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

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

             For the quarterly period ended June 30, 1999

                                       OR

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

  For the transition period from                  to

Commission      Registrant, State of Incorporation,      I.R.S. Employer
   File            Address, and Telephone Number         Identification
  Number                                                      No.
----------  ------------------------------------------  ----------------
 1-9120          PUBLIC SERVICE ENTERPRISE GROUP          22-2625848
                            INCORPORATED
                   (A New Jersey Corporation)
                          80 Park Plaza
                          P.O. Box 1171
                  Newark, New Jersey 07101-1171
                          973 430-7000
                       http://www.pseg.com

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

Indicate by check mark whether the registrant (1) has 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  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes X No ___


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: Common Stock, without par value
                    Outstanding at July 31, 1999: 219,247,118

As of July 31, 1999,  Public  Service  Electric  and  Gas Company had issued and
outstanding   132,450,344  shares  of  common  stock,   without  nominal  or par
value,  all of which were privately held,  beneficially  and of record by Public
Service Enterprise Group Incorporated.


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<PAGE>

================================================================================
                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
================================================================================
                                TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

   Item 1. Financial Statements
                                                                        Page
                                                                        ----
     Public Service Enterprise Group Incorporated (PSEG):

       Consolidated Statements of Income for the Three and Six
       Months Ended June 30, 1999 and 1998.............................   1

       Consolidated Balance Sheets as of June 30, 1999
       and December 31, 1998...........................................   2

       Consolidated Statements of Cash Flows for the Six
       Months Ended June 30, 1999 and 1998..............................  4

     Public Service Electric and Gas Company (PSE&G):

       Consolidated Statements of Income for the Three and Six
       Months Ended June 30, 1999 and 1998.............................   5

       Consolidated Balance Sheets as of June 30, 1999
       and December 31, 1998...........................................   6

       Consolidated Statements of Cash Flows for the Six
       Months Ended June 30, 1999 and 1998.............................   8

     Notes to Consolidated Financial Statements-- PSEG.................   9

     Notes to Consolidated Financial Statements-- PSE&G................  29

   Item 2. Management's Discussion and Analysis of Financial
           Condition and Results of Operations
       PSEG ...........................................................  30
       PSE&G...........................................................  50

   Item 3. Qualitative and Quantitative Disclosures About Market Risk..  50

PART II.  OTHER INFORMATION

   Item 1. Legal Proceedings...........................................  51

   Item 5. Other Information...........................................  53

   Item 6. Exhibits and Reports on Form 8-K............................  54

   Forward Looking Statements..........................................  55

   Signatures -- PSEG..................................................  56
   Signatures -- PSE&G.................................................  56

<PAGE>

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                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
================================================================================

                          PART I. FINANCIAL INFORMATION

                          ITEM 1. FINANCIAL STATEMENTS


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

<CAPTION>

                                                                          Three Months Ended         Six Months Ended
                                                                               June 30,                  June 30,
                                                                         ----------------------    ---------------------
                                                                           1999         1998         1999        1998
                                                                         ----------   ---------    ---------   ---------

<S>                                                                      <C>          <C>          <C>         <C>
OPERATING REVENUES
    Electric                                                             $   1,020    $    980     $  1,986    $  1,882
    Gas                                                                        277         272          977         884
    PSEG Energy Holdings Inc.                                                  139         110          268         255
                                                                         ----------   ---------    ---------   ---------
           Total Operating Revenues                                          1,436       1,362        3,231       3,021
                                                                         ----------   ---------    ---------   ---------

OPERATING EXPENSES
    Net Interchanged Power and Fuel for Electric Generation                    238         241          463         460
    Gas Purchased                                                              177         182          626         598
    Operation and Maintenance                                                  419         388          857         745
    Depreciation and Amortization                                              122         166          288         323
    Taxes:
      Income Taxes                                                             121          89          264         221
      Other                                                                     43          44           99         105
                                                                         ----------   ---------    ---------   ---------
             Total Operating Expenses                                        1,120       1,110        2,597       2,452
                                                                         ----------   ---------    ---------   ---------
OPERATING INCOME                                                               316         252          634         569
                                                                         ----------   ---------    ---------   ---------

OTHER INCOME AND DEDUCTIONS                                                     10           2           16           9
                                                                         ----------   ---------    ---------   ---------
INCOME BEFORE INTEREST CHARGES AND
  DIVIDENDS ON PREFERRED SECURITIES
  AND EXTRAORDINARY ITEM                                                       326         254          650         578
                                                                         ----------   ---------    ---------   ---------

INTEREST CHARGES AND PREFERRED SECURITIES DIVIDENDS
    Interest Expense                                                           119         116          233         237
    Capitalized Interest and AFDC                                               (2)         (3)          (4)         (7)
    Preferred Securities Dividend Requirements of Subsidiaries                  28          19           52          35
                                                                         ----------   ---------    ---------   ---------
        Total Interest Charges and Preferred Securities Dividends              145         132          281         265
                                                                         ----------   ---------    ---------   ---------

INCOME BEFORE EXTRAORDINARY ITEM                                               181         122          369         313

Extraordinary Item (Net of Tax of $345)                                       (790)          -         (790)          -
                                                                         ----------   ---------    ---------   ---------

NET INCOME (LOSS)                                                        $    (609)   $    122     $   (421)   $    313
                                                                         ==========   =========    =========   =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (000's)                         219,571     231,958      221,122     231,958

EARNINGS (LOSSES) PER SHARE (BASIC AND DILUTED)
    Income Before Extraordinary Item                                     $    0.83    $   0.53     $   1.67    $   1.35
    Extraordinary Item (Net of Tax)                                          (3.60)          -        (3.57)          -
                                                                         ----------   ---------    ---------   ---------
    Net Income (Loss)                                                    $   (2.77)   $   0.53     $  (1.90)   $   1.35
                                                                         ==========   =========    =========   =========

DIVIDENDS PAID PER SHARE OF COMMON STOCK                                 $    0.54    $   0.54     $   1.08    $   1.08
                                                                         ==========   =========    =========   =========
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
           PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                    CONSOLIDATED BALANCE SHEETS
                              ASSETS
                       (Millions of Dollars)

<CAPTION>

                                                                            (Unaudited)
                                                                              June 30,        December 31,
                                                                                1999              1998
                                                                          --------------   ----------------
<S>                                                                             <C>                <C>
PROPERTY, PLANT AND EQUIPMENT
  Electric - Generation                                                         $ 1,763            $ 9,226
  Electric - Transmission and Distribution                                        4,969              4,953
  Gas - Distribution                                                              2,946              2,882
  Common                                                                            265                414
                                                                          --------------   ----------------
       Total                                                                      9,943             17,475
  Less: Accumulated depreciation and amortization                                 3,417              7,048
                                                                          --------------   ----------------
       Net                                                                        6,526             10,427
  Nuclear Fuel in Service, net of accumulated amortization -
     1999, $377; 1998, $312                                                         194                187
                                                                          --------------   ----------------
       Net Property, Plant and Equipment in Service                               6,720             10,614
  Construction Work in Progress, including Nuclear Fuel in
    Process - 1999, $34; 1998, $72                                                   98                219
  Plant Held for Future Use                                                          21                 24
                                                                          --------------   ----------------
       Net Property, Plant and Equipment                                          6,839             10,857
                                                                          --------------   ----------------
INVESTMENTS AND OTHER NONCURRENT ASSETS
 Long-Term Investments, net of amortization - 1999, $36; 1998,
    $28, and net of valuation allowances - 1999, $19; 1998, $18                   3,475              3,034
 Nuclear Decommissioning Fund                                                       562                524
 Other Special Funds                                                                135                125
 Other Noncurrent Assets,  net of amortization - 1999, $33; 1998,
    $29, and net of valuation allowances - 1999, $10; 1998, $10                     193                150
                                                                          --------------   ----------------
       Total Investments and Other Noncurrent Assets                              4,365              3,833
                                                                          --------------   ----------------
CURRENT ASSETS
  Cash and Cash Equivalents                                                          77                140
  Accounts Receivable:
    Customer Accounts Receivable                                                    556                506
    Other Accounts Receivable                                                       460                219
    Less: Allowance for Doubtful Accounts                                            47                 38
  Unbilled Revenues                                                                 187                255
  Fuel - Gas Distribution                                                           226                274
  Fuel - Electric Generation                                                         47                 57
  Materials and Supplies,
    net of  valuation reserves - 1999, $51; 1998, $12                               130                167
  Prepayments                                                                       307                 61
  Miscellaneous Current Assets                                                       69                 32
                                                                          --------------   ----------------
       Total Current Assets                                                       2,012              1,673
                                                                          --------------   ----------------
DEFERRED DEBITS
  Regulatory Asset - Stranded Costs                                               4,058                  -
  SFAS 109 Income Taxes                                                             296                704
  OPEB Costs                                                                        260                270
  Demand Side Management Costs                                                      144                150
  Environmental Costs                                                               124                139
  Unamortized Loss on Reacquired Debt and Debt Expense                              130                135
  Other                                                                             239                236
                                                                          --------------   ----------------
       Total Deferred Debits                                                      5,251              1,634
                                                                          --------------   ----------------
TOTAL                                                                          $ 18,467           $ 17,997
                                                                          ==============   ================
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>

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

                                                                             (Unaudited)
                                                                                June 30,      December 31,
                                                                                1999              1998
                                                                             ------------    ---------------
<S>                                                                              <C>                <C>
CAPITALIZATION
  Common Stockholders' Equity:
    Common Stock, issued; 231,957,608 shares                                     $ 3,603            $ 3,603
    Treasury Stock, at cost; 1999 - 12,971,900 shares,
       1998 - 5,314,100 shares                                                      (507)              (207)
    Retained Earnings                                                              1,089              1,748
    Accumulated Other Comprehensive Income (Loss)                                   (173)               (46)
                                                                             ------------    ---------------
       Total Common Stockholders' Equity                                           4,012              5,098
  Subsidiaries' Preferred Securities:
    Preferred Stock Without Mandatory Redemption                                      95                 95
    Preferred Stock With Mandatory Redemption                                         75                 75
    Guaranteed Preferred Beneficial Interest in Subordinated
       Debentures                                                                  1,038              1,038
  Long-Term Debt                                                                   4,840              4,763
                                                                             ------------    ---------------
       Total Capitalization                                                       10,060             11,069
                                                                             ------------    ---------------
OTHER LONG-TERM LIABILITIES
  Nuclear Decommissioning                                                            462                  -
  OPEB Costs                                                                         367                344
  Cost of Removal - Generation                                                       126                  -
  Environmental Costs                                                                132                 84
  Capital Lease Obligations                                                           50                 50
  Other                                                                              127                 65
                                                                             ------------    ---------------
       Total Other Long-Term Liabilities                                           1,264                543
                                                                             ------------    ---------------
CURRENT LIABILITIES
  Long-Term Debt due within one year                                                 851                418
  Commercial Paper and Loans                                                       1,288              1,056
  Accounts Payable                                                                   789                655
  Accrued Taxes                                                                       75                 41
  Other                                                                              392                288
                                                                             ------------    ---------------
       Total Current Liabilities                                                   3,395              2,458
                                                                             ------------    ---------------
DEFERRED CREDITS AND REGULATORY LIABILITIES
  Income Taxes                                                                     2,807              3,384
  Investment Tax Credits                                                              79                322
  Regulatory Liability - Excess Depreciation Reserve                                 569                  -
  Other                                                                              293                221
                                                                             ------------    ---------------
       Total Deferred Credits and Regulatory Liabilities                           3,748              3,927
                                                                             ------------    ---------------
COMMITMENTS AND CONTINGENT LIABILITIES                                                 -                  -
                                                                             ------------    ---------------
TOTAL                                                                           $ 18,467           $ 17,997
                                                                             ============    ===============
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
                PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Millions of Dollars)
                                 (Unaudited)
                                                                                    Six Months Ended
<CAPTION>
                                                                                        June 30,
                                                                                 -----------------------
                                                                                   1999         1998
                                                                                 ---------    ----------
<S>                                                                                 <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income (loss)                                                                 $(421)        $ 313
  Adjustments to reconcile net income (loss) to net cash flows from
   operating activities:
    Extraordinary Loss - net of tax                                                   790             -
    Depreciation and Amortization                                                     288           323
    Amortization of Nuclear Fuel                                                       42            44
    Recovery of Electric Energy and Gas Costs - net                                   106            94
    Provision for Deferred Income Taxes - net                                        (206)            9
    Investment Distributions                                                           75            63
    Gains on Investments                                                              (45)          (98)
    Leasing Activities                                                                 (5)          (51)
    Net Changes in certain current assets and liabilities:
       Accounts Receivable and Unbilled Revenues                                     (160)          153
       Inventory - Fuel and Materials and Supplies                                     64            59
       Prepayments                                                                   (246)         (297)
       Accounts Payable                                                               137           (94)
       Accrued Taxes                                                                   35           (29)
       Other Current Assets and Liabilities                                            69            18
    Other                                                                              80            34
                                                                                 ---------    ----------
       Net Cash Provided By Operating Activities                                      603           541
                                                                                 ---------    ----------
CASH FLOWS FROM INVESTING ACTIVITIES
  Additions to Property, Plant and Equipment,
      excluding Capitalized Interest and AFDC                                        (172)         (191)
  Net Change in Long-Term Investments                                                (630)          (15)
  Contribution to Decommissioning Funds and Other Special Funds                       (31)          (61)
  Other                                                                               (37)          (24)
                                                                                 ---------    ----------
       Net Cash Used In Investing Activities                                         (870)         (291)
                                                                                 ---------    ----------
CASH FLOWS FROM FINANCING ACTIVITIES
  Net Change in Short-Term Debt                                                       232          (379)
  Issuance of Long-Term Debt                                                          713           250
  Redemption of Long-Term Debt                                                       (203)         (203)
  Issuance of Preferred Securities                                                      -           375
  Purchase of Treasury Stock                                                         (300)            -
  Cash Dividends Paid on Common Stock                                                (238)         (251)
  Other                                                                                 -           (10)
                                                                                 ---------    ----------
       Net Cash Provided By (Used In) Financing Activities                            204          (218)
                                                                                 ---------    ----------
Net Change In Cash And Cash Equivalents                                               (63)           32
Cash And Cash Equivalents At Beginning Of Year                                        140            83
                                                                                 ---------    ---------
Cash And Cash Equivalents At End Of Period                                           $ 77         $ 115
                                                                                 =========    =========

Income Taxes Paid                                                                   $ 307         $ 326
Interest Paid                                                                       $ 229         $ 204

See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
                  PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                     CONSOLIDATED STATEMENTS OF INCOME
                           (Millions of Dollars)
                                (Unaudited)
<CAPTION>



                                                                         Three Months Ended              Six Months Ended
                                                                              June 30,                       June 30,
                                                                     ---------------------------     --------------------------
                                                                        1999            1998            1999           1998
                                                                     ------------    -----------     -----------    -----------
<S>                                                                  <C>             <C>             <C>            <C>
OPERATING REVENUES
     Electric                                                        $     1,020     $      980      $    1,986     $    1,882
     Gas                                                                     277            272             977            884
                                                                     ------------    -----------     -----------    -----------
            Total Operating Revenues                                       1,297          1,252           2,963          2,766
                                                                     ------------    -----------     -----------    -----------

OPERATING EXPENSES
     Net Interchanged Power and Fuel for Electric Generation                 235            240             456            456
     Gas Purchased                                                           165            169             589            560
     Operation and Maintenance                                               365            344             759            667
     Depreciation and Amortization                                           120            166             285            318
     Taxes:
       Income Taxes                                                          107             80             240            195
       Other                                                                  43             46              99            104
                                                                     ------------    -----------     -----------    -----------
               Total Operating Expenses                                    1,035          1,045           2,428          2,300
                                                                     ------------    -----------     -----------    -----------

OPERATING INCOME                                                             262            207             535            466
                                                                     ------------    -----------     -----------    -----------

OTHER INCOME AND DEDUCTIONS                                                    -              4               3              6
                                                                     ------------    -----------     -----------    -----------

INCOME BEFORE INTEREST CHARGES AND
  DIVIDENDS ON PREFERRED SECURITIES
  AND EXTRAORDINARY ITEM                                                     262            211             538            472
                                                                     ------------    -----------     -----------    -----------

INTEREST CHARGES AND PREFERRED SECURITIES DIVIDENDS
     Interest Expense                                                         94             92             189            188
     Capitalized Interest and AFDC                                            (1)            (3)             (3)            (6)
     Preferred Securities Dividend Requirements of Subsidiaries               12             11              23             22
                                                                     ------------    -----------     -----------    -----------
          Total Interest Charges and Preferred Securities Dividends          105            100             209            204
                                                                     ------------    -----------     -----------    -----------

INCOME BEFORE EXTRAORDINARY ITEM                                             157            111             329            268

Extraordinary Item (Net of Tax of $345)                                     (790)             -            (790)             -
                                                                     ------------    -----------     -----------    -----------
NET INCOME (LOSS)                                                           (633)           111            (461)           268

Preferred Stock Dividend Requirement                                           2              3               5              5
                                                                     ------------    -----------     -----------    -----------

EARNINGS (LOSSES) AVAILABLE TO
  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED                       $      (635)    $      108      $     (466)    $      263
                                                                     ============    ===========     ===========    ===========

See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
           PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                 CONSOLIDATED BALANCE SHEETS
                           ASSETS
                    (Millions of Dollars)

<CAPTION>

                                                                          (Unaudited)
                                                                            June 30,          December 31,
                                                                              1999                1998
                                                                         ---------------     ----------------
<S>                                                                             <C>                  <C>
PROPERTY, PLANT AND EQUIPMENT
  Electric - Generation                                                         $ 1,763              $ 9,226
  Electric - Transmission and Distribution                                        4,969                4,953
  Gas - Distribution                                                              2,946                2,882
  Common                                                                            265                  414
                                                                         ---------------     ----------------
       Total                                                                      9,943               17,475
  Less: Accumulated depreciation and amortization                                 3,417                7,048
                                                                         ---------------     ----------------
       Net                                                                        6,526               10,427
  Nuclear Fuel in Service, net of accumulated amortization -
     1999, $377; 1998, $312                                                         194                  187
                                                                         ---------------     ----------------
       Net Property, Plant and Equipment in Service                               6,720               10,614
  Construction Work in Progress, including Nuclear Fuel in
    Process - 1999, $34; 1998, $72                                                   98                  219
  Plant Held for Future Use                                                          21                   24
                                                                         ---------------     ----------------
       Net Property, Plant and Equipment                                          6,839               10,857
                                                                         ---------------     ----------------
INVESTMENTS AND OTHER NONCURRENT ASSETS
  Long-Term Investments                                                              78                   65
 Nuclear Decommissioning Fund                                                       562                  524
 Other Special Funds                                                                135                  125
 Other Noncurrent Assets                                                             59                   46
                                                                         ---------------     ----------------
       Total Investments and Other Noncurrent Assets                                834                  760
                                                                         ---------------     ----------------
CURRENT ASSETS
  Cash and Cash Equivalents                                                          28                   42
  Accounts Receivable:
    Customer Accounts Receivable                                                    494                  451
    Other Accounts Receivable                                                       356                  178
    Less: Allowance for Doubtful Accounts                                            41                   34
  Unbilled Revenues                                                                 187                  255
  Fuel - Gas Distribution                                                           226                  274
  Fuel - Electric Generation                                                         47                   57
  Materials and Supplies,
    net of  valuation reserves - 1999, $51; 1998, $12                               130                  165
  Prepayments                                                                       303                   52
  Miscellaneous Current Assets                                                       28                   32
                                                                         ---------------     ----------------
       Total Current Assets                                                       1,758                1,472
                                                                         ---------------     ----------------
DEFERRED DEBITS
  Regulatory Asset - Stranded Costs                                               4,058                    -
  SFAS 109 Income Taxes                                                             296                  704
  OPEB Costs                                                                        260                  270
  Demand Side Management Costs                                                      144                  150
  Environmental Costs                                                               124                  139
  Unamortized Loss on Reacquired Debt and Debt Expense                              127                  135
  Other                                                                             198                  182
                                                                         ---------------     ----------------
       Total Deferred Debits                                                      5,207                1,580
                                                                         ---------------     ----------------
TOTAL                                                                          $ 14,638             $ 14,669
                                                                         ===============     ================

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

<TABLE>
           PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                 CONSOLIDATED BALANCE SHEETS
               CAPITALIZATION AND LIABILITIES
                    (Millions of Dollars)
<CAPTION>
                                                                           (Unaudited)
                                                                             June 30,       December 31,
                                                                               1999             1998
                                                                           -------------   ----------------
<S>                                                                             <C>                <C>
CAPITALIZATION
  Common Stockholder's Equity:
    Common Stock, issued; 132,450,344 shares                                    $ 2,563            $ 2,563
    Contributed Capital                                                             594                594
    Retained Earnings                                                               529              1,386
    Accumulated Other Comprehensive Income (Loss)                                    (3)                (3)
                                                                           -------------   ----------------
       Total Common Stockholder's Equity                                          3,683              4,540
  Preferred Stock Without Mandatory Redemption                                       95                 95
  Preferred Stock  With Mandatory Redemption                                         75                 75
  Subsidiaries' Preferred Securities:
    Guaranteed Preferred Beneficial Interest in Subordinated
      Debentures                                                                    513                513
  Long-Term Debt                                                                  3,393              4,045
                                                                           -------------   ----------------
       Total Capitalization                                                       7,759              9,268
                                                                           -------------   ----------------
OTHER LONG-TERM LIABILITIES
  Nuclear Decommissioning                                                           462                  -
  OPEB Costs                                                                        367                344
  Cost of Removal - Generation                                                      126                  -
  Environmental Costs                                                               132                 84
  Capital Lease Obligations                                                          50                 50
  Other                                                                             127                 65
                                                                           -------------   ----------------
       Total Other Long-Term Liabilities                                          1,264                543
                                                                           -------------   ----------------
CURRENT LIABILITIES
  Long-Term Debt due within one year                                                735                100
  Commercial Paper and Loans                                                        940                850
  Accounts Payable                                                                  734                611
  Accrued Taxes                                                                      40                 30
  Other                                                                             315                223
                                                                           -------------   ----------------
       Total Current Liabilities                                                  2,764              1,814
                                                                           -------------   ----------------
DEFERRED CREDITS AND REGULATORY LIABILITIES
  Income Taxes                                                                    1,952              2,533
  Investment Tax Credits                                                             70                313
  Regulatory Liability - Excess Depreciation Reserve                                569                  -
  Other                                                                             260                198
                                                                           -------------   ----------------
       Total Deferred Credits and Regulatory Liabilities                          2,851              3,044
                                                                           -------------   ----------------
COMMITMENTS AND CONTINGENT LIABILITIES                                                -                  -
                                                                           -------------   ----------------
TOTAL                                                                          $ 14,638           $ 14,669
                                                                           =============   ================
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>

                    PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Millions of Dollars)
                                  (Unaudited)
<CAPTION>
                                                                                    Six Months Ended
                                                                                        June 30,
                                                                                 -----------------------
                                                                                   1999         1998
                                                                                 ---------    ----------
<S>                                                                                 <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income (loss)                                                                 $(461)        $ 268
  Adjustments to reconcile net income (loss) to net cash flows from
   operating activities:
    Extraordinary Loss - net of tax                                                   790             -
    Depreciation and Amortization                                                     285           318
    Amortization of Nuclear Fuel                                                       42            44
    Recovery of Electric Energy and Gas Costs - net                                   106            94
    Provision for Deferred Income Taxes - net                                        (193)           (6)
    Net Changes in certain current assets and liabilities:
       Accounts Receivable and Unbilled Revenues                                     (146)           79
       Inventory - Fuel and Materials and Supplies                                     64            59
       Prepayments                                                                   (251)         (310)
       Accounts Payable                                                               126           (88)
       Accrued Taxes                                                                   11           (12)
       Other Current Assets and Liabilities                                            96            61
    Other                                                                              69            35
                                                                                 ---------    ----------
       Net Cash Provided By Operating Activities                                      538           542
                                                                                 ---------    ----------
CASH FLOWS FROM INVESTING ACTIVITIES
  Additions to Property, Plant and Equipment,
      excluding Capitalized Interest and AFDC                                        (172)         (191)
  Net Change in Long-Term Investments                                                 (13)           (8)
  Contribution to Decommissioning Funds and Other Special Funds                       (31)          (61)
  Other                                                                               (13)           (7)
                                                                                 ---------    ----------
       Net Cash Used In Investing Activities                                         (229)         (267)
                                                                                 ---------    ----------
CASH FLOWS FROM FINANCING ACTIVITIES
  Net Change in Short-Term Debt                                                        90          (151)
  Issuance of Long-Term Debt                                                            -           250
  Redemption of Long-Term Debt                                                        (17)         (103)
  Cash Dividends Paid on Common Stock                                                (392)         (251)
  Other                                                                                (4)           (5)
                                                                                 ---------    ----------
       Net Cash Used In Financing Activities                                         (323)         (260)
                                                                                 ---------    ----------
Net Change In Cash And Cash Equivalents                                               (14)           15
Cash And Cash Equivalents At Beginning Of Year                                         42            17
                                                                                 ---------   -----------
Cash And Cash Equivalents At End Of Period                                          $  28         $  32
                                                                                 =========   ===========

Income Taxes Paid                                                                   $ 335         $ 296
Interest Paid                                                                       $ 197         $ 193

See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
================================================================================
                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
================================================================================

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1.  Basis of Presentation/Summary of Significant Accounting Policies

Basis of Presentation

     The consolidated  financial  statements  included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange  Commission
(SEC).  Certain information and note disclosures  normally included in financial
statements prepared in accordance with generally accepted accounting  principles
have been condensed or omitted pursuant to such rules and regulations.  However,
in the  opinion  of  management,  the  disclosures  are  adequate  to  make  the
information  presented not misleading.  These consolidated  financial statements
and  Notes  to  Consolidated  Financial  Statements  (Notes)  should  be read in
conjunction with the  Registrant's  Notes contained in the 1998 Annual Report on
Form 10-K and the Quarterly  Report on Form 10-Q for the quarter ended March 31,
1999.  These Notes update and  supplement  matters  discussed in the 1998 Annual
Report on Form 10-K,  the  Quarterly  Report on Form 10-Q for the quarter  ended
March 31, 1999 and the Current  Reports on Form 8-K filed March 18, 1999,  April
26, 1999 and July 21, 1999.

     The unaudited  financial  information  furnished  reflects all  adjustments
which are, in the opinion of  management,  necessary to fairly state the results
for the interim periods presented. The year-end consolidated balance sheets were
derived from the audited consolidated  financial statements included in the 1998
Annual Report on Form 10-K. Certain  reclassifications of prior period data have
been made to conform with the current presentation.

Summary of Significant Accounting Policies

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

     Effective  April 1, 1999, and in concert with the  discontinuation  of SFAS
71, PSE&G changed its capitalization policy for the electric  generation-related
portion of its business.  Under its new capitalization  policy,  PSE&G will only
capitalize  costs which increase either the capacity or the life of an asset and
represent the  replacement of a retired asset.  All other costs will be expensed
as incurred.

     Also,  effective April 1, 1999, and in conjunction with the discontinuation
of  SFAS  71,   PSE&G   changed  its   depreciation   policy  for  the  electric
generation-related  portion of its business. Under this new depreciation policy,
PSE&G will calculate  depreciation on generation-related  assets consistent with
new asset lives determined by PSE&G policy rather than using  depreciation rates
prescribed  by  the  New  Jersey  Board  of  Public   Utilities  (BPU)  in  rate
proceedings.


<PAGE>


================================================================================
                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
================================================================================

     Additionally,   effective   April  1,  1999,   and  in  concert   with  the
discontinuation  of SFAS 71,  PSE&G  changed  its  policy for the  treatment  of
electric generation-related asset retirements. Under this new retirement policy,
the portion of future  retirements of  generation-related  assets which have not
been fully depreciated will impact earnings.

     In the past, fuel revenue and expense flowed through the Electric Levelized
Energy  Adjustment  Clause  (LEAC)  mechanism and variances in fuel revenues and
expenses  were subject to deferral  accounting  and thus had no direct effect on
earnings.  Due to the  discontinuation  of the LEAC mechanism on August 1, 1999,
earnings  volatility  may increase  since the  unregulated  electric  generation
portion of PSEG's  business will cease to follow  deferral  accounting  and will
bear the full risks and rewards of changes in nuclear and fossil generating fuel
costs  and  replacement  power  costs.  For  further  discussion,  see  Note  4.
Regulatory Assets and Liabilities.

     Effective  January 1, 1999, PSEG and PSE&G adopted EITF 98-10,  "Accounting
for Contracts  Involved in Energy Trading and Risk Management  Activities" (EITF
98-10).  EITF 98-10 requires that energy  trading  contracts be marked to market
with gains and losses  included  in earnings  and  separately  disclosed  in the
financial statements or footnotes.  Previously,  the gains and losses associated
with those contracts were recorded upon  settlement.  The adoption of EITF 98-10
did not have a material impact on the financial condition, results of operations
or net cash flows of PSEG or PSE&G.

     Effective  January 1, 1999,  PSEG and PSE&G  adopted  Statement of Position
(SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use" (SOP 98-1),  which provides criteria for capitalizing  certain
internal-use  software  costs.  The adoption of SOP 98-1 did not have a material
impact on the  financial  condition,  results of operations or net cash flows of
PSEG or PSE&G.

     Effective  January 1, 1999, PSEG and PSE&G adopted SOP 98-5,  "Reporting on
the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 requires the expensing of
the  costs  of  start-up  activities  as  incurred.   Additionally,   previously
capitalized  start-up  costs must be  written  off as a  Cumulative  Effect of a
Change in Accounting Principle. The adoption of SOP 98-5 did not have a material
impact on the  financial  condition,  results of operations or net cash flows of
PSEG or PSE&G.

Note 2.  Regulatory Issues

New Jersey Energy Master Plan Proceedings and Related Orders

     Following  the  passage  of the New  Jersey  Electric  Discount  and Energy
Competition Act (Energy  Competition Act), the BPU rendered its summary decision
relating  to  PSE&G's  rate   unbundling,   stranded  costs  and   restructuring
proceedings  (Summary Order) on April 21, 1999. It is expected that the BPU will
issue a more detailed  Decision and Order (Final Order) in these matters  during
the third quarter of 1999, which will provide a full discussion of the issues as
well as the reasoning for the BPU's determinations.  The Energy Competition Act,
the BPU's  Summary  Order and Final Order and the related  BPU  proceedings  are
hereinafter referred to as the Energy Master Plan Proceedings. These proceedings
provide that all New Jersey retail electric  customers may select their electric
supplier  commencing  August 1, 1999 and all New Jersey retail gas customers may
select their gas  supplier  commencing  December 31, 1999,  thus opening the New
Jersey energy markets to  competition.  Under New Jersey law, a 45-day period is
available  for a party to the  proceedings  and  ratepayers  to appeal the Final
Order once it is issued.  PSEG and PSE&G cannot predict whether any appeals will
be filed with  respect to the Final Order by any of the  parties  entitled to do
so. For discussion of the extraordinary  charge to earnings recorded as a result
of the deregulation of PSE&G's  generation  business,  see Note 3. Extraordinary
Charge and Other Accounting Impacts of Deregulation.


<PAGE>


     The Summary Order provides for the following:
     ---------------------------------------------

     Transition Period

     o    A four-year transition period beginning August 1, 1999 and ending July
          31, 2003. During this transition period,  rates will be capped for all
          customers who remain with PSE&G.

     Rate Reductions

     o    Customers  will receive the  following  reductions  from current rates
          through July 2003 according to this schedule:

                              August 1, 1999:   5%
          January 1, 2000 (or at the time
                          of securitization):   increasing to 7%
                              August 1, 2001:   increasing to 9%
                              August 1, 2002:   increasing to 13.9% average
                                                (10% off rates in effect in
                                                 April 1997)

         The BPU, in finding that the 2000 and 2001  incremental rate reductions
         assume  achievement  of 2%  overall  savings  from  securitization  (in
         addition  to the 1% assumed in the initial 5%  reduction),  conditioned
         these  additional  interim  rate  reductions  upon   implementation  of
         securitization.  The BPU further  determined  that the final  aggregate
         rate  reduction in 2002 of 13.9% is required by the Energy  Competition
         Act and is not contingent on the implementation of securitization.

         On July 26, 1999,  the BPU approved  PSE&G's  compliance  tariff filing
         reflecting the 5% decrease in rates on a provisional basis (see Note 2.
         Regulatory  Issues).  On August 1, 1999,  PSE&G  implemented  this rate
         reduction  as  required  by  the  BPU  under  the  Energy  Master  Plan
         Proceedings.

     Shopping Credits

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

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

     Stranded Costs

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

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

     Securitization

     o    The BPU will issue an irrevocable  Bondable  Stranded Costs Rate Order
          (Finance  Order),   consistent  with  the  provisions  of  the  Energy
          Competition  Act and the Summary and Final Orders,  to authorize PSE&G
          to issue up to $2.525  billion of transition  bonds,  with a scheduled
          amortization  upon issuance of 15 years,  representing $2.4 billion of
          generation-related  stranded  costs (net of tax) and an estimated $125
          million  of  transaction  costs.  A  transition  bond  charge  will be
          collected from all customers via a single per kWh "wires charge" to be
          subject  to  adjustment  at  least  annually.   For  an  update,   see
          Securitization Filing below.

     o    The BPU  determined  that the taxes related to  securitization,  which
          reflect the grossed up revenue  requirements  associated with the $2.4
          billion  in  net  of  tax  stranded  costs  being   securitized,   are
          recoverable  stranded costs. The BPU determined that such taxes should
          not be collected  through the  transition  bond charge;  rather,  such
          taxes will be  collected  via a separate  MTC.  The  duration  of this
          separate MTC shall be identical to the duration of the transition bond
          charge.

     o    The BPU clarified the language  concerning the use of the net proceeds
          of  securitization  to indicate that the  refinancing or retirement of
          debt  and/or   equity  shall  be  done  in  a  manner  that  will  not
          substantially alter PSE&G's overall capital structure.

     Sale of Generation-Related Assets

     o    The BPU directed the sale by PSE&G of its generation-related assets to
          a  separate  unregulated  subsidiary  of  PSEG at a  price  of  $2.443
          billion.  Such  separate  company  will  become  an  exempt  wholesale
          generator  (EWG) under the Public Utility  Holding Company Act (PUHCA)
          upon receipt of Federal Energy Regulatory  Commission (FERC) approval.
          Any gains resulting from any sale of the generation-related  assets to
          a third party which occurs  within five years from August 1, 1999 will
          be shared equally  between  ratepayers and  shareholders.  For further
          discussion, see Generation-Related Asset Sale to PSEG Power below.

     Basic Generation Service

     o    PSE&G is  obligated  to  provide  basic  generation  service  (BGS) to
          customers  who do not choose  another  electric  supplier.  PSE&G will
          contract  with PSEG Power LLC (PSEG  Power) to provide  the energy and
          capacity  required  to meet  its BGS and  Off-Tariff  Rate  Agreements
          (OTRA)  obligations  for the first three  years of retail  choice (see
          Generation-Related  Asset  Sale to PSEG  Power  below).  PSEG  will be
          prohibited from promoting such service as a competitive alternative to
          other electricity  suppliers and marketers.  BGS will be competitively
          bid for the fourth year and annually thereafter. Any payments to PSE&G
          resulting from BGS being bid out for year 4 of the  transition  period
          is  required to be credited to the  deferred  societal  benefit  costs
          balance for purposes of establishing the societal benefit clause (SBC)
          rate in year 5, and may not be retained by PSE&G or otherwise utilized
          to recover unsecuritized  generation-related  stranded costs.

     Societal Benefit Clause and Non-utility Generation Market Transition Clause

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

     Electric Distribution Depreciation

     o    PSE&G was  directed  by the BPU to record a  regulatory  liability  by
          reducing its depreciation reserve for its electric distribution assets
          by $568.7 million.  This  regulatory  liability will be amortized over
          the  period  from  January  1,  2000 to July  31,  2003  (see  Note 3.
          Extraordinary Charge and Other Accounting Impacts of Deregulation).

     Securitization Filing
     ---------------------

     On June 8,  1999,  PSE&G  filed a  petition  with the BPU  relating  to the
proposed securitization transaction. PSE&G petitioned the BPU for an irrevocable
Finance Order to authorize, among other things, the imposition of an irrevocable
non-bypassable  transition bond charge on PSE&G's customers; the sale of PSE&G's
property  right  in such  charge  created  by the  Energy  Competition  Act to a
bankruptcy-remote  financing entity;  the issuance and sale of $2.525 billion of
transition  bonds by such entity in payment  therefor;  and the  application  by
PSE&G of the transition bond proceeds to retire outstanding debt and/or equity.

     Subject to the receipt of the Finance Order and required  State and Federal
approvals and market  conditions then  prevailing,  PSE&G currently  anticipates
that  such  securitization  will  occur  in the  Fall of  1999,  as to  which no
assurances can be given.  This  proceeding is currently in the discovery  phase.
Under  New  Jersey  law,  a  45-day  period  is  available  for a  party  to the
proceedings  and ratepayers to appeal the Finance Order once it is issued.  PSEG
and PSE&G cannot  predict  whether any appeals will be filed with respect to the
Finance Order by any of the parties entitled to do so.

     In  anticipation  of the  Finance  Order and  required  State  and  Federal
approvals, PSE&G created PSE&G Transition Funding LLC, a wholly owned subsidiary
of PSE&G, to issue such transition bonds. PSE&G Transition Funding LLC submitted
an initial filing for  registration of its transition  bonds with the Securities
and Exchange Commission on July 23, 1999.

     Generic Issues
     --------------

     Additionally,  the BPU is  expected  to issue a series of orders  that will
decide  generic  issues  related to the  deregulation  of the  electric  and gas
industry in New Jersey. Proposed standards were issued by the BPU for comment on
March  31,  1999.  These  include   affiliate   relationships   (including  fair
competition and affiliate transactions), environmental issues, anti-slamming and
accounting  and  reporting   standards.   Hearings  on  the  proposed  affiliate
relationships  standards were held during April 1999 and an order is expected in
the third quarter of 1999.

     On July  26,  1999,  the BPU  approved  Interim  Environmental  Information
Disclosure  Standards which require electric power suppliers or basic generation
service  providers  serving  retail  customers  to disclose  to such  customers,
including residential,  commercial and industrial customers,  a uniform,  common
set of  information  about  the  environmental  characteristics  of  the  energy
purchased by the customer.  The standards prescribe a label format which must be
used to disclose the  environmental  information and must be distributed as part
of the customer's  billing materials or in other mailings,  as determined by the
BPU,  and on customer  contracts  and  marketing  materials.  The  environmental
information  to be  disclosed  includes,  but is not limited  to, fuel mix,  air
emissions and the electric power supplier's support of energy efficiency.

     On June 21, 1999, the BPU approved Interim  Government  Energy  Aggregation
Program  Standards  to apply  to all  government  aggregators  and  third  party
suppliers.   These  rules  provide   bidding   specifications,   guidelines  for
cooperative purchasing of electric generation service and/ or gas supply service
and required contract provisions for government energy aggregation programs.

     On May 12, 1999, the BPU approved Interim  Anti-Slamming  Standards.  These
rules include specific methods to verify all requests to switch providers. Under
the interim rules,  written  confirmation will be the only acceptable method for
electric and gas customers to switch suppliers,  although other methods could be
added later. The Energy  Competition Act set fines of up to $10,000 per slamming
incident.  In addition,  power  marketers must clearly  identify  themselves and
their rates in all solicitations.  Electricity  suppliers also must include only
those discounts they provide, not those mandated by the State.

     Also on May 12,  1999,  the BPU approved  Interim  Retail  Choice  Consumer
Protection Standards.  These standards include advertising standards,  marketing
standards  and credit and contract  requirements  including the  requirement  to
obtain a  customer's  written  signature  on a  contract  before  a third  party
supplier would be allowed to provide electric  generation  service or gas supply
service to a retail customer.  The standards require that customer bills contain
sufficient  information to allow  customers to determine the components of their
bills. Also, customer information shall not be disclosed, sold or transferred to
a third party  without  the  affirmative  written  consent of the  customer  and
complaint rules are delineated.  The standards also contain rules regarding when
termination for non-payment can be made.

     Also on May 12, 1999, the BPU approved  Interim  Licensing and Registration
Standards.  Electric power suppliers and gas suppliers must apply for and obtain
a license  from the BPU pursuant to these  standards  following  the  procedures
therein.  Energy agents and private  aggregators must also register with the BPU
under such  standards.  These standards  establish  guidelines for obtaining the
license which allows  contracting,  offering to contract,  enrolling,  providing
generation  service or gas supply  service or  arranging  for a contract for the
provision of those  services.  Rules for  maintaining and renewing a license are
also contained in these standards.

     Retail Choice
     -------------

     With the  opening  of retail  choice  in New  Jersey,  and to  comply  with
legislative  requirements,  customer  billing will be changing  throughout 1999.
These  changes  began on  August  1,  1999  with the  introduction  of a 5% rate
reduction  and a "Price to Compare"  (Shopping  Credit)  message on all customer
bills using the current bill format.  PSE&G will  introduce a new customer  bill
format on October 1, 1999 that will present the customer with unbundled electric
components,  the 5% rate reduction and the Price to Compare. Once securitization
proceeds are obtained,  securitization charges will also be included on customer
bills.

     PSE&G will provide a single bill option in November that will include third
party supplier charges. Customer payments will be applied as directed by the BPU
and distributed to third party suppliers as appropriate.

     Gas Unbundling
     --------------

     The Energy Competition Act requires that all residential customers have the
ability to choose a competitive  gas supplier by December 31, 1999. As a result,
on March 17, 1999,  the BPU issued its Order  requiring each natural gas utility
to submit a rate unbundling filing.

     The BPU  established  a gas rate  unbundling  filing  deadline of April 30,
1999, to include the following:

     o    A proposed basic supply rate(s) applicable to each customer class.

     o    A proposed  unbundled  billing  credit(s)  applicable to customers who
          receive billing services from a third party.

     o    A separate  SBC to recover all  Remediation  Adjustment  Clause  (RAC)
          expenses,  DSM program expenses and other expenses reasonably incurred
          and currently in rates recoverable via the SBC.

     o    A proposed regulatory asset charge, if applicable.

     o    A proposed transportation rate.

     On April 30, 1999,  PSE&G  submitted its gas unbundling  compliance  filing
with the BPU as required by the BPU's March 17, 1999 Order.  As  required,  this
filing  completes  the  unbundling  of PSE&G's gas rates.  Unbundled  rates were
developed for PSE&G's  remaining  bundled gas Rate Schedules:  RSG  (Residential
Service Gas),  SLG (Street  Lighting Gas Service),  CFG  (Cogeneration  Firm Gas
Service) and UVNG  (Uncompressed  Vehicular Natural Gas Service).  These bundled
rates  will  cease  to  exist  when  the  new  applicable   unbundled  FT  (Firm
Transportation) and CS (Firm Commodity Service) rates are approved. Hearings are
expected in September 1999 with the BPU expected to render a decision by the end
of November  1999.  The  discovery  process has been  completed  and  intervenor
testimony has been filed. PSE&G cannot predict the outcome of this proceeding.

     The Energy Competition Act also mandated similar rules for the gas industry
as those for the electric  industry  addressing  affiliate  relations,  consumer
protections,  among others.  The standards adopted by the BPU for generic issues
also apply to the competitive gas industry (see Generic Issues).

     Generation-Related Asset Sale to PSEG Power
     -------------------------------------------

     In anticipation of the Final Order directing the sale of generation-related
assets, in June 1999, PSEG organized PSEG Power and its subsidiaries, which will
purchase PSE&G's electric generation-related assets. PSEG Power will manage such
assets  through its wholly owned  subsidiaries,  PSEG Fossil LLC (PSEG  Fossil),
PSEG Nuclear LLC (PSEG  Nuclear) and PSEG Energy  Resources  and Trade LLC (PSEG
ER&T). It is currently  anticipated  that such transaction will occur during the
fourth quarter of 1999.

     Certain  regulatory  approvals  are  required  prior  to  the  sale  of the
generation-related  assets to PSEG Power.  PSEG Power must obtain final approval
from the BPU,  the Nuclear  Regulatory  Commission  (NRC) (to  transfer  PSE&G's
nuclear licenses) and the FERC (to be recognized as an EWG). PSEG and PSE&G will
also have to resolve a number of other  issues  related to taxes,  environmental
restrictions and financing.

     Requests for  transfer of the NRC licenses  from PSE&G to PSEG Nuclear were
filed with the NRC on June 4, 1999 for the Salem Generating Station, Units 1 and
2  (Salem 1 and 2) and for the  Hope  Creek  Generating  Station  (Hope  Creek).
Requests for transfer of the NRC licenses  from PSE&G to PSEG Nuclear were filed
with the NRC on July 1, 1999 for PSE&G's  ownership in the Peach  Bottom  Atomic
Power Station,  Units 2 and 3 (Peach Bottom 2 and 3).  PSE&G's  target  approval
date is October 1, 1999, as to which no assurances can be given.

     Additionally,  filings were made to the FERC in June 1999 to transfer  FERC
jurisdictional  assets to PSEG Fossil and PSEG Nuclear; to approve rates for the
services of PSEG Fossil,  PSEG Nuclear and PSEG ER&T; to approve the transfer of
contracts to PSEG ER&T from PSE&G and to approve the interconnection  agreements
between PSEG Fossil and PSE&G and between PSEG Nuclear and PSE&G. PSE&G's target
approval date is October 1, 1999, as to which no assurances  can be given.  Once
the Final Order is received, PSE&G plans to apply to the FERC for EWG status for
PSEG Nuclear and PSEG Fossil.

     As noted  previously and as directed by the Summary Order,  PSE&G will sell
its  generation  property,  plant and equipment for $2.443  billion plus the net
book value of other generation-related assets and liabilities transferred at the
time of  purchase,  currently  estimated  to be between  $200  million  and $400
million,  and will  transfer all rights and  obligations  associated  with those
assets and liabilities. PSE&G will record contributed capital for the difference
between the net book value of the generation  property,  plant and equipment and
the $2.443 billion of sale proceeds. In addition to those assets identifiable on
the  consolidated  balance  sheets,  PSE&G  had $79  million  of  Materials  and
Supplies, $53 million of Environmental Costs, $419 million of Deferred Taxes and
Investment Tax Credits and certain other  liabilities  related to its generation
business at June 30, 1999.  All of these  generation-related  assets reflect the
impairment  recorded  in the second  quarter of 1999 (see Note 3.  Extraordinary
Charge and Other Accounting Impacts of Deregulation).

Other Regulatory Issues

     Energy Efficiency and Renewable Energy (Formerly DSM)
     -----------------------------------------------------

     The BPU adopted rules in 1991 to encourage  utilities to offer  DSM-related
load management and conservation  services.  These rules were re-adopted in 1996
and are  designed to treat DSM on equal  regulatory  footing with supply side or
energy  production   investments.   The  Energy  Competition  Act  requires  the
continuation of these energy efficiency programs and the initiation of renewable
energy programs.  The costs for energy  efficiency and renewable energy programs
are to be recovered  through a societal  benefits charge on all electric and gas
customers'  bills,  initially set at the level in rates for DSM cost recovery in
place on February  9, 1999,  which was  approximately  $190  million,  annually.
Within the subsequent twelve months, the BPU is required to complete a statewide
comprehensive  resource  analysis  of energy  efficiency  and  renewable  energy
programs and determine the  appropriate  level of funding for each utility based
on such analysis. On June 9, 1999, the BPU formally initiated these proceedings.

     In  April  1998,  the BPU  approved  $180.5  million  per  year of DSM cost
recovery for PSE&G's  electric DSM programs via an increase of $150.8 million in
the demand side adjustment  factor (DSAF) component of the LEAC. The Division of
the Ratepayer Advocate (Ratepayer Advocate) appealed the BPU's order, seeking to
overturn the BPU's  decision.  On July 2, 1999,  the  Appellate  Division of the
Superior Court of New Jersey filed an opinion  affirming the BPU's DSAF decision
and thus,  rejecting the Ratepayer  Advocate's DSAF appeal. PSE&G cannot predict
whether the Ratepayer  Advocate will pursue a further appeal.  If such an appeal
were successful,  there could be a material adverse impact on PSEG's and PSE&G's
financial condition, results of operations or net cash flows.

     Non-utility Generation Buydown
     ------------------------------

     Under Federal and State regulations,  utilities were required to enter into
long-term power purchase  agreements with NUGs at prices which have subsequently
proven to be above market.  PSE&G is seeking to  restructure  certain of its BPU
approved  contracts  with NUGs,  which are  estimated to be $1.6  billion  above
assumed future market prices.  In July 1999, PSE&G and American Ref-Fuel Company
announced an agreement to amend a NUG contract originally signed in 1985 for the
Essex County Resource Recovery Facility,  a waste incinerator located in Newark,
New Jersey.  Under the terms of the agreement,  PSE&G  ratepayers will receive a
cost  reduction  of up to $100  million  over  the  remaining  20  years  of the
contract.  The agreement has been filed with the BPU and is pending BPU approval
of its terms.  If the BPU does not grant approval by September 30, 1999,  either
party  has the  option to  withdraw  it. If  approved  by the BPU,  the costs to
terminate this contract will be recovered through the NTC.

Note 3.  Extraordinary Charge and Other Accounting Impacts of Deregulation

     As a result of the BPU's issuance of the Summary Order in April 1999, PSE&G
determined  that SFAS 71 was no longer  applicable  to the  electric  generation
portion of its  business,  in  accordance  with EITF 97-4.  Accordingly,  in the
second  quarter,  PSE&G  recorded  an  extraordinary  charge to earnings of $790
million  (after  tax).  PSE&G  accounted  for this  charge  consistent  with the
requirements  of SFAS 101. This charge was based on an assumption that the Final
Order would not be materially  different  from the Summary  Order.  If the Final
Order were to be materially  different from the Summary Order, the extraordinary
charge could change.

     The extraordinary  charge consisted  primarily of the write down of PSE&G's
nuclear  and fossil  generating  stations  in  accordance  with SFAS 121.  PSE&G
performed a discounted  cash flow analysis on a unit-by-unit  basis to determine
the  amount  of the  impairment.  The  estimated  net cash  flows  for each unit
included estimated future revenues. As a result of this impairment analysis, the
net book value of the  generating  stations  was reduced by  approximately  $5.0
billion (pretax)  or approximately  $3.09 billion  (after-tax).  This amount was
offset by the creation of a regulatory  asset  related to the future  receipt of
securitization proceeds, as provided for in the Summary Order. The amount of the
regulatory  asset is  approximately  $4.058  billion,  pretax,  or $2.4 billion
after-tax.

     In addition to the impairment of PSE&G's electric generating stations,  the
extraordinary  charge related to the discontinuation of SFAS 71 and consisted of
various  accounting  adjustments  to  reflect  the  absence  of cost of  service
regulation in the electric generation portion of the business in the future. The
adjustments primarily related to materials and supplies, general plant items and
liabilities for certain contractual and environmental obligations.

     Other  accounting  impacts  of the  discontinuation  of  SFAS  71  included
reclassifying the Accrued Nuclear  Decommissioning  Reserve and the Accrued Cost
of Removal  for  generation-related  assets  from  Accumulated  Depreciation  to
Long-Term   Liabilities.   PSE&G  also  reclassified  a  $568.7  million  excess
depreciation  reserve  related  to PSE&G's  electric  distribution  assets  from
Accumulated  Depreciation  to a  Regulatory  Liability,  pursuant to the Summary
Order. Such amount will be amortized in accordance with the terms of the Summary
Order over the period from January 1, 2000 to July 31, 2003.

Note 4. Regulatory Assets and Liabilities

     Regulatory  assets and  liabilities  are  recorded in  accordance  with the
provisions  of SFAS 71. In  general,  SFAS 71  recognizes  that  accounting  for
rate-regulated enterprises should reflect the relationship of costs and revenues
as  determined  by  regulators.  As a  result,  a  regulated  utility  may defer
recognition of costs (a regulatory asset) or recognize obligations (a regulatory
liability) if it is probable that, through the ratemaking process, there will be
a  corresponding  increase  or  decrease  in  revenues.  Accordingly,  PSE&G has
deferred certain costs,  which are being amortized over various periods.  To the
extent  that  collection  of such costs or payment of  liabilities  is no longer
probable  as a result  of  changes  in  regulation  and/or  PSE&G's  competitive
position,  the  associated  regulatory  asset or  liability  has been charged or
credited to income.

     Starting  in  the  second  quarter  of  1999,   PSE&G  no  longer  met  the
requirements for the application of SFAS 71 to the electric  generation  portion
of its business.  In accordance with SFAS 101 and EITF 97-4,  regulatory  assets
and  liabilities  related to the  generation  portion of PSE&G's  business  were
written off, except to the extent the Summary Order provided for future recovery
through regulated  operations.  Additionally,  certain new regulatory assets and
regulatory  liabilities were recorded, in compliance with the Summary Order. The
items  listed below were  impacted by the Energy  Master Plan  Proceedings.  For
discussion of the Energy Master Plan Proceedings,  see Note 2. Regulatory Issues
and Note 3. Extraordinary Charge and Other Accounting Impacts of Deregulation.

     SFAS 109 Income Taxes:  This amount represents the regulatory asset related
to the implementation of SFAS 109, "Accounting for Income Taxes" (SFAS 109). Due
to the discontinuation of SFAS 71 for the electric generation portion of PSE&G's
business,  the  deferred  taxes  related to these  assets have been  reduced and
included as an offset to the  Extraordinary  Item.  At June 30,  1999,  SFAS 109
Income  Taxes were $296  million as compared to the balance at March 31, 1999 of
$690 million.  For additional  information on the discontinuation of SFAS 71 and
the Extraordinary  Item, see Note 3.  Extraordinary  Charge and Other Accounting
Impacts of Deregulation.

     Regulatory Asset - Stranded Costs: In anticipation of securitization, PSE&G
has recorded this regulatory  asset to reflect the future revenues which will be
collected  via the  securitization  transition  charge  which is  expected to be
authorized by the BPU's Finance Order. At June 30, 1999, Deferred Stranded Costs
were  $4.058  billion.  See Note 3.  Extraordinary  Charge and Other  Accounting
Impacts of Deregulation.

     Regulatory Liability - Excess Depreciation  Reserve: In connection with the
Energy  Master  Plan,  the BPU has  required  PSE&G to reduce  its  depreciation
reserve for its electric  distribution  assets by $568.7 million and to amortize
such reserve over the period from January 1, 2000 to July 31, 2003.  In 2000 and
2001,  $125 million will be amortized each year. In 2002 and 2003,  $135 million
and $183.7 million will be amortized, respectively.

     Regulatory Liability - Overrecovered  Electric Energy Costs: As provided by
the BPU in its Summary  Order,  PSE&G  continued to follow  deferred  accounting
treatment  for the LEAC through July 31, 1999.  At June 30, 1999,  Overrecovered
Electric Energy Costs were $79 million. Per the Summary Order, the overrecovered
balance as of July 31, 1999 will be applied as a credit to the starting deferred
balance of the NTC.

Note 5.  Commitments and Contingent Liabilities

Nuclear Operating Performance Standard (OPS)

     PECO Energy  Company (PECO  Energy),  Delmarva Power & Light Company (DP&L)
and PSE&G,  three of the  co-owners  of Salem 1 and 2 and Peach  Bottom 2 and 3,
have agreed to an OPS through  December 31, 2011 for Salem and through  December
31, 2007 for Peach  Bottom.  Under the OPS, the station  operator is required to
make  payments to the  non-operating  owners  (excluding  Atlantic City Electric
Company (ACE)) commencing in January 2001 if the three-year  historical  average
net  maximum  dependable  capacity  factor for that  station,  calculated  as of
December 31 of each year commencing with December 31, 2000, falls below 40%. Any
such  payment is limited to a maximum of $25 million per year.  The parties have
further agreed to forego  litigation in the future,  except for limited cases in
which the operator would be  responsible  for damages of no more than $5 million
per year.

Year 2000 Readiness Disclosure

     Many of PSEG's and PSE&G's systems,  which include  information  technology
applications, plant control and telecommunications  infrastructure systems, must
be modified due to computer  program  limitations  in  recognizing  dates beyond
1999.  Management  estimates the total cost related to Year 2000  readiness will
approximate  $83 million,  to be incurred  through 2001, of which $8 million was
incurred in 1997, $27 million was incurred in 1998 and approximately $36 million
is expected to be incurred in 1999.  During the six months  ended June 30, 1999,
$12  million  was  incurred.  A  portion  of  these  costs is not  likely  to be
incremental to PSEG or PSE&G, but rather,  represents a redeployment of existing
personnel/resources.

     PSE&G and PSEG Energy  Holdings Inc.  (Energy  Holdings),  which are wholly
owned  subsidiaries  of PSEG,  are  continuing  their  installation  of computer
software programs (SAP) from SAP America, Inc. to replace certain major business
systems. SAP America, Inc. has represented that SAP is Year 2000 compliant,  and
thus,  installation  of SAP will  eliminate  the need to modify  those  business
systems for Year 2000 compliance.  The phased  implementation  of SAP to replace
those systems is scheduled to be completed  before  January 1, 2000. The cost of
implementing  SAP  is not  included  in  the  above  cost  estimates  since  SAP
implementation  has not been  accelerated for Year 2000 purposes.  For its newly
acquired  companies,  PSEG Energy  Technologies  Inc. (Energy  Technologies),  a
wholly owned  subsidiary of Energy  Holdings,  is replacing  the  infrastructure
systems and  applications  with  Energy  Technologies'  standard  infrastructure
systems and applications, which are Year 2000 compliant.

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

Combustion Turbines

    PSEG has entered into  contracts  to purchase  combustion  turbines.  PSEG's
commitment  under these contracts is  approximately  $392 million to be expended
through  December 2001.  Through July 31, 1999,  payments of  approximately  $56
million were made under these contracts.

Construction and Fuel Supplies - PSE&G

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

    In concert with separating the electric  generation  portion of the business
from  PSE&G's  regulated  transmission  and  distribution  businesses  and  with
reviewing PSE&G's strategic initiatives, PSEG is in the process of assessing the
construction  requirements of its  businesses.  This will include a breakdown of
anticipated  construction  expenditures between the  generation-related  and the
transmission  and distribution  businesses.  For discussion of the Energy Master
Plan Proceedings and their impacts, see Note 2. Regulatory Issues.

Construction and Investment Expenditures - Energy Holdings

    Through  June 30,  1999,  Energy  Holdings'  subsidiaries  made  investments
totaling  approximately  $640 million.  This included the acquisition in June by
PSEG Global Inc.  (Global)  of an  interest  in a Chilean  distribution  company
serving customers in Chile and Peru. Global invested $268 million including fees
and closing  costs,  and financed an  additional  $160 million with project debt
consolidated on Energy  Holdings'  balance sheet that is non-recourse to Global,
Energy Holdings and PSEG. Projected investment  expenditures for the second half
of 1999 are approximately  $400 million,  comprised of investments in generation
and distribution  facilities and leveraged lease  transactions.  Energy Holdings
has approximately $35 million of debt maturing in November 1999, all of which is
expected to be refinanced through existing credit facilities.


Sale of Generation Plant in Newark, New Jersey

     In July 1999,  Global  entered  into an  agreement  for the sale of its 50%
partnership   interest  in  a  137  megawatt   (MW)   gas-fired   combined-cycle
co-generation  facility  in Newark,  New  Jersey.  Global  expects to close this
transaction  in the third  quarter of 1999 and  recognize an  after-tax  gain of
approximately $40 million.

Site Restorations and Other Environmental Costs

    It is  difficult to estimate the future  financial  impact of  environmental
laws,  including  potential  liabilities.  PSEG and PSE&G  accrue  environmental
liabilities  when it is probable  that a  liability  has been  incurred  and the
amount  of the  liability  is  reasonably  estimable.  Depending  on  the  site,
provisions  for  estimated  losses  from  environmental  remediation  are  based
primarily on internal and third party environmental studies, estimates as to the
number and  participation  level of any other  Potentially  Responsible  Parties
(PRP), the extent of the  contamination  and the nature of required remedial and
restoration actions.

    Certain  environmental  costs are currently  recoverable through the RAC and
are expected to be recoverable in accordance with the Summary Order, through the
SBC.  Other  environmental  costs may be  recoverable  through  future  recovery
mechanisms,  including  the SBC;  however,  no assurances  can be given.  To the
extent these costs are material and not recoverable,  they could have a material
adverse impact on PSEG's and PSE&G's financial condition,  results of operations
or net cash flows.

Hazardous Waste

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

    The NJDEP has recently revised regulations concerning site investigation and
remediation.   These  regulations  will  require  an  ecological  evaluation  of
potential   injuries  to  natural   resources  in  connection  with  a  remedial
investigation  of contaminated  sites.  The NJDEP is presently  working with the
utility industry to develop procedures for implementing these regulations. These
regulations may substantially increase the costs of remedial  investigations and
remediations,  where  necessary,  particularly at sites situate on surface water
bodies. PSE&G and predecessor companies owned and/or operated certain facilities
situate on surface water  bodies,  certain of which are currently the subject of
remedial activities. The financial impact of these regulations on these projects
is not currently  estimable.  PSE&G does not anticipate that the compliance with
these regulations will have a material adverse effect on its financial position,
results of operations or net cash flows.

PSE&G Manufactured Gas Plant Remediation Program

    In 1988,  NJDEP  notified  PSE&G that it had  identified the need for PSE&G,
pursuant  to  a  formal  arrangement,  to  systematically  investigate  and,  if
necessary,   resolve   environmental   concerns   existing  at  PSE&G's   former
manufactured gas plant sites. To date, NJDEP and PSE&G have identified 38 former
manufactured  gas plant  sites.  PSE&G is  currently  working with NJDEP under a
program  to assess,  investigate  and,  if  necessary,  remediate  environmental
concerns at these sites.  The Remediation  Program is periodically  reviewed and
revised  by  PSE&G  based  on  regulatory  requirements,   experience  with  the
Remediation  Program and  available  remediation  technologies.  The cost of the
Remediation  Program  cannot be  reasonably  estimated,  but  experience to date
indicates  that costs of  approximately  $20  million per year could be incurred
over a period of about 30 years and that the  overall  cost could be material to
PSEG's and PSE&G's financial condition, results of operations or net cash flows.
The Energy  Competition Act provides for the  continuation of RAC programs.  The
Summary  Order  provides for the recovery of costs for this  remediation  effort
through the SBC.

Air Pollution Control

     In June 1998,  NJDEP  adopted  regulations  implementing  a  memorandum  of
understanding  among  11  Northeastern  states  and the  District  of  Columbia,
establishing a regional plan for reducing  nitrogen  oxide (NOx)  emissions from
utilities  and large  industrial  boilers.  The extent of  investment in control
technologies, operational changes and purchases of allowances required to comply
with these  regulations  will be  directly  related to the number of  allowances
PSE&G receives.  PSE&G received a preliminary  allocation of allowances in March
1999,  which are sufficient for the Summer of 1999. The final allocation will be
determined in accordance with the NJDEP  regulations in November 1999,  which is
subsequent  to the May 1 through  September  30,  1999  period  governed  by the
regulations.  It is  currently  anticipated  that  the  NOx  allowances  will be
transferred to PSEG Power.

     PSE&G has attempted to minimize the uncertainty  associated with the timing
of the final allocation by purchasing allowances, upgrading control technologies
and estimating the expected  allocation with as much precision as is practicable
using available data. According to PSE&G's present analysis, the potential costs
for purchasing additional NOx budget allowances should not exceed a total of $10
million  through  December 31, 2002.  Expenditures  associated  with  installing
control technology could result in an additional $72 million.  However, PSE&G is
currently  analyzing  alternatives which could preclude the necessity of capital
improvements.

Passaic River Site

     The EPA has  determined  that a six mile  stretch of the  Passaic  River in
Newark,  New Jersey is a  "facility"  within the  meaning of that term under the
Federal Comprehensive Environmental Response,  Compensation and Liability Act of
1980  (CERCLA) and that,  to date,  at least  thirteen  corporations,  including
PSE&G,  may be potentially  liable for performing  required  remedial actions to
address potential  environmental  pollution at the facility. The EPA anticipates
identifying  other PRPs.  One PRP  (Cooperating  Party)  entered  into a consent
decree with the EPA in 1994  obligating  it to conduct a remedial  investigation
and  feasibility  study of available and applicable  corrective  actions for the
site. Future costs for prospective remedial actions may be material to PSE&G.

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

Subsurface Contamination

     Potential environmental  liabilities related to subsurface contamination at
certain  generating  stations  have  been  identified.  The law  that led to the
identification  is the  Industrial  Site Recovery Act (ISRA) that applies to the
sale of certain assets.  Although the sale of generation-related  assets to PSEG
Power will trigger an ISRA review,  PSEG and PSE&G will make an application  for
an  exemption  on the basis that the sale is being  made as part of a  corporate
reorganization.  In the second  quarter of 1999,  PSEG  recorded a $31  million,
after tax,  liability  related to these  obligations (see Note 3.  Extraordinary
Charge and Other Accounting Impacts of Deregulation).

Note 6.  Financial Instruments and Risk Management

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

Fair Value of Financial Instruments

     The  estimated  fair value was  determined  using the market  quotations or
values of instruments with similar terms, credit ratings,  remaining  maturities
and redemptions at June 30, 1999 and December 31, 1998, respectively.  Note that
certain future events in connection with securitization and the sale by PSE&G of
generation-related assets to PSEG Power will trigger certain redemption features
of certain PSE&G mortgage bonds.

<TABLE>
<CAPTION>
                                                                  June 30,  1999              December 31, 1998
                                                            -------------------------   ----------------------------
                                                              Carrying        Fair         Carrying         Fair
                                                               Amount         Value         Amount          Value
                                                            ------------  -----------   -------------   ------------
                                                                            (Millions of Dollars)
<S>                                                              <C>          <C>             <C>            <C>
Long-Term Debt (A):
     PSEG..................................................      $575         $575            $275           $275
     Energy Holdings.......................................       987          981             762            769
     PSE&G.................................................     4,128        4,174           4,145          4,389
Preferred Securities Subject to Mandatory Redemption:
     PSE&G Cumulative Preferred Securities.................        75           74              75             77
     Monthly Guaranteed Preferred Beneficial Interest in
        PSE&G's Subordinated Debentures....................       210          213             210            213
     Quarterly Guaranteed Preferred Beneficial Interest in
        PSE&G's Subordinated Debentures....................       303          306             303            315
     Quarterly Guaranteed Preferred Beneficial Interest in
        PSEG's Subordinated Debentures.....................       525          484             525            518

<FN>
(A)  Includes current  maturities.  Includes  interest rate swaps of $33 million
     and $150 million for Energy Holdings and PSEG, respectively, for the period
     ended June 30, 1999 and interest rate swaps of $44 million and $150 million
     for Energy Holdings and PSEG,  respectively,  for the period ended December
     31, 1998.
</FN>
</TABLE>

Commodity-Related Instruments--PSE&G

     At June 30, 1999 and December 31, 1998,  PSE&G held or issued commodity and
financial  instruments that reduce exposure to market  fluctuations from factors
such as weather,  environmental policies,  changes in demand, changes in supply,
state and Federal regulatory  policies and other events.  These instruments,  in
conjunction  with owned  electric  generating  capacity  and physical gas supply
contracts,   are  designed  to  cover   estimated   electric  and  gas  customer
commitments. PSE&G uses futures, forwards, swaps and options to manage and hedge
price risk related to these market exposures.

     At June 30, 1999,  PSE&G had outstanding  commodity  financial  instruments
with a  notional  contract  quantity  of 8.9  million  megawatt-hours  (MWH)  of
electricity  and 49.2 million MMBTU (million  British  thermal units) of natural
gas. At December 31, 1998, PSE&G had outstanding commodity financial instruments
with a notional  contract  quantity of 1.6 million MWH of  electricity  and 65.2
million MMBTU of natural gas. Notional amounts are indicative only of the volume
of activity and are not a measure of market risk.

     As  discussed  in Note 1.  Basis  of  Presentation/Summary  of  Significant
Accounting Policies,  PSE&G implemented EITF 98-10 effective January 1, 1999. As
a result,  PSE&G's energy trading  contracts were marked to market and gains and
losses from such contracts were included in earnings. Previously, such gains and
losses were recorded upon settlement of the contracts. PSE&G recorded $6 million
and $13  million  of gains  in the  quarters  ended  June  30,  1999  and  1998,
respectively.  PSE&G  recorded  $17  million and $18 million of gains in the six
months ended June 30, 1999 and 1998, respectively.

Commodity-Related Instruments--Energy Holdings

     Energy  Technologies'  policy is to enter into natural gas and  electricity
futures  contracts  and forward  purchases  to lock in prices  related to future
fixed sales commitments.  Whenever possible,  Energy Technologies attempts to be
100%  covered on its  electric and gas sales  positions  during  periods of peak
volatility.  During  the six  months  ended  June  30,  1999  and  1998,  Energy
Technologies  entered into futures  contracts to buy natural gas and electricity
related to fixed-price sales commitments. Energy Technologies had 99% and 90% of
its fixed  price  natural  gas sales  commitments  hedged and 97% and 63% of its
fixed price electric  commodity  sales  commitments  hedged at June 30, 1999 and
December  31,  1998,  respectively.  As of June 30, 1999 and  December 31, 1998,
Energy  Technologies had a net unrealized hedge gain of approximately $2 million
and net unrealized hedge loss of $5 million,  respectively, for its electric and
gas hedges.

Equity Securities--Energy Holdings

     PSEG Resources Inc.  (Resources) directly and indirectly has investments in
equity  securities.  Resources  carries its investments in equity  securities at
their  approximate  fair  value  as of the  reporting  date.  Consequently,  the
carrying value of these  investments is affected by changes in the fair value of
the  underlying  securities.  Fair value is  determined  by adjusting the market
value of the  securities  for liquidity  and market  volatility  factors,  where
appropriate.  The aggregate fair values of such investments  which had available
market  prices at June 30, 1999 and December 31, 1998 were $166 million and $204
million,  respectively.  A  sensitivity  analysis has been  prepared to estimate
Energy  Holdings'  exposure  to  market  volatility  of these  investments.  The
potential  change in fair  value  resulting  from a  hypothetical  10% change in
quoted  market prices of these  investments  amounted to $15 million at June 30,
1999 and $17 million at December 31, 1998.


<PAGE>


Foreign Currencies--Energy Holdings

     In accordance with their growth strategies,  Global and Resources have made
approximately  $1.2 billion and $0.8  billion,  respectively,  of  international
investments.  As of June 30, 1999, these  investments  represented 11% of PSEG's
consolidated  assets and  contributed  8% of  consolidated  revenues for the six
months ended June 30, 1999. Resources'  international  investments are primarily
leveraged leases of assets located in Australia,  the Netherlands and the United
Kingdom with associated revenues denominated in U.S. dollars and, therefore, not
subject to foreign currency risk.

     Global's international  investments are primarily in projects that generate
or distribute electricity in Argentina, Brazil, Chile, China and Peru. Investing
in foreign countries involves certain risks.  Economic conditions that result in
higher  comparative  rates of inflation in foreign  countries  likely  result in
declining  values  in  such  countries'  currencies.   As  currencies  fluctuate
vis-a-vis  the  U.S.  dollar,  there  is  a  corresponding  change  in  Global's
investment  value in terms of the U.S.  dollar.  Such change is  reflected as an
increase  or  decrease  in  comprehensive   income,  a  separate   component  of
stockholders'  equity.  Net  foreign  currency  devaluations  have  reduced  the
reported  amount of PSEG's  total  stockholders'  equity by $170  million,  $166
million of which was caused by the devaluation of the Brazilian Real, as of June
30, 1999.

     In January  1999,  Brazil  abandoned its managed  devaluation  strategy and
allowed its currency,  the Real, to float against other  currencies.  As of June
30, 1999, the Real had devalued  approximately 33% against the U.S. dollar since
December 31, 1998,  affecting  the carrying  value of Global's  investment  in a
Brazilian  distribution  company.  PSEG cannot  predict to what extent,  if any,
further  devaluation of the Brazilian Real or other  currencies may occur,  and,
therefore,  cannot predict the impact of potential  devaluation of currencies on
its financial condition, results of operations or net cash flows. For additional
information, see Note 8. Financial Information by Business Segments.

     Higher  comparative rates of inflation in foreign economies also means that
borrowing costs in local currency will be higher than in the United States. When
warranted,  Global has financed  certain  foreign  investments  with U.S. dollar
denominated  debt. While less costly to service in terms of U.S.  dollars,  such
debt is exposed to currency risk because a devaluation  would cause repayment to
be more  expensive in local  currency  terms since more units of local  currency
would be required to repay the debt.  Dollar  denominated  debt was  incurred by
Global in Argentina,  Chile and Peru to finance the  acquisition of interests in
rate  regulated  distribution  entities.  These  entities may be able to recover
higher  costs  incurred as a result of a  devaluation  specifically  through the
terms of the concession agreement or as a pass through of higher inflation costs
in rates over time, although no assurances can be given that this will occur. In
evaluating  its investment  decisions,  Global  considers the social,  economic,
political and currency  risks  associated  with each potential  project,  and if
warranted,  assumes a certain  level of  currency  devaluation  when  making its
investment  decisions.  In  Argentina,  the currency is pegged 1:1 with the U.S.
dollar and a  legislative  act is required to de-couple  the  currency  from the
dollar.  Management  cannot predict whether  devaluation in local economies will
occur or determine the ultimate impact of such  devaluation on PSEG's  financial
condition, results of operations or net cash flows.

     Global had  consolidated  project debt totaling $102 million as of June 30,
1999 associated with Global's investment in the Brazilian  distribution  company
noted above that is non-recourse  to Global,  Energy Holdings and PSEG. The debt
is  denominated  in the Brazilian Real and is indexed to a basket of currencies,
approximately 50% of which is the U.S. dollar. As a result, Global is subject to
foreign  currency  exchange  rate risk which  would  result from  exchange  rate
movements between the indexed foreign  currencies and the U.S. dollar.  Exchange
rate  changes  ultimately  impact the debt level  outstanding  in the  reporting
currency  and  result in foreign  currency  gains or losses in  accordance  with
generally accepted accounting principles.  Any related gains or losses resulting
from such exchange rate  movements are included in net income for the period and
amounted  to a gain of $2 million  and a loss of $0.1  million  in the  quarters
ended June 30,  1999 and 1998 and gains of $6 million  and $3 million in the six
months ended June 30, 1999 and 1998, respectively.

     Although Global  generally seeks to structure power purchase  contracts and
other  project  revenue  agreements  to provide  for  payments to be made in, or
indexed to, U.S. dollars or a currency freely convertible into U.S. dollars, its
ability to do so in all cases may be limited.  As Energy  Holdings  continues to
invest  internationally,  the financial  statements of PSEG will be increasingly
affected by changes in the global economy.

Interest Rates--PSE&G

     PSE&G is subject to the risk of  fluctuating  interest  rates in the normal
course of business.  PSE&G's policy is to manage  interest rate risk through the
use of fixed and, to a lesser extent,  floating rate debt.  Additionally,  PSE&G
may also use interest rate swap  instruments to hedge  interest rate risk,  when
appropriate.  As of June 30, 1999, a hypothetical  10% change in market interest
rates  would  result  in a $10  million  change in  interest  costs  related  to
short-term and floating rate debt.

Interest Rates--Energy Holdings

     Energy Holdings is subject to the risk of fluctuating interest rates in the
normal course of business.  Energy  Holdings'  policy is to manage interest rate
risk through the use of fixed rate debt,  floating  rate debt and interest  rate
swaps.  As of June 30, 1999, a hypothetical  10% change in market interest rates
would result in a $2 million  change in interest costs related to short-term and
floating rate debt.

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

Nuclear Decommissioning Trust Funds

     Contributions made to the Nuclear  Decommissioning Trust Funds are invested
in debt and  equity  securities.  The  carrying  values  of these  funds of $562
million and $524 million  approximates  their fair market  values as of June 30,
1999 and December 31, 1998, respectively.


<PAGE>


Note 7.  Income Taxes

     PSEG's effective income tax rate is as follows:
<TABLE>


                                                                    Quarter Ended                Six Months Ended
                                                                      June 30,                      June 30,
                                                               ------------------------    --------------------------
                                                                 1999 (A)        1998        1999 (A)          1998
                                                               -----------    ---------    -----------     ----------

<S>                                                                <C>          <C>            <C>            <C>
Federal tax provision at statutory rate...................         35.0%        35.0%          35.0%          35.0%
New Jersey Corporate Business Tax, net of Federal benefit.          5.9%         5.9%           5.9%           5.9%
Other-- net...............................................         (0.9)%        1.3%           0.7%           0.7%
                                                               -----------    ---------    -----------     ----------
     Effective Income Tax Rate............................         40.0%        42.2%          41.6%          41.6%
                                                               ===========    =========    ===========     ==========
<FN>
(A)  Excludes  the impact of the  extraordinary  charge  recorded  in the second
     quarter  of  1999.  The  effective   income  tax  rate  applicable  to  the
     extraordinary  charge was 30.4%.  This rate is below the statutory  rate of
     40.85% primarily due to income taxes that were flowed through to ratepayers
     in prior periods under regulated accounting methods partially offset by the
     investment tax credit being credited to the benefit of PSEG's  stockholders
     pursuant to the proposed  stipulation filed with the BPU by PSE&G and seven
     other parties on March 17, 1999 (Stipulation) and the Summary Order.

</FN>
</TABLE>

Note 8.  Financial Information by Business Segments

     The reportable segments disclosed herein were determined based on a variety
of factors  including the regulatory  environment  and the types of products and
services  offered.  Effective  with the unbundling of PSE&G's rates on August 1,
1999  and  the  deregulation  of the  electric  generation  portion  of  PSE&G's
business,  the basis of segment  reporting will change  beginning with the third
quarter of 1999. The generation  portion of PSE&G's  business,  including energy
trading, will then be a separate reportable segment.

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


<TABLE>
<CAPTION>

                                                                                        Other        Consolidated
                                                 Electric      Gas      Resources     Activities        Total
                                                                                         (A)
                                                 ----------- ---------- ------------ -------------- ----------------
                                                                       (Millions of Dollars)
<S>                                                <C>          <C>           <C>             <C>          <C>
For the Quarter Ended June 30, 1999:
     Total Operating Revenues.............         $1,020       $277          $51             $88          $1,436
     Segment Income before Extraordinary Item.        161         (4)          23               1             181
     Segment Net Income (Loss)............           (629)        (4)          23               1            (609)
                                                 =========== ========== ============ ============== ================

For the Quarter Ended June 30, 1998:
     Total Operating Revenues.............           $980       $272          $43             $73          $1,368
     Segment Net Income (Loss)............            123        (12)          18              (7)            122
                                                 =========== ========== ============ ============== ================
</TABLE>

<PAGE>
<TABLE>
<CAPTION>


                                                                                        Other        Consolidated
                                                 Electric      Gas      Resources     Activities        Total
                                                                                         (A)
                                                 ----------- ---------- ------------ -------------- ----------------
                                                                       (Millions of Dollars)
<S>                                                <C>          <C>           <C>            <C>           <C>
For the Six Months Ended June 30, 1999:
     Total Operating Revenues.............         $1,986       $977          $97            $171          $3,231
     Segment Income before Extraordinary Item.        259         70           42             (2)             369
     Segment Net Income (Loss)............           (531)        70           42             (2)            (421)
                                                 =========== ========== ============ ============== ================

For the Six Months Ended June 30, 1998:
     Total Operating Revenues.............         $1,882       $884         $113            $148          $3,027
     Segment Net Income (Loss)............            235         34           54             (10)            313
                                                 =========== ========== ============ ============== ================

As of June 30, 1999:
     Total Assets.........................        $12,202     $2,436       $1,948          $1,881         $18,467
                                                 =========== ========== ============ ============== ================

As of December 31, 1998:
        Total Assets......................        $12,200     $2,469       $1,809         $1,519          $17,997
                                                 =========== ========== ============ ============== ================

<FN>
(A)  Other   Activities   include   amounts   applicable  to  PSEG,  the  parent
     corporation, and Energy Holdings, excluding Resources.
</FN>
</TABLE>
<PAGE>

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

<TABLE>
<CAPTION>


                                                     Revenues (1)                              Identifiable Assets
                                   ---------------------------------------------------    -------------------------------
                                       Quarter Ended             Six Months Ended
                                         June 30,                    June 30,             June 30,         December 31,
                                     1999          1998           1999         1998          1999              1998
                                   ---------     ---------     ----------    ---------    -----------     ---------------
<S>                                 <C>           <C>            <C>          <C>           <C>                 <C>
United States.................      $1,397        $1,348         $3,165       $2,983        $16,409             $16,395
Foreign Countries (2).........          39            20             66           44          2,058               1,602
                                   ---------     ---------     ----------    ---------    -----------     ---------------
     Total....................      $1,436        $1,368         $3,231       $3,027        $18,467             $17,997
                                   =========     =========     ==========    =========    ===========     ===============
</TABLE>

Identifiable investments in foreign countries include amounts from:

      Argentina               $306               $304
      Brazil (3)               342                480
      Chile and Peru           429                 --
      Netherlands              524                400

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

     (2)  Total assets are net of foreign  currency  translation  adjustment  of
          $(189)  million  (pretax)  as of June  30,  1999  and  $(48)  million
          (pretax) as of December 31, 1998.

     (3)  Amount is net of foreign  currency  translation  adjustment  of $(184)
          million  (pretax) as of June 30, 1999 and $(43) million  (pretax) as
          of December 31, 1998.
<PAGE>


================================================================================
                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
================================================================================

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)


Note 9.  Accounting Matters

     In June  1999,  the  FASB  issued  SFAS  137,  "Accounting  for  Derivative
Instruments  and  Hedging  Activities--Deferral  of the  Effective  Date of FASB
Statement  No.  133"  (SFAS  137) to  defer  the  effective  date  of SFAS  133,
"Accounting for Derivative  Instruments and Hedging  Activities"  (SFAS 133) for
one year.  Consequently,  SFAS 133 will now be effective for all fiscal quarters
of all fiscal  years  beginning  after June 15,  2000.  The FASB also decided to
defer by one year the  transition  date regarding  embedded  derivatives in SFAS
133.

     SFAS  133,  which was  issued  in June  1998,  establishes  accounting  and
reporting  standards  for  derivative  instruments  and hedging  activities.  It
requires  an entity  to  recognize  all  derivatives,  within  the scope of this
statement,  as assets or liabilities  on the balance sheet at fair value.  Also,
derivatives  that are not hedges must be adjusted to fair value through  income.
If a derivative  is a hedge,  changes in the fair value of the  derivative  will
either be offset against the change in fair value of the hedged asset, liability
or firm  commitment  through  earnings or be recognized  in other  comprehensive
income until the hedged item is recognized in earnings,  depending on the nature
of the hedge. The ineffective portion of a hedge will be immediately  recognized
in earnings.  PSEG and PSE&G are currently evaluating the impact of SFAS 133 and
developing an implementation plan.

Note 10.  Comprehensive Income (Loss)

Comprehensive Income (Loss), Net of Tax:

<TABLE>
<CAPTION>

                                                                 Quarter Ended                    Six Months Ended
                                                                   June 30,                           June 30,
                                                         ------------------------------        -----------------------
                                                            1999              1998               1999         1998
                                                         -----------       ------------        ---------    ----------
                                                                            (Millions of Dollars)
<S>                                                          <C>                  <C>            <C>             <C>
Net income (loss)...................................         $(609)              $122           $(421)          $313
Foreign currency translation, net of tax (A) .......            (2)                (6)           (127)           (12)
                                                         -----------       ------------        ---------    ----------
Comprehensive income (loss).........................         $(611)              $116           $(548)          $301
                                                         ===========       ============        =========    ==========

<FN>
(A)  Net of tax of $(0.2)  million and $(1) million for the quarters  ended June
     30, 1999 and 1998, respectively, and $(14) million and $(2) million for the
     six months ended June 30, 1999 and 1998, respectively.
</FN>
</TABLE>
<PAGE>

================================================================================
                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
================================================================================

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     The Notes to Consolidated  Financial Statements of PSEG are incorporated by
reference insofar as they relate to PSE&G and its subsidiaries:

      Note 1. Basis of Presentation/Summary of Significant Accounting Policies
      Note 2. Regulatory Issues
      Note 3. Extraordinary Charge and Other Accounting Impacts of Deregulation
      Note 4. Regulatory Assets and Liabilities
      Note 5. Commitments and Contingent Liabilities
      Note 6. Financial Instruments and Risk Management
      Note 8. Financial Information by Business Segments
      Note 9. Accounting Matters

Note 7.  Income Taxes

     PSE&G's effective income tax rate is as follows:

<TABLE>
<CAPTION>
                                                                   Quarter Ended              Six Months Ended
                                                                      June 30,                    June 30,
                                                               ------------------------    -------------------------
                                                                 1999 (A)        1998        1999 (A)         1998
                                                               -----------    ---------    -----------     ---------
<S>                                                                <C>          <C>            <C>           <C>
Federal tax provision at statutory rate..................          35.0%        35.0%          35.0%         35.0%
New Jersey Corporate Business Tax, net of Federal benefit           5.9%         5.9%           5.9%          5.9%
Other-- net..............................................          (0.1)%        1.7%           1.5%          1.8%
                                                               -----------   ---------    -----------     ---------
     Effective Income Tax Rate............................         40.8%        42.6%          42.4%         42.7%
                                                               ===========    =========    ===========     =========
<FN>
(A)    Excludes the impact of the  extraordinary  charge  recorded in the second
       quarter  of  1999.  The  effective  income  tax  rate  applicable  to the
       extraordinary  charge was 30.4%. This rate is below the statutory rate of
       40.85%  primarily  due to  income  taxes  that  were  flowed  through  to
       ratepayers in prior periods under regulated  accounting methods partially
       offset by the  investment  tax credit  being  credited  to the benefit of
       PSEG's stockholders pursuant to the Stipulation and the Summary Order.

</FN>
</TABLE>

Note 10.  Comprehensive Income (Loss)

     For the  quarters  and six  months  ended June 30,  1999 and 1998,  PSE&G's
comprehensive income (loss) equaled the consolidated net income (loss) of PSE&G.
<PAGE>

================================================================================
                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
================================================================================

                 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS


     Following  are the  significant  changes  in or  additions  to  information
reported in the Public Service Enterprise Group Incorporated  (PSEG) 1998 Annual
Report on Form 10-K,  the  Quarterly  Report on Form 10-Q for the quarter  ended
March 31, 1999 and the Current  Reports on Form 8-K filed March 18, 1999,  April
26, 1999 and July 21, 1999 affecting the  consolidated  financial  condition and
the results of operations of PSEG and its  subsidiaries.  This discussion refers
to the  Consolidated  Financial  Statements  (Statements)  and related  Notes to
Consolidated  Financial  Statements  (Notes)  of  PSEG  and  should  be  read in
conjunction with such Statements and Notes.

Overview and Future Outlook

     Following the passage of the New Jersey  Electric  Discount and Competition
Act (Energy  Competition  Act), the New Jersey Board of Public  Utilities  (BPU)
rendered  its summary  decision  relating  to Public  Service  Electric  and Gas
Company's (PSE&G) rate unbundling,  stranded costs and restructuring proceedings
(Summary Order) on April 21, 1999. It is expected that the BPU will issue a more
detailed  Decision and Order  (Final  Order) in these  matters  during the third
quarter of 1999,  which will provide a full  discussion of the issues as well as
the  reasoning for the BPU's  determinations.  The Energy  Competition  Act, the
BPU's  Summary  Order  and Final  Order  and the  related  BPU  proceedings  are
hereinafter  referred to as the Energy Master Plan  Proceedings  (Energy  Master
Plan Proceedings). These proceedings provide that all New Jersey retail electric
customers may select their electric  supplier  commencing August 1, 1999 and all
New  Jersey  retail  gas  customers  may select  their gas  supplier  commencing
December 31, 1999, thus opening the New Jersey energy markets to competition.

     After analysis of the Summary Order,  PSE&G concluded that it no longer met
the  requirements  of  Statement of Financial  Accounting  Standards  (SFAS) 71,
"Accounting  for the Effects of Certain Types of Regulation"  (SFAS 71), for the
electric generation portion of its business.  As a result,  PSE&G recorded a net
extraordinary  charge to  earnings  of $790  million,  after tax,  in the second
quarter.  This  one-time  loss  reflects  the  impairment  of  PSE&G's  electric
generation-related assets and related fuel, equipment, materials and supplies as
well as recording certain liabilities  stemming from the deregulation of PSE&G's
electric  generation  business.  The  impairment  reflects the difference in the
level of stranded costs computed under SFAS 121,  "Accounting for the Impairment
of Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed Of" (SFAS 121),
and the  recovery  of such  stranded  costs that was  approved  by the BPU.  For
further  discussion  of the  Energy  Master  Plan  Proceedings  and the  related
extraordinary  charge to  earnings,  see Note 2.  Regulatory  Issues and Note 3.
Extraordinary Charge and Other Accounting Impacts of Deregulation of Notes.

     As  set  forth  in  the  Summary  Order,   PSE&G  will  sell  its  electric
generation-related  assets  and  all  associated  rights  and  liabilities  to a
separate  corporate  entity to be owned by PSEG.  The Summary Order  specifies a
sale  price  of  $2.443   billion   plus  the  book   value  of  PSE&G's   other
generation-related assets, including materials, supplies and fuel. To effectuate
the sale,  PSEG  organized  PSEG  Power LLC (PSEG  Power),  a  Delaware  limited
liability  company (LLC), as a wholly owned  subsidiary in June 1999. PSEG Power
will purchase the electric  generation-related assets from PSE&G and will manage
such  assets  through its  subsidiaries,  PSEG  Fossil LLC (PSEG  Fossil),  PSEG
Nuclear LLC (PSEG  Nuclear)  and PSEG Energy  Resources & Trade LLC (PSEG ER&T),
all of which are also Delaware LLCs. It is currently  anticipated  that the sale
of such assets will occur sometime in the fourth  quarter of 1999.  Prior to the
execution of such sale,  PSEG Power must obtain final approval from the BPU, the
Federal  Energy  Regulatory  Commission  (FERC) (to be  recognized  as an exempt
wholesale  generator (EWG) under the Public Utility Holding Company Act (PUHCA))
and the Nuclear Regulatory Commission (NRC) (to transfer PSE&G's licenses). PSEG
Power  will also have to  resolve a number  of other  issues  related  to taxes,
environmental  restrictions  and financing (see Liquidity and Capital  Resources
and Note 2. Regulatory Issues of Notes). Pending receipt and review of the Final
Order,  PSEG and PSE&G cannot  determine the  applicability  and impact of other
regulatory and/or legal requirements.


<PAGE>


================================================================================
                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
================================================================================


     The Summary Order requires PSE&G to provide basic generation  service (BGS)
for all customers who do not elect a different service  provider.  Pursuant to a
contractual  relationship,  PSEG  Power will  provide  PSE&G with the energy and
capacity  required  to  meet  its  BGS  and  off-tariff  rate  agreement  (OTRA)
obligations  under the  Summary  Order.  PSEG Power,  through  its wholly  owned
subsidiary  PSEG ER&T,  will  provide  such  energy and  capacity  under the BGS
contract  rate for the first three  years of the  transition  period,  beginning
August 1, 1999. BGS will be  competitively  bid for the fourth year and annually
thereafter.  PSEG ER&T will obtain the energy and capacity to supply PSE&G's BGS
and OTRA  requirements  from  its  affiliates,  PSEG  Nuclear  and PSEG  Fossil,
supplemented  as necessary with energy  purchased in the  competitive  wholesale
electricity  market.  PSEG  Power's  earnings  and its  contribution  to  PSEG's
earnings will be exposed to the risks of the competitive  wholesale  electricity
market to the extent that PSEG Power has to purchase  energy and/or  capacity to
meet its BGS and OTRA  obligations at market prices which approach or exceed the
BGS contract rate (see PJM and Item 3. Qualitative and Quantitative  Disclosures
About Market Risk). PSEG ER&T's policy will be to use derivatives to manage this
risk consistent with its business plans and prudent  practices.  PSEG Power will
also participate in the competitive wholesale electricity market for other items
such as energy, capacity and ancillary services.

     The Energy Master Plan Proceedings have  dramatically  reshaped the utility
industry in New Jersey and have directly affected how PSEG will conduct business
and its financial prospects in the future. PSEG is realigning its organizational
structure  to  address  the  competitive   environment   brought  about  by  the
deregulation of the electric generation industry in New Jersey. PSEG has already
been engaged in the  competitive  energy  business for a number of years through
certain of its unregulated  subsidiaries and, in 1998,  generated  approximately
10% of its earnings  from these  subsidiaries.  However,  due to the  regulatory
changes  outlined  above,  competitive  businesses will constitute a much larger
portion of PSEG's  activities in 1999 and beyond. It is expected that by the end
of the transition  period,  PSEG's unregulated  subsidiaries  (comprised of PSEG
Energy Holdings Inc. (Energy  Holdings) and PSEG Power) will contribute  between
60% and 70% of PSEG's  earnings.  Additionally,  PSEG will be more  dependent on
cash flows  generated  from its  unregulated  operations  to fund its  financing
needs. As the unregulated  portion of the business continues to grow,  potential
financial risks and rewards will be greater,  financial requirements will change
and the volatility of earnings and cash flows will increase.

     Going  forward,  PSEG will  continue to pursue its  strategies  to grow its
family of energy-related  businesses. As previously reported, more emphasis will
be placed on finding  opportunities  for  expansion  outside of its  traditional
utility  services and markets.  PSEG  Power's  business  strategy is to size its
fleet of  generation  assets to take  advantage of market  opportunities,  while
seeking to  increase  its value and manage  commodity  price  risk  through  its
wholesale trading  activity.  PSE&G's  transmission and distribution  objective,
both gas and electric,  is to provide  cost-effective,  high  quality,  reliable
service.  PSEG Global Inc.'s  (Global)  strategy is to focus on  generation  and
distribution  investments  within  targeted  high-growth  areas of the worldwide
energy market.  PSEG  Resources  Inc.'s  (Resources)  strategy is to utilize its
market access,  industry knowledge and transaction  structuring  capabilities to
expand its energy-related  investment portfolio. PSEG Energy Technologies Inc.'s
(Energy  Technologies)  strategy is to assess prospects in its emerging regional
energy  service   business  before   committing   additional   capital.   Energy
Technologies plans to grow existing operations and utilize the recently acquired
companies to deliver expanded  energy-related  services and products,  including
gas and  electricity,  to existing  and new  customers.  In addition to internal
growth,  PSEG expects to pursue  opportunities  for expansion  through  business
combinations.

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


<PAGE>


Results of Operations

<TABLE>
<CAPTION>

                                                                   Net Income (Loss)
                                             ---------------------------------------------------------------
                                                   Quarter Ended                     Six Months Ended
                                                     June 30,                            June 30,
                                             ---------------------------        ----------------------------
                                                1999           1998                1999            1998
                                             ------------    -----------        ------------    ------------
<S>                                               <C>            <C>                <C>             <C>
PSE&G, Before Extraordinary Item                  $155           $108               $324             $263
PSE&G Extraordinary Item                          (790)            --               (790)              --
                                             ------------    -----------        ------------    ------------
      Total PSE&G                                 (635)           108               (466)             263
Energy Holdings                                     26             14                 45               50
                                             ------------    -----------        ------------    ------------
      Total PSEG                                 $(609)          $122              $(421)            $313
                                             ============    ===========        ============    ============
</TABLE>


<TABLE>
<CAPTION>

                                                Contribution to Earnings Per Share (Basic and Diluted)
                                             ---------------------------------------------------------------
                                                   Quarter Ended                     Six Months Ended
                                                     June 30,                            June 30,
                                             ---------------------------        ----------------------------
                                                 1999           1998                1999            1998
                                             ------------    -----------        ------------    ------------
<S>                                              <C>             <C>                <C>              <C>
PSE&G, Before Extraordinary Item                 $0.71           $0.47              $1.47            $1.14
PSE&G Extraordinary Item                         (3.60)             --              (3.57)              --
                                             ------------    -----------        ------------    ------------
      Total PSE&G                                (2.89)           0.47              (2.10)            1.14
Energy Holdings                                   0.12            0.06               0.20             0.21
                                             ------------    -----------        ------------    ------------
      Total PSEG                                $(2.77)          $0.53             $(1.90)           $1.35
                                             ============    ===========        ============    ============
</TABLE>

     Basic and diluted  earnings per share of PSEG common stock  (Common  Stock)
were  $(2.77) for the quarter  ended June 30, 1999,  representing  a decrease of
$3.30 per share from the comparable 1998 period.  Basic and diluted earnings per
share of Common  Stock  were  $(1.90)  for the six months  ended June 30,  1999,
representing a decrease of $3.25 per share from the comparable 1998 period.

     In the second quarter of 1999,  PSE&G recorded an  extraordinary  charge to
earnings of $790 million,  net of tax, as a result of the BPU's Summary Order in
the  Energy  Master  Plan  Proceedings.  For  further  discussion,  see  Note 2.
Regulatory Issues and Note 3. Extraordinary  Charge and Other Accounting Impacts
of Deregulation of Notes. Excluding that extraordinary charge, basic and diluted
earnings  per share of Common  Stock were $0.83 for the  quarter  ended June 30,
1999,  representing  an  increase  of $0.30 per share over the  comparable  1998
period.  Excluding that  extraordinary  charge,  basic and diluted  earnings per
share of  Common  Stock  were  $1.67 for the six  months  ended  June 30,  1999,
representing an increase of $0.32 per share over the comparable 1998 period.

     Excluding the extraordinary  charge,  PSE&G's  contribution to earnings per
share of Common Stock for the quarter ended June 30, 1999  increased  $0.24 from
the comparable 1998 period. The increase for the quarter ended June 30, 1999 was
partially due to lower generation-related depreciation expenses due to the lower
net book  value of  generation-related  assets as a result of their  write  down
effective April 1, 1999, under SFAS 121. These lower depreciation  expenses were
partially offset by a change in the  capitalization  policy for PSE&G's electric
generation  business and by the effects of depreciation  policy changes stemming
from the  discontinuation of SFAS 71 (see Note 1. Basis of  Organization/Summary
of Significant Accounting Policies).  Additionally,  electric revenues increased
due to higher sales  resulting from  favorable  weather in the second quarter of
1999 augmented by positive  economic  factors in New Jersey and profits realized
from wholesale  energy  activities.  The increase was partially offset by higher
operating expenses,  including higher  transmission,  distribution and wholesale
energy costs than those incurred in the second quarter of 1998.
<PAGE>


     Excluding the extraordinary  charge,  PSE&G's  contribution to earnings per
share of Common  Stock for the six months  ended June 30, 1999  increased  $0.33
from the comparable 1998 period.  The increase for the six months ended June 30,
1999 was primarily due to increased sales of gas and electricity  resulting from
favorable weather in the first and second quarters of 1999 augmented by positive
economic  factors in New Jersey  and  profits  realized  from  wholesale  energy
activities. In addition,  generation-related depreciation expenses were lower as
a result  of the  impairment  write  down,  partially  offset by a change in the
capitalization  policy  for  PSE&G's  electric  generation  business  and by the
effects of depreciation policy changes stemming from the discontinuation of SFAS
71. The increase in earnings was partially offset by higher operating  expenses,
including higher  transmission,  distribution  and wholesale energy costs,  than
those incurred in the six months ended June 30, 1998.

     PSEG Energy Holdings Inc.'s (Energy Holdings)  contribution to earnings per
share of Common Stock for the quarter ended June 30, 1999  increased  $0.06 from
the comparable 1998 period,  primarily due to the better overall  performance of
Resources, Global and Energy Technologies.

     Energy Holdings' contribution to earnings per share of Common Stock for the
six months ended June 30, 1999 decreased  $0.01 from the comparable 1998 period,
primarily  due to lower  unrealized  gains in  Resources'  financial  investment
portfolio in the first  quarter of 1999.  In the six months ended June 30, 1998,
Resources  recognized  significant  gains  from  its  beneficial  interest  in a
leveraged buy-out (LBO) fund. The lower comparative  contribution from Resources
was  partially  offset  by  increased   contributions  from  Global  and  Energy
Technologies.

     As a result of PSEG's  stock  repurchase  program  which began in September
1998,  earnings  per share of Common  Stock for the quarter and six months ended
June 30, 1999 increased $0.04 and $0.07, respectively,  from the comparable 1998
periods.  As of  June  30,  1999,  approximately  13  million  shares  had  been
repurchased at a cost of approximately $507 million under this program.

PSE&G -- Revenues

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

     Electric

     Revenues increased $40 million or 4% and $104 million or 6% for the quarter
and six  months  ended  June 30,  1999  from  the  comparable  periods  in 1998,
respectively, primarily due to profits realized from wholesale energy activities
and DSM revenues  being higher in the quarter and six months ended June 30, 1999
than in the  comparable  1998 periods.  Additionally,  favorable  weather in the
first and second quarters of 1999 augmented by positive  economic factors in New
Jersey contributed to the increases.

     On July  26,  1999,  the BPU  approved  PSE&G's  compliance  tariff  filing
reflecting  the 5%  decrease  in  rates  on a  provisional  basis  (see  Note 2.
Regulatory  Issues of Notes).  On August 1, 1999,  PSE&G  implemented  this rate
reduction as required by the BPU under the Energy  Master Plan  Proceedings.  In
1999, this rate reduction is expected to decrease  revenues by approximately $80
million.  A further  revenue  reduction  could occur in 1999  depending upon the
timing of the receipt of securitization  proceeds (see Note 2. Regulatory Issues
of Notes).  Additionally,  the probable loss of customers through the opening of
competition could reduce future revenues.

     Gas

     Revenues  increased $5 million or 2% and $93 million or 11% for the quarter
and six  months  ended  June 30,  1999  from  the  comparable  periods  in 1998,
respectively.  The increases were  primarily due to increased  revenues from gas
service  contracts  and DSM revenues  being higher in the quarter and six months
ended June 30, 1999 than in the comparable 1998 periods. Additionally, favorable
weather in the first and second  quarters of 1999  contributed to the increases.
Additionally,  the probable loss of customers through the opening of competition
could reduce future revenues.

PSE&G -- Expenses

     Net Interchanged Power and Fuel for Electric Generation

     Net  Interchanged  Power  and Fuel for  Electric  Generation  decreased  $5
million or 2% for the quarter  ended June 30, 1999 and had no change for the six
months ended June 30, 1999 from the comparable 1998 periods, respectively.

     Due to the  elimination  of the LEAC on August 1,  1999,  these  historical
trends are not to be considered an indication of future Net  Interchanged  Power
and Fuel for Electric  Generation costs.  Given the elimination of the LEAC, the
lifting of the  requirements  that electric  energy  offered for sale in PJM not
exceed the variable cost of producing such energy and that such transactions are
now capped at $1,000 per MWH (see Competitive Environment), the absence of a PJM
price cap in  situations  involving  emergency  purchases  and the potential for
plant  outages;  price  movements  could  have a  material  impact on PSEG's and
PSE&G's  financial  condition,  results of operations  or net cash flows.  For a
discussion of market risks, see Item 3. Qualitative and Quantitative Disclosures
About  Market  Risk.  Additionally,  it is expected  that the  probable  loss of
customers through the opening of competition could reduce future expenses.

     Gas Purchased

     Gas  Purchased  decreased  $4 million or 2% for the quarter  ended June 30,
1999 from the  comparable  1998 period.  Gas  purchased for the six months ended
June 30, 1999  increased $29 million or 5% primarily  due to increased  sales of
gas resulting from colder weather in the first quarter of 1999. Additionally, it
is  expected  that  the  probable  loss of  customers  through  the  opening  of
competition could reduce future expenses.

     Operation and Maintenance

     Operation  and  Maintenance  expense  increased  $21  million or 6% and $92
million  or 14% for the  quarter  and six months  ended  June 30,  1999 from the
comparable 1998 periods,  respectively. The increase was primarily due to higher
costs  related  to  wholesale  power  activities  and  higher  transmission  and
distribution  costs,  including higher material and outside services in 1999 and
increased PJM restructuring expenses. Additionally, higher Other Post Retirement
Benefits (OPEB) costs were incurred in the quarter and six months ended June 30,
1999 than in the  comparable  1998 periods.  Also, in the quarter and six months
ended June 30,  1999,  there was  higher DSM  recovery  of  previously  deferred
expenses.

     With an increasingly  competitive energy market as an outcome of the Energy
Master Plan Proceedings and energy industry  restructuring,  the composition and
level of Operation and  Maintenance  expense is likely to change.  Additionally,
the change in capitalization policy will likely yield a material increase in the
Operation  and  Maintenance  expenses  associated  with the electric  generation
business (see Note 1. Basis of  Presentation/Summary  of Significant  Accounting
Policies). This increase in Operation and Maintenance expense is not expected to
exceed $75 million  after tax per year and will be offset by lower  depreciation
expense in the future.


<PAGE>
     Depreciation and Amortization

     Depreciation and Amortization  expense decreased $46 million or 28% and $33
million  or 10% for the  quarter  and six months  ended  June 30,  1999 from the
comparable 1998 periods,  respectively. The decreases were due to lower net book
value  balances of PSE&G's  generation-related  assets  which were reduced as of
April 1, 1999 as a result of the  impairment  calculated  pursuant  to SFAS 121.
This decrease was partially  offset by higher  depreciation  expense  related to
transmission  and  distribution  assets  having  higher  net book  values in the
quarter and six months ended June 30, 1999 than in the comparable  1998 periods.
Also, higher depreciation rates for  generation-related  assets were used in the
second  quarter  of  1999  due  to  the  change  in   depreciation   policy  for
generation-related   assets  (see  Note  1.  Basis  of  Presentation/Summary  of
Significant Accounting Policies).

     Despite the higher  depreciation rates for  generation-related  assets, the
decrease in  generation-related  depreciation expense will be ongoing due to the
reduced asset balances. Such reductions are currently anticipated to approximate
$230  million  per year,  pretax.  Additionally,  beginning  in 2000,  electric
distribution  asset-related  depreciation  will be  further  reduced  due to the
amortization of the excess electric  distribution  depreciation reserve over the
period from January 1, 2000 to July 31, 2003. See Note 4. Regulatory  Assets and
Liabilities of Notes for a discussion of the amortization schedule.

     Income Taxes

     Income  Taxes  increased  $27 million or 34% and $45 million or 23% for the
quarter and six months  ended June 30, 1999 from the  comparable  1998  periods,
respectively. This increase is primarily due to higher pretax operating income.

Energy Holdings -- Earnings/(Losses)

<TABLE>
<CAPTION>

                                                               Quarter Ended                    Six Months Ended
                                                                 June 30,                           June 30,
                                                         ---------------------------        ---------------------------
                                                            1999            1998                1999            1998
                                                         -----------     -----------        -----------     -----------
                                                                            (Millions of Dollars)
<S>                                                          <C>             <C>                <C>            <C>
Earnings Before Interest and Taxes:
     Resources                                               $48             $40                $92            $107
     Global                                                   22              16                 40              35
     Energy Technologies                                      (2)             (5)                (5)             (8)
                                                         ===========     ===========        ===========     ===========
Earnings:
     Energy Holdings                                          $26             $14                $45             $50
                                                         ===========     ===========        ===========     ===========
</TABLE>

     Energy Holdings' earnings for the quarter ended June 30, 1999 and 1998 were
$26 million and $14  million,  respectively.  The  increase in Energy  Holdings'
earnings was primarily due to higher investment gains and higher leveraged lease
income from  Resources  augmented  by higher  revenue  from  Global's  operating
projects and Energy  Technologies'  recent acquisition activity partially offset
by higher operating expenses.

     Energy  Holdings'  earnings for the six months ended June 30, 1999 and 1998
were $45 million  and $50  million,  respectively.  Lower  earnings  for the six
months  ended June 30,  1999 were  primarily  due to lower  investment  gains in
Resources'  financial  investment  portfolio.  In the six months  ended June 30,
1998, Resources recognized  significant gains from its beneficial interest in an
LBO. The lower  comparative  contribution from Resources was partially offset by
increased contributions from Global and Energy Technologies. Improved revenue at
Global  was  partially  offset  by  higher  expenses   associated  with  project
development.  Energy  Technologies'  losses narrowed due to higher revenues from
recent acquisition activities partially offset by higher operating expenses.

     Energy Holdings-Revenues

     Revenues  increased  $29 million to $139  million from $110 million for the
quarter ended June 30, 1999 as compared to the same period in 1998. The increase
was  due to a $5  million  increase  in  revenues  at  Global  primarily  due to
improvement in revenues from the Latin American electric distribution  companies
as well as the addition of revenues  from  investments  made in June 1999 in two
energy  distribution  companies  in Chile and Peru,  a $15  million  increase in
revenues at Energy  Technologies  due to the  addition  of revenues  from recent
acquisitions and an increase of $8 million at Resources due to higher investment
income from its limited partnership investments.

     Revenues  increased  $13 million to $268  million from $255 million for the
six months  ended June 30,  1999 as  compared  to the same  period in 1998.  The
increase was due to a $6 million increase in revenues at Global primarily due to
improvement in revenues from the Latin American electric distribution  companies
as well as the  addition  of  revenues  from two energy  distribution  companies
acquired  in  June  1999  and a $22  million  increase  in  revenues  at  Energy
Technologies  due to  the  addition  of  revenues  from  acquisitions  in  1999,
partially  offset  by a  decrease  of $16  million  at  Resources  due to  lower
investment income from its limited partnership investments.

     Global  is a 50%  partner  in  six  generating  facilities  in  California.
Beginning in 2000,  revenue from these  facilities  will be reduced due to lower
energy prices to be paid by the purchaser under the energy contracts  associated
with the plants.  Energy  prices under such  contracts  will be reduced from the
current fixed rates to short-run  avoided cost (SRAC) energy prices  approved by
the California Public Utilities  Commission  (CPUC). The CPUC is considering the
issue of transitioning  SRAC energy payments under contracts of this type to the
clearing price of the California Power Exchange (PX).  Although the CPUC has not
yet initiated a proceeding,  Global  anticipates  that eventually  energy prices
under these  contracts will be based upon the PX clearing  price.  Two-thirds of
the primary  California  facilities  in which Global has an interest will change
from fixed energy pricing by December 31, 2000,  with the remainder  changing in
2001. Both the SRAC and the PX energy prices are currently  substantially  lower
than the fixed energy prices charged in these  contracts.  Based on current SRAC
and PX energy  prices,  Global's share of annual income before income taxes from
these  facilities is projected to decrease by  approximately  $30 million to $35
million  when all such  contracts  reflect  SRAC or PX  energy  pricing.  Actual
revenues over the remaining  contract terms, which begin to expire in 2011, will
depend on a number of factors,  including the actual SRAC or PX prices in effect
in  the  applicable  future  periods.  Global's  projects  in  construction  and
development  are  expected  to  offset  this  revenue  shortfall;   however,  no
assurances can be given.

PSEG--Preferred Securities Dividend Requirements of Subsidiaries

     Preferred Securities Dividend Requirements  increased $9 million or 47% and
$17  million  or 49% for the  quarter  and six  months  ended  June 30,  1999 as
compared to the same  periods in 1998.  The  increase was due to the issuance of
trust preferred  securities by three special purpose  statutory  business trusts
controlled by PSEG, Enterprise Capital Trust I, II and III, in January, June and
July 1998 of $525 million.

Liquidity and Capital Resources

     PSEG and PSE&G

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

     PSEG and PSE&G believe that the  deregulation of the utility  industry will
impact the  sources and uses of cash in 1999 and  beyond.  Also,  as a result of
deregulation  and  related  corporate  structure  reorganizations,  the  capital
structure  of PSEG and PSE&G will likely  change.  As of June 30,  1999,  PSEG's
capital  structure  consisted of 39.9% common equity,  48.1%  long-term debt and
12.0%  preferred  stock and other  preferred  securities.  As of June 30,  1999,
PSE&G's capital structure consisted of 47.5% common equity, 43.7% long-term debt
and 8.8% preferred stock and other preferred securities. The BPU, in its Summary
Order, required that the use of the net proceeds of securitization shall be done
in a manner that will not substantially alter PSE&G's overall capital structure.


     It is anticipated that PSE&G will receive  securitization  proceeds of $2.4
billion (net of transaction  costs of up to $125 million).  Additionally,  PSE&G
will  receive  proceeds  of $2.443  billion  (plus  the net book  value of other
generation-related  assets and liabilities  transferred at the time of purchase,
currently estimated to be between $200 million and $400 million) for the sale of
PSE&G's generation-related assets to PSEG Power.

     In anticipation  of receipt of the Final Order  confirming the terms of the
Summary  Order,  PSEG has organized a new wholly owned  subsidiary,  PSEG Power.
Subject to the timely receipt of certain  required  Federal and State regulatory
approvals,  the  receipt  of which  cannot be  assured,  and  receipt of the net
proceeds from its stranded asset  securitization,  PSE&G anticipates  completing
the sale of its generation-related assets during the fourth quarter of 1999. See
Note 2.  Regulatory  Issues of Notes for a  discussion  of the status of PSE&G's
filings seeking regulatory approvals to date.

     In June 1999,  also in anticipation of receipt of the BPU's Final Order and
in accordance  with New Jersey's  Electric  Discount and Energy  Competition Act
(Energy  Competition Act), PSE&G petitioned the BPU for an irrevocable  Bondable
Stranded Costs Rate Order (Finance Order) to authorize,  among other things, the
imposition of a non-bypassable transition bond charge on its customers; the sale
of PSE&G's  property right in such charge created by the Energy  Competition Act
to a  bankruptcy-remote  financing entity (SPE); the issuance and sale of $2.525
billion  of  transition  bonds  by  such  entity  in  payment  therefor  and the
application by PSE&G of the transition bond proceeds to retire  outstanding debt
and/or  equity.  Subject  to the  receipt  of the  required  State  and  Federal
approvals,  the receipt of which cannot be assured,  and market  conditions then
prevailing, PSE&G anticipates that such securitization could occur in Fall 1999.

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

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

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

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

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

     At June 30,  1999,  PSE&G had a total of $4.130  billion of Mortgage  Bonds
outstanding,  of which  $3.335  billion are taxable  registered  Mortgage  Bonds
subject to  special  redemption  provisions,  outlined  in Option 3  (Redeemable
Bonds). $780 million are tax-exempt  Pollution Control Bonds and $15 million are
two series of taxable coupon  Mortgage Bonds due 2037 (Coupon  Bonds).  Both the
Pollution Control Bonds and the Coupon Bonds are not subject to Option 3.

     PSE&G has not yet made a final  decision as to the amount and the manner in
which it will retire or redeem its Mortgage Bonds.  Such a decision will be made
on or about  the  time  the  proceeds  from  securitization  and the sale of the
generation-related  assets to PSEG Power are deposited with the Trustee,  on the
basis of market  conditions  and other factors  existing at that time.  However,
based on current  information,  a likely utilization of the options available to
PSE&G, as noted above, could be as follows:

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

          (a)  Tender for all Coupon Bonds;

          (b)  Redeem $126.5 million of Pollution Control Bonds now redeemable;

          (c)  Make open market purchases and/or tender for  approximately  $500
               million to $800 million of Redeemable Bonds; and

          (d)  Reduce PSE&G common and/or  preferred  equity with the balance of
               proceeds.

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

     As previously reported, in anticipation of securitization,  PSEG's Board of
Directors  authorized  the repurchase of up to an aggregate of 20 million shares
of Common Stock in the open  market.  The  repurchased  shares have been held as
treasury stock. At June 30, 1999, PSEG had repurchased  approximately 13 million
shares of Common  Stock at a cost of  approximately  $507  million,  under these
authorizations.  No additional  shares have been repurchased since May 20, 1999.
Market  conditions and the availability of alternative  investments will dictate
if and  when  more  shares  of  Common  Stock  will be  repurchased  under  this
authorization.  Additionally,  PSE&G may also make open market  purchases of its
outstanding preferred stock and Mortgage Bonds pending receipt of securitization
and generation sale proceeds.

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

     Dividend  payments  on Common  Stock  were  $0.54  per  share  and  totaled
approximately  $238  million and $251  million for the six months ended June 30,
1999 and 1998, respectively. Amounts and dates of such dividends on Common Stock
as may be declared  in the future  will  necessarily  be  dependent  upon PSEG's
future earnings,  cash flows,  financial  requirements,  the receipt of dividend
payments from its  subsidiaries  and other factors.  Since 1986,  PSE&G has made
regular cash payments to PSEG in the form of dividends on outstanding  shares of
PSE&G's  common stock.  PSEG has not increased its dividend rates in seven years
in order to retain additional  capital for reinvestment and to reduce its payout
ratio.

     PSE&G paid common stock  dividends of $392 million and $251 million to PSEG
during the six months ended June 30, 1999 and 1998, respectively.  These amounts
were used to fund  PSEG's  Common  Stock  dividends,  and in 1999,  to support a
portion of PSEG's stock repurchase program. Based on its analysis of the Summary
Order,  PSEG  believes  that its dividend  payments can be  maintained  at their
current  level (see Note 2.  Regulatory  Issues of Notes).  In the future,  PSEG
expects to fund its dividend  payments  through cash generated by the operations
of PSE&G and PSEG Power.  Note that due to the competitive  environment in which
PSEG Power will  operate  and due to reduced  revenues at PSE&G  resulting  from
mandated rate reductions,  such dividend payments will be at a greater risk. Due
to the growth in Energy Holdings investment  activities,  no dividends on Energy
Holdings' common stock were paid in the six months ended June 30, 1999 and 1998.

     PSEG and PSE&G have each issued Deferrable Interest Subordinated Debentures
in connection  with the issuance of their  respective tax  deductible  preferred
securities.  If,  and for as long  as,  payments  on those  Deferrable  Interest
Subordinated  Debentures  have been deferred,  or PSEG or PSE&G has defaulted on
the applicable indenture related thereto or its guarantee thereof,  neither PSEG
nor PSE&G may pay any dividends on its common or preferred stock.

     As a result  of the 1992  focused  audit of PSEG's  non-utility  businesses
(Focused  Audit),  the BPU approved a plan which,  among other things,  provides
that:  (1) PSEG will not permit  Energy  Holdings'  non-utility  investments  to
exceed 20% of PSEG's  consolidated  assets without prior notice to the BPU (such
investments  at June 30,  1999 were  approximately  20% of  PSEG's  consolidated
assets);  (2) the PSE&G Board of Directors will provide an annual  certification
that the business and  financing  plans of Energy  Holdings  will not  adversely
affect  PSE&G;  (3) PSEG will (a) limit debt  supported by the minimum net worth
maintenance  agreement between PSEG and PSEG Capital  Corporation (PSEG Capital)
to $650 million and (b) make a good-faith  effort to eliminate such support over
a six to ten year period from April 1993; and (4) Energy Holdings will pay PSE&G
an affiliation fee of up to $2 million a year to be applied by PSE&G through its
LGAC and its LEAC to reduce  utility  rates.  PSEG and Energy  Holdings  and its
subsidiaries  continue to reimburse PSE&G for the costs of all services provided
to them by employees of PSE&G.

     Capital resources and capital  requirements will be affected by the outcome
of the Energy Master Plan Proceedings and the requirements of the Focused Audit.
As a result of the final outcome and the accounting  impacts  resulting from the
deregulation  of the generation of electricity and the unbundling of the utility
business,  PSEG  and  PSE&G do not  believe  that the  Focused  Audit  provision
requiring  notification of the BPU if PSEG's non-utility  investments exceed 20%
of its consolidated  assets remains  appropriate and believe that  modifications
will be required.  However, regulatory oversight by the BPU to ensure that there
is no harm to utility ratepayers from PSEG's non-utility investments is expected
to continue.  PSEG and PSE&G  believe  that these issues will be  satisfactorily
resolved, although no assurances can be given. Inability to achieve satisfactory
resolution of these matters could impact the future  relative size and financing
activities  of Energy  Holdings  and PSEG Power and  accordingly,  their  future
prospects. Consequently, this could have a material adverse impact on PSEG's and
PSE&G's  financial  condition,  results of  operations  or net cash  flows.  For
discussion of the Energy Master Plan Proceedings,  see Note 2. Regulatory Issues
of Notes.

     Energy Holdings

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

     Energy  Holdings  plans to  continue  the  growth of Global  and  Resources
through further investments made by these  subsidiaries.  Energy Technologies is
not expected to be a significant consumer of capital. Investing activity in 1999
will be subject to periodic  review and revision  and may vary  depending on the
opportunities  presented.  During the next five  years,  Energy  Holdings'  will
likely require significant capital to fund its planned growth. Factors affecting
actual expenditures and investments include  availability of suitable investment
opportunities,  market  volatility and local economic  trends.  The  anticipated
sources of funds for such growth  opportunities are additional equity from PSEG,
cash flow from  operations  and external  financings.  A significant  portion of
Global's  growth is  expected  to occur  internationally  due to the current and
anticipated  growth in  electric  capacity  required  in certain  regions of the
world.  Resources  will  continue  its focus on  investments  related  to energy
infrastructure.   Energy   Technologies   is   expected   to  expand   upon  the
energy-related  services  currently  being provided to industrial and commercial
customers.

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

     For a  discussion  of the source of Energy  Holdings'  funds,  see External
Financings.  Over the next several years,  Energy Holdings and its  subsidiaries
will be required to refinance  their maturing debt and provide  additional  debt
and equity  financing for growth.  Any inability to obtain  required  additional
external  capital  or  to  extend  or  replace  maturing  debt  and/or  existing
agreements at current levels and reasonable interest rates may affect PSEG's and
Energy Holdings' financial  condition,  results of operations or net cash flows.
As of June 30,  1999 and 1998,  Energy  Holdings'  embedded  cost of debt of its
finance subsidiaries was approximately 6.6% and 7.9%, respectively.

     Capital Requirements

     PSEG's and PSE&G's capital resources and capital  requirements are affected
by the Energy  Master Plan  Proceedings.  For a discussion  of the impact of the
Energy Master Plan Proceedings on PSEG's and PSE&G's future prospects, including
financial  condition,  results  of  operations  or net cash  flows,  see Note 2.
Regulatory Issues of Notes.

     PSEG

     PSEG has entered into  contracts to purchase  combustion  turbines.  PSEG's
commitment  under these contracts is  approximately  $392 million to be expended
through  December 2001.  Through July 31, 1999,  payments of  approximately  $56
million were made under these contracts.

     PSE&G

     For the six  months  ended  June  30,  1999,  PSE&G  had  plant  additions,
including  capitalized interest and Allowance for Funds Used During Construction
(AFDC),  of $175 million,  a $22 million  decrease from the  corresponding  1998
period. This decrease is primarily due to PSE&G's  capitalization  policy change
for the  electric  generation  portion  of its  business.  See Note 1.  Basis of
Presentation/Summary  of  Significant  Accounting  Policies of Notes for further
discussion regarding the capitalization policy change.

     PSE&G's  regulated  business expects to be able to internally  generate the
majority of its construction and capital  requirements over the next five years,
assuming adequate and timely recovery of costs, as to which no assurances can be
given,  with  the  balance  to be  provided  by  issuance  of  debt  to  replace
maturities.  The unregulated  generation  portion of PSE&G's current  operations
(i.e., PSEG Power) may incur capital  requirements based on its growth strategy.
For discussion of the Energy Master Plan Proceedings and their impacts, see Note
2.  Regulatory  Issues and Note 5.  Commitments  and  Contingent  Liabilities of
Notes.

     Energy Holdings

         Global

     In August 1999,  Global and its partners expect to close project  financing
for a 487 MW gas-fired  combined-cycle  electric  generating  facility in Rades,
Tunisia. Construction is expected to begin in August 1999 and to be completed in
the  Summer  of  2001  at a  total  cost of  approximately  $261  million.  Upon
completion,  the  facility is expected to qualify as a foreign  utility  company
(FUCO).  Global's  equity  investment  for its 35%  interest  is  expected to be
approximately $27 million.

     In July 1999,  Global  entered  into an  agreement  for the sale of its 50%
partnership interest in a 137 MW gas-fired combined-cycle co-generation facility
in Newark,  New Jersey.  Global  expects to close this  transaction in the third
quarter of 1999 and recognize an after-tax gain of approximately $40 million.

     In June 1999,  Global and a partner acquired 90% of a Chilean  distribution
company,  which  also  owns 37% of a  distribution  company  in  Peru,  together
providing  electric and gas service to  approximately  one million  customers in
Chile and Peru.  Global  paid  approximately  $268  million  including  fees and
closing  costs.  The  acquisition  was also  financed  with project debt that is
non-recourse to Global,  Energy Holdings and PSEG, totaling $160 million,  which
is consolidated on Global's balance sheet.

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

     In May 1999,  Global  acquired a 63% equity  interest in a company which is
developing a 525 MW coal-fired electric generating facility to be constructed in
North  Chennai,  India.  Upon scheduled  completion in 2003,  Global will be the
operator of the plant.  The total  project cost is expected to be  approximately
$633  million,   of  which  Global's   maximum  equity   investment,   including
contingencies,  is expected to be approximately $180 million.  Financial closure
is expected in the Fall of 1999.

     In April 1999,  Global and a partner entered into a joint venture agreement
to develop,  construct and operate a 1,000 MW gas-fired  combined-cycle electric
generating  facility in Guadalupe County in south central Texas. The facility is
expected  to be  operational  in 2001  and is  expected  to  qualify  as an EWG.
Global's maximum equity investment is expected to be approximately  $193 million
including loans and guarantees.

     Also in April 1999, Global and a partner announced the formation of a joint
venture to construct and operate three gas-fired electric generating  facilities
with total installed capacity of 200 MW and associated  distribution  systems to
serve, under contract,  industrial customers in Venezuela. Global expects two of
these facilities, which are in construction, to be operational in late 1999 with
the third  facility  expected to be operational in early 2001. The total cost of
these  facilities  is expected to be  approximately  $140  million and  Global's
equity investment is expected to be approximately $70 million.

         Resources

     In  June  1999,  Resources  sold  its  ownership  interest  in an  electric
generating  facility in  California  that was  subject to a leveraged  lease and
recognized an after-tax gain of $9 million.  Resources  received proceeds of $58
million on July 1, 1999 related to this sale.

     In  1999,  Resources  has  invested  approximately  $137  million  in three
leveraged lease  transactions of  energy-related  assets:  two gas  distribution
networks  in the  Netherlands  and a  liquefied  natural gas plant in the United
States.

     In 1999, Resources,  through its investment in a leveraged buyout fund, has
received cash of $59 million  resulting in an after-tax gain of $12 million from
the fund's sale of a portion of its equity  interests.  In the third  quarter of
1999,   Resources   expects  to  receive   additional   distributions   totaling
approximately $40 million from announced liquidations in the fund.


<PAGE>
        Energy Technologies

     During 1999,  Energy  Technologies  acquired five  mechanical  and building
service  contractors  in New  Jersey  and  Rhode  Island  for a  total  cost  of
approximately  $43 million  including debt assumed.  The latest  acquisition was
completed in July 1999.

External Financings

     The changes in the utility industry are attracting  increased  attention of
bond rating  agencies  which  regularly  assess  business and financial  matters
including  how  utility  companies  are  meeting   competition  and  competitive
initiatives,  especially as they affect potential  stranded costs.  Bond ratings
affect the cost of capital and the ability to obtain external  financing.  Given
the changes in the industry and the anticipated use of securitization, attention
and scrutiny of PSEG's and PSE&G's  competitive  strategies  by rating  agencies
will likely  continue.  These  changes  could affect the bond  ratings,  cost of
capital and market prices of the respective securities of both PSEG and PSE&G.

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

     PSEG

     At June 30,  1999,  PSEG had a  committed  $150  million  revolving  credit
facility which expires in December 2002. At June 30, 1999,  PSEG had $18 million
outstanding  under this revolving credit facility.  At June 30, 1999, PSEG had a
$25  million  uncommitted  line of credit  with a bank with no debt  outstanding
under this line of credit.

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

     PSE&G

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

     Under its Mortgage,  PSE&G may issue new First and Refunding Mortgage Bonds
against  previous  additions and  improvements  and/or  retired  Mortgage  Bonds
provided  that its ratio of earnings to fixed  charges  calculated in accordance
with its  Mortgage  is at least 2:1. As of June 30,  1999,  the  Mortgage  would
permit up to $3.8 billion aggregate principal amount of new Mortgage Bonds to be
issued against previous additions and improvements,  the level of which could be
impacted by the actions  ultimately taken in connection with  securitization and
the sale of  generation-related  assets to PSEG Power. At June 30, 1999, PSE&G's
Mortgage  coverage  ratio was  4.282:1.  PSE&G  expects to apply for and receive
necessary BPU  authorization  for external  financings to meet its  requirements
over the next five years, as needed. For a related discussion, see Liquidity and
Capital  Resources  and  Generation-Related  Asset Sale to PSEG Power of Note 2.
Regulatory Issues of Notes.

     In May 1999,  PSE&G  purchased in the open market $18.5  million  principal
amount of its 6 3/4% Series VV Mortgage Bonds due January 1, 2016. The remaining
principal amount of the 6 3/4% Series VV Bonds is $181.5 million.

     To provide  liquidity for its commercial  paper program,  PSE&G has an $850
million  revolving  credit  agreement  expiring in June 2000 and a $650  million
revolving  credit  agreement  expiring  in June 2002 with a group of  commercial
banks,  which provide for borrowings of up to one year. On June 30, 1999,  there
were no borrowings outstanding under these credit agreements.

     The BPU has authorized  PSE&G to issue and have outstanding at any one time
through  January 4, 2000, not more than $1.5 billion of short-term  obligations,
consisting of commercial  paper and other  unsecured  borrowings  from banks and
other  lenders.  On June 30,  1999,  PSE&G had $876 million of  short-term  debt
outstanding,  including $65 million  borrowed against its uncommitted bank lines
of credit which lines of credit totaled $100 million at that date.

     PSE&G Fuel Corporation (Fuelco) has a $125 million commercial paper program
to finance a 42.49% share of Peach Bottom  Atomic Power Station  (Peach  Bottom)
nuclear fuel, supported by a $125 million revolving credit facility with a group
of banks,  which  expires on June 28, 2001.  PSE&G has  guaranteed  repayment of
Fuelco's respective  obligations under this program. As of June 30, 1999, Fuelco
had commercial paper of $64 million outstanding.

     Energy Holdings

     The  availability  and cost of  external  capital  could be affected by the
performance  of Energy  Holdings  and PSE&G and by the actions  taken by the BPU
with regard to the Energy Master Plan Proceedings as well as by rating agencies'
views  of  such  matters  including  the  degree  of  structural  or  regulatory
separation between the utility and its non-utility  affiliates and the potential
impact of  affiliate  ratings  on the  consolidated  credit  quality of PSEG and
PSE&G.

     The minimum net worth  maintenance  agreement between PSEG Capital and PSEG
provides, among other things, that PSEG (1) maintain its ownership,  directly or
indirectly,  of all  outstanding  common stock of PSEG  Capital,  (2) cause PSEG
Capital to have at all times a positive  tangible net worth of at least $100,000
and (3) make sufficient  contributions of liquid assets to PSEG Capital in order
to permit it to pay its debt  obligations.  In 1993, PSEG agreed with the BPU to
make a good-faith effort to eliminate such PSEG support within six to ten years.
Effective  January 31, 1995, PSEG Capital  notified the BPU of its intention not
to have more than $650 million of debt outstanding at any time. PSEG Capital has
a  $650  million   Medium  Term  Note  (MTN)  program  which  provides  for  the
private-placement of MTNs without registration.

     PSEG  Capital's  assets  consist  principally of demand notes of Global and
Resources.   Intercompany  borrowing  rates  are  established  based  upon  PSEG
Capital's  cost of funds.  In February and June 1999,  PSEG Capital  issued $252
million of 6.25% MTNs due May 2003 and $35  million of 6.73% MTNs due June 2001,
respectively.  The proceeds were used to repay $100 million of PSEG Capital MTNs
which  matured in February 1999 and $35 million which matured in May 1999 and to
reduce Energy  Holdings'  short-term  debt.  At June 30, 1999,  PSEG Capital had
total debt outstanding of $650 million,  all of which was comprised of MTNs with
maturities  between  1999 and 2003.  Energy  Holdings  believes it is capable of
eliminating  PSEG  support of PSEG Capital debt within the time period set forth
in the Focused Audit.

     In May 1999, Energy Holdings closed on two separate senior revolving credit
facilities,  with a syndicate of banks, a $165 million, 364 day revolving credit
facility and a $495  million,  five year  revolving  credit and letter of credit
facility.  These facilities  replaced existing  facilities at Enterprise Capital
Funding  Corporation  (Funding),  a  financing  subsidiary  of Energy  Holdings,
totaling $450 million.  Effective May 1999, Funding is no longer being used as a
financing vehicle for Energy Holdings.

     Financial  covenants  contained in this new  facility  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.  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,
pretax cash  distributions  from all asset liquidations and equity capital from
PSEG to the extent not used to fund investing activity.  In addition,  the ratio
of consolidated recourse indebtedness to recourse capitalization,  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  supported by PSEG. As of June 30, 1999, the latest 12 months CFADS
was 11.5x and the ratio of recourse indebtedness to recourse  capitalization was
0.20 to 1.00.

     Compliance  with  applicable  financial  covenants  will depend upon future
financial  position  and  levels  of  earnings  and  cash  flow,  as to which no
assurances can be given. In addition,  Energy  Holdings'  ability to continue to
grow its  business  will  depend to a  significant  degree on PSEG's  ability to
access  capital  and Energy  Holdings'  ability to obtain  additional  financing
beyond  current  levels.  At June 30,  1999,  Energy  Holdings  had $330 million
outstanding under existing credit facilities totaling $660 million.

     In June 1999,  project financing,  which is non-recourse to Global,  Energy
Holdings and PSEG, for Global's equity investment in two Argentine  distribution
companies was refinanced.  Approximately  $67 million of an $87 million loan was
refinanced  for a total of one year maturing in June 2000. The original loan was
paid  down  with  $11  million  of  operating   cash  flow  from  the  Argentine
distribution  companies and  approximately  $9 million from Global.  An interest
rate swap was entered into which effectively  converts a portion of the floating
rate obligation into fixed rate  obligations.  The interest rate differential to
be  received  or paid  under  the  agreement  is  recorded  over the life of the
agreement as an adjustment to interest expense.

     In July 1999, an Argentine  distribution company, in which Global has a 33%
interest,  refinanced a portion of project debt that is  non-recourse to Global,
Energy Holdings and PSEG. The arrangement  required Global to make an additional
equity  investment  of  approximately  $25  million  to repay a  portion  of the
original loan. The new loan is floating rate for a term of three years.

Foreign Operations

     In accordance with their growth strategies,  Global and Resources have made
approximately  $1.2 billion and $0.8  billion,  respectively,  of  international
investments.  As of June 30, 1999, these  investments  represented 11% of PSEG's
consolidated  assets and  contributed  8% of  consolidated  revenues for the six
months ended June 30, 1999. Resources'  international  investments are primarily
leveraged leases of assets located in Australia,  the Netherlands and the United
Kingdom with associated revenues denominated in U.S.dollars and, therefore,  not
subject to foreign currency risk.

     Global's international  investments are primarily in projects that generate
or distribute electricity in Argentina, Brazil, Chile, China and Peru. Investing
in foreign countries involves certain risks.  Economic conditions that result in
higher  comparative  rates of inflation in foreign  countries  likely  result in
declining  values  in  such  countries'  currencies.   As  currencies  fluctuate
vis-a-vis  the  U.S.  dollar,  there  is  a  corresponding  change  in  Global's
investment  value in terms of the U.S.  dollar.  Such change is  reflected as an
increase  or  decrease  in  comprehensive   income,  a  separate   component  of
stockholders' equity. Net foreign currency  devaluations,  $166 million of which
was caused by the  Brazilian  Real,  have reduced the reported  amount of PSEG's
total  stockholders'  equity by $170  million as of June 30,  1999.  For further
discussion of foreign  currency risk and the  devaluation of the Brazilian Real,
see Note 6.Financial Instruments and Risk Management of Notes.

Competitive Environment

     Generation

     PSE&G will be required to provide  basic  generation  service (BGS) for all
customers who do not elect a different service provider. PSEG Power will provide
PSE&G with the energy and capacity required to meet its BGS and OTRA obligations
under the Summary Order.  PSEG Power,  through its wholly owned  subsidiary PSEG
ER&T,  will provide such energy and capacity under the BGS contract rate for the
first three years of the transition  period,  beginning August 1, 1999. BGS will
be competitively bid for the fourth year and annually thereafter. PSEG ER&T will
obtain the energy and capacity to supply PSE&G's BGS and OTRA  requirements from
its  affiliates,  PSEG Nuclear and PSEG Fossil,  supplemented  as necessary with
energy purchased in the competitive  wholesale  electricity market. PSEG Power's
earnings will be exposed to the risks of the competitive  wholesale  electricity
market to the extent that PSEG Power has to purchase  energy and/or  capacity to
meet its BGS and OTRA  obligations at market prices which approach or exceed the
BGS contract rate (see PJM and Item 3. Qualitative and Quantitative  Disclosures
About Market Risk). PSEG ER&T's policy will be to use derivatives to manage this
risk consistent with its business plans and prudent  practices.  PSEG Power will
also participate in the competitive wholesale electricity market for other items
such as energy,  capacity and ancillary services.  For further discussion of the
sale of generation-related assets, see Note 2. Regulatory Issues of Notes.

     State Regulatory Matters

     For discussions of the Energy Master Plan Proceedings,  Gas Unbundling, the
LEAC and other rate matters, see Note 2. Regulatory Issues of Notes.

     PJM Interconnection, LLC (PJM)

     PSE&G is a member of PJM and  participates on the PJM Members  Committee as
part of its  governance  structure.  PSE&G is also a member of the  Mid-Atlantic
Area  Reliability  Council which provides for review and evaluation of plans for
generation  and  transmission  facilities  and  other  matters  relevant  to the
reliability of the bulk electric supply systems in the Mid-Atlantic area.

     On July 6, 1999, both PSE&G and PJM broke all-time  demand  records.  PSE&G
customer  demand  reached more than 9,800 MW,  surpassing  PSE&G's  prior energy
demand record set on July 17, 1997 of 9,548 MW. PJM also set an all-time high of
51,550 MW.

     As of April 1, 1999,  FERC lifted the  requirement  that bids for  electric
energy offered for sale in the PJM interchange  energy market from utility-owned
generation  located  within the PJM control area not exceed the variable cost of
producing such energy.  FERC found that no single market  participant can unduly
influence market prices.  Additionally, a market monitoring function is provided
by the PJM Independent System Operator (ISO). Transactions that are bid into the
PJM pool are now capped at $1,000 per  megawatt  hour.  The  current  PJM market
structure,  which  includes this price cap on offers into the spot market and an
installed capacity  obligation,  is being studied by a PJM user group and may be
modified in the future.

     All  power  providers  are paid the  locational  marginal  price  (LMP) set
through  power  providers'  bids.  Furthermore,  in the event that all available
generation  within the PJM control area is insufficient  to satisfy demand,  PJM
may institute  emergency  purchases  from  adjoining  regions.  The cost of such
emergency  purchases  is not  subject to any PJM price  cap.  Since the LEAC was
discontinued  as of August 1, 1999,  to the extent  PSEG's  generation  business
produces  less  energy  than  required  to  supply  PSE&G's  BGS  customers  and
off-tariff  rate  agreement  customers,  the lifting of such caps could  present
additional  risks with  respect to the  difference  between  the LMP and the BGS
rate. For further  discussion of price  volatility of  electricity,  see Item 3.
Qualitative and Quantitative Disclosures About Market Risk.

     On May 12,  1999,  FERC  issued a Notice of Proposed  Rulemaking  regarding
Regional  Transmission  Organizations (RTO). Although PJM is consistent with the
proposed  requirements for a RTO, the proposed rulemaking,  which PSE&G believes
is in conflict  with the Federal  Power Act,  may  restrict  PSE&G's  ability to
recover its  transmission  related revenue  requirements.  Also,  under some RTO
structures,  ownership of  transmission  assets would be limited to a de minimus
level. Both of these possible  restrictions could have a material adverse impact
on PSEG's and PSE&G's  financial  condition,  results of  operations or net cash
flows.  PSE&G expects to actively  participate in this rulemaking  proceeding to
advocate positions favorable to PSE&G,  although no assurances on the outcome of
these proceedings can be given.

     On April 13, 1999,  FERC approved PJM's market  enhancements  which provide
the ability to auction residual and released Fixed  Transmission  Rights (FTRs).
An FTR is a financial  instrument which under certain  circumstances  hedges the
holder against  transmission  congestion  charges.  The PJM ISO administers this
system.  The FTR  auction  market  has not had a  material  impact on PSEG's and
PSE&G's financial condition, results of operations or net cash flows.

Year 2000 Readiness Disclosure

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

     Year 2000 Readiness Status

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

     PSEG and PSE&G have  completed  required Year 2000  readiness work for more
than 99% of their  critical  systems as of June 30,  1999,  except  for  certain
systems at PSE&G's nuclear facilities. The majority of these system upgrades are
scheduled beyond July 1999 in order to coincide with planned  refueling  outages
at these facilities.  Certain systems at the Hope Creek Generating Station (Hope
Creek) and the Salem Generating  Station Unit 2 (Salem 2) were remediated during
their respective  first quarter 1999 and second quarter 1999 refueling  outages.
The remaining nuclear systems will be remediated before or during Salem Unit 1's
(Salem 1) planned  refueling  outage in the third  quarter 1999 with  completion
expected by the end of November  1999.  By the end of 1999, a majority of PSEG's
and PSE&G's  non-critical  systems are also  expected to be Year 2000 ready with
the remainder of such non-critical systems to be ready in 2000.


<PAGE>


     Energy Holdings and its subsidiaries have essentially  completed  Inventory
on all systems impacted by Year 2000 readiness issues and substantial Assessment
work has been completed on such systems.  Remediation/Testing  is expected to be
completed in 1999 on all critical systems and a majority of non-critical systems
and in 2000 on remaining non-critical systems. Energy Holdings (parent company),
Energy  Technologies  and Resources have completed  required Year 2000 readiness
work for 100% of their critical  systems and such systems are Year 2000 ready as
of June 30, 1999. Global has completed required Year 2000 readiness work for 90%
of its critical systems through June 1999.

     As previously reported, on May 11, 1998, the NRC issued a Generic Letter to
all nuclear facilities requiring submission of a written response within 90 days
of that date  which  addressed  the  status of their  Year 2000  programs.  This
response  was  required  to address the  facility's  project  scope,  assessment
process, plans for corrective actions,  quality assurance measures,  contingency
plans and  regulatory  compliance.  Additionally,  the Generic  Letter  required
submission of a written  response upon  completion of the  facility's  Year 2000
programs  or no later than July 1, 1999  confirming  their  Year 2000  readiness
status and defining when their  facilities would be Year 2000 ready. On July 23,
1998, PSE&G provided its written response to the first  requirement noted above,
outlining for the NRC its nuclear facility Year 2000 program.  In this response,
PSE&G  indicated  that  planned   implementation   will  allow  PSE&G's  nuclear
facilities to be Year 2000 ready and in compliance with the terms and conditions
of their  licenses and NRC regulation by January 1, 2000.  Additionally,  during
the week of  October  26,  1998,  the NRC  conducted  an  audit  of the  nuclear
operations'  Hope Creek Year 2000  Project.  The audit  report  states  that the
nuclear operations' Year 2000 project plan is comprehensive and is receiving the
appropriate management support and oversight.

     On June 30,  1999,  PSE&G  provided  its  written  response  to the  second
requirement of the NRC Generic  Letter,  noted above.  In this  response,  PSE&G
reaffirmed its plan to have all mission critical systems ready and in compliance
with the terms and  conditions of their license and NRC regulation by January 1,
2000.  PSE&G has  identified  no Year 2000  problem that could affect the proper
functioning of any nuclear safety system. All safety-related  systems that could
have a Year 2000  issue have  already  been  identified  and,  where  necessary,
corrected  and tested.  PSE&G  advised the NRC that Salem and Hope Creek will be
fully Year 2000 ready once scheduled work on eleven non-safety  mission critical
systems is completed by November  1999.  PSE&G will continue to monitor the Year
2000 issue to ensure that it is prepared for any issues, internal or external to
the  plants,  which  could  impact  PSE&G.  Additionally,  PSE&G  has  developed
contingency  plans to address issues that may arise during the December 31, 1999
through  January 1, 2000  rollover.  Additionally,  PECO informed  PSE&G that it
provided  the  required  July 1999  response  to the NRC  confirming  that Peach
Bottom's  Year 2000  effort  is on  schedule  to also be Year 2000  ready and in
compliance  with the terms and conditions of their license and NRC regulation by
January 1, 2000.

     PSEG,  PSE&G and  their  subsidiaries  are  continuing  to work with  their
supplier  base to assess the Year 2000  readiness  status of vendors who provide
critical  materials and services (key vendors).  PSEG and PSE&G have indications
from  more  than 95% of their  key  vendors  that  they are  making or have made
preparations  for the Year 2000. To date,  all key vendors  responding  indicate
that their business operations will be ready.  Global's vendors are not included
in that statistic;  however,  Global's key vendors have also indicated that they
expect to be able to meet Year 2000 requirements.  Strategies are being put into
place to minimize the impact of potential  vendor failures on PSEG's and PSE&G's
operations.  However,  failure of key vendors to be Year 2000 ready could result
in  material  adverse  impacts  to  PSEG's  and  PSE&G's  operations,  financial
condition, results of operations or net cash flows.

     Year 2000 Costs

     For a discussion of Year 2000 Costs, see Note 5. Commitments and Contingent
Liabilities of Notes.

<PAGE>


     Year 2000 Risks

     PSEG and PSE&G have identified some scenarios and will continue  working to
determine the most  reasonably  likely,  worst case scenarios  arising from Year
2000 readiness  issues.  PSEG and PSE&G see "most reasonably  likely" and "worst
case" scenarios as two ends of a continuum of possible events:

     o    Most reasonably likely scenarios include operating  conditions similar
          to those  experienced  routinely for electric and gas utilities during
          that time of year.  Service  disruptions  can,  and most likely  will,
          occur during critical periods because of automobile accidents,  animal
          intervention  in   transformers,   etc.  Because  of  increased  media
          attention, some of these incidents may be misinterpreted as being Year
          2000 related.

     o    At the other end of the  continuum,  PSEG and PSE&G are  planning  for
          both low demand and increased volatility in demand because of customer
          actions.  It is possible that many  customers will revert to their own
          back-up generation during critical Year 2000 periods (primarily around
          December 31, 1999 through January 1, 2000). Their individual decisions
          could aggregate to unpredictable  demand patterns.  PSEG and PSE&G are
          preparing  for this  scenario by having their most "agile"  generating
          units (typically peaking units) in a high state of readiness.

     Energy  Holdings  has  identified  some  scenarios  and  will  continue  to
determine the most  reasonably  likely,  worst case scenarios  arising from Year
2000 readiness issues. Global's most reasonably likely, worst case scenarios may
include  potential  external  disturbances  of its  systems  including,  but not
limited to,  fuel supply or  transmission  interruptions  or  telecommunications
systems outages. Global's contingency plans are being developed to address these
scenarios.

     Further  analysis  will  depend,  in part,  on the  results of  information
currently  being  obtained from key vendors as to their Year 2000  readiness and
the readiness of PJM and trading partners, among others.

     PSEG and PSE&G have no outstanding litigation relating to Year 2000 issues.
The likelihood of future Year 2000 related  liabilities  cannot be determined at
this  time.  PSEG and  PSE&G  have  been  subject  to the  following  Year  2000
regulatory action:

     o    The BPU has issued a specific  order  requiring  a number of  customer
          related disclosures, including bill inserts, establishment of an "800"
          number, and others.

     o    The BPU has  issued an  interim  report  assessing  Year 2000  program
          progress by PSE&G up to June 15, 1999.  The report  indicated that the
          BPU agreed with the overall  status of the project,  and that based on
          reported  progress,  the Year 2000 program should come to a successful
          termination.

     o    On a general level, the BPU has required PSEG and PSE&G to participate
          in periodic status meetings with other utilities.

     Additionally,  Energy  Holdings  is  subject  to  international  Year  2000
regulatory initiatives which include:

     o    The  Argentine   Secretariat   of  Energy  has  enacted  a  resolution
          establishing certain guidelines and due dates in relation to Year 2000
          compliance. Lack of compliance with the guidelines may cause sanctions
          to be imposed.

     o    The Brazil  Ministry  of Justice  has  issued a ruling  requiring  all
          Brazilian  companies to indemnify consumers for damages resulting from
          Year 2000 non-compliance.

     Contingency Plans

     PSEG and  PSE&G  have  adopted  the  North  American  Electric  Reliability
Council's (NERC) timetable,  guidelines and detailed requirements for developing
these  contingency  plans.  The planning  process is an iterative  one. PSEG and
PSE&G have completed their preliminary  contingency plans. The second version of
their contingency  plans was completed by June 30, 1999,  consistent with NERC's
timetable.  PSEG and PSE&G conducted a limited scope internal drill on March 19,
1999. The scope of the drill involved using alternate communication capabilities
(i.e.,  radio) to monitor electric generation and transmission should the public
switched  phone  network  become   unavailable.   The  drill  showed  the  basic
feasibility  of   preliminary   plans  and  it  identified   needed   procedural
enhancements.

     On   April   9,   1999,   PSEG   and   PSE&G   participated   in   a   NERC
industry-coordinated  Year 2000 readiness  drill. It involved a scope similar to
the March 19,  1999 drill plus the  involvement  of PJM.  The drill had  similar
results in that it showed the basic feasibility of using the radio system and it
identified some needed procedural  enhancements.  Going forward,  PSEG and PSE&G
will build on the results of these  exercises  to  participate  in the  NERC-led
drill  on  September  9,  1999,  may  conduct  other  drills  and may use  other
communications  capabilities such as  satellite-based  telephones.  Further plan
updates will be evaluated, as needed, from September 1999 through January 2000.

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

Environmental Costs

     For discussion of potential  environmental and other remediation costs, see
Note 5. Commitments and Contingent Liabilities of Notes.

Accounting Issues

     For a discussion of significant  accounting matters including SFAS 71; SFAS
121;  Emerging  Issues Task Force (EITF) Issue No.  97-4,  "Deregulation  of the
Pricing of Electricity-Issues  Related to the Application of FASB Statements No.
71 and No. 101" (EITF 97-4); SFAS 101, "Regulated Enterprises-Accounting for the
Discontinuation  of Application of FASB Statement No. 71" (SFAS 101); changes in
capitalization,  depreciation and asset retirement policies;  discontinuation of
deferred accounting for fuel revenues and expenses; EITF 98-10,  "Accounting for
Energy  Trading and Risk  Management  Activities"  (EITF  98-10);  Statement  of
Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal  Use" (SOP 98-1) and SOP 98-5,  "Reporting on the Costs of
Start-Up  Activities" (SOP 98-5), see Note 1. Basis of  Presentation/Summary  of
Significant Accounting Policies of Notes.

Impact of New Accounting Pronouncements

     For a discussion of the impact of new accounting  pronouncements  including
SFAS 133,  "Accounting for Derivative  Instruments and Hedging Activities" (SFAS
133) and SFAS 137, "Accounting for Derivative Instruments and Hedging Activities
- Deferral of the Effective Date of FASB Statement No. 133" (SFAS 137), see Note
9. Accounting Matters of Notes.

<PAGE>


PSE&G

     The information  required by this item is incorporated  herein by reference
to the  following  portions of PSEG's  Management's  Discussion  and Analysis of
Financial  Condition and Results of Operations,  insofar as they relate to PSE&G
and its  subsidiaries:  Overview  and Future  Outlook;  Results  of  Operations;
Liquidity  and  Capital  Resources;  External  Financings;  Foreign  Operations;
Competitive  Environment;  Year 2000 Readiness Disclosure;  Environmental Costs;
Accounting Issues and Impact of New Accounting Pronouncements.


                      ITEM 3. QUALITATIVE AND QUANTITATIVE
                          DISCLOSURES ABOUT MARKET RISK

     The market risk inherent in PSEG's market risk  sensitive  instruments  and
positions  is the  potential  loss  arising  from  adverse  changes in commodity
prices,  equity security prices,  interest rates and foreign  currency  exchange
rates as discussed  below.  PSEG's policy is to use  derivatives  to manage risk
consistent  with its  business  plans  and  prudent  practices.  PSEG has a Risk
Management  Committee  made up of  executive  officers and an  independent  risk
oversight function to ensure compliance with corporate policies and prudent risk
management practices.

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

     Commodity Instruments--PSE&G

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

     Prior to August 1, 1999, PSE&G had levelized energy  adjustment  clauses in
its rate structure in place for both electricity  (LEAC) and natural gas (LGAC).
These clauses were  established to minimize the impact of major  commodity price
swings on customer  prices.  They also  reduced the risk to PSE&G by  permitting
PSE&G to defer price increases and decreases until regulatory treatment could be
determined.  In accordance  with the BPU's Summary  Order,  effective  August 1,
1999,  the  LEAC was  discontinued  and the full  costs of  electricity  will be
recorded as an expense.  For further  discussion,  see Note 2. Regulatory Issues
and Note 4.  Regulatory  Assets and  Liabilities  of Notes and Net  Interchanged
Power and Fuel for Electric  Generation of Item 2.  Management's  Discussion and
Analysis of Financial Condition and Results of Operations (MD&A). For discussion
of  changes  in the  pricing  of  electric  energy  offered  for sale in the PJM
interchange energy market, see PJM Interconnection, LLC (PJM) of MD&A.

     PSE&G uses a value-at-risk model to assess the market risk of its commodity
business.  This model includes fixed price sales commitments,  owned generation,
native  load   requirements,   physical   contracts  and  financial   derivative
instruments.   Value-at-risk  represents  the  potential  gains  or  losses  for
instruments or portfolios due to changes in market factors, for a specified time
period and confidence level. PSE&G estimates  value-at-risk across its commodity
business using a model with historical volatilities and correlations.

     During June 6 and 7, 1999,  the Northeast  was faced with a record  setting
heat wave which drove the PJM spot prices up as high as $850 per MWH. During the
July 4, 1999  weekend,  records  were  again set when  PSE&G's  customer  demand
reached more than 9,800 MW due to another heat wave. Prices during July 5 and 6,
1999 hit  highs  of $920 per MWH.  Note  that in the  future,  the full  cost of
electricity  will be recorded as an expense  due to the  discontinuation  of the
LEAC, as previously discussed.

     The measured  value-at-risk using a  variance/co-variance  model with a 95%
confidence  level  and  assuming  a one  week  horizon  at  June  30,  1999  was
approximately  $11  million,  compared  to the  December  31,  1998  level of $4
million.  This  increase  is  mainly  due to the  increase  in price  volatility
illustrated  above.  PSE&G's  calculated  value-at-risk  exposure  represents an
estimate of potential  net losses that could be  recognized  on its portfolio of
physical and financial  derivative  instruments assuming historical movements in
future market rates. These estimates, however, are not necessarily indicative of
actual results which may occur, since actual future gains and losses will differ
from those historical  estimates based upon actual fluctuations in market rates,
operating exposures, and the timing thereof, and changes in PSE&G's portfolio of
hedging instruments during the year.

     Commodity Instruments--Energy Holdings

     For  discussion  of Energy  Holdings'  commodity  instruments,  see Note 6.
Financial Instruments and Risk Management of Notes.

     Equity Securities--Energy Holdings

     For  discussion  of  equity  securities  of  Energy  Holdings,  see Note 6.
Financial Instruments and Risk Management of Notes.

     Foreign Currencies--Energy Holdings

     For discussion of foreign currency risks, see Note 6. Financial Instruments
and Risk Management of Notes.

     Interest Rates--PSE&G

     For  discussion  of  interest  rates  of  PSE&G,   see  Note  6.  Financial
Instruments and Risk Management of Notes.

     Interest Rates--Energy Holdings

     For discussion of interest rates of Energy Holdings,  see Note 6. Financial
Instruments and Risk Management of Notes.


                           PART II. OTHER INFORMATION
                            ITEM 1. LEGAL PROCEEDINGS

     Certain  information  reported  under  Item 3 of Part I of  Public  Service
Enterprise  Group  Incorporated's  (PSEG) and Public  Service  Electric  and Gas
Company's  (PSE&G) 1998 Annual Report on Form 10-K, the Quarterly Report on Form
10-Q for the Quarter  ended  March 31, 1999 and the Current  Reports on Form 8-K
filed March 18, 1999, April 26, 1999 and July 21, 1999 is updated below.
<PAGE>


(1)  Form 10-K, Page 29. As previously  disclosed,  by complaints  filed in 1995
     and 1996,  shareholder  derivative  actions on behalf of PSEG  shareholders
     were  commenced by purported  shareholders  against  certain  directors and
     officers.  The four  complaints  generally  sought  recovery of damages for
     alleged losses  purportedly  arising out of PSE&G's  operation of the Salem
     and Hope Creek  generating  stations,  together  with certain other relief,
     including  removal  of  certain  executive  officers  of PSE&G and PSEG and
     certain changes in the composition of PSEG's Board of Directors.  By letter
     dated July 9, 1999,  the Court  advised  the  parties in the actions of its
     determination  to  grant  the  defendants'  motion  for  summary  judgement
     dismissing all four  derivative  actions.  A written order has not yet been
     issued.   Public  Service   Enterprise  Group  Inc.  by  G.  E.  Stricklin,
     derivatively  v. E. James Ferland,  et. al.,  Superior Court of New Jersey,
     Chancery Division,  Essex County, Docket No. C-160-96.  Dr. Steven Fink and
     Dr. David  Friedman,  P.C.  Profit Sharing Plan,  derivatively,  et. al. v.
     Lawrence  R.  Codey,  et.  al.,  Superior  Court  of New  Jersey,  Chancery
     Division,  Essex  County,  Docket No.  C-65-96.  A. Harold Datz Pension and
     Profit Sharing Plan  derivatively,  et. al., v. Lawrence R. Codey, et. al.,
     Superior Court of New Jersey,  Chancery Division,  Essex County, Docket No.
     C-68-96.  Tillie  Greenberg,  derivatively  v. E. James  Ferland,  et. al.,
     Superior Court of New Jersey,  Chancery Division,  Essex County, Docket No.
     C-188-96.

(2)  March 31, 1999 Form 10-Q, Page 38. As previously disclosed, a complaint was
     received by PSEG naming as defendants  the current  directors of PSEG,  and
     naming PSEG as a nominal defendant,  from the same purported shareholder of
     PSEG who instituted the December 1995  shareholder  derivative suit and who
     instituted  the June 1998 proxy  litigation,  alleging  that the 1999 proxy
     statement  provided to  shareholders  of PSEG was false and  misleading  by
     reason,  among other things,  of failure to disclose certain material facts
     relating  to  (i)  the  controls  over  and  oversight  of  PSEG's  nuclear
     operations,  (ii) the condition of problems at and reserves with respect to
     PSEG's  nuclear  operations  and (iii) the  demand  letter  and  derivative
     litigation  described  above.  The  complaint  seeks to have the 1999 proxy
     statement  declared to be in violation of law, to set aside the election of
     directors  of PSEG and the  ratification  of the  selection  of  Deloitte &
     Touche LLP as PSEG's auditors at the 1999 annual shareholder  meeting,  and
     to require PSEG to conduct a special meeting of shareholders  providing for
     election of directors  following timely  dissemination of a proxy statement
     approved by the Court hearing the matter,  which should include as nominees
     for election as directors persons having no previous relationship with PSEG
     or the current directors, and other relief. PSEG cannot predict the outcome
     of this  matter.  A  motion  to  dismiss  the  complaint  was  filed by the
     defendants on June 28, 1999.  On August 2, 1999,  the Court issued an order
     granting the defendants'  motion to dismiss the complaint.  G. E. Stricklin
     v. I.  Lerner,  et.  al.,  United  States  District  Court for the  Eastern
     District of Pennsylvania. Civil Action No. 99-1950.

     In addition, see the following at the pages hereof indicated:

     (1)  Pages 10 through 16, 30 through 31 and 37.  Proceedings before the BPU
          in the  matter  of the  Energy  Master  Plan  Phase II  Proceeding  to
          investigate  the future  structure  of the  Electric  Power  Industry,
          Docket Nos. EX94120585Y, EO97070461, EO97070462 and EO97070463.

     (2)  Page 14.  Proceedings  before the BPU in the Matter of the  Filings of
          the  Comprehensive  Resource  Analysis of Energy Programs  pursuant to
          Section 12 of the  Electric  Discount  and Energy  Competition  Act of
          1999,  Docket Nos.  EX99050347,  EO99050348,  EO99050349,  EO99050350,
          EO99050351, EO99050352, EO99050353 and EO99050354.

     (3)  Page 14.  Proceeding  before the BPU approving  Interim  Licensing and
          Registration Standards, Docket No. EX99030182.

     (4)  Page 15.  Proceeding  before the BPU  Establishing  Procedures for gas
          unbundling, Docket Nos. GX99030121, GO99030122, GO99030123, GO99030124
          and GO99030125.

     (5)  Page 21.  Investigation by the U.S.  Environmental  Protection  Agency
          (EPA) regarding the Passaic River site.

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


                            ITEM 5. OTHER INFORMATION

     Certain  information  reported  under PSEG's and PSE&G's 1998 Annual Report
and March 31, 1999 Quarterly Report to the SEC is updated below.  References are
to the related pages of the Form 10-K and the  Quarterly  Report for the quarter
ended March 31, 1999 as printed and distributed.

Impact of Drought Emergency

     New Matter.  Continuing dry weather in the  northeastern  United States has
caused a state of water  emergency  to be  declared  in New  Jersey on August 5,
1999.  The  operation  of  the  condenser  cooling  water  systems  for  PSE&G's
generating  stations  should  not be  adversely  affected  due  to  the  drought
emergency.  Only units located in the Delaware River Basin (Mercer,  Burlington,
Hope Creek and Salem) are on a fresh  water  body where  public  drinking  water
supplies could be potentially  impacted by an upriver movement of the salt line.
The Merrill Creek Reservoir was built by seven electric utility companies in the
Delaware River Basin,  including  PSE&G,  so that power  reduction  would not be
necessary during drought warnings or drought emergency  conditions.  The Merrill
Creek Reservoir  releases water during low flow conditions to offset consumptive
water use from the  operation  of the  cooling  systems of those units and, as a
result, these units do not have to reduce power levels or shut down.

     However,  all other water uses at PSE&G's  generating  stations  (including
Delaware  River Basin units),  distribution  facilities and other PSEG and PSE&G
locations do come under the  jurisdiction of the Delaware River Basin Commission
(DRBC) and NJDEP and are subject to mandatory curtailments and reductions during
a drought  emergency.  PSEG and PSE&G are taking  appropriate  actions to reduce
water  consumption and to mitigate the potential  impacts which could arise from
the drought emergency condition.  PSEG and PSE&G cannot predict what actions the
DRBC or NJDEP may take if the drought conditions worsen;  however,  such actions
could have a material adverse effect on PSEG's and PSE&G's financial  condition,
results of operations or net cash flows.

Credit Ratings

     Form 10-K,  page 6. Energy  Holdings'  revolving  credit facility which was
entered into in May 1999 has been rated as follows:

     Standard & Poor's              BBB-    Outlook: Stable
     Moody's                        Ba1

Toxic Release Inventory

     Form 10-K, page 20. The United States Environmental Protection Agency (EPA)
has revised its Toxic  Release  Inventory  (TRI) program to expand it to include
electric generating facilities.  By July 1, 1999, electric generating facilities
were required to report their toxic release  numbers for 1998 to the EPA.  PSE&G
filed its first report under this program on June 2, 1999 reporting PSE&G's 1998
emissions  of acid gases and heavy  metals.  Because this is solely a disclosure
requirement,  PSEG and PSE&G do not expect a material  impact on their financial
condition,  results of operations or net cash flows; however, PSEG and PSE&G are
pursuing options to reduce toxic releases.


<PAGE>


Air Pollution Control

     Form 10-K, page 20 and March 31, 1999 Form 10-Q, Page 40. For discussion of
NOx allowances, see Note 5. Commitments and Contingent Liabilities of Notes.

Generation Properties

     Form 10-K,  page 27.  Conectiv,  parent of Atlantic City  Electric  Company
(ACE) and Delmarva Power & Light Company (DP&L), has announced that it will sell
its generating  assets.  Those assets include  Conectiv's 5% share in Hope Creek
Generating Station (Hope Creek), its 15% share in the Salem Generating  Stations
(Salem)  and its 15% share in the  Peach  Bottom  Atomic  Power  Station  (Peach
Bottom).  Conectiv  also plans to sell its  ownership  shares in the  coal-fired
Conemaugh and Keystone plants in western Pennsylvania.
PSE&G owns approximately 23% of those stations.


                    ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K


(A) A listing of exhibits being filed with this document is as follows:

                                    PSEG
  ------------------------------------------------------------------------------
   Exhibit Number                        Document
  ----------------  ------------------------------------------------------------
        12          Computation of Ratios of Earnings to Fixed Charges (PSEG)

       27(A)        Financial Data Schedule (PSEG)

        4           Form of Notes for PSEG Series C Extendible Notes


                                   PSE&G
  ------------------------------------------------------------------------------
   Exhibit Number                        Document
  ----------------  ------------------------------------------------------------

       12(A)        Computation of Ratios of Earnings to Fixed Charges (PSE&G)

       12(B)        Computation  of Ratios of Earnings to Fixed  Charges  plus
                    Preferred Stock Dividend Requirements (PSE&G)

       27(B)        Financial Data Schedule (PSE&G)



(B) Reports on Form 8-K:

     Registrant               Date of Report                  Items Reported
  -----------------     ---------------------------      -----------------------

   PSEG and PSE&G             April 26, 1999                      Item 5

   PSEG and PSE&G             July 21, 1999                    Items 5 and 7

<PAGE>


                           FORWARD LOOKING STATEMENTS

     Except for the  historical  information  contained  herein,  certain of the
matters  discussed  in this  report  are  forward-looking  statements  which are
subject to risks and  uncertainties  which could cause actual  results to differ
materially  from those  anticipated.  Such  statements are based on management's
beliefs as well as assumptions  made by and information  currently  available to
management.  When  used  herein,  the  words  "will",  "anticipate",   "intend",
"estimate", "believe", "expect", "plan", "hypothetical", "potential", variations
of such words and similar  expressions are intended to identify  forward-looking
statements.  For those  statements,  PSEG and PSE&G claim the  protection of the
safe harbor for forward-looking  statements  contained in the Private Securities
Litigation Reform Act of 1995.

     In addition to any assumptions  and other factors  referred to specifically
in connection  with such  forward-looking  statements,  factors that could cause
actual   results  to  differ   materially   from  those   contemplated   in  any
forward-looking  statements include,  among others, the following:  deregulation
and the unbundling of energy  supplies and services and the  establishment  of a
competitive  energy  marketplace  for products and  services;  managing  rapidly
changing wholesale energy trading operations in conjunction with electricity and
gas  production,   transmission  and  distribution  systems;   managing  foreign
investments  and electric  generation and  distribution  operations in locations
outside of the  traditional  utility  service  territory;  political and foreign
currency risks; an increasingly competitive energy marketplace;  sales retention
and growth  potential in a mature PSE&G service  territory;  ability to complete
development  or  acquisition  of current  and future  investments;  partner  and
counterparty risk;  exposure to market price fluctuations and volatility of fuel
and power supply, power output, marketable securities,  among others; ability to
obtain  adequate  and timely rate relief,  cost  recovery,  and other  necessary
regulatory approvals;  ability to obtain securitization proceeds; Federal, state
and foreign regulatory actions; regulatory oversight with respect to utility and
non-utility  affiliate  relations and  activities;  Year 2000 issues;  operating
restrictions,   increased  cost  and   construction   delays   attributable   to
environmental  regulations;  nuclear  decommissioning  and the  availability  of
reprocessing  and storage  facilities  for spent  nuclear  fuel;  licensing  and
regulatory  approval  necessary for nuclear and other  operating  stations;  the
ability to economically and safely operate nuclear facilities in accordance with
regulatory  requirements;  environmental  concerns; and market risk and debt and
equity market concerns associated with these issues.

     PSEG and PSE&G  undertake no  obligation  to publicly  update or revise any
forward-looking  statements,  whether  as a result  of new  information,  future
events or otherwise.  The foregoing review of factors should not be construed as
exhaustive or as any admission  regarding  the adequacy of  disclosures  made by
PSEG and PSE&G prior to the effective date of the Private Securities  Litigation
Reform Act of 1995.


<PAGE>


                                   SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrants  have duly  caused  these  reports to be signed on their  respective
behalf by the undersigned thereunto duly authorized.


                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                     ---------------------------------------

                                  (Registrants)


                        By:    PATRICIA A. RADO
                     ---------------------------------------
                               Patricia A. Rado
                          Vice President and Controller
                         (Principal Accounting Officer)



Date: August 16, 1999