13 million gain on the Early Retirement
  of Debt.

Other Income increased
  $3 million in 2001, as compared to 2000.

Other Deductions

Other Deductions
  increased $61 million in 2002, as compared to 2001 primarily due to the re-measuring
  of the US Dollar denominated debt at EDEERSA to the devaluing Argentine Peso,
  which resulted in a loss of $68 million. Foreign exchange currency transaction
  losses were also impacted by a loss of $7 million related to the Chilean Peso
  at SAESA and a gain of $9 million related to a Euro-denominated loan. Such loan
  is expected to be repaid in connection with the sale of Prisma. These net increases
  were partially offset by a $3 million loss on the Early Retirement of Debt in
  2001, with no comparable amount in 2002.

Other Deductions
  increased by $9 million in 2001, as compared to 2000 as a result of higher foreign
  exchange currency transaction losses related to the Brazilian Real at Globals
  investment in RGE and a loss on the early Retirement of Debt of $3 million in
  2001.

Interest Expense

Interest Expense
  increased $34 million or 19% from $180 million in 2001 to $214 million in 2002.
  The increase was the result of selling $135 million of 8.625% Senior Notes in
  July 2002 and an increase in project level debt at Global of $273 million. The
  increase was partially offset by a decrease in interest expense from the repayments
  of borrowings under the revolving credit facilities.

Interest Expense
  increased $46 million or 34% from $134 million to $180 million in 2001 as compared
  to 2000. Interest Expense associated with recourse financing activities increased
  $45 million primarily due to additional borrowings incurred as a result of equity
  investments in distribution and generation facilities.

62

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Income Taxes

Income taxes were a
  benefit of $150 million for the year-ended December 31, 2002, a decrease of
  $215 million as compared to 2001. This is primarily a result of the write-downs
  and asset impairments recorded during 2002, which resulted in a pre-tax loss,
  thereby creating a tax benefit.

Income taxes increased
  $14 million or 27% from $51 million to $65 million in 2001 as compared to 2000,
  primarily attributable to increased pre-tax income.

Losses From Discontinued
  Operations

Energy Technologies

Energy Holdings reduced
  the carrying value of the investments in the 11 HVAC/mechanical operating companies
  to their fair value less costs to sell, and recorded a loss on disposal for
  the year ended December 31, 2002 of $21 million, net of $11 million in taxes.
  Energy Holdings remaining investment position in Energy Technologies is
  approximately $56 million, of which approximately $32 million relates to deferred
  tax assets from discontinued operations, and $12 million relates to certain
  intercompany payables included in the current liabilities of Discontinued Operations.
  Although Energy Holdings believes that it will be able to sell the HVAC/mechanical
  companies, it can give no assurances that it will be able to realize their total
  carrying values.

Operating results
  of Energy Technologies HVAC/mechanical operating companies, less certain
  allocated costs from Energy Holdings, have been reclassified into discontinued
  operations in the Consolidated Statements of Operations. The results of operations
  of these discontinued operations for the years ended December 31, 2002, 2001
  and 2000 yielded additional losses of $21 million (after-tax), $22 million (after-tax)
  and $12 million (after-tax), respectively.

Tanir Bavi

In the fourth quarter
  of 2002, Global sold its 74% interest in Tanir Bavi, a 220 MW barge mounted, combined-cycle generating facility in
  India. Tanir Bavi meets the criteria for classification as a component of discontinued
  operations and all prior periods have been reclassified to conform to the current
  years presentation. Global reduced the carrying value of Tanir Bavi to the
  contracted sales price of $45 million and recorded a loss on disposal of $14
  million (after-tax) for the year ended December 31, 2002. The operating results
  of Tanir Bavi for the year ended December 31, 2002 yielded income of $5 million
  (after-tax). See Note 5. Discontinued Operations of the Notes.

Cumulative Effect
  of Change in Accounting Principle

In 2002, Energy Holding
  finalized the evaluation of the effect of adopting SFAS 142 on the recorded
  amount of goodwill. Under this standard, PSEG was required to complete an impairment
  analysis of its recorded goodwill and record any resulting impairment. The total
  amount of goodwill impairments was $120 million, net of tax of $66 million and
  was comprised of $36 million (after-tax) at EDEERSA, $34 million (after-tax)
  at RGE, $32 million (after-tax) at Energy Technologies and $18 million (after-tax)
  at Tanir Bavi. All of the goodwill on these companies, other than RGE, was fully
  impaired. In accordance with SFAS 142, this impairment charge was recorded as
  of January 1, 2002 as a component of the Cumulative Effect of a Change in Accounting
  Principle and is reflected in the Consolidated Statements of Operations for the
  year ended December 31, 2002. See Note 2. New Accounting Standards of the Notes.

In 2001, Energy Holdings
  adopted SFAS 133, which established accounting and reporting standards for derivative
  instruments. Energy Holdings recorded an after-tax gain of $9 million as a result
  of adopting SFAS 133.

63

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Other

Global

The following summarizes
  the net contribution to Operating Income and Other Income and Other Deductions
  by Globals projects in the following regions for the years ended December
  31, 2002, 2001 and 2000. Certain of these amounts include results from Globals equity method subsidiaries which are recorded
  net of taxes and financing costs.

|                                                         | Years Ended December
      31, |    
|-------------------------------------------------------- | ------------------------------ | ---
|                                                         |                                |    
|Operating Income and Other Income
      (Deductions) (A) | 2002                           |    
|                                                         |                                |    
|                                                         | (Millions)                     |    
|North America                                            | $                              | 108
|Chile                                                    |                                | 61 
|Peru                                                     |                                | 54 
|Brazil                                                   |                                | 20 
|Asia Pacific                                             |                                | 6  
|All Other                                                |                                | 16 
|Global Unallocated Administrative
      and General      |                                |    
|Expenses (B)                                             |                                | (58
|                                                         |                                |    

|(A) | Operating Income plus Other Income
      and Deductions in Argentina for the years ended December 31, 2002, 2001
      and 2000 was $(558) million, $45 million and $14 million, respectively.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(B) | Includes $9 million of Loss
        Contingencies and Other expenses recorded in 2002 related to Energy Holdings
        investment in EDEERSA.                                              

Resources

The following summarizes
  Resources lease revenue for the years ended December 31, 2002, 2001 and
  2000 by credit quality of lease counterparties:

|                                                        | Years Ended December
      31 |    
|------------------------------------------------------- | ----------------------------- | ---
|                                                        |                               |    
|                                                        | 2002                          |    
|                                                        |                               |    
|                                                        | (Millions)                    |    
|Lease Revenue-Investment Grade(1)                       | $                             | 164
|Lease Revenue-Non-Investment Grade
      or not rated   |                               | 96 
|                                                        |                               |    
|Total (2)                                               | $                             | 260
|                                                        |                               |    
|Cash Flow Available From Leveraged
      Leases (3) (4) | $                             | 215
|Proceeds from Sale of Capital Leases
      (5)          |                               | 183
|                                                        |                               |    
|Gross Cash Flow from Leveraged
      Leases             | $                             | 398
|                                                        |                               |    

|(1) | Investment Grade means rated investment
      grade by both S&P and Moodys. For S&P, the minimum investment
      grade rating is BBB. For Moodys, the equivalent minimum investment
      grade rating is Baa3.                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Operating lease income does not
      reflect operating lease expense.                                                                                                                                                                                          
|(3) | Over 80% of lease cash flow is
      provided by tax payments from PSEG pursuant to a tax allocation agreement
      between PSEG and Energy Holdings.                                                                                                          
|(4) | The amounts are equal to Income
      from Capital and Operating Leases from the Consolidated Statements of Operations
      plus Leveraged Lease Income, Adjusted for Rents Received from the Consolidated
      Statements of Cash Flows.                     
|(5) | In 2002, Resources received $183
      million of cash proceeds associated with the termination of two lease transactions
      with affiliates of TXU-Europe. As a result of these terminations, Resources
      will pay income taxes of $115 million in 2003.
|64 

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LIQUIDITY AND CAPITAL RESOURCES

The following discussion
  of liquidity and capital resources is on a consolidated basis for PSEG, noting
  the uses and contributions of PSEGs three direct operating subsidiaries,
  PSE&G, Power and Energy Holdings.

Financing Methodology

PSEG,
  PSE&G, Power and Energy Holdings

Capital requirements
  are met through liquidity provided by internally generated cash flow and external
  financings. PSEG, Power and Energy Holdings from time to time make equity contributions
  or otherwise provide credit support to their respective direct and indirect
  subsidiaries to provide for part of their capital and cash requirements, generally
  relating to long-term investments.

At times, PSEG utilizes
  intercompany dividends and intercompany loans (except that PSE&G may not
  make loans to its parent or to affiliates that are not its direct subsidiaries)
  to satisfy various subsidiary needs and efficiently manage short-term cash needs.
  Any excess funds are invested in accordance with guidelines adopted by PSEGs
  Board of Directors.

External funding
  to meet PSEGs and PSE&Gs needs, the majority of the requirements
  of Power and a substantial portion of the requirements of Energy Holdings, is
  comprised of corporate finance transactions. The debt incurred is the direct
  obligation of those respective entities. Some of the proceeds of these debt
  transactions are used by the respective obligor to make equity investments in
  its subsidiaries.

As discussed below,
  depending on the particular company, external financing may consist of public
  and private capital market debt and equity transactions, bank revolving credit
  and term loans, commercial paper and/or project financings. Some of these transactions
  involve special purpose entities (SPEs), formed in accordance with applicable
  tax and legal requirements in order to achieve specified beneficial financial
  advantages, such as favorable tax and legal liability treatment. All SPEs are
  consolidated where PSEG has controlling interest.

The availability
  and cost of external capital could be affected by each subsidiarys performance,
  as well as by the performance of their respective subsidiaries and affiliates.
  This could include the degree of structural separation between PSEG and its
  subsidiaries and the potential impact of affiliate ratings on consolidated and
  unconsolidated credit quality. Additionally, compliance with applicable financial
  covenants will depend upon future financial position and levels of earnings
  and net cash flows, as to which no assurances can be given.

Over the next several
  years, PSEG, PSE&G, Power and Energy Holdings will be required to refinance
  maturing debt and expect to incur additional debt and provide equity to fund
  investment activities. 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 adversely affect PSEGs financial
  condition, results of operations and net cash flows.

From time to time,
  PSEG, PSE&G, Power and Energy Holdings may repurchase portions of their
  respective debt securities using funds from operations, asset sales, commercial
  paper, debt issuances, equity issuances and other sources of funding and may
  make exchanges of new securities, including common stock, for outstanding securities.
  Such repurchases may be at variable prices below, at or above prevailing market
  prices and may be conducted by way of privately negotiated transactions, open-market
  purchases, tender or exchange offers or other means. PSEG, PSE&G, Power
  and Energy Holdings may utilize brokers or dealers or effect such repurchases
  directly. Any such repurchases may be commenced or discontinued at any time
  without notice.

Power and Energy
  Holdings

A portion of the
  financing for Globals projects and investments is generally provided by
  non-recourse project financing transactions. These consist of loans from banks
  and other lenders that are typically secured by project and SPE assets and/or
  cash flows. Two of Powers projects currently under construction have similar
  financing.

65

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Nonrecourse transactions generally impose no material
  obligation on the parent-level investor to repay any debt incurred by the project
  borrower. However, in some cases, certain obligations relating to the investment
  being financed, including additional equity commitments, are guaranteed by Global,
  Energy Holdings and/or Power for their respective subsidiaries. The consequences
  of permitting a project-level default include loss of any invested equity by
  the parent. PSEG has not currently provided any guarantees or credit support
  to PSE&G, Power or Energy Holdings, except for the minimum net worth maintenance
  support agreement to PSEG Capital Corporation (PSEG Capital), a subsidiary of
  Energy Holdings, which is planned to be eliminated upon maturity of PSEG Capital
  Corporations debt in May 2003.

Cross Default
  Provisions

PSEG

The PSEG credit agreements
  contain default provisions under which a default by it, PSE&G, Power or
  Energy Holdings in an aggregate amount of $50 million would result in a default
  and the potential acceleration of payment under those agreements. The $350 million
  PSEG Credit Agreement which expires in December 2005 contains provisions that
  will eliminate the cross-default to Energy Holdings, once the $495 million Energy
  Holdings Credit Agreement expires in May 2004, or is renewed prior to that time.
  PSEG expects to negotiate similar provisions in PSEGs other credit agreements.

PSE&G

PSE&Gs
  First and Refunding Mortgage (Mortgage) and its credit agreements have no cross-defaults.
  The PSE&G Medium-Term Note Indenture has a cross-default to the PSE&G
  Mortgage. The credit agreements have cross-defaults under which a default by
  PSE&G in the aggregate of $50 million would result in a default and the
  potential acceleration of payment under the credit agreements.

Power

The Power Senior
  Debt Indenture contains a default provision under which a default by it, Nuclear,
  Fossil or PSEG Energy Resources & Trade LLC (ER&T) in an aggregate amount of $50 million would result in a default
  and the potential acceleration of payment under the indenture. There are no
  cross-defaults within Powers indenture from PSEG, Energy Holdings or PSE&G.

Energy Holdings

Energy Holdings
  credit agreements contain default provisions under which a default by it, Resources
  or Global in an aggregate amount of $5 million, or a default by PSEG in an aggregate
  amount of $75 million would result in an event of default and the potential
  acceleration of payment under those agreements. The Energy Holdings Senior Note
  Indenture contains cross-default provisions under which a default by it, Resources
  or Global in an aggregate amount of $25 million would result in a default and
  the potential acceleration of payment under the indenture.

Debt Covenants

PSEG, PSE&G,
  Power and Energy Holdings

The credit agreements
  generally contain customary provisions under which the lenders could refuse
  to advance loans in the event of a material adverse change in the borrowers
  business or financial condition. In that event, loan funds may not be advanced.

As explained in detail
  below, some of these credit agreements also contain maximum debt-to-equity ratios,
  minimum cash flow tests and other restrictive covenants and conditions to borrowing.
  Compliance with applicable financial covenants will depend upon PSEGs
  future financial position and the level of earnings and cash flow, as to which
  no assurances can be given.

66

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PSEG

Financial covenants
  contained in PSEGs credit facilities include a ratio of debt (excluding
  non-recourse project financings and securitization debt and including commercial
  paper and loans, certain letters of credit and similar instruments) to total
  capitalization covenant. This covenant requires that at the end of any quarterly
  financial period, such ratio not be more than 0.70 to 1. As of December 31,
  2002, PSEGs ratio of debt to capitalization was 0.61 to 1. PSEGs
  expects that this ratio will decrease slightly later in 2003 due to earnings
  exceeding dividends and a onetime benefit due to the adoption of SFAS 143. See
  Note 2. New Accounting Standards of the Notes.

PSEG
  has issued Deferrable Interest Subordinated Debentures in connection with the
  issuance of tax deductible preferred securities. If payments on those Deferrable
  Interest Subordinated Debentures are deferred, in accordance with their terms,
  PSEG may not pay any dividends on its common stock until such
  default is cured. Currently, there has been no deferral or default.

PSE&G

Financial covenants
  contained in PSE&Gs credit facilities include a ratio of Long-Term
  Debt (excluding Long-Term Debt Maturing within 1 Year) to Total Capitalization
  covenant. This covenant requires that at the end of any quarterly financial
  period, such ratio will not be more than 0.65 to 1. As of December 31, 2002,
  PSE&Gs ratio of Long-Term Debt to Total Capitalization was 0.53 to 1.

Under its Mortgage, PSE&G may issue new First and Refunding Mortgage Bonds against
  previous additions and improvements, provided that its ratio of earnings to
  fixed charges calculated in accordance with its Mortgage is at least 2:1, and/or
  against retired Mortgage Bonds. At December 31, 2002, PSE&Gs Mortgage
  coverage ratio was 3.6:1. As of December 31, 2002, the Mortgage would permit
  up to approximately $1 billion aggregate principal amount of new Mortgage Bonds
  to be issued against previous additions and improvements.

PSE&G
  has issued Deferrable Interest Subordinated Debentures in connection with the
  issuance of tax deductible preferred securities. If payments on those Deferrable
  Interest Subordinated Debentures are deferred, in accordance with their terms,
  PSE&G may not pay any dividends on its common or preferred stock until such
  default is cured. Currently, there has been no deferral or default.

**Energy
Holdings**

Financial covenants
  contained in Energy Holdings credit facilities include the ratio of cash
  flow available for debt service (CFADS) to fixed charges. At the end of any
  quarterly financial period such ratio shall not be less than 1.50x for the 12-month
  period then ending. As a condition of borrowing, the pro-forma CFADS to fixed
  charges ratio shall not be less than 1.75x as of the quarterly financial period
  ending immediately following the first anniversary of each borrowing or letter
  of credit issuance. CFADS includes, but is not limited to, operating cash before
  interest and taxes, pre-tax cash distributions from all asset liquidations and
  equity capital contributions from PSEG to the extent not used to fund investing
  activity. As of December 31, 2002, Energy Holdings ratio of CFADS to fixed charges
  was 5.5x. In addition, the ratio of consolidated recourse indebtedness to recourse
  capitalization, as at the end of any quarterly financial period, shall not be
  greater than 0.60 to 1.00. This ratio is calculated by dividing the total recourse
  indebtedness of Energy Holdings by the total recourse capitalization. This ratio
  excludes the debt of PSEG Capital, which is supported by PSEG. As of December
  31, 2002, Energy Holdings ratio of consolidated recourse indebtedness
  to recourse capitalization was 0.43 to 1.00.

PSEG Capital has
  a Medium-Term Note program which provides for the private placement of Medium-Term
  Notes. Medium-Term Notes are debt instruments, which may be issued with a maturity
  of 1 to 30 years. This Medium-Term Note program is supported by a minimum net
  worth maintenance agreement between PSEG Capital and PSEG which 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. PSEG will eliminate its support of PSEG Capital
  debt by May 2003 at which time the total debt outstanding of $252 million will
  be repaid and the program will terminate.

Ratings
  Triggers

PSEG, PSE&G,
  Power and Energy Holdings

The debt indentures
  and credit agreements of PSEG, PSE&G, Power and Energy Holdings do not contain
  any material ratings triggers that would cause an acceleration of
  the required interest and principal payments in the event of a ratings downgrade.
  However, in the event of a downgrade, any one or more of the affected companies
  may be subject to increased interest costs on certain bank debt.

Power

In connection
  with its energy marketing and trading activities, Power must meet certain credit
  quality standards as are required by counterparties. If Power loses its investment
  grade credit rating, ER&T would have to provide credit support (letters
  of credit or cash), which would significantly impact the cost of the energy
  trading activities. Powers Master Agreements and other supply contracts
  contain margin and/or other collateral requirements that, as of December 31,
  2002, could require Power to post additional collateral of approximately $320

67

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million if Power were to lose its investment grade
  credit rating. These same contracts provide reciprocal benefits to Power. Providing
  this credit support would increase Powers costs of doing business and
  limit Powers ability to successfully conduct its energy trading operations.

In addition, Power
  may be required by its counterparties to meet margin or other security requirements
  that may include cash payments. Power may also have to provide credit support
  for certain of its equity commitments if Power loses its investment grade rating.

Energy Holdings

Global and Energy
  Holdings may have to provide collateral of approximately $85 million for certain
  of their equity commitments if Energy Holdings ratings should fall below
  investment grade.

Credit Ratings

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

|                     | Moodys(1) |  | Standard
      & Poors(2) |  | Fitch(3) 
|-------------------- | ---------- |  | -------------------------- |  | ---------
|                     |            |  |                            |  |          
|PSEG:                |            |  |                            |  |          
|Preferred Securities | Baa3       |  | BB+                        |  | BBB      
|Commercial Paper     | P2         |  | A2                         |  | Not Rated
|PSE&G:               |            |  |                            |  |          
|Mortgage Bonds       | A3         |  | A                         |  | A        
|Preferred Securities | Baa2       |  | BB+                        |  | BBB+     
|Commercial Paper     | P2         |  | A2                         |  | F1       
|Power:               |            |  |                            |  |          
|Senior Notes         | Baa1       |  | BBB                        |  | BBB+     
|Energy Holdings:     |            |  |                            |  |          
|Senior Notes         | Baa3       |  | BBB-                       |  | BBB-     
|PSEG Capital:        |            |  |                            |  |          
|Medium-Term Notes    | Baa2       |  | BBB-                       |  | BBB+     

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |     |                                                                                                                                                                                                                           
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | (1) | On October 11, 2002 Moodys
      reaffirmed these credit ratings but changed the outlook from stable to negative
      for PSEG, Power and Energy Holdings.                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | (2) | Affirmed in the second quarter
      of 2002 and noted an outlook of stable. Standard and Poors has established
      an overall corporate credit rating of BBB for PSEG and each of its subsidiaries
      listed above.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | (3) | Affirmed in the second quarter
      of 2002 and noted an outlook of stable, except for PSE&G Mortgage Bonds,
      which was noted as negative.                                                                          
|Short-Term
      Liquidity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|PSEG,
      PSE&G, Power and Energy Holdings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|In
      order to support its short-term financing requirements as well as those
      of Power, PSEG has revolving credit facilities that are used both as a source
      of short-term funding and to provide backup liquidity for its $1.0 billion
      commercial paper program. As of December 31, 2002, PSEGs consolidated
      total short-term debt outstanding was $762 million consisting of $300 million
      of commercial paper and $101 million in loans outstanding under its uncommitted
      bilateral agreement and the amounts discussed below in PSE&G, Energy
      Holdings and Power. See Note 11. Schedule of Consolidated Debt of the Notes
      for a table illustrating the credit facilities, amounts outstanding and
      available liquidity as of December 31, 2002.
|68                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

---



PSE&G

PSE&G
  maintains credit facilities to provide backup for its $400 million commercial
  paper program. As of December 31, 2002, PSE&G had $183 million in commercial
  paper and $41 million in loans outstanding under its uncommitted bilateral agreement.
  See Note 11. Schedule of Consolidated Debt of the Notes for a table illustrating
  the credit facilities, amounts outstanding and available  liquidity
  as of December 31, 2002.

Power

Power
  has a $50 million credit facility, but primarily relies on PSEG for its short-term
  financing needs. As of December 31, 2002, there was $6 million outstanding in
  letters of credit under the credit facility of Power. See Note 11. Schedule
  of Consolidated Debt of the Notes for a table illustrating the credit facilities, amounts
  outstanding and available liquidity as of December 31, 2002.

Energy Holdings

Energy Holdings has
  credit facilities that are used both as a source of short-term funding and to
  issue letters of credit. As of December 31, 2002, there was $74 million outstanding
  in letters of credit under the credit facilities of Energy Holdings and $137
  million of non-recourse short-term financing at Global. See Note 11. Schedule
  of Consolidated Debt of the Notes for a table illustrating the credit facilities, amounts
  outstanding and available liquidity as of December 31, 2002. For information
  regarding the refinancing of maturing non-recourse short-term financing at SAESA,
  see Note 13. Commitments and Contingent Liabilities of the Notes.

External
  Financings

PSEG

In
  2002, PSEG began issuing new shares of its common stock under its Dividend Reinvestment
  Program (DRASPP) and its Employee Stock Purchase Plan (ESPP), rather than purchasing
  them on the open market. For the year ended December 31, 2002 PSEG issued approximately
  2.2 million shares for approximately $78 million pursuant to these plans.

On
  May 21, 2002, $275 million of Floating Rate Notes matured.

In
  September 2002, PSEG issued 9.2 million Participating Units with a stated amount
  of $50 per unit. Each unit consists of a 6.25% trust preferred security of
  PSEG Funding Trust I due 2007 having a liquidation value of $50, and a stock
  purchase contract obligating the purchasers to purchase shares of PSEG common
  stock in an amount equal to $50 on November 16, 2005. In exchange for the obligations under the purchase
  contract, the purchasers will receive quarterly contract adjustment payments at the annual rate of 4% until such date.
  The number of new shares
  issued on November 16, 2005 will depend upon the average closing price per share
  of PSEG common stock for the 20 consecutive trading days ending the third trading
  day immediately preceding November 16, 2005. Based on the formula described
  in the purchase contract, at that time PSEG will issue between 11,429,139 and
  13,714,967 shares of its common stock based on a range of closing prices from
  $33.54 to $40.25 per share. The net proceeds from the sale of the Participating
  Units were $446 million and were used primarily to reduce short-term debt.

69

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In
  October 2002, PSEG closed on a $245 million private placement debt transaction
  with a five-year average life and seven-year final maturity. The coupon rate
  was 6.89% and the proceeds were used to reduce short-term debt.

In
  November 2002, PSEG issued 17.25 million shares of common stock pursuant to
  an underwritten public offering at a price of $26.55 per share. The net proceeds
  from the sale of common stock were $443 million and were used to reduce short-term
  debt.

In
  December 2002, PSEG Funding Trust II issued 7.2 million shares of $25 par value
  trust preferred securities. The net proceeds of $174 million were used to reduce
  short-term debt.

During
  2002, PSEG contributed $400 million of equity to Energy Holdings, $200 million
  to Power and on January 21, 2003, PSEG contributed $170 million of equity to
  PSE&G.

PSE&G

PSE&G is required
  to obtain BPU authorization to issue any financing necessary for its capital
  program, including refunding of maturing debt and opportunistic refinancing.
  PSE&G has authorization from the BPU to issue up to an aggregate of $1 billion
  of long-term debt through December 31, 2003 for the refunding of maturing debt
  and opportunistic refinancing of debt. PSE&G currently has authority to
  issue up to $750 million of short-term debt through January 4, 2005. In addition,
  PSE&G expects to securitize approximately $250 million of deferred BGS costs.

In
  August 2002, $257 million of 6.125% Series RR Mortgage Bonds matured.

In
  September 2002, PSE&G issued $300 million of 5.125% Medium-Term Notes due
  2012, the proceeds of which were used to repay $290 million of 7.19% Medium-Term
  Notes that matured.

In
  January 2003, PSE&G issued $150 million of 5.00% Medium-Term Notes due 2013.
  The proceeds were used to repay $150 million of 6.875% Series MM Mortgage Bonds
  which matured in January 2003.

Also
  in January 2003, PSEG contributed $170 million to PSE&G to offset a minimum
  pension liability charge to OCI in order to maintain its targeted
  regulated equity ratio at approximately 42%.

During
  2002, PSE&G Transition Funding LLC (Transition Funding), a wholly-owned subsidiary of PSE&G, repaid $121
  million of securitization bonds.

Since
  1986, PSE&G has made regular cash payments to PSEG in the form of dividends
  on outstanding shares of its common stock. PSE&G paid common stock dividends
  of $305 million and $112 million to PSEG for the years ended December 31, 2002
  and 2001, respectively.

Power

Powers
  short-term financing needs are substantially met using PSEGs commercial
  paper program or lines of credit discussed above.

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In
  June 2002, Power issued $600 million of 6.95% Senior Unsecured Notes due 2012.
  The proceeds were used to repay short-term funding from PSEG, including amounts
  related to the gas contract transfer from PSE&G in May 2002.

Energy
  Holdings

In
  June 2002, Energy Holdings issued an additional $135 million of its 8.625%
  Series of Senior Notes due February 2008.

In
  June 2002, July 2002 and October 2002, $98 million, $100 million and $30 million
  of PSEG Capital medium-term notes (MTNs) with average borrowing rates of 3.12%, 6.95% and 6.80%
  matured, respectively. These MTNs were refunded with funds from operations and
  proceeds from borrowings under Energy Holdings credit facilities. The remaining
  maturity under the PSEG Capital Corporation program is $252 million, which matures
  in May 2003 and is expected to be refinanced through operating cash flows and
  existing short-term credit facilities.

During
  2002, Energy Holdings repurchased approximately $54 million of its outstanding
  Senior Notes at prices below par value.

OCI
  Charge for Pension Liability

PSEG, PSE&G,
  Power and Energy Holdings

Due
  to the weak financial markets over the past few years, PSEGs, PSE&Gs,
  Powers and Energy Holdings pension plan assets have not experienced
  the returns necessary to outpace the growth of the related pension liabilities.
  In accordance with SFAS No. 87, Employers Accounting for Pensions
  (SFAS 87), PSEG, PSE&G, Power and Energy Holdings were required to record
  a minimum pension liability on their respective Consolidated Balance Sheets
  as of December 31, 2002. As calculated under SFAS 87, a minimum pension liability
  exists and must be recorded when the accumulated benefit obligation (ABO) of
  the plan exceeds the fair value of the plan assets. The excess of the ABO over
  the fair value of the plan assets is recorded as a charge to OCI
  within the equity section of the Consolidated Balance Sheets. The offsetting
  adjustment is recorded as a pension liability or as a reduction of certain pension
  plan intangible assets as applicable. The minimum pension liability is reduced
  or reversed when cash funding occurs, or when the fair value of the pension
  plan assets grow to a level above that of the ABO.

As of
  December 31, 2002, PSEG, PSE&G, Power and Energy Holdings recorded after-tax
  charges to OCI as follows:

|                 | (Millions)
|---------------- | ----------
|PSE&G            |           
|Power            |           
|Energy Holdings  |           
|Services         |           
|                 |           
|Total
      PSEG |           
|                 |           

PSEG funded the pension
  plan by $250 million in 2002 and plans on contributing $175 million in 2003,
  but will consider increasing this planned contribution to remove the OCI charge
  based on market conditions. For additional information, see Note 17. Pension,
  Other Postretirement Benefit (OPEB) and Savings Plans of the Notes.

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CAPITAL REQUIREMENTS

Forecasted Expenditures

PSEG, PSE&G,
  Power and Energy Holdings

PSEG,
  Power and Energy Holdings have substantially reduced their respective capital
  expenditure forecasts in response to tightening market conditions resulting
  from market and lender concerns regarding the overall economy and the industry
  in particular, including an investor and rating agency focus on leverage ratios.

It is expected
  that the majority of each subsidiarys capital requirements over the next
  five years will come from internally generated funds, with the balance to be
  provided by the issuance of debt at the subsidiary or project level and equity
  contributions from PSEG. Projected construction and investment expenditures,
  excluding nuclear fuel purchases for Power, for PSEGs subsidiaries for
  the next five years are as follows:

|                 | 2003       |       | 2004 |   | 2005  |   | 2006 |     | 2007
|---------------- | ---------- | ----- | ---- | - | ----- | - | ---- | --- | ----
|                 |            |       |      |   |       |   |      |     |     
|                 | (Millions)
|PSE&G            |            | $     | 450  |   |       | $ | 450  |     | $   
|Power            |            |       | 500  |   |       |   | 675  |     |     
|Energy Holdings  |            |       | 100  |   |       |   |     |     |     
|                 |            |       |      |   |       |   |      |     |     
|Total
      PSEG | $          | 1,050 |      | $ | 1,125 |   | $    | 750 |     
|                 |            |       |      |   |       |   |      |     |     

PSE&G

PSE&G
  projects future capital needs in order to maintain continuous additions to its transmission
  and distribution systems to manage reliability. In 2002, PSE&G had net plant
  additions of $472 million related to improvements in its transmission and distribution
  system, gas system and common facilities.

Power

Powers
  capital needs will be dictated by its strategy to continue to develop as a profitable,
  growth-oriented supplier in the wholesale power market. Power has revised its
  schedule for completion of several projects under development to provide better
  sequencing of its construction program with anticipated market demand. This
  should allow Power to conserve capital in 2003 and will allow it to take advantage
  of the expected recovery of the electric markets and its anticipated need for
  capacity in 2005. Powers subsidiaries have substantial commitments as
  part of their ongoing construction programs. Power will
  continue to evaluate its development and construction requirements in relation
  to the energy and financial markets.

In 2002, Power
  made approximately $1.3 billion of capital expenditures, primarily related to
  developing the Lawrenceburg, Indiana, Waterford, Ohio and Bethlehem, New York (Albany)
  sites and adding capacity to the Bergen and Linden stations in New Jersey.

Energy Holdings

Energy Holdings
  capital needs in 2003 are limited to fulfilling existing contractual commitments.
  All of the forecasted expenditures in 2005 through 2007 related to Energy Holdings
  are discretionary.

In 2002, Energy
  Holdings subsidiaries made net investments totaling approximately $237
  million. These investments include a majority interest in a coal-fired generation
  facility in Poland, additional investments in existing generation and distribution
  facilities and projects by Global and investments in capital leases by Resources.
  Partially offsetting these investments was a loan repayment from TIE and proceeds
  from the termination of two lease transactions with affiliates of TXU-Europe.
  For further discussion of the loans to TIE and the termination of the two lease
  transactions, see Note 22. Related-Party Transactions and Note 8. Long-Term
  Investments of the Notes.

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Disclosures about Long-Term Maturities, Contractual
  and Commercial Obligations and Certain Investments

The following table
  summarizes anticipated recourse and non-recourse debt maturities for the years
  shown. Payments for Transition Funding are based on expected payment dates rather
  than final maturity dates.

|Long-Term Debt Maturities:       | 2003       |     | 2004 |   | 2005 |  | 2006 |       | Thereafter
|-------------------------------- | ---------- | --- | ---- | - | ---- |  | ---- | ----- | ----------
|                                 |            |     |      |   |      |  |      |       |           
|                                 | (Millions)
|PSEG                             | $          |    |      | $ |     |  | $    |      |           
|PSE&G                            |            | 300 |      |   | 286  |  |      | 125   |           
|Transition Funding
      (PSE&G) |            | 129 |      |   | 138  |  |      | 146   |           
|Power                            |            |    |      |   |     |  |      |      |           
|Energy Holdings(A)               |            | 252 |      |   | 276  |  |      |      |           
|Non-recourse project financing   |            |     |      |   |      |  |      |       |           
|Power                            |            |    |      |   |     |  |      | 800   |           
|Energy Holdings                  |            | 68  |      |   | 42   |  |      | 48    |           
|                                 |            |     |      |   |      |  |      |       |           
|Total                            | $          | 749 |      | $ | 742  |  | $    | 1,119 |           
|                                 |            |     |      |   |      |  |      |       |           

|    |                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------
|(A) | The $252 million in 2003 for Energy Holdings
      represents the total remaining maturities under the PSEG Capital Corporation
      program.

The following tables,
  reflect PSEG and its subsidiaries contractual cash obligations and other
  commercial commitments in the respective periods in which they are due.

|Contractual Cash Obligations       | TotalAmountsCommitted |        | **Less
      Than
      1 Year** |  | 2 - 3 years |       | 4 - 5 years |     | Over 5 years
|---------------------------------- | --------------------- | ------ | -------------------------------- |  | ----------- | ----- | ----------- | --- | ------------
|                                   |                       |        |                                  |  |             |       |             |     |             
|                                   | (Millions)           
|Short - Term Debt Maturities       |                       |        |                                  |  |             |       |             |     |             
|PSEG                               | $                     | 401    |                                  |  | $           | 401   |             | $   |            
|PSE&G                              |                       | 224    |                                  |  | 224         |       |             |    |             
|Energy Holdings                    |                       | 137    |                                  |  | 137         |       |             |    |             
|Long - Term Debt Maturities        |                       |        |                                  |  |             |       |             |     |             
|PSEG                               |                       | 248    |                                  |  |             |      |             |     |            
|PSE&G                              |                       | 2,927  |                                  |  | 300         |       |             | 411 |             
|Transition Funding
      (PSE&G)   |                       | 2,351  |                                  |  | 129         |       |             | 284 |             
|Power                              |                       | 3,316  |                                  |  |             |      |             |     | 800         
|Energy Holdings                    |                       | 2,898  |                                  |  | 320         |       |             | 366 |             
|Preferred Securities Redemptions   |                       |        |                                  |  |             |       |             |     |             
|PSEG                               |                       | 705    |                                  |  |             |      |             |     |            
|PSE&G                              |                       | 155    |                                  |  |             |      |             |     |            
|Capital Lease Obligations          |                       |        |                                  |  |             |       |             |     |             
|PSE&G                              |                       | 80     |                                  |  |             | 6     |             |     | 12          
|Power                              |                       | 19     |                                  |  |             | 1     |             |     | 2           
|Operating Leases                   |                       |        |                                  |  |             |       |             |     |             
|PSE&G                              |                       | 13     |                                  |  |             | 3     |             |     | 6           
|Energy
      Holdings              |                       | 37     |                                  |  |             | 6     |             |     | 9           
|Services                           |                       | 8      |                                  |  |             | 1     |             |     | 2           
|Fuel Purchase Commitments:         |                       |        |                                  |  |             |       |             |     |             
|Power                              |                       | 545    |                                  |  |             | 163   |             |     | 140         
|                                   |                       |        |                                  |  |             |       |             |     |             
|Total Contractual Cash Obligations | $                     | 14,064 |                                  |  | $           | 1,691 |             | $   | 2,032       
|                                   |                       |        |                                  |  |             |       |             |     |             

Power

As of December
  31, 2002, Power had guaranteed equity contribution commitments with respect
  to its subsidiaries of $134 million. Power also issued guarantees with respect
  to certain energy trading contracts, see Note 13. Commitments and Contingent
  Liabilities of the Notes for further discussion.

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Energy Holdings

As of December
  31, 2002, Energy Holdings had guaranteed equity contribution commitments of
  $141 million and other guarantees of $167 million.

In the normal
  course of business, Energy Technologies secures construction obligations with
  performance bonds issued by insurance companies. As of December 31, 2002, Energy
  Technologies had performance bonds outstanding of $228 million which were supported
  by Energy Holdings and of which $45 million was at risk for projects currently
  under construction. This amount is expected to decrease as Energy Technologies
  construction projects are completed. The performance bonds are not included
  in the table below. See Note 13. Commitments and Contingent Liabilities of the
  Notes for further discussion.

|Other Commercial
      Commitments: |            | Total
      AmountsCommitted |     | **Less
      Than
      1 year** |  | 2
      - 3 years |     | 4
      - 5 years |  | Over
      5 years
|----------------------------------- | ---------- | ---------------------------- | --- | -------------------------------- |  | ----------------- | --- | ----------------- |  | ------------------
|                                    |            |                              |     |                                  |  |                   |     |                   |  |                   
|                                    |            |                              |     |                                  |  |                   |     |                   |  |                   
|                                    | (Millions)
|Standby Letters of Credit           |            |                              |     |                                  |  |                   |     |                   |  |                   
|Power                               |            | $                            | 73  |                                  |  | $                 | 28  |                   |  | $                 
|Energy
      Holdings               |            |                              | 74  |                                  |  |                   | 70  |                   |  |                   
|Guarantees and Equity Commitments   |            |                              |     |                                  |  |                   |     |                   |  |                   
|Power                               |            |                              | 134 |                                  |  |                   | 134 |                   |  |                   
|Energy Holdings                     |            |                              | 265 |                                  |  |                   | 123 |                   |  |                   
|                                    |            |                              |     |                                  |  |                   |     |                   |  |                   
|Total Commercial Commitments        |            | $                            | 546 |                                  |  | $                 | 355 |                   |  | $                 
|                                    |            |                              |     |                                  |  |                   |     |                   |  |                   

Off Balance Sheet Arrangements

Energy Holdings

Global has
  certain investments that are accounted for under the equity method in accordance
  with generally accepted accounting principles (GAAP). Accordingly, amounts recorded
  on the Consolidated Balance Sheets for such investments represents Globals equity investment
  which is increased for Globals pro-rata share of earnings less any dividend
  distribution from such investments. The companies in which PSEG invest that
  are accounted for under the equity method have an aggregate $1.7 billion of
  debt on their combined, consolidated financial statements. PSEGs pro-rata
  share of such debt is $700 million. This debt is non-recourse to PSEG, Energy
  Holdings, and Global. PSEG is generally not required to support the debt service
  obligations of these companies. However, default with respect to this nonrecourse
  debt could result in a loss of invested equity.

Resources
  has investments in leveraged leases that are accounted for in accordance with
  SFAS No. 13 Accounting for Leases. Leveraged lease investments generally
  involve three parties: an owner/lessor, a creditor and a lessee. In a typical
  leveraged lease financing, the lessor purchases an asset to be leased. The purchase
  price is typically financed 80% with debt provided by the creditor and the balance
  comes from equity funds provided by Resources, as the lessor. The creditor provides
  long-term financing to the transaction, and is secured by the property subject
  to the lease. Such long-term financing is non-recourse to Resources. As such, in
  the event of default, the creditor may only look to the leased asset as security
  for its loan. As a lessor, Resources has ownership rights to the property and
  rents the property to the lessee for use in its business operation. As of December
  31, 2002, Resources equity investment in leased assets was approximately
  $1.5 billion, net of deferred taxes of approximately $1.3 billion. For additional
  information, see Note 8. Long-Term Investments of the Notes.

In the event
  that collectibility of the minimum lease payments to be received by the lessor
  is no longer reasonably predictable, the accounting treatment for some of the
  leases may change. In such cases, Resources may deem that a lessee has a high
  probability of defaulting on the lease obligation. In many instances, Resources
  has protected its equity investment in such transactions by providing for the
  direct right to assume the debt obligation under certain circumstances. Debt
  assumption would be at Resources sole discretion and normally only would
  occur if an appraisal of the leased property yielded a value that exceeds the
  present value of the debt outstanding.

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Should Resources ever directly assume a debt obligation,
  the fair value of the underlying asset and the associated debt would be recorded
  on the Consolidated Balance Sheets instead of the net equity investment in the lease. In 2000, Resources
reclassified an investment in a real estate leveraged lease due to the unpredictability of future rent collections, and assumed a
debt obligation of $24 million.

ACCOUNTING ISSUES

New Accounting Standards

SFAS No. 142, Goodwill
  and Other Intangible Assets (SFAS 142)

PSEG,
  PSE&G, Power and Energy Holdings

On January
  1, 2002, PSEG, PSE&G, Power and Energy Holdings adopted SFAS 142. Under
  this standard, PSEG was required to complete an impairment analysis of goodwill
  by June 30, 2002 and record any required impairment retroactive to January 1,
  2002. Under SFAS 142, goodwill is considered a nonamortizable asset and is subject
  to an annual review for impairment and an interim review when certain events
  or changes in circumstances occur. The effect of no longer amortizing goodwill
  on an annual basis was not material to PSEGs, PSE&Gs, or Powers
  financial position and results of operations upon adoption.

Power
  and Energy Holdings

Power and
  Energy Holdings evaluated the recoverability of the recorded amount of goodwill
  based on certain operating and financial factors. Such impairment testing included
  discounted cash flow tests which require broad assumptions and significant judgment
  to be exercised by management. As a result of adopting this new standard, in
  2002 Energy Holdings recorded after-tax charges to reflect the goodwill impairment
  of $120 million and such amount has been recognized as a Cumulative Effect of
  a Change in Accounting Principle in accordance with the new standard. All of
  these charges related to investments of Energy Holdings. See Note 2. New Accounting
  Standards of the Notes for additional discussion on the adoption of this standard.

SFAS
  No. 143, Accounting for Asset Retirement Obligations (SFAS 143)

PSEG,
  PSE&G, Power and Energy Holdings

Effective
  January 1, 2003, PSEG, PSE&G, Power and Energy Holdings will adopt SFAS
  143. SFAS 143 addresses accounting and reporting for obligations associated
  with the retirement of tangible long-lived assets and the associated asset retirement
  costs. It applies to legal obligations associated with the retirement of long-lived
  assets that result from the acquisition, construction, development and/or
  the normal operation of a long-lived asset. A legal obligation is a liability
  that a party is required to settle as a result of an existing or enacted law,
  statute, ordinance or contract.

Under SFAS
  143, a company must initially recognize the fair value of a liability for an
  asset retirement obligation in the period in which it is incurred and concurrently
  capitalize an asset retirement cost by increasing the carrying amount of the
  related long-lived asset by the same amount as the liability. A company shall
  subsequently allocate that asset retirement cost to expense over its useful
  life. In periods subsequent to the the initial measurement, an entity shall recognize
  changes in the liability resulting from the passage of time (accretion) or due
  to revisions to either the timing or the amount of the originally estimated
  cash flows. Changes in the liability due to accretion will be charged to the
  Consolidated Statements of Operations whereas changes due to the timing or amount
  of cashflows shall be an adjustment to the carrying amount of the related asset.

PSE&G
  and Power

Power
  has performed a review of its potential obligations under SFAS 143 and believes
  that its quantifiable obligations are primarily related to the decommissioning
  of its nuclear power plants. Amounts collected from PSE&G customers are
  remitted to Power and deposited into the Nuclear Decommissioning Trust (NDT) Fund and realized
  and unrealized gains and losses in the trust were all recorded as changes in
  the NDT Fund with an offsetting charge to

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the liability. As of December 31, 2002, Power had
  a $766 million asset and liability recorded on its Consolidated Balance Sheets
  for nuclear decommissioning.

In addition
  to the quantifiable obligations, Power identified certain legal obligations
  that meet the criteria of SFAS 143 which at this time are not quantifiable.
  These obligations relate to certain industrial establishments subject to the
  Industrial Site Recovery Act, underground storage tanks subject to the Spill
  Compensation and Control Act, permits and authorizations, the restoration of
  an area occupied by a reservoir when the reservoir is no longer needed, an obligation
  to retire certain plants from operation, prior to the initial burning of fuel
  from a new plant and the demolition of certain plants and the restoration of
  the sites on which reside when the plants are no longer in service.

In August 2002, PSE&G
  filed a petition requesting clarification from the BPU regarding the future
  cost responsibility for nuclear decommissioning and whether: (a) PSE&Gs
  customers will continue to pay for such costs; or (b) such customer responsibility
  will terminate at the end of the four-year transition period on July 31, 2003
  and become the sole responsibility of Power. The outcome of this petition will
  affect the treatment of a material portion of the liability recorded for Powers
  nuclear decommissioning obligation. If the BPU determines that PSE&Gs
  customers will continue to pay for these costs, the majority of the difference
  between the previously recorded amount of the liability and the liability calculated
  under SFAS 143 will continue to be deferred on the balance sheet. If the BPU
  determines that such customer responsibility terminates at the end of the transition
  period, then the net effect of implementation will be recorded as a one-time
  benefit as a Cumulative Effect of a Change in Accounting Principle. A decision
  is expected as part of PSE&Gs electric base rate case, which is expected
  to be completed prior to July 2003. Although the outcome of this petition
  cannot be predicted, management believes that the net effect of adopting this
  accounting standard should be recorded in earnings. Power also has $131 million
  of liabilities, $7 million of which relates to legal obligations, recorded on
  its Consolidated Balance Sheets at December 31, 2002 related to the Cost of
  Removal associated with its fossil generating stations. These potential obligations
  are required to be reversed upon implementation of SFAS 143.

Therefore,
  upon adoption of this standard on January 1, 2003, PSEG and Power will record
  an adjustment for a Cumulative Effect of a Change in Accounting Principle in
  the Consolidated Statements of Earnings by reducing the existing liabilities
  to their present value. It is anticipated that the result will be a benefit
  to net income, and therefore equity, in a range of $300 million to $400 million.
  Of this amount, $200 million to $300 million relates to interests in certain
  nuclear units Power purchased from PSE&G which are subject to the BPU issue
  discussed above, approximately $55 million relates to interests in certain nuclear
  units Power purchased from Atlantic City Electric Company (ACE) and Delmarva
  Power and Light Company (DP&L) which are not subject to BPU approval and
  approximately $70 million relates to the cost of removal liabilities for the
  fossil units being reversed.

The BPU could
  decide that the future cost for decommissioning the nuclear units rests with
  PSE&Gs customers. If that is the case, the portion of the benefit recorded
  to equity related to the nuclear units Power purchased from PSE&G would
  be reversed and a regulatory liability would be established. The $55 million
  related to the nuclear units purchased from ACE and DP&L and the $70 million
  related to the cost of removal liabilities for the fossil units would be unaffected.

PSE&G

As of
  December 31, 2002, PSE&G had no legal liabilities, as contemplated under
  SFAS 143, recorded on the Consolidated Balance Sheets and therefore the effect
  of adoption will not result in an adjustment to the Consolidated Statement of
  Operations. PSE&G does, however, have cost of removal liabilities embedded
  within Accumulated Depreciation pursuant to SFAS 71. Since PSE&G is a regulated
  enterprise, these amounts will continue to be recorded and presented in Accumulated
  Depreciation and will be disclosed in accordance with SFAS 143.

PSE&G has identified
  certain legal obligations that meet the criteria of SFAS 143 which at this time
  are not quantifiable and therefore unable to be recorded. These obligations
  relate to certain industrial establishments subject to the Industrial Site Recovery
  Act, underground storage tanks subject to the Spill Compensation and Control
  Act, leases and licenses, and the requirement to seal natural gas pipelines
  at all sources of gas when the pipelines are no longer in service.

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Energy
  Holdings

Energy Holdings
  identified certain legal obligations that met the criteria of SFAS 143 and are
  not expected to be material to the Consolidated Statement of Operations.

SFAS No. 144, Accounting
  for the Impairment or Disposal of Long-Lived Assets (SFAS 144)

PSEG,
  PSE&G, Power and Energy Holdings

On January
  1, 2002, SFAS 144 which provides guidance on the accounting for the impairment
  or disposal of long-lived assets, became effective. For long-lived assets to
  be held and used, the new rules are similar to previous guidance which required
  the recognition of an impairment when the undiscounted cash flows will not recover
  its carrying amount. The impairment to be recognized will continue to be measured
  as the difference between the carrying amount and fair value of the asset. The
  computation of fair value now removes goodwill from consideration and incorporates
  a probability-weighted cash flow estimation approach if fair value is not readily
  determinable. The previous guidance provided in SFAS No. 121, Accounting
  for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of, (SFAS 121)
  is to be applied to assets that are to be disposed of by sale. Additionally, assets qualifying for discontinued operations treatment
  have been expanded beyond the former major line of business or class of customer
  approach. Long-lived assets to be disposed of by other than sale will now recognize
  impairment at the date of disposal, but will be considered assets to be held
  and used until that time. There was no impact on the Consolidated Financial
  Statements due to adoption of these rules.

SFAS No. 145, Rescission
  of FASB Statements Nos. 4, 44 and 64, Amendment of FASB Statement No. 13, and
  Technical Corrections (SFAS 145)

PSEG,
  PSE&G, Power and Energy Holdings

Effective
  January 1, 2002, PSEG, PSE&G, Power and Energy Holdings adopted SFAS 145.
  This Statement rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishments
  of Debt, (SFAS 4) and an amendment of that Statement, SFAS No. 64, Extinguishments
  of Debt Made to Satisfy Sinking Fund Requirements (SFAS 64). SFAS 4 required
  that gains and losses from extinguishments of debt that were included in the
  determination of net income be aggregated, and if material, classified as an
  extraordinary item. Since the issuance of SFAS 4, the use of debt extinguishments
  has become part of the risk management strategy of many companies, representing
  a type of debt extinguishment that does not meet the criteria for classification
  as an extraordinary item. Based on this trend, the FASB issued this rescission
  of SFAS 4 and SFAS 64. Accordingly, under SFAS 145, PSEG, PSE&G, Power and Energy Holdings now record these gains
  and losses in Other Income and Other Deductions, respectively.

Energy Holdings

Energy Holdings recorded
  pre-tax gains of $13 million ($8 million after-tax) from the early retirement
  of debt as a component of Other Income for the period ended December 31, 2002.
  Also, Energy Holdings reclassified a pre-tax loss of $3 million ($2 million after-tax)
  from the early retirement of debt to a component of Other Deductions for the
  period ended December 31, 2001.

Emerging
  Issues Task Force (EITF) Issue No. 02-3, Accounting for Contracts Involved
  in Energy Trading and Risk Management Activities (EITF 02-3)

PSEG,
  PSE&G and Power

EITF 02-3
  requires all gains and losses on energy trading contracts to be reported on
  a net basis. Also, energy trading contracts that do not qualify as derivatives
  will no longer be marked to market. Instead, accrual accounting will be used.
  The consensus was effective for all new contracts executed after October 25,
  2002, and requires a cumulative effect adjustment to income in the first quarter
  of 2003 for all contracts executed prior to October 25, 2002. The vast majority
  of PSEGs energy contracts qualify as derivatives under SFAS 133 and will
  therefore continue to be marked to market. Management believes the impact of
  adopting this consensus will not be material to the Consolidated Financial Statements.

Pursuant to
  EITF Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net
  as an Agent (EITF 99-19), PSE&G and Power had been recording trading
  revenues and trading related costs on a gross basis for physical energy and
  capacity sales and purchases. In accordance with EITF 02-3, beginning in the
  third quarter of 2002,

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Power started reporting energy trading revenues
  and energy trading costs on a net basis and have reclassified prior periods
  to conform with this net presentation. As a result, both Operating Revenues
  and Energy Costs were reduced by approximately $1.9 billion, $2.3 billion and
  $2.6 billion for the years ended December 31, 2002, 2001 and 2000, respectively.
  This change in presentation did not have an effect on trading margins, net income
  or cash flows.

Financial Interpretation
  (FIN) No. 45, Guarantors Accounting and Disclosure Requirements
  for Guarantees, Including Indirect Guarantees of Indebtedness of Others
  (FIN 45)

PSEG,
  PSE&G, Power and Energy Holdings

FIN 45 enhances
  the disclosures to be made by a guarantor in its interim and annual Financial
  Statements about its obligations under certain guarantees that it has issued.
  It also clarifies that a guarantor is required to recognize, at the inception
  of a guarantee, a liability for the fair value of the obligation undertaken
  in issuing the guarantee, although PSEG does not anticipate the recording of
  such liabilities will be material to the Consolidated Financial Statements.
  The initial recognition and initial measurement provisions of this Interpretation
  are applicable on a prospective basis to guarantees issued or modified after
  December 31, 2002. The disclosure requirements are effective for financial statements
  of interim or annual periods ending after December 15, 2002. For further information
  regarding Powers and Energy Holdings respective guarantees, refer
  to Note 13. Commitments and Contingent Liabilities of the Notes.

FIN No. 46, Consolidation
  of Variable Interest Entities (VIE) (FIN 46)

PSEG,
  PSE&G, Power and Energy Holdings

FIN 46clarified the application of Accounting
  Research Bulletin No. 51, Consolidated Financial Statements, to
  certain entities in which equity investors do not have the characteristics of
  a controlling financial interest. Because a controlling financial interest in
  an entity may be achieved through arrangements that do not involve voting interests,
  FIN 46 sets forth specific requirements with respect to consolidation, measurement
  and disclosure of such relationships. Disclosure requirements for existing qualifying
  entities are effective for financial statements issued after January 31, 2003.
  All enterprises with VIEs created after February 1, 2003, shall apply
  the provisions of FIN 46 no later than the beginning of the first interim period
  beginning after June 15, 2003. Although, PSEG, PSE&G, Power and Energy Holdings
  are evaluating the potential impact of this standard, it is not expected to
  have a material impact.

Other

PSE&G,
  Power and Energy Holdings

In connection with
  the January 2003 EITF meeting, the FASB was requested to reconsider an interpretation
  of SFAS 133. The interpretation, which is contained in the Derivatives Implementation
  Groups C-11 guidance, relates to the pricing of contracts that include
  broad market indices. In particular, that guidance discusses whether the pricing
  in a contract that contains broad market indices (e.g., Consumer Price Index) could qualify as
  a normal purchase or sale under SFAS 133. PSEG, PSE&G, Power and Energy
  Holdings are currently reevaluating which contracts, if any, that have previously
  been designated as normal purchases or sales, would now not qualify for this
  exception. PSEG, PSE&G, Power and Energy Holdings are currently evaluating
  the effects that this guidance will have on their respective results of operations,
  financial position and net cash flows.

Critical Accounting Estimates

PSEG, PSE&G,
  Power and Energy Holdings

Under GAAP, there are many accounting standards that require
  the use of estimates, variable inputs and assumptions (collectively referred
  to as estimates) that are subjective in nature. Because of this, differences
  between the actual measure realized versus the estimate can have a material
  impact on results of operations, financial position and cash flows. The management
  of PSEG, PSE&G, Power and Energy

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Holdings has each, respectively, determined that
  the following estimates are considered critical to the application of rules
  that relate to its business.

Accounting
  for Pensions

PSEG, PSE&G, Power
  and Energy Holdings account for pensions under SFAS 87. Under these rules,
  certain assumptions which are subjective by nature are made. There are many
  subjective assumptions involved in determining an entitys pension liabilities
  and costs each period including demographic information such as life expectancy
  and pay increases, and financial metrics, such as discount rates used to determine
  the pension liability and assumed rate of return on the pension assets which
  affects annual pension costs. PSEGs assumptions are supported by historical
  data and reasonable projections and are reviewed with an outside actuary firm
  and investment advisors. As of December 31, 2002, PSEG used a 6.75% discount
  rate and a 9% annual rate of return. In selecting an assumed discount rate,
  PSEG uses a rate based on a blend of the Aa Moodys Corporate and Utility Indices. The 9% annual rate of return is
  consistent with PSEGs cumulative returns on the pension funds since inception
  and with a study performed late in 2002 of projected returns for PSEGs
  pension funds based on their asset allocation, maturities and an active investment
  manager.

The following
  chart reflects the sensitivities associated with a change in certain actuarial
  assumptions by the indicated percentage. While the chart below reflects an increase
  or decrease in the percentage for each assumption, PSEG, PSE&G, Power and
  Energy Holdings and its actuaries expect that the inverse of this change would
  impact the projected benefit obligation (PBO), the reported pension liability
  on the Consolidated Balance Sheets and the reported annual pension cost on the Consolidated
  Statements of Operations by a similar amount in the opposite direction. Each
  sensitivity below reflects an evaluation of the change based solely on a change
  in that assumption only.

|Actuarial Assumption          | Current    |   | Change/(Decrease) |    | Impact onPBO |  | Increase toPensionExpense
|----------------------------- | ---------- | - | ----------------- | -- | ------------ |  | -------------------------
|                              |           
|                              | (Millions)
|Discount Rate                 | 6.75       | % |                   | (1 | %)           |  |                          
|Rate of Return on Plan Assets | 9.0        | % |                   | (1 | %)           |  |                          

Accounting
  for Derivative Instruments and Hedging Activities

SFAS 133 requires
  an entity to recognize the fair value of derivative instruments held as assets
  or liabilities on the balance sheet. In accordance with SFAS 133, the effective
  portion of the change in the fair value of a derivative instrument designated
  as a cash flow hedge is reported in OCI, net of
  tax, or as a regulatory asset (liability). Amounts in accumulated OCI are ultimately
  recognized in earnings when the related hedged forecasted transaction occurs.
  The change in the fair value of the ineffective portion of the derivative instrument
  designated as a cash flow hedge is recorded in earnings. Derivative instruments
  that have not been designated as hedges, such as energy trading contracts, are
  adjusted to fair value through earnings. PSEG, PSE&G, Power and Energy Holdings have entered into various derivative
  instruments, including hedges of anticipated electric and gas purchases, interest
  rate swaps and foreign currency hedges which have been designated as cash flow
  hedges. Management may choose to designate these contracts as hedges based on
  its business practices, if such derivatives meet the effectiveness test under
  SFAS 133.

The fair value
  of the derivative instruments is determined by reference to quoted market prices,
  listed contracts, published quotations or quotations from counterparties. In
  the absence thereof, PSEG, PSE&G, Power and Energy Holdings utilize mathematical models

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based on current and historical data. The fair value
  of most of PSEGs derivatives is determined based upon quoted market prices.

For additional information
  regarding Derivative Financial Instruments, see Note 12. Risk Management of the Notes.

Accounting
  for Deferred Taxes

PSEG, PSE&G,
  Power and Energy Holdings provide for income taxes based on the asset and liability
  method required by SFAS No. 109, Accounting for Income Taxes. Under
  this method, deferred tax assets and liabilities are recognized for the future
  tax consequences attributable to differences between the financial statement
  carrying amounts of existing assets and liabilities and their respective tax
  bases, as well as net operating loss and credit carryforwards.

PSEG, PSE&G,
  Power and Energy Holdings evaluate the need for a valuation allowance of their
  respective deferred tax assets based on the likelihood of expected future taxable
  benefits. PSEG, PSE&G, Power and Energy Holdings do not believe a valuation
  allowance is necessary; however, if the expected level of future taxable income
  changes or certain tax planning strategies become unavailable, PSEG, PSE&G,
  Power and Energy Holdings would record a valuation allowance through income
  tax expense in the period the valuation allowance is deemed necessary.

Accounting for
  Long-Lived Assets

SFAS 144, a new standard
  related to testing long-lived assets for impairment, was adopted on January
  1, 2002. Testing under SFAS 144 is essentially the same as the asset impairment
  tests PSEG, PSE&G, Power and Energy Holdings performed under SFAS 121. This
  test consisted of an undiscounted cash flow analysis to determine if an impairment
  existed, and, if an impairment existed, a discounted cash flow test would be
  performed to quantify it. The new standard is broader in that it includes discontinued
  operations as part of its scope. This test requires the same judgment to be
  employed by management in building assumptions related to future earnings of
  individual assets or an investment as was required in determining potential
  impairments of goodwill as discussed above.

These tests are required
  whenever events or circumstances indicate an impairment may exist. Examples
  of potential events which could require an impairment test are when power prices
  become depressed for a prolonged period in a market, when a foreign currency
  significantly devalues, or when an investment generates negative operating cash
  flows. Any potential impairment of investments under these circumstances is
  recorded as a component of operating expenses.

PSE&G

Unbilled Revenues

Electric and gas
  revenues are recorded based on services rendered to customers during each accounting
  period. PSE&G records unbilled revenues for 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. Unbilled usage is calculated in
  two steps. The initial step is to apply a base usage per day to the number of
  unbilled days in the period. The second step estimates seasonal loads based
  upon the time of year and the variance of actual degree-days and temperature-humidity-index
  hours of the unbilled period from expected norms. The resulting usage is priced
  at current rate levels and recorded as revenue. A calculation of the associated
  energy cost for the unbilled usage is recorded as well. Each month the prior
  months unbilled amounts are reversed and the current months amounts
  are accrued. The resulting revenue and expense reflect the billed data less
  the portion booked in the prior month plus the unbilled portion of the current
  month.

SFAS 71 - Accounting
  for the Effects of Certain Types of Regulation

PSE&G prepares
  its Consolidated Financial Statements in accordance with the provisions of SFAS 71, which
  differs in certain respects from the application of GAAP by non-regulated businesses.
  In general, SFAS 71 recognizes that accounting for rate-regulated enterprises
  should reflect the economic effects of regulation. As a result, a regulated

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utility is required to defer the recognition of
  costs (a regulatory asset) or the recognition of 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, 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.
  See Note 7. Regulatory Assets and Liabilities of the Notes for further discussion
  of these and other regulatory issues.

Power
  and Energy Holdings

Accounting
  for Goodwill

SFAS 142 requires
  an entity to evaluate its goodwill for impairment at least annually or when indications
  of impairment exist. An impairment may exist when the carrying amount of goodwill
  exceeds its implied fair value.

Accounting estimates
  related to goodwill fair value are highly susceptible to change from period
  to period because they require management to make cash flow assumptions about
  future sales, operating costs, economic conditions and discount rates over an
  indefinite life and the impact of recognizing an impairment could have a material
  impact on financial position and results of operations.

Power and Energy Holdings perform annual
  goodwill impairment tests and continuously monitor the business environment
  in which they operate for any impairment issues that may arise. As indicated
  above, certain assumptions are used to arrive at a fair value for goodwill testing.
  Such assumptions are consistently employed and include, but are not limited
  to, free cash flow projections, interest rates, tariff adjustments, economic
  conditions prevalent in the geographic regions in which Power and Energy Holdings do business,
  local spot market prices for energy, foreign exchange rates and the credit worthiness
  of customers. If an adverse event were to occur, such an event could materially
  change the assumptions used to value goodwill and could result in impairments
  of goodwill. For further information, see Note 2. New Accounting Standards of
  the Notes.

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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, forecast,
  projections variations of such words and similar expressions are
  intended to identify forward-looking statements. PSEG, PSE&G, Power and
  Energy Holdings 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 PSEG, PSE&G, Power and Energy Holdings
  disclosures prior to the effective date of the Private Securities Litigation
  Reform Act of 1995.

In addition to the
  risks identified in MD&A  Overview and Future Outlook and in addition
  to any assumptions and other factors referred to specifically in connection
  with such forward-looking statements discussed above, factors that could cause
  actual results to differ materially from those contemplated in any forward-looking
  statements include, among others, the following:

PSEG, PSE&G, Power and Energy Holdings

- credit, commodity, interest rate, counterparty
    and other financial market risks, could have an adverse impact;
- liquidity and the ability to access capital and
    credit markets, could have an adverse impact;
- acquisitions, divestitures, mergers, restructurings or strategic
    initiatives that change PSEG, PSE&G, Power and Energy Holdings structure;
    business combinations among competitors and major customers could change financial
    position, results of operations or net cash flows;
- general economic conditions including inflation;
- changes to accounting standards or generally accepted
    accounting principles, which may require adjustments to financial statements
    and may affect future results;
- changes in tax laws and regulations which could
    affect cash flows and business prospects;
- energy obligations, available supply and trading
    risks may have an adverse impact;
- changes in the electric industry including changes to power pools
    could have an adverse impact;
- regulation and availability of power transmission
    facilities may impact ability to deliver output to customers;
- growth in costs and expenses could have an adverse
    impact;
- environmental regulation significantly impacts
    operations;
- changes in rates of return on overall debt and
    equity markets could have an adverse impact on the value of pension assets
    and the NDT fund;
- changes in political conditions, recession, acts
    of war or terrorism could have an adverse impact;
- insurance coverage may not be sufficient;
- involvement in lawsuits, including liability claims
    and commercial disputes, could affect profits or ability to sell and market
    products;
- inability to attract and retain management and
    other key employees could have an adverse impact;
- ability to service debt as a result of any of
    the aforementioned events could have an adverse impact;

PSE&G & Energy Holdings

- ability to obtain adequate and timely rate relief;
- regulatory issues significantly impact operations;

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Power and Energy Holdings

- low energy prices could adversely affect revenues
    and cash flows;
- excess supply due to overbuild in the industry
    may have adverse effects;
- generation operating performance may fall below
    projected levels;
- the operations are subject to substantial competition
    from well capitalized participants in the worldwide energy markets;
- inability to effectively manage trading risk could
    have an adverse impact;
- margin posting requirements could have an adverse
    effect on cash flows;
- availabililty of fuel at reasonable prices;
- competitive position could be adversely affected
    by actions involving competitors or major customers;
- changes in product or sourcing mix could have
    an adverse impact;
- acquisition, construction and development may not be timely
    or successful;
- changes in technology may make power generation
    assets less competitive;

Energy Holdings

- because a significant portion of business is
    conducted outside the United States, adverse international developments could
    negatively impact its business;
- changes in foreign currency exchange rates;
- unavailability of leveraged lease investments with adequate
    returns at reasonable risk could have an adverse impact;
- inadequate operating performance or legal protections of leveraged
    lease investments could have an adverse impact;
- substandard operating performance or cash flow
    from investments could fall below projected levels, adversely impacting the
    ability to service its debt; and
- credit of lessees to service the leases.

Consequently, all
  of the forward-looking statements made in this report are qualified by these
  cautionary statements and PSEG, PSE&G, Power and Energy Holdings cannot
  assure you that the results or developments anticipated by management will be
  realized, or even if realized, will have the expected consequences to, or effects
  on PSEG, PSE&G, Power and Energy Holdings or its business prospects, financial
  condition or results of operations. Undue reliance should not be placed on these
  forward-looking statements in making any investment decision. Each PSEG, PSE&G,
  Power and Energy Holdings expressly disclaim any obligation or undertaking to
  release publicly any updates or revisions to these forward-looking statements
  to reflect events or circumstances that occur or arise or are anticipated to
  occur or arise after the date hereof. In making any investment decision regarding
  PSEG, PSE&G, Power and Energy Holdings securities, PSEG, PSE&G,
  Power and Energy Holdings is not making, and you should not infer, any representation
  about the likely existence of any particular future set of facts or circumstances.
  The forward-looking statements contained in this report are intended to qualify
  for the safe harbor provisions of Section 27A of the Securities Act of 1933,
  as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

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|ITEM 7A. | QUALITATIVE AND QUANTITATIVE DISCLOSURES
      ABOUT MARKET RISK
|-------- | ----------------------------------------------------------------

PSEG,
  PSE&G, Power and Energy Holdings

The market risk inherent
  in PSEGs, PSE&Gs, Powers and Energy Holdings market
  risk sensitive instruments and positions is the potential loss arising from
  adverse changes in foreign currency exchange rates, commodity prices, equity
  security prices and interest rates as discussed in the Notes to the Consolidated Financial
  Statements. Each of PSEG, PSE&G, Power and Energy Holdings policy
  is to use derivatives to manage risk consistent with its respective business
  plans and prudent practices. PSEG, PSE&G, Power and Energy Holdings utilize the PSEG
  Risk Management Committee (RMC) comprised of executive officers which utilizes an
  independent risk oversight function to ensure compliance with corporate policies
  and prudent risk management practices.

Additionally, PSEG, PSE&G, Power and Energy
  Holdings are exposed to counterparty credit losses in the event of non-performance
  or non-payment. PSEG 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 and its subsidiaries financial condition,
  results of operations or net cash flows.

Foreign Exchange Rate Risk Energy Holdings

Global is exposed
  to foreign currency risk and other foreign operations risk that arise from investments
  in foreign subsidiaries and affiliates. A key component of this risk is that
  some of its foreign subsidiaries and affiliates utilize currencies other than
  the consolidated reporting currency, the US Dollar. Additionally, certain of
  Globals foreign subsidiaries and affiliates have entered into monetary
  obligations and maintain receipts/receivables in US Dollars or currencies other
  than their own functional currencies. Primarily, Global is exposed to changes
  in the US Dollar to Brazilian Real exchange rate, the US Dollar to Euro
  exchange rate, the US Dollar to Polish Zloty exchange rate and the US Dollar
  to Chilean Peso exchange rate. With respect to the foreign currency risk associated
  with the Brazilian Real and the Chilean Peso, there has already been significant
  devaluation since the initial acquisition of these investments, which has resulted
  in reduced US Dollar earnings and cash flows relative to initial projections.
  Whenever possible, these subsidiaries and affiliates have attempted to limit
  potential foreign exchange exposure by entering into revenue contracts that
  adjust to changes in foreign exchange rates. Global also uses foreign currency
  forward, swap and option agreements, wherever possible, to manage risk related
  to certain foreign currency fluctuations.

As of December 31,
  2002, the devaluing Brazilian Real has resulted in a cumulative $225 million
  loss of value which is recorded as a $202 million after-tax charge to Other
  Comprehensive Income related to Globals equity method investments in RGE,
  a Brazilian distribution company. An additional devaluation in the December
  31, 2002 Brazilian Real to the US Dollar exchange rate of 10% would result in
  a $3 million change in the value of the investment in RGE and an after-tax $3
  million impact to Other Comprehensive Income.

Additionally, Global
  has $52 million of monetary receivables in Euros subject to fluctuations in
  the US Dollar to Euro exchange rate. If the December 31, 2002 Euro to US Dollar
  exchange rate were to change by 10%, Global would record a $4 million after-tax
  foreign currency transaction gain or loss.

Global also has net
  monetary positions in the Polish Zloty related to its consolidated investments in
  ELCHO and Skawina, Polish generation companies. If the December 31, 2002 Polish
  Zloty to US Dollar exchange rate were to change by 10%, Global would record
  a $4 million after-tax foreign currency transaction gain or loss.

An additional exposure
  related to foreign currency risk includes the $157 million of monetary obligations
  in US Dollars subject to fluctuations in the US Dollar to Chilean Peso exchange
  rate. If the December 31, 2002 exchange rate of the Chilean Peso to the US Dollar
  were to change by 10%, Energy Holdings would record an after-tax $9 million foreign
  currency transaction gain or loss. Such gain or loss should be materially
  offset by gains or

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losses on the Chilean Peso forward exchange contract
  hedging such exposure. See Note 12. Risk Management of the Notes.

With respect to any
  other monetary assets or liabilities subject to foreign currency risk, a 10%
  change in any individual US Dollar to local currency exchange rate would not
  be material.

Commodity Contracts

Power and Energy Holdings

The availability and
  price of energy commodities are subject to fluctuations from factors such as
  weather, environmental policies, changes in supply and demand, state and Federal
  regulatory policies and other events. To reduce price risk caused by market
  fluctuations, Power and Energy Holdings enter into supply contracts and derivative
  contracts, including forwards, futures, swaps and options with approved counterparties,
  to hedge their respective anticipated supply and demand differential. These
  contracts, in conjunction with owned electric generation capacity and demand
  obligations, make up the portfolio.

Power and Energy Holdings
  use a value-at-risk (VaR) model to assess the market risk of their respective
  commodity businesses. This model includes fixed price sales commitments, owned
  generation, load requirements, physical contracts and financial derivative instruments.
  VaR represents the potential gains or losses, under normal market conditions,
  for instruments or portfolios due to changes in market factors, for a specified
  time period and confidence level. Power and Energy Holdings estimate VaR across
  their respective commodity businesses.

Power

VaR Model

Power manages its
  exposure at the portfolio level. Its portfolio consists of owned generation, gas or electric
  load-serving contracts, gas supply contracts and energy
  derivatives designed to manage the risk around the differential between generation
  and load.

The RMC established a VaR threshold of $50 million for a one-week
  (5 business days) holding period at a 95% (two-tailed) confidence level. The
  RMC will be notified if the VaR reaches $40 million and the portfolio will be
  closely monitored. The risk is monitored by area of responsibility. The Board
  of Directors of PSEG is notified if a VaR threshold of $75 million is reached.

The current modeling
  process and methodology has been reviewed by a third party consulting firm.
  This review included analysis and comparison of Powers current VaR process and methodology to other processes
  and methodologies used in the energy industry. PSEG believes the evaluation
  indicates that Powers methodology to calculate VaR is reasonable.

The model is an augmented
  variance/covariance model adjusted for the delta of positions with a 95% two-tailed
  confidence level for a one-week holding period. The model is augmented to incorporate,
  the non-log-normality of energy-related commodity prices, especially emissions
  and capacity and the non-stationary nature of energy volatility. The model also
  assumes no hedging activity throughout the holding period whereas Power actively
  manages its portfolio.

As of December 31,
  2002, VaR was approximately $7 million, compared to the December 31, 2001, level
  of $18 million. Previous to 2002, Powers load was considered an indefinite
  obligation; therefore, for consistency purposes Power decided to model both
  the cost to serve its load obligation and the value of its generation assets
  on a rolling 12-month basis. At present, Powers load obligation is determined
  by the results of the annual BGS auction. In February 2003, the BPU held two
  simultaneous auctions for load obligations covering overlapping time periods.
  Two-thirds of New Jerseys fixed-price BGS load was auctioned for the 10
  months from August 2003 through May 2004 and the remaining one-third was auctioned
  for the 34 months from August 2003 through May 2006. The combined result is
  that all of New Jerseys fixed-price BGS load is auctioned through May
  2004, while only one-third is auctioned for the 24 months from June 2004 through
  May 2006. To maintain an actionable VaR, generation

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and load (based on an assumed success rate in the
  auction) are both modeled at 100% of their assumed value through May 2004 and
  at one-third of the assumed value of each from June 2004 through May 2006.

Powers VaR
  Associated with Generating Assets and Commodity Contracts

|For the Year Ended December
      31, 2002                       |  | Total VaR 
|---------------------------------------------------------------- |  | ----------
|                                                                 |  |           
|                                                                 |  | (Millions)
|95% Confidence Level, Five-Day
      Holding Period, Two-Tailed: |  |           
|Period End                                                       |  | $         
|Average for the Period                                           |  | $         
|High                                                             |  | $         
|Low                                                              |  | $         
|                                                                 |  |           
|99% Confidence Level, One-Day
      Holding Period, Two-Tailed:  |  |           
|Period End                                                       |  | $         
|Average for the Period                                           |  | $         
|High                                                             |  | $         
|Low                                                              |  | $         

Energy Holdings

VaR Model

In general, Energy
  Holdings manages its commodity exposure through power purchase agreements. One
  notable exception is its partial ownership of TIE, which owns two merchant energy
  plants that manage their risk through short-term energy sales.

The model is a variance/covariance
  model with a two-tailed 95% confidence level for a one-week holding period.
  Expected energy output and fuel usage are modeled as forward obligations. The
  Electric Reliability Council of Texas (ERCOT) system is a closed system and
  is less liquid than PJM. This makes estimates of volatility and correlation
  less reliable.

As of December
  31, 2002 and December 31, 2001, VaR was approximately $4 million.

Energy Holdings
  VaR Associated with Generating Assets and Commodity Contracts

|For the Year Ended December
      31, 2002                       |  | Total VaR 
|---------------------------------------------------------------- |  | ----------
|                                                                 |  |           
|                                                                 |  | (Millions)
|95% Confidence Level, Five-Day
      Holding Period, Two-Tailed: |  |           
|Period End                                                       |  | $         
|Average for the Period                                           |  | $         
|High                                                             |  | $         
|Low                                                              |  | $         
|                                                                 |  |           
|99% Confidence Level, One-Day
      Holding Period, Two-Tailed:  |  |           
|Period End                                                       |  | $         
|Average for the Period                                           |  | $         
|High                                                             |  | $         
|Low                                                              |  | $         

86

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Interest Rates

PSEG, PSE&G, Power and Energy Holdings

PSEG, PSE&G, Power
  and Energy Holdings are subject to the risk of fluctuating interest rates in
  the normal course of business. PSEGs, PSE&G, Power & Energy Holdings
  policy is to manage interest rate risk through the use of fixed rate debt, floating
  rate debt, interest rate swaps and interest rate lock agreements. PSEG, PSE&G,
  Power & Energy Holdings manages its interest rate exposure by maintaining
  a targeted ratio of fixed and floating rate debt. As of December 31, 2002, a
  hypothetical 10% change in market interest rates would result in a $1 million,
  $4 million, $2 million, and $2 million, change in annual interest costs related
  to debt at PSEG, PSE&G, Power and Energy Holdings, respectively. In addition,
  as of December 31, 2002, a hypothetical 10% change in market interest rates
  would result in a $8 million, $216 million, $122 million, and $50 million change
  in the fair value of the debt of PSEG, PSE&G, Power and Energy Holdings,
  respectively.

Debt and Equity Securities

PSEG

PSEG has approximately
  $2.1 billion invested in its pension plan. Although fluctuations
  in market prices of securities within this portfolio do not directly affect
  PSEGs earnings in the current period, changes in the value of these investments
  could affect PSEGs future contributions to these plans, its financial
  position if the accumulated benefit obligation under its pension plan exceeds
  the fair value of its pension funds and future earnings as PSEG would earn
  a lower return on the fund balance and could be required to adjust its assumed
  rate of return.

Power

Powers
  Nuclear Decommissioning Trust (NDT) fund is comprised of both fixed income and
  equity securities totaling $766 million at December 31, 2002. The equity securities
  are independently marked-to-market each month by the Trustee. As of December
  31, 2002, the portfolio was comprised of approximately $445 million of equity
  securities and approximately $321 million in fixed income securities. The fair
  market value of the NDT assets will fluctuate depending on the performance of
  equity markets. As of December 31, 2002, a hypothetical 10% change in the equity market would impact the value of
  Powers equity securities by approximately $45 million.

Power uses duration
  to measure the interest rate sensitivity of the fixed income portfolio. Duration
  is a summary statistic of the effective average maturity of the fixed income
  portfolio. Also, it is an essential tool in immunizing portfolios from interest
  rate risk. The benchmark for the fixed income component of the NDT Fund is the
  Lehman Brothers Aggregate Bond Index which currently has a duration
  of 3.79 years and a yield of 3.66%. The portfolios value will appreciate
  or depreciate by the duration with a 1% change in interest rates. As of December 31, 2002, a hypothetical
  1% increase in interest rates would result in a decline in the market value
  for the fixed income portfolio of approximately $12 million.

Energy Holdings

Resources has investments
  in equity securities and limited partnerships. Resources carries its investments
  in equity securities at their approximate fair value as of the reporting date.
  Consequently, the carrying value of these investments is affected by changes
  in the fair value of the underlying securities. Fair value is determined by
  adjusting the market value of the securities for liquidity and market volatility
  factors, where appropriate.

As of December 31,
  2002, Resources had investments in leveraged buyout funds of approximately $93
  million, of which $24 million was comprised of public securities with available
  market prices and $69 million was comprised of non-publicly traded securities.
  The

87

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potential change in fair value resulting from a
  hypothetical 10% change in quoted market prices of the publicly traded investments
  amounted to $2 million as of December 31, 2002.

Credit Risk

PSEG, PSE&G, Power and Energy Holdings

Credit risk relates
  to the risk of loss that PSEG, PSE&G, Power and Energy Holdings would incur
  as a result of non-performance by counterparties pursuant to the terms of their
  contractual obligations. PSEG, PSE&G, Power and Energy Holdings have established
  credit policies that they believe significantly minimize 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.

Power

Counterparties expose
  Power to credit losses in the event of non-performance or non-payment. Power
  has a credit management process which is used to assess, monitor and mitigate
  counterparty exposure for Power and its subsidiaries. In the event of non-performance
  or non-payment by a major counterparty, there may be a material adverse impact
  on Power and its subsidiaries financial condition, results of operations
  or net cash flows. As of December 31, 2002 over 89% of the credit exposure (mark-to-market
  plus net receivables and payables, less cash collateral) for Powers trading
  operations was with investment grade counterparties. The majority of the credit
  exposure with non-investment grade counterparties is with certain companies
  that supply fuel to Power. Therefore, this exposure relates to the risk of a
  counterparty performing under its obligations rather than payment risk. As of
  December 31, 2002, Powers trading operations had over 177 active counterparties.

As a result of the
  New Jersey BGS auction, Power contracted to provide energy to the direct suppliers
  of New Jersey electric utilities, including PSE&G, commencing August 1,
  2002. Subsequently certain bidders failed to meet the credit standards required
  under the BGS auction process and a portion of the contracts with those bidders
  was reassigned to Power. Therefore, for a limited portion of the New Jersey
  retail load, Power is a direct supplier to one utility, although this utility
  is not PSE&G. Power sells electricity to nine direct supplier-counterparties
  that serve the load of the utilities, and one utility directly. Four of these
  supplier-counterparties pay Power directly, and one of the four prepays its
  purchases. The revenue from the remaining five counterparties is paid directly
  from the utilities that those suppliers serve, and the related margin due to
  the counterparties is recorded as a liability and will be remitted to those
  counterparties separately. These bilateral contracts are subject to credit risk.
  This risk is substantially higher than the risk that was associated with potential
  nonpayment by PSE&G or any other electric distribution company (EDC) making direct
  payment under the BGS contract which expired on July 31, 2002, since the EDCs
  are rate-regulated entities. This credit risk relates to the ability of counterparties
  to meet their payment obligations for the power delivered under each BGS-related
  contract. Any failure to collect these payments under the BGS-related contracts
  could have a material impact on Powers results of operations, cash flows
  and financial position. Power expects the credit risk and risk mitigation measures
  to be similar under the BGS-related contracts commencing August 1, 2003.

In December 2001,
  Enron Corp. (Enron) and its subsidiaries filed for reorganization under Chapter
  11 of the US Bankruptcy Code. Power had entered into a variety of energy trading
  contracts with Enron and its affiliates as part of its energy trading activities. Enron has guaranteed
  the obligations of its subsidiaries. Power undertook various measures to mitigate
  its exposure to Enron and its subsidiaries and other counterparties which could
  have been affected by the Enron bankruptcy. As of December 31, 2002, Enron has
  claimed that Power owes Enron North America approximately $52 million and has
  asserted that payment obligations of Enron Power Marketing to Power in the amount of
  $14 million may not be offset against this amount. The parties have engaged
  in settlement discussions. Power believes that it has valid claims and defenses
  against Enron and its subsidiaries, which it will vigorously pursue. Based on
  these discussions, rulings in the bankruptcy proceeding and its evaluations
  of its legal rights and obligations, Power believes the net amount payable in
  this matter may approximate $30 million.

88

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Energy Holdings

Leveraged Leases

Resources has credit
  risk related to its investments in leveraged leases, totaling $1.5 billion,
  which is net of deferred taxes of $1.3 billion, as of December 31, 2002. These
  investments are significantly concentrated in the energy related industry and
  have some exposure to the airline industry. Resources is the lessor of various
  aircraft to several domestic and foreign airlines. Resources leases a Boeing
  B767 aircraft to United Airlines (UAL). In December 2002, UAL filed
  for Chapter 11 bankruptcy protection. UAL has stated that it intends to retain
  B767 aircraft and use them in place of the Boeing 747. UAL has an additional
  debt obligation of $53 million associated with this aircraft. Resources will
  work constructively with UAL to keep the leveraged lease in place. However,
  if UAL is unable to meet the lease requirements, Energy Holdings could realize an
  adverse impact to its Consolidated Statements of Operations and net cash flows. The gross
  invested balance of this investment as of December 31, 2002 was $21 million.

Resources is the
  lessor of domestic generating facilities in several US energy markets. As a
  result of recent actions of the rating agencies due to concerns over forward
  energy prices, the credit of some of the transaction lessees, or ultimate guarantors
  of the lease obligations, was downgraded. As of December 31, 2002, 65% of counterparties
  in the lease portfolio were rated investment grade by both S&P and Moodys.
  Specifically, the lessees in the following transactions were downgraded below
  investment grade during 2002 by these rating agencies. Resources investment
  in such transactions was approximately $455 million, net of deferred taxes of
  $294 million as of December 31, 2002.

Resources leases
  1,173 MW of coal-fired generation to Reliant Energy Mid Atlantic Power Holdings
  LLC (REMA), an indirect wholly-owned subsidiary of Reliant Resources Incorporated
  (RRI). The leased assets are the Keystone, Conemaugh and Shawville generating
  facilities located in the PJM West market in Pennsylvania. In addition to the
  leased assets, REMA also owns and operates another 2,830 MW located within PJM.
  REMA is capitalized with over $1 billion of equity from RRI and has no debt
  obligations senior to the lease obligations. REMA is currently rated B by S&P
  and B3 by Moodys. As the lessor/equity participant in the lease, Resources
  is protected with significant lease covenants that restrict the flow of dividends
  from REMA to its parent, and by over-collateralization of REMA with an additional
  2,830 MWs of non-leased assets, transfer of which is restricted by the financing
  documents. Restrictive covenants include historical and forward cash flow coverage
  tests that prohibit discretionary capital expenditures and dividend payments
  to the parent/lessee if stated minimum coverages are not met, and similar cash
  flow restrictions if ratings are not maintained at stated levels. The covenants
  are designed to maintain cash reserves in the transaction entity for the benefit
  of the non-recourse lenders and the lessor/equity participants in the event
  of a market downturn or degradation in operating performance of the leased
  assets. The lease capitalization includes approximately $578 million of non-recourse
  debt. Resources investment in the REMA transaction was $128 million, net
  of deferred taxes of $92 million as of December 31, 2002.

Resources is the
  lessor of the Collins facility to Midwest Generation LLC (Midwest), an indirect
  subsidiary of Edison Mission Energy (EME). Collins is comprised of 2,698 MWs
  of oil and natural gas-fired assets located in the Mid-American Interconnected
  Network (MAIN) power market located in the mid-western region of the US. Midwest
  has a contract with Exelon to supply capacity and energy for 1,078 MWs for Collins
  through December 2003 with an option to extend. Both Midwest and EME are rated
  BB- by S&P and Ba3 by Moodys. In addition to the leased assets, Midwest
  owns and operates an additional 4,459 MWs of generation assets, excluding the
  Powerton and Joliet generating stations discussed below. The restrictive covenants
  protecting Resources are similar to those noted above in the REMA transaction.
  Midwest has a debt obligation of approximately $1.5 billion at a holding company
  above Midwest. The Collins lease is pari-passu with this debt obligation. The
  lease capitalization includes approximately $774 million of non-recourse debt.
  Resources investment in the Collins facility was $107 million, net of
  deferred taxes of $78 million as of December 31, 2002.

Resources also leases
  the Powerton and Joliet generating stations located in the MAIN market to Midwest.
  Both Powerton and Joliet are coal-fired stations
  comprising 2,896 MWs of gross generating capacity. The lease obligations are
  guaranteed by EME. The guarantee contains certain restrictive covenants including,
  but not limited to, additional investment, liens and sales of non-leased collateral.
  In addition, EME is required to maintain a minimum net worth equal to $400 million
  plus cumulative, consolidated net income earned by it and its subsidiaries since
  1992 (without subtracting losses). The lease capitalization includes

89

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approximately $733 million of non-recourse debt.
  Resources investment in the Powerton and Joliet transaction was $90 million,
  net of deferred taxes of $80 million as of December 31, 2002.

Resources is the
  lessor of the 370 MW coal-fired Danskammer plant to Dynegy Danskammer LLC (Danskammer)
  and the 1,200 MW natural gas/oil fired Roseton plant to Dynegy Roseton LLC (Roseton).
  Both Danskammer and Roseton are indirect subsidiaries of Dynegy Holdings Inc
  (DHI). The lease obligations are guaranteed by DHI which is currently rated
  B by S&P and Caa2 by Moodys. The lease capitalization includes approximately
  $800 million of non-recourse debt. Resources investment in the Danskammer
  and Roseton transaction was $129 million, net of deferred taxes of $43 million
  as of December 31, 2002. The non-recourse debt and Resources equity investment
  in this transaction represented the full acquisition price of the underlying
  plants.

In the domestic lease
  transactions described above, Resources has protected its equity investment
  by providing for the right to assume the debt obligation at its discretion in
  the event of default by the lessee with the condition that the lease debt is
  rated at least equal to the rating that existed at the date of the original
  transaction. If Resources were pursuing a debt assumption, it would first seek
  to renegotiate all relevant terms of the agreement with the lenders. Debt assumption
  normally only would occur if an appraisal of the leased property yielded a value
  that exceeds the present value of the debt outstanding. Should Resources ever
  directly assume a debt obligation, the fair value of the underlying asset and
  the associated debt would be recorded on the Consolidated Balance Sheets instead of the net
  equity investment in the lease. As of December 31, 2002, Resources determined
  that the collectibility of the minimum lease payments under its leveraged lease
  investments is still reasonably predictable and therefore continues to account
  for these investments as leveraged leases.

Other

In 2000, Global withdrew
  from its interest in the Eagle Point Cogeneration Partnership (EPCP) with El
  Paso Corp. in exchange for a series of contingent payments over five years.
  These payments are expected to total $290 million, subject to certain subsequent
  annual facility performance factors. When such factors are met on an annual
  basis the earnings are recorded and the payments are ordinarily received in
  the same period. The payments to date have been received in accordance with
  the terms of the agreement, including a payment of $44 million in January 2003.
  Currently under the withdrawal agreement Global is owed in a form of a note
  from EPCP approximately $81 million, with the last payment anticipated in January
  2005. In the event that EPCP operating cash flows are insufficient to make payment,
  mandatory capital contributions are required from the partners to pay the note
  to PSEG Global as amounts become due. Additional covenants in the note security
  package include mandatory restrictions on cash distributions to the partners
  and performance guaranties of EPCPs obligations are required. El Paso
  Corp indirectly owns in excess of 85% of the partnership interests of EPCP.
  In February 2003, S&P downgraded El Paso Corp long-term corporate credit
  rating to B+ from BB and Moodys reduced El Paso Corp. debt rating to Caa1
  from Ba2. If El Paso Corp or its subsidiaries or affiliates is required to fulfill
  an obligation in accordance with the terms of the agreement and is unable to
  perform, the impact would adversely effect Energy Holdings statements
  of operations and net cash flows in the years 2004 and 2005.

ITEM 8.   FINANCIAL STATEMENTS AND
  SUPPLEMENTARY DATA

90

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FINANCIAL STATEMENT RESPONSIBILITY 
  (PSEG)

PSEGs management
  is responsible for the preparation, integrity and objectivity of its consolidated
  financial statements and related notes. 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 Reportis
  also the responsibility of management and is consistent with these consolidated
  financial statements and related notes.

The firm of Deloitte
  & ToucheLLP,
  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 of PSEG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.
  Management also maintains a system of disclosure controls and procedures to
  provide reasonable assurance that PSEG is able to collect, process and disclose,
  within the time periods specified by the Securities and Exchange Commission,
  the information required to be disclosed in reports under the Securities Exchange
  Act of 1934.

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 considers the internal auditors and Deloitte &
  Touches recommendations concerning PSEG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, 2002, PSEG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 its
  Audit Committee, which presently consists of six directors who are not PSEG
  employees or any employees 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. JAMESFERLAND                       | THOMASM. OFLYNN            
|------------------------------------- | ----------------------------
|Chairman of the Board,                | Executive Vice President and
|President and Chief Executive Officer | Chief Financial Officer     
|                                      |                             
|PATRICIAA. RADO                       |                             
|Vice President and Controller         |                             
|(Principal Accounting Officer)        |                             

February 25, 2003

91

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FINANCIAL STATEMENT RESPONSIBILITY 
  (PSE&G)

PSE&Gs
  management is responsible for the preparation, integrity and objectivity of
  its consolidated financial statements and related notes. 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
  & ToucheLLP,
  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 of PSE&G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.
  Management also maintains a system of disclosure controls and procedures to
  provide reasonable assurance that PSE&G is able to collect, process and
  disclose, within the time periods specified by the Securities and Exchange Commission,
  the information required to be disclosed in reports under the Securities Exchange
  Act of 1934.

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 PSE&G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, 2002,
  the PSE&G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 six directors who are not PSEG nor PSE&G
  employees of or employees of any of their 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. JAMESFERLAND                 | ALFREDC. KOEPPE               
|------------------------------- | ------------------------------
|Chairman of the Board and       | President                     
|Chief Executive Officer         | and Chief Operating Officer   
|                                |                               
|ROBERTE. BUSCH                  | PATRICIAA. RADO               
|Senior Vice President  Finance | Vice President and Controller 
|and Chief Financial Officer     | (Principal Accounting Officer)

February 25, 2003

92

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FINANCIAL STATEMENT RESPONSIBILITY 
  (Power)

Powers management
  is responsible for the preparation, integrity and objectivity of its consolidated
  financial statements and related notes. 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 Power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
  & ToucheLLP,
  independent auditors, is engaged to audit Power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 of Power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.
  Management also maintains a system of disclosure controls and procedures to
  provide reasonable assurance that Power is able to collect, process and disclose,
  within the time periods specified by the Securities and Exchange Commission,
  the information required to be disclosed in reports under the Securities Exchange
  Act of 1934.

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 Power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, 2002,
  Power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 six directors who are not PSEG nor Power
  employees of or employees of any of their 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. JAMESFERLAND             | FRANKCASSIDY                 
|--------------------------- | -----------------------------
|Chairman of the Board and   | President                    
|Chief Executive Officer     | and Chief Operating Officer  
|                            |                              
|THOMASM. OFLYNN            | PATRICIAA. RADO              
|Executive Vice President    | Vice President and Controller
|and Chief Financial Officer | (Chief Accounting Officer)   

February 25, 2003

93

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FINANCIAL STATEMENT RESPONSIBILITY 
  (Energy Holdings)

Energy Holdings
  management is responsible for the preparation, integrity and objectivity of
  its consolidated financial statements and related notes. 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 Energy Holdings
  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
  & ToucheLLP,
  independent auditors, is engaged to audit Energy Holdings 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
  of Energy Holdings 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.
  Management also maintains a system of disclosure controls and procedures to
  provide reasonable assurance that Energy Holdings is able to collect, process
  and disclose, within the time periods specified by the Securities and Exchange
  Commission, the information required to be disclosed in reports under the Securities
  Exchange Act of 1934.

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 Energy Holdings 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, 2002,
  Energy Holdings 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 six directors who are not PSEG nor Energy
  Holdings employees or employees of any of their 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. JAMESFERLAND             | ROBERTJ. DOUGHERTY,
      JR. 
|--------------------------- | ------------------------------
|Chairman of the Board and   | President                     
|Chief Executive Officer     | and Chief Operating Officer   
|                            |                               
|THOMASM. OFLYNN            | DEREKM. DIRISIO               
|Executive Vice President    | Vice President and Controller 
|and Chief Financial Officer | (Principal Accounting Officer)

February 25, 2003

94

---



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, 2002 and 2001, and the related consolidated statements of
  operations, common stockholders equity and cash flows for each of the three
  years in the period ended December 31,2002.
  Our audits also included the consolidated financial statement schedule listed
  in the Index in Item 15. 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 auditing
  standards generally accepted in the United States of America. 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, 2002 and 2001, and the results of its operations and its
  cash flows for each of the three years in the period ended December 31, 2002,
  in conformity with accounting principles generally accepted in the United States
  of America. Also, in our opinion, such consolidated financial statement schedule,
  when considered in relation to the basic consolidated financial statements taken
  as a whole, presents fairly in all material respects, the information set forth
  therein.

We have also previously audited, in accordance with
  auditing standards generally accepted in the United States of America, the consolidated
  balance sheets of the Company as of December 31, 2000, 1999, and 1998, and the
  related consolidated statements of operations, common stockholders equity
  and cash flows for the years ended December 31, 1999 and 1998 (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, 2002 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.

As discussed in Note 2 to the consolidated financial
  statements, on January 1, 2001, the Company adopted Statement of Financial Accounting
  Standards No. 133, Accounting for Derivative Instruments and Hedging Activities,
  as amended.

As discussed in Note 2 to the consolidated
  financial statements, on January 1, 2002, the Company adopted Statement of Financial
  Accounting Standards No. 142, Goodwill and Other Intangible Assets.

DELOITTE & TOUCHE

Parsippany, New Jersey
  February 7, 2003

95

---



INDEPENDENT AUDITORS REPORT

To the Sole Stockholder and 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, 2002 and 2001, and the related consolidated statements of
  operations, common stockholders equity and cash flows for each of the three
  years in the period ended December 31, 2002. Our audits also included the consolidated
  financial statement schedule listed in the Index in Item 15. 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 auditing
  standards generally accepted in the United States of America. 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, 2002 and 2001, and the results of its operations and its
  cash flows for each of the three years in the period ended December 31, 2002,
  in conformity with accounting principles generally accepted in the United States
  of America. Also, in our opinion, such consolidated financial statement schedule,
  when considered in relation to the basic consolidated financial statements taken
  as a whole, presents fairly in all material respects, the information set forth
  therein.

We have also previously audited, in accordance with
  auditing standards generally accepted in the United States of America, the consolidated
  balance sheets of the Company as of December 31, 2000, 1999, and 1998, and the
  related consolidated statements of operations, common stockholders equity
  and cash flows for the years ended December 31, 1999 and 1998 (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, 2002 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

Parsippany, New Jersey
  February 7, 2003

96

---



INDEPENDENT AUDITORS REPORT

To the Sole Member and Board of Directors of
                PSEG Power LLC:

We have audited the consolidated balance sheets
  of PSEG Power LLC and its subsidiaries (the Company) as of December
  31, 2002 and 2001, and the related consolidated statements of operations, members
  equity and cash flows for each of the three years in the
  period ended December 31, 2002. Our audits also included the consolidated financial
  statement schedule listed in the Index in Item 15. 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 auditing
  standards generally accepted in the United States of America. 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, 2002 and 2001, and the results of its operations and its
  cash flows for each of the three years in the period ended December 31, 2002,
  in conformity with accounting principles generally accepted in the United States
  of America. 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.

DELOITTE & TOUCHE

Parsippany, New Jersey
  February 7, 2003

97

---



INDEPENDENT AUDITORS REPORT

To the Sole Member and Board of Directors of
                PSEG Energy Holdings LLC:

We have audited the consolidated balance sheets
  of PSEG Energy Holdings LLC and its subsidiaries (the Company) as
  of December 31, 2002 and 2001, and the related consolidated statements of operations,
  members equity and cash flows for each of the three years
  in the period ended December 31, 2002. Our audits also included the consolidated
  financial statement schedule listed in the Index in Item 15. 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 auditing
  standards generally accepted in the United States of America. 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, 2002 and 2001, and the results of its operations and its
  cash flows for each of the three years in the period ended December 31, 2002,
  in conformity with accounting principles generally accepted in the United States
  of America. 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 2 to the consolidated financial
  statements, on January 1, 2001, the Company adopted Statement of Financial Accounting
  Standards No. 133, Accounting for Derivative Instruments and Hedging Activities,
  as amended.

As discussed in Note 2 to the consolidated
  financial statements, on January 1, 2002, the Company adopted Statement of Financial
  Accounting Standards No. 142, Goodwill and Other Intangible Assets.

DELOITTE & TOUCHE

Parsippany, New Jersey
  February 7, 2003

98

---





PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
  CONSOLIDATED STATEMENTS OF OPERATIONS
  (Millions, except for Share Data)


`For The Years Ended December 31,
                                                                      -----------------------------------
                                                                         2002         2001         2000
                                                                      ---------    ---------    ---------

OPERATING REVENUES                                                    $   8,390    $   7,055    $   6,521

OPERATING EXPENSES
  Energy Costs                                                            3,769        2,674        2,423
  Operation and Maintenance                                               1,896        1,841        1,706
  Write-down of Project Investments                                         497            7           --
  Depreciation and Amortization                                             571          496          350
  Taxes Other Than Income Taxes                                             131          121          135
                                                                      ---------    ---------    ---------
       Total Operating Expenses                                           6,864        5,139        4,614
                                                                      ---------    ---------    ---------
OPERATING INCOME                                                          1,526        1,916        1,907
  Other Income                                                               57           50           33
  Other Deductions                                                          (79)         (15)          (3)
  Interest Expense                                                         (783)        (722)        (571)
  Preferred Securities Dividends                                            (57)         (72)         (94)
                                                                      ---------    ---------    ---------
INCOME BEFORE INCOME TAXES,
  DISCONTINUED OPERATIONS AND
  CUMULATIVE EFFECT OF A CHANGE
  IN ACCOUNTING PRINCIPLE                                                   664        1,157        1,272
Income Taxes                                                               (248)        (381)        (496)
                                                                      ---------    ---------    ---------
INCOME BEFORE DISCONTINUED OPERATIONS
  AND CUMULATIVE EFFECT OF A CHANGE IN
  ACCOUNTING PRINCIPLE                                                      416          776          776
  Loss from Discontinued Operations,
     net of tax of $9, $8 and $5 in 2002, 2001 and 2000,respectively
     (including $35 Loss on Disposal, net of tax of $18 in 2002)            (51)         (15)         (12)
                                                                      ---------    ---------    ---------
INCOME BEFORE CUMULATIVE EFFECT OF
  A CHANGE IN ACCOUNTING PRINCIPLE                                          365          761          764
Cumulative Effect of a Change in Accounting Principle,
  net of tax of $66 and $8 in 2002 and 2001, respectively                  (120)           9           --
                                                                      ---------    ---------    ---------
NET INCOME                                                            $     245    $     770    $     764
                                                                      =========    =========    =========
WEIGHTED AVERAGE COMMON SHARES
    OUTSTANDING (000s)                                                  208,813      208,226      215,121
                                                                      =========    =========    =========
EARNINGS PER SHARE (BASIC AND DILUTED):
INCOME BEFORE DISCONTINUED  OPERATIONS
  AND CUMULATIVE EFFECT OF A CHANGE IN
  ACCOUNTING PRINCIPLE                                                $    1.99    $    3.73    $    3.61
Loss from Discontinued Operations, net of tax                             (0.24)       (0.07)       (0.06)
     (including Loss on Disposal, net of tax)
Cumulative Effect of a Change in Accounting Principle, net of tax         (0.58)        0.04           --
                                                                      ---------    ---------    ---------
NET INCOME                                                            $    1.17    $    3.70    $    3.55
                                                                      =========    =========    =========
DIVIDENDS PAID PER SHARE OF COMMON STOCK                              $    2.16    $    2.16    $    2.16
                                                                      =========    =========    =========`

See Notes to Consolidated Financial Statements.


99

---



PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS ASSETS
(Millions)


`December 31,
                                                       --------------------
                                                         2002        2001
                                                       --------    --------
CURRENT ASSETS
  Cash and Cash Equivalents                            $    165    $    167
  Accounts Receivable                                     1,404       1,032
  Allowance for Doubtful Accounts                           (34)        (40)
  Unbilled Electric and Gas Revenues                        275         291
  Fuel                                                      412         506
  Materials and Supplies                                    208         175
  Energy Trading Contracts                                  179         148
  Restricted Cash                                            32          12
  Assets Held for Sale                                       83         422
  Current Assets of Discontinued Operations                 107         483
  Other                                                     135          93
                                                       --------    --------
       Total Current Assets                               2,966       3,289
                                                       --------    --------
PROPERTY, PLANT AND EQUIPMENT                            16,562      14,700
     Less: Accumulated Depreciation and Amortization     (5,113)     (4,789)
                                                       --------    --------
       Net Property, Plant and Equipment                 11,449       9,911
                                                       --------    --------
NONCURRENT ASSETS
 Regulatory Assets                                        4,992       5,242
 Long-Term Investments                                    4,581       4,768
 Nuclear Decommissioning Trust Funds                        766         817
 Other Special Funds                                         72         222
 Goodwill                                                   452         569
 Energy Trading Contracts                                    22          29
 Other Intangibles                                          206          63
 Other                                                      236         246
                                                       --------    --------
       Total Noncurrent Assets                           11,327      11,956
                                                       --------    --------
TOTAL ASSETS                                           $ 25,742    $ 25,156
                                                       ========    ========`

See Notes to Consolidated Financial Statements.


100

---



PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND CAPITALIZATION
(Millions)


`December 31,
                                                                          --------------------
                                                                            2002        2001
                                                                          --------    --------

CURRENT LIABILITIES
  Long-Term Debt Due Within One Year                                      $    749    $  1,186
  Commercial Paper and Loans                                                   762       1,337
  Accounts Payable                                                           1,115         871
  Energy Trading Contracts                                                     123         279
  Accrued Taxes                                                                229         243
  Current Liabilities of Discontinued Operations                                83         251
  Other                                                                        755         379
                                                                          --------    --------
       Total Current Liabilities                                             3,816       4,546
                                                                          --------    --------
NONCURRENT LIABILITIES
  Deferred Income Taxes and Investment Tax Credits (ITC)                     2,924       3,205
  Regulatory Liabilities                                                       252         368
  Nuclear Decommissioning                                                      766         817
  OPEB Costs                                                                   501         476
  Accrued Pension Costs                                                        336          42
  Cost of Removal                                                              131         146
  Other                                                                        638         467
                                                                          --------    --------
       Total Noncurrent Liabilities                                          5,548       5,521
                                                                          --------    --------
COMMITMENTS AND CONTINGENT LIABILITIES  (See Note 13)

CAPITALIZATION
  LONG-TERM DEBT
  Long-Term Debt                                                             7,116       6,437
  Securitization Debt                                                        2,222       2,351
  Project Level, Non-Recourse Debt                                           1,653       1,404
                                                                          --------    --------
    Total Long-Term Debt                                                    10,991      10,192
                                                                          --------    --------
  SUBSIDIARIES' PREFERRED SECURITIES
    Preferred Stock Without Mandatory Redemption                                80          80
    Preferred Stock With Mandatory Redemption                                  460          --
    Guaranteed Preferred Beneficial Interest in Subordinated Debentures        860         680
                                                                          --------    --------
       Total Subsidiaries' Preferred Securities                              1,400         760
                                                                          --------    --------
  COMMON STOCKHOLDERS' EQUITY
    Common Stock, issued; 2002 - 251,385,937 shares
        2001 - 231,957,608 shares                                            4,056       3,599
    Treasury Stock, at cost; 2002 and 2001 - 26,118,590 shares                (981)       (981)
    Retained Earnings                                                        1,601       1,809
    Accumulated Other Comprehensive Loss                                      (689)       (290)
                                                                          --------    --------
       Total Common Stockholders' Equity                                     3,987       4,137
                                                                          --------    --------
            Total Capitalization                                            16,378      15,089
                                                                          --------    --------
TOTAL LIABILITIES AND CAPITALIZATION                                      $ 25,742    $ 25,156
                                                                          ========    ========`

See Notes to Consolidated Financial Statements.


101

---



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


`For The Years Ended December 31,
                                                                                  -------------------------------
                                                                                     2002       2001       2000
                                                                                   -------    -------    -------

CASH FLOWS FROM OPERATING ACTIVITIES
  Net Income                                                                       $   245    $   770    $   764
  Adjustments to reconcile net income to net cash flows from
   operating activities:
   Write-down of Project Investments                                                   497          7         --
   Loss on Disposal of Discontinued Operations, net of tax                              35          2         --
   Cumulative Effect of a Change in Accounting Principle, net of tax                   120         (9)        --
   Depreciation and Amortization                                                       571        496        350
   Amortization of Nuclear Fuel                                                         89        101         96
   Provision for Deferred Income Taxes (Other than Leases) and ITC                    (117)      (118)        (5)
   Non-Cash Employee Benefit Plan Costs                                                193        158        147
   Leveraged Lease Income, Adjusted for Rents Received                                 (45)        (6)        74
   Undistributed Earnings from Affiliates                                              (59)      (111)       (28)
   Foreign Currency Transaction Loss (Gain)                                             70          9         (3)
   Unrealized (Gains) Losses on Energy Contracts and Other Derivatives                 (36)        22        (13)
   (Under) Over Recovery of Electric Energy Costs (BGS and NTC) and MTC                 (1)       110        116
   (Under) Over Recovery of Gas Costs                                                  (41)      (143)        11
   Other Non-Cash Charges (Credits)                                                     54        (68)       (20)
   Net Change in Certain Current Assets and Liabilities                                279        183       (170)
   Employee Benefit Plan Funding and Related Payments                                 (308)      (210)       (35)
   Proceeds from the Withdrawal of Partnership Interests and Other Distributions        63        124         51
   Other                                                                               (81)       (88)      (145)
                                                                                   -------    -------    -------
       Net Cash Provided By Operating Activities                                     1,528      1,229      1,190
                                                                                   -------    -------    -------
CASH FLOWS FROM INVESTING ACTIVITIES
  Additions to Property, Plant and Equipment                                        (1,814)    (2,111)      (815)
  Investments in Joint Ventures, Partnerships and Capital Leases                      (222)      (596)      (821)
  Proceeds from the Sale of Investments and Return of Capital from Partnerships        380        132        177
  Acquisitions, net of Cash Provided                                                  (289)      (832)       (88)
  Other                                                                                (42)      (195)       (84)
                                                                                   -------    -------    -------
       Net Cash Used In Investing Activities                                        (1,987)    (3,602)    (1,631)
                                                                                   -------    -------    -------
CASH FLOWS FROM FINANCING ACTIVITIES
  Net Change in Short-Term Debt                                                       (552)    (1,511)       929
  Issuance of Long-Term Debt                                                         1,542      6,509      1,200
  Issuance of Preferred Securities                                                     180         --         --
  Issuance of Participating Units                                                      460         --         --
  Issuance of Common Stock                                                             536         --         --
  Deferred Issuance Costs                                                              (44)      (228)       (39)
  Redemptions of Long-Term Debt                                                     (1,212)    (1,292)    (1,052)
  Redemptions of Preferred Securities                                                   --       (448)        --
  Purchase of Treasury Stock                                                            --        (91)      (298)
  Cash Dividends Paid on Common Stock                                                 (456)      (448)      (464)
  Other                                                                                  5        (47)         2
                                                                                   -------    -------    -------
       Net Cash Provided By Financing Activities                                       459      2,444        278
                                                                                   -------    -------    -------
  Effect of Exhange Rate Change                                                         (2)        --         --
                                                                                   -------    -------    -------
Net Change In Cash And Cash Equivalents                                                 (2)        71       (163)
Cash And Cash Equivalents At Beginning Of Period                                       167         96        259
                                                                                   -------    -------    -------
Cash And Cash Equivalents At End Of Period                                         $   165    $   167    $    96
                                                                                   =======    =======    =======
Income Taxes Paid                                                                  $   145    $    87    $   485
Interest Paid                                                                      $   843    $   713    $   548
Non-Cash Financing and Investing Activities:
Property, Plant and Equipment Assumed from Acquisitions                            $   538    $   749    $   213
Debt Assumed from Acquisitions                                                     $    --    $   256    $   161
Reduction in Equity and Increase in Debt From Issuance of Participating Units      $    54    $    --    $    --`

See Notes to Consolidated Financial Statements.


102

---



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


`Common              Treasury
                                                                                Stock                Stock
                                                                          -----------------    ------------------   Retained
                                                                            Shs.     Amount      Shs.      Amount   Earnings
                                                                          -------   -------    -------    -------   --------

Balance as of January 1, 2000                                                 232     3,604        (16)      (597)     1,193
    Net Income                                                                 --        --         --         --        764
    Other Comprehensive Income (Loss), net of tax:
        Currency Translation Adjustment, net of tax of $(0)                    --        --         --         --         --

           Other Comprehensive Loss                                            --        --         --         --         --

    Comprehensive Income                                                       --        --         --         --         --
    Cash Dividends on Common Stock                                             --        --         --         --       (464)
    Purchase of Treasury Stock                                                 --        --         (8)      (298)        --
                                                                          -------   -------    -------    -------    -------
Balance as of December 31, 2000                                               232   $ 3,604        (24)   $  (895)   $ 1,493
                                                                          -------   -------    -------    -------    -------
    Net Income                                                                 --        --         --         --        770
    Other Comprehensive Income (Loss), net of tax:
        Currency Translation Adjustment, net of tax $(12)                      --        --         --         --         --
        Change in Fair Value of Derivative Instruments, net of tax $(31)       --        --         --         --         --
        Cumulative Effect of a Change in Accounting Principle,
          net of tax $(14)                                                     --        --         --         --         --
        Reclassification Adjustments for Net Amounts included in
          net income, net of tax of $19                                        --        --         --         --         --
        Pension Adjustments, net of tax $(1)                                   --        --         --         --         --
        Change in Fair Value of Equity Investments, net of tax $(1)            --        --         --         --         --

           Other Comprehensive Loss                                            --        --         --         --         --

    Comprehensive Income                                                       --        --         --         --         --
    Cash Dividends on Common Stock                                             --        --         --         --       (449)
    Purchase of Treasury Stock                                                 --        --         (2)       (92)        --
    Other                                                                      --        (5)        --          6         (5)
                                                                          -------   -------    -------    -------    -------
Balance as of December 31, 2001                                               232   $ 3,599        (26)   $  (981)   $ 1,809
                                                                          -------   -------    -------    -------    -------
    Net Income                                                                 --        --         --         --        245
    Other Comprehensive Income (Loss), net of tax:
        Currency Translation Adjustment, net of tax $(63)                      --        --         --         --         --
        Reclassification Adjustment for Losses Included in Net Income
        Change in Fair Value of Derivative Instruments, net of tax $(38)       --        --         --         --         --
        Reclassification Adjustments for Net Amounts included in
          Net Income, net of tax of $10                                        --        --         --         --         --
        Minimum Pension Liability, net of tax $(204)                           --        --         --         --         --
        Change in Fair Value of Equity Investments                             --        --         --         --         --

           Other Comprehensive Loss                                            --        --         --         --         --

    Comprehensive Income                                                       --        --         --         --         --
    Cash Dividends on Common Stock                                             --        --         --         --       (456)
    Issuance of Equity                                                         19       536         --         --         --
    Issuance Costs and Other                                                   --       (79)        --         --          3
                                                                          -------   -------    -------    -------    -------
Balance as of December 31, 2002                                               251   $ 4,056        (26)   $  (981)   $ 1,601
                                                                          =======   =======    =======    =======    =======



                                                                                 Accumulated
                                                                                    Other
                                                                                Comprehensive
                                                                                 Income (Loss)    Total
                                                                                --------------   -------

Balance as of January 1, 2000                                                         (204)      $ 3,996
    Net Income                                                                          --           764
    Other Comprehensive Income (Loss), net of tax:
        Currency Translation Adjustment, net of tax of $(0)                             (2)           (2)
                                                                                                 -------
           Other Comprehensive Loss                                                     --            (2)
                                                                                                 -------
    Comprehensive Income                                                                --           762
    Cash Dividends on Common Stock                                                      --          (464)
    Purchase of Treasury Stock                                                          --          (298)
                                                                                   -------       -------
Balance as of December 31, 2000                                                    $  (206)      $ 3,996
                                                                                   -------       -------
    Net Income                                                                          --           770
    Other Comprehensive Income (Loss), net of tax:
        Currency Translation Adjustment, net of tax $(12)                              (34)          (34)
        Change in Fair Value of Derivative Instruments, net of tax $(31)               (57)          (57)
        Cumulative Effect of a Change in Accounting Principle, net of tax $(14)        (15)          (15)
        Reclassification Adjustments for Net Amounts included in
          net income, net of tax of $19                                                 26            26
        Pension Adjustments, net of tax $(1)                                            (2)           (2)
        Change in Fair Value of Equity Investments, net of tax $(1)                     (2)           (2)
                                                                                                 -------
           Other Comprehensive Loss                                                     --           (84)
                                                                                                 -------
    Comprehensive Income                                                                --           686
    Cash Dividends on Common Stock                                                      --          (449)
    Purchase of Treasury Stock                                                          --           (92)
    Other                                                                               --            (4)
                                                                                   -------       -------
Balance as of December 31, 2001                                                    $  (290)      $ 4,137
                                                                                   -------       -------
    Net Income                                                                          --           245
    Other Comprehensive Income (Loss), net of tax:
        Currency Translation Adjustment, net of tax $(63)                             (117)         (117)
        Reclassification Adjustment for Losses Included in Net Income                   68            68
        Change in Fair Value of Derivative Instruments, net of tax $(38)               (67)          (67)
        Reclassification Adjustments for Net Amounts included in
          Net Income, net of tax of $10                                                 15            15
        Minimum Pension Liability, net of tax $(204)                                  (297)         (297)
        Change in Fair Value of Equity Investments                                      (1)           (1)
                                                                                                 -------
           Other Comprehensive Loss                                                     --          (399)
                                                                                                 -------
    Comprehensive Income                                                                --          (154)
    Cash Dividends on Common Stock                                                      --          (456)
    Issuance of Equity                                                                  --           536
    Issuance Costs and Other                                                            --           (76)
                                                                                   -------       -------
Balance as of December 31, 2002                                                    $  (689)      $ 3,987
                                                                                   =======       =======`

See Notes to Consolidated Financial Statements.


103

---



PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Millions)


`For The Years Ended December 31,
                                          --------------------------------
                                            2002         2001        2000
                                          -------      -------     -------
OPERATING REVENUES                        $ 5,919      $ 6,091     $ 5,887

OPERATING EXPENSES
    Energy Costs                            3,684        3,913       2,901
    Operation and Maintenance                 982          996       1,297
    Depreciation and Amortization             409          370         286
    Taxes Other Than Income Taxes             131          121         135
                                          -------      -------     -------
          Total Operating Expenses          5,206        5,400       4,619
                                          -------      -------     -------
OPERATING INCOME                              713          691       1,268
    Other Income                               28          111         173
    Other Deductions                           (2)          (4)         (4)
    Interest Expense                         (406)        (450)       (397)
    Preferred Securities Dividends            (13)         (24)        (46)
                                          -------      -------     -------
INCOME BEFORE INCOME TAXES                    320          324         994
Income Taxes                                 (115)         (89)       (407)
                                          -------      -------     -------
NET INCOME                                    205          235         587
Preferred Stock Dividends                      (4)          (5)         (9)
                                          -------      -------     -------
EARNINGS AVAILABLE TO PUBLIC
  SERVICE ENTERPRISE GROUP INCORPORATED   $   201      $   230     $   578
                                          =======      =======     =======`

See disclosures regarding
Public Service Electric and Gas Company included in the combined Notes to Consolidated Financial Statements.


104

---



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


`December 31,
                                                       --------------------
                                                         2002        2001
                                                       --------    --------
CURRENT ASSETS
  Cash and Cash Equivalents                            $     35    $    102
  Accounts Receivable                                       787         623
  Allowance for Doubtful Accounts                           (32)        (38)
  Unbilled Revenues                                         275         291
  Natural Gas                                                --         415
  Materials and Supplies                                     45          50
  Prepayments                                                25          40
  Restricted Cash                                            14          12
  Other                                                      16          23
                                                       --------    --------
       Total Current Assets                               1,165       1,518
                                                       --------    --------
  PROPERTY, PLANT AND EQUIPMENT                           9,581       9,170
     Less: Accumulated Depreciation and Amortization     (3,604)     (3,329)
                                                       --------    --------
       Net Property, Plant and Equipment                  5,977       5,841
                                                       --------    --------
NONCURRENT ASSETS
  Regulatory Assets                                       4,992       5,242
  Long-Term Investments                                     123         112
  Other Special Funds                                        44         130
  Intangibles                                                60           7
  Other                                                      68          77
                                                       --------    --------
       Total Noncurrent Assets                            5,287       5,568
                                                       --------    --------
TOTAL ASSETS                                           $ 12,429    $ 12,927
                                                       ========    ========`

See disclosures regarding
Public Service Electric and Gas Company included in the combined Notes to Consolidated Financial Statements.


105

---



PUBLIC SERVICE ELECTRIC AND GAS COMPANY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND CAPITALIZATION
(Millions)


`December 31,
                                                               --------------------
                                                                 2002        2001
                                                               --------    --------

CURRENT LIABILITIES
  Long-Term Debt Due Within One Year                           $    429    $    668
  Commercial Paper and Loans                                        224          --
  Accounts Payable                                                  724         642
  Energy Contracts                                                   --         133
  Other                                                             315         307
                                                               --------    --------
       Total Current Liabilities                                  1,692       1,750
                                                               --------    --------
NONCURRENT LIABILITIES
  Deferred Income Taxes and Investment Tax Credit (ITC)           2,436       2,551
  Regulatory Liabilities                                            252         368
  Other Postemployment Benefit (OPEB) Costs                         486         466
  Accrued Pension Costs                                             175          13
  Other                                                             209         197
                                                               --------    --------
       Total Noncurrent Liabilities                               3,558       3,595
                                                               --------    --------
COMMITMENTS AND CONTINGENT LIABILITIES  (see Note 13)

CAPITALIZATION
  LONG-TERM DEBT
  Long-Term Debt                                                  2,627       2,626
  Securitization Debt                                             2,222       2,351
                                                               --------    --------
       Total Long-Term Debt                                       4,849       4,977
                                                               --------    --------
  PREFERRED SECURITIES
  Preferred Stock Without Mandatory Redemption                       80          80
  Subsidiaries' Preferred Securities:
    Guaranteed Preferred Beneficial Interest in Subordinated
     Debentures                                                     155         155
                                                               --------    --------
       Total Preferred Securities                                   235         235
                                                               --------    --------
  COMMON STOCKHOLDER'S EQUITY
    Common Stock; 150,000,000 shares authorized,
           132,450,344 shares issued and outstanding                892         892
    Basis Adjustment                                                986         986
    Retained Earnings                                               389         493
    Accumulated Other Comprehensive Loss                           (172)         (1)
                                                               --------    --------
       Total Common Stockholder's Equity                          2,095       2,370
                                                               --------    --------
            Total Capitalization                                  7,179       7,582
                                                               --------    --------
TOTAL LIABILITIES AND CAPITALIZATION                           $ 12,429    $ 12,927
                                                               ========    ========`

See disclosures regarding
Public Service Electric and Gas Company included in the combined Notes to Consolidated Financial Statements.


106

---



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


`For The Years Ended December 31,
                                                                         --------------------------------
                                                                           2002         2001        2000
                                                                         -------      -------     -------

CASH FLOWS FROM OPERATING ACTIVITIES
  Net Income                                                             $   205      $   235     $   587
  Adjustments to reconcile net income to net cash flows from
   operating activities:
    Depreciation and Amortization                                            409          370         286
    Amortization of Nuclear Fuel                                              --           --          57
    Provision for Deferred Income Taxes and ITC                              (23)        (203)         (4)
    Non-Cash Employee Benefit Plan Costs                                     141          125         131
    Non-Cash Interest Expense (Income)                                        21           (7)        (19)
    Overrecovery of Electric Energy Costs and Market Transition Charge        (1)         110         116
    Underrecovery/Overrecovery of Gas Costs                                  (41)        (143)         11
    Net Changes in certain current assets and liabilities:
       Accounts Receivable and Unbilled Revenues                            (154)         127        (268)
       Natural Gas                                                           415          (43)       (105)
       Inventory - Materials and Supplies                                      5           (2)         (6)
       Prepayments                                                            15          (35)         27
       Restricted Cash                                                        (2)         (11)         --
       Accrued Taxes                                                         (22)           5          44
       Accrued Interest                                                      (13)          11          --
       Accounts Payable                                                       82           56         252
       Other Current Assets and Liabilities                                    2           20         (63)
     Employee Benefit Plan Funding and Related Payments                     (198)        (139)        (18)
    Other                                                                     24          (17)        (55)
                                                                         -------      -------     -------
       Net Cash Provided By Operating Activities                             865          459         973
                                                                         -------      -------     -------
CASH FLOWS FROM INVESTING ACTIVITIES
  Additions to Property, Plant and Equipment                                (472)        (395)       (437)
  Other                                                                       --           --         (17)
                                                                         -------      -------     -------
       Net Cash Used In Investing Activities                                (472)        (395)       (454)
                                                                         -------      -------     -------
CASH FLOWS FROM FINANCING ACTIVITIES
  Net Change in Short-Term Debt                                              224       (1,543)         68
  Issuance of Long-Term Debt                                                 300        2,525         590
  Redemption of Long-Term Debt                                              (667)        (570)       (622)
  Deferred Issuance Costs                                                     (2)        (201)        (36)
  Capital Lease Payments                                                      (6)          (6)         (6)
  Redemption of Preferred Stock                                               --         (448)         --
  Return of Capital                                                           --       (2,265)         --
  Collection of Notes Receivable-Affiliated Company                           --        2,786          --
  Cash Dividends Paid on Common Stock                                       (305)        (274)       (638)
  Preferred Stock Dividends                                                   (4)          (5)         (9)
                                                                         -------      -------     -------
       Net Cash Used In Financing Activities                                (460)          (1)       (653)
                                                                         -------      -------     -------
Net Change In Cash And Cash Equivalents                                      (67)          63        (134)
Cash And Cash Equivalents At Beginning Of Period                             102           39         173
                                                                         -------      -------     -------
Cash And Cash Equivalents At End Of Period                               $    35      $   102     $    39
                                                                         =======      =======     =======
Income Taxes Paid                                                        $   161      $   264     $   593
Interest Paid                                                            $   428      $   427     $   406`

See disclosures regarding
Public Service Electric and Gas Company included in the combined Notes to Consolidated Financial Statements.


107

---



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


`Accumulated
                                                           Contributed                               Other
                                                Common    Capital from      Basis     Retained   Comprehensive
                                                 Stock        PSEG       Adjustment   Earnings        Loss      Total
                                                -------   ------------   ----------   --------   -------------  -------

Balance as of January 1, 2000                   $ 2,563     $   594       $    --      $   597      $    (3)    $ 3,751
    Net Income                                       --          --            --          587           --         587
    Other Comprehensive Income, net of tax:
                                                                                                                -------
          Comprehensive Income                       --          --            --           --           --         587
                                                                                                                -------
    Cash Dividends on Common Stock                   --          --            --         (800)          --        (800)
    Cash Dividends on Preferred Stock                --          --            --           (9)          --          (9)
    Basis Adjustment                                 --          --           986           --           --         986
                                                -------     -------       -------      -------      -------     -------
Balance as of December 31, 2000                 $ 2,563     $   594       $   986      $   375      $    (3)    $ 4,515
                                                -------     -------       -------      -------      -------     -------
    Net Income                                       --          --            --          235           --         235
    Other Comprehensive Income , net of tax:
       Pension Adjustments, net of tax $(1)          --          --            --           --            2           2
                                                                                                                -------
          Comprehensive Income                       --          --            --           --           --         237
                                                                                                                -------
    Cash Dividends on Common Stock                   --          --            --         (112)          --        (112)
    Cash Dividends on Preferred Stock                --          --            --           (5)          --          (5)
    Return of Capital                            (1,671)       (594)           --           --           --      (2,265)
                                                -------     -------       -------      -------      -------     -------
Balance as of December 31, 2001                 $   892     $    --       $   986      $   493      $    (1)    $ 2,370
                                                -------     -------       -------      -------      -------     -------
    Net Income                                       --          --            --          205           --         205
    Other Comprehensive Loss , net of tax:
       Minimum Pension Liability,
         net of tax $(104)                           --          --            --           --         (171)       (171)
                                                                                                                -------
          Comprehensive Income                       --          --            --           --           --          34
                                                                                                                -------
    Cash Dividends on Common Stock                   --          --            --         (305)          --        (305)
    Cash Dividends on Preferred Stock                --          --            --           (4)          --          (4)
    Return of Capital                                --          --            --           --           --          --
                                                -------     -------       -------      -------      -------     -------
Balance as of December 31, 2002                 $   892     $    --       $   986      $   389      $  (172)    $ 2,095
                                                =======     =======       =======      =======      =======     =======`

See disclosures regarding Public Service Electric and Gas Company included in the combined Notes to Consolidated Financial Statements.


108

---



PSEG POWER LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(Millions)


`For the Years Ended December 31,
                                         --------------------------------
                                           2002         2001        2000
                                         -------      -------     -------
OPERATING REVENUES                       $ 3,670      $ 2,452     $ 2,275

OPERATING EXPENSES
      Energy Costs                         1,886          832         741
      Operation and Maintenance              773          738         686
      Depreciation and Amortization          108           95         136
                                         -------      -------     -------
              Total Operating Expenses     2,767        1,665       1,563
                                         -------      -------     -------
OPERATING INCOME                             903          787         712
      Other Income                            --           --           7
      Interest Expense                      (122)        (143)       (198)
                                         -------      -------     -------
INCOME BEFORE INCOME TAXES                   781          644         521
Income Taxes                                (313)        (250)       (208)
                                         -------      -------     -------
EARNINGS AVAILABLE TO PUBLIC
 SERVICE ENTERPRISE GROUP INCORPORATED   $   468      $   394     $   313
                                         =======      =======     =======`

See disclosures regarding PSEG Power LLC included in the combined Notes to Consolidated Financial Statements.


109

---



PSEG POWER LLC
CONSOLIDATED BALANCE SHEETS
(Millions)


`December 31,
                                                              -----------------
                                                                2002      2001
                                                              -------   -------
                                     ASSETS
CURRENT ASSETS
     Cash and Cash Equivalents                                $    26   $     9
     Accounts Receivable - net                                    499       287
     Fuel                                                         406        76
     Materials and Supplies                                       148       124
     Energy Trading Contracts                                     179       147
     Other                                                         44        13
                                                              -------   -------
          Total Current Assets                                  1,302       656
                                                              -------   -------
PROPERTY, PLANT AND EQUIPMENT                                   5,347     4,238
     Less: Accumulated Depreciation and Amortization           (1,302)   (1,253)
                                                              -------   -------
          Net Property, Plant and Equipment                     4,045     2,985
                                                              -------   -------
NONCURRENT ASSETS
     Deferred Income Taxes and Investment Tax Credits (ITC)       545       572
     Nuclear Decommissioning Trust Funds                          766       817
     Goodwill                                                      16        21
     Intangibles                                                  125        47
     Other                                                        165       141
                                                              -------   -------
          Total Noncurrent Assets                               1,617     1,598
                                                              -------   -------
TOTAL ASSETS                                                  $ 6,964   $ 5,239
                                                              =======   =======
                         LIABILITIES AND MEMBER'S EQUITY

CURRENT LIABILITIES
     Accounts Payable                                         $   671   $   333
     Energy Trading Contracts                                     123       146
     Other                                                        283       111
                                                              -------   -------
        Total Current Liabilities                               1,077       590
                                                              -------   -------
NONCURRENT LIABILITIES
     Nuclear Decommissioning                                      766       817
     Cost of Removal                                              131       146
     Accrued Pension Costs                                        101        10
     Other                                                        131       131
                                                              -------   -------
        Total Noncurrent Liabilities                            1,129     1,104
                                                              -------   -------
COMMITMENTS AND CONTINGENT LIABILITIES  (see Note 13)

LONG-TERM DEBT
     Project Level, Non-Recourse Debt                             800       770
     Long-Term Debt                                             2,516     1,915
                                                              -------   -------
         Total Long-Term Debt                                   3,316     2,685
                                                              -------   -------
MEMBER'S EQUITY
     Contributed Capital                                        1,550     1,350
     Basis Adjustment                                            (986)     (986)
     Retained Earnings                                            966       498
     Accumulated Other Comprehensive Loss                         (88)       (2)
                                                              -------   -------
        Total Member's Equity                                   1,442       860
                                                              -------   -------
TOTAL LIABILITIES AND MEMBER'S EQUITY                         $ 6,964   $ 5,239
                                                              =======   =======`

See disclosures regarding PSEG Power LLC Company included in the combined Notes to Consolidated Financial Statements.


110

---



PSEG POWER LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions)


`For the Years Ended December 31,
                                                                  --------------------------------
                                                                    2002         2001        2000
                                                                  -------      -------     -------

CASH FLOWS FROM OPERATING ACTIVITIES
  Net Income                                                      $   468      $   394     $   313
  Adjustments to reconcile net income to net cash flows
   from operating activities:
    Depreciation and Amortization                                     108           95         136
    Amortization of Nuclear Fuel                                       89          101          96
    Provision for Deferred Income Taxes                                88           94         (69)
    Unrealized (Gains) Losses on Energy Trading Contracts             (23)          22         (55)
    Non-Cash Employee Benefit Plan Costs                               32           20          11
    Net changes in certain current assets and liabilities:
        Inventory, Materials and Supplies                            (329)         (35)        (30)
        Accounts Receivable                                          (212)           2         161
        Accrued Taxes                                                 (17)           6          13
        Accounts Payable                                              338         (140)        195
        Other Current Assets and Liabilities                          111           74          11
     Employee Benefit Plan Funding Payments                           (76)         (34)         --
     Other                                                            (84)         (80)        (75)
                                                                  -------      -------     -------
       Net Cash Provided By Operating Activities                      493          519         707
                                                                  -------      -------     -------
CASH FLOWS FROM INVESTING ACTIVITIES
  Additions to Property, Plant and Equipment                       (1,046)      (1,592)       (411)
  Proceeds from the Sale of Property, Plant and Equipment              47           30          --
  Acquisition of Generation Businesses, net of cash provided         (272)         (22)        (74)
  Contribution to Decommissioning Funds and Other Special Funds       (29)         (29)        (29)
  Other                                                                --           --         (34)
                                                                  -------      -------     -------
       Net Cash Used In Investing Activities                       (1,300)      (1,613)       (548)
                                                                  -------      -------     -------
CASH FLOWS FROM FINANCING ACTIVITIES
  Net Change in Commercial Paper and Loans                             --           --        (685)
  Issuance of Long-Term Debt                                          630        2,685          --
  Repayment of Note Payable - Affiliated Company                       --       (2,786)         --
  Net Change in Capitalization Activity                                --           --         319
  Proceeds from Contributed Capital                                   200        1,200         150
  Deferred Issuance Costs                                              (6)         (16)         --
                                                                  -------      -------     -------
       Net Cash Provided By (Used In) Financing Activities            824        1,083        (216)
                                                                  -------      -------     -------
Net Change In Cash And Cash Equivalents                                17          (11)        (57)
Cash And Cash Equivalents At Beginning Of Year                          9           20          77
                                                                  -------      -------     -------
Cash And Cash Equivalents At End Of Year                          $    26      $     9     $    20
                                                                  =======      =======     =======

Property, Plant and Equipment Assumed from Acquisitions           $   237      $    22     $    31
Income Taxes Paid                                                 $    91      $   166     $   242
Interest Paid                                                     $   200      $   197     $   118`

See disclosures regarding PSEG Power LLC Company included in the combined Notes to Consolidated Financial Statements.


111

---



PSEG POWER LLC
CONSOLIDATED STATEMENTS OF CAPITALIZATION AND MEMBER'S EQUITY
(Millions)


`Accumulated
                                                                                                Other       Total
                                                         Contributed    Basis     Retained  Comprehensive  Member's
                                                           Capital    Adjustment  Earnings      Loss        Equity
                                                         -----------  ----------  --------  -------------  --------

Balance as of January 1, 2000                              $    --     $    --     $    --     $    --     $    --
    Net Income (1)                                              --          --         104          --         104
    Contributed Capital                                        150          --          --          --         150
    Net Transfers to PSEG                                       --          --          --          --          --
    Transfer of Generation Business                             --        (986)         --          --        (986)
                                                           -------     -------     -------     -------     -------
Balance as of December 31, 2000                            $   150     $  (986)    $   104     $    --     $  (732)
                                                           -------     -------     -------     -------     -------
    Net Income (1)                                              --          --         394          --         394
       Change in Fair Value of Derivative Instruments,
          (net of tax $(16))                                    --          --          --         (23)        (23)
        Reclassification Adjustments for Net Amount             --
          included in Net Income (net of tax of $14)            --          --          --          21          21
                                                                                                           -------
       Other Comprehensive Income (Loss)                        --          --          --          --          (2)
                                                                                                           -------
    Comprehensive Income                                                                                       392
    Contributed Capital                                      1,200          --          --          --       1,200
                                                           -------     -------     -------     -------     -------
Balance as of December 31, 2001                            $ 1,350     $  (986)    $   498     $    (2)    $   860
                                                           -------     -------     -------     -------     -------
    Net Income (1)                                              --          --         468          --         468
    Other Comprehensive Income (Loss), net of tax:
       Change in Fair Value of Derivative Instruments,
          (net of tax $(1))                                     --          --          --          (2)         (2)
        Pension Adjustments, net of tax $(50)                   --          --          --         (84)        (84)
                                                                                                           -------
       Other Comprehensive Income (Loss)                        --          --          --          --         (86)
                                                                                                           -------
    Comprehensive Income                                        --          --         468          --         382
    Contributed Capital                                        200          --          --          --         200
                                                           -------     -------     -------     -------     -------
Balance as of December 31, 2002                            $ 1,550     $  (986)    $   966     $   (88)    $ 1,442
                                                           =======     =======     =======     =======     =======

                                                                             Total
                                                                         Capitalization
                                                                          and Member's
                                                         Capitalization      Equity
                                                         --------------  --------------

Balance as of January 1, 2000                               $ 1,272          $ 1,272
    Net Income (1)                                              209              313
    Contributed Capital                                          --              150
    Net Transfers to PSEG                                    (1,481)          (1,481)
    Transfer of Generation Business                                             (986)
                                                            -------          -------
Balance as of December 31, 2000                             $    --          $  (732)
                                                            -------          -------
    Net Income (1)                                               --              394
       Change in Fair Value of Derivative Instruments,
          (net of tax $(16))                                     --              (23)
        Reclassification Adjustments for Net Amount                               --
          included in Net Income (net of tax of $14)             --               21
                                                                             -------
       Other Comprehensive Income (Loss)                         --               (2)
                                                                             -------
    Comprehensive Income                                                         392
    Contributed Capital                                          --            1,200
                                                            -------          -------
Balance as of December 31, 2001                             $    --          $   860
                                                            -------          -------
    Net Income (1)                                               --              468
    Other Comprehensive Income (Loss), net of tax:
        Change in Fair Value of Derivative Instruments,
          (net of tax $(1))                                      --               (2)
        Pension Adjustments, net of tax $(50)                    --              (84)
                                                                             -------
       Other Comprehensive Income (Loss)                         --              (86)
                                                                             -------
    Comprehensive Income                                         --              382
    Contributed Capital                                          --              200
                                                            -------          -------
Balance as of December 31, 2002                             $    --          $ 1,442
                                                            =======          =======

     (1)  Net Income included in retained earnings reflects earnings from the
          legal operations of PSEG Power LLC during 2000. Net Income/Loss
          included in Capitalization for 2000 reflects the Net Income/Loss
          allocated from Public Service Electric and Gas Company.`

See disclosures regarding PSEG Power LLC Company included in the combined Notes to Consolidated Financial Statements.


112

---

PSEG ENERGY HOLDINGS LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(Millions)


`For The Years Ended December 31,
                                                                        --------------------------------
                                                                          2002         2001        2000
                                                                        -------      -------     -------

OPERATING REVENUES
     Electric Generation and Distribution Revenues                      $   364      $   128     $    --
     Income from Capital and Operating Leases                               260          215         170
     Income from Joint Ventures and Partnerships                             58          144         157
     Interest and Dividend Income                                            46           48           3
     Gain on Withdrawal from/Sale of Partnerships                            32           75          --
     Other                                                                   30           30          40
     Net Investment (Losses) Gains                                          (41)          (2)         35
     Energy Supply Revenues                                                  --           --          67
                                                                        -------      -------     -------
          Total Operating Revenues                                          749          638         472
                                                                        -------      -------     -------
OPERATING EXPENSES
     Write-down of Project Investments                                      497            7          --
     Energy Costs                                                           147           55          66
     Administrative and General                                             111           79          76
     Operation and Maintenance                                               54           40          14
     Depreciation and Amortization                                           35           16           6
                                                                        -------      -------     -------
            Total Operating Expenses                                        844          197         162
                                                                        -------      -------     -------
OPERATING (LOSS) INCOME                                                     (95)         441         310
     Other Income                                                            25            6           3
     Other Deductions                                                       (73)         (12)         (3)
     Interest Expense                                                      (214)        (180)       (134)
                                                                        -------      -------     -------
(LOSS) INCOME BEFORE INCOME TAXES,
    DISCONTINUED OPERATIONS AND CUMULATIVE EFFECT OF
    A CHANGE IN ACCOUNTING PRINCIPLE                                       (357)         255         176
     Income Tax Benefit (Expense)                                           150          (65)        (51)
     Minority Interests in (Earnings) Losses of Subsidiaries                 (2)          (1)          1
                                                                        -------      -------     -------
(LOSS) INCOME BEFORE DISCONTINUED OPERATIONS
      AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE            (209)         189         126
DISCONTINUED OPERATIONS
      Loss From Discontinued Operations, net of tax of
             $9, $8 and $5 in 2002, 2001 and 2000, respectively             (16)         (15)        (12)
      Loss on Disposal of Discontinued Operations,  net of tax of $18       (35)          --          --
                                                                        -------      -------     -------
(LOSS) INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE
      IN ACCOUNTING PRINCIPLE                                              (260)         174         114
Cumulative Effect of a Change in Accounting Principle,
     net of tax of $66 and $8 in 2002 and 2001, respectively               (120)           9          --
                                                                        -------      -------     -------
NET (LOSS) INCOME                                                          (380)         183         114
Preference Units Distributions/Preferred Stock Dividends                    (23)         (22)        (24)
                                                                        -------      -------     -------
(LOSS) EARNINGS AVAILABLE TO PUBLIC SERVICE
       ENTERPRISE GROUP                                                 $  (403)     $   161     $    90
                                                                        =======      =======     =======`

See disclosures regarding PSEG Energy Holdings LLC included in the combined Notes to Consolidated Financial Statements.


113

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PSEG ENERGY HOLDINGS LLC
CONSOLIDATED BALANCE SHEETS
ASSETS
(Millions)


`December 31,
                                                     ------------------
                                                       2002       2001
                                                     -------    -------
CURRENT ASSETS
  Cash and Cash Equivalents                          $   104    $    54
  Accounts Receivable:
    Trade - Net                                           91        108
    Other Accounts Receivable - Net                       24         17
  Assets Held for Sale                                    83        422
  Notes Receivable                                        73         --
  Inventory                                               22         15
  Prepayments                                              4          2
  Restricted Cash                                         18         --
  Current Assets of Discontinued Operations              107        483
                                                     -------    -------
       Total Current Assets                              526      1,101
                                                     -------    -------
PROPERTY, PLANT AND EQUIPMENT                          1,534      1,181
   Less: Accumulated Depreciation and Amortization      (139)      (157)
                                                     -------    -------
       Net Property, Plant and Equipment               1,395      1,024
                                                     -------    -------
INVESTMENTS
 Capital Leases-Net                                    2,844      2,784
 Corporate Joint Ventures                              1,004      1,115
 Partnership Interests                                   484        659
 Other Investments                                        38         56
                                                     -------    -------
       Total Investments                               4,370      4,614
                                                     -------    -------
OTHER ASSETS
 Goodwill                                                436        548
 Other                                                   111        152
                                                     -------    -------
       Total Other Assets                                547        700
                                                     -------    -------
TOTAL ASSETS                                         $ 6,838    $ 7,439
                                                     =======    =======`

See disclosures regarding PSEG Energy Holdings LLC included in the combined Notes to Consolidated Financial Statements.


114

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PSEG ENERGY HOLDINGS LLC
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND MEMBER'S/STOCKHOLDER'S EQUITY
(Millions)


`December 31,
                                                                              ------------------
                                                                                2002       2001
                                                                              -------    -------

CURRENT LIABILITIES
  Long-Term Debt Due Within One Year                                          $   320    $   243
  Short-Term Borrowings Due to Public Service Enterprise Group Incorporated        --         38
  Accounts Payable                                                                257        211
  Borrowings Under Lines of Credit                                                 --        300
  Notes Payable                                                                   137        285
  Current Liabilities of Discontinued Operations                                   95        251
                                                                              -------    -------
       Total Current Liabilities                                                  809      1,328
                                                                              -------    -------
NONCURRENT LIABILITIES
  Deferred Income Taxes and Investment and Energy Tax Credits                   1,042      1,211
  Other Noncurrent Liabilities                                                    179         99
                                                                              -------    -------
       Total Noncurrent Liabilities                                             1,221      1,310
                                                                              -------    -------
COMMITMENTS AND CONTINGENT LIABILITIES  (See Note 13)

MINORITY INTERESTS                                                                106         47
                                                                              -------    -------
  LONG-TERM DEBT
    Project Level, Non-Recourse Long-Term Debt                                    853        634
    Senior Notes                                                                1,725      1,644
    Medium-Term Notes                                                              --        252
                                                                              -------    -------
       Total Long-Term Debt                                                     2,578      2,530
                                                                              -------    -------
MEMBER'S/STOCKHOLDER'S EQUITY
  Ordinary Unit                                                                 1,888         --
  Preference Units                                                                509         --
  Preferred Stock                                                                  --        509
  Additional Paid-in Capital                                                       --      1,490
  Retained Earnings                                                               107        510
  Accumulated Other Comprehensive Loss                                           (380)      (285)
                                                                              -------    -------
       Total Member's/Stockholder's Equity                                      2,124      2,224
                                                                              -------    -------
TOTAL LIABILITIES AND MEMBER'S/STOCKHOLDER'S EQUITY                           $ 6,838    $ 7,439
                                                                              =======    =======`

See disclosures regarding PSEG Energy Holdings LLC included in the combined Notes to Consolidated Financial Statements.


115

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PSEG ENERGY HOLDINGS LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions)


`For The Years Ended December 31,
                                                                        --------------------------------
                                                                          2002         2001        2000
                                                                        -------      -------     -------

CASH FLOWS FROM OPERATING ACTIVITIES
  Net (Loss) Income                                                     $  (380)     $   183     $   114
  Adjustments to reconcile net income to net cash flows from
   operating activities:
    Depreciation and Amortization                                            54           28          25
    Deferred Income Taxes (Other than Leases)                              (188)         (20)        (11)
    Leveraged Lease Income, Adjusted for Rents Received                     (45)          (6)         74
    Investment Distributions                                                  7           74          51
    Investment in Securities                                                 (5)         (14)         (7)
    Undistributed Earnings from Affiliates                                  (59)        (111)        (28)
    Net Gains on Investments                                                  7          (74)        (35)
    Write-down of Project Investments                                       497            7          --
    Loss on Disposal of Discontinued Operations, net of tax                  35           --          --
    Foreign Currency Transaction Loss                                        70            9          (3)
    Proceeds on Withdrawal from  Partnership                                 47           50          --
    Cumulative Effect of a Change in Accounting Principle, net of tax       120           (9)         --
    Net Changes in certain current assets and liabilities:
       Accounts Receivable                                                    2          (56)       (112)
       Accounts Payable                                                      (2)         109          46
       Other Current Assets and Liabilities                                  42           51          16
    Other                                                                    (3)          13          10
                                                                        -------      -------     -------
       Net Cash Provided By Operating Activities                            199          234         140
                                                                        -------      -------     -------
CASH FLOWS FROM INVESTING ACTIVITIES
  Additions to Property, Plant and Equipment                               (353)        (169)        (56)
  Investments in Joint Ventures and Partnerships                           (191)        (137)       (361)
  Investments in Capital Leases                                             (31)        (460)       (460)
  Proceeds from Sale of Capital Leases                                      183          104          89
  Acquisitions, net of Cash Acquired                                        (17)        (810)        (14)
  Proceeds from sale of Discontinued Operations                              45           --          --
  Return of Capital from Partnerships                                       147            2          87
  Other                                                                     (20)        (104)        (43)
                                                                        -------      -------     -------
       Net Cash Used In Investing Activities                               (237)      (1,574)       (758)
                                                                        -------      -------     -------
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from Capital Contributions                                       400          400         300
  Net (Decrease) Increase in Short-Term Debt                               (424)         139         146
  Cash Dividends Paid                                                       (23)         (26)        (37)
  Restricted Cash (Increase) Decrease                                       (18)           2           3
  Net Increase in Short-Term Affiiliate Borrowings                           31           40          --
  Proceeds from Sale of Senior Notes                                        133          939         297
  Early Retirement of Senior Notes                                          (41)          --          --
  Proceeds from Project-Level Non-Recourse Debt                             228          348          34
  Repayment of Medium-Term and Project-Level Non-Recourse Debt             (229)        (422)       (155)
  Other                                                                      33          (42)          4
                                                                        -------      -------     -------
       Net Cash Provided By Financing Activities                             90        1,378         592
                                                                        -------      -------     -------
Effect of Exchange Rate Changes on Cash                                      (2)          --          --
Net Change In Cash And Cash Equivalents                                      50           38         (26)
Cash And Cash Equivalents At Beginning Of Year                               54           16          42
                                                                        -------      -------     -------
Cash And Cash Equivalents At End Of Year                                $   104      $    54     $    16
                                                                        =======      =======     =======

Supplemental Disclosure of Cash Flow Information
   Cash Payments (Receipts)  for:
       Income Taxes (Benefits)                                          $  (126)   $  (178)   $  (105)
       Interest Paid                                                    $   193    $   155    $    87

Non-Cash Investing and Financing Activities:
       Fair Value of Property, Plant and Equipment Acquired             $   301    $   727    $   182
       Debt Assumed from Companies Acquired                             $    --    $   256    $   161`

See disclosures regarding PSEG Energy Holdings LLC included in the combined Notes to Consolidated Financial Statements.


116

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PSEG ENERGY HOLDINGS LLC
CONSOLIDATED STATEMENTS OF MEMBER'S/STOCKHOLDER'S EQUITY
(Millions)


`Additional
                                                                     Ordinary   Preference  Preferred   Paid-In   Retained
                                                                       Unit        Units      Stock     Capital   Earnings
                                                                     --------   ----------  ----------  -------   --------

Balance as of January 1, 2000                                         $    --    $    --     $   509    $   790   $   276
    Net Income                                                             --         --          --         --       114
    Other Comprehensive Loss, net of tax:
    Currency Translation Adjustment, net of tax of $0                      --         --          --         --        --

        Other Comprehensive Loss                                           --         --          --         --        --

    Comprehensive Income                                                   --         --          --         --        --
    Additional Contributed Capital                                         --         --          --        300        --
    Preferred Stock Dividends                                              --         --          --         --       (24)
    Common Stock Dividends                                                 --         --          --         --       (13)
                                                                      -------    -------     -------    -------   -------
Balance as of December 31, 2000                                            --         --         509      1,090       353
                                                                      -------    -------     -------    -------   -------
    Net Income                                                             --         --          --         --       183
    Other Comprehensive Income (Loss), net of tax:
    Currency Translation Adjustment, net of tax of $(6)                    --         --          --         --        --
    Cumulative Effect of a Change in Accounting Principle,
        net of tax of $14                                                  --         --          --         --        --
    Current Period Declines in Fair Value of Derivative
        Instruments-Net                                                    --         --          --         --        --
    Reclassification Adjustments for Net Amounts Included
        in Net Income                                                      --         --          --         --        --

        Other Comprehensive Loss                                           --         --          --         --        --

    Comprehensive Income                                                   --         --          --         --        --
    Additional Contributed Capital                                         --         --          --        400        --
    Preferred Stock Dividends                                              --         --          --         --       (22)
    Common Stock Dividends                                                 --         --          --         --        (4)
                                                                      -------    -------     -------    -------   -------
Balance as of December 31, 2001                                            --         --         509      1,490       510
                                                                      -------    -------     -------    -------   -------
    Net Income                                                             --         --          --         --      (380)
    Other Comprehensive Income (Loss), net of tax:
       Currency Translation Adjustment, net of tax of $(43)                --         --          --         --        --
       Reclassification Adjustment for Losses Included in Net Income,
      net of tax of $37                                                    --         --          --         --        --
       Current Period Declines in Fair Value of Derivative
        Instruments, net of tax of $(12)                                   --         --          --         --        --
        Reclassification Adjustments for Net Amounts Included
        in Net Income, net of tax of $6                                    --         --          --         --        --
        Minimum Pension Liability Adjustment                               --         --          --         --        --

        Other Comprehensive Loss                                           --         --          --         --        --

    Comprehensive Loss                                                     --         --          --         --        --
    Additional Contributed Capital                                        100         --          --        300        --
    Recapitalization of Energy Holdings' Assets and Liabilities         1,790        509        (509)    (1,790)       --
    Preference Units/Preferred Stock Dividends                             --         --          --         --       (23)
    Dividend of Pantellos Corporation to PSEG                              (2)        --          --         --        --
                                                                      -------    -------     -------    -------   -------
Balance as of December 31, 2002                                       $ 1,888    $   509     $    --    $    --   $   107
                                                                      -------    -------     -------    -------    -------

                                                                          Accumulated
                                                                             Other       Total Member's/
                                                                        OComprehensive    Stockholder's
                                                                         Income (Loss)       Equity
                                                                        --------------   ---------------

Balance as of January 1, 2000                                               $  (200)         $ 1,375
    Net Income                                                                   --              114
    Other Comprehensive Loss, net of tax:
    Currency Translation Adjustment, net of tax of $0                            (3)              (3)
                                                                                             -------
        Other Comprehensive Loss                                                 --               (3)
                                                                                             -------
    Comprehensive Income                                                         --              111
    Additional Contributed Capital                                               --              300
    Preferred Stock Dividends                                                    --              (24)
    Common Stock Dividends                                                       --              (13)
                                                                            -------          -------
Balance as of December 31, 2000                                                (203)           1,749
                                                                            -------          -------
    Net Income                                                                   --              183
    Other Comprehensive Income (Loss), net of tax:
    Currency Translation Adjustment, net of tax of $(6)                         (55)             (55)
    Cumulative Effect of a Change in Accounting Principle,
        net of tax of $14                                                       (15)             (15)
    Current Period Declines in Fair Value of Derivative
        Instruments-Net                                                         (16)             (16)
    Reclassification Adjustments for Net Amounts Included
        in Net Income                                                             4                4
                                                                                             -------
        Other Comprehensive Loss                                                 --              (82)
                                                                                             -------
    Comprehensive Income                                                         --              101
    Additional Contributed Capital                                               --              400
    Preferred Stock Dividends                                                    --              (22)
    Common Stock Dividends                                                       --               (4)
                                                                            -------          -------
Balance as of December 31, 2001                                                (285)           2,224
                                                                            -------          -------
    Net Income                                                                   --             (380)
    Other Comprehensive Income (Loss), net of tax:
       Currency Translation Adjustment, net of tax of $(43)                    (117)            (117)
       Reclassification Adjustment for Losses Included in Net Income,
      net of tax of $37                                                          68               68
       Current Period Declines in Fair Value of Derivative
        Instruments, net of tax of $(12)                                        (52)             (52)
        Reclassification Adjustments for Net Amounts Included
        in Net Income, net of tax of $6                                          12               12
        Minimum Pension Liability Adjustment                                     (6)              (6)
                                                                                             -------
        Other Comprehensive Loss                                                 --              (95)
                                                                                             -------
    Comprehensive Loss                                                           --             (475)
    Additional Contributed Capital                                               --              400
    Recapitalization of Energy Holdings' Assets and Liabilities                                   --
    Preference Units/Preferred Stock Dividends                                   --              (23)
    Dividend of Pantellos Corporation to PSEG                                    --               (2)
                                                                            -------          -------
Balance as of December 31, 2002                                             $  (380)         $ 2,124
                                                                            -------          -------`

See disclosures regarding PSEG Energy Holdings LLC included in the combined Notes to Consolidated Financial Statements.


117

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NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS

This
  combined Form 10-K is separately filed by Public Service Enterprise Group Incorporated
  (PSEG), Public Service Electric and Gas Company (PSE&G), PSEG Power LLC
  (Power), and PSEG Energy Holdings LLC (Energy Holdings). Information contained
  herein relating to any individual company is filed by such company on its own
  behalf. PSE&G, Power and Energy Holdings each makes representations only
  as to itself and make no other representations whatsoever as to any other company.

Note 1. Organization and Summary of Significant
  Accounting Policies

Organization

PSEG

PSEG has four
  principal direct wholly-owned subsidiaries: PSE&G, Power, Energy Holdings
  and PSEG Services Corporation (Services).

PSE&G

PSE&G is an operating
  public utility providing electric and gas service in certain areas within the
  State of New Jersey. Following the transfer of its generation-related assets
  and liabilities to Power in August 2000 and gas supply business to Power in
  May 2002, PSE&G continues to own and operate its transmission and distribution
  business.

Power

Power is a
  multi-regional wholesale energy supply business that uses energy trading to
  optimize the value of its portfolio of electric generating and gas capacity
  and its supply obligations. Power has three principal direct wholly-owned subsidiaries:
  PSEG Nuclear LLC (Nuclear), PSEG Fossil LLC (Fossil) and PSEG Energy Resources
  & Trade LLC (ER&T). Power and its subsidiaries were initially established
  to acquire, own and operate the electric generation-related business 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 Electric Discount and Energy
  Competition Act (Energy Competition Act) discussed below. Power also has a finance
  company subsidiary, PSEG Power Capital Investment Co. (Power Capital), which
  provides certain financing for Powers subsidiaries.

Energy Holdings

Energy Holdings is
  the parent of PSEG Global Inc. (Global), which invests and participates in the
  development and operation of international and domestic projects in the generation
  and distribution of energy, which include cogeneration and independent power
  production facilities and electric distribution companies; PSEG Resources LLC
  (Resources), which makes investments primarily in energy-related leveraged leases;
  PSEG Energy Technologies Inc. (Energy Technologies), which provides energy-related
  services and construction to industrial and commercial customers; Enterprise
  Group Development Corporation (EGDC), a commercial real estate property management
  business; PSEG Capital Corporation (PSEG Capital), which serves as a financing
  vehicle for Energy Holdings subsidiaries, and borrows on the basis of
  a minimum net worth maintenance agreement with PSEG; and Enterprise Capital
  Funding Corporation (Funding), which is currently inactive and formerly served
  as the financing vehicle on the basis of Energy Holdings consolidated
  financial position. EGDC has been conducting a controlled exit from the real
  estate business since 1993. The businesses of Energy Technologies are presented
  as discontinued operations and are expected to be sold in 2003. PSEG Capitals
  final maturity is in 2003, at which point it will no longer be utilized.

Energy Holdings,
  a New Jersey limited liability company, is the successor to PSEG Energy Holdings
  Inc. pursuant to a merger consummated in October 2002 which changed the legal
  form of the business from a corporation to a limited liability company. Energy
  Holdings succeeded to all the assets and liabilities of PSEG Energy Holdings
  Inc. in accordance with the New Jersey Limited Liability Company Act. Energy
  Holdings has succeeded to PSEG Energy Holdings
  Inc.s reporting obligations under the Securities Exchange Act of 1934,
  as amended. As part of the

118

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

Energy Holdings reorganization, PSEG Resources Inc.
  became a wholly-owned subsidiary of Resources, a newly formed New Jersey limited
  liability company. Resources is wholly-owned by Energy Holdings. This reorganization
  was completed to further improve efficiencies within PSEGs tax reporting
  process.

Other

Services provides
  management and administrative services such as accounting, legal, communications,
  human resources, information technology, treasury and financial, investor relations,
  stockholder services and risk management to PSEG and its subsidiaries. Services
  charges PSEG and its subsidiaries for the cost of work performed and services
  provided by it.

Summary of Significant Accounting Policies

Consolidation

PSEG,
  PSE&G, Power and Energy Holdings

PSEGs, PSE&Gs,
  Powers and Energy Holdings consolidated financial statements include
  their respective accounts and those of their respective subsidiaries. PSEG,
  PSE&G, Power and Energy Holdings and their respective subsidiaries consolidate
  those entities in which they have a controlling interest. Those entities in
  which PSEG, PSE&G, Power and Energy Holdings and their respective subsidiaries
  do 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. No gains or losses
  are recorded on any intercompany transactions.

PSE&G
  and Power

In addition, Power
  and PSE&G each has undivided interests in certain jointly owned facilities.
  Power and PSE&G are responsible to pay for their respective ownership share
  of additional construction costs, fuel inventory purchases and operating expenses.
  All revenues and expenses related to these facilities are consolidated at their
  respective pro-rata ownership share in the appropriate revenue and expense categories
  on the Consolidated Statements of Operations.

Accounting for
  the Effects of Regulation

PSE&G

PSE&G
  prepares its financial statements in accordance with the provisions of Statement
  of Financial 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 the recognition of costs
  (a regulatory asset) or the recognition of 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. PSE&Gs transmission and distribution business continues
  to meet the requirements for application of SFAS 71.

Derivative Financial
  Instruments

PSEG,
  PSE&G, Power and Energy Holdings

PSEG, PSE&G, Power
  and Energy Holdings use derivative financial instruments to manage risk from
  changes in interest rates, congestion credits, emission credits, commodity prices
  and foreign currency exchange rates, pursuant to its business plans and prudent
  practices.

119

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

PSEG, PSE&G, Power
  and Energy Holdings recognize all derivative instruments on the balance sheet
  at their fair value. Changes in the fair value of a derivative that is highly
  effective as, and that is designated and qualifies as, a fair-value hedge (including
  foreign currency fair-value hedges), along with changes of the fair value of
  the hedged asset or liability that are attributable to the hedged risk, are
  recorded in current-period earnings. Changes in the fair value of a derivative
  that is highly effective as and that is designated and qualifies as a cash flow
  hedge (including foreign currency cash flow hedges), are recorded in Other Comprehensive Income (OCI) until
  earnings are affected by the variability of cash flows of the hedged transaction.
  Any hedge ineffectiveness is included in current-period earnings. In certain
  circumstances, PSEG, PSE&G, Power and/or Energy Holdings enter into derivative
  contracts and do not designate them as fair value or cash flow hedges, in such
  cases, changes in fair value are recorded in earnings.

Power

Additionally, Power
  has certain energy trading contracts that do not meet the definition of a derivative.
  Those contracts are also carried at fair market value with changes recorded
  in current-period earnings. Upon adoption of Emerging Issues Task Force (EITF) Issue No. 02-3, Accounting
  for Contracts Involved in Energy Trading and Risk Management Activities
  (EITF 02-3) on January 1, 2003, Power will record these contracts at historical
  cost. See Note 2. New Accounting Standards.

For additional information
  regarding Derivative Financial Instruments, see Note 12. Risk Management.

Revenue Recognition

PSE&G

PSE&Gs Operating
  Revenues are recorded based on services rendered to customers during each accounting
  period. PSE&G records unbilled revenues for 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. The unbilled revenue is estimated
  each month based on weather factors, line losses and unaccounted for gas factors,
  estimated customer usage by class and applicable customer rates based on regression
  analyses reflecting significant historical trends and experience.

Power

The majority of Powers
  revenues relate to the Basic Generation Service (BGS), Basic Gas Supply Service
  (BGSS) and other bilateral contracts which are accounted for on the accrual
  basis, as the energy is delivered. Power also records revenues and energy costs
  for physical energy delivered to and received from the power pool. Power also
  records margins from energy trading on a net basis as revenues pursuant to EITF
  02-3 and SFAS 133 Accounting for Derivative Instruments and Hedging Activities (SFAS 133).
  See Note 12. Risk Management for further discussion.

Energy Holdings

The majority of Resources
  revenues relate to its investments in leveraged leases and are accounted for
  under SFAS 13 Accounting for Leases (SFAS 13). Income on leveraged leases is recognized by a method which produces
  a constant rate of return on the outstanding net investment in the lease, net
  of the related deferred tax liability, in the years in which the net investment
  is positive. Any gains or losses incurred as a result of a lease termination
  are recorded as revenues as these events occur in the ordinary course of business
  of managing the investment portfolio. In accordance with specialized accounting
  practices, Resources records revenue from the changes in share prices of publicly-traded
  equity securities held within its leveraged buyout funds. See Note 8. Long-Term
  Investments for further discussion.

Global records revenues
  from its investments in generation and distribution facilities. Certain of Globals
  investments are majority owned and controlled by Global and the revenues from
  these projects are recorded as Globals revenues. Other investments are
  less than majority owned and are accounted for under the equity or cost methods
  as appropriate. Revenues for many of these investments are estimated on a monthly
  basis and trued up to actual results in the next accounting month. Gains or
  losses incurred as a result of exiting one of these businesses are typically
  recorded as a component of Operating Income.

120

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NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

Depreciation
  and Amortization

PSE&G

PSE&G calculates
  depreciation under the straight-line method 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.
  The depreciation rate stated as a percentage of original cost of depreciable
  property was 3.37% for 2002, 3.32% for 2001 and 3.52% for 2000.

Power

Power calculates
  depreciation on generation-related assets based on the assets estimated
  useful lives determined based on planned operations. The estimated useful lives
  are from 3 years to 20 years for general plant. The estimated useful lives for
  buildings and generating stations are as follows:

|Class of Property  | Estimated Useful
      Life
|------------------ | ---------------------------
|                   |                            
|Fossil Production  | 30-55 years                
|Nuclear Generation | 30-40 years                
|Pumped Storage     | 45 years                   

Energy Holdings

Energy
  Holdings calculates depreciation on property, plant and equipment under the
  straight-line method with estimated useful lives from 3 years to 40 years.

Taxes
  Other than Income Taxes

PSE&G

Taxes Other than Income
  Taxes is comprised of the transitional energy facilities assessment (TEFA).
  TEFA is collected from PSE&G customers and presented gross on PSE&Gs
  Consolidated Statement of Operations.

Allowance
  for Funds Used During Construction (AFDC) and Interest Capitalized During Construction
  (IDC)

PSE&G

AFDC represents the
  cost of debt and equity funds used to finance the construction of new utility
  assets under the guidance of SFAS 71. The amount of AFDC capitalized was reported
  in the Consolidated Statements of Operations as a reduction of interest charges.
  The rates used for calculating AFDC in 2002, 2001, and 2000 were 8.80%, 6.71%,
  and 6.45%, respectively. In 2002, 2001, and 2000, PSE&Gs AFDC amounted
  to $1 million, $2 million, and $1 million, respectively.

Power and Energy
  Holdings

IDC represents the
  cost of debt used to finance the construction of non-utility facilities. The
  amount of IDC capitalized is reported in the Consolidated Statements of Operations
  as a reduction of interest charges. Powers weighted average rates used
  for calculating IDC in 2002, 2001 and 2000 were 7.01%, 7.98% and 9.98%, respectively.
  In 2002, 2001, and 2000, Powers IDC amounted to $95 million, $63 million,
  and $14 million, respectively. Energy Holdings weighted average rates
  used for calculating IDC in 2002, 2001 and 2000 were 9.06%, 8.05% and 7.93%,
  respectively. In 2002, 2001, and 2000, Energy Holdings IDC amounted to
  $13 million, $16 million, and $21 million, respectively.

121

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NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

Income Taxes

PSEG,
  PSE&G, Power and Energy Holdings

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.

Foreign Currency
  Translation/Transactions

Energy
  Holdings

Revenues and
  expenses are translated at average exchange rates for the year. Transaction
  gains and losses that arise from exchange rate fluctuations on normal operating
  transactions denominated in a currency other than the functional currency are
  included in earnings as incurred.

The assets
  and liabilities of foreign operations are translated into US Dollars
  at current exchange rates. Resulting translation adjustments are reflected in
  OCI, net of taxes, as a separate component of members/stockholders
  equity.

Cash
  and Cash Equivalents

PSEG,
  PSE&G, Power and Energy Holdings

Cash and cash
  equivalents consists primarily of working funds and highly liquid marketable
  securities (commercial paper and money market funds) with an original maturity
  of three months or less.

Materials
  and Supplies and Fuel

PSE&G

PSE&Gs
  materials and supplies are carried at average cost in accordance with rate-based
  regulation.

Power
  and Energy Holdings

The carrying
  value of the materials and supplies and fuel for Power and Energy Holdings is
  valued at lower of cost or market.

Property,
  Plant and Equipment

PSE&G

PSE&Gs
  additions to plant, property and equipment and replacements that are either
  retirement units or property record units are capitalized at original cost.
  The cost of maintenance, repair and replacement of minor items of property is
  charged to appropriate expense accounts as incurred. At the time units of depreciable property
  are retired or otherwise disposed of, the original cost, adjusted for net salvage
  value, is charged to accumulated depreciation.

Power
  and Energy Holdings

Power and
  Energy Holdings only capitalize 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. The cost of maintenance, repair
  and replacement of minor items of property is charged to appropriate expense
  accounts as incurred. Environmental costs are capitalized if the costs mitigate or prevent
  future environmental contamination or if the

122

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NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

costs improve existing assets environmental
  safety or efficiency. All other environmental expenditures are expensed.

Unamortized
  Loss on Reacquired Debt and Debt Expense

PSE&G

PSE&Gs
  bond issuance costs and associated premiums and discounts are generally amortized
  over the life of the debt issuance. In accordance with New Jersey Board of Public
  Utility (BPU) and Federal Energy Regulatory Commission (FERC) regulations, PSE&Gs
  costs to reacquire debt are deferred and 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. 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.

Nuclear
  Decommissioning Trust Funds

Power

Funds in Powers
  Nuclear Decommissioning Trust are stated at fair value. Changes in the fair
  value of the trust funds are also reflected in the accrued liability for nuclear
  decommissioning. See Note 2. New Accounting Standards for a discussion of SFAS
  143.

Investments in
  Corporate Joint Ventures and Partnerships

Energy
  Holdings

Globals and
  Resources interests in active joint ventures and partnerships are accounted
  for under the equity method of accounting where their respective ownership interests
  are 50% or less and significant influence over joint venture or partnership
  operating and management decisions exists. For investments in which significant
  influence does not exist, the cost method of accounting is applied. Interest
  is capitalized on investments during the construction and development of qualifying
  assets.

Resources carries
  its partnership investments in certain venture capital and leveraged buyout
  funds investing in securities at fair value where market quotations and an established
  liquid market of underlying securities in the portfolio are available. Fair
  value is determined based on the review of market price and volume data in conjunction
  with PSEGs invested liquid position in such securities. Changes in fair
  value are recorded in Operating Revenues in the Consolidated Statements
  of Operations.

Goodwill

PSEG,
  Power and Energy Holdings

PSEG, Power
  and Energy Holdings record the cost in excess of fair value of net assets (including
  tax attributes) of companies acquired in purchase business transactions as goodwill.

PSEG, Power
  and Energy Holdings annually evaluate the recoverability of goodwill by estimating
  the fair value of the businesses to which goodwill relates. PSEG, Power and
  Energy Holdings typically determine fair value by estimating the future discounted
  cash flows. The discount rate used in determining discounted cash flows is a
  rate corresponding to the cost of capital of the business to which the goodwill
  relates. Estimated cash flows are then determined by disaggregating PSEGs,
  Powers and Energy Holdings respective business segments to an operational
  and organizational level for which meaningful identifiable cash flows can be
  determined. When estimated future discounted cash flows are less than the carrying
  value of the net assets (tangible or identifiable intangibles) and related goodwill,
  impairment losses of goodwill are charged to operations. Impairment losses,
  limited to the carrying value of goodwill, represent the excess sum of the fair
  value of the net assets (tangible or identifiable intangibles) and goodwill
  over the discounted cash flows of the business being evaluated. In

123

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NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

determining the estimated future cash flows, PSEG,
  Power and Energy Holdings consider current and projected future levels of income,
  as well as business trends, prospects and economic conditions.

For a discussion
  of business combinations and goodwill, see Note 2. New Accounting Standards
  and Note 9. Purchase Business Combinations/Asset Acquisitions.

Capital
  Leases as Lessor

Energy Holdings

Resources, as lessor,
  leases property and equipment, through leveraged leases, with terms ranging
  from 4 to 45 years. The lease investments are recorded on a net basis by totaling
  the lease rents receivable over the lease term and adding the residual value,
  if any, less unearned income and deferred taxes to be recognized over the lease
  term. Leveraged leases are recorded net of non-recourse debt.

Deferred Project
  Costs

Power and Energy
  Holdings

Power and Energy Holdings
  capitalize all direct external and direct incremental internal costs related
  to project development once a project reaches certain milestones. Once the project
  reaches financial closing, the deferred project balance is transferred to the
  investment account. These costs are amortized on a straight-line basis over
  the lives of the related project assets. Such amortization commences upon the
  date of commercial operation. Development costs related to unsuccessful projects
  are charged to expense. Deferred project costs are recorded in Other Assets on the Consolidated Balance Sheets.

Use of Estimates

PSEG, PSE&G,
  Power and Energy Holdings

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.

Reclassifications

PSEG, PSE&G,
  Power and Energy Holdings

Certain reclassifications
  of amounts reported in prior periods have been made to conform with the current
  presentation.

Note 2. New Accounting Standards

SFAS No. 142, Goodwill and Other Intangible Assets
  (SFAS 142)

PSEG,
  PSE&G, Power and Energy Holdings

On January 1, 2002,
  PSEG, PSE&G, Power and Energy Holdings adopted SFAS 142. Under this standard,
  PSEG, PSE&G, Power and Energy Holdings were required to complete an impairment
  analysis of goodwill before June 30, 2002 and record any required impairment
  retroactive to January 1, 2002. Under SFAS 142, goodwill is considered a nonamortizable
  asset and is subject to an annual review for impairment and an interim review
  when certain events or changes in circumstances occur. The effect of no longer
  amortizing goodwill on an annual basis was not material to PSEGs, PSE&Gs
  or Powers financial position and results of operations upon adoption.

124

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NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

In addition to goodwill,
  PSEG has consolidated intangible assets related to its defined benefit pension
  plans, which is not subject to amortization for Powers emissions allowances
  and for various access rights at Powers Albany station. PSEGs total
  intangible assets were $206 million, including $114 million, $52 million and
  $40 million related to defined benefit plans, emissions allowances and various
  access rights, respectively, as of December 31, 2002.

Power and Energy
  Holdings

Power and Energy
  Holdings evaluated the recoverability of the recorded amount of goodwill based
  on certain operating and financial factors. Such impairment testing included
  discounted cash flow tests which require broad assumptions and significant judgment
  to be exercised by management.

Energy
  Holdings

During the second
  quarter of 2002, Energy Holdings finalized its evaluation of the effect of SFAS
  142 on the recorded amount of goodwill. The total amount of goodwill impairments
  was $120 million, net of tax of $66 million and was comprised of $36 million
  (after-tax) at Empresa Distribuidora de Electricidad de Entre Rios S.A. (EDEERSA),
  an Argentine distribution company, $34 million (after-tax) at Rio Grande Energia
  (RGE), a Brazilian distribution company of which Global owns 32%, $32 million
  (after-tax) at Energy Technologies and $18 million (after-tax) at Tanir Bavi,
  a generating facility in India, which was 74% owned by Global. All of the goodwill
  related to these companies, other than RGE, was fully impaired.

As of December 31,
  2002, the remaining carrying value of Energy Holdings goodwill was $436
  million, of which $430 million was recorded in connection with Globals acquisitions
  of Sociedad Austral de Electricidad S.A. (SAESA), a distribution company in
  Chile, and Empresa de Electricidad de los Andes S.A. (Electroandes), a generation
  company in Peru in August and December of 2001, respectively. For the year ended
  December 31, 2001, amortization expense related to goodwill was $3 million.

As of December 31,
  2002, Energy Holdings pro-rata share of the remaining goodwill included
  on the balance sheets of its equity method investees totaled $282 million.In accordance with generally accepted accounting
  principles, such goodwill is not consolidated on the balance sheet. Energy Holdings
  share of the amortization expense related to such goodwill was $8 million for
  the year ended December 31, 2001.

In addition to goodwill,
  Energy Holdings has an intangible asset related to its defined benefit pension
  plans, which is not subject to amortization. This intangible asset totaled $5
  million as of December 31, 2002.

125

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NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

Power and Energy Holdings

As of December 31,
  2002 and 2001, Power and Energy Holdings goodwill and pro-rata
  share of goodwill in consolidated equity method projects was as follows:

|                                                   | As of December
      31, |    
|-------------------------------------------------- | ------------------------ | ---
|                                                   |                         
|                                                   | 2002                     |    
|                                                   |                          |    
|Consolidated Investments                           | (Millions)              
|                                                   |                          |    
|Energy Holdings (1)                                |                          |    
|SAESA(2)                                           | $                        | 290
|EDEERSA(3)                                         |                          |   
|Electroandes(4)                                    |                          | 140
|Elektrocieplownia
      Chorzow Sp. Z o.o. (ELCHO) |                          | 6  
|                                                   |                          |    
|Total
      Energy Holdings-Global                 |                          | 436
|Power  Albany Steam Station
      (5)             |                          | 16 
|                                                   |                          |    
|Total
      PSEG Consolidated Goodwill             |                          | 452
|                                                   |                          |    
|Pro-Rata Share of Equity Method
      Investments  |                          |    
|                                                   |                          |    
|Energy Holdings                                    |                          |    
|RGE (6)                                            |                          | 60 
|Chilquinta Energia
      S.A. (Chilquinta) (7)     |                          | 163
|Luz del Sur S.A.A.                                 |                          | 34 
|Kalaeloa                                           |                          | 25 
|                                                   |                          |    
|Pro-Rata
      Share of Equity Investment Goodwill |                          | 282
|                                                   |                          |    
|Total
      PSEG Goodwill                          | $                        | 734
|                                                   |                          |    

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |     |                                                                                                                                                                                                                                                                                                                                        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | (1) | Goodwill for Tanir Bavi and Energy
      Technologies was fully impaired in 2002. For 2001, goodwill for Tanir Bavi
      and Energy Technologies of $27 million and $53 million, respectively, was
      reclassed to Current Assets of Discontinued Operations. See Note 5. Discontinued
      Operations for additional information.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | (2) | The decrease at SAESA relates to
      final purchase price adjustments that resulted in higher value allocated
      to fixed assets.                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | (3) | The decrease at EDEERSA relates
      to an impairment of $56 million under SFAS 142 and to purchase price adjustments
      of $7 million made subsequent to December 31, 2001.                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | (4) | The decrease at Electroandes relates
      to purchase price adjustments made subsequent to December 31, 2001 which
      resulted in higher value allocated to Property, Plant and Equipment.                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | (5) | The decrease at Albany relates
      to a purchase price adjustment related to a contingent liability.                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | (6) | The decrease at RGE relates to
      an impairment under SFAS 142 totaling $50 million and the devaluation of
      the Brazilian Real amounting to $32 million.                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | (7) | The decrease at Chilquinta relates
      to the devaluation of the Chilean Peso.                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Power                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|In
      addition to goodwill associated with Powers Albany Station (see table
      above), Power has intangible assets relating to its defined benefit pension
      plans, for its emissions allowances and for various access rights at the
      Albany station, all of which are not subject to amortization. Powers
      intangible asset relating to its defined benefit pension plans totaled $33
      and $5 million as of December 31, 2002 and 2001, respectively. Powers
      intangible assets relating to its emissions allowances totaled $52 million
      and $2 million as of December 31, 2002 and 2001, respectively. Powers
      intangible assets relating to various access rights at its Albany Station
      totaled approximately $40 million as of December 31, 2002 and 2001.
|126                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

PSE&G

PSE&G has intangible
  assets relating to its defined benefit pension plans totaling $60 million and
  $7 million as of December 31, 2002 and December 31, 2001, respectively. These
  intangible assets are not subject to amortization.

SFAS No. 144. Accounting for the Impairment or
  Disposal of Long-Lived Assets (SFAS 144)

PSEG, PSE&G,
  Power and Energy Holdings

On January 1, 2002,
  (SFAS 144) which provides guidance on
  the accounting for the impairment or disposal of long-lived assets, became effective.
  For long-lived assets to be held and used, the new rules are similar to previous
  guidance which required the recognition of an impairment when the undiscounted
  cash flows will not recover its carrying amount. The impairment to be recognized
  is measured as the difference between the carrying amount and fair value of
  the asset. The computation of fair value now removes goodwill from consideration
  and incorporates a probability-weighted cash flow estimation approach. The previous
  guidance provided in SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
  and Long-Lived Assets to be Disposed of  (SFAS 121) is to be applied to assets that are to be
  disposed of by sale. Additionally, assets qualifying for discontinued operations
  treatment have been expanded beyond the former major line of business or class
  of customer approach. Long-lived assets to be disposed of by other than sale
  now recognize impairment at the date of disposal, but are considered assets
  to be held and used until that time. There was no impact on the Consolidated
  Financial Statements of PSEG, PSE&G, Power or Energy Holdings upon adoption
  of these rules. For additional information, see Note 4. Asset Impairments.

SFAS No. 143, Accounting for Asset Retirement
  Obligations (SFAS 143)

PSEG, PSE&G,
  Power and Energy Holdings

Effective January
  1, 2003, PSEG, PSE&G, Power and Energy Holdings will adopt SFAS 143. SFAS
  143 addresses accounting and reporting for legal obligations associated with
  the retirement of tangible long-lived assets and the associated asset retirement
  costs. A legal obligation is a liability that a party is required to settle
  as a result of an existing or enacted law, statute, ordinance or contract.

Under SFAS 143, a
  company must initially recognize the fair value of a liability for an asset
  retirement obligation in the period in which it is incurred and concurrently
  capitalize an asset retirement cost by increasing the carrying amount of the
  related long-lived asset by the same amount as the liability. A company shall
  subsequently allocate that asset retirement cost to expense over its useful
  life. In periods subsequent to initial measurement, an entity shall recognize
  changes in the liability resulting from the passage of time (accretion) or due
  to revisions to either the timing or the amount of the originally estimated
  cash flows. Changes in the liability due to accretion will be charged to the
  Consolidated Statements of Operations, whereas changes due to the timing or amount
  of cashflows shall be an adjustment to the carrying amount of the related asset.

PSE&G and
  Power

Power
  has performed a review of its potential obligations under SFAS 143 and believes
  that its quantifiable obligations are primarily related to the decommissioning
  of its nuclear power plants. Prior to the adoption of SFAS 143, amounts collected
  from PSE&G customers that have been deposited into the Nuclear Decommissioning
  Trust and realized and unrealized gains and losses in the trust were all recorded
  as changes in the NDT Fund with an offsetting charge to the liability. Beginning
  January 1, 2003, amounts will be recorded in earnings or in OCI, as appropriate. As of
  December 31, 2002, Power had a $766 million asset and liability recorded on
  its Consolidated Balance Sheets for nuclear decommissioning.

127

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NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

In addition to the
  quantifiable obligations, Power identified certain legal obligations that meet
  the criteria of SFAS 143, which at this time are not quantifiable. These obligations
  relate to certain industrial establishments subject to the Industrial Site Recovery
  Act, underground storage tanks subject to the Spill Compensation and Control
  Act, permits and authorizations, the restoration of an area occupied by a reservoir
  when the reservoir is no longer needed, an obligation to retire from operation,
  certain plants prior to the initial burning of fuel from a new plant and the
  demolition of certain plants and the restoration of the sites when the plants
  are no longer in service.

In August 2002, PSE&G
  filed a petition requesting clarification from the BPU regarding the future
  cost responsibility for nuclear decommissioning and whether: (a) PSE&Gs
  customers will continue to pay for such costs; or (b) such customer responsibility
  will terminate at the end of the four-year transition period on July 31, 2003
  and become the sole responsibility of Power. The outcome of this petition will
  affect the treatment of a material portion of the liability recorded for Powers
  nuclear decommissioning obligation. If the BPU determines that PSE&Gs
  customers will continue to pay for these costs, the majority of the difference
  between the previously recorded amount of the liability and the liability calculated
  under SFAS 143 will continue to be deferred on the balance sheet. If the BPU
  determines that such customer responsibility terminates at the end of the transition
  period, then the net effect of implementation will be recorded as a one-time
  benefit as a Cumulative Effect of a Change in Accounting Principle. A decision
  is expected as part of PSE&Gs electric base rate case, which is expected
  to be completed prior to July 2003. Although the outcome of this petition cannot
  be predicted, management believes that the net effect of adopting this accounting
  standard should be recorded in earnings. Power also has $131 million of liabilities,
  $7 million of which relates to legal obligations, recorded on its Consolidated
  Balance Sheets at December 31, 2002 related to the Cost of Removal associated
  with its fossil generating stations. These potential obligations are required
  to be reversed upon implementation of SFAS 143.

Therefore, upon adoption
  of this standard on January 1, 2003, PSEG and Power will record an adjustment
  for a Cumulative Effect of a Change in Accounting Principle in the Consolidated
  Statements of Operations by reducing the existing liabilities to their present
  value. It is anticipated that the result will be a benefit to net income, and
  therefore equity, in a range of $300 million to $400 million. Of this amount,
  $200 million to $300 million relates to interests in certain nuclear units Power
  purchased from PSE&G which is subject to the BPU issue discussed above,
  approximately $55 million relates to interests in certain nuclear units Power
  purchased from Atlantic City Electric Company (ACE) and Delmarva Power and Light
  Company (DP&L) which is not subject to BPU approval and approximately $70
  million relates to the cost of removal liabilities for the fossil units being
  reversed.

The BPU could decide
  that the future cost for decommissioning the nuclear units rests with PSE&Gs
  customers. If that is the case, the portion of the benefit to equity related
  to the nuclear units Power purchased from PSE&G would be reversed and a
  regulatory liability would be established. The $55 million related to the nuclear
  units purchased from ACE and DP&L and the $70 million related to the cost
  of removal liabilities for the fossil units would be unaffected.

PSE&G

At
  December 31, 2002, PSE&G had no legal liabilities, as contemplated under
  SFAS 143, recorded on the consolidated balance sheets and therefore the effect
  of adoption will not result in an adjustment to the consolidated statement of
  earnings. PSE&G does, however, have cost of removal liabilities embedded
  within Accumulated Depreciation pursuant to SFAS 71. Since PSE&G is a regulated
  enterprise, these amounts will continue to be recorded and presented in Accumulated
  Depreciation and will be disclosed in accordance with SFAS 143.

PSE&G has identified
  certain legal obligations that meet the criteria of SFAS 143 which at this time
  are not quantifiable and therefore unable to be recorded. These obligations
  relate to certain industrial establishments subject to the Industrial Site Recovery
  Act, underground storage tanks subject to the Spill Compensation and Control
  Act, leases and licenses, and the requirement to seal natural gas pipelines
  at all sources of gas when the pipelines are no longer in service.

128

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NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

Energy Holdings

Energy Holdings identified
  certain legal obligations that met the criteria of SFAS 143 and are not expected
  to be material to the Consolidated Statement of Operations.

SFAS No. 145, Rescission of FASB Statements Nos.
  4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections
  (SFAS 145)

PSEG, PSE&G,
  Power and Energy Holdings

Effective January
  1, 2002, PSEG, PSE&G, Power and Energy Holdings adopted SFAS 145. This Statement
  rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishments of
  Debt, (SFAS 4) and an amendment of that Statement, SFAS No. 64, Extinguishments
  of Debt Made to Satisfy Sinking Fund Requirements (SFAS 64). SFAS 4 required
  that gains and losses from extinguishments of debt that were included in the
  determination of net income be aggregated, and if material, classified as an
  extraordinary item. Since the issuance of SFAS 4, the use of debt extinguishments
  has become part of the risk management strategy of many companies, representing
  a type of debt extinguishment that does not meet the criteria for classification
  as an extraordinary item. Based on this trend, the FASB issued this rescission
  of SFAS 4 and SFAS 64. Accordingly, under SFAS 145, PSEG now records these gains
  and losses in Other Income and Other Deductions, respectively. PSEG recorded
  pre-tax gains of $13 million ($8 million after-tax) from the early retirement
  of debt as a component of Other Income for the period ended December 31, 2002.
  Also, PSEG reclassified a pre-tax loss of $3 million ($2 million after-tax)
  from the early retirement of debt to a component of Other Deductions for the
  period ended December 31, 2001.

SFAS 133

PSEG, PSE&G,
  Power and Energy Holdings

On January 1, 2001,
  PSE&G, Power and Energy Holdings adopted SFAS 133. SFAS 133 established
  accounting and reporting standards for derivative instruments, including certain
  derivative instruments included in other contracts, and for hedging activities.
  It requires an entity to recognize the fair value of derivative instruments
  held as assets or liabilities on the balance sheet. For cash flow hedging purposes,
  changes in the fair value of the effective portion of the gain or loss on the
  derivative are reported in Other Comprehensive Income (OCI) or as a Regulatory
  Asset (Liability), net of tax. Amounts in accumulated OCI are ultimately recognized
  in earnings when the related hedged forecasted transaction occurs. The change
  in the fair value of the ineffective portion of the gain or loss on a derivative
  instrument designated as a cash flow hedge is recorded in earnings. Derivative
  instruments that have not been designated as hedges are adjusted to fair value
  through earnings.

Energy Holdings

Upon adoption, Energy
  Holdings recorded a cumulative effect of a change in accounting principle of
  $9 million, net of tax and a decrease to OCI of $15 million, respectively.

EITF 02-3

PSE&G and
  Power

EITF 02-3 requires
  all gains and losses on energy trading derivatives to be reported on a net basis.
  Also, energy trading contracts that are not derivatives will no longer be marked
  to market. Instead, settlement accounting will be used. EITF 02-3 was effective
  for all new contracts executed after October 25, 2002 and will require a cumulative
  effect adjustment to income in the first quarter of 2003 for all contracts executed
  prior to October 25, 2002. The vast majority of Powers energy contracts
  qualify as derivatives under SFAS 133 and will therefore continue to be marked
  to market. Management believes the impact of adopting this EITF 02-3 will not
  be material to the financial statements.

129

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NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

Pursuant to EITF
  Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as
  an Agent (EITF 99-19), PSE&G (prior to the generation-related asset
  transfer in August 2000) and Power had been recording trading revenues and trading
  related costs on a gross basis for physical energy and capacity sales and purchases.
  In accordance with EITF 02-3, beginning in the third quarter of 2002, Power
  started reporting energy trading revenues and energy trading costs on a net
  basis and have reclassified prior periods to conform with this net presentation.
  As a result, both Operating Revenues and Energy Costs were reduced by approximately
  $1.9 billion, $2.3 billion and $2.6 billion for the years ended December 31,
  2002, 2001 and 2000, respectively. This change in presentation did not have
  an effect on trading margins, net income or cash flows.

Financial Interpretation (FIN) No. 45, Guarantors
  Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees
  of Indebtedness of Others (FIN 45)

PSEG,
  PSE&G, Power and Energy Holdings

FIN 45 enhances the
  disclosures to be made by a guarantor in its interim and annual financial statements
  about its obligations under certain guarantees that it has issued. It also clarifies
  that a guarantor is required to recognize, at the inception of a guarantee,
  a liability for the fair value of the obligation undertaken in issuing the guarantee,
  although PSEG, PSE&G, Power and Energy Holdings do not anticipate the recording
  of such liabilities will be material to their respective Consolidated Financial
  Statements. The initial recognition and initial measurement provisions of this
  Interpretation are applicable on a prospective basis to guarantees issued or
  modified after December 31, 2002. The disclosure requirements are effective
  for financial statements of interim or annual periods ending after December
  15, 2002. For further information regarding Powers and Energy Holdings
  respective guarantees, refer to Note 13. Commitments and Contingent Liabilities.

FIN No. 46, Consolidation of Variable Interest
  Entities (VIE) (FIN 46)

PSEG, PSE&G,
  Power and Energy Holdings

FIN 46clarified the application of Accounting
  Research Bulletin No. 51, Consolidated Financial Statements, to
  certain entities in which equity investors do not have the characteristics of
  a controlling financial interest. Because a controlling financial interest in
  an entity may be achieved through arrangements that do not involve voting interests,
  FIN 46 sets forth specific requirements with respect to consolidation, measurement
  and disclosure of such relationships. Disclosure requirements for existing qualifying
  entities are effective for financial statements issued after January 31, 2003.
  All enterprises with VIEs created after February 1, 2003, shall apply
  the provisions of FIN 46 no later than the beginning of the first interim period
  beginning after June 15, 2003.

Other

PSE&G, Power
  and Energy Holdings

In connection with
  the January 2003 EITF meeting, the FASB was requested to reconsider an interpretation
  of SFAS 133. The interpretation, which is contained in the Derivatives Implementation
  Groups C-11 guidance, relates to the pricing of contracts that include
  broad market indices. In particular, that guidance discusses whether the pricing
  in a contract that contains broad market indices (e.g., CPI) could qualify as
  a normal purchase or sale under SFAS 133. PSEG, PSE&G, Power and Energy
  Holdings are currently reevaluating which contracts, if any, that have previously
  been designated as normal purchases or sales would now not qualify for this
  exception. PSEG, PSE&G, Power and Energy Holdings are currently evaluating
  the effects that this guidance will have on their respective results of operations,
  financial position and net cash flows.

130

---



|NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS  Continued                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note
      3. Change in Accounting Principle                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|PSE&G
      and Power                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|PSE&G
      and Power has each changed its method of accounting for the classification
      of assets and liabilities arising from transactions related to energy trading
      contracts when the right of set-off exists, from a separate presentation
      of assets and liabilities to a net presentation. PSE&G and Power believe
      that the right of set-off exists when all of the following conditions are
      met:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|PSE&G
      and Power each believe that this change in method of accounting and classification
      is preferable and more closely represents the economic substance of such
      transactions. Additionally, the new method reflects PSE&Gs and
      Powers existing practice of settling amounts net, and is consistent
      with the classification of trading revenues and trading costs on a net basis
      on the Consolidated Statements of Operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|As
      of and for the year ended December 31, 2002, there was no effect on revenues,
      expenses, net income or cash flows as a result of this change. Affected
      amounts on the Consolidated Balance Sheets have been reclassified for all
      periods presented. The impact of this reclassification was a decrease as
      of December 31, 2001 in PSEGs current assets, noncurrent assets, current
      liabilities and noncurrent liabilities by approximately $266 million ($240
      million related to Power and $26 million related to PSE&G), $17 million
      (primarily all related to Power), $271 million ($240 million related to
      Power and $31 million related to PSE&G) and $12 million (a $17 million
      decrease related to Power and a $5 million increase related to PSE&G),
      respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Note 4. Asset Impairments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Energy
      Holdings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|As
      of December 31, 2001, Energy Holdings aggregate investment exposure
      in Argentina was $632 million, including certain loss contingencies. These
      investments included a 90% owned distribution company, Empresa Distribuidora
      de Electricidad de Entre Rios S.A. (EDEERSA); minority interests in three
      distribution companies, Empresa Distribuidora de Energia Norte S.A. (EDEN),
      Empresa Distribuidora de Energia Sur S.A. (EDES) and Empresa Distribuidora
      La Plata S.A. (EDELAP); and two generating companies, Central Termica San
      Nicolas S.A. (CTSN), and AES Parana S.C.A. (Parana) which were under contract
      for sale to certain subsidiaries of The AES Corporation (AES). In June 2002,
      Energy Holdings determined that the carrying value of its Argentine investments
      was impaired. The combination of the year-to-date operating losses, goodwill
      impairment at EDEERSA, write-down of $497 million for all Argentine assets,
      and certain loss contingencies resulted in a pre-tax charge to earnings
      of $623 million ($406 million after-tax). In connection with the write-down
      of Energy Holdings Argentine assets, Energy Holdings recorded a net
      deferred tax asset of $217 million. Energy Holdings has reviewed this deferred
      tax asset for recoverability and no reserve is required. For a discussion
      of certain contingencies related to Argentine investments, see Note 13.
      Commitments and Contingent Liabilities.
|131                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

The tables below
  provide pre-tax and after-tax impacts of the various impairment charges, results
  of operations and accruals of loss contingencies recorded with respect to Energy
  Holdings investments in Argentina for the periods ended December 31, 2002
  and 2001.

|                                                   | (Pre-Tax)December 31, |      | (After-Tax)December 31,
|-------------------------------------------------- | --------------------- | ---- | -----------------------
|                                                   |                       |      |                        
|                                                   | 2002                  |      | 2001                   
|                                                   |                       |      |                        
|                                                   | (Millions)           
|(Losses) Earnings Before
      Local Taxes-EDEERSA | $                     | (59  | )                      
|Write-down of EDEERSA                              |                       | (94  | )                      
|Write-down of Assets Held for Sale
      to AES    |                       | (403 | )                      
|Loss Contingencies and Other                       |                       | (11  | )                      
|Goodwill Impairment-EDEERSA                        |                       | (56  | )                      
|                                                   |                       |      |                        
|Total                                              | $                     | (623 | )                      
|                                                   |                       |      |                        

The asset impairments
  are described in more detail below.

EDEERSA

In January 2002, the
  Argentine Federal government enacted a temporary emergency law that imposed
  various changes to the concession contracts in effect between electric distributors
  and local and federal regulators. The Province of Entre Rios enjoined in the
  emergency law impacting operations at EDEERSA. The Argentine government and
  regulators made unilateral decisions to abrogate key components of the tariff
  concessions related to public utilities. In addition to the emergency law, the
  Province of Entre Rios unilaterally enacted other laws which forced EDEERSA
  to accept provincial bonds, known as federales, as payment for electric
  service in lieu of Argentine Pesos. Federales cannot be exchanged outside of
  the Entre Rios Province. In addition, restrictions were imposed on EDEERSAs
  ability to terminate service to a majority of customers in the event of nonpayment.

Such laws significantly
  restricted Globals ability to control the operations of EDEERSA, as unilateral
  changes enacted by the government restricted Globals ability to manage
  its operations to reduce the financial losses incurred as a result of such actions.
  In the second quarter of 2002, Global believed such temporary measures were
  likely to be permanent in nature as a credible solution to the economic crisis
  in Argentina, including International Monetary Fund (IMF) support, was not probable. The more significant
  provisions included in the initial emergency law remain in effect. As a result
  of a loss of control of the financial and operational management of EDEERSA,
  the investment is recorded in accordance with the equity method of accounting
  as of December 31, 2002. Global has no significant exposure remaining related to EDEERSA
  as of December 31, 2002.

As of January 1,
  2002, goodwill related to Energy Holdings investment in EDEERSA was approximately
  $56 million and was included in Energy Holdings previously disclosed investment
  exposure. As part of the adoption of SFAS 142, Energy Holdings determined that
  this goodwill was impaired and all of the goodwill was written-off as of January
  1, 2002. See Note 2. New Accounting Standards for a further discussion of the
  goodwill analysis.

Based on actual and
  projected operating losses at EDEERSA and the continued economic uncertainty
  in Argentina, Energy Holdings determined that it was necessary to test these
  assets for impairment. Such impairment analyses were completed as of June 30,
  2002. As a result of these analyses, Energy Holdings determined that these assets
  were completely impaired under SFAS 144. Energy Holdings recorded total charges
  and losses of $213 million, pre-tax, related to this investment for the year
  ended December 31, 2002. These pre-tax charges consisted of goodwill impairment
  charges (calculated under SFAS 142) of $56 million, operating losses of $59
  million, of which $45 million was recorded in the first quarter of 2002, a write-off
  of the remaining $94 million net asset balance pursuant to the SFAS 144 impairment
  analysis and loss contingencies and other items of $4 million. The total after-tax
  charges and losses related to this investment were $139 million for the period
  ended December 31, 2002.

132

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

Energy Holdings
  share of the pre-tax (Losses) Earnings for EDEERSA are included in the Consolidated
  Statements of Operations as indicated in the following table:

|                                                       | December 31,
|------------------------------------------------------ | ------------
|                                                       |             
|                                                       | 2002(A)     
|                                                       |             
|                                                       | (Millions)  
|Operating Revenues                                     | $           
|Operating Expenses                                     |             
|                                                       |             
|Operating Income                                       |             
|Other Losses  Foreign Currency
      Transaction Loss |             
|Minority Interest and Other                            |             
|                                                       |             
|(Loss) Earnings before Taxes                           | $           
|                                                       |             

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |     |                                                                                                                                                                                                                                                                                                                
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | (A) | In the second quarter of 2002,
      as a result of a loss of control of EDEERSA, Energy Holdings accounted for
      this investment in accordance with the equity method of accounting.                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | (B) | Operating results for EDEERSA included
      $7 million of revenues recorded in accordance with the equity method of
      accounting for the six months ended June 30, 2001. In the third quarter
      of 2001, Global recorded EDEERSA as a consolidated entity as it was a majority-owned
      investment.
|Stock
      Purchase Agreement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|On
      August 24, 2001, Global entered into a Stock Purchase Agreement with AES
      to sell its minority interests in EDEN, EDES, EDELAP, CTSN and Parana, to
      certain subsidiaries of AES. In connection with the terms of the Stock Purchase
      Agreement, Global accrued interest and other receivables of $17 million
      through February 6, 2002, which were direct obligations of AES. On February
      6, 2002, AES notified Global that it was terminating the Stock Purchase
      Agreement. In the Notice of Termination, AES alleged that a Political Risk
      Event, within the meaning of the Stock Purchase Agreement, had occurred
      by virtue of certain decrees of the Government of Argentina, thereby giving
      AES the right to terminate the Stock Purchase Agreement. As discussed previously,
      Energy Holdings recorded a Write-Down of Project Investments of $403 million,
      pre-tax, net of the reduction discussed below, for the year ended December
      31, 2002. Global filed suit in New York State Supreme Court for New York
      County against AES to enforce its rights under the Stock Purchase Agreement.
      A settlement was reached in October 2002 between the parties under which
      Global will transfer its minority ownership interest in EDEN, EDES, EDELAP,
      Parana and CTSN to AES. AES paid Global $15 million under the settlement
      and, in addition, has issued promissory notes which should yield an additional
      $15 million, plus interest at 12%, maturing through July 2003. In the fourth
      quarter of 2002, Energy Holdings assessed the collectibility of the notes
      receivable and recognized $9 million of Operating Income. This amount was
      recorded as a reduction in the Write-Down of Project Investments. In February
      2003, Energy Holdings received the first note installment totaling $5 million,
      plus interest.
|133                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

Note 5. Discontinued Operations

Energy Holdings

Energy Technologies Investments

Energy Technologies
  is primarily comprised of 11 heating, ventilating and air conditioning (HVAC)
  and mechanical operating companies. In June 2002, Energy Holdings adopted a
  plan to sell its interests in the HVAC/mechanical operating companies. The sale
  of these companies is expected to be completed by June 30, 2003. Energy Holdings
  has retained the services of an investment-banking firm to market these companies
  to interested parties. The HVAC/mechanical operating companies meet the criteria
  for classification as components of discontinued operations and all prior periods
  have been reclassified to conform to the current years presentation.

In addition to the
  pre-tax goodwill impairment of $53 million recorded in accordance with the adoption
  of SFAS 142, Energy Holdings reviewed this investment for impairment in accordance
  with SFAS 144 and has further reduced the carrying value of the 11 HVAC/mechanical
  operating companies to their fair value less costs to sell and recorded a loss
  on disposal for the year ended December 31, 2002 of $21 million, net of $11
  million in taxes. Energy Holdings remaining investment position in Energy
  Technologies is approximately $56 million, of which $32 million relates to deferred
  tax assets from discontinued operations and $12 million relates to certain intercompany
  payables included in Current Liabilities of Discontinued Operations. For a discussion
  of these intercompany payables included in the Current Liabilities of Discontinued
  Operations, see Note 22. Related-Party Transactions.

Operating results
  of the HVAC/mechanical operating companies, less certain allocated costs from
  Energy Holdings, have been reclassified into discontinued operations in the
  Consolidated Statements of Operations. The results of operations of these discontinued
  operations for the periods ended December 31, 2002, 2001 and 2000, respectively,
  are displayed below:

|                         | Years Ended
      December 31,
|------------------------ | ------------------------------
|                         |                               
|                         | 2002                          
|                         |                               
|                         | (Millions)                    
|Operating Revenues       | $                             
|                         |                               
|Operating Loss           | $                             
|Loss Before Income Taxes | $                             
|Net Loss                 | $                             

The carrying amounts
  of the assets and liabilities of the HVAC/mechanical operating companies, as
  of December 31, 2002 and 2001, have been reclassified into Current
  Assets of Discontinued Operations and Current Liabilities of Discontinued Operations,
  respectively, on the Consolidated Balance Sheets and are summarized in the following
  table:

|                       | As of December
      31,
|---------------------- | ------------------------
|                       |                         
|                       | 2002                    
|                       |                         
|                       | (Millions)              
|Current Assets         | $                       
|Noncurrent Assets      |                         
|                       |                         
|Total Assets           | $                       
|                       |                         
|                       |                         
|Current Liabilities    | $                       
|Noncurrent Liabilities |                         
|Long-Term Debt         |                         
|                       |                         
|Total Liabilities      | $                       
|                       |                         

134

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

Tanir Bavi

In the fourth quarter
  of 2002, Global sold its 74% interest in Tanir Bavi, a 220 MW barge mounted,
  combined-cycle generating facility in India. Tanir Bavi meets the criteria for
  classification as a component of discontinued operations and all prior periods
  have been reclassified to conform to the current years presentation. Global
  reduced the carrying value of Tanir Bavi to the contracted sales price of $45
  million and recorded a loss on disposal of $14 million (after-tax) for the year-ended
  December 31, 2002. The operating results of Tanir Bavi for the years ended December
  31, 2002 and 2001 yielded income of $5 million and $7 million (after-tax), respectively.

For information regarding
  the goodwill impairment associated with Tanir Bavi, see Note 2. New Accounting
  Standards.

Globals share
  of operating results of this discontinued operation are summarized in the following
  table:

|                           | Years Ended December
      31,
|-------------------------- | ------------------------------
|                           |                               
|                           | 2002                          
|                           |                               
|                           | (Millions)                    
|Operating Revenues         | $                             
|                           |                               
|Operating Income           | $                             
|Income Before Income Taxes | $                             
|Net Income                 | $                             

(A)  Commerical operations at Tanir Bavi
  began in 2001.

The carrying amounts
  of the assets and liabilities of Tanir Bavi, as of December 31, 2001, have been
  reclassified into Current Assets of Discontinued Operations and Current Liabilities
  of Discontinued Operations, respectively, in the Consolidated Balance Sheets.
  The carrying amounts of the major classes of assets and liabilities of Tanir
  Bavi, as of December 31, 2001, are summarized in the following tables:

|                                  | As ofDecember 31, 2001
|--------------------------------- | ----------------------
|                                  |                       
|                                  | (Millions)            
|Current Assets                    |                       
|Net Property, Plant and Equipment |                       
|Noncurrent Assets                 |                       
|                                  |                       
|Total Assets                      |                       
|                                  |                       
|                                  |                       
|Current Liabilities               |                       
|Noncurrent Liabilities            |                       
|Long-Term Debt                    |                       
|                                  |                       
|Total Liabilities                 |                       
|                                  |                       

135

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

Note 6. Regulatory Issues and Accounting Impacts
  of Deregulation

New Jersey Energy Master Plan Proceedings and Related
  Orders

PSE&G and
  Power

Following
  the enactment of the New Jersey Electric Discount and Energy Competition Act
  (Energy Competition Act), the BPU issued its Final Order in 1999 relating to
  PSE&Gs rate unbundling, stranded costs and restructuring proceedings
  (Final Order). This Final Order deregulated the electric generation business
  and set the stage to deregulate the gas supply business in New Jersey. As a
  result of this process, PSE&G transferred its generation business to Power
  in August 2000 and the gas supply business to Power in May 2002. The electric
  business was transferred at the BPU prescribed price of $2.4 billion, plus
  $343 million for the book value of the related materials and supplies. PSE&G
  transferred its gas inventories and contracts to Power and its subsidiaries
  in May 2002 for approximately $183 million.

Also in the Final
  Order, the BPU concluded that PSE&G should recover up to $2.9 billion (net
  of tax) of its electric generation-related stranded costs through securitization
  of $2.4 billion, plus an estimated $125 million of transaction costs, and an
  opportunity to recover up to $540 million (net of tax) of its unsecuritized
  generation-related stranded costs on a net present value basis. The $540 million
  is subject to recovery through a market transition charge (MTC) included in
  Operating Revenues through the transition period ending July 31, 2003. PSE&G
  remits the MTC revenues to Power as part of the BGS contract as provided for
  by the Final Order which is included in operating revenues.

On January 31, 2001,
  $2.5 billion of securitization bonds (non-recourse asset backed securities)
  were issued by PSE&G Transition Funding LLC (Transition Funding), in eight
  classes with maturities ranging from 1 year to 15 years. Also on January 31,
  2001, PSE&G received payment from Power on its $2.8 billion promissory
  note used to finance the transfer of PSE&Gs generation business. The
  proceeds from these transactions were used to pay for certain debt issuance
  and related costs for securitization, retire a portion of PSE&Gs outstanding
  short-term debt, reduce PSE&G common equity, loan funds to PSEG and make
  various short-term investments in accordance with the Final Order.

In order to properly
  recognize the recovery of the allowed unsecuritized stranded costs over the
  transition period, PSE&G recorded a charge to net income of $88 million,
  pre-tax, or $52 million, after tax, in the third quarter of 2000 for the cumulative
  amount of estimated collections in excess of the allowed unsecuritized stranded
  costs from August 1, 1999 through September 30, 2000. As of December 31, 2002,
  the amount of estimated collections in excess of the allowed unsecuritized stranded
  costs was $189 million. For additional information, see Note 7. Regulatory Assets
  and Liabilities. After deferrals, pre-tax MTC revenues recognized were $221
  million in 1999, $239 million in 2000, $196 million in 2001 and $98 million
  in 2002. In 2003, PSE&G expects to record approximately $115 million in
  pre-tax MTC revenues.

Note 7. Regulatory Assets and Liabilities

PSE&G

PSE&G prepares
  its financial statements in accordance with the provisions of SFAS 71. A regulated
  utility is required to defer the recognition of costs (a regulatory asset) or
  the recognition of 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, which will
  be amortized over various future periods. These costs are deferred based on
  rate orders issued by the BPU or the FERC and PSE&Gs experience with
  prior rate cases. As of December 31, 2002, approximately 87% of PSE&Gs
  regulatory assets were deferred based on written rate orders. Regulatory assets
  recorded on a basis other than by an issued rate order have less certainty of
  recovery

136

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

since they can be disallowed in the future by regulatory
  authorities. However, PSE&G has experienced no material disallowances in
  the past. PSE&G believes that all of its regulatory assets are probable
  of recovery.

As of December
  31, 2002 and 2001, respectively, PSE&G had deferred the following
  regulatory assets and liabilities on the Consolidated Balance Sheets:

|                                                           | As ofDecember 31, |       |      |  
|---------------------------------------------------------- | ----------------- | ----- | ---- | -
|                                                           | 2002              |       | 2001 |  
|                                                           |                   |       |      |  
|                                                           | (Millions)        |       |      |  
|Regulatory Assets                                          |                   |       |      |  
|                                                           |                   |       |      |  
|Stranded Costs
      To Be Recovered                       | $                 | 3,885 |      | $
|Deferred Income Taxes                                      |                   | 328   |      |  
|OPEB-Related
      Costs                                   |                   | 193   |      |  
|Societal Benefits Charges (SBC)                            |                   |      |      |  
|Manufactured
      Gas Plant Remediation Costs             |                   | 115   |      |  
|Unamortized Loss on Reacquired
      Debt and Debt Expense |                   | 86    |      |  
|Underrecovered
      Gas Costs                             |                   | 154   |      |  
|Unrealized Losses on Gas Contracts                         |                   |      |      |  
|Unrealized Losses
      on Interest Rate Swap              |                   | 66    |      |  
|Repair Allowance Taxes                                     |                   | 93    |      |  
|Decontamination
      and Decommissioning Costs            |                   | 21    |      |  
|Plant and Regulatory Study Costs                           |                   | 25    |      |  
|Regulatory Restructuring
      Costs                       |                   | 26    |      |  
|                                                           |                   |       |      |  
|Total Regulatory Assets                                    | $                 | 4,992 |      | $
|                                                           |                   |       |      |  
|                                                           |                   |       |      |  
|Regulatory Liabilities                                     |                   |       |      |  
|                                                           |                   |       |      |  
|Excess Depreciation
      Reserve                          | $                 | 171   |      | $
|Non-Utility Generation Transition
      Charge (NTC)       |                   | 27    |      |  
|SBC                                                        |                   | 50    |      |  
|Other                                                      |                   | 4     |      |  
|                                                           |                   |       |      |  
|Total Regulatory Liabilities                               | $                 | 252   |      | $
|                                                           |                   |       |      |  

|(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Recovered/Refunded with interest                                                                  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------
|(2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Recoverable/Refundable per specific
      rate order                                              
|(3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Recovery/Refunding is pending the
      outcome of the current electric base rate or deferral case
|All
      regulatory assets and liabilities are excluded from PSE&Gs rate
      base unless otherwise noted. The descriptions below define certain regulatory
      items.                                                                                                                                                                                                                                                                                                               
|Stranded
      Costs To Be Recovered:This reflects
      deferred costs to be recovered through the securitization transition charge
      that was authorized by the BPU. Funds collected through the securitization
      transition charge will be used to make the future interest and principal
      payments on the transition bonds.                                                                                                                                              
|Deferred
      Income Taxes:This amount represents
      the portion of deferred income taxes that will be recovered through future
      rates, based upon established regulatory practices, which permit the recovery
      of current taxes. Accordingly, this regulatory asset is offset by a deferred
      tax liability and is expected to be recovered, without interest, over the
      period the underlying book-tax timing differences reverse and become current
      taxes.
|137                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

OPEB-Related
  Costs:Includes costs associated with the
  adoption of SFAS No. 106. Employers Accounting for Benefits Other
  Than Pensions which were deferred in accordance with EITF Issue 92-12,
  Accounting for OPEB Costs by Rate Regulated Enterprises.

SBC:The SBC, as authorized by
  the BPU and the Energy Competition Act, includes costs related to PSE&Gs
  electric and gas business as follows: 1) the universal service fund; 2) nuclear
  plant decommissioning; 3) demand side management (DSM) programs; 4) social programs
  which include consumer education; 5) electric bad debt expenses; and 6) MTC
  overrecovery. All components except for MTC accrue interest.

Manufactured Gas
  Plant Remediation Costs:Represents a three-year
  estimate of the environmental investigation and remediation program costs that
  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.

Underrecovered
  Gas Costs:Represents PSE&Gs
  gas costs in excess of the amount included in rates and probable of recovery
  in the future. The current portion of the balance does not accrue
  interest.

NTC:This clause was established by the Energy
  Competition Act to account for above market costs related to non-utility generation
  (NUG) contracts, as approved by the BPU. Costs or benefits associated with the
  restructuring of these contracts are deferred. This clause also includes BGS
  costs in excess of current rates, as approved by the BPU.

Unrealized Losses
  on Gas Contracts:This represents the recoverable
  portion of unrealized losses associated with contracts used in PSE&Gs
  gas distribution business.

Unrealized Losses
  on Interest Rate Swap:This represents
  the costs related to Transition Fundings interest rate swap that will
  be recovered without interest over the life of Transition Fundings transition
  bonds. This asset is offset by a derivative liability on the balance sheet.

Repair Allowance
  Taxes:This represents tax, interest and
  carrying charges relating to disallowed tax deductions for repair allowance
  as authorized by the BPU.

Decontamination
  and Decommissioning Costs:These costs
  are related to PSE&Gs portion of the obligation for nuclear decontamination
  and decommissioning costs of US Department of Energy nuclear sites dating back
  prior to the generation asset transfer to Power in 2000.

Plant
  and Regulatory Study Costs:These are costs
  incurred by PSE&G required by the BPU related to current and future operations,
  including safety, planning, management and construction.

Regulatory Restructuring
  Costs:These are costs related to the restructuring
  of the energy industry in New Jersey through the Energy Competition Act and
  include such items as the system design work necessary to transition PSE&G
  to a transmission and distribution only company, as well as costs incurred to
  transfer and establish the generation function as a separate corporate entity.

Excess
  Depreciation Reserve:As required by the
  BPU, PSE&G reduced its depreciation reserve for its electric distribution
  assets and recorded such amount as a regulatory liability.

Other
  Regulatory Liabilities:This includes the
  following: 1) amounts collected from customers in order for Transition Funding
  to obtain a AAA rating on its transition bonds; and 2) amounts available to
  fund consumer education discounts.

138

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

Note 8. Long-Term Investments

|                                                     | December 31,
|---------------------------------------------------- | ------------
|                                                     |             
|                                                     | 2002        
|                                                     |             
|Energy Holdings:                                     | (Millions)  
|Leveraged Leases                                     | $           
|Partnerships:                                        |             
|General
      Partnerships                           |             
|Limited
      Partnerships                           |             
|                                                     |             
|Total Partnerships                                   |             
|                                                     |             
|                                                     |             
|Corporate Joint Ventures                             |             
|Securities                                           |             
|Other Investments (A)                                |             
|                                                     |             
|Total Long-Term
      Investments of Energy Holdings |             
|PSE&G (B)                                            |             
|Power (C)                                            |             
|Other Investments (D)                                |             
|                                                     |             
|Total
      Long-Term Investments                    | $           
|                                                     |             

|                                                                                                                            | (A) | Primarily relates to Demand Side
      Management (DSM) investments at Resources.                                                                        
|--------------------------------------------------------------------------------------------------------------------------- | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                            | (B) | Primarily relates to life insurance
      and supplemental benefits of $113 million and $102 million as of December
      31, 2002 and 2001 respectively.
|                                                                                                                            | (C) | Amounts represent Sulfur Dioxide (SO2)
      and Nitrogen Oxide (NOx)emission credits held for future use.                                               
|                                                                                                                            | (D) | Amounts represent investments at
      PSEG (parent company).                                                                                            
|Energy Holdings                                                                                                            
|Leveraged
      Leases                                                                                                     
|Energy
      Holdings net investment, through Resources, in leveraged leases is
      comprised of the following elements:

|                                                | December 31,
|----------------------------------------------- | ------------
|                                                |             
|                                                | 2002        
|                                                |             
|                                                | (Millions)  
|Lease rents receivable                          | $           
|Estimated residual value of leased
      assets |             
|                                                |             
|                                                |             
|Unearned and
      deferred income              |             
|                                                |             
|Total investments
      in leveraged leases     |             
|Deferred taxes                                  |             
|                                                |             
|Net investment
      in leveraged leases        | $           
|                                                |             

Resources pre-tax
  income and income tax effects related to investments in leveraged leases are
  as follows:

|                                             | Years Ended
      December 31,
|-------------------------------------------- | ------------------------------
|                                             |                               
|                                             | 2002                          
|                                             |                               
|                                             | (Millions)                    
|Pre-tax income                               | $                             
|                                             |                               
|Income tax effect on pre-tax income          | $                             
|Amortization of investment tax
      credits | $                             

139

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

Resources initial
  investment in leveraged leases represents approximately 15% to 20% of the purchase
  price of the leveraged leased property. The balance is provided by third-party
  financing in the form of non-recourse long-term debt which is secured by the
  property.

In 2002, Resources
  invested $31 million in a leveraged lease financing of a district heating network
  leased to Linz Gas/Warme GmbH, a district heating utility providing service
  to the residents of Linz, Austria, and the surrounding area.

In November 2002,
  Resources terminated its two lease transactions with affiliates of TXU-Europe,
  the Peterborough and Kings Lynn facilities due to an uncured default under the
  lease financial covenants. Resources received cash proceeds of $183 million,
  recognizing an after-tax gain of $4 million. As a result of these lease terminations,
  Resources will pay income taxes of $115 million in 2003.

In 2001, Resources
  negotiated the early termination of nine leveraged leases and received cash
  proceeds of $104 million, recognizing an after-tax gain of $10 million. As a
  result of these lease terminations, Resources paid income taxes of $87 million
  in 2002.

In 2000, Resources
  negotiated the early termination of four leveraged leases and received cash
  proceeds of $89 million, recognizing an after-tax gain of $24 million. As a
  result of these lease terminations, Resources paid income taxes of $24 million
  in 2001.

Partnership
  Investments and Corporate Joint Ventures

Energy Holdings
  partnership investments of $484 million and corporate joint ventures of approximately
  $1 billion are those of Resources, Global and EGDC.

Investments
  in and Advances to Affiliates

Investments in net
  assets of affiliated companies accounted for under the equity method of accounting
  by Global amounted to $1.3 billion and $1.5 billion at December 31, 2002 and
  December 31, 2001, respectively. During the three years ended December 31, 2002,
  2001 and 2000, the amount of dividends from these investments was $64 million,
  $51 million, and $107 million respectively. Globals share of income and
  cash flow distribution percentages currently range from 16% to 50%. Interest
  is earned on loans made to various projects. Such loans earned rates of interest
  ranging from 7.5% to 20% during 2002 and 2001.

140

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

Summarized
  results of operations and financial position of all affiliates in which Global
  uses the equity method of accounting are presented below:

|                                                    | Foreign    |       | Domestic |    | Total | 
|--------------------------------------------------- | ---------- | ----- | -------- | -- | ----- | 
|                                                    |            |       |          |    |       | 
|                                                    | (Millions)
|For the Year Ended December
      31, 2002          |            |       |          |    |       | 
|                                                    |            |       |          |    |       | 
|Condensed
      Statement of OperationsInformation  |            |       |          |    |       | 
|Revenue                                             | $          | 1,125 |          | $  | 492   | 
|Gross Profit                                        | $          | 413   |          | $  | 149   | 
|Minority Interest                                   | $          | (10   | )        | $  |      | 
|Net Income                                          | $          | 148   |          | $  | 6     | 
|As of December 31, 2002                             |            |       |          |    |       | 
|                                                    |            |       |          |    |       | 
|Condensed Balance Sheet Information                 |            |       |          |    |       | 
|Assets:                                             |            |       |          |    |       | 
|Current Assets                                      | $          | 494   |          | $  | 110   | 
|Property, Plant and Equipment                       |            | 1,597 |          |    | 1,193 | 
|Goodwill                                            |            | 586   |          |    | 50    | 
|Other Noncurrent Assets                             |            | 489   |          |    | 24    | 
|                                                    |            |       |          |    |       | 
|Total Assets                                        | $          | 3,166 |          | $  | 1,377 | 
|                                                    |            |       |          |    |       | 
|Liabilities:                                        |            |       |          |    |       | 
|Current Liabilities                                 | $          | 464   |          | $  | 56    | 
|Debt*                                               |            | 868   |          |    | 641   | 
|Other Noncurrent Liabilities                        |            | 183   |          |    | 72    | 
|Minority Interest                                   |            |      |          | 43 |       | 
|                                                    |            |       |          |    |       | 
|Total Liabilities                                   |            | 1,558 |          |    | 769   | 
|Equity                                              |            | 1,608 |          |    | 608   | 
|                                                    |            |       |          |    |       | 
|Total Liabilities and Equity                        | $          | 3,166 |          | $  | 1,377 | 
|                                                    |            |       |          |    |       | 
|                                                    |            |       |          |    |       | 
|                                                    | Foreign    |       | Domestic |    | Total | 
|                                                    |            |       |          |    |       | 
|                                                    | (Millions)
|For the Year Ended December
      31, 2001          |            |       |          |    |       | 
|                                                    |            |       |          |    |       | 
|Condensed Statement of Operations
      Information |            |       |          |    |       | 
|Revenue                                             | $          | 1,099 |          | $  | 473   | 
|Gross Profit                                        | $          | 416   |          | $  | 165   | 
|Minority Interest                                   | $          | (20   | )        | $  |      | 
|Net Income                                          | $          | 180   |          | $  | 91    | 
|As of December 31, 2001                             |            |       |          |    |       | 
|                                                    |            |       |          |    |       | 
|Condensed Balance Sheet Information                 |            |       |          |    |       | 
|Assets:                                             |            |       |          |    |       | 
|Current Assets                                      | $          | 366   |          | $  | 131   | 
|Property, Plant and Equipment                       |            | 1,625 |          |    | 1,406 | 
|Goodwill                                            |            | 863   |          |    | 50    | 
|Other Noncurrent Assets                             |            | 481   |          |    | 23    | 
|                                                    |            |       |          |    |       | 
|Total Assets                                        | $          | 3,335 |          | $  | 1,610 | 
|                                                    |            |       |          |    |       | 
|Liabilities:                                        |            |       |          |    |       | 
|Current Liabilities                                 | $          | 487   |          | $  | 109   | 
|Debt*                                               |            | 802   |          |    | 658   | 
|Other Noncurrent Liabilities                        |            | 245   |          |    | 212   | 
|Minority Interest                                   |            | 25    |          |    |      | 
|                                                    |            |       |          |    |       | 
|Total Liabilities                                   |            | 1,559 |          |    | 979   | 
|Equity                                              |            | 1,776 |          |    | 631   | 
|                                                    |            |       |          |    |       | 
|Total Liabilities and Equity                        | $          | 3,335 |          | $  | 1,610 | 
|                                                    |            |       |          |    |       | 

141

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

|                                                    | Foreign    |       | Domestic |   | Total | 
|--------------------------------------------------- | ---------- | ----- | -------- | - | ----- | 
|                                                    |            |       |          |   |       | 
|                                                    | (Millions)
|For the Year Ended
      December 31, 2000          |            |       |          |   |       | 
|                                                    |            |       |          |   |       | 
|Condensed
      Statement of Operations Information |            |       |          |   |       | 
|Revenue                                             | $          | 1,334 |          | $ | 452   | 
|Gross Profit                                        | $          | 532   |          | $ | 256   | 
|Minority Interest                                   | $          | (24   | )        | $ |      | 
|Net Income                                          | $          | 190   |          | $ | 162   | 

* Debt is non-recourse to PSEG, Energy Holdings
  and Global

Other Investments

Resources also has
  limited partnership investments in two leveraged buyout funds, a collateralized
  bond obligation structure, a clean air facility and solar electric generating
  systems. Resources total investment in limited partnerships was $118 million,
  and $163 million as of December 31, 2002 and 2001, respectively.

Included in the limited
  partnership amounts above are interests in two leveraged buyout funds that hold
  publicly traded securities, which are managed by KKR Associates L.P., (KKR).
  The book value of the investment in the leveraged buyout funds was $93 million
  and $130 million as of December 31, 2002 and December 31, 2001, respectively.
  The largest single investment in the funds held indirectly by Resources is the
  investment in approximately 16,847,000 shares of common stock of Borden, Inc.,
  having a book value of $48 million and $81 million as of December 31, 2002 and
  2001, respectively.

Resources applies fair
  value accounting to investments in the funds where publicly traded market prices
  are available as described in Note 1. Organization and Summary of Significant
  Accounting Policies. Approximately $24 million and $34 million represent the
  fair value of Resources share of the publicly traded securities in the
  funds as of December 31, 2002 and 2001, respectively. For a discussion
  of other than temporary impairments of non-publicly traded equity securities
  within certain leveraged buyout funds at Resources, see Note 12. Risk Management.

During January and
  February 2001, KKR sold its interest in FleetBoston Financial Corporation. Resources
  received cash proceeds of $35 million and recorded a $4 million pre-tax gain
  as a result of this transaction. In August 2001, KKR sold its interest in Gillette
  Corporation. Resources received cash proceeds of $30 million from the sale,
  which had a book value of $31 million.

142

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

Note 9. Purchase Business Combinations/Asset
  Acquisitions

Power

On December 6, 2002,
  Power purchased Wisvest Connecticut LLC, which owns the Bridgeport Harbor Station
  (BHS), the New Haven Harbor Station (NHHS) and the related assets and liabilities,
  from Wisvest Corporation (Wisvest), a subsidiary of Wisconsin Energy Corporation.
  The name of Wisvest Connecticut LLC was subsequently changed to PSEG Power Connecticut
  LLC.

The aggregate purchase
  price was approximately $272 million, which consisted of approximately $269
  million of cash paid to Wisvest and approximately $3 million of direct acquisition
  costs necessary to conduct the transaction, which were paid to third parties.

Power has not finalized
  the allocation of the purchase price as of December 31, 2002. As shown in the
  table below, an estimation of this allocation was prepared and recorded as of
  December 6, 2002. Power Connecticuts results of operations were reflected
  in the Consolidated Statements of Operations from December 6, 2002 through December
  31, 2002.

|                              | As of December
      6, 2002
|----------------------------- | ----------------------------
|                              |                             
|                              | (Millions)                  
|Current Assets                |                             
|Property, Plant and Equipment |                             
|Intangible Assets             |                             
|                              |                             
|Total Assets Acquired         |                             
|                              |                             
|Current Liabilities           |                             
|Noncurrent Liabilities        |                             
|                              |                             
|Total Liabilities Assumed     |                             
|                              |                             
|Net Assets Acquired           |                             
|                              |                             

Approximately $42
  million of the intangible assets consisted of SO2 allowances, which can be sold on the open
  market or used to offset plant emissions. These allowances
  have an indefinite life.

Energy Holdings

In June 2002, Global
  completed a 35% acquisition of the 590MW (electric) and 618 MW (thermal) coal-fired
  Skawina CHP Plant (Skawina), located in Poland, and purchased an additional approximate
  15%, increasing its ownership to approximately 50%. The purchase price of this
  ownership interest was $31 million and was allocated $18 million to Current
  Assets, $51 million to Property, Plant and Equipment, $14 million to Current
  Liabilities, $9 million to Noncurrent Liabilities and $15 million to minority interest.

During the fourth
  quarter of 2002, Global increased its interest in GWF Energy LLC (GWF Energy),
  which includes three new gas-fired peaking plants located in California, to
  76%. The partnership agreement stipulates that the condition for control is
  indicated at 75% or greater ownership interest of the voting stock. Globals
  investment in GWF Energy was recorded in accordance with the equity method of accounting as
  of September 30, 2002. Globals investment in GWF Energy is recorded as
  a consolidated entity as of December 31, 2002 and for the three months ended
  December 31, 2002. The partner in this investment, Harbinger GWF LLC, has the
  right to buy back from Global up to one-half of the reduction of its equity
  ownership in GWF Energy from the 50% ownership level. This right terminates
  at the earlier of project financing or September 30, 2003.

143

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

Note 10. Schedule of Consolidated Capital Stock
  and Other Securities

|                                                                         | Outstanding
      Shares
      At December 31,
      2002 |  | Current
      Redemption
      Price
      Per Share |  | December
      31,
      2002 |       | December
      31,
      2001
|------------------------------------------------------------------------ | --------------------------------------------------------- |  | ---------------------------------------------------- |  | ----------------------------- | ----- | -----------------------------
|                                                                         |                                                           |  |                                                      |  |                               |       |                              
|                                                                         |                                                           |  |                                                      |  | (Millions)                   
|PSEG Common Stock
      (no par) (A)                                     |                                                           |  |                                                      |  |                               |       |                              
|Authorized 500,000,000
      shares; issued and outstanding (at          |                                                           |  |                                                      |  |                               |       |                              
|December 31,
      2001, 205,839,018 shares)                             | 225,267,347                                               |  |                                                      |  | $                             | 3,075 |                              
|                                                                         |                                                           |  |                                                      |  |                               |       |                              
|                                                                         |                                                           |  |                                                      |  |                               |       |                              
|PSEG Preferred
      Securities (B)                                      |                                                           |  |                                                      |  |                               |       |                              
|PSEG Quarterly
      Guaranteed Preferred Beneficial Interest in         |                                                           |  |                                                      |  |                               |       |                              
|PSEGs
      Subordinated Debentures (D) (F)                             |                                                           |  |                                                      |  |                               |       |                              
|7.44%                                                                    | 9,000,000                                                 |  |                                                     |  | $                             | 225   |                              
|Floating
      Rate (LIBOR + 1.22%)                                      | 150,000                                                   |  |                                                     |  |                               | 150   |                              
|7.25%                                                                    | 6,000,000                                                 |  |                                                     |  |                               | 150   |                              
|8.75%
      (F)                                                          | 7,200,000                                                 |  |                                                     |  |                               | 180   |                              
|                                                                         |                                                           |  |                                                      |  |                               |       |                              
|Total Quarterly
      Guaranteed Preferred Beneficial Interest in        |                                                           |  |                                                      |  |                               |       |                              
|PSEGs
      Subordinated Debentures                                     |                                                           |  |                                                      |  | $                             | 705   |                              
|                                                                         |                                                           |  |                                                      |  |                               |       |                              
|                                                                         |                                                           |  |                                                      |  |                               |       |                              
|PSEG Participating
      Units                                           |                                                           |  |                                                      |  |                               |       |                              
|10.25%
      (G)                                                         | 9,200,000                                                 |  |                                                     |  | $                             | 460   |                              
|                                                                         |                                                           |  |                                                      |  |                               |       |                              
|PSE&G Preferred Securities                                               |                                                           |  |                                                      |  |                               |       |                              
|PSE&G Cumulative Preferred
      Stock (C) without Mandatory             |                                                           |  |                                                      |  |                               |       |                              
|Redemption (D)
      $100 par value series                               |                                                           |  |                                                      |  |                               |       |                              
|4.08%                                                                    | 146,221                                                   |  | 103.00                                               |  | $                             | 15    |                              
|4.18%                                                                    | 116,958                                                   |  | 103.00                                               |  |                               | 12    |                              
|4.30%                                                                    | 149,478                                                   |  | 102.75                                               |  |                               | 15    |                              
|5.05%                                                                    | 104,002                                                   |  | 103.00                                               |  |                               | 10    |                              
|5.28%                                                                    | 117,864                                                   |  | 103.00                                               |  |                               | 12    |                              
|6.92%                                                                    | 160,711                                                   |  |                                                     |  |                               | 16    |                              
|                                                                         |                                                           |  |                                                      |  |                               |       |                              
|Total
      Preferred Stock without Mandatory Redemption                 |                                                           |  |                                                      |  | $                             | 80    |                              
|                                                                         |                                                           |  |                                                      |  |                               |       |                              
|                                                                         |                                                           |  |                                                      |  |                               |       |                              
|PSE&G 8.00%
      Monthly Guaranteed Preferred Beneficial                |                                                           |  |                                                      |  |                               |       |                              
|Interest
      in Subordinated Debentures (D)(E)                         | 2,400,000                                                 |  | 25.00                                                |  | $                             | 60    |                              
|                                                                         |                                                           |  |                                                      |  |                               |       |                              
|PSE&G 8.125% Quarterly
      Guaranteed Preferred Beneficial Interest in |                                                           |  |                                                      |  |                               |       |                              
|PSE&Gs
      Subordinated Debentures (D)(E)                             | 3,800,000                                                 |  |                                                     |  | $                             | 95    |                              
|                                                                         |                                                           |  |                                                      |  |                               |       |                              

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(A) | In 1999, PSEGs Board of Directors
      authorized the repurchase of up to 30 million shares of its common stock
      in the open market. As of December 31, 2001, PSEG repurchased approximately
      26.5 million shares of common stock at a cost of approximately $997 million.
      No shares were repurchased in 2002. The repurchased shares have been held
      as treasury stock or used for other corporate purposes.                                                                                                                                                                                                                                                                               
|    | In November 2002, PSEG issued 17.25
      million shares of common stock for approximately $458 million, with net
      proceeds of $443 million. In addition, in 2002, PSEG began issuing new shares
      under the Dividend Reinvestment and Stock Purchase Plan (DRASPP) and the
      Employee Stock Purchase Plan (ESPP), rather than purchasing them on the
      open market. For the year ended December 31, 2002, PSEG issued approximately
      2.2 million shares for approximately $78 million under these plans. Total
      authorized and unissued shares of common stock available for issuance through
      PSEGs DRASPP, ESPP and various employee benefit plans amounted to
      5,663,081.
|(B) | PSEG has authorized a class of
      50,000,000 shares of Preferred Stock without par value, none of which is
      outstanding.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|144

---



|NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
|------------------------------------------------------------
|(C)                                                         
|                                                            
|(D)                                                         
|                                                            
|                                                            
|                                                            
|(E)                                                         
|(F)                                                         
|                                                            
|(G)                                                         
|145                                                         

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued



| | will issue between 11,429,139 and 13,714,967
      shares of its common stock. The net proceeds from the sale of the Participating
      Units was $446.2 million. In connection with the issuance of the Participating Units,
      PSEG recorded a $54 million reduction to equity associated with the stock purchase
      contracts.                                                                                                       
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | PSEG applies SFAS No. 128, Earnings Per
      Share, specifically the treasury stock method, when accounting for
      the forward purchase contract associated with these participating units.
      If PSEGs common stock price were to exceed $40.25 per share, shares
      would be added to the diluted earnings per share calculation. For additional
      information, see Note 18. Stock Options and Employee Stock Purchase Plan.

Fair Value of Preferred Securities

The estimated fair
  values were determined using the market quotations or values of instruments
  with similar terms, credit ratings, remaining maturities and redemptions as
  of December 31, 2002 and 2001, respectively.

|                                                            | As
      ofDecember 31, 2002 |    | As
      ofDecember 31, 2001
|----------------------------------------------------------- | ---------------------------- | -- | ----------------------------
|                                                            |                              |    |                             
|                                                            | Carrying
      Amount        |    | Fair
      Value            
|                                                            |                              |    |                             
|                                                            | (Millions)                  
|                                                            |                              |    |                             
|PSE&G Cumulative Preferred
      Stock                      | $                            | 80 |                             
|Monthly Guaranteed Preferred Beneficial
      Interest in   |                              |    |                             
|PSE&Gs
      Subordinated Debentures                       |                              | 60 |                             
|Quarterly Guaranteed Preferred
      Beneficial Interest in |                              |    |                             
|PSE&Gs
      Subordinated Debentures                       |                              | 95 |                             
|Quarterly Guaranteed Preferred
      Beneficial Interest in |                              |    |                             
|PSEGs
      Subordinated Debentures                        | 705                          |    |                             
|Participating Units in                                      |                              |    |                             
|PSEGs
      Subordinated Debentures                        | 460                          |    |                             

146

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

Note 11. Schedule of Consolidated Debt

Long-Term Debt

|                                             |           |  | December 31,
|-------------------------------------------- | --------- |  | ------------
|                                             |           |  |             
|                                             | Maturity  |  | 2002        
|                                             |           |  |             
|PSEG                                         |           |  | (Millions)  
|                                             |           |  |             
|Senior Note-6.89% (A)                        | 2009      |  | $           
|Floating Rate Notes-LIBOR plus
      0.875%  | 2002      |  |             
|Other                                        |           |  |             
|                                             |           |  |             
|Principal Amount Outstanding                 |           |  |             
|Amounts Due Within One Year (B)              |           |  |             
|                                             |           |  |             
|Total
      Long-Term Debt of PSEG (Parent)  |           |  |             
|                                             |           |  |             
|PSE&G                                        |           |  |             
|                                             |           |  |             
|First and Refunding Mortgage Bonds:          |           |  |             
|6.125%                                       | 2002      |  | $           
|6.875%-8.875%                                | 2003      |  |             
|6.50%                                        | 2004      |  |             
|9.125%                                       | 2005      |  |             
|6.75%                                        | 2006      |  |             
|6.25%                                        | 2007      |  |             
|6.75%7.375%                                 | 2013-2017 |  |             
|6.45%9.25%                                  | 2018-2022 |  |             
|5.20%7.50%                                  | 2023-2027 |  |             
|5.45%6.55%                                  | 2028-2032 |  |             
|5.00%8.00%                                  | 2033-2037 |  |             
|Medium-Term Notes:                           |           |  |             
|5.125% (C)                                   | 2012      |  |             
|7.19%                                        | 2002      |  |             
|8.10%8.16%                                  | 2008-2012 |  |             
|7.04%                                        | 2018-2022 |  |             
|7.15%7.18%                                  | 2023-2027 |  |             
|                                             |           |  |             
|Principal Amount Outstanding                 |           |  |             
|Amounts Due Within One Year (B)              |           |  |             
|Net Unamortized Discount                     |           |  |             
|                                             |           |  |             
|Total
      Long-Term Debt of PSE&G (Parent) |           |  | $           
|                                             |           |  |             

147

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

|                                                      |          |  | December 31,
|----------------------------------------------------- | -------- |  | ------------
|                                                      |          |  |             
|                                                      | Maturity |  | 2002        
|                                                      |          |  |             
|Transition Funding (PSE&G)                            |          |  | (Millions)  
|                                                      |          |  |             
|Securitization Bonds:                                 |          |  |             
|5.46%                                                 | 2004     |  | $           
|5.74%                                                 | 2007     |  |             
|5.98%                                                 | 2008     |  |             
|LIBOR plus 0.30%                                      | 2011     |  |             
|6.45%                                                 | 2013     |  |             
|6.61%                                                 | 2015     |  |             
|6.75%                                                 | 2016     |  |             
|6.89%                                                 | 2017     |  |             
|                                                      |          |  |             
|Principal Amount Outstanding                          |          |  |             
|Amounts Due Within One Year (B)                       |          |  |             
|                                                      |          |  |             
|Total
      Securitization Debt of Transition Funding |          |  | $           
|                                                      |          |  |             
|Total
      PSE&G                                     |          |  | $           
|                                                      |          |  |             
|                                                      |          |  |             
|Power                                                 |          |  |             
|                                                      |          |  |             
|Senior Notes:                                         |          |  |             
|6.88%                                                 | 2006     |  | $           
|6.95% (D)                                             | 2012     |  |             
|7.75%                                                 | 2011     |  |             
|8.63%                                                 | 2031     |  |             
|                                                      |          |  |             
|Total Senior Notes                                    |          |  |             
|Pollution Control Notes:                              |          |  |             
|5.00%                                                 | 2012     |  | $           
|5.50%                                                 | 2020     |  |             
|5.85%                                                 | 2027     |  |             
|5.75%                                                 | 2031     |  |             
|                                                      |          |  |             
|Total Pollution Control Notes                         |          |  | $           
|Non-recourse debt :                                   |          |  |             
|Variable (3.00% to 5.00%)                             | 2005     |  | $           
|                                                      |          |  |             
|Principal Amount Outstanding                          |          |  |             
|Amounts Due Within One Year (B)                       |          |  |             
|Net Unamortized Discount                              |          |  |             
|                                                      |          |  |             
|Total
      Long-Term Debt of Power                   |          |  | $           
|                                                      |          |  |             

148

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

|                                                       |           |        | December 31,
|------------------------------------------------------ | --------- | ------ | ------------
|                                                       |           |        |             
|                                                       | Maturity  |        | 2002        
|                                                       |           |        |             
|Energy Holdings                                        |           |        | (Millions)  
|                                                       |           |        |             
|Senior Notes:                                          |           |        |             
|9.125% (E)                                             | 2004      |        | $           
|8.625% (E)(F)                                          | 2008      |        |             
|10.00%                                                 | 2009      |        |             
|8.50%(E)                                               | 2011      |        |             
|                                                       |           |        |             
|Principal Amount Outstanding                           |           |        | 1,730       
|Net Unamortized Discount                               |           |        |             
|                                                       |           |        |             
|Total Long-Term
      Debt of Energy Holdings (Parent) |           |        | $           
|                                                       |           |        |             
|                                                       |           |        |             
|PSEG Capital (Energy Holdings)                         |           |        |             
|                                                       |           |        |             
|Medium-Term Notes:                                     |           |        |             
|3.12%  7.72%                                          | 2002      |        | $           
|6.25%                                                  | 2003      |        |             
|                                                       |           |        |             
|Principal Amount Outstanding                           |           |        |             
|Amounts Due Within One Year (B)                        |           |        | (252        
|                                                       |           |        |             
|Total
      Long-Term Debt of PSEG Capital             |           |        | $           
|                                                       |           |        |             
|                                                       |           |        |             
|Global (Energy Holdings)                               |           |        |             
|                                                       |           |        |             
|Non-recourse Debt:                                     |           |        |             
|5.47%  10.385%                                        | 2002      |        | $           
|5.19% 
      6.96%                                    | 2003      |        |             
|5.19% 
      13.22%                                   | 2004-2019 |        | 832         
|14.00% 
      Minority Shareholder Loan               | 2027      |        |             
|                                                       |           |        |             
|Principal Amount Outstanding                           |           |        |             
|Amounts Due Within One Year (B)                        |           |        |             
|                                                       |           |        |             
|Total
      Long-Term Debt of Global                   |           |        | $           
|                                                       |           |        |             
|                                                       |           |        |             
|Resources (Energy Holdings)                            |           |        |             
|                                                       |           |        |             
|8.60%  Bank Loan                                      | 2001-2020 | $      | 22          
|                                                       |           |        |             
|Principal Amount Outstanding                           |           |        |             
|Amounts Due Within One Year (B)                        |           |        |             
|                                                       |           |        |             
|Total
      Long-Term Debt of Resources                |           |        |             
|                                                       |           |        |             
|Total
      Long-Term Debt of Energy Holdings          |           |        | $           
|                                                       |           |        |             
|Total PSEG Consolidated
      Long-Term Debt           |           | 10,991 |             
|                                                       |           |        |             

149

---



|NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS  Continued
|--------------------------------------------------------------
|(A)                                                           
|(B)                                                           

|     |  |            |   | PSE&G |   |                   |  | Energy Holdings |     |               
|---- |  | ---------- | - | ----- | - | ----------------- |  | --------------- | --- | --------------
|     |  |            |   |       |   |                   |  |                 |     |               
|Year |  | PSEG       |   | PSE&G |   | TransitionFunding |  | PSEGPower       |     | EnergyHoldings
|     |  |            |   |       |   |                   |  |                 |     |               
|     |  | (Millions)
|2003 |  | $          |  |       | $ | 300               |  | $               |    |               
|2004 |  |            |  |       |   | 286               |  |                 |    |               
|2005 |  |            |  |       |   | 125               |  |                 |    |               
|2006 |  |            |  |       |   | 147               |  |                 |    |               
|2007 |  |            |  |       |   | 113               |  |                 | 300 |               
|     |  |            |   |       |   |                   |  |                 |     |               
|     |  | $          |  |       | $ | 971               |  | $               | 300 |               
|     |  |            |   |       |   |                   |  |                 |     |               

|                                                                                                                                                                                                                                                                                                  |     |                                                                                                                                                                                                                                                 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                  | (C) | In September 2002, PSE&G issued
      $300 million of 5.125% Medium-Term Notes due 2012, the proceeds of which
      were used to repay $290 million of 7.19% Medium-Term Notes that matured.                                                   
|                                                                                                                                                                                                                                                                                                  | (D) | In June 2002, Power issued $600
      million of 6.95% Senior Unsecured Notes due 2012. The proceeds were used
      to repay short-term funding from PSEG, including amounts related to the
      Gas Contract Transfer from PSE&G in May 2002.
|                                                                                                                                                                                                                                                                                                  | (E) | In 2002, Energy Holdings repurchased
      a combined total of $54 million of Senior Notes.                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                  | (F) | In 2002, Energy Holdings, in a
      private placement, sold $135 million of 8.625% Senior Notes due in 2008
      and subsequently completed an exchange offer for these Senior Notes.                                                         
|Short-Term Liquidity                                                                                                                                                                                                                                                                             
|PSEG                                                                                                                                                                                                                                                                                             
|In
      order to support its short-term financing requirements, as well as those
      of Power and Services, PSEG has revolving credit facilities that are used
      both as a source of short-term funding and to provide backup liquidity for
      its $1 billion commercial paper program.
|PSE&G                                                                                                                                                                                                                                                                                            
|PSE&G
      maintains credit facilities to backup its $400 million commercial paper
      program.                                                                                                                                                                                               
|Power                                                                                                                                                                                                                                                                                            
|Power
      has a $50 million credit facility, but primarily relies on PSEG for its short-term
      financing needs.                                                                                                                                                                            
|Energy
      Holdings                                                                                                                                                                                                                                                                            
|Energy
      Holdings has credit facilities that are used both as a source of short-term
      funding and to issue letters of credit.                                                                                                                                                           
|150                                                                                                                                                                                                                                                                                              

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

PSEG, PSE&G, Power and Energy Holdings

As of December 31,
  2002, PSEG had a total of approximately $2.5 billion of committed credit facilities,
  with approximately $600 million drawn against such facilities resulting in $1.9
  billion in available liquidity. In addition to this amount, PSEG had access
  to certain uncommitted credit facilities. The following table summarizes the
  various revolving credit facilities of PSEG and its subsidiaries and the liquidity
  available as of December 31, 2002.



|Company                 | ExpirationDate      |  | TotalFacility |     | PrimaryPurpose |  | Usage at12/31/02          |  | AvailableLiquidity at12/31/02 |    
|----------------------- | ------------------- |  | ------------- | --- | -------------- |  | ------------------------- |  | ----------------------------- | ---
|                        |                     |  |               |     |                |  |                           |  |                               |    
|                        |                     |  |               |     | (Millions)     |  |                           |  |                               |    
|PSEG:                   |                     |  |               |     |                |  |                           |  |                               |    
|                        |                     |  |               |     |                |  |                           |  |                               |    
|364-day Credit Facility | March 2003          |  | $             | 620 |                |  | CP Support                |  | $                             | 300
|364-day Bilateral       |                     |  |               |     |                |  |                           |  |                               |    
|Facility                | March 2003          |  | $             | 75  |                |  | CP Support                |  | $                             |   
|5-year Credit Facility  | March 2005          |  | $             | 280 |                |  | CP Support                |  | $                             |   
|3-year Credit Facility  | December
      2005 |  | $             | 350 |                |  | CP Support
      /Funding |  | $                             |   
|Uncommitted Bilateral   |                     |  |               |     |                |  |                           |  |                               |    
|Agreement               | N/A                 |  |               | *   |                |  | Funding                   |  | $                             | 101
|                        |                     |  |               |     |                |  |                           |  |                               |    
|PSE&G:                  |                     |  |               |     |                |  |                           |  |                               |    
|                        |                     |  |               |     |                |  |                           |  |                               |    
|364-day Credit Facility | June 2003           |  | $             | 200 |                |  | CP Support                |  | $                             | 183
|3-year Credit Facility  | June 2005           |  | $             | 200 |                |  | CP Support                |  | $                             |   
|Uncommitted Bilateral   |                     |  |               |     |                |  |                           |  |                               |    
|Agreement               | N/A                 |  |               | *   |                |  | Funding                   |  | $                             | 41 
|                        |                     |  |               |     |                |  |                           |  |                               |    
|Energy Holdings:        |                     |  |               |     |                |  |                           |  |                               |    
|                        |                     |  |               |     |                |  |                           |  |                               |    
|364-day Credit Facility | May 2003            |  | $             | 200 |                |  | Funding                   |  | $                             |   
|5-year Credit Facility  | May 2004            |  | $             | 495 |                |  | Funding                   |  | $                             | 74 
|Uncommitted Bilateral   |                     |  |               |     |                |  |                           |  |                               |    
|Agreement               | N/A                 |  |               | *   |                |  | Funding                   |  | $                             |   
|                        |                     |  |               |     |                |  |                           |  |                               |    
|Power:                  |                     |  |               |     |                |  |                           |  |                               |    
|                        |                     |  |               |     |                |  |                           |  |                               |    
|3-year Credit Facility  | August 2005         |  | $             | 50  |                |  | Funding                   |  | $                             | 6  

* Availability varies based on market conditions.

As of December 31,
  2002, PSEGs consolidated total short-term debt outstanding was $762 million,
  including $300 million of commercial paper and $101 million in loans outstanding
  under PSEGs uncommitted bilateral agreement, $183 million in commercial
  paper and $41 million in loans outstanding under PSE&Gs uncommitted
  bilateral agreement and $137 million of non-recourse short-term financing at
  Global with various rates, primarily consisting of amounts related to its investment in Electroandes.

In addition, as shown
  in the above table, there was $74 million and $6 million outstanding in letters
  of credit under the credit facilities of Energy Holdings and Power, respectively.

151

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

Fair Value of Debt

The estimated fair
  values were determined using the market quotations or values of instruments
  with similar terms, credit ratings, remaining maturities and redemptions as of
  December 31, 2002 and December 31, 2001, respectively.

|                                 | December
      31, 2002 |       | December
      31, 2001
|-------------------------------- | ----------------------- | ----- | -----------------------
|                                 |                         |       |                        
|                                 | CarryingAmount          |       | FairValue              
|                                 |                         |       |                        
|                                 | (Millions)              |      
|Long-Term Debt:                  |                         |       |                        
|PSEG                             | $                       | 248   |                        
|Energy Holdings                  | $                       | 2,898 |                        
|PSE&G                            | $                       | 2,927 |                        
|Transition Funding
      (PSE&G) | $                       | 2,351 |                        
|Power                            | $                       | 3,316 |                        

Because their maturities
  are less than one year, fair values approximate carrying amounts for cash and
  cash equivalents, short-term debt and accounts payable.

Note 12. Risk Management

PSEG, PSE&G, Power
  and Energy Holdings

The operations of
  PSEG, PSE&G, Power, and Energy Holdings are exposed to market risks from
  changes in commodity prices, foreign currency exchange rates, interest rates
  and equity prices that could affect the results of operations and financial
  conditions. PSEG manages its exposure to these market risks through its regular
  operating and financing activities and, when deemed appropriate, hedges these
  risks through the use of derivative financial instruments. PSEG, PSE&G,
  Power and Energy Holdings use the term hedge to mean a strategy designed to
  manage risks of volatility in prices or rate movements on certain assets, liabilities
  or anticipated transactions and by creating a relationship in which gains or
  losses on derivative instruments are expected to counterbalance the losses or
  gains on the assets, liabilities or anticipated transactions exposed to such
  market risks. Each of PSEG, PSE&G, Power and Energy Holdings use derivative
  instruments as risk management tools consistent with its respective business
  plans and prudent business practices.

Energy Trading Contracts

Power

Power maintains
  a strategy of entering into trading positions to optimize the value of its portfolio
  of generation assets, gas supply contracts and its electric and gas supply obligations.
  Power does not engage in the practice of simultaneous trading for the purpose
  of increasing trading volume or revenue. Power engages in physical and financial
  transactions in the electricity wholesale markets and executes an overall risk
  management strategy to

152

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

mitigate the effects of adverse movements in the
  fuel and electricity markets. Power actively trades energy and energy-related
  products, including electricity, natural gas, electric capacity, fixed transmission
  rights, coal and emission allowances, in the spot, forward and futures markets,
  primarily in Pennsylvania-New Jersey-Maryland Power Pool (PJM), and electricity
  in the Super Region, which extends from Maine to the Carolinas and the Atlantic
  Coast to Indiana and natural gas in the producing region, the Henry Hub Basin,
  as well as the Super Region. These contracts also involve financial transactions
  including swaps, options and futures.

For the year ended
  December 31, 2002, Power marked to market its energy trading contracts in accordance
  with EITF 02-3 and SFAS 133, see Note 1. Organization
  and Summary of Significant Accounting Policies. As of December 31, 2002 and
  2001, substantially all of these contracts had terms of two years or less. Wherever
  possible, market values for these contracts were obtained from quoted market
  sources. For contracts where no quoted market exists, modeling techniques were
  employed using assumptions reflective of current market rates, yield curves
  and forward prices as applicable. Only one such contract which expires in 2003,
  is marked to a model and has an effect on earnings. The effects on earnings
  of the contract that was marked to a model was immaterial.

In prior periods,
  Power disclosed gains and losses related to certain activities within its trading
  segment. Commencing with its change in segment reporting discussed in Note 19.
  Financial Information by Business Segments, Power has excluded certain transactions,
  such as firm transmission rights and Basic Gas Supply Service (BGSS) results,
  from this table and solely report gains and losses on transactions accounted
  for pursuant to EITF 02-3. There was no change in margins, net income or cash
  flows as a result of this change in presentation. Prior periods have been reclassified
  to conform to this presentation.

For the years ended
  December 31, 2002, 2001 and 2000, Power recorded net margins of $47 million,
  $130 million and $73 million, respectively, as shown below:

|                                      | For the Year Ended
      December 31,
|------------------------------------- | -------------------------------------
|                                      |                                      
|                                      | 2002                                 
|                                      |                                      
|                                      | (Millions)                           
|                                      |                                      
|Realized Gains                        | $                                    
|Unrealized Gains (Losses)             |                                      
|                                      |                                      
|Gross Margin                          |                                      
|Broker Fees and Other Trading-Related |                                      
|Expense                               |                                      
|                                      |                                      
|Net Margin                            | $                                    
|                                      |                                      

As of December 31,
  2002 and 2001, the cumulative unrealized gains related to these energy trading
  contracts were approximately $24 million and $7 million, respectively. The contracts
  related to the majority of these gains had terms of less than two years.

Power routinely enters
  into exchange-traded futures and options transactions for electricity and natural
  gas as part of its operations. Generally, exchange-traded futures contracts
  require a deposit of margin cash, the amount of which is subject to change based
  on market movement and in accordance with exchange rules. The amount of Powers
  margin deposits as of December 31, 2002 was approximately $9 million.

Derivative Instruments and Hedging Activities

Commodity
  Contracts

Power

The availability
  and price of energy commodities are subject to fluctuations from factors such
  as weather, environmental policies, changes in supply and demand, state and
  federal regulatory policies and other events.

In order to hedge a
  portion of Powers forecasted energy purchases to meet its electric supply
  requirements, Power enters into forward purchase contracts, futures, options
  and swaps. These contracts, in conjunction with

153

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

owned electric generation capacity, are designed
  to cover estimated wholesale electric customer commitments. Power has also forecasted
  the energy delivery from its generating stations based on the forward price
  curve movement of energy and, as a result, entered into swaps, options and futures
  transactions to hedge the price of gas to meet its gas purchases requirements
  for generation. These transactions qualified as cash flow hedges under SFAS
  133. As of December 31, 2002 the fair value of these hedges was $5 million.
  Unrealized gains and losses associated with these hedges of $3 million, net
  of tax, was charged to OCI for the year ended December 31, 2002. There was no
  ineffectiveness associated with these hedges. These hedges will mature through
  2003.

Also, prior to May
  2002, PSE&G had entered into gas forwards, futures, options and swaps to
  hedge its forecasted requirements for natural gas, which was required under
  an agreement with the BPU in 2001. Effective with the transfer of PSE&Gs
  gas contracts to Power on May 1, 2002, Power acquired all of the derivatives
  entered into by PSE&G. The use of derivatives to hedge the forecasted purchase
  of natural gas qualifed as a cash flow hedge. Gains or losses from these derivatives
  is recovered from customers as part of the monthly billing to PSE&G. Derivatives
  relating to commercial and industrial customers is accounted for in accordance
  with SFAS 133 where appropriate. Gains or losses on these derivatives are deferred
  and reported as a component of OCI. There was no ineffectiveness or excluded
  ineffectiveness realized on these hedges. As of December 31, 2002 Power had
  gas forwards, futures, options and swaps to hedge forecasted requirements with
  a fair value of approximately $1.4 million. The maximum term of these contracts
  is approximately one year. As of December 31, 2001, PSE&G had gas forwards,
  futures, options and swaps to hedge forecasted requirements with a fair value
  of approximately $(137) million.

Power also enters
  into certain other contracts which are derivatives, but do not qualify for hedge
  accounting under SFAS 133, which was adopted effective January 1, 2001. Most
  of these contracts are option contracts on gas purchases for generation requirements.
  Therefore, the changes in fair market value of these derivative contracts are
  recorded in Energy Costs on the Consolidated Statement of Operations at the
  end of each reporting period. For the years ended December 31, 2002 and 2001,
  Power recorded gains on these contracts of $20 million and $12 million, respectively,
  as shown below:

|                          | For the Year
      Ended December 31,
|------------------------- | -------------------------------------
|                          |                                      
|                          | 2002                                 
|                          |                                      
|                          | (Millions)                           
|Realized Gains (Losses)   |                                      
|Unrealized Gains (Losses) |                                      
|                          |                                      
|Gross Margin              |                                      
|                          |                                      

As of December 31,
  2002 and 2001, the cumulative unrealized gains and (losses) related to these
  contracts were approximately $20 million and $(7) million, respectively. The
  contracts related to the majority of these gains and losses had terms of less
  than two years.

As of December 31,
  2002 and 2001, substantially all of these contracts had terms of two years or
  less and were valued through market exchanges and, where necessary, broker quotes.

Interest Rates

PSEG, PSE&G,
  Power and Energy Holdings

PSEG, PSE&G,
  Power and Energy Holdings are subject to the risk of fluctuating interest rates
  in the normal course of business. PSEGs policy is to manage interest rate
  risk through the use of fixed rate debt, floating rate debt and interest rate
  derivatives.

The fair value of
  interest rate swaps, designated and effective as cash flow hedges, are initially
  recorded in OCI. Reclassification of unrealized gains or losses on cash flow
  hedges of variable-rate debt instruments from OCI into earnings occurs as interest
  payments are accrued on the debt instrument and generally offsets the change
  in the interest accrued on the underlying variable rate debt. In order to test
  the effectiveness of such swaps, a hypothetical

154

---

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

swap is used to mirror all the critical terms of
  the underlying debt and utilize regression analysis to assess the effectiveness
  of the actual swap at inception and on an ongoing basis. The assessment is done
  periodically to ensure the swaps continue to be effective. PSEG, PSE&G,
  Power and Energy Holdings determine the fair value of interest rate swaps through
  counterparty valuations, internal valuations and broker quotes. There have been
  no material changes in the techniques or models used in the valuation of interest
  rate swaps during the periods presented. There is minimal impact of counterparty
  credit risk on the fair value of the hedges since each of PSEG, PSE&G, Power
  and Energy Holdings policies require that its respective counterparties
  have investment grade credit ratings.

Ineffectiveness may
  occur if the actual draw down of the debt and the notional amount of the swap
  during the construction phase are different. The amount of ineffectiveness,
  if any, is recorded in earnings at the end of the reporting period. The impact
  of ineffectiveness on net income should be minimal because the interest rate
  swaps and the underlying debt are indexed to the same benchmark interest rate.
  Therefore, interest rate fluctuations should be offset.

The table below displays
  fair value, ineffectiveness and OCI information relating to PSEG, PSE&G,
  Power and Energy Holdings interest rate swaps as of December 31, 2002 and
  2001:

|                |                         |      |                 |   |           |   |           |  |            |  | OCI     |     |          | 
|--------------- | ----------------------- | ---- | --------------- | - | --------- | - | --------- |  | ---------- |  | ------- | --- | -------- | 
|                |                         |      |                 |   |           |   |           |  | OCI        |  | Losses  |     | Maturity | 
|                | Fair Market
      Value |      | Ineffectiveness |   | Losses    |   | to be     |  | of Longest | 
|                |                         |      |                 |   | Reclassed |   | Reclassed |  | Cash Flow  | 
|                | 2002                    |      | 2001            |   | 2002      |   | 2001      |  | in 2002    |  | in 2003 |     | Hedge    | 
|                |                         |      |                 |  
|                | (Millions)              |      |                 |  
|PSEG            | $                       | (21  | )               | $ | (5        | ) | $        |  | $         |  | $  6    |     | $  6     | 
|PSE&G (A)       |                         | (66  | )               |   | (19       | ) |          |  |           |  |        |     |         | 
|Power           |                         | (9   | )               |   | 2         |   |          |  |           |  | (3      | )   |         | 
|Energy Holdings |                         | (138 | )               |   | (73       | ) |          |  |           |  | 12      |     | 16       | 
|                |                         |      |                 |   |           |   |           |  |            |  |         |     |          | 
|                | $                       | (234 | )               | $ | (95       | ) | $        |  | $         |  |         | $15 |          | 
|                |                         |      |                 |   |           |   |           |  |            |  |         |     |          | 

|    |                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------
|(A) | Amounts at PSE&G relate to an interest rate
      swap at Transition Funding, which is offset by a Regulatory Asset of $66
      million.

Equity Securities

Energy Holdings

During 2002, Resources
  recognized a $38 million (pre-tax) loss from other than temporary impairments
  of non-publicly traded equity securities within certain leveraged buyout funds
  and other investments, which is included in Operating Revenues in the Consolidated
  Statements of Operations. As of December 31, 2002, Resources had investments
  in leveraged buyout funds of approximately $93 million, of which $24 million
  was comprised of public securities with available market prices and $69 million
  was comprised of non-publicly traded securities. Comparably, as of December
  31, 2001, Resources had investments in leveraged buyout funds of approximately
  $130 million, of which $34 million was comprised of public securities with available
  market prices and $96 million was comprised of non-publicly traded securities.

Foreign Currencies

Energy Holdings

As of December 31,
  2002, net foreign currency devaluations have reduced the reported amount of
  Energy Holdings total Members Equity by $307 million, of
  which $202 million and $103 million were caused by

155

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NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

the devaluation of the Brazilian Real and the Chilean
  Peso, respectively. For the net foreign currency devaluations for the period
  ended December 31, 2002 and 2001, see Energy Holdings Consolidated Statements of Members Equity.

Global holds a 60%
  ownership interest in Carthage Power Company (CPC), a Tunisian generation facility.
  The Power Purchase Agreement (PPA), signed in 1999 and extending through 2022,
  contains an embedded derivative that indexes the fixed Tunisian Dinar payments
  to US Dollar exchange rates. This embedded derivative is the longest standing
  foreign currency hedge that is outstanding. The indexation portion of the PPA
  is considered an embedded derivative and has been recognized and valued separately
  as a derivative instrument. As currencies devalue/revalue in relation to the
  US Dollar, the derivative increases/decreases in value equal to the discounted
  present value of additional units of foreign currency (measured in US Dollars)
  over the life of the PPA. This increased/decreased value is reported on the
  Consolidated Balance Sheets as an asset/liability. To the extent that such indexation is provided
  to hedge foreign currency debt exposure, the offsetting amount is recorded in
  OCI. Amounts will be reclassified from OCI to earnings over the life of the
  debt. To the extent such indexation is provided to hedge an equity return in
  US Dollars, the offsetting amount is recorded in earnings. As of December 31,
  2002 and 2001, Global has recorded a derivative asset of $26 million and $35
  million, respectively. For the year ended December 31, 2002, Global recorded
  a loss of $7 million, after taxes and minority interest, related to this embedded
  derivative, offsetting $8 million in foreign currency gains from the US Dollar
  debt at CPC. This was the only ineffectiveness that was present for the year
  ended December 31, 2002 and was immaterial to earnings. As of December 31,
  2001, Global recorded a loss of $10 million to earnings, after tax and minority
  interest, of which $9 million was recorded as a Cumulative Effect of a Change in Accounting
  Principle.

In May 2002, Energy
  Holdings purchased foreign currency call options in order to hedge its average
  2002 earnings denominated in Brazilian Reais and in Peruvian Nuevo Soles for
  the remainder of 2002. These options are not considered hedges for accounting
  purposes under SFAS 133 and, as a result, changes in their fair value are recorded
  directly to earnings. Global recorded a gain of $1 million related to Brazilian
  and Peruvian option contracts that expired during 2002. In December 2002, Energy
  Holdings purchased foreign currency call options in order to hedge its average
  2003 earnings denominated in Chilean Pesos and Peruvian Nuevo Soles for the
  entire 2003 year. Changes in the fair value of these options are recorded directly
  to earnings. As of December 31, 2002, Energy Holdings had recorded a derivative
  asset of $2 million related to these assets. For the year ended December 31,
  2002, the impact on earnings as a result of changes in fair value of these
  instruments was immaterial.

During 2001, Global
  purchased approximately 100% of a Chilean distribution company, Sociedad Austral
  de Electricidad S.A. (SAESA). As a requirement to obtain certain debt financing
  necessary to fund the acquisition, and in order to hedge against fluctuations
  in the US Dollar to Chilean Peso foreign exchange rates, Global entered into
  two forward contracts with notional values of $75 million each to exchange Chilean
  Pesos for US Dollars. These transactions expired in October 2002 but were renewed
  through January 2003. For accounting purposes, these transactions were considered
  hedges, whereby changes in fair value were recorded to OCI, until July 2002,
  when SAESA and its holding companies were restructured. Subsequent to
  July 2002, the changes in fair value of these instruments were recorded to earnings,
  and serve to offset currency gains or losses on SAESAs US Dollar denominated
  debt. As of December 31, 2002 and 2001, Global had recorded a derivative asset
  of $3 million and $4 million, respectively, and a permanent OCI balance
  related to the hedge of $6 million. For the period from July 2002 through
  December 2002, Global recorded an after-tax loss of $7 million related to
  this hedge, offset by after-tax currency gains on the debt of approximately
  $8 million.

Global holds a 32%
  ownership interest in a Brazilian distribution company, Rio Grande Energia (RGE),
  whose debt is denominated in US Dollars. As of December 31, 2002 and 2001, Globals
  pro-rata share of such debt was approximately $49.3 million and $60 million,
  respectively. In order to hedge the risk of fluctuations in the exchange rate
  between the Brazilian Real and US Dollar associated with the principal payments
  due in May, June and July of 2003 through 2005, RGE entered into a series of
  nine cross currency interest rate swaps in January 2002. The instruments convert
  the variable LIBOR-based principal payments to a variable CDI (the Brazilian
  inter-bank offered rate) based payments. As a result, RGE has hedged its foreign
  currency exposure but is still at risk for variability in the Brazilian CDI
  interest rate during the term of the instruments. Globals share of the
  notional value of these instruments totals approximately $15 million per year
  for the instruments maturing in 2003 and 2004 and totals approximately $19 million
  per year for the instruments maturing in 2005. For accounting purposes,

156

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NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

fluctuations in the fair value of the interest rate
  component of these cross currency swaps is recorded directly to earnings.

The fair value of
  foreign currency derivatives, designated and effective as cash flow hedges,
  are initially recorded in OCI. Reclassification of unrealized gains or losses
  on cash flow hedges from OCI into earnings generally occurs when the hedged
  transaction is recorded in earnings and generally offsets the change in the
  value of the hedged item. Energy Holdings estimates reclassifying less than
  $1 million of foreign exchange gains from foreign currency cash flow hedges,
  including Energy Holdings pro-rata share from its equity method investees,
  from OCI to the Consolidated Statements of Operations over the next 12 months.
  For the period ended December 31, 2002 and 2001, losses transferred from OCI
  to the Consolidated Statements of Operations were less than $1 million.

Credit Risk

PSEG, PSE&G,
  Power and Energy Holdings

Credit risk relates
  to the risk of loss that would occur as a result of non-performance by counterparties
  pursuant to the terms of their contractual obligations. PSEG, PSE&G, Power
  and Energy Holdings have established credit policies to minimize 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.

Power

Through the BGS auctions,
  Power contracted to provide generating capacity to the direct suppliers of New
  Jersey electric utilities commencing August 1, 2002. These bilateral contracts
  are subject to credit risk. This credit risk relates to the ability of counterparties
  to meet their payment obligations for the power delivered under each BGS contract.
  This risk is substantially higher than the risk associated with potential nonpayment
  by PSE&G under the BGS contract that expired July 31, 2002. Any failure
  to collect these payments under the BGS contracts could have a material impact
  on Powers results of operations, cash flows and financial position.

Note 13. Commitments and Contingent Liabilities

Nuclear Insurance Coverages and Assessments

Power

Power is a member
  of an industry mutual insurance company, Nuclear Electric Insurance Limited
  (NEIL). NEIL provides the primary property and decontamination liability insurance
  at the Salem, Hope Creek and Peach Bottom nuclear facilities. NEIL also provides
  excess property insurance through its decontamination liability, decommissioning
  liability and excess property policy and replacement power coverage through
  its accidental outage policy. NEIL policies may make retrospective premium assessments
  in case of adverse loss experience. Powers maximum potential liabilities
  under these assessments are included in the table and notes below. 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 Nuclear Regulatory Commission (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 shut down.

The American Nuclear
  Insurers (ANI) and NEIL policies both include coverage for claims arising out
  of acts of terrorism. The ANI policies are subject to an industry aggregate
  limit of $200 million, subject to one reinstatement provided the reinstatement
  does not exceed the balance in the Industry Credit Rating Plan reserve fund.
  The NEIL Policies are subject to an industry aggregate limit of $3.24 billion
  plus any amounts available through reinsurance or indemnity.

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NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

The Price-Anderson
  Act sets the limit of liability for claims that could arise from
  an incident involving any licensed nuclear facility in the United States. 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 $9.45 billion. All utilities owning
  a nuclear reactor, including Power, 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. Powers
  maximum aggregate assessment per incident is $277 million (based on Powers
  ownership interests in Hope Creek, Peach Bottom and Salem) and its maximum aggregate
  annual assessment per incident is approximately $32 million. This does not include
  the $11 million that could be assessed under the nuclear worker policies. Further,
  a decision by the US Supreme Court, not involving Power, has held that the Price-Anderson
  Act did not preclude awards based on state law claims for punitive damages.

Powers insurance
  coverages and maximum retrospective assessments for its nuclear operations are
  as follows:

|Type
      and Source of Coverages                         |       | Total SiteCoverage |       | PSEGPower LLCAssessments | 
|---------------------------------------------------------- | ----- | ------------------ | ----- | ------------------------ | 
|                                                           |       |                    |      
|                                                           |       | (Millions)         |      
|Public and Nuclear Worker Liability
      (Primary Layer): |       |                    |       |                          | 
|American Nuclear
      Insurers (ANI)                      |       | $                  | 200   | (A)                      | 
|Nuclear Liability (Excess Layer):                          |       |                    |       |                          | 
|Price-Anderson
      Act                                   |       |                    | 9,249 | (B)                      | 
|                                                           |       |                    |       |                          | 
|Nuclear
      Liability Total                              |       | $                  | 9,449 | (C)                      | 
|                                                           |       |                    |       |                          | 
|Property Damage (Primary Layer):                           |       |                    |       |                          | 
|Nuclear Electric
      Insurance Limited (NEIL) Primary    |       |                    |       |                          | 
|(Salem/Hope Creek/Peach
      Bottom)                      |       | $                  | 500   |                          | 
|                                                           |       |                    |       |                          | 
|Property Damage (Excess Layers):                           |       |                    |       |                          | 
|NEIL II (Salem/Hope
      Creek/Peach Bottom)              |       |                    | 600   |                          | 
|NEIL Blanket
      Excess                                  |       |                    |       |                          | 
|(Salem/Hope Creek/Peach
      Bottom)                      | 1,000 | (D)                |       |                          | 
|                                                           |       |                    |       |                          | 
|Property Damage
      Total (Per Site)                     |       | $                  | 2,100 |                          | 
|                                                           |       |                    |       |                          | 
|                                                           |       |                    |       |                          | 
|Accidental Outage:                                         |       |                    |       |                          | 
|NEIL I (Peach
      Bottom)                                |       | $                  | 245   | (E)                      | 
|NEIL I (Salem)                                             |       |                    | 281   |                          | 
|NEIL I (Hope
      Creek)                                  |       |                    | 490   |                          | 
|                                                           |       |                    |       |                          | 
|Replacement
      Power Total                              |       | $                  | 1,016 |                          | 
|                                                           |       |                    |       |                          | 

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.
|    | Effective January 1, 2003, the Nuclear Worker
      Liability and the Primary Layer of American Nuclear Insurers was increased
      to $300 million.                                                                                                                                                                                                                                                                                                                                                                      
|(B) | Retrospective premium program under the Price-Anderson
      liability provisions of the Atomic Energy Act of 1954, as amended. Power
      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                                                                                                                                                               

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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) | For property limits excess of $1.1 billion,
      Power participates in a Blanket Limit policy where the $1 billion limit
      is shared by Amergen, Exelon, and Power among the Braidwood, Byron, Clinton,
      Dresden, La Salle, Limerick, Oyster Creek, Quad Cities, TMI-1 facilities
      owned by Amergen and Exelon and the Peach Bottom, Salem and Hope Creek facilities.
      This limit is not subject to reinstatement in the event of a loss. Participation
      in this program significantly reduces Powers premium and the associated
      potential assessment.
|(E) | Peach Bottom has an aggregate indemnity limit
      based on a weekly indemnity of $2.3 million for 52 weeks followed by 80%
      of the weekly indemnity for 68 weeks. Salem has an aggregate indemnity limit
      based on a weekly indemnity of $2.5 million for 52 weeks followed by 80%
      of the weekly indemnity for 75 weeks. Hope Creek has an aggregate indemnity
      limit based on a weekly indemnity of $4.5 million for 52 weeks followed
      by 80% of the weekly indemnity for 71 weeks.                                                                     

Old Dominion Electric Cooperative (ODEC)

PSE&G and Power

In 1995, PSE&G
  entered into a ten-year wholesale power contract with ODEC. The contract was
  transferred to Power in conjunction with the generation asset transfer in 2000.
  The contract provides for PSE&G to supply ODEC with capacity and energy
  for a bundled rate that includes a component to recover multiple transmission
  charges (referred to as pancaked transmission rates).

In November 1997, FERC
  issued the PJM Restructuring Order, which required PSE&G to modify its contract
  with ODEC to remove pancaked transmission rates. While PSE&G sought rehearing
  of this order, it was nonetheless required to reduce its rate to ODEC by approximately
  $6 million per year, effective April 1, 1998. In 2000, FERC issued its order
  denying PSE&Gs request for rehearing. Thereafter, PSE&G appealed
  to the US Court of Appeals for judicial review of the matter.

In July 2002, the Court
  ruled that FERC had not met its burden to justify modification of the ODEC
  contract. On December 19, 2002, based on the Court ruling, FERC reversed its
  November 1997 order thereby reinstating the original contract terms. This allows
  Power to collect amounts for April 1998 through December 2002 that would not
  have otherwise been collected over the contract term. The difference in revenues
  between the contracted rate and the FERC-ordered reduced rate is approximately
  $30 million, inclusive of back interest and represents a gain contingency to
  Power. Power billed ODEC for this amount in January 2003 and will record this
  gain when realized.

Guaranteed Obligations

Power

Power has guaranteed
  certain commodity related transactions for its subsidiary, ER&T, which is
  involved in energy marketing activities. These guarantees were provided to counterparties
  in order to facilitate physical and financial agreements in gas, pipeline capacity,
  transportation, oil, electricity and related commodities and services. These Power
  guarantees support the current exposure (net billed and unbilled energy plus
  mark-to-market value on open positions), interest and other costs on sums due
  and payable by ER&T under these agreements. Guarantees

159

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NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

offered for trading and marketing cover the granting
  of lines of credit between entities and are often reciprocal in nature. The
  exposure between counterparties can go either direction. If the exposure were
  one directional at year-end with all contracts out-of-the-money
  for Power, then the maximum liability (face value) of the guarantees on December
  31, 2002 and 2001 would be $1.1 billion and $506 million, respectively. The
  probability of all contracts at ER&T being simultaneously out-of-the-money
  given the nature of ER&Ts asset backed transactions is highly unlikely.
  For this reason, the current exposure at any point in time is a more meaningful
  representation of the liability under these guarantees. The current exposure
  from such liabilities was $268 million and $153 million as of December 31, 2002,
  and 2001, respectively. To the extent liabilities exist under the commodity
  related contracts subject to these guarantees, such liabilities are included
  in the Consolidated Balance Sheets.

In addition, all
  Master Agreements and other supply contracts contain margin and/or other collateral
  requirements that, as of December 31, 2002, could require Power to post additional
  collateral of approximately $320 million if Power were to lose its investment
  grade credit rating.

As of December 31,
  2002, letters of credit issued by Power were outstanding in the amount of approximately
  $73 million in support of various contractual obligations.

Energy Holdings

Energy Holdings and/or
  Global have guaranteed certain obligations of Globals subsidiaries or
  affiliates, including the successful completion, performance or other obligations
  related to certain projects in an aggregate amount of approximately $339 million
  as of December 31, 2002. The guarantees include a $61 million equity commitment
  for ELCHO in Poland, a $55 million standby equity commitment for Skawina in
  Poland, $56 million of various guarantees for Dhofar Power Company in Oman and
  a $25 million contingent guarantee related to debt service obligations of Chilquinta
  Energia Finance L.L.C. in connection with electric distribution companies in
  Chile and Peru. Additional guarantees consist of a $35 million leasing agreement
  guarantee for Prisma in Italy, $27 million in standby letters of credit for
  SAESA (which were eliminated upon the refinancing at SAESA in January 2003)
  and various other guarantees comprising the remaining $49 million. A substantial
  portion of such guarantees will be cancelled upon successful completion, performance
  and/or refinancing of construction debt with non-recourse project debt.

In the normal course
  of business, Energy Technologies secures construction obligations with performance
  bonds issued by insurance companies. Prior to January 2003, in the event that
  Energy Technologies tangible equity was reduced to an amount less than
  $100 million, Energy Holdings would have been required to provide additional
  support for the performance bonds. Tangible equity is defined as net equity
  less goodwill. As of December 31, 2002, Energy Technologies tangible equity
  was $105 million. As of December 31, 2002, Energy Technologies had $228 million
  of such bonds outstanding, of which $45 million was at risk in ongoing construction
  projects. The performance bonds are not included in the $339 million of guaranteed
  obligations discussed above. In January 2003, Energy Holdings provided an indemnification
  agreement and $31 million of letters of credit to replace the $100 million capital
  retention agreement referred to above. These amounts are expected to decrease
  over time as Energy Technologies completes the work in process or transfers
  ownership to other companies.

Environmental Matters

PSE&G and
  Power

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 the energy 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, Power and predecessor
  companies own or owned and/or operate 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. PSEG 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.

160

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NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

PSE&G

PSE&G
  Manufactured Gas Plant Remediation Program

PSE&G
  is currently working with the NJDEP under a program (Remediation Program) to
  assess, investigate and, if necessary, remediate environmental conditions at
  PSE&Gs former manufactured gas plant (MGP) sites. To date, 38 sites
  have been identified. 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
  at least $20 million per year could be incurred over a period of about 30 years
  since inception of the program in 1988 and that the overall cost could be material.
  The costs for this remediation effort are recovered through the SBC.

As of December
  31, 2002, PSE&Gs estimated liability for remediation costs through
  2004 aggregated $115 million. Expenditures beyond 2004 cannot be reasonably
  estimated.

Passaic
  River Site

The United
  States Environmental Protection Agency (EPA) has determined that a nine mile
  stretch of the Passaic River in the area of Newark, New Jersey is a facility
  within the meaning of that term under the Federal Comprehensive Environmental
  Response, Compensation and Liability Act of 1980 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 in the
  Passaic River facility.

In a separate
  matter, PSE&G and certain of its predecessors conducted industrial operations
  at properties within the Passaic River facility. The operations included one
  operating electric generating station one former generating station, and four
  former MGPs. PSE&Gs costs to clean up former MGPs are recoverable
  from utility customers through the SBC. PSE&G has sold the site and obtained
  releases and indemnities for liabilities arising out of the site in connection
  with the sale. PSE&G cannot predict what action, if any, the EPA or any
  third party may take against PSE&G with respect to this matter, or in such
  an event, what costs may be incurred to address any such claims. However, such
  costs may be material.

Power

Prevention
  of Significant Deterioration (PSD)/New Source Review(NSR)

The EPA and the NJDEP
  issued a demand in March 2000 under the Federal Clean Air Act (CAA) requiring information to assess
  whether projects completed since 1978 at the Hudson and Mercer coal burning
  units were implemented in accordance with applicable PSD/NSR regulations. Power
  completed its response to the information request in November 2000. In January
  2002, Power reached an agreement with New Jersey and the federal governments
  to resolve allegations of noncompliance with federal and State of New Jersey
  PSD/NSR regulations. Under that agreement, over the course of 10 years, Power
  must install advanced air pollution controls that are designed to reduce emissions
  of NOx, SO2, particulate matter and mercury. The estimated cost of
  the program at the time of the settlement was $337 million to be incurred through
  2011. Power also paid a $1.4 million civil penalty and has agreed to spend up
  to $6 million on supplemental environmental projects. The agreement resolving
  the NSR allegations concerning the Hudson and Mercer coal-fired units also resolved
  the dispute over Bergen 2 regarding the applicability of PSD requirements, and
  allowed construction of the unit to be completed and operation to commence.

Power has recently
  notified the EPA and the NJDEP that it is evaluating the continued operation
  of the Hudson coal unit beyond 2006, in light of changes in the energy and capacity
  markets and increases in the cost of pollution control equipment and other necessary
  modifications. A decision is expected to be made in 2003 as to the Hudson units
  continued operation. The related costs associated with these modification have
  not been included in Powers capital expenditure projections.

Industrial Site Recovery Act

Potential environmental liabilities related to
subsurface contamination at certain generating stations have been identified. The New Jersey statute that led to the
identification is the Industrial Site Recovery Act (ISRA) that applies to the sale of certain assets.
In the second quarter of 1999, in anticipation of the transfer of PSE&Gs generation-related assets to Power, a study
was conducted to identify potential environmental liabilities and PSEG recorded a $53 million liability related to
these obligations, which is represented on the Consolidated Balance Sheets.

161

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NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

New Generation and Development

Power

Power has revised
  its schedules for completion of several of its projects under development to
  provide better sequencing of its construction program with anticipated market
  demand. This delay will allow Power to conserve capital in 2003 and will allow it
  to take advantage of the expected recovery of the electric markets and their
  need for capacity in 2005.

Through an indirect,
  wholly-owned subsidiary, Power is developing the Bethlehem Energy Center, a
  763 MW combined-cycle power plant that will replace the 376 MW Albany, NY Steam
  Station. Total costs for this project are expected to be approximately $483
  million with expenditures to date of approximately $170 million. Construction
  began in 2002 with the expected completion date in 2005, at which time the existing
  station will be retired.

Power is constructing
  a 1,218 MW combined-cycle generation plant at Linden, New Jersey with costs
  estimated at approximately $711 million and expenditures to date of approximately
  $564 million. Completion is expected in 2005, at which time 451 MW of existing
  generating capacity at the site will be retired.

Power is constructing
  through indirect, wholly-owned subsidiaries, two natural gas-fired combined
  cycle electric generation plants in Waterford, Ohio (821 MW) and Lawrenceburg,
  Indiana (1,096 MW) at an estimated aggregate total cost of $1.2 billion. Total
  expenditures to date on these projects have been approximately $1.0 billion.
  The required estimated equity investment in these projects is approximately
  $400 million, with the remainder being financed with non-recourse bank financing.
  As of December 31, 2002, approximately $275 million of equity has been invested
  in these projects. In connection with these projects, ER&T has entered into
  a five-year tolling agreement pursuant to which it is obligated to purchase
  the output of these facilities. Based on current prices, the purchase price
  under this contract is currently above market. ER&T may terminate the agreement
  upon repayment of the current financing scheduled for August 2005. Additional
  equity investments may be required if the proceeds received from ER&T under
  this tolling agreement are not sufficient to cover the required payments under
  the bank financing. The Waterford facility is currently scheduled to achieve
  commercial operation in June 2003. The Lawrenceburg facility is currently scheduled
  to achieve commercial operation in November 2003.

Power also has contracts
  with outside parties to purchase upgraded turbines for the Salem Nuclear Generating
  Station Units 1 and 2 and to purchase upgraded turbines and to purchase a power
  uprate for Hope Creek Generating Station to increase its generating capacity.
  The contracts are subject to regulatory approval and the projects are currently
  scheduled to be completed by 2004 for Salem Unit 1 and Hope Creek and 2006 for
  Salem Unit 2. Powers aggregate estimated costs for these projects are
  $210 million, with expenditures to date of approximately $40 million.

Power has commitments
  to purchase gas turbines and/or other services to meet its current plans to
  develop additional generating capacity. The aggregate amount due under these
  commitments is approximately $480 million, approximately $370 million of which
  is included in estimated costs for the projects discussed above. The approximate
  $110 million remaining relates to obligations to purchase hardware and services
  that have not been designated to any specific projects. If Power does not contract
  to satisfy its commitment relating to the $110 million in obligations by July
  2003, it will be subject to penalties of up to $24 million.

162

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

Minimum Fuel Purchase Requirements

Power

Power uses coal for
  its fossil electric generation stations. Power purchases coal through various
  contracts and in the spot market. The total minimum purchase requirements included
  in these contracts amount to approximately $75 million through 2003.

Power has several
  long-term purchase contracts with uranium suppliers, converters, enrichers and
  fabricators to meet the currently projected fuel requirements for Salem and
  Hope Creek. On average, Power has various multi-year requirements-based purchase
  commitments that total approximately $88 million per year to meet Salem and
  Hope Creek fuel needs. Power has been advised by Exelon, the co-owner and operator
  of the Peach Bottom that it has similar purchase contracts to satisfy the fuel
  requirements for Peach Bottom.

Nuclear Fuel Disposal

Power

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 the operators of nuclear power plants for transportation and ultimate disposal
  of the spent nuclear fuel. To pay for this service, nuclear plant owners are
  required to contribute to a Nuclear Waste Fund at a rate of one mil ($0.001)
  per Kilowatt-hour (kWh) of nuclear generation ($21 million for 2002), subject
  to such escalation as may be required to assure full cost recovery by the Federal
  government. Payments made to the United States Department of Energy (DOE) for
  disposal costs are based on nuclear generation and are included in Energy Costs
  in the Consolidated Statements of Operations.

Pursuant to NRC rules,
  spent nuclear fuel generated in any reactor can be stored in reactor facility
  storage pools or in independent spent fuel storage installations located at
  reactor or away-from-reactor sites for at least 30 years beyond the licensed
  life for reactor operation (which may include the term of a revised or renewed
  license). The availability of adequate spent fuel storage capacity is estimated
  through 2011 for Salem 1, 2015 for Salem 2 and 2007 for Hope Creek. Power presently
  expects to construct an on-site storage facility that would satisfy the spent
  fuel storage needs of both Salem and Hope Creek through the end of the license
  life. This construction will require certain regulatory approvals, the timely
  receipt of which cannot be assured. Exelon has advised us that it has constructed
  an on-site storage facility at Peach Bottom that is now licensed and operational
  and can provide storage capacity through the end of the current licenses for
  the two Peach Bottom units. Additional storage facilities will need to be constructed
  if the licenses for these facilities are extended. If the DOE begins to take
  possession of spent nuclear fuel, as discussed below, the need for additional
  storage capacity would be reduced.

Under the NWPA, the
  DOE was required to begin taking possession of the spent nuclear fuel by no
  later than 1998. The DOE has announced that it does not expect a facility to
  be available earlier than 2010. Exelon has advised us that it had signed an
  agreement with the DOE applicable to Peach Bottom under which Exelon would be
  reimbursed for costs incurred resulting from the DOEs delay in accepting
  spent nuclear fuel. The agreement allows Exelon to reduce the charges paid to
  the Nuclear Waste Fund to reflect costs reasonably incurred due to the DOEs
  delay. Past and future expenditures associated with Peach Bottoms recently
  completed on-site dry storage facility would be eligible for this reduction
  in DOE fees. Under this agreement, Powers portion of Peach Bottoms
  Nuclear Waste Fund fees have been reduced by approximately $18 million through
  August 31, 2002, at which point the credits were fully utilized and covered
  the cost of Exelons storage facility.

In 2000, a group of
  eight utilities filed a petition against the DOE in the US Court of Appeal for
  the Eleventh Circuit, seeking to set aside the receipt of credits by Exelon
  out of the Nuclear Waste Fund, as stipulated in the Peach Bottom agreement.
  On September 24, 2002, the Court issued an opinion upholding the challenge by
  the petitioners regarding the settlement agreements compensation provisions.
  Under the terms of the agreement, DOE and Exelon are required to
  meet and discuss alternative funding sources for the settlement credits. Initial
  meetings have occurred. The Eleventh Circuits opinion suggests that the
  federal judgment fund should be available as an alternate source. The agreement
  provides that if such negotiations are unsuccessful, the agreement will be null
  and void. Any payments required by Power resulting from a disallowance of the
  previously reduced fees would be included in Energy Costs in the Consolidated
  Statements of Operations.

163

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

On September 26, 2001,
  Nuclear filed a complaint in the US Court of Federal Claims seeking damages
  caused by the DOE not taking possession of spent nuclear fuel in 1998. No assurances
  can be given as to any damage recovery or the ultimate availability of a disposal
  facility.

In October 2001, Power
  filed a complaint in the US Court of Federal Claims, along with a
  number of other plaintiffs, seeking $28.2 million in relief from past overcharges
  by the DOE for enrichment services. No assurances can be given as to any damage
  recovery.

In February 2002,
  President Bush announced that Yucca Mountain in Nevada would be the permanent
  disposal facility for nuclear wastes. In April 2002, the Governor of Nevada
  submitted his veto to the siting decision and in July 2002, Congress affirmed
  the Presidents decision. The DOE must still license and construct the
  facility. No assurances can be given regarding the final outcome of this matter.

Energy Holdings

Argentina

Global has certain
  contingent obligations that are likely to occur if certain projects in Argentina
  continue to default on their debt and performance obligations. The estimated
  amount to cover this exposure is $7 million and has been recorded as a component
  of Operating Expenses in the Consolidated Statements of Operations.

Under certain circumstances,
  Global could be obligated to settle its share (approximately $26 million) of
  a project loan for EDELAP should it or the majority owner of the project, take
  certain actions including forcing or permitting certain loan parties to declare
  bankruptcy. In addition, the guarantee can be triggered by transferring the
  shares of certain loan parties without lender consent. Breach of this transfer
  covenant can be cured by delivering certain pledge agreements relating to the
  ownership of loan parties to the lenders. Global could also be liable for any
  incremental direct damages arising from the breach of these covenants. Given
  the likely cure of any breach by the project sponsors, such a contingent obligation
  has a low probability of being triggered and, therefore, no provision has been
  made in Globals Consolidated Financial Statements. Under the terms of
  the settlement of Globals litigation with AES, AES is required to deliver
  pledge agreements that may be required under the loan documents. For further
  information, see Note 4. Asset Impairments.

California

In May 2001, GWF Energy
  LLC (GWF Energy), a joint venture between Global and Harbinger GWF LLC entered
  into a 10-year power purchase agreement (PPA) with the California Department
  of Water Resources (CDWR) to provide approximately 340 MW of electric capacity
  to California from three new natural gas-fired peaking plants, the Hanford,
  Henrietta and Tracy Peaker Plants. Total project cost for these plants is estimated
  at approximately $345 million.

In 2002, GWF Energy
  entered into negotiations with the California Public Utilities Commission (CPUC)
  and the California Electricity Oversight Board (collectively the California
  Parties) resulting in the execution of (i) an amended and restated PPA that
  has been affirmed by the CPUC as just and reasonable and (ii) a
  settlement agreement with the California Parties, the CDWR, the Governor of
  the State of California and the People of California by and through the Attorney
  General.

The Hanford and Henrietta
  Peaker Plants were completed in August 2001 and in June 2002, respectively,
  and the Tracy Peaker Plant, a 167 MW facility, is now under construction. The
  commercial operations date deadline of the Tracy Peaker Plant is July 1, 2003
  under the amended and restated PPA discussed above.
  As of December 31, 2002, Globals equity
  investment in these plants was $228 million. Upon successful completion of project
  financing, which is currently expected to occur in the second quarter of 2003,
  Globals permanent equity investment in the plants, including contingencies,
  is not expected to exceed $150 million.
  In the event financing does
  not occur, Globals investment in these plants could increase to approximately
  $293 million.

164

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

Globals ownership interest in this project
  was 76% as of December 31, 2002. For a description of turbine loans and working
  capital loans from Global to GWF Energy pending completion of project financing,
  see Note 22. Related-Party Transactions.

Chile

Global owns SAESA,
  a group of companies that consists of four distribution companies and one transmission
  company that provide electric service to customers in southern Chile. SAESA
  had a $150 million loan facility in place that had an original maturity date
  of October 18, 2002 and is recorded as a component of Notes Payable and Project
  Level Non-Recourse Debt on Energy Holdings Consolidated Balance Sheets
  as of December 31, 2002. The principal payment was not made as scheduled and
  the lending group agreed not to declare any payment defaults or exercise any
  remedies with regard to that loan and accordingly a term sheet for an extension
  of the loan to April 2003 was agreed to. On January 17, 2003, SAESA issued bonds
  worth $114 million in the Chilean market. SAESA divided the debt issue into
  a $61 million, 7-year bond with a coupon rate of 5.39% and another $54 million
  bond maturing in 21 years at a rate of 6.6%. SAESA also signed a syndicated
  bank loan for $58 million. These funds were used to repay the $150 million loan
  scheduled to mature in April 2003. In January 2003, Global contributed an additional
  $55 million in equity and increased its investment in SAESA to $466 million.

Peru

In December 2001,
  Global acquired an interest in Electroandes, a 183 MW hydroelectric generation
  and distribution company in Peru. Part of the purchase price was financed with
  a $100 million one year bridge loan which matured in December 2002. The loan
  facility provided that the maturity date could be extended for six months if
  certain conditions were met. The loan was extended to June 2003 and a refinancing
  plan is underway.

India

Energy Holdings has
  a 20% interest in a 330 MW Naphtha/natural gas fired plant (PPN) in the Indian
  State of Tamil Nadu. Energy Holdings investment exposure (investment less
  non-recourse debt) in this facility is approximately $40 million. Power from
  the facility is sold under a long-term power purchase agreement with the Tamil
  Nadu Electricity Board (TNEB) which sells the power to retail end-user customers.
  The TNEB has not been able to make full payment to the plant for the purchase
  of energy under contract due to its overall poor liquidity situation. The past
  due receivable at PPN as of December 31, 2002 at the project company is approximately
  $57 million, Energy Holdings share of which is approximately $8 million,
  net of a $3 million reserve.

Poland

In January 2002, Global
  acquired a 35% interest in the 590 MW (electric) and 618 MW (thermal) coal-fired
  Skawina CHP Plant (Skawina), located in Poland and in June 2002 increased its
  ownership interest to approximately 50%. The transaction includes the obligation
  to purchase additional shares in 2003 that will bring Globals aggregate
  interest in Skawina to approximately 65% and the obligation to offer to purchase
  an additional 10% from Skawinas employees, increasing Globals potential
  ownership interest to 75%. Global expended $31 million during 2002 for its approximate
  50% ownership interest and the total equity investment is expected to be approximately
  $105 million, including contingencies and equity commitment guarantees.

Tunisia

Global owns a 60%
  interest in Carthage Power Company (CPC), a 471 MW gas-fired combined-cycle
  electric generation facility located in Rades, Tunisia. CPC has entered into
  a 20-year power purchase contract for the sale of 100% of the output to Societe
  Tunisienne de l Electricite et du Gaz (STEG). The contract called for
  the plant to be operational by November 24, 2001, however, due to delays in
  construction, this deadline was not met. STEG has declared that it is entitled
  to liquidated damages at the rate of $67 thousand a day since November 24, 2001
  in accordance with the terms of the power purchase contract. CPC is contesting
  STEGs claim and the two parties are currently in negotiations to settle
  this dispute. The facility was built by Alstom Centrales Energetiques S.A.,

165

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

(Alstom) an independent contractor, who was also
  obligated to complete construction by September 3, 2001. The facility commenced
  operation on May 14, 2002. CPC believes it is entitled to liquidated damages
  from Alstom in amounts greater than the claims by STEG. Such liquidated damages
  are secured by letters of credit totaling $30 million.

Minimum Lease Payments

PSEG, PSE&G
  and Energy Holdings

PSE&G, Services
  and Energy Holdings lease administrative office space under various operating
  leases. In addition, PSE&G, Services and Energy Holdings expense the costs
  of renting various facilities for an immaterial amount. Total future minimum
  lease payments as of December 31, 2002 are:

|                | 2003       |    | 2004 |   | 2005 |  | 2006 |   | 2007 |   | After
      2007 |  | Total |  
|--------------- | ---------- | -- | ---- | - | ---- |  | ---- | - | ---- | - | ---------------- |  | ----- | -
|                |            |    |      |   |      |  |      |   |      |   |                  |  |       |  
|                | (Millions)
|PSE&G           | $          | 3  |      | $ | 3    |  | $    | 3 |      | $ | 2                |  | $     | 2
|Services        |            | 1  |      |   | 1    |  |      | 1 |      |   | 1                |  |       | 1
|Energy Holdings |            | 6  |      |   | 5    |  |      | 4 |      |   | 4                |  |       | 4
|                |            |    |      |   |      |  |      |   |      |   |                  |  |       |  
|Total PSEG      | $          | 10 |      | $ | 9    |  | $    | 8 |      | $ | 7                |  | $     | 7
|                |            |    |      |   |      |  |      |   |      |   |                  |  |       |  

Power
  and PSE&G have entered into capital leases for administrative office space.
  The total future minimum payments and present value of these capital leases
  as of December 31, 2002 are:

|                                            | PSE&G      |   | Power
|------------------------------------------- | ---------- | - | -----
|                                            |           
|                                            | (Millions)
|2003                                        |            | $ | 6    
|2004                                        |            |   | 6    
|2005                                        |            |   | 6    
|2006                                        |            |   | 6    
|2007                                        |            |   | 6    
|Thereafter                                  |            |   | 50   
|                                            |            |   |      
|Total
      minimum lease payments          |            | $ | 80   
|Less:Imputed
      Interest                 |            |   | (38  
|                                            |            |   |      
|Present Value of net minimum lease payments |            | $ | 42   
|                                            |            |   |      

166

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

Note 14. Nuclear Decommissioning Trust

Power

In
  accordance with Federal regulations, entities 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 owner places funds in independent external
  trust accounts it maintains to provide for decommissioning.

The ownership of the
  Nuclear Decommissioning Trust Funds was transferred to Nuclear with the transfer
  of the generation-related assets from PSE&G to Power. Pursuant to the Final
  Order, PSE&G will collect approximately $30 million annually through the SBC and will
  remit to Power an equivalent amount solely to fund the trust through at least
  the end of the transition period, July 31, 2003. For information relating to
  cost responsibility for nuclear decommissioning subsequent to July 31, 2003,
  see Note 2. New Accounting Standards. The fair market value of these funds as
  of December 31, 2002 and 2001 was $766 million and $817 million, respectively.

Power
  maintains the external master nuclear decommissioning trust previously established
  by PSE&G. 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. In the most recent study the
  total cost of decommissioning, Powers share of its five nuclear units
  was estimated at approximately $1.8 billion in year-end 2002 dollars, excluding
  contingencies.

Note 15. Other Income and Deductions

Other Income

|                                            | PSE&G      |     | **Power** |   | Energy
      Holdings |  | Other
      (A) |    | Consolidated
      Total
|------------------------------------------- | ---------- | --- | --------- | - | --------------------- |  | --------------- | -- | ------------------------
|                                            |            |     |           |   |                       |  |                 |    |                         
|For the Year Ended December
      31, 2002: | (Millions)
|                                            |            |     |           |   |                       |  |                 |    |                         
|Interest
      Income                       | $          | 17  |           | $ |                      |  | $               |   |                         
|Gain
      on Disposition of Property       |            | 10  |           |   |                      |  |                 |   |                         
|Change
      in Derivative Fair Value       |            |    |           |   |                      |  |                 | 12 |                         
|Gain
      on Early Retirement of Debt      |            |    |           |   |                      |  |                 | 13 |                         
|Other                                       |            | 1   |           |   |                      |  |                 |   |                         
|                                            |            |     |           |   |                       |  |                 |    |                         
|Total
      Other Income                    | $          | 28  |           | $ |                      |  | $               | 25 |                         
|                                            |            |     |           |   |                       |  |                 |    |                         
|                                            |            |     |           |   |                       |  |                 |    |                         
|For the Year Ended December
      31, 2001: |            |     |           |   |                       |  |                 |    |                         
|                                            |            |     |           |   |                       |  |                 |    |                         
|Interest
      Income                       | $          | 104 |           | $ |                      |  | $               |   |                         
|Gain
      on Disposition of Property       |            | 4   |           |   |                      |  |                 |   |                         
|Other                                       |            | 3   |           |   |                      |  |                 | 6  |                         
|                                            |            |     |           |   |                       |  |                 |    |                         
|Total
      Other Income                    | $          | 111 |           | $ |                      |  | $               | 6  |                         
|                                            |            |     |           |   |                       |  |                 |    |                         
|                                            |            |     |           |   |                       |  |                 |    |                         
|For the Year Ended December
      31, 2000: |            |     |           |   |                       |  |                 |    |                         
|                                            |            |     |           |   |                       |  |                 |    |                         
|Interest
      Income                       | $          | 164 |           | $ | 1                     |  | $               |   |                         
|Litigation
      Settlement                 |            | 6   |           |   | 6                     |  |                 |   |                         
|Minority
      Interest                     |            |    |           |   |                      |  |                 |   |                         
|Foreign
      Currency Gains                |            |    |           |   |                      |  |                 | 3  |                         
|Other                                       |            | 3   |           |   |                      |  |                 |   |                         
|                                            |            |     |           |   |                       |  |                 |    |                         
|Total
      Other Income                    | $          | 173 |           | $ | 7                     |  | $               | 3  |                         
|                                            |            |     |           |   |                       |  |                 |    |                         

---

167

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
  Continued

Other Deductions

|                                            | **PSE&G**  |   | **Power** |   | **Energy
      Holdings** |  | **Other
      (A)** |    | Consolidated
      Total
|------------------------------------------- | ---------- | - | --------- | - | ------------------------- |  | ------------------- | -- | ------------------------
|                                            |            |   |           |   |                           |  |                     |    |                         
|For the Year Ended December
      31, 2002: | (Millions)
|                                            |            |   |           |   |                           |  |                     |    |                         
|Donations                                   | $          | 2 |           | $ |                          |  | $                   |   |                         
|Minority
      Interest                     |            |  |           |   |                          |  |                     |   |                         
|Foreign
      Currency Losses               |            |  |           |   |                          |  |                     | 70 |                         
|Other                                       |            |  |           |   |                          |  |                     | 3  |                         
|                                            |            |   |           |   |                           |  |                     |    |                         
|Total
      Other Deductions                | $          | 2 |           | $ |                          |  | $                   | 73 |                         
|                                            |            |   |           |   |                           |  |                     |    |                         
|                                            |            |   |           |   |                           |  |                     |    |                         
|For the Year Ended December
      31, 2001: |            |   |           |   |                           |  |                     |    |                         
|                                            |            |   |           |   |                           |  |                     |    |                         
|Donations                                   | $          | 3 |           | $ |                          |  | $                   |   |                         
|Minority
      Interest                     |            |  |           |   |                          |  |                     |   |                         
|Foreign
      Currency Losses               |            |  |           |   |                          |  |                     | 9  |                         
|Loss
      on Early Retirement of Debt      |            |  |           |   |                          |  |                     | 3  |                         
|Other                                       |            | 1 |           |   |                          |  |                     |   |                         
|                                            |            |   |           |   |                           |  |                     |    |                         
|Total
      Other Deductions                | $          | 4 |           | $ |                          |  | $                   | 12 |                         
|                                            |            |   |           |   |                           |  |                     |    |                         
|                                            |            |   |           |   |                           |  |                     |    |                         
|For the Year Ended December
      31, 2000: |            |   |           |   |                           |  |                     |    |                         
|                                            |            |   |           |   |                           |  |                     |    |                         
|Donations                                   | $          | 3 |           | $ |                          |  | $                   |   |                         
|Other                                       |            | 1 |           |   |                          |  |                     | 3  |                         
|                                            |            |   |           |   |                           |  |                     |    |                         
|Total
      Other Deductions                | $          | 4 |           | $ |                          |  | $                   | 3  |                         
|                                            |            |   |           |   |                           |  |                     |    |                         

(A)   Other primarily consists of activity
  at PSEG (parent company), Services and intercompany eliminations.

168

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

Note 16. Income Taxes

A reconciliation
  of reported income tax expense with the amount computed by multiplying pre-tax
  income by the statutory Federal income tax rate of 35% is as follows:

|                                                                                                  |  | **PSE&G**  |    | **Power** |   | **Energy
      Holdings** |     | **Other** |   | **Consolidated
      Total**
|------------------------------------------------------------------------------------------------- |  | ---------- | -- | --------- | - | ------------------------- | --- | --------- | - | ----------------------------
|                                                                                                  |  |            |    |           |   |                           |     |           |   |                             
|2002                                                                                              |  | (Millions)
|                                                                                                  |  |            |    |           |   |                           |     |           |   |                             
|Net Income (Loss)                                                                                 |  |            | $  | 201       |   | $                         | 468 |           |   | $                           
|Loss
      from Discontinued Operations,                                                          |  |            |    |           |   |                           |     |           |   |                             
|(Including Loss
      on Disposal, Net of Tax $27)                                               |  |            |  |           |   |                         |     |           |   | (51                         
|Cumulative
      Effect of a Change in                                                            |  |            |    |           |   |                           |     |           |   |                             
|Accounting
      Principle, (Net of Tax $66)                                                     |  |            |    |         |   |                           |   |           |   |                             
|Minority Interest in Earnings of
      Subsidiaries                                               |  |            |    |         |   |                           |   |           |   |                             
|                                                                                                  |  |            |    |           |   |                           |     |           |   |                             
|Net Income before Retained Earnings                                                               |  |            |    |           |   |                           |     |           |   |                             
|Adjustment
      and Minority Interests                                                           |  |            |    | 201       |   |                           | 468 |           |   |                             
|Preferred
      Dividends (net)                                                                   |  |            |    | (4        | ) |                           |   |           |   |                             
|                                                                                                  |  |            |    |           |   |                           |     |           |   |                             
|Net Income before Retained Earnings                                                               |  |            |    |           |   |                           |     |           |   |                             
|Adjustment and Preferred Dividends                                                                |  |            |    | 205       |   |                           | 468 |           |   |                             
|                                                                                                  |  |            |    |           |   |                           |     |           |   |                             
|Income Taxes:                                                                                     |  |            |    |           |   |                           |     |           |   |                             
|Federal
       Current                                                                           |  |            |    | 121       |   |                           | 184 |           |   |                             
|Deferred                                                                                          |  |            |    | (44       | ) |                           | 69  |           |   |                             
|ITC                                                                                               |  |            |    | (2        | ) |                           |   |           |   |                             
|                                                                                                  |  |            |    |           |   |                           |     |           |   |                             
|Total Federal                                                                                     |  |            |    | 75        |   |                           | 253 |           |   |                             
|                                                                                                  |  |            |    |           |   |                           |     |           |   |                             
|State
       Current                                                                             |  |            |    | 17        |   |                           | 41  |           |   |                             
|Deferred                                                                                          |  |            |    | 23        |   |                           | 19  |           |   |                             
|                                                                                                  |  |            |    |           |   |                           |     |           |   |                             
|Total State                                                                                       |  |            |    | 40        |   |                           | 60  |           |   |                             
|                                                                                                  |  |            |    |           |   |                           |     |           |   |                             
|Foreign
       Current                                                                           |  |            |    |         |   |                           |   |           |   |                             
|Deferred                                                                                          |  |            |    |         |   |                           |   |           |   |                             
|                                                                                                  |  |            |    |           |   |                           |     |           |   |                             
|Total Foreign                                                                                     |  |            |    |         |   |                           |   |           |   |                             
|                                                                                                  |  |            |    |           |   |                           |     |           |   |                             
|Total                                                                                             |  |            |    | 115       |   |                           | 313 |           |   |                             
|                                                                                                  |  |            |    |           |   |                           |     |           |   |                             
|Pre-tax Income                                                                                    |  |            | $  | 320       |   | $                         | 781 |           |   | $                           
|                                                                                                  |  |            |    |           |   |                           |     |           |   |                             
|                                                                                                  |  |            |    |           |   |                           |     |           |   |                             
|Tax computed at the statutory rate                                                                |  |            | $  | 112       |   | $                         | 273 |           |   | $                           
|Increase (decrease) attributable
      to flow through
         of
      certain tax adjustments: |  |            |    |           |   |                           |     |           |   |                             
|Plant
      Related Items                                                                         |  |            |    | (15       | ) |                           |   |           |   |                             
|Amortization of investment tax
      credits                                                      |  |            |    | (2        | ) |                           |   |           |   |                             
|Other                                                                                             |  |            |    | (6        | ) |                           | 1   |           |   |                             
|Tax Effects Attributable to Foreign                                                               |  |            |    |           |   |                           |     |           |   |                             
|Operations                                                                                        |  |            |    |         |   |                           |   |           |   |                             
|New Jersey Corporate Business Tax                                                                 |  |            |    | 26        |   |                           | 39  |           |   |                             
|                                                                                                  |  |            |    |           |   |                           |     |           |   |                             
|Subtotal                                                                                          |  |            |    | 3         |   |                           | 40  |           |   |                             
|                                                                                                  |  |            |    |           |   |                           |     |           |   |                             
|Total
      income tax provisions                                                                 |  |            | $  | 115       |   | $                         | 313 |           |   | $                           
|                                                                                                  |  |            |    |           |   |                           |     |           |   |                             
|Effective income tax rate                                                                         |  | 35.9       | %  | 40.1      | % | 42.0                      | %   | 41.1      | % | 37.0                        

169

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

|                                                                                     |  | **PSE&G** |     | **Power** |      | **Energy
      Holdings** |      | **Other** |      | **Consolidated
      Total**
|------------------------------------------------------------------------------------ |  | --------- | --- | --------- | ---- | ------------------------- | ---- | --------- | ---- | ----------------------------
|                                                                                     |  | ****      |     | ****      |      | **(Millions)**            |      | ****      |      | ****                        
|2001                                                                                 |  |           |     |           |      |                           |      |           |      |                             
|                                                                                     |  |           |     |           |      |                           |      |           |      |                             
|Net Income (Loss)                                                                    |  | $         | 230 |           |      | $                         | 394  |           | $    | 161                         
|Loss from Discontinued
      Operations,(Net
      of Tax $8)                       |  |           |   |           |      |                           |    |           |      | (15                         
|Cumulative Effect
      of a Change in Accounting                                    |  |           |     |           |      |                           |      |           |      |                             
|Principle, (Net of Tax$8)                                                           |  |         |     |           |      |                         |      |           | 9    |                             
|Minority Interest
      in Earnings of Subsidiaries                                  |  |           |   |           |      |                           |    |           |      | (1                          
|                                                                                     |  |           |     |           |      |                           |      |           |      |                             
|Net Income before Retained Earnings                                                  |  |           |     |           |      |                           |      |           |      |                             
|Adjustment
      and Minority Interests                                              |  |           | 230 |           |      |                           | 394  |           |      | 168                         
|Preferred
      Dividends (net)                                                      |  |           | (5  | )         |      |                           |    |           |      | (22                         
|                                                                                     |  |           |     |           |      |                           |      |           |      |                             
|Net Income before Retained Earnings                                                  |  |           |     |           |      |                           |      |           |      |                             
|Adjustment
      and Preferred Dividends                                             |  |           | 235 |           |      |                           | 394  |           |      | 190                         
|                                                                                     |  |           |     |           |      |                           |      |           |      |                             
|Income Taxes:                                                                        |  |           |     |           |      |                           |      |           |      |                             
|Federal
       Current                                                              |  |           | 250 |           |      |                           | 139  |           | (100 | )                           
|Deferred                                                                             |  | (192      | )   |           |      | 74                        |      |           | 161  |                             
|ITC                                                                                  |  |           | (2  | )         |      |                           |    |           |      | (1                          
|                                                                                     |  |           |     |           |      |                           |      |           |      |                             
|Total
      Federal                                                                  |  |           | 56  |           |      |                           | 213  |           |      | 60                          
|                                                                                     |  |           |     |           |      |                           |      |           |      |                             
|State
       Current                                                                |  |           | 42  |           |      |                           | 17   |           |      | 9                           
|Deferred                                                                             |  |           | (9  | )         |      |                           | 20   |           |      | (11                         
|                                                                                     |  |           |     |           |      |                           |      |           |      |                             
|Total
      State                                                                    |  |           | 33  |           |      |                           | 37   |           |      | (2                          
|                                                                                     |  |           |     |           |      |                           |      |           |      |                             
|Foreign
       Current                                                              |  |           |   |           |      |                           |    |           |      | 1                           
|Deferred                                                                             |  |           |   |           |      |                           |    |           |      | 6                           
|                                                                                     |  |           |     |           |      |                           |      |           |      |                             
|Total
      Foreign                                                                  |  |           |   |           |      |                           |    |           |      | 7                           
|                                                                                     |  |           |     |           |      |                           |      |           |      |                             
|Total                                                                                |  |           | 89  |           |      | 250                       |      |           | 65   |                             
|                                                                                     |  |           |     |           |      |                           |      |           |      |                             
|Pre-tax Income                                                                       |  | $         | 324 |           |      | $                         | 644  |           | $    | 255                         
|                                                                                     |  |           |     |           |      |                           |      |           |      |                             
|                                                                                     |  |           |     |           |      |                           |      |           |      |                             
|Tax computed at the statutory rate                                                   |  | $         | 113 |           |      | $                         | 225  |           | $    | 89                          
|Increase (decrease) attributable to flow through
        of certain tax adjustments: |  |           |     |           |      |                           |      |           |      |                             
|Plant
      Related Items                                                            |  |           | (41 | )         |      |                           |    |           |      |                           
|Amortization
      of investment and energy tax credits                              |  |           | (2  | )         |      |                           |    |           |      | (1                          
|Other                                                                                |  |           | (2  | )         |      |                           | 1    |           |      | (2                          
|Tax Effects Attributable
      to ForeignOperations                                  |  |           |   |           |      |                           |    |           |      | (18                         
|New Jersey Corporate Business Tax                                                    |  |           | 21  |           |      |                           | 24   |           |      | (3                          
|                                                                                     |  |           |     |           |      |                           |      |           |      |                             
|Subtotal                                                                             |  |           | (24 | )         |      |                           | 25   |           |      | (24                         
|                                                                                     |  |           |     |           |      |                           |      |           |      |                             
|Total
      income tax provisions                                                    |  | $         | 89  |           |      | $                         | 250  |           | $    | 65                          
|                                                                                     |  |           |     |           |      |                           |      |           |      |                             
|Effective income
      tax rate                                                      |  | 27.4      | %   |           | 38.8 | %                         | 25.4 | %         | 59.0 | %                           

170

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

|                                                                                             | **PSE&G (A)** |   | **Power (A)** |   | **Energy
      Holdings** |   |      | **Other (A)** |      | **Consolidated
      Total**
|-------------------------------------------------------------------------------------------- | ------------- | - | ------------- | - | ------------------------- | - | ---- | ------------- | ---- | ----------------------------
|                                                                                             |              
|2000                                                                                         | (Millions)   
|                                                                                             |               |   |               |   |                           |   |      |               |      |                             
|Net Income (Loss)                                                                            |               | $ | 578           |   |                           | $ | 313  |               |      | $                           
|                                                                                             |               |   |               |   |                           |   |      |               |      |                             
|Loss from Discontinued
      Operations,(Net
      of Tax $5)                               |               |   |             |   |                           |   |    |               | (12  | )                           
|Minority Interest
      in Earnings of Subsidiaries                                          |               |   |             |   |                           |   |    |               |      |                             
|                                                                                             |               |   |               |   |                           |   |      |               |      |                             
|Net Income before Retained Earnings                                                          |               |   |               |   |                           |   |      |               |      |                             
|Adjustment
      and Minority Interests                                                      |               |   | 578           |   |                           |   | 313  |               | 101  |                             
|Preferred
      securities (net)                                                             |               |   | (9            | ) |                           |   |    |               | (24  | )                           
|                                                                                             |               |   |               |   |                           |   |      |               |      |                             
|Net Income before Retained Earnings                                                          |               |   |               |   |                           |   |      |               |      |                             
|Adjustment
      and Preferred Dividends                                                     |               |   | 587           |   |                           |   | 313  |               | 125  |                             
|                                                                                             |               |   |               |   |                           |   |      |               |      |                             
|Income Taxes:                                                                                |               |   |               |   |                           |   |      |               |      |                             
|Federal
       Current                                                                      |               |   | 261           |   |                           |   | 139  |               | (127 | )                           
|Deferred                                                                                     |               |   | 50            |   |                           |   | 25   |               | 169  |                             
|ITC                                                                                          |               |   | (1            | ) |                           |   |    |               |      |                             
|                                                                                             |               |   |               |   |                           |   |      |               |      |                             
|Total
      Federal                                                                          |               |   | 310           |   |                           |   | 164  |               |      |                             
|                                                                                             |               |   |               |   |                           |   |      |               |      |                             
|State
       Current                                                                        |               |   | 150           |   |                           |   | 114  |               |      |                             
|Deferred                                                                                     |               |   | (53           | ) |                           |   | (70  | )             |      |                             
|                                                                                             |               |   |               |   |                           |   |      |               |      |                             
|Total
      State                                                                            |               |   | 97            |   |                           |   | 44   |               |      |                             
|                                                                                             |               |   |               |   |                           |   |      |               |      |                             
|Foreign
       Current                                                                      |               |   |             |   |                           |   |    |               |      |                             
|Deferred                                                                                     |               |   |             |   |                           |   |    |               |      |                             
|                                                                                             |               |   |               |   |                           |   |      |               |      |                             
|Total
      Foreign                                                                          |               |   |             |   |                           |   |    |               |      |                             
|                                                                                             |               |   |               |   |                           |   |      |               |      |                             
|Total                                                                                        |               |   | 407           |   |                           |   | 208  |               |      |                             
|                                                                                             |               |   |               |   |                           |   |      |               |      |                             
|Pre-tax Income                                                                               |               | $ | 994           |   |                           | $ | 521  |               |      | $                           
|                                                                                             |               |   |               |   |                           |   |      |               |      |                             
|Tax computed at the statutory
      rate                                                     |               | $ | 348           |   |                           | $ | 182  |               |      | $                           
|Increase (decrease) attributable
      to flow through 
         of certain tax adjustments: |               |   |               |   |                           |   |      |               |      |                             
|Plant
      Related Items                                                                    |               |   | (15           | ) |                           |   |    |               |      |                             
|Amortization
      of investment tax credits                                                 |               |   | (1            | ) |                           |   |    |               |      |                             
|Other                                                                                        |               |   | 17            |   |                           |   | (4   | )             |      |                             
|Tax Effects Attributable to Foreign                                                          |               |   |               |   |                           |   |      |               |      |                             
|Operations                                                                                   |               |   |             |   |                           |   |    |               | (14  | )                           
|New Jersey Corporate Business
      Tax                                                      |               |   | 58            |   |                           |   | 30   |               |      |                             
|                                                                                             |               |   |               |   |                           |   |      |               |      |                             
|Subtotal                                                                                     |               |   | 59            |   |                           |   | 26   |               | (10  | )                           
|                                                                                             |               |   |               |   |                           |   |      |               |      |                             
|Total
      income tax provisions                                                            |               | $ | 407           |   |                           | $ | 208  |               |      | $                           
|                                                                                             |               |   |               |   |                           |   |      |               |      |                             
|Effective income tax rate                                                                    | 40.9          | % | 39.9          | % | 29.0                      | % | 41.5 | %             | 38.7 | %                           

(A)  Included in Powers results for 2000 are the results of PSE&Gs generation business prior
to the generation-related asset transfer in August 2000. For additional information see Note 19. Financial Information
by Business Segments.

PSEG, PSE&G,
  Power and Energy Holdings

Each of PSEG,
  PSE&G, Power and Energy Holdings provide 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 PSE&Gs customers
  in the future. Accordingly, an offsetting regulatory asset was established.
  As of December 31, 2002, PSE&G had a deferred tax liability and an offsetting
  regulatory asset of $328 million representing the tax costs 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%.

Energy Holdings

Energy Holdings
  effective tax rate differs from the statutory Federal income tax rate of 35%
  primarily due to the imposition of state taxes and the fact that Global accounts
  for many of its foreign investments using the equity method of accounting. Under
  such accounting method, Global reflects in revenues its pro-rata share of the
  investment s net income. The foreign income taxes are a component of each
  PSEG and Energy Holdings equity in earnings rather than included as a
  component of the income tax provision.

171

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

The following is an analysis of deferred income
  taxes:

|                                         | PSE&G      |       | Power |   | Energy
      Holdings |   | Other |      | Consolidated |   
|---------------------------------------- | ---------- | ----- | ----- | - | --------------------- | - | ----- | ---- | ------------ | --
|                                         |            |       |       |   |                       |   |       |      |              |   
|                                         | 2002       |       | 2001  |   | 2002                  |   | 2001  |      | 2002         |   
|                                         |            |       |       |   |                       |   |       |      |              |   
|Deferred Income Taxes                    | (Millions) |      
|                                         |            |       |       |   |                       |   |       |      |              |   
|Assets:                                  |            |       |       |   |                       |   |       |      |              |   
|Current (net)                            |            | $     | 16    |   |                       | $ | 21    |      | $          |   
|                                         |            |       |       |   |                       |   |       |      |              |   
|Non-current:                             |            |       |       |   |                       |   |       |      |              |   
|Unrecovered
      Investment Tax Credits |            |       | 19    |   |                       |   | 19    |      |              | 
|Nuclear
      Decommissioning            |            |     |       |   |                     |   |       | 26   |              |   
|SFAS
      133                           |            |     |       |   |                     |   |       | 2    |              |   
|Other
      Comprehensive Income         |            | 122   |       |   |                     |   |       | 58   |              |   
|New
      Jersey Corporate Business Tax  |            | 380   |       |   | 407                   |   |       | 125  |              |   
|OPEB                                     |            |       | 99    |   |                       |   | 83    |      |              | 
|Cost
      of Removal                    |            |     |       |   |                     |   |       | 51   |              |   
|Investment
      Related Adjustments     |            |     |       |   |                     |   |       |    |              |   
|Development
      Fees                   |            |     |       |   |                     |   |       |    |              |   
|Foreign
      Currency Translation       |            |     |       |   |                     |   |       |    |              |   
|Contractual
      Liabilities and        |            |       |       |   |                       |   |       |      |              |   
|Environmental
      Costs                |            |     |       |   |                     |   |       | 35   |              |   
|Market
      Transition Charge           |            |       | 64    |   |                       |   | 56    |      |              | 
|                                         |            |       |       |   |                       |   |       |      |              |   
|Total
      Non-current                  |            | 684   |       |   | 565                   |   |       | 297  |              |   
|                                         |            |       |       |   |                       |   |       |      |              |   
|Total
      Assets                       |            | 700   |       |   | 586                   |   |       | 297  |              |   
|                                         |            |       |       |   |                       |   |       |      |              |   
|Liabilities:                             |            |       |       |   |                       |   |       |      |              |   
|Non-current:                             |            |       |       |   |                       |   |       |      |              |   
|Plant
      Related Items                |            | 1,244 |       |   | 1,228                 |   | (276  | )    | (341         | ) 
|Securitization                           |            | 1,545 |       |   | 1,594                 |   |       |    |              |   
|Leasing
      Activities                 |            |     |       |   |                     |   |       |    |              |   
|Partnership
      Activities             |            |     |       |   |                     |   |       |    |              |   
|Conservation
      Costs                 |            |       | 10    |   |                       |   | 24    |      |              | 
|Pension
      Costs                      |            |       | 84    |   |                       |   | 70    |      |              | 25
|Taxes
      Recoverable Through          |            |       |       |   |                       |   |       |      |              |   
|Future
      Rates (net)                 |            | 145   |       |   | 130                   |   |       |    |              |   
|Income
      from Foreign Operation      |            |     |       |   |                     |   |       |    |              |   
|Other                                    |            |       | 38    |   |                       |   | 14    |      |              | (4
|                                         |            |       |       |   |                       |   |       |      |              |   
|Total
      Non-current                  |            | 3,066 |       |   | 3,060                 |   | (255  | )    | (325         | ) 
|                                         |            |       |       |   |                       |   |       |      |              |   
|Total
      Liabilities                  |            | 3,066 |       |   | 3,060                 |   | (255  | )    | (325         | ) 
|                                         |            |       |       |   |                       |   |       |      |              |   
|Summary  Accumulated                    |            |       |       |   |                       |   |       |      |              |   
|Deferred Income
      Taxes:             |            |       |       |   |                       |   |       |      |              |   
|Net Current Assets                       |            |       | 16    |   |                       |   | 21    |      |              | 
|Net Non-current
      Liability          |            | 2,382 |       |   | 2,495                 |   | (552  | )    | (579         | ) 
|                                         |            |       |       |   |                       |   |       |      |              |   
|Total                                    | $          | 2,366 |       | $ | 2,474                 |   | $     | (552 | )            | $ 
|                                         |            |       |       |   |                       |   |       |      |              |   

|172 | 
|--- | 

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

Note 17. Pension, Other Postretirement Benefit
  (OPEB) and Savings Plans

PSEG sponsors several
  qualified and nonqualified pension plans and other postretirement benefit plans
  covering PSEG, as well as its participating affiliates, current and former employees
  who meet certain eligibility criteria. The following table provides a reconciliation
  of the changes in the fair value of plan assets over each of the two years in
  the period ended December 31, 2002 and a reconciliation of the funded status
  at the end of both years.

Pension and Other Postretirement Benefit Plans

|                                                       | Pension Benefits |       | Other Benefits
|------------------------------------------------------ | ---------------- | ----- | --------------
|                                                       |                  |       |               
|                                                       | 2002             |       | 2001          
|                                                       |                  |       |               
|                                                       | (Millions)       |       | (Millions)    
|Change in Benefit Obligation:                          |                  |       |               
|Benefit Obligation
      at Beginning of Year          | $                | 2,676 |               
|Service Cost                                           |                  | 69    |               
|Interest Cost                                          |                  | 188   |               
|Actuarial (Gain)/Loss                                  |                  | 162   |               
|Benefits Paid                                          |                  | (156  | )             
|Plan Amendments                                        |                  | 7     |               
|Business Combinations                                  |                  | 22    |               
|                                                       |                  |       |               
|Benefit Obligation
      at End of Year                |                  | 2,968 |               
|                                                       |                  |       |               
|                                                       |                  |       |               
|Change in Plan Assets:                                 |                  |       |               
|Fair Value of
      Assets at Beginning of Year        |                  | 2,228 |               
|Actual Return
      on Plan Assets                     |                  | (192  | )             
|Employer Contributions                                 |                  | 240   |               
|Benefits Paid                                          |                  | (156  | )             
|Business Combinations                                  |                  | 11    |               
|                                                       |                  |       |               
|Fair Value of
      Assets at End of Year              |                  | 2,131 |               
|                                                       |                  |       |               
|                                                       |                  |       |               
|Reconciliation of Funded
      Status:                 |                  |       |               
|Funded Status                                          |                  | (837  | )             
|Unrecognized
      Net                                 |                  |       |               
|Transition
      Obligation                            |                  | 5     |               
|Prior
      Service Cost                               |                  | 104   |               
|(Gain)
      Loss                                      |                  | 1,003 |               
|                                                       |                  |       |               
|Net Amount Recognized                                  | $                | 275   |               
|                                                       |                  |       |               
|                                                       |                  |       |               
|Amounts Recognized in Statement
      of               |                  |       |               
|Financial Position:                                    |                  |       |               
|Prepaid
      Benefit Cost                             | $                | 3     |               
|Accrued Cost                                           |                  | (343  | )             
|Intangible Asset                                       |                  | 114   |               
|Accumulated Other
      Comprehensive Income (pre-tax) |                  | 501   |               
|                                                       |                  |       |               
|Net Amount Recognized                                  | $                | 275   |               
|                                                       |                  |       |               
|                                                       |                  |       |               
|Separate Disclosure for Pension
      Plans With       |                  |       |               
|Accumulated Benefit Obligation
      in Excess of      |                  |       |               
|Plan Assets:                                           |                  |       |               
|Projected Benefit
      Obligation at End of Year      | $                | 2,946 |               
|Accumulated Benefit
      Obligation at End of Year    | $                | 2,451 |               
|Fair Value of
      Assets at End of Year              | $                | 2,113 |               

173

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

The pension benefits
  table above provides information relating to the funded status of all qualified
  and nonqualified pension plans and other postretirement benefit plans on an
  aggregate basis.

|                                                      | Pension Benefits |      | Other Benefits
|----------------------------------------------------- | ---------------- | ---- | --------------
|                                                      |                  |      |               
|                                                      | 2002             |      | 2001          
|                                                      |                  |      |               
|                                                      | (Millions)       |      | (Millions)    
|Components of Net Periodic
      Benefit Cost:        |                  |      |               
|Service Cost                                          | $                | 69   |               
|Interest Cost                                         |                  | 188  |               
|Expected Return
      on Plan Assets                  |                  | (206 | )             
|Amortization
      of Net                             |                  |      |               
|Transition
      Obligation                           |                  | 8    |               
|Prior
      Service Cost                              |                  | 17   |               
|(Gain)/Loss                                           |                  | 13   |               
|                                                      |                  |      |               
|Net Periodic
      Benefit Cost                       | $                | 89   |               
|                                                      |                  |      |               
|                                                      |                  |      |               
|Components of Total Benefit
      Expense:            |                  |      |               
|Net Periodic
      Benefit Cost                       | $                | 89   |               
|Effect of Regulatory
      Asset                      |                  |    |               
|                                                      |                  |      |               
|Total Benefit
      Expense Including Effect of       |                  |      |               
|Regulatory
      Asset                                | $                | 89   |               
|                                                      |                  |      |               
|                                                      |                  |      |               
|Components of Other Comprehensive
      Income:       |                  |      |               
|Decrease in Intangible
      Asset                    | $                | (95  | )             
|Increase in Additional
      Minimum Liability        |                  | 589  |               
|                                                      |                  |      |               
|Other Comprehensive
      Income (pre-tax)            | $                | 494  |               
|                                                      |                  |      |               
|                                                      |                  |      |               
|Weighted-Average Assumptions
      as of December 31: |                  |      |               
|Discount Rate                                         |                  | 6.75 | %             
|Expected Return
      on Plan Assets                  |                  | 9.00 | %             
|Rate of Compensation
      Increase                   |                  | 4.69 | %             
|Rate of Increase
      in Health Benefit Costs        |                  |      |               
|Administrative
      Expense                          |                  |      |               
|Dental
      Costs                                    |                  |      |               
|Pre-65
      Medical Costs                            |                  |      |               
|Immediate
      Rate                                  |                  |      |               
|Ultimate
      Rate                                   |                  |      |               
|Year
      Ultimate Rate Reached                      |                  |      |               
|Post-65
      Medical Costs                           |                  |      |               
|Immediate
      Rate                                  |                  |      |               
|Ultimate
      Rate                                   |                  |      |               
|Year
      Ultimate Rate Reached                      |                  |      |               
|                                                      |                  |      |               
|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         |                  |      |               
|Postretirement
      Benefit Obligation               |                  |      |               
|Effect of a 1%
      Decrease On                      |                  |      |               
|Total
      of Service Cost and Interest Cost         |                  |      |               
|Postretirement
      Benefit Obligation               |                  |      |               

174

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

401K Plans

PSEG sponsors two
  defined contribution plans. Eligible represented employees of PSE&G, Power
  and Services participate in the PSEG Employee Savings Plan (Savings Plan), while
  eligible non-represented employees of PSE&G, Power, Energy Holdings and
  Services participate 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 50% 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. For periods prior to March 1, 2002, employer contributions, related
  to participant contributions in excess of 5% and up to 7%, were made in shares
  of PSEG common stock for Savings Plan participants. For periods prior to March
  1, 2002, Employer contributions, related to participant contributions in excess
  of 6% and up to 8%, were made in shares of PSEG common stock for Thrift Plan
  participants. The shares for these contributions were purchased in the open
  market. Beginning on March 1, 2002, and thereafter, all Employer contributions
  will be made in cash to each plan. The amount expensed for Employer matching
  contributions to the plans was approximately $25 million, $24 million, and $22
  million in 2002, 2001 and 2000, respectively.

PSE&G, Power,
  Energy Holdings and Services eligible employees participate in non-contributory
  pension and OPEB plans sponsored by PSEG and administered by Services. In addition,
  represented and nonrepresented employees are eligible for participation in PSEGs
  two defined contribution plans described above.

PSE&G

PSE&Gs pension
  costs amounted to $46 million, $30 million and $17 million for the years ended
  December 31, 2002, 2001 and 2000, respectively. For 2002, this amount represented
  approximately 52% of PSEGs total consolidated pension costs. PSE&Gs
  Thrift Plan and Savings Plan matching costs amounted to approximately $13 million,
  $12 million and $11 million for the years ended December 31, 2002, 2001 and
  2000, respectively. PSE&Gs OPEB costs amounted to $95 million, $95
  million, and $109 million for the years ended December 31, 2002, 2001, and 2000,
  respectively. For 2002, this amount represented approximately 92% of PSEGs
  total consolidated OPEB costs.

Power

Powers pension
  costs amounted to $26 million, $16 million and $9 million for the years ended
  December 31, 2002, 2001 and 2000, respectively. For 2002, this amount represented
  approximately 29% of PSEGs total consolidated pension costs. Powers
  Thrift Plan and Savings Plan matching costs amounted to approximately $8 million,
  $8 million and $8 million for the years ended December 31, 2002, 2001 and 2000,
  respectively. Powers OPEB costs amounted to $6 million, $4 million, and
  $2 million for the years ended December 31, 2002, 2001, and 2000, respectively.
  For 2002, this amount represented approximately 6% of PSEGs total consolidated
  OPEB costs.

Energy Holdings

Energy Holdings
  pension costs amounted to $2 million and $1 million for the years ended December
  31, 2002 and 2001, respectively. For 2002, this amount represented approximately
  4% of PSEGs total consolidated pension costs. Energy Holdings Thrift
  Plan and Savings Plan matching costs amounted to approximately $1 million for
  each of the years ended December 31, 2002, 2001 and 2000. Energy Holdings OPEB costs amounted to
  less than $1 million for each of the years ended December 31, 2002, 2001 and
  2000.

175

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

Note 18. Stock Options and Employee Stock Purchase
  Plan

PSEG

Stock Options

Under PSEGs
  1989 Long-Term Incentive Plan (1989 LTIP) and its 2001 Long-Term Incentive Plan
  (2001 LTIP), non-qualified options to acquire shares of common stock may be
  granted to officers and other key employees of PSEG, PSE&G, Power, Energy
  Holdings and Services selected by the Organization and Compensation Committee
  of PSEGs Board of Directors, the plans administrative committee
  (Committee). In addition, certain key executives have received option grants
  under the 1989 LTIP in connection with their employment agreements. 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 1989 LTIP currently
  provides for the issuance of up to 8,000,000 options to purchase shares of common
  stock. At December 31, 2002, there were 3,817,717 options available for future
  grants under the 1989 LTIP.

The 2001 LTIP currently
  provides for the issuance of up to 15,000,000 options to purchase shares of
  common stock. At December 31, 2002, there were 9,241,500 options available for
  future grants under the 2001 LTIP.

PSEG purchases 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 Stockholders Equity
  except where otherwise discussed.

Changes in common
  shares under option for the three fiscal years in the period ended December
  31, 2002 are summarized as follows:

|                           | **2002**  |   |                               | **2001** |         |  | **2000**                     
|-------------------------- | --------- | - | ----------------------------- | -------- | ------- |  | -----------------------------
|                           |           |   |                               |          |         |  |                              
|                           | Options   |   | WeightedAverageExercise Price |          | Options |  | WeightedAverageExercise Price
|                           |           |   |                               |          |         |  |                              
|Beginning of year          | 7,652,463 |   | $                             | 41.22    |         |  | 5,186,099                    
|Granted                    | 1,890,000 |   |                               | 31.62    |         |  | 2,833,000                    
|Exercised                  | (157,332  | ) |                               | 36.28    |         |  | (303,135                     
|Canceled                   | (192,500  | ) |                               | 41.94    |         |  | (63,501                      
|                           |           |   |                               |          |         |  |                              
|End of year                | 9,192,631 |   |                               | 39.32    |         |  | 7,652,463                    
|                           |           |   |                               |          |         |  |                              
|Exercisable at end of year | 4,542,165 |   | $                             | 40.24    |         |  | 2,767,830                    
|                           |           |   |                               |          |         |  |                              
|                           |           |   |                               |          |         |  |                              
|Weighted average fair      |           |   |                               |          |         |  |                              
|value of options granted   |           |   |                               |          |         |  |                              
|during the year            |           |   | $                             | 4.37     |         |  |                              
|                           |           |   |                               |          |         |  |                              

176

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

The following
  table provides information about options outstanding at December 31, 2002:

|Options Outstanding            |                                       | Options Exercisable
|------------------------------ | ------------------------------------- | -------------------
|                               |                                       |                    
|Range of
      Exercise Prices | Outstanding
      atDecember 31, 2002 |                    
|                               |                                       |                    
|$                              | 25.03 $30.02                         | 173,300            
|$                              | 30.03 $35.03                         | 2,930,331          
|$                              | 35.04 $40.03                         | 690,500            
|$                              | 40.04 $45.04                         | 3,169,000          
|$                              | 45.05 $50.05                         | 2,229,500          
|                               |                                       |                    
|$                              | 25.03 $50.05                         | 9,192,631          
|                               |                                       |                    

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 2002, 2001, and 2000, respectively: expected volatility of
  30.24%, 28.22% and 26.63%, risk free interest rates of 2.82%, 4.40% and 6.06%,
  expected lives of 4.0 years, 4.2 years and 4.4 years, respectively. There was
  a dividend yield of 6.84% in 2002, 5.18% in 2001 and 4.77% in 2000.

PSEG applies 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, no compensation cost has been recognized for fixed stock option
  grants since the exercise price of the stock options equaled the market price
  of the underlying stock on the date of grant. Had compensation costs for 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 net income
  of approximately $10.4 million, $9.6 million and $3.6 million in 2002, 2001
  and 2000, respectively, with a $(0.05), $(0.05) and $(0.02) impact on earnings
  per share in 2002, 2001 and 2000, respectively.

The following table illustrates the effect on net
  income and earnings per share if PSEG had applied the fair value recognition
  provisions of SFAS No. 123 to stock-based employee compensation:

|                                             | Year Ended December
      31,
|-------------------------------------------- | -----------------------------
|                                             |                              
|                                             | **2002**                     
|                                             |                              
|                                             |                              
|Net Income, as reported                      | $                            
|                                             |                              
|Deduct: Total stock-based employee           |                              
|compensation
      expense determined        |                              
|under fair value
      based method for      |                              
|all awards, net
      of related tax effects |                              
|                                             |                              
|                                             |                              
|Pro forma Net Income                         | $                            
|                                             |                              
|                                             |                              
|Earnings per share:                          |                              
|Basic and Diluted
       as reported        | $                            
|Basic and Diluted
       pro forma          | $                            

Diluted Earning Per Share

Diluted earning per
  share assumes the issuance of potentially dilutive common shares outstanding
  during the period and the repurchase of common shares that would have occurred
  with proceeds from the assumed issuance.

177

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

These potentially
  dilutive instruments include stock options, vesting of non-vested stock awards,
  and certain convertible preferred securities.

As shown in the tables
  above, as of December 31, 2002, options to purchase approximately 9.2 million
  shares of common stock at an average price of $39.32 per share were outstanding
  during 2002. These securities were not included in the computation of diluted
  EPS because these options exercise price was greater than the average
  market price of common shares, thus making these securities anti-dilutive.

Stock Compensation

Executive Officers

In June 1998, the
  Committee granted 150,000 shares of restricted common stock to a key executive.
  An additional 60,000 shares of restricted stock was granted to this executive
  in November 2001. 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, 2007. The unearned compensation related to this restricted stock
  grant as of December 31, 2002 is approximately $4 million and is included in
  retained earnings on the consolidated balance sheets.

In addition, in July
  2001, the Committee granted 100,000 shares of restricted common stock to another
  key executive. These shares are subject to restrictions on transfer and subject
  to risk of forfeiture until earned by continued employment. The shares vest
  at one-third per year and become fully vested on July 1, 2004. The unearned
  compensation related to this restricted stock grant as of December 31, 2002
  is approximately $2 million and is included in retained earnings on the consolidated
  balance sheets.

Outside Directors

During 2002, a director
  who was not an officer of PSEG or its subsidiaries and affiliates was paid an
  annual retainer of $30,000 and a fee of $1,500 for attendance at any Board or
  committee meeting, inspection trip, conference or other similar activity relating
  to PSEG or PSE&G. This amount was raised to $40,000 effective for 2003.
  Pursuant to the Compensation Plan for Outside Directors, a certain percentage,
  currently fifty percent, of the annual retainer is paid in PSEG Common Stock.
  No additional retainer is paid for service as a director of PSE&G. Each
  Committee Chair received an additional annual retainer of $3,000, increased
  for 2003 to $5,000 except for the Chair of the Audit Committee, who will receive
  $10,000. In addition, beginning in 2003, each member of the Audit Committee
  will receive an annual retainer of $5,000. In January 2003, PSEG amended the
  Compensation Plan for Outside Directors pursuant to which 100,000 shares of
  Common Stock may be awarded to directors of PSEG who are not employees of PSEG
  or its subsidiaries.

PSEG also maintains
  a Stock Plan for Outside Directors pursuant to which directors of PSEG who are
  not employees of PSEG or its subsidiaries receive shares of restricted stock
  for each year of service as a director. For 2002, this amount was 600 shares,
  increased to 800 shares for 2003. 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 these restrictions
  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. The fair value of these shares is recorded as compensation
  expense in the Consolidated Statements of Operations. In January 2003, PSEG
  adopted the Stock Plan for Outside Directors pursuant to which 100,000 shares
  of Common Stock may be awarded as restricted stock to directors of PSEG who
  are not employees of PSEG or its subsidiaries.

178

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

Employee Stock Purchase Plan

PSEG maintains
  an employee stock purchase plan for all eligible employees of PSEG, PSE&G,
  Power, Energy Holdings and Services. Under the plan, shares of the common stock
  may be purchased at 95% of the fair market value through payroll deductions.
  Employees may purchase shares having a value not exceeding 10% of their base
  pay. During 2002, 2001, and 2000, employees purchased 104,627, 85,552, and 101,986
  shares at an average price of $36.41, $44.02, and $37.06 per share, respectively.
  At December 31, 2002, 169,456 shares were available for future issuance under
  this plan. In January 2003, an additional 2,000,000 shares were authorized for
  this plan.

Note 19. Financial Information by Business Segments

Basis of Organization

PSEG, PSE&G, Power and Energy Holdings

The reportable
  segments were determined by management in accordance with SFAS No. 131, Disclosures
  About Segments of an Enterprise and Related Information (SFAS 131). These
  segments were determined based on how management measures the performance based
  on segment net income, as illustrated in the following table, and how it allocates
  resources to each business.

The majority of operations
  within the business segment Energy Technologies were reclassified into discontinued
  operations during 2002. The DSM investments, which were the only remaining continuing
  operations of Energy Technologies, were transferred to Resources effective December
  31, 2002. Therefore, Energy Technologies is no longer reported as a separate
  segment. The amounts related to Energy Technologies are included in Energy Holdings Other Activities
  and all prior periods have been restated to conform to the current years
  presentation.

Power

Power earns
  revenues by selling energy, capacity and ancillary services on a wholesale basis
  under contract to power marketers and to load serving entities (LSEs) and by
  bidding the energy, capacity and ancillary services of Power into the market.
  Power also enters into trading contracts for energy capacity, firm transmission
  rights, gas, emission allowances and other energy related contracts to optimize
  the value of its portfolio of generating assets and its electric and gas supply
  obligations.

Powers business
  has evolved during 2002. With the transfer of the BGSS contract to Power and
  the commencement of the new BGS contracts with wholesale electric suppliers,
  Powers business has become a fully integrated wholesale energy supply
  business. As a result of that evolution of Powers business, trading activities
  changed from a stand-alone operation to a function that has become fully integrated
  with the wholesale energy supply business and primarily serves to optimize the
  value of that business. Therefore, upon review and in accordance with SFAS 131,
  PSEG determined that Powers generation and trading components no longer
  meet the definition of separate operating segments for financial reporting purposes
  and PSEG has reported Powers financial position and results of operations
  as one segment. All prior periods have been reclassified to conform to the current
  presentation.

PSE&G

PSE&G
  earns 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 earned from a variety of other activities such
  as sundry sales, the appliance service business, wholesale transmission services
  and other miscellaneous services.

179

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

Energy Holdings

Global

Global earns
  revenues from its investment in and operation of projects in the generation
  and distribution of energy, both domestically and internationally. Global has
  ownership interests in four distribution companies (excluding those in Argentina
  which were fully impaired during 2002) which serve approximately 2.9 million
  customers and has developed or acquired interests in electric generation facilities
  which sell energy, capacity and ancillary services to numerous customers. The
  generation plants sell power under long-term agreements as well as on a merchant
  basis while the distribution companies are rate-regulated enterprises.

Resources

Resources earns revenues
  from its passive investments in leveraged leases, limited partnerships, leveraged
  buyout funds and marketable securities. Over 75% of Resources investments
  are in energy industry related leveraged leases. DSM Investments were transferred
  to Resources on December 31, 2002 and earn revenues primarily from monthly payments
  from utilities, representing shared electricity savings from the installation
  of energy efficient equipment. Resources operates both domestically and internationally,
  however, revenues from all international investments are denominated in US dollars.

Other

Energy
  Holdings other activities include amounts applicable to Energy Holdings
  (parent company), the HVAC/operating companies of Energy Technologies, which
  were reclassified into discontinued operations in 2002, and EGDC. The net losses
  primarily relate to financing and certain administrative and general costs at
  the Energy Holdings parent corporation.

Other

PSEGs other
  activities include amounts applicable to PSEG (parent corporation), and intercompany
  eliminations, primarily relating to intercompany transactions between Power
  and PSE&G. No gains or losses are recorded on any intercompany transactions,
  rather, all intercompany transactions are at cost or, in the case of the BGS
  and BGSS contracts between Power and PSE&G, at rates prescribed by the BPU.
  For a further discussion of the intercompany transactions between Power and
  PSE&G, see Note 22. Related-Party Transactions. The net losses primarily
  relate to financing and certain administrative and general costs at the PSEG
  parent corporation.

180

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
  Continued

Information related to the segments of PSEGs
  and its subsidiaries is detailed below:

|                                                                                                                         |            |       |       |   |           |  | Energy Holdings |       |       |   |       |   |                         
|------------------------------------------------------------------------------------------------------------------------ | ---------- | ----- | ----- | - | --------- |  | --------------- | ----- | ----- | - | ----- | - | ------------------------
|                                                                                                                         |            |       |       |   |           |  |                 |       |       |   |       |   |                         
|                                                                                                                         | Power      |       | PSE&G |   | Resources |  | Global          |       | Other |   | Other |   | Consolidated
      Total
|                                                                                                                         |            |       |       |   |           |  |                 |       |       |   |       |   |                         
|                                                                                                                         | (Millions)
|For the Year Ended
      December 31, 2002:                                                                              |            |       |       |   |           |  |                 |       |       |   |       |   |                         
|                                                                                                                         |            |       |       |   |           |  |                 |       |       |   |       |   |                         
|Total Operating Revenues                                                                                                 | $          | 3,670 |       | $ | 5,919     |  | $               | 247   |       | $ | 501   |   | $                       
|Depreciation and Amortization                                                                                            |            | 108   |       |   | 409       |  |                 | 5     |       |   | 29    |   |                         
|Operating Income
      (Loss)                                                                                            |            | 903   |       |   | 713       |  |                 | 213   |       |   | (296  | ) | (12                     
|Interest Income                                                                                                          |            |      |       |   | 17        |  |                 |      |       |   |      |   |                        
|Net Interest
      Charges                                                                                               |            | 122   |       |   | 406       |  |                 | 99    |       |   | 115   |   |                        
|Income (Loss) Before Income Taxes                                                                                        |            | 781   |       |   | 320       |  |                 | 121   |       |   | (465  | ) | (13                     
|Income Taxes                                                                                                             |            | 313   |       |   | 115       |  |                 | 37    |       |   | (184  | ) | (3                      
|Equity in Earnings
      of Unconsolidated    Subsidiaries                                                               |            |      |       |   |          |  |                 | 1     |       |   | 58    |   |                        
|Income (Loss) Before Discontinued                                                                                        |            |       |       |   |           |  |                 |       |       |   |       |   |                         
|Operations and Cumulative Effect
      of a                                                                              |            |       |       |   |           |  |                 |       |       |   |       |   |                         
|Change in Accounting
      Principle                                                                                     |            | 468   |       |   | 201       |  |                 | 84    |       |   | (285  | ) | (8                      
|Income (Loss) from Discontinued
      Operations                                                                         |            |      |       |   |          |  |                 |      |       |   | (9    | ) | (42                     
|Cumulative Effect
      of a Change in Accounting Principle                                                              |            |      |       |   |          |  |                 |      |       |   | (88   | ) | (32                     
|Segment Earnings (Loss)                                                                                                  |            | 468   |       |   | 201       |  |                 | 78    |       |   | (399  | ) | (82                     
|                                                                                                                         |            |       |       |   |           |  |                 |       |       |   |       |   |                         
|As of December 31, 2002:                                                                                                 |            |       |       |   |           |  |                 |       |       |   |       |   |                         
|                                                                                                                         |            |       |       |   |           |  |                 |       |       |   |       |   |                         
|Total Assets                                                                                                             | $          | 6,964 |       | $ | 12,429    |  | $               | 3,086 |       | $ | 3,802 |   | $                       
|Investments in Equity Method Subsidiaries                                                                                | $          |      |       | $ |          |  | $               | 118   |       | $ | 1,300 |   | $                       
|For the Year Ended December
      31, 2002:                                                                              |            |       |       |   |           |  |                 |       |       |   |       |   |                         
|                                                                                                                         |            |       |       |   |           |  |                 |       |       |   |       |   |                         
|Gross Additions to Long-Lived Assets                                                                                     | $          | 1,318 |       | $ | 472       |  | $               | 37    |       | $ | 579   |   | $                       
|                                                                                                                         |            |       |       |   |           |  |                 |       |       |   |       |   |                         
|For the Year Ended December
      31, 2001:                                                                              |            |       |       |   |           |  |                 |       |       |   |       |   |                         
|                                                                                                                         |            |       |       |   |           |  |                 |       |       |   |       |   |                         
|Total Operating Revenues                                                                                                 | $          | 2,452 |       | $ | 6,091     |  | $               | 241   |       | $ | 396   |   | $                       
|Depreciation and Amortization                                                                                            |            | 95    |       |   | 370       |  |                 | 4     |       |   | 11    |   | 1                       
|Operating Income                                                                                                         |            | 787   |       |   | 691       |  |                 | 211   |       |   | 243   |   | (13                     
|Interest Income                                                                                                          |            |      |       |   | 104       |  |                 |      |       |   |      |   |                        
|Net Interest
      Charges                                                                                               |            | 143   |       |   | 450       |  |                 | 100   |       |   | 78    |   | 2                       
|Income Before Income Taxes                                                                                               |            | 644   |       |   | 324       |  |                 | 111   |       |   | 153   |   | (9                      
|Income Taxes                                                                                                             |            | 250   |       |   | 89        |  |                 | 34    |       |   | 35    |   | (4                      
|Equity in Earnings of Unconsolidated Subsidiaries                                                                        |            |      |       |   |          |  |                 | 55    |       |   | 143   |   |                        
|Income
      (Loss) Before Discontinued
      Operations and Cumulative Effect of a
      Change in Accounting Principle |            | 394   |       |   | 230       |  |                 | 77    |       |   | 117   |   | (5                      
|Income (Loss) from Discontinued                                                                                          |            |       |       |   |           |  |                 |       |       |   |       |   |                         
|Operations                                                                                                               |            |      |       |   |          |  |                 |      |       |   | 7     |   | (22                     
|Cumulative Effect of a Change in
      Accounting Principle                                                              |            |      |       |   |          |  |                 |      |       |   | 9     |   |                        
|Segment Earnings
      (Loss)                                                                                            |            | 394   |       |   | 230       |  |                 | 71    |       |   | 116   |   | (26                     
|                                                                                                                         |            |       |       |   |           |  |                 |       |       |   |       |   |                         
|As of December 31, 2001:                                                                                                 |            |       |       |   |           |  |                 |       |       |   |       |   |                         
|                                                                                                                         |            |       |       |   |           |  |                 |       |       |   |       |   |                         
|Total Assets                                                                                                             | $          | 5,239 |       | $ | 12,927    |  | $               | 3,085 |       | $ | 4,074 |   | $                       
|Investments in Equity Method Subsidiaries                                                                                | $          |      |       | $ |          |  | $               | 163   |       | $ | 1,541 |   | $                       
|For the Year Ended December
      31, 2001:                                                                              |            |       |       |   |           |  |                 |       |       |   |       |   |                         
|                                                                                                                         |            |       |       |   |           |  |                 |       |       |   |       |   |                         
|Gross Additions to Long-Lived Assets                                                                                     | $          | 1,614 |       | $ | 395       |  | $               | 462   |       | $ | 1,249 |   | $                       

181

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NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

|                                            |                 |       |                 |   | Energy Holdings |  |        |     |       |  
|------------------------------------------- | --------------- | ----- | --------------- | - | --------------- |  | ------ | --- | ----- | -
|                                            |                 |       |                 |   |                 |  |        |     |       |  
|                                            | Power
      (A) |       | (A)
      PSE&G |   | Resources       |  | Global |     | Other |  
|                                            |                 |       |                 |   |                 |  |        |     |       |  
|For the Year Ended December
      31, 2000: | (Millions)     
|                                            |                 |       |                 |   |                 |  |        |     |       |  
|Total Operating Revenues                    | $               | 2,275 |                 | $ | 4,644           |  | $      | 233 |       | $
|Depreciation and Amortization               |                 | 136   |                 |   | 209             |  |        | 5   |       |  
|Operating Income                            |                 | 712   |                 |   | 869             |  |        | 207 |       |  
|Interest Income                             |                 | 1     |                 |   | 164             |  |        |    |       |  
|Net Interest Charges                        |                 | 198   |                 |   | 348             |  |        | 79  |       |  
|Income Before Income Taxes                  |                 | 521   |                 |   | 638             |  |        | 128 |       |  
|Income Taxes                                |                 | 208   |                 |   | 260             |  |        | 47  |       |  
|Equity in Earnings of Unconsolidated        |                 |       |                 |   |                 |  |        |     |       |  
|Subsidiaries                                |                 |      |                 |   |                |  |        | 13  |       |  
|Income (Loss) Before Discontinued           |                 |       |                 |   |                 |  |        |     |       |  
|Operations                                  |                 | 313   |                 |   | 369             |  |        | 81  |       |  
|Loss from Discontinued
      Operations     |                 |      |                 |   |                |  |        |    |       |  
|Segment Earnings (Loss)                     |                 | 313   |                 |   | 369             |  |        | 75  |       |  

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(A) | Included in the Power segment for 2000 are the
      results of the generation business of PSE&G prior to the asset transfer
      in August 2000. These results through July 31, 2000 are included in PSE&Gs
      Consolidated Statement of Operations for the year ended December 31, 2000.
      Because Powers historical information was derived from historical
      financial statements of PSE&G, these amounts are also included on Powers
      Consolidated Statement of Operations for the year ended December 31, 2000.
      For segment reporting purposes, these amounts are appropriately classified
      as Power. Amounts relating to the generation business of PSE&G prior
      to the asset transfer to Power in August 2000 were as follows:

|                               |   | (Millions) |  
|------------------------------ | - | ---------- | -
|Operating Revenues             | $ | 1,243      |  
|Operating Expenses             |   |            |  
|Energy Costs                   |   | 410        |  
|Operations and Maintenance     |   | 357        |  
|Depreciation and Amortization  |   | 77         |  
|                               |   |           
|Total Operating
      Expenses |   | 844        |  
|Operating Income               |   | 399        |  
|Other Income                   |   | 6          |  
|Interest Expense               |   | (49        | )
|Income Taxes                   |   | (147       | )
|                               |   |           
|Net Income                     | $ | 209        |  
|                               |   |           

182

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

Geographic information
  for PSEG is disclosed below. The foreign assets and operations noted below were
  made solely through Energy Holdings.

|                                                        | Revenues (A) |       | Assets (B)   |  
|------------------------------------------------------- | ------------ | ----- | ------------ | -
|                                                        |              |       |              |  
|                                                        | December 31, |       | December 31, |  
|                                                        |              |       |              |  
|                                                        | 2002         | 2001  | 2000         |  
|                                                        |              |       |              |  
|                                                        | (Millions)   |       | (Millions)   |  
|United States                                           | $            | 7,864 |              | $
|Foreign Countries                                       |              | 526   |              |  
|                                                        |              |       |              |  
|Total                                                   | $            | 8,390 |              | $
|                                                        |              |       |              |  
|                                                        |              |       |              |  
|Identifiable assets in foreign
      countries include: |             
|Chile                                                   |              |       |              |  
|Netherlands                                             |              |       |              |  
|Argentina                                               |              |       |              |  
|Peru                                                    |              |       |              |  
|Tunisia                                                 |              |       |              |  
|India (C)                                               |              |       |              |  
|Poland                                                  |              |       |              |  
|Brazil                                                  |              |       |              |  
|Other                                                   |              |       |              |  
|                                                        |              |       |              |  
|Total                                                   |              |       |              |  
|                                                        |              |       |              |  

|(A)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 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.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(B)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Total assets are net of foreign
      currency translation adjustment of $(340) million (pre-tax) as of December
      31, 2002 and $(285) million (pre-tax) as of December 31, 2001.                                      
|(C)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Approximately $257 million at December
      31, 2001 relates to Tanir Bavi, which was discontinued as of June 30, 2002
      and was sold in October 2002.                                                                
|As
      of December 31, 2002, Global and Resources had approximately $2.9 billion
      and $1.3 billion, respectively of international assets. As of December 31,
      2002, foreign assets represented 16% and 61% of PSEGs and Energy Holdings
      consolidated assets, respectively, and the revenues related to those foreign
      assets contributed 6% and 70% to PSEGs and Energy Holdings consolidated
      revenues, respectively, for the year ended December 31, 2002.
|183                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

Note 20. Property, Plant and Equipment and Jointly
  Owned Facilities

Information related
  to Property, Plant and Equipment as of December 31, 2002 and 2001 is detailed
  below:

|                                          | PSE&G      |       | Power |   | Energy
      Holdings |  | **Other** |       | PSEG
      Consolidated | 
|----------------------------------------- | ---------- | ----- | ----- | - | --------------------- |  | --------- | ----- | ----------------------- | 
|                                          |            |       |       |   |                       |  |           |       |                         | 
|2002                                      | (Millions) |      
|                                          |            |       |       |   |                       |  |           |       |                         | 
|Generation:                               |            |       |       |   |                       |  |           |       |                         | 
|Fossil
      Production                   | $          |      |       | $ | 2,467                 |  | $         | 599   |                         | 
|Nuclear
      Production                  |            |      |       |   | 215                   |  |           |      |                         | 
|Nuclear
      Fuel in Service             |            |      |       |   | 527                   |  |           |      |                         | 
|Construction
      Work in Progress       |            |      |       |   | 2,062                 |  |           | 466   |                         | 
|                                          |            |       |       |   |                       |  |           |       |                         | 
|Total
      Generation                    |            |      |       |   | 5,271                 |  |           | 1,065 |                         | 
|                                          |            |       |       |   |                       |  |           |       |                         | 
|Transmission and Distribution:            |            |       |       |   |                       |  |           |       |                         | 
|Electric
      Transmission               |            | 1,243 |       |   |                      |  |           |      |                         | 
|Electric
      Distribution               |            | 4,446 |       |   |                      |  |           | 329   |                         | 
|Gas
      Transmission                    |            | 74    |       |   |                      |  |           |      |                         | 
|Gas
      Distribution                    |            | 3,271 |       |   |                      |  |           |      |                         | 
|Construction
      Work in Progress       |            | 20    |       |   |                      |  |           | 27    |                         | 
|Plant
      Held for Future Use           |            | 18    |       |   |                      |  |           |      |                         | 
|Other                                     |            | 91    |       |   |                      |  |           |      |                         | 
|                                          |            |       |       |   |                       |  |           |       |                         | 
|Total
      Transmission and Distribution |            | 9,163 |       |   |                      |  |           | 356   |                         | 
|                                          |            |       |       |   |                       |  |           |       |                         | 
|Other                                     |            | 418   |       |   | 76                    |  |           | 113   |                         | 
|                                          |            |       |       |   |                       |  |           |       |                         | 
|Total                                     | $          | 9,581 |       | $ | 5,347                 |  | $         | 1,534 |                         | 
|                                          |            |       |       |   |                       |  |           |       |                         | 
|2001                                      |            |       |       |   |                       |  |           |       |                         | 
|                                          |            |       |       |   |                       |  |           |       |                         | 
|Generation:                               |            |       |       |   |                       |  |           |       |                         | 
|Fossil
      Production                   | $          |      |       | $ | 1,856                 |  | $         | 88    |                         | 
|Nuclear
      Production                  |            |      |       |   | 154                   |  |           |      |                         | 
|Nuclear
      Fuel in Service             |            |      |       |   | 486                   |  |           |      |                         | 
|Construction
      Work in Progress       |            |      |       |   | 1,687                 |  |           | 312   |                         | 
|                                          |            |       |       |   |                       |  |           |       |                         | 
|Total
      Generation                    |            |      |       |   | 4,183                 |  |           | 400   |                         | 
|                                          |            |       |       |   |                       |  |           |       |                         | 
|Transmission and Distribution:            |            |       |       |   |                       |  |           |       |                         | 
|Electric
      Transmission               |            | 1,201 |       |   |                      |  |           |      |                         | 
|Electric
      Distribution               |            | 4,254 |       |   |                      |  |           | 577   |                         | 
|Gas
      Transmission                    |            | 74    |       |   |                      |  |           |      |                         | 
|Gas
      Distribution                    |            | 3,121 |       |   |                      |  |           |      |                         | 
|Construction
      Work in Progress       |            | 26    |       |   |                      |  |           | 32    |                         | 
|Plant
      Held for Future Use           |            | 20    |       |   |                      |  |           |      |                         | 
|Other                                     |            | 89    |       |   |                      |  |           |      |                         | 
|                                          |            |       |       |   |                       |  |           |       |                         | 
|Total
      Transmission and Distribution |            | 8,785 |       |   |                      |  |           | 609   |                         | 
|                                          |            |       |       |   |                       |  |           |       |                         | 
|Other                                     |            | 385   |       |   | 55                    |  |           | 172   |                         | 
|                                          |            |       |       |   |                       |  |           |       |                         | 
|Total                                     | $          | 9,170 |       | $ | 4,238                 |  | $         | 1,181 |                         | 
|                                          |            |       |       |   |                       |  |           |       |                         | 

184

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

PSE&G and Power

PSE&G and Power
  have ownership interests in and are responsible for providing their share of
  the necessary financing for the following jointly owned facilities. All amounts
  reflect the share of PSE&Gs and Powers jointly owned projects
  and the corresponding direct expenses are included in Consolidated Statements
  of Operations as operating expenses.

|December
      31, 2002          | Ownership
      Interest           |   | Plant |   | **Accumulated
      Depreciation**
|-------------------------------- | ---------------------------------- | - | ----- | - | ----------------------------------
|                                 |                                    |   |       |   |                                   
|Power:                           | (Millions, where
      Applicable)
|Coal Generating                  |                                    |   |       |   |                                   
|Conemaugh                        | 22.50                              | % |       | $ | 203                               
|Keystone                         | 22.84                              | % |       | $ | 155                               
|Nuclear Generating               |                                    |   |       |   |                                   
|Peach Bottom                     | 50.00                              | % |       | $ | 225                               
|Salem                            | 57.41                              | % |       | $ | 324                               
|Nuclear Support
      Facilities | Various                            |   |       | $ | 34                                
|Pumped Storage Facilities        |                                    |   |       |   |                                   
|Yards Creek                      | 50.00                              | % |       | $ | 28                                
|Merrill Creek
      Reservoir    | 13.91                              | % |       | $ | 2                                 
|PSE&G:                           |                                    |   |       |   |                                   
|Transmission Facilities          | Various                            |   |       | $ | 80                                
|Linden SNG Plant                 | 90.00                              | % |       | $ | 5                                 
|                                 |                                    |   |       |   |                                   
|December 31,
      2001          |                                    |   |       |   |                                   
|                                 |                                    |   |       |   |                                   
|Power:                           |                                    |   |       |   |                                   
|Coal Generating                  |                                    |   |       |   |                                   
|Conemaugh                        | 22.50                              | % |       | $ | 199                               
|Keystone                         | 22.84                              | % |       | $ | 128                               
|Nuclear Generating               |                                    |   |       |   |                                   
|Peach Bottom                     | 50.00                              | % |       | $ | 263                               
|Salem                            | 57.41                              | % |       | $ | 257                               
|Nuclear Support
      Facilities | Various                            |   |       | $ | 32                                
|Pumped Storage Facilities        |                                    |   |       |   |                                   
|Yards Creek                      | 50.00                              | % |       | $ | 28                                
|Merrill Creek
      Reservoir    | 13.91                              | % |       | $ | 2                                 
|PSE&G:                           |                                    |   |       |   |                                   
|Transmission Facilities          | Various                            |   |       | $ | 80                                
|Linden SNG Plant                 | 90.00                              | % |       | $ | 5                                 

Power

Power holds undivided
  ownership interests in the jointly owned facilities above, excluding related
  nuclear fuel and inventories. Power is entitled to shares of the generating
  capability and output of each unit equal to its respective ownership interests.
  Power also pays its ownership share of additional construction costs, fuel inventory
  purchases and operating expenses. Powers share of expenses for the jointly
  owned facilities is included in the appropriate expense category.

Powers subsidiary,
  PSEG Nuclear LLC (Nuclear) co-owns Salem and Peach Bottom with Exelon Generation
  Company, LLC. Nuclear is the owner-operator of Salem and Exelon Generation Company,
  LLC is the operator of Peach Bottom. A committee appointed by the co-owners
  reviews/approves major planning, financing and budgetary (capital and operating)
  decisions. Operating decisions within the above guidelines are made by the owner-operator.

Reliant Resources
  is a co-owner and the operator for Keystone Generating Station and Conemaugh
  Generating Station. A committee appointed by all co-owners makes all planning,
  financing and budgetary (capital and operating) decisions. Operating decisions
  within the above guidelines are made by Reliant Resources.

185

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

Power is a co-owner
  in the Yards Creek Pumped Storage Generation Facility. First Energy is also
  a co-owner and the operator of this facility. First Energy submits separate
  capital and Operations and Maintenance budgets, subject to the approval of Power.

Power is a minority
  owner in the Merrill Creek Reservoir. Merrill Creek Reservoir is the owner-operator
  of this facility. The operator submits separate capital and Operations and Maintenance
  budgets, subject to the approval of the non-operating owners.

All owners receive
  revenues, Operations and Maintenance and capital allocations based on their
  ownership percentages. Each owner is responsible for any financing with respect
  to its pro rata share of capital expenditures.

Note 21. Selected Quarterly Data (Unaudited)

The information shown
  below, in the opinion of PSEG, PSE&G, Power and Energy Holdings, includes
  all adjustments, consisting only of normal recurring accruals, necessary to
  a fair presentation of such amounts.

|                                                                                                                | Calendar Quarter
      Ended       |      
|--------------------------------------------------------------------------------------------------------------- | ---------------------------------- | -----
|                                                                                                                |                                    |      
|                                                                                                                | March 31,                          |      
|                                                                                                                |                                    |      
|                                                                                                                | 2002                               |      
|                                                                                                                |                                    |      
|PSEG Consolidated:                                                                                              | (Millions, where
      Applicable)
|Operating Revenues                                                                                              | $                                  | 1,914
|Operating Income                                                                                                |                                    |      
|Income
      before Discontinued Operationsand Cumulative
      Effect of a Change inAccounting
      Principle |                                    |      
|Income (loss) from Discontinued
      Operations                                                                |                                    |      
|Cumulative Effect
      of a Change inAccounting Principle                                                      |                                    | (120 
|Net Income (Loss)                                                                                               |                                    |      
|Earnings per Share                                                                                              |                                    |      
|(Basic and Diluted)                                                                                             |                                    |      
|                                                                                                                |                                    |      
|Weighted Average
      CommonShares
      and Potential Dilutive Effectof
      Stock Options Outstanding       |                                    |      
|                                                                                                                |                                    |      
|PSE&G:                                                                                                          |                                    |      
|Operating Revenues                                                                                              | $                                  | 1,659
|Operating Income                                                                                                |                                    |      
|Net Income                                                                                                      |                                    |      
|Earnings Available to PSEG                                                                                      |                                    |      
|                                                                                                                |                                    |      
|Power:                                                                                                          |                                    |      
|Operating Revenues                                                                                              | $                                  |      
|Operating Income                                                                                                |                                    |      
|Net Income                                                                                                      |                                    |      
|                                                                                                                |                                    |      
|Energy Holdings:                                                                                                |                                    |      
|Operating Revenues                                                                                              | $                                  |      
|Operating Income                                                                                                |                                    |      
|Income before Discontinued
      Operationsand Cumulative Effect of a Change
      inAccounting Principle       |                                    |      
|                                                                                                                |                                    |      
|(Loss) Income from DiscontinuedOperations                                                                       |                                    |      
|Cumulative Effect of a Change in                                                                                |                                    |      
|Accounting
      Principle                                                                                      |                                    | (120 
|Net (Loss) Income                                                                                               |                                    | (115 
|(Loss) Earnings
      Available to PSEG                                                                         |                                    | (121 

186

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

Note 22. Related-Party Transactions

Affiliate Loans

These transactions
  were properly recognized on each companys stand-alone financial statements
  and were eliminated when preparing PSEGs consolidated financial statements.

PSEG
  and PSE&G

On January 31, 2001,
  PSE&G loaned approximately $1.1 billion to PSEG at 14.23% per annum and
  recorded interest income of approximately $33 million relating to the loan in
  2001. PSEG repaid the loan on April 16, 2001. PSE&G also returned approximately
  $2.3 billion of capital to PSEG on January 31, 2001 utilizing proceeds from
  the $2.5 billion securitization transaction and the generation asset transfer,
  as required by the Final Order, as part of the recapitalization. For additional
  information, see Note 6. Regulatory Issues and Accounting Impacts of Deregulation.

PSEG
  and Power

As of December 31,
  2002 and 2001, Power had a payable to PSEG of approximately $239 million and
  $164 million, respectively, for short-term funding needs. Interest expense related
  to these borrowings was $4 million and $23 million for the year ended December
  31, 2002 and 2001, respectively.

PSEG and Energy
  Holdings

As of December 31,
  2002, Energy Holdings had a receivable due from PSEG of $62 million. Interest
  Income related to this borrowing was immaterial.

Changes in Capitalization

PSE&G

PSE&G paid
  a common stock dividend of approximately $305 million to PSEG in 2002.

Power

During 2002, PSEG
  invested $200 million of additional equity in Power, the proceeds of which were
  used to repay short-term debt and fund additional investments.

Energy Holdings

During 2002, PSEG
  invested $400 million of additional equity in Energy Holdings, the proceeds
  of which were used to repay short-term debt and fund additional investments.

Tax Sharing Agreement

PSEG, PSE&G, Power and Energy Holdings

PSEG files a consolidated
  Federal income tax return with its affiliated companies. A tax allocation agreement
  exists between PSEG and its affiliated companies. The general operation of these
  agreements is that the subsidiary company will compute its taxable income on
  a stand-alone basis. If the result is a net tax liability, such amount shall
  be paid to PSEG. If there are net operating losses and/or tax credits, the subsidiary
  shall receive payment for the tax savings from PSEG to the extent that PSEG
  is able to utilize those benefits.

Power and Energy Holdings

Foster Wheeler
  Ltd.

Certain contracts
  were entered into with subsidiaries of Foster Wheeler Ltd. E. James Ferland,
  PSEG Chairman of the Board, President and Chief Executive Officer, serves on
  the Board of Directors of Foster Wheeler Ltd. Richard J. Swift, who serves on
  PSEGs Board of Directors, was the President and Chief Executive Officer
  of Foster Wheeler Ltd. at the time the contracts were entered into. The original
  contracts were for approximately $369 million of engineering, procurement and
  construction services related to the development of certain generating facilities
  for Power, Global and Services, $129 million of which was rendered in 2002. As
  of December 31, 2002, the aggregate open commitment under the contracts is approximately
  $69 million, of which $6 million, $62 million and $1 million relates to Power,
  Global and Services, respectively. PSEG believes that the contracts were entered

187

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

into on commercial terms no more favorable than
  those available in an arms-length transaction from other parties and the pricing
  is consistent with that available from other third parties.

Equipment Purchases
  and Sales

Global purchased equipment
  from Power totaling $47 million and $30 million in 2002 and 2001, respectively.
  These amounts were sold at book value, thus no gain or loss was recorded on
  these transactions. As of December 31, 2002 and 2001, there were no outstanding
  receivables or payables related to such sales.

PSE&G and Power

Transfer of Electric
  Generating Assets

In August 2000, PSE&G
  transferred its electric generating assets to Power in exchange for a $2.786
  billion Promissory Note. Interest on the Promissory Note was payable at an annual
  rate of 14.23%, which represented PSE&Gs weighted average cost of
  capital. For the year ended, December 31, 2000, PSE&G recorded interest
  income of approximately $143 million relating to the Promissory Note. For the
  period from January 1, 2001 to January 31, 2001, PSE&G recorded interest
  income of approximately $34 million relating to the Promissory Note. Power repaid
  the Promissory Note on January 31, 2001.

Effective with the
  transfer of the electric generation business, Power charges PSE&G for the
  MTC and the energy and capacity provided to meet its BGS requirements. For the
  years ended December 31, 2002, 2001 and 2000, PSE&G was charged by Power
  approximately $1.2 billion, $2 billion and $0.8 billion, respectively, for the
  MTC and BGS. As of December 31, 2002, and 2001, PSE&Gs payable to
  Power (or Powers receivable) relating to these costs was approximately
  $2 million and $158 million, respectively.

For the years ended
  December 31, 2002, 2001 and 2000, PSE&G sold energy and capacity to Power
  at the market price of approximately $77 million, $158 million and $78 million,
  which PSE&G purchased under various NUG contracts at costs above market
  prices. As of December 31, 2002 PSE&G had no receivable (or Powers
  payable) related to these purchases as compared to the $7 million receivable
  as of December 31, 2001. As a result of the Final Order, PSE&G has established
  an NTC to recover the above market costs related to these NUG contracts. The
  difference between PSE&Gs costs and recovery of costs through the
  NTC and sales to Power, which are priced at the locational marginal price (LMP)
  set by the PJM ISO for energy and at wholesale market prices for capacity, is
  deferred as a regulatory asset.

These transactions
  were properly recognized on each companys stand-alone financial statements
  and were eliminated when preparing PSEGs consolidated financial statements.
  No gains or losses are recorded on any intercompany transactions, rather, all
  intercompany transactions are at cost or, in the case of the BGS and BGSS contracts
  between Power and PSE&G, at rates prescribed by the BPU.

Under the BGS contract,
  which terminated on July 31, 2002, Power sold energy directly to PSE&G,
  which in turn sold this energy to its customers. For the new BGS contract period
  beginning August 1, 2002, Power entered into contracts with third parties who
  are direct suppliers of New Jerseys EDCs and PSE&G purchases the energy
  for its customers needs from such direct suppliers. Due to this change
  in the BGS model, these revenues and expenses were no longer recorded as intercompany
  revenues and expenses and were no longer eliminated in consolidation after August
  1, 2002.

Transfer of Gas
  Supply Contracts and Gas Inventory

Effective
  May 1, 2002, PSE&G transferred its gas supply contracts and gas inventory
  requirements to Power for approximately $183 million. On the same date, PSE&G
  entered into a requirements contract with Power under which Power provides the
  gas supply services needed to meet PSE&Gs BGSS requirements. The contract
  term ends March 31, 2004 and PSE&G has a three-year renewal option. As part
  of the agreement, PSE&G is providing Power the use of its peak shaving facilities
  at cost.

From May 1,
  2002 through December 31, 2002, Power billed PSE&G approximately $703 million
  for BGSS. As of December 31, 2002, PSE&Gs payable to Power related
  to the BGSS contract was approximately $241 million.

188

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

PSEG, PSE&G, Power and Energy Holdings

Services provides
  and bills administrative services to PSEG, PSE&G, Power and Energy Holdings
  as follows:

|                | Services
      billed for the
      Year Ended December 31, |     | Payable to
      Services as of
      December 31,
|--------------- | ----------------------------------------------------------- | --- | --------------------------------------------------
|                |                                                             |     |                                                   
|                | 2002                                                        |     | 2001                                              
|                |                                                             |     |                                                   
|                | (Millions)                                                 
|PSEG            | $                                                           | 13  |                                                   
|PSE&G           | $                                                           | 200 |                                                   
|Power           | $                                                           | 119 |                                                   
|Energy Holdings | $                                                           | 22  |                                                   

These transactions
  were properly recognized on each companys stand-alone financial statements
  and were eliminated when preparing PSEGs consolidated financial statements.
  PSEG, PSE&G, Power and Energy Holdings believe that the costs of services
  provided by Services approximates market value for such services.

Energy Holdings

Operation and Maintenance
  and Development Fees

Global provides operating,
  maintenance and other services to and receives management and guaranty fees
  from various joint ventures and partnerships in which it is an investor. Fees
  related to the development and construction of certain projects are deferred
  and recognized when earned. Income from these services of $3 million, $3 million,
  and $12 million, were included in Operating Revenues in the Consolidated Statements
  of Operations for the years ended December 31, 2002, 2001, and 2000, respectively.

Affiliate Payables
  due to PSEG from Energy Technologies

As of December 31,
  2002 and December 31, 2001, Energy Technologies had recorded affiliate payables
  due to PSEG and its associated companies, other than Energy Holdings, of $12
  million and $6 million, respectively. The amounts are recorded as a component
  of Current Liabilities of Discontinued Operations on the Consolidated Balance
  Sheets. Energy Technologies will repay the balance of the intercompany payable
  of $12 million prior to or upon the sale of the HVAC/mechanical operating companies.

Loans to TIE

Global and its partner,
  Panda Energy International, Inc., through Texas Independent Energy, L.P. (TIE),
  a 50/50 joint venture, owns and operates two electric generation facilities
  in Texas. As of December 31, 2002 and 2001, Globals investments in the
  TIE partnership include $73 million and $165 million, respectively, of loans
  that earn interest at an annual rate of 12% that are expected to be repaid over
  the next 10 years. The loan structure was put in place to provide Global with
  a preferential cash and earnings flow from the projects after third-party debt
  service. Global received $101 million of loan repayments, including interest,
  and invested $51 million of equity in the TIE investments for the year ended
  December 31, 2002. Globals share of interest earned was $10 million. However,
  only 50% of the interest received is being recorded as income as the interest
  related to Globals 50% ownership share is being eliminated in consolidation.

189

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

Loans to GWF Energy

Global provided GWF
  Energy approximately $98 million of secured loans to finance the purchase of
  turbines. The turbine loans were interest bearing and the rates ranged from
  12% to 15% per annum. The first installment payment began May 31, 2002 and as
  of December 31, 2002, the loans were repaid in accordance with the loan agreement.

Global had also provided
  GWF Energy up to $74 million of working capital loans to fund construction costs
  pending completion of project financing. Such loans earned interest at 20% per
  annum and were convertible into equity at Globals option. During 2002,
  Global converted $71 million of such working capital loans to equity, which
  increased Globals ownership of GWF Energy to 76%. The partnership agreement
  stipulates that the condition for control is indicated at 75% or greater ownership
  interest of the voting stock. Accordingly, Globals investment in GWF Energy
  is recorded as a consolidated entity as of December 31, 2002 and for the three
  months ended December 31, 2002. Harbinger GWF LLC has the right to buy back
  from Global up to one-half of the reduction of its equity ownership in GWF Energy
  from the 50% ownership level. Such right terminates at the earlier of project
  financing or September 30, 2003. The loan structures were put in place to provide
  Global with a preferential cash and earnings distribution from GWF Energy similar
  to Globals subordinated loans from TIE. For a discussion of the commercial
  dates of operation and issues of the construction process with respect to these
  three plants, see Note 13. Commitments and Contingent Liabilities.

Transfer of Asset
  Management Group (AMG) from Energy Technologies to Resources

As of December 31,
  2002, Energy Technologies contributed its equity investment in the capital stock
  of AMG, which includes various DSM investments, to Resources. The aggregate
  book value, which approximated fair value, of the stock contributed was $42
  million. As of December 31, 2002, AMG has total assets of $45 million and earnings
  of $7 million for the year ended December 31, 2002.

190

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Continued

Note 23. Guarantees of Debt

Power

In April 2001, Power
  issued $500 million of 6.875% Senior Notes due 2006, $800 million of 7.75% Senior
  Notes due 2011 and $500 million of 8.625% Senior Notes due 2031. Additionally,
  in June 2002, Power issued $600 million of 6.95% Senior Notes due 2012. Each
  series of the Senior Notes is fully and unconditionally and jointly and severally
  guaranteed by Fossil, Nuclear and ER&T. The following table presents condensed
  financial information for the guarantor subsidiaries as well as Powers
  non-guarantor subsidiaries as of December 31, 2002 and 2001:

|For the Year
      Ended December 31, 2002:               | Power      |       | Guarantor
      Subsidiaries |       | Other
      Subsidiaries |   | Consolidating
      Adjustments |        | Total 
|--------------------------------------------------------- | ---------- | ----- | ---------------------------- | ----- | ------------------------ | - | ------------------------------- | ------ | ------
|                                                          |            |       |                              |       |                          |   |                                 |        |       
|                                                          | (Millions)
|Revenues                                                  | $          | 2     |                              | $     | 5,041                    |   | $                               | 43     |       
|Operating Expenses                                        |            |      |                              |       | 4,140                    |   |                                 | 43     |       
|                                                          |            |       |                              |       |                          |   |                                 |        |       
|Operating Income (Loss)                                   |            | 2     |                              |       | 901                      |   |                                 |       |       
|Other Income                                              |            | 616   |                              |       |                         |   |                                 |       |       
|Interest Expense                                          |            | (180  | )                            |       | (60                      | ) |                                 | 118    |       
|Income Taxes                                              |            | 78    |                              |       | (350                     | ) |                                 | (41    | )     
|                                                          |            |       |                              |       |                          |   |                                 |        |       
|Net Income (Loss)                                         | $          | 516   |                              | $     | 491                      |   | $                               | 77     |       
|                                                          |            |       |                              |       |                          |   |                                 |        |       
|                                                          |            |       |                              |       |                          |   |                                 |        |       
|As of December 31, 2002:                                  |            |       |                              |       |                          |   |                                 |        |       
|                                                          |            |       |                              |       |                          |   |                                 |        |       
|Current Assets                                            | $          | 1,068 |                              | $     | 1,283                    |   | $                               | 89     |       
|Property, Plant and Equipment,
      net                  |            | 42    |                              | 2,430 |                          |   | 1,573                           |        |       
|Noncurrent Assets                                         |            | 3,196 |                              | 1,777 |                          |   | 1,355                           |        | (4,711
|                                                          |            |       |                              |       |                          |   |                                 |        |       
|Total Assets                                              | $          | 4,306 |                              | $     | 5,490                    |   | $                               | 3,017  |       
|                                                          |            |       |                              |       |                          |   |                                 |        |       
|                                                          |            |       |                              |       |                          |   |                                 |        |       
|Current Liabilities                                       | $          | 128   |                              | $     | 1,571                    |   | $                               | 504    |       
|Noncurrent Liabilities                                    |            | 125   |                              |       | 984                      |   |                                 | 28     |       
|Note Payable
       Affiliated Company                   |            | 97    |                              | 1,150 |                          |   |                                |        | (1,247
|Long-Term Debt                                            |            | 2,516 |                              |       |                         |   |                                 | 800    |       
|Members
      Equity                                     |            | 1,440 |                              | 1,785 |                          |   | 1,685                           |        | (3,468
|                                                          |            |       |                              |       |                          |   |                                 |        |       
|Total Liabilities and Members
      Equity               | $          | 4,306 |                              | $     | 5,490                    |   | $                               | 3, 017 |       
|                                                          |            |       |                              |       |                          |   |                                 |        |       
|For the Year Ended December
      31, 2002:               |            |       |                              |       |                          |   |                                 |        |       
|                                                          |            |       |                              |       |                          |   |                                 |        |       
|                                                          |            |       |                              |       |                          |   |                                 |        |       
|                                                          |            |       |                              |       |                          |   |                                 |        |       
|Net Cash Provided By (Used In)
      Operating Activities | $          | (182  | )                            | $     | 617                      |   | $                               | 298    |       
|Net Cash Provided By (Used In)
      Investing Activities | $          | (695  | )                            | $     | (749                     | ) | $                               | (625   | )     
|Net Cash Provided By (Used In)
      Financing Activities | $          | 877   |                              | $     | 150                      |   | $                               | 328    |       

191

---



NOTES TO CONSOLIDATED FINANCIAL
  STATEMENTS  Concluded

|                                                          | Power      |       | Guarantor
      Subsidiaries |       | Other
      Subsidiaries |       | Consolidating
      Adjustments | Total
|--------------------------------------------------------- | ---------- | ----- | ---------------------------- | ----- | ------------------------ | ----- | ------------------------------- | -----
|                                                          |            |       |                              |       |                          |       |                                 |      
|                                                          | (Millions)
|For the Year Ended
      December 31, 2001:               |            |       |                              |       |                          |       |                                 |      
|                                                          |            |       |                              |       |                          |       |                                 |      
|Revenues                                                  | $          | 2     |                              | $     | 3,965                    |       | $                               | 24   
|Operating Expenses                                        |            |      |                              |       | 3,164                    |       |                                 | 40   
|                                                          |            |       |                              |       |                          |       |                                 |      
|Operating Income (Loss)                                   |            | 2     |                              |       | 801                      |       |                                 | (16  
|Other Income (Loss)                                       |            | 584   |                              |       |                         |       |                                 |     
|Interest Expense                                          | (182       | )     |                              | (69   | )                        |       | 108                             |      
|Income Taxes                                              |            | 74    |                              |       | (292                     | )     |                                 | (32  
|                                                          |            |       |                              |       |                          |       |                                 |      
|Net Income (Loss)                                         | $          | 478   |                              | $     | 440                      |       | $                               | 60   
|                                                          |            |       |                              |       |                          |       |                                 |      
|                                                          |            |       |                              |       |                          |       |                                 |      
|As of December 31, 2001:                                  |            |       |                              |       |                          |       |                                 |      
|                                                          |            |       |                              |       |                          |       |                                 |      
|Current Assets                                            | $          | 399   |                              | $     | 1,195                    |       | $                               | 64   
|Property, Plant and Equipment,
      net                  |            | 40    |                              |       | 1,992                    |       |                                 | 953  
|Noncurrent Assets                                         | 2,454      |       |                              | 1,475 |                          | 1,230 |                                 |      
|                                                          |            |       |                              |       |                          |       |                                 |      
|Total Assets                                              | $          | 2,893 |                              | $     | 4,662                    |       | $                               | 2,247
|                                                          |            |       |                              |       |                          |       |                                 |      
|                                                          |            |       |                              |       |                          |       |                                 |      
|Current Liabilities                                       | $          | 81    |                              | $     | 1,284                    |       | $                               | 215  
|Noncurrent Liabilities                                    |            | 16    |                              |       | 1,094                    |       |                                 | 16   
|Note Payable  Affiliated
      Company                   |            | 21    |                              |       | 1,150                    |       |                                 |     
|Long-Term Debt                                            | 1,915      |       |                              |      |                          |       | 770                             |      
|Members
      Equity                                     |            | 860   |                              |       | 1,134                    |       | 1,246                           |      
|                                                          |            |       |                              |       |                          |       |                                 |      
|Total Liabilities and Members
      Equity               | $          | 2,893 |                              | $     | 4,662                    |       | $                               | 2,247
|                                                          |            |       |                              |       |                          |       |                                 |      
|                                                          |            |       |                              |       |                          |       |                                 |      
|For the Year Ended December
      31, 2001:               |            |       |                              |       |                          |       |                                 |      
|                                                          |            |       |                              |       |                          |       |                                 |      
|                                                          |            |       |                              |       |                          |       |                                 |      
|                                                          |            |       |                              |       |                          |       |                                 |      
|Net Cash Provided By (Used In)
      Operating Activities | $          | 313   |                              | $     | 830                      |       | $                               | (989 
|Net Cash Provided By (Used In)
      Investing Activities | $          | 41    |                              | $     | (1,544                   | )     | $                               | (947 
|Net Cash Provided By (Used In)
      Financing Activities | $          | 329   |                              | $     | 704                      |       | $                               | 1,936

There are no restrictions
  on the ability of Powers subsidiaries to transfer funds in the form of
  dividends, loans or advances to Power for the periods noted above.

192

---





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

PSEG

None.

PSE&G

None.

Power

None.

Energy Holdings

None.

PART III



|ITEM 10. | ITEM DIRECTORS AND EXECUTIVE OFFICERS
      OF THE REGISTRANTS
|-------- | --------------------------------------------------------------

Executive Officers

The Executive Officers of each of PSEG, PSE&G,
  Power and Energy Holdings, respectively, are set forth below, as indicated for
  each individual.

|                 
|-----------------
|                 
|NAME             
|                 
|E. James Ferland 
|(1)(2)(3)(4)     
|                 
|                 
|                 
|                 
|                 
|                 
|                 
|                 
|                 
|                 
|                 
|                 
|                 
|Thomas M. OFlynn
|(1)(3)(4)        
|                 
|                 
|                 
|                 
|                 
|                 
|                 
|                 
|                 
|                 
|                 
|                 
|                 

193

---



|                        
|------------------------
|Robert J. Dougherty, Jr.
|(1)(4)                  
|                        
|                        
|                        
|                        
|Alfred C. Koeppe        
|(1)(2)                  
|                        
|                        
|                        
|                        
|R. Edwin Selover        
|(1)(2)                  
|                        
|                        
|                        
|                        
|                        
|                        
|                        
|                        
|                        
|                        
|                        
|Patricia A. Rado        
|(1)(2)(3)               
|                        
|                        
|                        
|                        
|                        
|                        
|                        
|                        
|                        
|Robert E. Busch         
|(1)(2)                  
|                        
|                        
|                        
|                        
|                        
|                        
|                        
|Thomas R. Smith         
|(3)                     
|                        
|                        
|                        
|                        
|                        
|                        
|                        
|Harold W. Borden Jr.    
|(3)                     
|74                      
|                        
|                        
|Morton A. Plawner       
|(3)                     
|                        
|                        
|                        
|                        
|                        
|                        

194


---



|                  
|------------------
|Frank Cassidy     
|(1)(3)            
|                  
|                  
|                  
|Michael J. Thomson
|(4)               
|                  
|Eileen A. Moran   
|(4)               
|                  
|                  
|                  
|                  
|Stanley M.        
|Kosierowski       
|(4)               
|                  
|                  
|                  
|                  
|                  
|                  
|                  
|Miriam E. Gilligan
|(4)               
|                  
|                  
|                  
|Derek M. DiRisio  
|(4)               
|                  
|                  
|                  
|                  

|(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Executive Officer of PSEG           
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------
|(2);                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | Executive Officer of PSE&G          
|(3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Executive Officer of Power          
|(4)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Executive Officer of Energy Holdings
|Directors                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|PSEG                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|The
      information required by Item 10 of Form 10-K with respect to (i) present
      directors of PSEG who are nominees for election as directors at PSEGs
      Annual Meeting of Stockholders to be held on April 15, 2003, and directors
      whose terms will continue beyond the meeting, and (ii) compliance with Section
      16 (a) of the Securities Exchange Act of 1934, as amended, is set forth
      under the headings "Election of Directors" and Section 16 (a) Beneficial
      Ownership Reporting Compliance 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 7, 2003 and which information set forth under said heading is
      incorporated herein by this reference thereto.
|PSE&G                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|E.
      JAMES FERLAND has been a director since 1986. Age 61. Chairman of Executive Committee. For additional information, see Executive Officers table above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|195                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

---



ALBERT R. GAMPER,
  JR. has been a director since December 2000. Age 60. Director of PSEG. He has
  been Chairman of the Board, President and Chief Executive Officer of The CIT
  Group, Inc., Livingston, New Jersey (commercial finance company) since July
  2002. Was President and Chief Executive Officer of The CIT Group, Inc., from
  February 2002 to June 2002. Was President and Chief Executive Officer of Tyco
  Capital Corporation from June 2001 to February 2002. Was Chairman of the Board,
  President and Chief Executive Officer of The CIT Group, Inc., from January 2000
  to June 2001. Was President and Chief Executive Officer of The CIT Group, Inc.
  from December 1989 to December 1999.

CONRAD
  K. HARPER has been a director since May 1997. Age 62. Director of PSEG. Has
  been of counsel to the law firm of Simpson Thacher & Bartlett,
  New York, New York since January 2003. Was a partner from October
  1996 to December 2002 and from 1974 to May 1993. Was Legal Adviser, US Department
  of State from May 1993 to June 1996. Director of New York Life Insurance Company.

MARILYN
  M. PFALTZ has been a director since 1980. Age 70. Director of PSEG. Has been
  a partner of P and R Associates, Summit, New Jersey (communications specialists)
  since 1968. Director of AAA National Association, AAA Investment Company, AAA
  Life Re Ltd. and Beacon Trust Company.

Power

ROBERT E. BUSCH has
  been a director since December 2000. Age 56. For additional information,
  see Executive Officers table above.

FRANK CASSIDY has been
  a director since 1999. Age 56. For additional information, see Executive
  Officers table above.

ROBERT J. DOUGHERTY,
  JR. has been a director since 1999. Age 51. For additional information,
  see Executive Officers table above.

E.JAMES
  FERLAND has been a director since 1999. For additional information see Executive Officers table
  above.

R.EDWIN
  SELOVER has been a director since 1999, Age 57. For additional information,
  see Executive Officers table above.

MICHAEL J. THOMSON
  has been a director since January 2000. Age 44. For additional information,
  see Executive Officers table above.

**Energy Holdings**

ROBERT E. BUSCH has
  been a director since December 2000. For additional information,
  see Executive Officers table above.

FRANK CASSIDY has been
  a director since January 2000. For additional information,
  see Executive Officers table above.

ROBERT J. DOUGHERTY,
  JR. has been a director since January 2000. For additional
  information, see Executive Officers table above.

E. JAMES
  FERLAND has been a director since 1989. For additional information,
  see Executive Officers table above.

THOMAS M. OFLYNN
  has been a director since July 2001. For additional information, see Executive Officers table above.

R. EDWIN
  SELOVER has been a director since January 2000, For additional information, see Executive Officers table above.

196

---



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 15, 2003 which definitive Proxy Statement is expected to be
  filed with the Securities and Exchange Commission on or about March 7, 2003
  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, 2002 is
  set forth below. Amounts shown were paid or awarded for all services rendered
  to PSEG and its subsidiaries and affiliates including PSE&G.

|                                 
|---------------------------------
|                                 
|                                 
|                                 
|                                 
|Name and Principal
      Position
|                                 
|E. James Ferland                 
|Chairman of the Board and        
|Chief Executive Officer          
|                                 
|Alfred C. Koeppe                 
|President and Chief              
|Operating Officer                
|                                 
|R. Edwin Selover                 
|Senior Vice President and        
|General Counsel                  
|                                 
|Robert E. Busch                  
|Senior Vice President and        
|Chief Financial Officer          
|                                 
|Patricia A. Rado                 
|Vice President and               
|Controller                       
|                                 

|(1) | Amount awarded in 2002 and 2001 were earned
      under the Restated and Amended Management Incentive Compensation Plan and
      in 2000 was earned under the Management Incentive Compensation
      Plan and determined and was paid in the 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 non-qualified options made under the 1989
      Long-Term Incentive Plan (1989 LTIP) and/or the 2001 Long-Term Incentive Plan
      (2001 LTIP). All options granted were non-tandem. 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 under the 1989 LTIP, each as measured during three-year
      period ending the year prior to the year in which payment is made. Under
      the 1989 LTIP, tandem grants were 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 was made at the beginning of a
|197

---





|    | 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.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(4) | Includes employer contribution to the Thrift
      and Tax-Deferred Savings Plan:                                                                                                                                           

|    
|----
|Year
|    
|2002
|    
|2001
|    
|2000
|    

|    | In addition, 2001 and 2000 amounts include for
      Mr. Ferland $46,050, and $53,935; for Mr. Selover $10,493, and $12,533;
      and for Mrs. Rado $1,093 and $867, 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 PSEGs Deferred Compensation Plan, interest was 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 of $40.80 on the New York Stock Exchange on November 20, 2001,
      with respect to an award to Mr. Ferland of 60,000 shares of restricted stock,
      with 30,000 shares vesting in 2006 and 30,000 shares vesting in 2007. Dividends
      on the entire grant are paid in cash from the date of award.                                                                                                                                                                                                                                                                                                                                                                                           

198

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|                                              
|----------------------------------------------
|OPTION GRANTS
      IN LAST FISCAL YEAR (2002)
|                                              
|**Name**                                      
|                                              
|E. James Ferland                              
|                                              
|Alfred C. Koeppe                              
|                                              
|R. Edwin Selover                              
|                                              
|Robert E. Busch                               
|                                              
|Patricia A. Rado                              
|                                              

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Granted under the 2001 LTIP with exercisability
      commencing December 17, 2003, December 17, 2004 and December 17, 2005, 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 $31.43, 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 4.03% that represent the interest rates
      on US Treasury securities on the date of grant with a maturity date corresponding
      to that of the option terms; (d) volatility of 31.67% calculated using daily
      PSEG Common Stock prices for the one-year period prior to the grant date;
      (e) dividend yield of 6.87% and (f) reductions of approximately 7.83% to
      reflect the probability of forfeiture due to termination prior to vesting,
      and approximately 6.96% to reflect the probability of a shortened option
      term due to termination of employment prior to the option expiration dates.
      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 (2002)AND FISCAL YEAR ENDOPTION VALUES
      (12/31/02)
|                                                                                                             
|                                                                                                             
|                                                                                                             
|**Name******                                                                                                 
|                                                                                                             
|E. James Ferland                                                                                             
|                                                                                                             
|Alfred C. Koeppe                                                                                             
|                                                                                                             
|R. Edwin Selover                                                                                             
|                                                                                                             
|Robert E. Busch                                                                                              
|                                                                                                             
|Patricia A. Rado                                                                                             
|                                                                                                             

|    |                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Does not reflect any options granted
      and/or exercised after year-end (12/31/02). The net effect of any such grants
      and exercises is reflected in the table appearing under Security Ownership
      of Directors, Management and Certain Beneficial Owners.
|(2) | Represents difference between exercise
      price and market price of PSEG Common Stock on date of exercise.                                                                                                                                                          
|199

---



|(3) | Represents difference between market price of
      PSEG Common Stock and the respective exercise prices of the options at fiscal
      year end (12/31/02). 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 and amended as of November
  20, 2001 with Mr. Ferland covering his employment as Chief Executive
  Officer through March 31, 2007. 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. The Agreement also provided for an award to
  him of 150,000 shares of restricted PSEG Stock as of June 16, 1998 and 60,000
  shares of restricted PSEG Common Stock as of November 20, 2001, with 60,000
  shares vesting in 2002; 20,000 shares vesting in 2003; 30,000 shares vesting
  in 2004; 40,000 shares vesting in 2005; 30,000 shares vesting in 2006; and 30,000
  shares vesting in 2007. Any non-vested shares are forfeited upon his retirement
  unless the Board of Directors, in its discretion, determines to waive the forfeiture.
  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 initial employment.

PSE&G has entered
  into an employment agreement with Mr. Koeppe dated as of October 17, 2000 and
  Mr. Busch dated as of April 24, 2001, covering the respective employment of
  each in the position listed in the Summary Compensation Table through October
  16, 2005 for Mr. Koeppe and April 24, 2006 for Mr. Busch. The agreements are
  essentially identical and provide that the base salary, target annual incentive
  bonus and long-term incentive bonus will be determined based on compensation
  practices of similar companies and that their annual salary will not be reduced
  during the term of the Agreement, and awarded to Mr. Koeppe 250,000 options
  on PSEG Common Stock, 50,000 of which vest each October 17 and expire
  on October 17, 2010 and awarded to Mr. Busch 250,000 options on PSEG
  Common Stock, 50,000 of which vest each April 24 and expire on April
  24, 2011 in each case provided that the individual has remained continuously employed by
  PSEG through such date. The agreement for Messrs. Busch and Koeppe also provide for the grant
  of additional years of credited service for retirement purposes in light of
  allied work experience of fifteen years and twenty-five years, respectively.

The Agreements further
  provide that if the individual is terminated without Cause or resigns
  for Good Reason (as those terms are defined in each Agreement) during
  the term of the Agreement, the respective entire restricted stock award or the
  entire option award becomes vested, the individual will be paid a benefit of
  two times base salary and target bonus, and his welfare benefits will be continued
  for two years unless he is sooner employed. In the event such a termination
  occurs after a Change in Control (also as defined in the Agreement),
  the payment to the individual 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 of 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 respective Agreements provide
  that Mr. Ferland is prohibited for two years and Messrs. Koeppe and Busch are prohibited for
  one year from competing with and each is prohibited for two years from recruiting
  employees from, PSEG or its subsidiaries or affiliates, after termination of
  employment. Violation of these provisions requires a forfeiture of the respective
  restricted stock grant and option and certain benefits.

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 2002 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.

200

---



Compensation of
  Directors and Certain Business Relationships

During 2002, a director
  who was not an officer of PSEG or its subsidiaries and affiliates, including
  PSE&G, was paid an annual retainer of $30,000 and a fee of $1,500 for attendance
  at any Board or committee meeting, inspection trip, conference or other similar
  activity relating to PSEG or PSE&G. This amount was raised to $40,000 effective
  for 2003. Pursuant to the Compensation Plan for Outside Directors, a certain
  percentage, currently fifty percent, of the annual retainer is paid in PSEG
  Common Stock. No additional retainer is paid for service as a director of PSE&G.
  Each PSEG Committee Chair received an additional annual retainer of $3,000, increased
  for 2003 to $5,000 except for the Chair of the Audit Committee, who will receive
  $10,000. In addition, beginning in 2003, each member of the Audit Committee
  will receive an annual retainer of $5,000.

PSEG also maintains
  a Stock Plan for Outside Directors pursuant to which directors who are not employees
  of PSEG or its subsidiaries receive shares of restricted stock for each year
  of service as a director. For 2002, this amount was 600 shares, increased to
  800 shares for 2003. Such shares held by each non-employee director are included
  in the table above under the heading Security Ownership of Directors, Management
  and Certain Beneficial Owners.

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 these restrictions for good cause shown. Restricted stock may not be
  sold or otherwise transferred prior to the lapse of the restrictions. Dividends
  on shares held subject to restrictions are paid directly to the director, and
  the director has the right to vote the shares.

Compensation Pursuant
  to Pension Plans

The table
  below illustrates annual retirement benefits for executive officers 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              
|                                      
|                                      
|                                      
|Average
      Final
      Compensation
|                                      
|$                                     
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      
|                                      

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 150% of the average annual
  salary for such five year period. Messrs. Ferland, Koeppe, Selover, Busch and
  Mrs. Rado will have accrued approximately 48, 46, 43, 34, and 29years of credited service, respectively,
  as of age 65.

201

---



Power

Omitted pursuant to
  conditions set forth in General Instruction I of Form 10-K.

Energy Holdings

Omitted pursuant to
  conditions set forth in General Instruction I of Form 10-K.

|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 15,
  2003 which definitive Proxy Statement is expected to be filed with the Securities
  and Exchange Commission on or about March 7, 2003, and such information set
  forth under such heading is incorporated herein by this reference thereto.

The following table
  indicates the securities authorized for issuance under equity compensation plans
  as of December 31, 2002:

|Plan category         |  | Number of securities
      tobe issued upon exerciseof outstanding options,warrants and rights (A) |  | Weighted-average
      exercise price of
      outstanding options,
      warrants and rights |   | Number of securitiesremaining availablefor future issuanceunder equitycompensation plans
|--------------------- |  | -------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------- | - | ----------------------------------------------------------------------------------------
|                      |  |                                                                                                    |  |                                                                                               |   |                                                                                         
|Equity Compensation   |  |                                                                                                    |  |                                                                                               |   |                                                                                         
|plans approved by     |  |                                                                                                    |  |                                                                                               |   |                                                                                         
|security holders      |  | 5,758,500                                                                                          |  |                                                                                               | $ | 39.35                                                                                   
|                      |  |                                                                                                    |  |                                                                                               |   |                                                                                         
|Equity compensation   |  |                                                                                                    |  |                                                                                               |   |                                                                                         
|plans not approved by |  |                                                                                                    |  |                                                                                               |   |                                                                                         
|security holders      |  | 3,744,131                                                                                          |  |                                                                                               | $ | 39.25                                                                                   
|                      |  |                                                                                                    |  |                                                                                               |   |                                                                                         
|Total:                |  | 9,502,631                                                                                          |  |                                                                                               | $ | 39.32                                                                                   
|                      |  |                                                                                                    |  |                                                                                               |   |                                                                                         

(A)  Includes 310,000 shares granted under
  restricted stock agreements of certain key employees.

For additional discussion
  of specific plans concerning equity-based compensation, see Note
  18. Stock Options and Employee Stock Purchase Plan of the Notes, Item 11. Executive
  Compensation for PSE&G, above, and the information set forth under the heading
  Executive Compensation in PSEGs definitive Proxy Statement
  for the Annual Meeting of Stockholders.

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 February 21, 2003. None
  of these amounts exceed 1% of the PSEG Common Stock outstanding at such date,
  except for the amount for all directors and executive officers as a

202

---



group which constitutes approximately 1.41%. No
  director or executive officer owns any of PSE&Gs Preferred Stock of
  any class.

|                                                                 
|-----------------------------------------------------------------
|Name                                                             
|                                                                 
|E. James Ferland                                                 
|R. Edwin Selover                                                 
|Alfred C. Koeppe                                                 
|Robert E. Busch                                                  
|Patricia A. Rado                                                 
|Albert R. Gamper, Jr.                                            
|Conrad K. Harper                                                 
|Marilyn M. Pfaltz                                                
|All directors and executive officers as a group
      (8 persons)
|                                                                 

|    |                                                                                                                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes the equivalent of 14,205
      shares held under PSE&G Thrift and Tax-Deferred Savings Plan. Includes
      options to purchase 1,465,000 shares, 781,667 of which are currently exercisable.
      Includes 210,000 shares of restricted stock, which vest as described in
      the Summary Compensation Table Note 5.
|(2) | Includes the equivalent of 10 shares
      of PSE&G Thrift and Tax-Deferred Savings Plan. Includes options to purchase
      260,000 shares, 120,001 of which are currently exercisable.                                                                                                                                         
|(3) | Includes the equivalent of 2,852
      shares held under the PSE&G Thrift and Tax-Deferred Savings Plan. Includes
      options to purchase 570,000 shares, 275,000 of which are currently exercisable.                                                                                                                          
|(4) | Includes the equivalent of 173
      shares held under PSE&G Thrift and Tax-Deferred Savings Plan. Includes
      options to purchase 460,000 shares, 138,334 of which are currently exercisable.                                                                                                                                
|(5) | Includes options to purchase 88,000
      shares, 41,334 of which are currently exercisable.                                                                                                                                                                                                                                     
|(6) | Includes 1,200 shares of restricted
      stock awarded pursuant to the Stock Plan for Outside Directors described
      below.                                                                                                                                                                                                  
|(7) | Includes 3,000 shares of restricted
      stock awarded pursuant to the Stock Plan for Outside Directors described
      below.                                                                                                                                                                                                  
|(8) | Includes 6,355 shares of restricted
      stock awarded pursuant to the Stock Plan for Outside Directors described
      below.                                                                                                                                                                                                  
|(9) | Includes the equivalent of 17,241
      shares held under PSE&G Thrift and Tax-Deferred Savings Plan. Includes
      options to purchase 2,843,000 shares, 1,356,336 of which are currently exercisable.
      Includes 210,000 shares of restricted stock.                                                                      

Power

Omitted pursuant to conditions set forth in General
  Instruction I of Form 10-K.

Energy Holdings

Omitted pursuant to conditions set forth in General
  Instruction I of Form 10-K.

|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS
|-------- | ---------------------------------------------

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 15, 2003, which definitive Proxy Statement is expected to be
  filed with the Securities and Exchange Commission on or about March 7, 2003.
  Such information set forth under such heading is incorporated herein by this
  reference thereto.

203

---



PSE&G

None.

Power

Omitted pursuant to conditions set forth in General
  Instruction I of Form 10-K.

Energy Holdings

Omitted pursuant to conditions set forth in General
  Instruction I of Form 10-K.

|ITEM 14. | DISCLOSURE CONTROLS AND PROCEDURES
|-------- | ----------------------------------

PSEG,
  PSE&G, Power and Energy Holdings

Each of PSEG, PSE&G, Power and Energy Holdings
  has established and maintain disclosure controls and procedures which are designed
  to provide reasonable assurance that material information relating to each
  company, including its respective consolidated subsidiaries, is made known
  to the Chief Executive Officer and Chief Financial Officer of each company,
  by others within those entities, particularly during the period in which its
  annual report is being prepared. Each of PSEG, PSE&G, Power and Energy Holdings
  has established a Disclosure Committee which is made up of several key management
  employees and reports directly to the Chief Financial Officer and Chief Executive
  Officer of each company, to monitor and evaluate these disclosure controls and
  procedures. The Chief Financial Officer and Chief Executive Officer of each
  company have evaluated the effectiveness of the disclosure controls and procedures
  as of a date within 90 days prior to the filing date of these annual reports
  (the Evaluation Date) and based on this evaluation, it was concluded
  that the disclosure controls and procedures were effective in providing reasonable
  assurance during the period covered in the respective annual reports. There were no significant
  changes in internal controls or in other factors that could significantly affect
  internal controls subsequent to the date of each companys most recent
  evaluation.

204

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|Certification
        Pursuant to Rules 13a-14 and 15d-14
        of the 1934 Securities Exchange Act
|-----------------------------------------------------------------------------------------------------
|                                                                                                     
|1.                                                                                                   
|2.                                                                                                   
|3.                                                                                                   
|4.                                                                                                   
|                                                                                                     
|                                                                                                     
|                                                                                                     
|5.                                                                                                   
|                                                                                                     
|                                                                                                     
|6.                                                                                                   

|Date:February
      25, 2003 | /s/ E. James Ferland                                                                      
|---------------------------- | ------------------------------------------------------------------------------------------
|                             |                                                                                           
|                             | E. James FerlandPublic Service Enterprise Group Incorporated
      Chief Executive Officer

205


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|Certification
        Pursuant to Rules 13a-14 and 15d-14
        of the 1934 Securities Exchange Act
|-----------------------------------------------------------------------------------------------------
|                                                                                                     
|1.                                                                                                   
|2.                                                                                                   
|3.                                                                                                   
|4.                                                                                                   
|                                                                                                     
|                                                                                                     
|                                                                                                     
|5.                                                                                                   
|                                                                                                     
|                                                                                                     
|6.                                                                                                   

|Date:February
      25, 2003 | /s/
      Thomas M. OFlynn                                                                      
|---------------------------- | -------------------------------------------------------------------------------------------------
|                             |                                                                                                  
|                             | Thomas M. OFlynnPublic
      Service Enterprise Group Incorporated
      Chief Financial Officer

206


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|Certification
        Pursuant to Rules 13a-14 and 15d-14
        of the 1934 Securities Exchange Act
|-----------------------------------------------------------------------------------------------------
|                                                                                                     
|1.                                                                                                   
|2.                                                                                                   
|3.                                                                                                   
|4.                                                                                                   
|                                                                                                     
|                                                                                                     
|                                                                                                     
|5.                                                                                                   
|                                                                                                     
|                                                                                                     
|6.                                                                                                   

|                             |                                                                                       
|---------------------------- | --------------------------------------------------------------------------------------
|Date:February
      25, 2003 | /s/ E. James Ferland                                                                  
|                             |                                                                                       
|                             | E. James FerlandPublic Service Electric and Gas Company 
      Chief Executive Officer

207

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|Certification
        Pursuant to Rules 13a-14 and 15d-14
        of the 1934 Securities Exchange Act
|-----------------------------------------------------------------------------------------------------
|                                                                                                     
|1.                                                                                                   
|2.                                                                                                   
|3.                                                                                                   
|4.                                                                                                   
|                                                                                                     
|                                                                                                     
|                                                                                                     
|5.                                                                                                   
|                                                                                                     
|                                                                                                     
|6.                                                                                                   

|                             |                                                                                                               
|---------------------------- | --------------------------------------------------------------------------------------------------------------
|Date:February
      25, 2003 | /s/ Robert E. Busch                                                                                           
|                             |                                                                                                               
|                             | Robert E. BuschPublic Service Electric and Gas Company
      Senior Vice President and Chief Financial Officer

208

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|Certification
        Pursuant to Rules 13a-14 and 15d-14
        of the 1934 Securities Exchange Act
|-----------------------------------------------------------------------------------------------------
|                                                                                                     
|1.                                                                                                   
|2.                                                                                                   
|3.                                                                                                   
|4.                                                                                                   
|                                                                                                     
|                                                                                                     
|                                                                                                     
|5.                                                                                                   
|                                                                                                     
|                                                                                                     
|6.                                                                                                   

|                             |                                                             
|---------------------------- | ------------------------------------------------------------
|Date:February
      25, 2003 | /s/ E. James Ferland                                        
|                             |                                                             
|                             | E. James FerlandPSEG Power LLC
      Chief Executive Officer

209

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|Certification
        Pursuant to Rules 13a-14 and 15d-14
        of the 1934 Securities Exchange Act
|-----------------------------------------------------------------------------------------------------
|                                                                                                     
|1.                                                                                                   
|2.                                                                                                   
|3.                                                                                                   
|4.                                                                                                   
|                                                                                                     
|                                                                                                     
|                                                                                                     
|5.                                                                                                   
|                                                                                                     
|                                                                                                     
|6.                                                                                                   

|                             |                                                              
|---------------------------- | -------------------------------------------------------------
|Date:February
      25, 2003 | /s/
      Thomas M. OFlynn                                  
|                             |                                                              
|                             | Thomas M. OFlynnPSEG Power LLC
      Chief Financial Officer

210

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|Certification
        Pursuant to Rules 13a-14 and 15d-14
        of the 1934 Securities Exchange Act
|-----------------------------------------------------------------------------------------------------
|                                                                                                     
|1.                                                                                                   
|2.                                                                                                   
|3.                                                                                                   
|4.                                                                                                   
|                                                                                                     
|                                                                                                     
|                                                                                                     
|5.                                                                                                   
|                                                                                                     
|                                                                                                     
|6.                                                                                                   

|                             |                                                                       
|---------------------------- | ----------------------------------------------------------------------
|Date:February
      25, 2003 | /s/ E. James Ferland                                                  
|                             |                                                                       
|                             | E. James FerlandPSEG Energy Holdings LLC
      Chief Executive Officer

211

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|Certification
        Pursuant to Rules 13a-14 and 15d-14
        of the 1934 Securities Exchange Act
|-----------------------------------------------------------------------------------------------------
|                                                                                                     
|1.                                                                                                   
|2.                                                                                                   
|3.                                                                                                   
|4.                                                                                                   
|                                                                                                     
|                                                                                                     
|                                                                                                     
|5.                                                                                                   
|                                                                                                     
|                                                                                                     
|6.                                                                                                   

|                             |                                                                              
|---------------------------- | -----------------------------------------------------------------------------
|Date:February
      25, 2003 | /s/
      Thomas M. OFlynn                                                  
|                             |                                                                              
|                             | Thomas M. OFlynnPSEG
      Energy Holdings LLC
      Chief Financial Officer

212

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|PART
        IV
|---------------
|               
|ITEM 15.       
|               
|(A)            
|               
|               
|               
|               
|(B)            
|               
|               
|               
|               
|               
|               
|               
|               
|               
|(C)            
|               
|               
|213            

---



|    |                                                                                                                                                   | Exhibit 99:    Certification
      by E. James Ferland
      Exhibit 99a: Certification by Thomas M. OFlynn
      (See Exhibit Index on pages 221 to 224)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | b.                                                                                                                                                | PSE&G:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                   | Exhibit 3c     Amended and Restated Trust Agreement for PSE&G Capital Trust I
                    Exhibit 3d     Amended and Restated Trust Agreement for PSE&G Capital Trust II
                    Exhibit 4a(97):  Supplemental Indenture between PSE&G and Wachovia Bank dated September 1, 2002
                    Exhibit 12a:      Computation of Ratios of Earnings to Fixed ChargesExhibit 12b: Computation of Ratios of Earnings to Fixed Charges Plus Preferred Stock Dividend Requirements
                   Exhibit 18a     Independent Auditors' Preferability Letter dated February 7, 2003
      Exhibit 21:      Subsidiaries of Registrant
      Exhibit 23:      Independent Auditors Consent
      Exhibit 99b:    Certification by E. James Ferland
      Exhibit 99c:   Certification by Robert E. Busch(See Exhibit
      Index on pages 225 to 231)
|    | c.                                                                                                                                                | Power:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                   | Exhibit 12c:    Computation of Ratios of Earnings to Fixed Charges
                   Exhibit 18b     Independent Auditors' Preferability Letter dated February 7, 2003
              Exhibit 99d:    Certification by E. James Ferland
              Exhibit 99e: Certification by Thomas M. OFlynn
              (See Exhibit Index on page 232)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    | d.                                                                                                                                                | Energy Holdings:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                   | Exhibit 12d:    Computation
      of Ratios of Earnings to Fixed Charges
      Exhibit 99f:    Certification by E. James Ferland
      Exhibit 99g: Certification by Thomas M. OFlynn
      (See Exhibit Index on page 233)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(D) | The following reports
      on Form 8-K were filed during the last quarter of 2002 and the 2003 period
      covered by this report under Item 5:

|a.PSEG:                     |  |                  
|--------------------------- |  | -----------------
|Items Reported              |  | Date of Report   
|                            |  |                  
|Items 5 and 7               |  | November 22, 2002
|Items 5 and 7               |  | January 28, 2003 
|                            |  |                  
|b.   PSE&G:                 |  |                  
|Items Reported              |  | Date of Report   
|                            |  |                  
|Items 5 and 7               |  | January 28, 2003 
|                            |  |                  
|c.   Power:                 |  |                  
|Items Reported              |  | Date of Report   
|                            |  |                  
|Items 5 and 7               |  | January 28, 2003 
|                            |  |                  
|d.   Energy
      Holdings: |  |                  
|Items Reported              |  | Date of Report   
|                            |  |                  
|Items 5 and 7               |  | January 28, 2003 

214

---



SCHEDULE II

PUBLIC SERVICE ENTERPRISE GROUP INCORPORATEDSchedule II  Valuation and Qualifying
  Accounts
  Years Ended December 31, 2002  December 31, 2000

|**Column
      A**                             |  | **Column
      B**                                   |    | **Column C**                                       |               | **Column
      D**                                       |    | **Column
      E**            
|---------------------------------------------- |  | ---------------------------------------------------- | -- | -------------------------------------------------- | ------------- | -------------------------------------------------------- | -- | ------------------------------
|                                               |  |                                                      |    |                                                    |               |                                                          |    |                               
|                                               |  |                                                      |    |                                                    | **Additions** |                                                          |    |                               
|                                               |  |                                                      |    |                                                    |               |                                                          |    |                               
|**Description**                                |  | **Balance
      at
      Beginning of
      Period** |    | **Charged
      to
      cost and
      expenses** |               | **Charged
      to
      other accounts
      describe** |    | **Deductions-
      describe**
|                                               |  |                                                      |    |                                                    |               |                                                          |    |                               
|                                               |  | (Millions)                                          
|2002:                                          |  |                                                      |    |                                                    |               |                                                          |    |                               
|                                               |  |                                                      |    |                                                    |               |                                                          |    |                               
|Allowance for Doubtful Accounts                |  | $                                                    | 40 |                                                    |               | $                                                        | 43 |                               
|Materials and Supplies Valuation
      Reserve |  |                                                      | 2  |                                                    |               |                                                          | 2  |                               
|Other Reserves                                 |  |                                                      | 2  |                                                    |               |                                                          |   |                               
|Other Valuation Allowances                     |  |                                                      | 22 |                                                    |               |                                                          |   |                               
|                                               |  |                                                      |    |                                                    |               |                                                          |    |                               
|2001:                                          |  |                                                      |    |                                                    |               |                                                          |    |                               
|                                               |  |                                                      |    |                                                    |               |                                                          |    |                               
|Allowance for Doubtful Accounts                |  | $                                                    | 39 |                                                    |               | $                                                        | 39 |                               
|Materials and Supplies Valuation
      Reserve |  |                                                      | 11 |                                                    |               |                                                          |   |                               
|Other Reserves                                 |  |                                                      | 4  |                                                    |               |                                                          |   |                               
|Other Valuation Allowances                     |  |                                                      | 22 |                                                    |               |                                                          |   |                               
|                                               |  |                                                      |    |                                                    |               |                                                          |    |                               
|2000:                                          |  |                                                      |    |                                                    |               |                                                          |    |                               
|                                               |  |                                                      |    |                                                    |               |                                                          |    |                               
|Allowance for Doubtful Accounts                |  | $                                                    | 35 |                                                    |               | $                                                        | 45 |                               
|Materials and Supplies Valuation
      Reserve |  |                                                      | 11 |                                                    |               |                                                          |   |                               
|Other Reserves                                 |  |                                                      | 2  |                                                    |               |                                                          | 2  | (D)                           
|Other Valuation Allowances                     |  |                                                      | 22 |                                                    |               |                                                          |   |                               

|(A) | Accounts Receivable/Investments
      written off.                                  
|--- | ------------------------------------------------------------------------------------
|(B) | Reduced reserve to appropriate
      level and to remove obsolete inventory.        
|(C) | Acquired two Connecticut electric
      generating stations.                        
|(D) | Includes various liquidity, credit
      and bad debt reserves.                     
|(E) | Valuation allowances consolidated
      in connection with the acquisition of SAESA.
|(F) | Recorded in connection with the
      sales of certain properties held by EGDC.     

PUBLIC SERVICE ELECTRIC AND GAS COMPANYSchedule II  Valuation and Qualifying Accounts
  Years Ended December 31, 2002  December 31, 2000

|Column A                                       |  | Column B                           |    | Column C                         |  | Column D                          |           | Column E          
|---------------------------------------------- |  | ---------------------------------- | -- | -------------------------------- |  | --------------------------------- | --------- | ------------------
|                                               |  |                                    |    |                                  |  |                                   |           |                   
|                                               |  |                                    |    |                                  |  |                                   | Additions |                   
|                                               |  |                                    |    |                                  |  |                                   |           |                   
|Description                                    |  | Balance
      atBeginning ofPeriod |    | Charged
      tocost andexpenses |  | Charged toother accounts-describe |           | Deductionsdescribe
|                                               |  |                                    |    |                                  |  |                                   |           |                   
|                                               |  | (Millions)                        
|2002:                                          |  |                                    |    |                                  |  |                                   |           |                   
|                                               |  |                                    |    |                                  |  |                                   |           |                   
|Allowance for Doubtful Accounts                |  | $                                  | 38 |                                  |  | $                                 | 43        |                   
|2001:                                          |  |                                    |    |                                  |  |                                   |           |                   
|                                               |  |                                    |    |                                  |  |                                   |           |                   
|Allowance for Doubtful Accounts                |  | $                                  | 39 |                                  |  | $                                 | 45        |                   
|2000:                                          |  |                                    |    |                                  |  |                                   |           |                   
|                                               |  |                                    |    |                                  |  |                                   |           |                   
|Allowance for Doubtful Accounts                |  | $                                  | 35 |                                  |  | $                                 | 45        |                   
|Materials and Supplies Valuation
      Reserve |  |                                    | 11 |                                  |  |                                   |          |                   

|    |                                                   
|--- | --------------------------------------------------
|(A) | Accounts Receivable/Investments
      written off.
|(B) | Transferred to Power                              
|215

---



PSEG POWER LLCSchedule II  Valuation and Qualifying
  Accounts
  Years Ended December 31, 2002  December 31, 2000

|**Column
      A**                             |  | **Column
      B**                                   |    | **Column C**                                       |               | **Column
      D**                                        |    | **Column
      E**           
|---------------------------------------------- |  | ---------------------------------------------------- | -- | -------------------------------------------------- | ------------- | --------------------------------------------------------- | -- | -----------------------------
|                                               |  |                                                      |    |                                                    |               |                                                           |    |                              
|                                               |  |                                                      |    |                                                    | **Additions** |                                                           |    |                              
|                                               |  |                                                      |    |                                                    |               |                                                           |    |                              
|**Description**                                |  | **Balance
      at
      Beginning of
      Period** |    | **Charged
      to
      cost and
      expenses** |               | **Charged
      to
      other accounts-
      describe** |    | **Deductions
      describe**
|                                               |  |                                                      |    |                                                    |               |                                                           |    |                              
|                                               |  | (Millions)                                          
|2002:                                          |  |                                                      |    |                                                    |               |                                                           |    |                              
|                                               |  |                                                      |    |                                                    |               |                                                           |    |                              
|Materials and Supplies Valuation
      Reserve |  | $                                                    | 2  |                                                    |               | $                                                         | 2  |                              
|Other Reserves                                 |  |                                                      | 2  |                                                    |               |                                                           | 10 | (C)                          
|2001:                                          |  |                                                      |    |                                                    |               |                                                           |    |                              
|                                               |  |                                                      |    |                                                    |               |                                                           |    |                              
|Materials and Supplies Valuation
      Reserve |  | $                                                    | 11 |                                                    |               | $                                                         |   |                              
|Other Reserves                                 |  |                                                      | 4  |                                                    |               |                                                           |   |                              
|2000:                                          |  |                                                      |    |                                                    |               |                                                           |    |                              
|                                               |  |                                                      |    |                                                    |               |                                                           |    |                              
|Materials and Supplies Valuation
      Reserve |  | $                                                    | 11 |                                                    |               | $                                                         |   |                              
|Other Reserves                                 |  |                                                      | 2  |                                                    |               |                                                           | 2  | (C)                          

|                                                                                                                                         |                                                                           
|---------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------
|(A)                                                                                                                                      | Reduced reserve to appropriate
      level and removed obsolete inventory.
|(B)                                                                                                                                      | Acquired two Connecticut electric
      generation stations.              
|(C)                                                                                                                                      | Includes various liquidity, credit
      and bad debt reserves.           
|PSEG ENERGY HOLDINGS LLCSchedule II  Valuation and Qualifying
        Accounts Years
        Ended December 31, 2002 December 31, 2000

|**Column
      A**              |  | **Column
      B**                                   |    | **Column C**                                       |               | **Column
      D**                                        |   | **Column
      E**           
|------------------------------- |  | ---------------------------------------------------- | -- | -------------------------------------------------- | ------------- | --------------------------------------------------------- | - | -----------------------------
|                                |  |                                                      |    |                                                    |               |                                                           |   |                              
|                                |  |                                                      |    |                                                    | **Additions** |                                                           |   |                              
|                                |  |                                                      |    |                                                    |               |                                                           |   |                              
|**Description**                 |  | **Balance
      at
      Beginning of
      Period** |    | **Charged
      to
      cost and
      expenses** |               | **Charged
      to
      other accounts-
      describe** |   | **Deductions
      describe**
|                                |  |                                                      |    |                                                    |               |                                                           |   |                              
|                                |  | (Millions)                                          
|2002:                           |  |                                                      |    |                                                    |               |                                                           |   |                              
|                                |  |                                                      |    |                                                    |               |                                                           |   |                              
|Allowance for Doubtful Accounts |  | $                                                    | 2  |                                                    |               | $                                                         |  |                              
|Other Valuation Allowances      |  |                                                      | 22 |                                                    |               |                                                           |  |                              
|2001:                           |  |                                                      |    |                                                    |               |                                                           |   |                              
|                                |  |                                                      |    |                                                    |               |                                                           |   |                              
|Allowance for Doubtful Accounts |  | $                                                    |   |                                                    |               | $                                                         |  |                              
|Other Valuation Allowances      |  |                                                      | 22 |                                                    |               |                                                           |  |                              
|2000:                           |  |                                                      |    |                                                    |               |                                                           |   |                              
|                                |  |                                                      |    |                                                    |               |                                                           |   |                              
|Allowance for Doubtful Accounts |  | $                                                    |   |                                                    |               | $                                                         |  |                              
|Other Valuation Allowances      |  |                                                      | 22 |                                                    |               |                                                           |  |                              

|    |                                                                                    
|--- | -----------------------------------------------------------------------------------
|(A) | Valuation allowance consolidated
      in connection with the acquisition of SAESA.
|(B) | Recorded in connection with the
      sales of certain properties held by EDGC.    
|(C) | Includes various liquidity, credit
      and bad debt reserves.                    

216

---



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.
  The signature of the undersigned company shall be deemed to relate only to matters
  having reference to such company and any subsidiaries thereof.

| | Public Service Enterprise
      Group Incorporated
| | --------------------------------------------------
| |                                                   
| | By                                                
| |                                                   
| |                                                   

Date: February 25, 2003

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. The signatures of the undersigned shall be deemed to
  relate only to matters having reference to such company and any subsidiaries
  thereof.

|Signature                   |  | Title                                                 |  | Date             
|--------------------------- |  | ----------------------------------------------------- |  | -----------------
|                            |  |                                                       |  |                  
|E. JAMESFERLAND             |  | Chairman of the Board,                                |  | February 25, 2003
|                            |  | President and Chief Executive Officer                 |  |                  
|E. James Ferland            |  | and Director (Principal Executive
      Officer)      |  |                  
|                            |  |                                                       |  |                  
|                            |  |                                                       |  |                  
|THOMASM. OFLYNN            |  | Executive Vice President and Chief                    |  | February 25, 2003
|                            |  | Financial Officer (Principal Financial
      Officer) |  |                  
|Thomas M. OFlynn           | 
|                            |  |                                                       |  |                  
|PATRICIAA. RADO             |  | Vice President and Controller                         |  | February 25, 2003
|                            |  | (Principal Accounting Officer)                        |  |                  
|Patricia A. Rado            |  |                                                       |  |                  
|                            |  |                                                       |  |                  
|ERNESTH. DREW               |  | Director                                              |  | February 25, 2003
|                            |  |                                                       |  |                  
|Ernest H. Drew              |  |                                                       |  |                  
|                            |  |                                                       |  |                  
|ALBERTR. GAMPER,
      JR.  |  | Director                                              |  | February 25, 2003
|                            |  |                                                       |  |                  
|Albert R. Gamper,
      Jr. |  |                                                       |  |                  
|                            |  |                                                       |  |                  
|RAYMONDV. GILMARTIN         |  | Director                                              |  | February 25, 2003
|                            |  |                                                       |  |                  
|Raymond V. Gilmartin        |  |                                                       |  |                  
|                            |  |                                                       |  |                  
|CONRADK. HARPER             |  | Director                                              |  | February 25, 2003
|                            |  |                                                       |  |                  
|Conrad K. Harper            |  |                                                       |  |                  
|                            |  |                                                       |  |                  
|WILLIAMV. HICKEY            |  | Director                                              |  | February 25, 2003
|                            |  |                                                       |  |                  
|William V. Hickey           |  |                                                       |  |                  
|                            |  |                                                       |  |                  
|SHIRLEYANNJACKSON           |  | Director                                              |  | February 25, 2003
|                            |  |                                                       |  |                  
|Shirley Ann Jackson         |  |                                                       |  |                  
|                            |  |                                                       |  |                  
|MARILYNM. PFALTZ            |  | Director                                              |  | February 25, 2003
|                            |  |                                                       |  |                  
|Marilyn M. Pfaltz           |  |                                                       |  |                  
|                            |  |                                                       |  |                  
|RICHARDJ. SWIFT             |  | Director                                              |  | February 25, 2003
|                            |  |                                                       |  |                  
|Richard J. Swift            |  |                                                       |  |                  
|                            |  |                                                       |  |                  

217

---



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. The signature of the undersigned shall be deemed to relate
  only to matters having reference to such company and any subsidiaries thereof.

| | Public Service Electric
      and Gas Company
| | ---------------------------------------------
| |                                              
| | By                                           
| |                                              
| |                                              

Date: February
  25, 2003

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. The signatures of the undersigned company shall be deemed
  to relate only to matters having reference to such company and any subsidiaries
  thereof.

|Signature                  |  | Title                                                 |  | Date             
|-------------------------- |  | ----------------------------------------------------- |  | -----------------
|                           |  |                                                       |  |                  
|                           |  |                                                       |  |                  
|E. JAMESFERLAND            |  | Chairman of the Board and Chief                       |  | February 25, 2003
|                           |  | Executive Officer and Director                        |  |                  
|E. James Ferland           |  | (Principal Executive Officer)                         |  |                  
|                           |  |                                                       |  |                  
|                           |  |                                                       |  |                  
|ROBERTE. BUSCH             |  | Senior Vice President 
      Finance and Chief       |  | February 25, 2003
|                           |  | Financial Officer (Principal
      Financial Officer) |  |                  
|Robert E. Busch            | 
|                           |  |                                                       |  |                  
|PATRICIAA. RADO            |  | Vice President and Controller                         |  | February 25, 2003
|                           |  | (Principal Accounting Officer)                        |  |                  
|Patricia A. Rado           |  |                                                       |  |                  
|                           |  |                                                       |  |                  
|ALBERTR. GAMPER,
      JR. |  | Director                                              |  | February 25, 2003
|                           |  |                                                       |  |                  
|Albert R. Gamper, Jr.      |  |                                                       |  |                  
|                           |  |                                                       |  |                  
|CONRADK. HARPER            |  | Director                                              |  | February 25, 2003
|                           |  |                                                       |  |                  
|Conrad K. Harper           |  |                                                       |  |                  
|                           |  |                                                       |  |                  
|MARILYNM. PFALTZ           |  | Director                                              |  | February 25, 2003
|                           |  |                                                       |  |                  
|Marilyn M. Pfaltz          |  |                                                       |  |                  

218

---



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. The signature
of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.

| | PSEG Power LLC
| | --------------
| |               
| | By            
| |               
| |               
| |               
| |               

Date: February 25, 2003

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. The signatures
of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof.

|Signature                      |  | Title                                |  | Date             
|------------------------------ |  | ------------------------------------ |  | -----------------
|                               |  |                                      |  |                  
|                               |  |                                      |  |                  
|E. JAMESFERLAND                |  | Chairman of the Board and            |  | February 25, 2003
|                               |  | Chief Executive Officer and Director |  |                  
|E. James Ferland               |  | (Principal Executive Officer)        |  |                  
|                               |  |                                      |  |                  
|                               |  |                                      |  |                  
|THOMASM. OFLYNN               |  | Executive Vice President and Chief   |  | February 25, 2003
|                               |  | Financial Officer and Director       |  |                  
|Thomas M. OFlynn              |  | (Principal Financial Officer)        |  |                  
|                               |  |                                      |  |                  
|                               |  |                                      |  |                  
|PATRICIAA. RADO                |  | Vice President and Controller        |  | February 25, 2003
|                               |  | (Principal Accounting Officer)       |  |                  
|Patricia A. Rado               |  |                                      |  |                  
|                               |  |                                      |  |                  
|ROBERTE. BUSCH                 |  | Director                             |  | February 25, 2003
|                               |  |                                      |  |                  
|Robert E. Busch                |  |                                      |  |                  
|                               |  |                                      |  |                  
|FRANKCASSIDY                   |  | Director                             |  | February 25, 2003
|                               |  |                                      |  |                  
|Frank Cassidy                  |  |                                      |  |                  
|                               |  |                                      |  |                  
|ROBERTJ. DOUGHERTY,
      JR.  |  | Director                             |  | February 25, 2003
|                               |  |                                      |  |                  
|Robert J. Dougherty,
      Jr. |  |                                      |  |                  
|                               |  |                                      |  |                  
|R. EDWINSELOVER                |  | Director                             |  | February 25, 2003
|                               |  |                                      |  |                  
|R. Edwin Selover               |  |                                      |  |                  
|                               |  |                                      |  |                  
|MICHAELJ. THOMSON              |  | Director                             |  | February 25, 2003
|                               |  |                                      |  |                  
|Michael J. Thomson             |  |                                      |  |                  
|                               |  |                                      |  |                  
|                               |  |                                      |  |                  
|219                           

---



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. The signature of the undersigned company shall be deemed to
  relate only to matters having reference to such company and any subsidiaries
  thereof.

| | PSEG Energy Holdings
      LLC
| | ------------------------------
| |                               
| | By                            
| |                               
| |                               

Date: February 25, 2003

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. The signatures of the undersigned shall be deemed to
  relate only to matters having reference to such company and any subsidiaries
  thereof.

|Signature                      |  | Title                                |  | Date             
|------------------------------ |  | ------------------------------------ |  | -----------------
|                               |  |                                      |  |                  
|                               |  |                                      |  |                  
|E. JAMESFERLAND                |  | Chairman of the Board and            |  | February 25, 2003
|                               |  | Chief Executive Officer and Director |  |                  
|E. James Ferland               |  | (Principal Executive Officer)        |  |                  
|                               |  |                                      |  |                  
|                               |  |                                      |  |                  
|THOMASM. OFLYNN               |  | Executive Vice President and         |  | February 25, 2003
|                               |  | Chief Financial Officer and Director |  |                  
|Thomas M. OFlynn              |  | (Principal Financial Officer)        |  |                  
|                               |  |                                      |  |                  
|                               |  |                                      |  |                  
|DEREKM. DIRISIO                |  | Vice President and Controller        |  | February 25, 2003
|                               |  | (Principal Accounting Officer)       |  |                  
|Derek M. DiRisio               |  |                                      |  |                  
|                               |  |                                      |  |                  
|ROBERTE. BUSCH                 |  | Director                             |  | February 25, 2003
|                               |  |                                      |  |                  
|Robert E. Busch                |  |                                      |  |                  
|                               |  |                                      |  |                  
|FRANKCASSIDY                   |  | Director                             |  | February 25, 2003
|                               |  |                                      |  |                  
|Frank Cassidy                  |  |                                      |  |                  
|                               |  |                                      |  |                  
|ROBERTJ. DOUGHERTY,
      JR.  |  | Director                             |  | February 25, 2003
|                               |  |                                      |  |                  
|Robert J. Dougherty,
      Jr. |  |                                      |  |                  
|                               |  |                                      |  |                  
|R. EDWINSELOVER                |  | Director                             |  | February 25, 2003
|                               |  |                                      |  |                  
|R. Edwin Selover               |  |                                      |  |                  

220

---



|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)                                                                                                                                                                                                                                                                    
|(b)                                                                                                                                                                                                                                                                    
|(c)                                                                                                                                                                                                                                                                    
|(d)                                                                                                                                                                                                                                                                    
|(e)                                                                                                                                                                                                                                                                    
|(f)                                                                                                                                                                                                                                                                    
|(g)                                                                                                                                                                                                                                                                    
|(h)                                                                                                                                                                                                                                                                    
|(i)                                                                                                                                                                                                                                                                    
|(j)                                                                                                                                                                                                                                                                    
|(k)                                                                                                                                                                                                                                                                    
|(l)                                                                                                                                                                                                                                                                    
|(m)                                                                                                                                                                                                                                                                    
|(n)                                                                                                                                                                                                                                                                    
|(o)                                                                                                                                                                                                                                                                    
|(p)                                                                                                                                                                                                                                                                    

---



|(q)  | 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.                                                                                                                    
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(r)  | 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.                                                                                                                         
|(s)  | 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.                                                                                                                                                                   
|(t)  | 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.                                                                                                                                                                                               
|(u)  | Filed with registration statement
      of PSEG 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.                                                                                                                                        
|(v)  | 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.                                                                                                                            
|(w)  | Filed with registration statement of PSE&G under the Securities Act of 1933, No. 333-02763,
effective June 12, 1996, relating to the registration of $350,000,000 of Cumulative Quarterly Income Preferred Securities
of PSE&G Capital Trust I, II and III.                                                                                                       
|(x)  | Filed with the registration statement of PSEG under the Securities Act of 1933, No.
333-43241, effective January 8, 1998, relating to the registration of $225,000,000 of Trust Preferred Securities of Enterprise
Capital Trust, I, II and III.                                                                                                                  
|(y)  | Filed with registration statement
      of PSE&G under the Securities Act of 1933, No. 333-76020, effective
      February 12, 2002, relating to the registration of $1,000,000,000 of Senior
      Debt Securities.                                                                                                                                              
|(z)  | Filed with registration statement
      of PSEG under the Securities Act of 1933, No. 333-86372, effective July
      3, 2002 relating to the registration of $1.5 billion of Common Stock, Preferred
      Stock, Stock Purchase Contracts, Stock Purchase Units and Debt Securities
      and PSEG Funding Trust I Preferred Trust Securities.                  
|(aa) | Filed with registration statement
      of PSEG under the Securities Act of 1933, No. 333-101400, effective December
      5, 2002 relating to the registration of $1.0 billion of Common Stock, Preferred
      Stock, Stock Purchase Contracts, Stock Purchase Units and Debt Securities
      and PSEG Funding Trust II, III and IV Preferred Trust Securities.
|(bb) | Filed with registration statement
      of PSEG under the Securities Act of 1933, No. 033-45491, effective February
      4, 1992, relating to the Employee Stock Purchase Plan.                                                                                                                                                                                  

|PSEG           |   |           
|-------------- | - | ----------
|               |   |           
|Exhibit Number |   |           
|               |   |           
|               |   |           
|               |   |           
|This Filing    |   | Commission
|               |   |           
|               |   |           
|3              |   |           
|               |   |           
|               |   |           
|3              | b |           
|               |   |           
|               |   |           
|3              | c |           
|               |   |           
|               |   |           
|               |   |           
|3              | d |           
|               |   |           
|               |   |           
|3              | e |           
|               |   |           

---



|PSEG           |   |           
|-------------- | - | ----------
|               |   |           
|Exhibit Number |   |           
|               |   |           
|               |   |           
|               |   |           
|This Filing    |   | Commission
|               |   |           
|3              | f |           
|               |   |           
|3              | g |           
|               |   |           
|3              | h |           
|               |   |           
|4a(1)          |   |           
|               |   |           
|               |   |           
|               |   |           
|               |   |           
|               |   |           
|4a(2)          |   |           
|               |   |           
|               |   |           
|               |   |           
|               |   |           
|               |   |           
|               |   |           
|4a(3)          |   |           
|               |   |           
|               |   |           
|               |   |           
|               |   |           
|               |   |           
|               |   |           
|4              | b |           
|               |   |           
|               |   |           
|               |   |           
|               |   |           
|4              | c |           
|               |   |           
|               |   |           
|               |   |           
|               |   |           
|               |   |           
|4              | d |           
|               |   |           
|               |   |           
|               |   |           
|               |   |           
|               |   |           
|9              |   |           
|               |   |           
|10a(1)         |   |           
|               |   |           
|               |   |           
|10a(2)         |   |           
|               |   |           
|               |   |           
|10a(3)         |   |           
|               |   |           
|               |   |           
|10a(4)         |   |           
|               |   |           
|               |   |           
|10a(5)         |   |           
|               |   |           
|               |   |           
|               |   |           
|10a(6)         |   |           
|               |   |           
|               |   |           
|10a(7)         |   |           
|               |   |           

---



|PSEG           |  |                
|-------------- |  | ---------------
|               |  |                
|Exhibit Number |  |                
|               |  |                
|               |  | Previous Filing
|               |  |                
|This Filing    |  | Commission     
|               |  |                
|10a(8)         |  | (c)            
|               |  |                
|               |  |                
|10a(9)         |  | (b)            
|               |  |                
|               |  |                
|10a(10)        |  | (c)            
|               |  |                
|               |  |                
|10a(11)        |  | (b)            
|               |  |                
|               |  |                
|10a(12)        |  | (c)            
|               |  |                
|               |  |                
|10a(13)        |  | (a)            
|               |  |                
|               |  |                
|10a(14)        |  | (b)            
|               |  |                
|               |  |                
|10a(15)        |  | (b)            
|               |  |                
|               |  |                
|10a(16)        |  | (b)            
|               |  |                
|               |  |                
|10a(17)        |  |                
|               |  |                
|10a(18)        |  | (f)            
|               |  |                
|               |  |                
|10a(19)        |  | (bb)           
|               |  |                
|10a(20)        |  |                
|               |  |                
|11             |  |                
|               |  |                
|12             |  |                
|               |  |                
|13             |  |                
|               |  |                
|16             |  |                
|               |  |                
|18             |  |                
|               |  |                
|21             |  |                
|               |  |                
|22             |  |                
|               |  |                
|23             |  |                
|               |  |                
|24             |  |                
|               |  |                
|99             |  |                
|               |  |                
|               |  |                
|99a            |  |                
|               |  |                

---



|PSE&G          |  |           
|-------------- |  | ----------
|               |  |           
|Exhibit Number |  |           
|               |  |           
|               |  |           
|               |  |           
|This Filing    |  | Commission
|               |  |           
|3a(1)          |  | (b)       
|               |  |           
|               |  |           
|3a(2)          |  | (c)       
|               |  |           
|               |  |           
|               |  |           
|               |  |           
|               |  |           
|3a(3)          |  | (a)       
|               |  |           
|               |  |           
|               |  |           
|               |  |           
|3a(4)          |  | (a)       
|               |  |           
|               |  |           
|               |  |           
|               |  |           
|3a(5)          |  | (a)       
|               |  |           
|               |  |           
|               |  |           
|               |  |           
|               |  |           
|3b(1)          |  | (d)       
|               |  |           
|               |  |           
|3c             |  |           
|               |  |           
|3d(1)          |  |           
|               |  |           
|3e             |  | (w)       
|               |  |           
|               |  |           
|4a(1)          |  | (f)       
|               |  |           
|               |  |           
|               |  |           
|               |  |           
|               |  |           
|               |  |           
|               |  |           
|4a(2)          |  | (i)       
|               |  |           
|               |  |           
|4a(3)          |  | (k)       
|               |  |           
|               |  |           
|4a(4)          |  | (k)       
|               |  |           
|               |  |           
|4a(5)          |  | (k)       
|               |  |           
|               |  |           
|4a(6)          |  | (g)       
|               |  |           
|               |  |           
|4a(7)          |  | (k)       
|               |  |           
|               |  |           
|4a(8)          |  | (k)       
|               |  |           
|               |  |           
|4a(9)          |  | (k)       
|               |  |           
|               |  |           
|4a(10)         |  | (k)       
|               |  |           

---



|PSE&G          |  |           
|-------------- |  | ----------
|               |  |           
|Exhibit Number |  |           
|               |  |           
|               |  |           
|               |  |           
|This Filing    |  | Commission
|               |  |           
|4a(11)         |  | (j)       
|               |  |           
|               |  |           
|4a(12)         |  | (k)       
|               |  |           
|               |  |           
|4a(13)         |  | (k)       
|               |  |           
|               |  |           
|4a(14)         |  | (k)       
|               |  |           
|               |  |           
|4a(15)         |  | (k)       
|               |  |           
|               |  |           
|4a(16)         |  | (k)       
|               |  |           
|               |  |           
|4a(17)         |  | (k)       
|               |  |           
|               |  |           
|4a(18)         |  | (k)       
|               |  |           
|               |  |           
|4a(19)         |  | (k)       
|               |  |           
|               |  |           
|4a(20)         |  | (k)       
|               |  |           
|               |  |           
|4a(21)         |  | (k)       
|               |  |           
|               |  |           
|4a(22)         |  | (k)       
|               |  |           
|               |  |           
|4a(23)         |  | (k)       
|               |  |           
|               |  |           
|4a(24)         |  | (k)       
|               |  |           
|               |  |           
|4a(25)         |  | (k)       
|               |  |           
|               |  |           
|4a(26)         |  | (k)       
|               |  |           
|               |  |           
|4a(27)         |  | (a)       
|               |  |           
|               |  |           
|4a(28)         |  | (a)       
|               |  |           
|               |  |           
|4a(29)         |  | (a)       
|               |  |           
|               |  |           
|4a(30)         |  | (a)       
|               |  |           
|               |  |           
|4a(31)         |  | (k)       
|               |  |           

---



|PSE&G          |  |                
|-------------- |  | ---------------
|               |  |                
|Exhibit Number |  |                
|               |  |                
|               |  | Previous Filing
|               |  |                
|This Filing    |  | Commission     
|               |  |                
|4a(32)         |  | (a)            
|               |  |                
|               |  |                
|4a(33)         |  | (l)            
|               |  |                
|               |  |                
|4a(34)         |  | (a)            
|               |  |                
|               |  |                
|4a(35)         |  | (a)            
|               |  |                
|               |  |                
|4a(36)         |  | (m)            
|               |  |                
|               |  |                
|4a(37)         |  | (m)            
|               |  |                
|               |  |                
|4a(38)         |  | (a)            
|               |  |                
|               |  |                
|4a(39)         |  | (a)            
|               |  |                
|               |  |                
|4a(40)         |  | (a)            
|               |  |                
|               |  |                
|4a(41)         |  | (b)            
|               |  |                
|               |  |                
|4a(42)         |  | (a)            
|               |  |                
|               |  |                
|4a(43)         |  | (a)            
|               |  |                
|               |  |                
|4a(44)         |  | (d)            
|               |  |                
|4a(45)         |  | (a)            
|               |  |                
|               |  |                
|4a(46)         |  | (d)            
|               |  |                
|               |  |                
|4a(47)         |  | (d)            
|               |  |                
|               |  |                
|4a(48)         |  | (b)            
|               |  |                
|               |  |                
|4a(49)         |  | (b)            
|               |  |                
|               |  |                
|4a(50)         |  | (a)            
|               |  |                
|               |  |                
|4a(51)         |  | (c)            
|               |  |                
|               |  |                
|4a(52)         |  | (a)            
|               |  |                

---



|PSE&G          |  |                
|-------------- |  | ---------------
|               |  |                
|Exhibit Number |  |                
|               |  |                
|               |  | Previous Filing
|               |  |                
|This Filing    |  | Commission     
|               |  |                
|4a(53)         |  | (a)            
|               |  |                
|               |  |                
|4a(54)         |  | (a)            
|               |  |                
|               |  |                
|4a(55)         |  | (p)            
|               |  |                
|               |  |                
|4a(56)         |  | (a)            
|               |  |                
|               |  |                
|4a(57)         |  | (d)            
|               |  |                
|               |  |                
|4a(58)         |  | (a)            
|               |  |                
|               |  |                
|4a(59)         |  | (a)            
|               |  |                
|               |  |                
|4a(60)         |  | (a)            
|               |  |                
|               |  |                
|4a(61)         |  | (a)            
|               |  |                
|               |  |                
|4a(62)         |  | (a)            
|               |  |                
|               |  |                
|4a(63)         |  | (a)            
|               |  |                
|               |  |                
|4a(64)         |  | (a)            
|               |  |                
|               |  |                
|4a(65)         |  | (a)            
|               |  |                
|               |  |                
|4a(66)         |  | (a)            
|               |  |                
|               |  |                
|4a(67)         |  | (a)            
|               |  |                
|               |  |                
|4a(68)         |  | (a)            
|               |  |                
|               |  |                
|4a(69)         |  | (a)            
|               |  |                
|               |  |                
|4a(70)         |  | (a)            
|               |  |                
|               |  |                
|4a(71)         |  | (a)            
|               |  |                
|               |  |                
|4a(72)         |  | (a)            
|               |  |                

---



|PSE&G          |  |                
|-------------- |  | ---------------
|               |  |                
|Exhibit Number |  |                
|               |  |                
|               |  | Previous Filing
|               |  |                
|               |  |                
|This Filing    |  |                
|               |  | Commission     
|               |  |                
|4a(73)         |  | (a)            
|               |  |                
|               |  |                
|4a(74)         |  | (a)            
|               |  |                
|               |  |                
|4a(75)         |  | (a)            
|               |  |                
|               |  |                
|4a(76)         |  | (b)            
|               |  |                
|               |  |                
|4a(77)         |  | (a)            
|               |  |                
|               |  |                
|4a(78)         |  | (a)            
|               |  |                
|               |  |                
|4a(79)         |  | (b)            
|               |  |                
|               |  |                
|4a(80)         |  | (a)            
|               |  |                
|               |  |                
|4a(81)         |  | (b)            
|               |  |                
|               |  |                
|4a(82)         |  | (a)            
|               |  |                
|               |  |                
|4a(84)         |  | (a)            
|               |  |                
|               |  |                
|4a(85)         |  | (a)            
|               |  |                
|               |  |                
|4a(86)         |  | (a)            
|               |  |                
|               |  |                
|4a(87)         |  | (d)            
|               |  |                
|               |  |                
|4a(88)         |  | (d)            
|               |  |                
|               |  |                
|4a(89)         |  | (d)            
|               |  |                
|               |  |                
|4a(90)         |  | (d)            
|               |  |                
|               |  |                
|4a(91)         |  | (d)            
|               |  |                
|               |  |                
|4a(92)         |  | (a)            
|               |  |                
|               |  |                
|4a(93)         |  | (a)            
|               |  |                
|               |  |                
|4a(94)         |  | (c)            
|               |  |                

---



|PSE&G          |  |                
|-------------- |  | ---------------
|               |  |                
|Exhibit Number |  |                
|               |  |                
|               |  | Previous Filing
|               |  |                
|This Filing    |  | Commission     
|               |  |                
|4a(95)         |  | (a)            
|               |  |                
|               |  |                
|4a(96)         |  | (a)            
|               |  |                
|               |  |                
|4a(97)         |  |                
|               |  |                
|4b             |  | (b)            
|               |  |                
|               |  |                
|               |  |                
|4c(1)          |  | (b)            
|               |  |                
|               |  |                
|               |  |                
|               |  |                
|4c(2)          |  | (a)            
|               |  |                
|               |  | (d)            
|               |  |                
|               |  |                
|               |  |                
|4d(1)          |  | (d)            
|               |  |                
|               |  |                
|               |  |                
|               |  |                
|4d(2)          |  | (d)            
|               |  |                
|               |  |                
|               |  |                
|               |  |                
|               |  |                
|4e             |  | (q)            
|               |  |                
|               |  |                
|               |  |                
|               |  |                
|10a(1)         |  | (c)            
|               |  |                
|               |  |                
|10a(2)         |  | (c)            
|               |  |                
|               |  |                
|10a(3)         |  | (c)            
|               |  |                
|               |  |                
|10a(4)         |  | (c)            
|               |  |                
|               |  |                
|10a(5)         |  | (c)            
|               |  |                
|               |  |                
|               |  |                
|10a(6)         |  | (b)            
|               |  |                
|               |  |                
|10a(7)         |  | (c)            
|               |  |                
|               |  |                
|10a(8)         |  | (c)            
|               |  |                

---



|PSE&G          |   |           
|-------------- | - | ----------
|               |   |           
|Exhibit Number |   |           
|               |   |           
|               |   |           
|               |   |           
|This Filing    |   | Commission
|               |   |           
|10a(9)         |   |           
|               |   |           
|               |   |           
|10a(10)        |   |           
|               |   |           
|               |   |           
|10a(11)        |   |           
|               |   |           
|               |   |           
|10a(12)        |   |           
|               |   |           
|               |   |           
|10a(13)        |   |           
|               |   |           
|               |   |           
|11             |   |           
|               |   |           
|12             | a |           
|               |   |           
|12             | b |           
|               |   |           
|               |   |           
|13             |   |           
|               |   |           
|16             |   |           
|               |   |           
|18             |   |           
|               |   |           
|19             |   |           
|               |   |           
|21             | a |           
|               |   |           
|23             | a |           
|               |   |           
|24             |   |           
|               |   |           
|99             | b |           
|               |   |           
|               |   |           
|99             | c |           
|               |   |           

---



Power

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.

|Power          |  
|-------------- | -
|               |  
|Exhibit Number |  
|               |  
|               |  
|               |  
|This Filing    |  
|               |  
|3              | a
|               |  
|               |  
|3              | b
|               |  
|               |  
|4              | a
|               |  
|               |  
|               |  
|10             |  
|               |  
|               |  
|11             |  
|               |  
|12             | c
|               |  
|13             |  
|               |  
|16             |  
|               |  
|18             |  
|               |  
|19             |  
|               |  
|24             |  
|               |  
|99             | d
|               |  
|               |  
|99             | e
|               |  

---



Energy Holdings

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.

|Energy Holdings |  
|--------------- | -
|                |  
|Exhibit Number  |  
|                |  
|                |  
|                |  
|This Filing     |  
|                |  
|3               | a
|                |  
|                |  
|3               | b
|                |  
|                |  
|3               | c
|                |  
|                |  
|4               | a
|                |  
|                |  
|                |  
|4               | b
|                |  
|                |  
|                |  
|11              |  
|                |  
|12              | d
|                |  
|13              |  
|                |  
|16              |  
|                |  
|19              |  
|                |  
|24              |  
|                |  
|99              | f
|                |  
|                |  
|99              | g
|                |  

---