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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 September 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 October 31, 1999: 218,591,318

As of October 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 Nine
       Months Ended September 30, 1999 and 1998........................   1

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

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

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

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

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

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

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

     Notes to Consolidated Financial Statements -- PSE&G...............  28

   Item 2. Management's Discussion and Analysis of Financial
           Condition and Results of Operations

       PSEG ...........................................................  29
       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............................  53

   Forward Looking Statements..........................................  53

   Signatures..........................................................  55

<PAGE>


================================================================================
                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
================================================================================
                          PART I. FINANCIAL INFORMATION

                          ITEM 1. FINANCIAL STATEMENTS
<PAGE>
<TABLE>
<CAPTION>
                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                        CONSOLIDATED STATEMENTS OF INCOME
                (Millions of Dollars, except for Per Share Data)
                                   (Unaudited)


                                                                       Three Months Ended                 Nine Months Ended
                                                                          September 30,                     September 30,
                                                                   -----------------------------     ----------------------------
                                                                      1999             1998             1999             1998
                                                                   ------------     ------------     ------------     -----------
<S>                                                                      <C>            <C>              <C>             <C>
OPERATING REVENUES
    Electric Revenues  *
      Bundled  (1/1/99 - 7/31/99)                                        $ 494          $ 1,212          $ 2,480         $ 3,094
      Generation (8/1/99 - 9/30/99)                                        430                -              430               -
      Transmission and Distribution (8/1/99 - 9/30/99)                     320                -              320               -
                                                                   ------------     ------------     ------------     -----------
        Total Electric Revenues                                          1,244            1,212            3,230           3,094
    Gas Distribution (1/1/99 - 9/30/99)                                    214              197            1,191           1,081
    Other                                                                  148               30              416             285
                                                                   ------------     ------------     ------------     -----------
        Total Operating Revenues                                         1,606            1,439            4,837           4,460
                                                                   ------------     ------------     ------------     -----------
OPERATING EXPENSES
    Electric Energy Costs                                                  312              280              775             740
    Gas Costs                                                              154              135              780             733
    Operation and Maintenance                                              471              363            1,328           1,108
    Depreciation and Amortization                                          122              162              410             485
    Taxes Other Than Income Taxes                                           44               49              143             154
                                                                   ------------     ------------     ------------     -----------
          Total Operating Expenses                                       1,103              989            3,436           3,220
                                                                   ------------     ------------     ------------     -----------
OPERATING INCOME                                                           503              450            1,401           1,240
Other Income - net                                                          26                8               39              21
Interest Charges                                                          (126)            (114)            (355)           (344)
Preferred Securities Dividend Requirements                                 (23)             (22)             (70)            (57)
                                                                   ------------     ------------     ------------     -----------
INCOME BEFORE INCOME TAXES AND
  EXTRAORDINARY ITEM                                                       380              322            1,015             860
Income Taxes                                                              (159)            (142)            (425)           (367)
                                                                   ------------     ------------     ------------     -----------
INCOME BEFORE EXTRAORDINARY ITEM                                           221              180              590             493
Extraordinary Item (Net of Tax of  $ - and $345)                           (14)               -             (804)              -
                                                                   ------------     ------------     ------------     -----------
 NET INCOME (LOSS)                                                       $ 207            $ 180           $ (214)          $ 493
                                                                   ============     ============     ============     ===========
WEIGHTED AVERAGE COMMON SHARES
   OUTSTANDING (OOO's)                                                 219,225          231,727          220,413         231,901
                                                                   ============     ============     ============     ===========

EARNINGS (LOSSES) PER SHARE (BASIC AND DILUTED):
Income Before Extraordinary Item                                        $ 1.01           $ 0.78           $ 2.68          $ 2.13
Extraordinary Item (Net of Tax)                                          (0.06)               -            (3.65)              -
                                                                   ------------     ------------     ------------     -----------
Net Income (Loss)                                                       $ 0.95           $ 0.78          $ (0.97)         $ 2.13
                                                                   ============     ============     ============     ===========

DIVIDENDS PAID PER SHARE OF COMMON STOCK                                $ 0.54           $ 0.54           $ 1.62          $ 1.62
                                                                   ============     ============     ============     ===========

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

    See Notes to Consolidated Financial Statements.

</TABLE>
<PAGE>

<TABLE>
<CAPTION>
               PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                       CONSOLIDATED BALANCE SHEETS
                                  ASSETS
                          (Millions of Dollars)
                                                                                (Unaudited)
                                                                                September 30,    December 31,
                                                                                    1999             1998
                                                                                -------------  ---------------
<S>                                                                                    <C>           <C>
CURRENT ASSETS
  Cash and Cash Equivalents                                                            $ 84          $ 140
  Accounts Receivable:
    Customer Accounts Receivable                                                        620            506
    Other Accounts Receivable                                                           385            219
    Less: Allowance for Doubtful Accounts                                                45             38
  Unbilled Revenues                                                                     163            255
  Fuel                                                                                  351            331
  Materials and Supplies, net of  valuation reserves - 1999, $40;
    1998, $12                                                                           134            167
  Prepayments                                                                           163             61
  Miscellaneous Current Assets                                                           95             32
                                                                                -----------   ------------
       Total Current Assets                                                           1,950          1,673
                                                                                -----------   ------------

PROPERTY, PLANT AND EQUIPMENT
  Electric - Generation                                                               1,747          9,226
  Electric - Transmission and Distribution                                            4,983          4,953
  Gas - Distribution                                                                  2,982          2,882
  Other                                                                                 555            551
                                                                                -----------   ------------
       Total                                                                         10,267         17,612
  Less: Accumulated depreciation and amortization                                     3,648          7,080
                                                                                -----------   ------------
       Net                                                                            6,619         10,532
  Nuclear Fuel in Service, net of accumulated amortization -
     1999, $402; 1998, $312                                                             173            187
                                                                                -----------   ------------
       Net Property, Plant and Equipment in Service                                   6,792         10,719
  Construction Work in Progress, including Nuclear Fuel in
    Process - 1999, $43; 1998, $72                                                      140            219
  Plant Held for Future Use                                                              21             24
                                                                                -----------   ------------
       Net Property, Plant and Equipment                                              6,953         10,962
                                                                                -----------   ------------

NONCURRENT ASSETS
 Regulatory Assets                                                                    5,078          1,579
 Long-Term Investments, net of accumulated amortization - 1999, $40;
    1998, $28, and net of valuation allowances - 1999, $19; 1998, $18                 3,689          3,034
 Nuclear Decommissioning Fund                                                           579            524
 Other Special Funds                                                                    141            125
 Other Noncurrent Assets,  net of accumulated amortization -
    1999, $10; 1998, $8                                                                 200            100
                                                                                -----------   ------------
       Total Noncurrent Assets                                                        9,687          5,362
                                                                                -----------   ------------
TOTAL                                                                              $ 18,590       $ 17,997
                                                                                ===========   ============

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

<TABLE>
<CAPTION>

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

                                                                   (Unaudited)
                                                                    September 30,    December 31,
                                                                       1999              1998
                                                                   -------------    ----------------
<S>                                                                       <C>                 <C>
CURRENT LIABILITIES
  Long-Term Debt Due Within One Year                                      $ 755               $ 418
  Commercial Paper and Loans                                              1,602               1,056
  Accounts Payable                                                          826                 655
  Accrued Taxes                                                              68                  41
  Other                                                                     359                 288
                                                                   -------------    ----------------
       Total Current Liabilities                                          3,610               2,458
                                                                   -------------    ----------------

NONCURRENT LIABILITIES
  Deferred Income Taxes and ITC                                           2,890               3,706
  Regulatory Liability - Excess Depreciation Reserve                        569                   -
  Nuclear Decommissioning                                                   475                   -
  OPEB Costs                                                                376                 344
  Other                                                                     692                 420
                                                                   -------------    ----------------
       Total Noncurrent Liabilities                                       5,002               4,470
                                                                   -------------    ----------------

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

CAPITALIZATION:
  LONG TERM DEBT                                                          4,711               4,763
                                                                   -------------    ----------------

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

  COMMON STOCKHOLDERS' EQUITY:
    Common Stock, issued; 231,957,608 shares                              3,604               3,603
    Treasury Stock, at cost; 1999 - 13,209,490 shares,
       1998 - 5,314,100 shares                                             (516)               (207)
    Retained Earnings                                                     1,177               1,748
    Accumulated Other Comprehensive Income (Loss)                          (206)                (46)
                                                                   -------------    ----------------
       Total Common Stockholders' Equity                                  4,059               5,098
                                                                   -------------    ----------------
            Total Capitalization                                          9,978              11,069
                                                                   -------------    ----------------
TOTAL                                                                  $ 18,590            $ 17,997
                                                                   =============    ================

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


                  PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Millions of Dollars)
                                  (Unaudited)
                                                                                   Nine Months Ended
                                                                                     September 30,
                                                                                 -----------------------
                                                                                    1999         1998
                                                                                 ---------    ----------
<S>                                                                                 <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income (loss)                                                                 $(214)        $ 493
  Adjustments to reconcile net income (loss) to net cash flows from
   operating activities:
    Extraordinary Loss - net of tax                                                   804             -
    Depreciation and Amortization                                                     410           485
    Amortization of Nuclear Fuel                                                       68            70
    Recovery of Electric Energy and Gas Costs - net                                    68            98
    Provision for Deferred Income Taxes and ITC - net                                (227)            -
    Investment Distributions                                                          124            79
    Gains on Investments                                                             (103)          (66)
    Net Changes in certain current assets and liabilities:
       Accounts Receivable and Unbilled Revenues                                     (127)           (5)
       Prepayments                                                                   (102)         (186)
       Accounts Payable                                                               174            39
       Other Current Assets and Liabilities                                             1           (20)
    Other                                                                              79            (8)
                                                                                 ---------    ----------
       Net Cash Provided By Operating Activities                                      955           979
                                                                                 ---------    ----------
CASH FLOWS FROM INVESTING ACTIVITIES
  Additions to Property, Plant and Equipment,
      excluding Capitalized Interest and AFDC                                        (280)         (359)
  Net Change in Long-Term Investments                                                (846)            8
  Contribution to Decommissioning Funds and Other Special Funds                       (51)          (91)
  Other                                                                                 -           (39)
                                                                                 ---------    ----------
       Net Cash Used In Investing Activities                                       (1,177)         (481)
                                                                                 ---------    ----------
CASH FLOWS FROM FINANCING ACTIVITIES
  Net Change in Short-Term Debt                                                       546          (242)
  Issuance of Long-Term Debt                                                          713           250
  Redemption/Purchase of Long-Term Debt                                              (428)         (527)
  Issuance of Preferred Securities                                                      -           525
  Purchase of Treasury Stock                                                         (309)          (91)
  Cash Dividends Paid on Common Stock                                                (357)         (376)
  Other                                                                                 1           (42)
                                                                                 ---------    ----------
       Net Cash Provided By (Used In) Financing Activities                            166          (503)
                                                                                 ---------    ----------
Net Change In Cash And Cash Equivalents                                               (56)           (5)
Cash And Cash Equivalents At Beginning Of Year                                        140            83
                                                                                 ---------    ----------
Cash And Cash Equivalents At End Of Period                                           $ 84          $ 78
                                                                                 =========    ==========

Income Taxes Paid                                                                   $ 426         $ 347
Interest Paid                                                                       $ 345         $ 339

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


                     PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                        CONSOLIDATED STATEMENTS OF INCOME
                              (Millions of Dollars)
                                   (Unaudited)

                                                                               Three Months Ended              Nine Months Ended
                                                                                 September 30,                   September 30,
                                                                       -----------------------------     ---------------------------
                                                                           1999             1998             1999             1998
                                                                       ------------     ------------     ----------      -----------
<S>                                                                         <C>            <C>             <C>              <C>
OPERATING REVENUES
    Electric Revenues  *
      Bundled  (1/1/99 - 7/31/99)                                           $ 494          $ 1,212         $ 2,480          $ 3,094
      Generation (8/1/99 - 9/30/99)                                           430                -             430                -
      Transmission and Distribution (8/1/99 - 9/30/99)                        320                -             320                -
                                                                         ---------     ------------     -----------      -----------
        Total Electric Revenues                                             1,244            1,212           3,230            3,094
    Gas Distribution (1/1/99 - 9/30/99)                                       214              197           1,191            1,081
                                                                         ---------     ------------     -----------      -----------
        Total Operating Revenues                                            1,458            1,409           4,421            4,175
                                                                         ---------     ------------     -----------      -----------
OPERATING EXPENSES
    Electric Energy Costs                                                     309              273             765              729
    Gas Costs                                                                 141              127             730              687
    Operation and Maintenance                                                 382              324           1,141              991
    Depreciation and Amortization                                             120              160             405              478
    Taxes Other Than Income Taxes                                              43               51             142              155
                                                                         ---------     ------------     -----------      -----------
          Total Operating Expenses                                            995              935           3,183            3,040
                                                                         ---------     ------------     -----------      -----------
OPERATING INCOME                                                              463              474           1,238            1,135
Other Income - net                                                              5                8               8               14
Interest Charges                                                              (98)             (94)           (284)            (276)
Preferred Securities Dividend Requirements                                    (12)             (11)            (35)             (33)
                                                                         ---------     ------------     -----------      -----------
INCOME BEFORE INCOME TAXES AND
  EXTRAORDINARY ITEM                                                          358              377             927              840
Income Taxes                                                                 (153)            (160)           (393)            (355)
                                                                         ---------     ------------     -----------      -----------
INCOME BEFORE EXTRAORDINARY ITEM                                              205              217             534              485
Extraordinary Item (Net of Tax of  $ - and $345)                              (14)               -            (804)               -
                                                                         ---------     ------------     -----------      -----------
NET INCOME (LOSS)                                                             191              217            (270)             485
Preferred Stock Dividend Requirement                                           (2)              (2)             (7)              (7)
                                                                         ---------     ------------     -----------      -----------
EARNINGS (LOSSES) AVAILABLE TO
 PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED                               $ 189            $ 215          $ (277)           $ 478
                                                                         =========     ============     ===========      ===========

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

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

<TABLE>
<CAPTION>
                PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                      CONSOLIDATED BALANCE SHEETS
                                 ASSETS
                         (Millions of Dollars)
                                                                                (Unaudited)
                                                                               September 30,     December 31,
                                                                                    1999             1998
                                                                               -------------   -----------------
<S>                                                                                    <C>             <C>
CURRENT ASSETS
  Cash and Cash Equivalents                                                            $ 24            $ 42
  Accounts Receivable:
    Customer Accounts Receivable                                                        500             451
    Other Accounts Receivable                                                           352             178
    Less: Allowance for Doubtful Accounts                                                39              34
  Unbilled Revenues                                                                     163             255
  Fuel                                                                                  348             331
  Materials and Supplies, net of  valuation reserves - 1999, $40;
    1998, $12                                                                           134             165
  Prepayments                                                                           159              52
  Miscellaneous Current Assets                                                           41              32
                                                                               -------------   -------------
       Total Current Assets                                                           1,682           1,472
                                                                               -------------   -------------

PROPERTY, PLANT AND EQUIPMENT
  Electric - Generation                                                               1,747           9,226
  Electric - Transmission and Distribution                                            4,983           4,953
  Gas - Distribution                                                                  2,982           2,882
  Other                                                                                 449             461
                                                                               -------------   -------------
       Total                                                                         10,161          17,522
  Less: Accumulated depreciation and amortization                                     3,606           7,049
                                                                               -------------   -------------
       Net                                                                            6,555          10,473
  Nuclear Fuel in Service, net of accumulated amortization -
     1999, $402; 1998, $312                                                             173             187
                                                                               -------------   -------------
       Net Property, Plant and Equipment in Service                                   6,728          10,660
  Construction Work in Progress, including Nuclear Fuel in
    Process - 1999, $43; 1998, $72                                                      140             219
  Plant Held for Future Use                                                              21              24
                                                                               -------------   -------------
       Net Property, Plant and Equipment                                              6,889          10,903
                                                                               -------------   -------------

NONCURRENT ASSETS
 Regulatory Assets                                                                    5,078           1,579
 Long-Term Investments                                                                   74              65
 Nuclear Decommissioning Fund                                                           579             524
 Other Special Funds                                                                    141             125
 Other Noncurrent Assets                                                                102               1
                                                                               -------------   -------------
       Total Noncurrent Assets                                                        5,974           2,294
                                                                               -------------   -------------

TOTAL                                                                              $ 14,545        $ 14,669
                                                                               =============   =============
See Notes to Consolidated Financial Statements.

</TABLE>
<PAGE>
<TABLE>
<CAPTION>
          PUBLIC SERVICE ELECTRIC AND GAS COMPANY
                CONSOLIDATED BALANCE SHEETS
               LIABILITIES AND CAPITALIZATION
                   (Millions of Dollars)
                                                                   (Unaudited)
                                                                    September 30,    December 31,
                                                                       1999            1998
                                                                   -------------   --------------
<S>                                                                       <C>              <C>
CURRENT LIABILITIES
  Long-Term Debt Due Within One Year                                      $ 638            $ 100
  Commercial Paper and Loans                                              1,080              850
  Accounts Payable                                                          746              611
  Other                                                                     286              253
                                                                   -------------   --------------
       Total Current Liabilities                                          2,750            1,814
                                                                   -------------   --------------

NONCURRENT LIABILITIES
  Deferred Income Taxes and ITC                                           2,011            2,846
  Regulatory Liability - Excess Depreciation Reserve                        569                -
  Nuclear Decommissioning                                                   475                -
  OPEB Costs                                                                376              344
  Other                                                                     666              397
                                                                   -------------   --------------
       Total Noncurrent Liabilities                                       4,097            3,587
                                                                   -------------   --------------
COMMITMENTS AND CONTINGENT LIABILITIES                                        -                -
                                                                   -------------   --------------

CAPITALIZATION:
  LONG TERM DEBT                                                          3,261            4,045
                                                                   -------------   --------------

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

  COMMON STOCKHOLDER'S EQUITY:
    Common Stock, issued; 132,450,344 shares                              2,563            2,563
    Contributed Capital                                                     594              594
    Retained Earnings                                                       600            1,386
    Accumulated Other Comprehensive Income (Loss)                            (3)              (3)
                                                                   -------------   --------------
       Total Common Stockholder's Equity                                  3,754            4,540
                                                                   -------------   --------------
            Total Capitalization                                          7,698            9,268
                                                                   -------------   --------------
TOTAL                                                                  $ 14,545         $ 14,669
                                                                   =============   ==============

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

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

                                                                                    Nine Months Ended
                                                                                      September 30,
                                                                                 -----------------------
                                                                                    1999         1998
                                                                                 ---------    ----------
<S>                                                                                 <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income (loss)                                                                 $(270)        $ 485
  Adjustments to reconcile net income (loss) to net cash flows from
   operating activities:
    Extraordinary Loss - net of tax                                                   804             -
    Depreciation and Amortization                                                     405           478
    Amortization of Nuclear Fuel                                                       68            70
    Recovery of Electric Energy and Gas Costs - net                                    68            98
    Provision for Deferred Income Taxes - net                                        (203)           11
    Net Changes in certain current assets and liabilities:
       Accounts Receivable and Unbilled Revenues                                     (126)          (66)
       Prepayments                                                                   (107)           41
       Accounts Payable                                                               138          (185)
       Other Current Assets and Liabilities                                            (9)           12
    Other                                                                              85            31
                                                                                 ---------    ----------
       Net Cash Provided By Operating Activities                                      853           975
                                                                                 ---------    ----------
CASH FLOWS FROM INVESTING ACTIVITIES
  Additions to Property, Plant and Equipment,
      excluding Capitalized Interest and AFDC                                        (280)         (359)
  Contribution to Decommissioning Funds and Other Special Funds                       (51)          (91)
  Other                                                                                (8)          (17)
                                                                                 ---------    ----------
       Net Cash Used In Investing Activities                                         (339)         (467)
                                                                                 ---------    ----------
CASH FLOWS FROM FINANCING ACTIVITIES
  Net Change in Short-Term Debt                                                       230           (24)
  Issuance of Long-Term Debt                                                            -           250
  Redemption/Purchase of Long-Term Debt                                              (246)         (351)
  Cash Dividends Paid on Common Stock                                                (510)         (376)
  Other                                                                                (6)           (7)
                                                                                 ---------    ----------
       Net Cash Used In Financing Activities                                         (532)         (508)
                                                                                 ---------    ----------
Net Change In Cash And Cash Equivalents                                               (18)            -
Cash And Cash Equivalents At Beginning Of Year                                         42            17
                                                                                 ---------    ----------
Cash And Cash Equivalents At End Of Period                                           $ 24          $ 17
                                                                                 =========    ==========

Income Taxes Paid                                                                   $ 443         $ 333
Interest Paid                                                                       $ 297         $ 295

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,  the Quarterly  Reports on Form 10-Q for the quarters ended March 31,
1999 and June 30, 1999 and the Current Reports on Form 8-K filed March 18, 1999,
April 26, 1999, July 21, 1999, September 15, 1999 and October 14, 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.

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

Summary of Significant Accounting Policies

     Effective April 1, 1999, PSE&G discontinued the application 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.   PSE&G  calculated  an  extraordinary   charge  consistent  with  the
requirements of Emerging Issues Task Force (EITF) Issue No. 97-4,  "Deregulation
of the  Pricing  of  Electricity  - Issues  Related to the  Application  of FASB
Statements   No.  71  and  No.  101"  (EITF  97-4)  and  SFAS  101,   "Regulated
Enterprises--Accounting for the Discontinuation of Application of FASB Statement
No. 71" (SFAS  101).  The  portion  of the  extraordinary  charge  related to an
impairment of  long-lived  assets was  calculated  in accordance  with SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" (SFAS 121). The  discontinuation  of the  application of SFAS 71

<PAGE>
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.

     In concert with the  discontinuation  of SFAS 71, PSE&G revised a number of
accounting policies related to its  generation-related  capital assets.  Under a
revised  capitalization  policy, PSE&G will only capitalize costs which increase
the capacity or extend the life of an existing asset, represent a newly acquired
or constructed  asset or represent the  replacement of a retired asset.  Under a
revised depreciation policy, PSE&G will calculate  depreciation  consistent with
revised asset lives  determined  by PSE&G policy rather than using  depreciation
rates prescribed by the BPU in rate proceedings.  Finally, under a revised asset
retirement  policy,  the portion of future retirements 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 had no  direct  effect on
earnings.  Due to the  discontinuation  of the LEAC mechanism on August 1, 1999,
earnings  volatility  will increase since the  unregulated  electric  generation
portion of PSEG's business ceased to follow deferral accounting. PSE&G now bears
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 these contracts were recorded upon  settlement.  The adoption of EITF 98-10
did not have a material impact on the financial condition, results of operations
or net cash flows of PSEG or PSE&G.

     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.  On August 24,  1999,  the BPU
issued a Final Order in these  matters  which  provided  the  reasoning  for the
action taken by the BPU and affirmed,  in all material  respects,  the decisions
and actions  previously  approved in the BPU's Summary Order, with the exception
of PSE&G's  treatment of investment tax credits (ITC) of $235 million related to
PSE&G's generation assets (see Investment Tax Credits).

<PAGE>
     In October and  November  1999,  two Notices of Appeal of each of the Final
Order and of the BPU's order approving PSE&G's petition relating to the proposed
securitization transaction for an irrevocable Bondable Stranded Costs Rate Order
(Finance Order) (see Securitization  Filing and Finance Order) were filed in the
Appellate  Division  of the New  Jersey  Superior  Court on  behalf  of  several
ratepayers.  The Court  granted  requests to  accelerate  two of the appeals and
ordered that the matters be consolidated. The Court further established November
3, 1999 as the deadline for the filing of any additional appeals of these Orders
and  directed the BPU to certify the record of both  proceedings  by November 5,
1999. No additional Notices of Appeal were filed and the record was certified to
the Court on such date. In addition, the Court established an expedited briefing
schedule with appellants' briefs due December 10, 1999,  respondents' briefs due
January 5, 2000 and reply  briefs due  January  14,  2000.  The Court fixed oral
argument on the  consolidated  matters  for March 8, 2000.  While PSEG and PSE&G
believe that the appeals are without  merit,  no assurances can be given at this
time as to the timing or outcome of these proceedings. Accordingly, neither PSEG
nor PSE&G are able to predict whether such appeals will have a material  adverse
effect on their financial condition, results of operations or net cash flows.

     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.  The  result of these  proceedings  is that all New  Jersey  retail
electric  customers  have had the  ability  to select  their  electric  supplier
beginning  August 1, 1999 (see  Retail  Choice)  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.  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.

     The Final Order provides for the following;  however, the existence of such
appeals noted above may impact the implementation provided in the Final Order:

     Transition Period

     o   A four-year  transition period beginning August 1, 1999 and ending July
         31,  2003.  During this  transition  period,  rates for those  services
         provided by PSE&G will be capped for all electric customers.

     Rate Reductions

     o   Customers will receive  through July 2003 the following rate reductions
         from those rates in effect on July 31, 1999  according  to the schedule
         below:

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

         The BPU,  in  finding  that  the  second  and  third  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 August 18, 1999, the BPU approved PSE&G's  compliance  tariff filing
         reflecting  the 5%  decrease  in rates.  On August 1,  1999,  PSE&G had
         implemented this rate reduction,  previously  approved on a provisional
         basis.

<PAGE>
     Shopping Credits

     o   Shopping credits  (credits which a customer  electing a new supplier of
         electricity  will  receive  from  PSE&G)  will be  established  for the
         transition  period  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 its  generation-related
         stranded  costs,  through  securitization  of $2.4  billion  (discussed
         below) and an opportunity to recover up to $540 million (net of tax) of
         its unsecuritized  generation-related stranded costs on a present value
         basis.  The $540  million  is  subject to  recovery  by various  means,
         including an explicit  market  transition  charge  (MTC).  The stranded
         costs  recovery is subject to a  reconciliation  of the  collection  of
         unsecuritized generation-related stranded costs.

     o   PSE&G was directed to use the  overrecovered  balance in the 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 concluded that it would issue an irrevocable  Bondable Stranded
         Costs  Rate  Order,  consistent  with  the  provisions  of  the  Energy
         Competition  Act, 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 existing and future
         electric customers via a single per kWh "wires charge" to be subject to
         adjustment at least annually.  For further details,  see Securitization
         Filing and Finance Order.

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

     o   The 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.


<PAGE>
     Sale of Generation-Related Assets

     o   As  directed  by the  Final  Order,  PSE&G  will  sell  its  generation
         property,  plant and equipment to a separate unregulated  subsidiary of
         PSEG  for   $2.443   billion   plus   the  net  book   value  of  other
         generation-related  assets and  liabilities  transferred at the time of
         purchase, such as fuel and materials and supplies,  currently estimated
         to be between $200 million and $400  million.  PSE&G and PSEG Power LLC
         (Power), the separate  unregulated  subsidiary of PSEG, will record the
         difference between the net book value of the generation property, plant
         and  equipment  and the $2.443  billion of sale proceeds as an increase
         and decrease to contributed capital,  respectively,  on their financial
         statements.

     o   Such separate company will become an exempt  wholesale  generator (EWG)
         under  the  Public  Utility  Holding  Company  Act  (PUHCA).  Any gains
         resulting  from any sale of the  generation-related  assets  to a third
         party which occurs before August 1, 2004 must be shared equally between
         ratepayers   and   shareholders.    For   further    discussion,    see
         Generation-Related Asset Sale to Power.

     Basic Generation Service

     o    PSE&G is  obligated  to  provide  BGS to  customers  who do not choose
          another  electric  supplier.  PSE&G will contract with Power,  through
          Power's  wholly  owned  subsidiary  PSEG Energy  Resources & Trade LLC
          (ER&T),  to provide the energy and  capacity  required to meet PSE&G's
          BGS and Off-Tariff  Rate Agreements  (OTRA)  obligations for the first
          three  years of retail  choice (see  Generation-Related  Asset Sale to
          Power).  PSEG,  PSE&G and Power are  prohibited  from  promoting  such
          service as a competitive  alternative to other  electricity  suppliers
          and marketers.  BGS will be competitively  bid for the fourth year and
          thereafter.  Any  payments  resulting  from BGS  being bid out will be
          applied to the deferred societal benefit costs balance for purposes of
          establishing the societal benefit clause (SBC) rate in the fifth year.

     Societal Benefit Clause and Non-utility Generation Market Transition Clause

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

     Electric Distribution Depreciation

     o   PSE&G was  directed  by the BPU to  record a  regulatory  liability  by
         reducing its depreciation reserve for its electric  distribution assets
         by $569 million.  This regulatory  liability will be amortized over the
         period from January 1, 2000 to July 31, 2003 (see Note 3. Extraordinary
         Charge and Other Accounting Impacts of Deregulation).

<PAGE>
     Investment Tax Credits

     o    The BPU  directed   PSE&G  to  seek  a private  letter ruling from the
          Internal Revenue Service (IRS) to determine if the ITC can be credited
          to customers  without  violating  the tax  normalization  rules of the
          Internal  Revenue Code. If the IRS's private letter ruling  determines
          that  the ITC  could  be  passed  on to  customers  of  PSE&G  without
          violating the IRS's  normalization  rules,  then the BPU in the fourth
          year of the  transition  period will  consider any action which it may
          deem   appropriate   regarding  the  treatment  of  the  ITC,   giving
          consideration  to the  issues  resolved  in the Final  Order and other
          relevant considerations. PSE&G accounted for the ITC as a reduction to
          the extraordinary charge recorded in the second quarter of 1999. PSE&G
          cannot  predict  the  outcome  of  the  ruling  from  the  IRS  or any
          subsequent  potential  actions which may be taken by the BPU. However,
          an adverse  resolution  to this matter would  result in an  additional
          extraordinary  charge  to income  up to the  amount of the ITC,  which
          would  likely  have a material  adverse  impact on PSEG's and  PSE&G's
          financial condition, results of operations and net cash flows.

     Securitization Filing and Finance Order

     On September 17, 1999, the BPU issued its Finance Order to authorize, among
other things,  the  imposition  of a  non-bypassable  transition  bond charge on
PSE&G's customers;  the sale of PSE&G's property right in such charge 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,  including an estimated  $125 million of  transaction  costs;  and the
application by PSE&G of the transition bond proceeds to retire  outstanding debt
and/or  equity.  The order was  consistent  with the  provisions  of the  Energy
Competition Act and the Final Order.

     PSE&G  Transition  Funding LLC, a wholly  owned  subsidiary  of PSE&G,  was
created to issue such transition  bonds.  Two appeals have been filed which have
challenged the Finance Order and will  delay the sale of the  transition  bonds.
Although  PSEG and PSE&G believe the appeals are without  merit,  PSEG and PSE&G
are unable to predict the outcome of such appeals. However, assuming a favorable
outcome,  PSEG and PSE&G  expect  such sale of  transition  bonds and receipt of
proceeds therefrom will occur in the first half of 2000.

     Generation-Related Asset Sale to Power

     In anticipation of the Final Order directing the sale of generation-related
assets,  PSEG organized Power and its subsidiaries in June 1999.  Power, and its
subsidiaries,  PSEG Fossil LLC  (Fossil) and PSEG  Nuclear LLC  (Nuclear),  will
acquire and manage PSE&G's electric generation-related assets. The appeal, which
has been filed  challenging  the approval  granted by the BPU in the Final Order
for this sale,  will   delay  this sale.  Although  PSEG and PSE&G  believe  the
appeals are without  merit,  PSEG and PSE&G are unable to predict the outcome of
such appeals.  However, assuming a favorable outcome, PSEG and PSE&G expect such
sale will occur in the first half of 2000.

     Certain  regulatory  approvals  are  required  prior  to  the  sale  of the
generation-related  assets  to Power  and its  subsidiaries.  Power has made the
necessary  filings and is awaiting  final  approval from the Nuclear  Regulatory
Commission  (NRC)  (to  transfer  PSE&G's  nuclear  licenses),  the  New  Jersey
Department  of  Environmental  Protection  (NJDEP) and the  Pennsylvania  Public
Utility Commission  (PAPUC).  Additionally,  in October 1999, Nuclear and Fossil
filed with the FERC for EWG status.  In September  1999,  FERC approved  PSE&G's
proposed  sale of its  generating  units  to  Power  and its  subsidiaries. FERC
conditionally accepted a number of other agreements. Additionally, FERC directed
Power to make  amendments  clarifying  the  proposed  rate formula by which ER&T
would  compensate  Fossil and Nuclear for their actual costs and to  redesignate
the proposed market-based rate tariff from PSE&G to ER&T.

<PAGE>
     Metering, Billing and Account Services

     In  accordance  with the Energy  Competition  Act, the BPU has mandated the
creation of a Customer  Account  Services  working  group  comprised of electric
and/or gas utilities,  including PSE&G, alternative energy service providers and
other interested parties.  The focus of the working group and the BPU will be to
outline a timeline and the extent to which  competition  will be  introduced  to
various  functions,  including  metering,  billing and customer service,  and to
create  regulatory  guidelines for making these services  competitive.  Meetings
began in  November  1999  with  expectations  that a formal  proceeding  will be
scheduled sometime after January 2000.

     Generic Issues

     In 1999,  the BPU issued a series of interim  orders that  decided  generic
issues  related to the  deregulation  of the electric and gas  industries in New
Jersey.  These  orders  addressed  environmental  disclosure  standards,  energy
aggregation program standards,  anti-slamming standards,  retail choice consumer
protection standards and licensing and registration  standards applicable to all
energy  service  providers.  It is also  anticipated  that the BPU will issue an
order addressing  affiliate  relationships and transactions,  which could impact
the pricing of affiliate transactions.

     Retail Choice

     Retail choice of electric energy suppliers started on August 1, 1999. Those
retail  customers who choose a third party  supplier (TPS) are expected to begin
to receive  electric  energy from such TPS  commencing in the fourth  quarter of
1999.  As  previously  noted,  the  appeals  of the Final  Order may delay  this
implementation.

     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.

     On April 30, 1999,  PSE&G submitted its required gas unbundling  compliance
filing  with the BPU.  The  discovery  process  has been  completed,  intervenor
testimony has been filed and hearings  before the BPU commenced on September 27,
1999.  The BPU is expected  to render a decision  by the end of  December  1999.
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 and consumer
protection,  among others.  The standards  adopted by the BPU for generic issues
also apply to the competitive gas industry (see Generic Issues).

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 were 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 of which  are to be  recovered  through a  societal
benefits  charge on all electric and gas customers'  bills. On June 9, 1999, the
BPU initiated a proceeding  causing a comprehensive  resource analysis of energy
programs  to be  undertaken  including  the  reevaluation  of DSM  programs  and
incorporation  of  new  renewable  programs.  Key  to  this  proceeding  is  the
determination  of the  appropriate  level of funding for energy  efficiency  and
renewable energy programs on a statewide basis.  Hearings have been scheduled by
the BPU with a target  established  that would permit it to render decisions for
each of the utilities in lieu of settlements, if necessary, by February 9, 2000.
PSE&G filed its proposed plan with the BPU on August 23, 1999.

<PAGE>
     Non-utility Generation Buydown

     Under Federal and State regulations,  utilities were required to enter into
long-term power purchase  agreements with NUGs at prices which have subsequently
proven to be above market.  PSE&G is seeking to  restructure  certain of its BPU
approved  contracts  with NUGs,  which were  estimated to be $1.6 billion  above
assumed future market prices.  In July 1999, PSE&G 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. In September 1999, the agreement was approved by the BPU and the costs
to restructure this contract will be recovered through the NTC.

Note 3.  Extraordinary Charge and Other Accounting Impacts of Deregulation

     As previously  disclosed,  as a result of the BPU's issuance of the Summary
Order in April 1999 and in accordance with EITF 97-4, PSE&G determined that SFAS
71 was no longer applicable to the electric  generation portion of its business.
Accordingly,  in the second quarter,  PSE&G recorded an extraordinary  charge to
earnings  of  $790  million  (net of  tax).  PSE&G  accounted  for  this  charge
consistent  with the  requirements  of SFAS 101.  In the third  quarter of 1999,
PSE&G revised the estimates inherent in the extraordinary charge and recorded an
additional $14 million  extraordinary  charge. For discussion of the Final Order
and PSE&G's treatment of ITC, see Note 2. Regulatory Issues.

     The extraordinary  charge recorded in the second and third quarters of 1999
consisted  primarily of the write-down of PSE&G's nuclear and fossil  generating
stations in accordance  with SFAS 121.  PSE&G  performed a discounted  cash flow
analysis on a unit-by-unit basis to determine the amount of the impairment. As a
result  of this  impairment  analysis,  the net  book  value  of the  generating
stations was reduced by  approximately  $5.0 billion  (pre-tax) or approximately
$3.09  billion (net of tax).  This amount was offset by the creation of a $4.057
billion (pre-tax), or $2.4 billion (net of tax), regulatory asset related to the
future receipt of securitization  proceeds, as provided for in the Summary Order
and affirmed in the Final Order.

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

     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  $569  million  excess
depreciation  reserve  related  to PSE&G's  electric  distribution  assets  from
Accumulated  Depreciation  to  a  Regulatory  Liability.  Such  amount  will  be
amortized in  accordance  with the terms of the Final Order over the period from
January 1, 2000 to July 31, 2003.

Note 4. Regulatory Assets and Liabilities

     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.
<PAGE>
     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 and Final  Orders  provided  for
future  recovery  through  regulated  operations.   Additionally,   certain  new
regulatory assets and regulatory  liabilities were recorded,  in compliance with
the  Summary  and  Final  Orders.  For  discussion  of the  Energy  Master  Plan
Proceedings,  see Note 2. Regulatory Issues and Note 3. Extraordinary Charge and
Other Accounting Impacts of Deregulation.

     At September 30, 1999 and December 31, 1998,  respectively,  PSEG and PSE&G
had deferred the following regulatory assets and liabilities on the Consolidated
Balance Sheets:

<TABLE>
<CAPTION>


                                                                    September 30,       December 31,
                                                                        1999                1998
                                                                  ------------------   --------------
<S>                                                                       <C>                   <C>
Regulatory Assets                                                        (Millions of Dollars)
Regulatory Asset--Stranded Costs                                          $4,057                $--
SFAS 109 Income Taxes                                                        287                704
OPEB Costs                                                                   237                270
Regulatory Asset--SBC                                                        137                 --
Demand Side Management Costs                                                   7                150
Environmental Costs                                                          106                139
Unamortized Loss on Reacquired Debt and Debt Expense                         122                135
Underrecovered Gas Costs                                                      --                 35
Other                                                                        125                146
                                                                  --------------       ------------
     Total Regulatory Assets                                              $5,078             $1,579
                                                                  ==============       ============
Regulatory Liabilities
Regulatory Liability--Excess Depreciation Reserve                           $569                $--
Regulatory Liability--NTC                                                     56                 --
Overrecovered Gas Costs                                                       23                 --
Overrecovered Electric Energy Costs                                           --                 39
Other Stranded Cost Recovery Offsets                                           6                  4
                                                                  --------------       ------------
     Total Regulatory Liabilities                                           $654                $43
                                                                  ==============       ============
</TABLE>

     Regulatory Asset - Stranded Costs: PSE&G has recorded this regulatory asset
to reflect the future  revenues  which will be collected via the  securitization
transition charge which was authorized by the BPU's Finance Order.

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

     Regulatory Asset - SBC: See Note 2. Regulatory  Issues for a description of
the SBC. Before creation of the SBC, the electric DSM and manufactured gas plant
remediation costs were included in DSM and Environmental Costs, respectively, as
listed above.

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


<PAGE>
     Regulatory Liability - NTC: See Note 2. Regulatory Issues for a description
of the NTC.

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

 Note 5.  Commitments and Contingent Liabilities

Pending Asset Purchases

         PSEG has entered  into  contracts  to  purchase a number of  combustion
turbines to expand capacity at a number of generating  sites.  PSEG's commitment
under these  contracts  is  approximately  $392  million to be expended  through
December 2001.  Through October 31, 1999,  payments of approximately $70 million
were made under these contracts.

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

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

Nuclear Operating Performance Standard (OPS)

    PECO Energy Company (PECO Energy), DP&L and PSE&G, three of the co-owners of
Salem and Peach  Bottom,  have  agreed to an OPS through  December  31, 2011 for
Salem and through December 31, 2007 for Peach Bottom. Under the OPS, the station
operator is required to make  payments to the  non-operating  owners  (excluding
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%. At December 31,
1998,  the  capacity  factors  were  67%  and  81%  for  Salem  1 and  Salem  2,
respectively.  Any such payment is limited to a maximum of $25 million per year.
The parties have further agreed to forego  litigation in the future,  except for
limited cases in which the operator would be responsible  for damages of no more
than $5 million per year.
<PAGE>
    As noted  above,  Power has  announced  that it has signed an  agreement  to
acquire  all of  Conectiv's  interests  in  Salem  and  Hope  Creek  and half of
Conectiv's interest in Peach Bottom. Once the purchases are completed, DP&L will
no longer have an interest in the OPS agreement.

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  $76 million,  to be incurred  through 2001, of which $8 million was
incurred in 1997, $27 million was incurred in 1998 and approximately $35 million
is expected to be incurred in 1999.  During the nine months ended  September 30,
1999, $20 million was incurred.  A portion of these costs is not  incremental to
PSEG  or  PSE&G,   but   rather,   represents   a   redeployment   of   existing
personnel/resources.

     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 key 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.

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.  Estimated  losses  related to
site  environmental  remediation are based primarily on internal and third party
environmental  studies,  the number and participation level of other Potentially
Responsible  Parties (PRP),  the extent of the  contamination  and the nature of
required remediation.

    Certain  environmental  costs are currently  recoverable through the RAC and
are expected to be recoverable in accordance  with the Final 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 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  (Remediation  Program),  PSEG and PSE&G do not expect
their expenditures for any such site,  individually or all such current sites in
the  aggregate,  except as noted below (see  Passaic  River  Site),  will have a
material effect on financial condition, results of operations or net cash flows.
<PAGE>
    The NJDEP regulations  concerning site investigation and remediation require
an  ecological   evaluation  of  potential  injuries  to  natural  resources  in
connection with a remedial  investigation  of contaminated  sites.  The NJDEP is
presently   working  with  the  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
conditions at these sites. The Remediation Program is periodically  reviewed and
revised  by  PSE&G  based  on  regulatory  requirements,   experience  with  the
Remediation  Program and  available  remediation  technologies.  The 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. The
Energy Competition Act provides for the continuation of RAC programs.  The Final
Order provides for the recovery of costs for this remediation effort through the
SBC.

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 emission allowances required
to comply  with  these  regulations  will be  directly  related to the number of
emission allowances PSE&G receives.  PSE&G received a preliminary  allocation of
emission allowances in March 1999, which were 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 sold to  Power  at the  time of the  sale of the  generating
assets.

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 entered into a consent  decree with the EPA in
1994 obligating it to conduct a remedial  investigation  and  feasibility  study
(RI/FS) of  available  and  applicable  corrective  actions for the site.  It is
anticipated that a report of the RI/FS will be issued in 2001.

     PSE&G and certain of its  predecessors  operated  industrial  facilities at
properties  within the six mile stretch of the Passaic  River  designated as the
facility.  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 matter,  or in such event,  what costs PSE&G
may incur to address any such claims. However, such costs may be material.
<PAGE>
Subsurface Contamination

     PSE&G's  sale of  generation-related  assets to PSEG Power may  trigger the
requirements  of the New  Jersey  Industrial  Site  Recovery  Act  (ISRA).  ISRA
requires  that before any transfer of an industrial  establishment  can be made,
the interested parties shall remediate or cause to be remediated  potential site
environmental  concerns in accordance  with NJDEP  requirements.  Certain of the
generation-related assets being sold are industrial establishments as defined by
ISRA. In October 1999,  PSE&G filed a request with the NJDEP for a determination
that the sale involves a transfer to an affiliate and, as such, is not a covered
transaction  under  ISRA.  In the second  quarter of 1999,  PSEG  recorded a $53
million 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 September 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 Power will  trigger  certain  redemption
features of certain PSE&G mortgage bonds.

<TABLE>
<CAPTION>


                                                              September 30, 1999            December 31, 1998
                                                            -------------------------   ----------------------------
                                                             Carrying       Fair         Carrying          Fair
                                                              Amount        Value         Amount          Value
                                                            ------------  -----------   -------------   ------------
<S>                                                              <C>          <C>             <C>            <C>
                                                                            (Millions of Dollars)
Long-Term Debt (A):
     PSEG..................................................      $575         $575            $275           $275
     Energy Holdings.......................................       992          980             762            769
     PSE&G.................................................     3,899        3,874           4,145          4,389
Preferred Securities Subject to Mandatory Redemption:
     PSE&G Cumulative Preferred Securities.................        75           68              75             77
     Monthly Guaranteed Preferred Beneficial Interest in
        PSE&G's Subordinated Debentures....................       210          209             210            213
     Quarterly Guaranteed Preferred Beneficial Interest in
        PSE&G's Subordinated Debentures....................       303          296             303            315
     Quarterly Guaranteed Preferred Beneficial Interest in
        PSEG's Subordinated Debentures.....................       525          471             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  September  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.

       Global  has $67  million of project  debt that is  non-recourse  to PSEG,
       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 the London Interbank Offered Rate (LIBOR).

</FN>
</TABLE>
<PAGE>
Commodity-Related Instruments--PSE&G

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

     At  September  30,  1999,   PSE&G  had  outstanding   commodity   financial
instruments  with a notional  contract  quantity of 10.4 million  megawatt-hours
(MWH) of electricity  and 47.5 million MMBTU (million  British thermal units) of
natural gas. At December 31, 1998,  PSE&G had  outstanding  commodity  financial
instruments with a notional  contract quantity of 1.6 million MWH of electricity
and 65.2 million MMBTU of natural gas.  Notional  amounts are indicative only of
the volume of activity and are not a measure of market risk.

     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 $3 million
of gains in the quarters ended  September 30, 1999 and 1998.  PSE&G recorded $20
million and $21 million of gains in the nine months ended September 30, 1999 and
1998, respectively.

Commodity-Related Instruments--Energy Holdings

     PSEG Energy  Technologies Inc.'s (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 the nine months  ended  September  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 97% and 90% of
its fixed  price  natural gas sales  commitments  hedged and 100% and 63% of its
fixed price electric  commodity sales  commitments  hedged at September 30, 1999
and December 31, 1998,  respectively.  As of September 30, 1999 and December 31,
1998, Energy  Technologies had a net unrealized gain of approximately $3 million
and net unrealized loss of $5 million, respectively, related to 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.  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
September  30, 1999 and December  31, 1998 were $118  million and $204  million,
respectively.  The  decrease  in fair  value  was  primarily  due to the sale of
certain of such  investments  during 1999.  The  potential  change in fair value
resulting  from a  hypothetical  10%  change  in quoted  market  prices of these
investments  amounted  to $11 million at  September  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  $1.4 billion and $1.0  billion,  respectively,  of  international
investments.

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

     Global's international  investments are primarily in projects that generate
or distribute  electricity in Argentina,  Brazil,  Chile, China, India, Peru and
Venezuela.  Investing in foreign  countries  involves  certain  risks.  Economic
conditions  that  result in higher  comparative  rates of  inflation  in foreign
countries  likely result in declining values in such countries'  currencies.  As
currencies fluctuate against the U.S. dollar, there is a corresponding change in
Global's  investment value in terms of the U.S. dollar. Such change is reflected
as an increase or decrease in  comprehensive  income,  a separate  component  of
stockholders'  equity.  Net  foreign  currency  devaluations  have  reduced  the
reported  amount of PSEG's  total  stockholders'  equity by $160  million,  $147
million of which was caused by the  devaluation  of the Brazilian  Real, for the
nine months ended September 30, 1999.

     In January  1999,  Brazil  abandoned its managed  devaluation  strategy and
allowed  its  currency,  the Real,  to float  against  other  currencies.  As of
September  30, 1999,  the Real had devalued  approximately  37% against the U.S.
dollar  since  December  31,  1998,  affecting  the  carrying  value of Global's
investment in a Brazilian distribution company. For additional information,  see
Note 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.

     Global had consolidated  project debt totaling $106 million as of September
30, 1999 associated with Global's investment in a Brazilian distribution company
that  is  non-recourse  to  Global,  Energy  Holdings  and  PSEG.  The  debt  is
denominated  in the  Brazilian  Real and is indexed  to a basket of  currencies,
approximately  50% of which is the U.S.  dollar.  Global is  subject  to foreign
currency  exchange rate risk as a result of exchange rate movements  between the
indexed foreign currencies and the U.S. dollar. Exchange rate changes ultimately
impact  the debt  level  outstanding  in the  reporting  currency  and result in
foreign  currency gains or losses.  Gains or losses resulting from such exchange
rate  movements  are  included in other  income for the period and amounted to a
loss of $3 million and a gain of $1 million in the quarters ended  September 30,
1999 and 1998,  respectively, and gains of $2 million and $4 million in the nine
months ended September 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.  PSEG cannot predict foreign currency
exchange  rate  movements  and,  therefore,  cannot  predict  the impact of such
movements  on PSEG's  financial  condition,  results of  operations  or net cash
flows.
<PAGE>
Interest Rates

     PSEG,  PSE&G and Energy  Holdings  are  subject to the risk of  fluctuating
interest  rates in the  normal  course of  business.  Their  policy is to manage
interest  rate risk through the use of fixed rate debt,  floating  rate debt and
interest  rate swaps.  As of September  30, 1999, a  hypothetical  10% change in
market  interest rates would result in a $4 million,  $10 million and $3 million
change in annual  interest costs related to short-term and floating rate debt at
PSEG (parent company), PSE&G and Energy Holdings, respectively.

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  approximate
their fair market values.

Note 7.  Income Taxes

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

                                                                     Quarter Ended              Nine Months Ended
                                                                     September 30,                September 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...............................................          0.6%         2.6%           0.7%           1.4%
                                                               -----------    ---------    -----------     ----------
     Effective Income Tax Rate.............................        41.5%        43.5%          41.6%          42.3%
                                                               ===========    =========    ===========     ==========
<FN>
(A)    Excludes the impact of the  extraordinary  charge  recorded in the second
       and third quarters of 1999. The associated income tax benefits  resulting
       from the extraordinary charge had an effective income tax rate of 30.04%.
       The effective rate is below the statutory rate of 40.85% primarily due to
       some of the income tax benefits  being flowed  through to  ratepayers  in
       prior  periods under  regulated  accounting  methods.  This was partially
       offset by the  investment  tax credit  being  credited  to the benefit of
       PSEG's   stockholders   pursuant  to  the  Summary  Order.   For  further
       discussion, see Note 2. Regulatory Issues.

</FN>
</TABLE>

Note 8.  Financial Information by Business Segments

Basis of Organization

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

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

     Energy Resources and Trade

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

     Transmission and Distribution (T&D)

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

     Resources

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

     Global

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

     Other

     PSEG's other  activities  generate  revenues from Energy  Technologies  and
Enterprise Group  Development  Corporation  (EGDC).  Energy  Technologies  earns
revenues from energy sales and a variety of energy related services  provided to
industrial and commercial  customers to reduce costs and improve  related energy
efficiencies.  EGDC,  which has been  conducting a controlled exit from the real
estate business since 1993, earns revenues from its  nonresidential  real estate
property management  business.  Other activities also include amounts applicable
to PSEG, the parent  corporation,  and Energy Holdings,  excluding Resources and
Global.
<PAGE>
Information related to the segments of PSEG's business is detailed below:
<TABLE>
<CAPTION>

                                                      Energy
                                                     Resources                                               Consolidated
                                         Generation  and Trade     T & D   Resources    Global      Other        Total
                                         ----------  ----------  --------  ---------  --------   --------   ---------------
<S>                                            <C>          <C>      <C>         <C>       <C>        <C>         <C>
                                                                     (Millions of Dollars)
For the Quarter Ended September 30,
1999:
     Total Operating Revenues...........       $736         $10      $712       $22        $40        $86         $1,606
     Segment Income before                      104           4        97         4         15         (3)           221
Extraordinary Item......................
     Segment Net Income (Loss)..........         90           4        97         4         15         (3)           207
                                         ==========  ==========  ========  =========  ========   ========   ============

For  the  Quarter  Ended  September  30,
1998:
     Total Operating Revenues...........       $743          $9      $657      $(38)       $28        $40         $1,439
     Segment Net Income (Loss)..........        104           4       109       (34)         3         (6)           180
                                         ==========  ==========  ========  =========  ========   ========   ============

For the Nine Months Ended September 30,
1999:
     Total Operating Revenues...........     $2,068         $51    $2,302     $ 119       $102       $195         $4,837
     Segment Income before                      285          23       226        46         21        (11)           590
Extraordinary Item......................
     Segment Net Income (Loss)(A).......    (2,919)          23     2,626        46         21        (11)         (214)
                                         ==========  ==========  ========  =========  ========   =========  ============

For the Nine Months Ended September 30,
1998:
     Total Operating Revenues...........     $1,934         $43    $2,198       $75        $84       $126         $4,460
     Segment Net Income (Loss)..........        191          22       272        20          5        (17)           493
                                         ==========  ==========  ========  =========  ========   =========  ============

As of September 30, 1999:
     Total Assets (A)...................     $2,295        $352   $11,898    $1,945     $1,658       $442        $18,590
                                         ==========  ==========  ========  =========  ========   =========  ============

As of December 31, 1998:
     Total Assets.......................     $7,881        $164    $6,624    $1,809     $1,124       $395        $17,997
                                         ==========  ==========  ========  =========  ========   =========  ============

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

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

<TABLE>
<CAPTION>


                                                   Revenues (1)                              Identifiable Assets
                                  -------------------------------------------------    ----------------------------------
                                     Quarter Ended            Nine Months Ended
                                     September 30,              September 30,           September 30,       December 31,
                                  ----------------------     ---------------------     ---------------     --------------
                                     1999         1998          1999          1998          1999                1998
                                  ---------    ---------     ---------    ---------    ---------------     --------------
<S>                                <C>          <C>           <C>          <C>               <C>                <C>
United States.................     $1,569       $1,410        $4,734       $4,387            $16,266            $16,395
Foreign Countries (2).........         37           29           103           73              2,324              1,602
                                  ---------    ---------     ---------    ---------    ---------------     --------------
     Total....................     $1,606       $1,439        $4,837       $4,460            $18,590            $17,997
                                  =========    =========     =========    =========    ===============     ==============
</TABLE>
Identifiable investments in foreign countries include:

      Argentina                       $355               $304
      Brazil (3)                       322                480
      Chile and Peru                   528                 --
      Netherlands                      608                400

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

(2)  Total assets are net of foreign currency  translation  adjustment of $(224)
     million  (pre-tax) as of September 30, 1999 and $(48) million  (pre-tax) as
    of December 31, 1998.

(3)  Amount is net of foreign currency translation  adjustment of $(206) million
     (pre-tax)  as of  September  30,  1999 and $(43)  million  (pre-tax)  as of
     December 31, 1998.

<PAGE>
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
beginning  after January 1, 2001. The FASB also decided to defer by one year the
transition date regarding embedded derivatives in SFAS 133.

Note 10.  Comprehensive Income (Loss)

Comprehensive Income (Loss), Net of Tax:
<TABLE>
<CAPTION>


                                                                 Quarter Ended                Nine Months Ended
                                                                 September 30,                   September 30,
                                                         ----------------------------   ---------------------------
                                                            1999             1998           1999          1998
                                                         -----------     ------------   ------------   ------------
                                                                            (Millions of Dollars)
<S>                                                         <C>             <C>            <C>             <C>
Net income (loss)...................................        $207            $180           $(214)          $493
Foreign currency translation, net of tax (A) .......         (33)            (10)           (160)           (22)
                                                         -----------     -----------    ------------   ----------
Comprehensive income (loss).........................        $174           $ 170           $(374)         $ 471
                                                         ===========     ===========    ============   ==========
<FN>

(A)    Net of tax of $(4)  million  and  $(1)  million  for the  quarters  ended
       September  30, 1999 and 1998,  respectively,  and $(18)  million and $(2)
       million  for  the  nine  months  ended   September  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              Nine Months Ended
                                                                   September 30,                September 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..............................................           1.3%         0.9%           1.4%          1.4%
                                                               -----------    ---------    -----------    ---------
     Effective Income Tax Rate............................         42.2%        41.8%          42.3%         42.3%
                                                               ===========    =========    ===========    =========
<FN>
(A)    Excludes the impact of the  extraordinary  charge  recorded in the second
       and third quarters of 1999. The associated income tax benefits  resulting
       from the extraordinary charge had an effective income tax rate of 30.04%.
       The effective rate is below the statutory rate of 40.85% primarily due to
       some of the income tax benefits  being flowed  through to  ratepayers  in
       prior  periods under  regulated  accounting  methods.  This was partially
       offset by the  investment  tax credit  being  credited  to the benefit of
       PSEG's   stockholders   pursuant  to  the  Summary  Order.   For  further
       discussion, see Note 2. Regulatory Issues.
</FN>
</TABLE>

Note 10.  Comprehensive Income (Loss)

     For the quarters and nine months ended September 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  Reports on Form 10-Q for the quarters ended
March 31, 1999 and June 30, 1999 and the Current Reports on Form 8-K filed March
18, 1999, April 26, 1999, July 21, 1999, September 15, 1999 and October 14, 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

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

     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 PSE&G's rate  unbundling,  stranded
costs and restructuring  proceedings  (Summary Order) and subsequently  issued a
Final Decision and Order (Final Order) in these matters.  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.

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

     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,  net of tax, in the second
quarter of 1999.  In the third  quarter of 1999,  PSE&G  revised  the  estimates
inherent in the  extraordinary  charge and  recorded an  additional  $14 million
extraordinary  charge.  This  extraordinary  charge  reflects the  impairment of
PSE&G's  electric   generation-related   assets  and  related  fuel,  equipment,
materials and supplies,  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 extraordinary charge also included recording certain liabilities
stemming from the deregulation of PSE&G's electric generation business.

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


<PAGE>
     As  set  forth  in  the  Final   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 Final 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,  currently  estimated  to be
between $200 million and $400 million.  To effectuate  the sale,  PSEG organized
Power, a Delaware limited  liability company (LLC), as a wholly owned subsidiary
in June 1999.  Power,  and its  subsidiaries,  PSEG Fossil LLC (Fossil) and PSEG
Nuclear   LLC   (Nuclear),    will   acquire   and   manage   PSE&G's   electric
generation-related assets. Power's subsidiaries, Fossil, Nuclear and PSEG Energy
Resources  & Trade LLC  (ER&T),  are also  Delaware  LLCs.  Assuming a favorable
outcome of the appeals,  PSEG and PSE&G expect that the sale of such assets will
occur in the first half of 2000. Prior to the execution of such sale, Power must
obtain  approval  from the  Nuclear  Regulatory  Commission  (NRC) (to  transfer
PSE&G's licenses), the New Jersey Department of Environmental Protection (NJDEP)
and the Pennsylvania  Public Utility Commission  (PAPUC). In September 1999, the
Federal Energy  Regulatory  Commission  (FERC) approved PSE&G's proposed sale of
its generating units to Power and its subsidiaries.

     The Final Order  requires PSE&G to provide basic  generation  service (BGS)
for all  customers  who do not  elect a  different  service  provider.  Once the
generation-related  asset sale to Power is complete,  pursuant to a  contractual
relationship,  Power,  through  ER&T,  will  provide  PSE&G  with the energy and
capacity  required  to  meet  its  BGS  and  off-tariff  rate  agreement  (OTRA)
obligations.  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 thereafter. Once the
generation-related  asset sale to Power is  complete,  pursuant  to  contractual
relationships,  ER&T will obtain the energy and  capacity to supply  PSE&G's BGS
and OTRA requirements from its affiliates,  Nuclear and Fossil,  supplemented as
necessary with energy purchased in the competitive wholesale electricity market.
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 Power
has  to  purchase  energy  and/or  capacity  or  generate  energy  to  meet  its
obligations  to supply power to PSE&G at market  prices or costs,  respectively,
which   approach   or  exceed   the  BGS  or  OTRA   contract   rates  (see  PJM
Interconnection,  LLC and Item 3. Qualitative and Quantitative Disclosures About
Market  Risk).  ER&T's  policy  will be to use  derivatives  to manage this risk
consistent  with its  business  plans and  prudent  practices.  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  therefore,  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 had
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  going  forward.  It is expected  that by July 31,
2003, the end of the transition period under the Energy Master Plan Proceedings,
PSEG's  unregulated  subsidiaries  (comprised of Energy Holdings and 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 for its
capital 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.  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 has
positioned  Energy Holdings as a major part of its planned growth  strategy.  In
order to  achieve  this  strategy,  PSEG  Global  Inc.  (Global)  will  focus on
generation and distribution  investments within targeted  high-growth regions of
the worldwide  energy market.  PSEG Resources Inc.  (Resources) will utilize its
market access,  industry knowledge and transaction  structuring  capabilities to
<PAGE>
expand  its  energy-related   financial   investment   portfolio.   PSEG  Energy
Technologies  Inc.  (Energy  Technologies)  will  continue  to provide  heating,
ventilating and air  conditioning  (HVAC)  contracting and other  energy-related
services to industrial and commercial  customers in the  Northeastern and Middle
Atlantic  United  States.  However,  Energy  Holdings  will  assess  the  growth
prospects and opportunities for Energy Technologies'  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  has  evolved  due to the  deregulation  of the
electric  generation  business.  Past  results are not an  indication  of future
business prospects or financial results.

<TABLE>
<CAPTION>
Results of Operations

                                                                   Earnings (Losses)
                                             ---------------------------------------------------------------
                                                   Quarter Ended                    Nine Months Ended
                                                   September 30,                      September 30,
                                             ---------------------------        ----------------------------
                                                 1999           1998                1999            1998
                                             ------------    -----------        ------------    ------------

<S>                                               <C>             <C>                <C>              <C>
PSE&G, Before Extraordinary Item                  $203            $215               $527             $478
PSE&G Extraordinary Item                           (14)             --               (804)              --
                                             ------------    -----------        ------------    ------------
      Total PSE&G                                  189             215               (277)             478
Energy Holdings                                     18            (35)                 63               15
                                             ------------   -----------        ------------    ------------
      Total PSEG                                  $207            $180              $(214)            $493
                                             ============    ===========        ============    ============


                                                Contribution to Earnings Per Share (Basic and Diluted)
                                             ---------------------------------------------------------------
                                                   Quarter Ended                    Nine Months Ended
                                                   September 30,                      September 30,
                                             ---------------------------        ----------------------------
                                                 1999           1998                1999            1998
                                             ------------    -----------        ------------    ------------

PSE&G, Before Extraordinary Item                 $0.93           $0.93              $2.40            $2.07
PSE&G Extraordinary Item                         (0.06)             --              (3.65)              --
                                             ------------    -----------        ------------    ------------
      Total PSE&G                                 0.87            0.93              (1.25)            2.07
Energy Holdings                                   0.08           (0.15)              0.28             0.06
                                             ------------   -----------        ------------    ------------
      Total PSEG                                 $0.95           $0.78             $(0.97)           $2.13
                                             ============    ===========        ============    ============
</TABLE>

     Basic and diluted  earnings per share of PSEG common stock  (Common  Stock)
were $0.95 for the quarter ended September 30, 1999, representing an increase of
$0.17 per share from the comparable 1998 period.  Basic and diluted earnings per
share of Common Stock were $(0.97) for the nine months ended September 30, 1999,
representing a decrease of $3.10 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.  In the third quarter of 1999, PSE&G revised
the estimates  inherent in the  extraordinary  charge and recorded an additional
$14 million extraordinary charge. 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 $1.01 for the quarter  ended  September
30, 1999,  representing  an increase of $0.23 per share over the comparable 1998
period and $2.68 for the nine months ended  September 30, 1999,  representing an
increase of $0.55 per share over the comparable 1998 period.
<PAGE>
     Excluding the extraordinary  charge,  PSE&G's  contribution to earnings per
share of Common Stock for the quarter ended September 30, 1999 was flat with the
comparable 1998 period.  Although PSE&G's contribution to earnings per share was
flat,  PSE&G's  net income was down by $12  million or $0.05 per share of Common
Stock as compared to the same period in 1998. The decrease in net income for the
quarter  ended  September  30,  1999  was  offset  by the  impact  of the  stock
repurchase  program with fewer shares  outstanding  in 1999 as compared to 1998.
The decrease in net income was due to decreased  electric revenues due to the 5%
rate reduction, beginning August 1, 1999, associated with the Energy Master Plan
Proceedings,  and higher  operating and  maintenance  expenses  attributable  to
several  factors,  including  restoration  work required in the wake of Tropical
Storm  Floyd  and  the  flooding   and  damage  it  caused,   a  change  in  the
capitalization  policy for PSE&G's electric  generation business and the effects
of depreciation policy changes stemming from the discontinuation of SFAS 71 (see
Note 1. Basis of  Presentation/Summary  of  Significant  Accounting  Policies of
Notes).  This decrease was partially  offset by an improvement in electric sales
volumes  due  to  hot  summer  weather  in  1999  and  lower  generation-related
depreciation  expenses  due to the  lower net book  value of  generation-related
assets as a result of the SFAS 121 write-down.

     Excluding the extraordinary  charge,  PSE&G's  contribution to earnings per
share of Common Stock for the nine months  ended  September  30, 1999  increased
$0.33 from the  comparable  1998 period,  including  $0.12 as a result of PSEG's
stock repurchase  program.  The increase for the nine months ended September 30,
1999 was primarily due to increased sales of gas and electricity  resulting from
favorable  weather  conditions in 1999 augmented by positive economic factors in
New Jersey and profits realized from wholesale energy  activities.  In addition,
generation-related   depreciation  expenses  were  lower  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 the effects of depreciation policy
changes stemming from the  discontinuation  of SFAS 71. The increase in earnings
was also partially  offset by the 5% rate reduction  discussed  above and higher
operating and maintenance expenses, including higher transmission,  distribution
and  wholesale  energy  costs,  than those  incurred  in the nine  months  ended
September 30, 1998.

     Energy Holdings' contribution to earnings per share of Common Stock for the
quarter and nine months  ended  September  30,  1999  increased  $0.23 and $0.22
including $0.01 as a result of PSEG's stock  repurchase  program,  respectively,
from  the  comparable  1998  periods,   primarily  due  to  the  better  overall
performance of Resources, Global and Energy Technologies.  The improvements were
attributable largely to Resources which benefited from an upturn in the equities
markets as compared to the same period in 1998.  In addition,  Energy  Holdings'
results  reflect  Global's gain from the sale of its interest in a co-generation
facility  in  Newark,  New  Jersey,  partially  offset by  write-downs  of other
investments in Global's portfolio.

     As a result of PSEG's  stock  repurchase  program  which began in September
1998,  earnings  per share of Common Stock for the quarter and nine months ended
September 30, 1999 increased $0.05 and $0.13, respectively,  from the comparable
1998 periods.  As of September 30, 1999,  approximately  13.2 million shares had
been repurchased at a cost of approximately $516 million under this program.

PSE&G -- Revenues

     The presentation of revenues on the  Consolidated  Statements of Income has
changed effective August 1, 1999, due to the change in regulation as required by
the Final Order.  PSE&G's generation business has been deregulated and, starting
August 1, 1999, earns revenues by providing the energy and capacity necessary to
meet  PSE&G's  BGS and OTRA  obligations  as well as by a variety  of  wholesale
energy and capacity sales and other ancillary services. PSE&G's transmission and
distribution  businesses  remain  regulated  and will  continue to earn revenues
based on its  tariffs  under  which it provides  transmission  and  distribution
services for its residential, commercial and industrial customers in New Jersey.
The rates charged for  transmission  and  distribution are regulated by FERC and
the BPU,  respectively.  Revenues  are also  generated  from a variety  of other
activities  such as sundry  sales,  wholesale  transmission  services  and other
miscellaneous   services.  For  more  information  on  the  Energy  Master  Plan
Proceedings, see Note 1. Basis of Presentation/Summary of Significant Accounting
Policies and Note 2. Regulatory Issues of Notes. Because historical  information
is not  available  for the Electric  Generation  and Electric  Transmission  and
Distribution  Revenues,  variances in Electric Revenues will be discussed in the
aggregate.   For  estimates  of  historical  Electric  Generation  and  Electric
Transmission and  Distribution  Revenues,  see Note 8. Financial  Information by
Business Segments of Notes.
<PAGE>
     Certain of the below listed year to year variances did not impact  earnings
as there was an offsetting  variance in expense.  To the extent fuel revenue and
expense flowed through the Electric  Levelized Energy  Adjustment  Clause (LEAC)
through July 31, 1999, the Levelized Gas Adjustment Clause (LGAC),  the Societal
Benefits Clause (SBC) or the non-utility  generation  market  transition  charge
(NTC) mechanisms, variances in certain revenues and expenses offset and thus had
no direct effect on earnings.  These include base fuel revenues through July 31,
1999,  demand side management  (DSM) revenue and Remediation  Adjustment  Charge
(RAC) revenue.  On August 1, 1999, the LEAC mechanism was eliminated as a result
of the Energy  Master  Plan  Proceedings.  This is likely to  increase  earnings
volatility  since  PSE&G now bears the full  risks and  rewards  of  changes  in
nuclear and fossil  generating fuel costs and replacement  power costs. See Note
2. Regulatory  Issues and Note 4. Regulatory Assets and Liabilities of Notes for
a discussion  of LEAC,  LGAC,  SBC,  NTC, RAC and DSM and their status under the
Energy Master Plan Proceedings.

     Electric

     Revenues increased $32 million or 3% and $136 million or 4% for the quarter
and nine months ended  September 30, 1999 from the  comparable  periods in 1998,
respectively, primarily due to favorable weather conditions in 1999 augmented by
positive economic factors in New Jersey. These factors increased both generation
and transmission and distribution revenues;  however, the increase in generation
revenues was partially  offset by the 5% rate reduction,  discussed  below.  The
increase in the nine  months  ended  September  30, 1999 was also due to profits
realized from wholesale  energy  activities  being higher than in the comparable
1998 period.  Also,  higher DSM revenues in the nine months ended  September 30,
1999 than in the comparable  1998 period  contributed to increased  distribution
revenues.

     On August 18,  1999,  the BPU approved  PSE&G's  compliance  tariff  filing
reflecting the 5% decrease in rates.  On August 1, 1999,  PSE&G had  implemented
this rate reduction  previously  approved on a provisional  basis. In 1999, this
rate reduction is expected to decrease  generation revenues by approximately $80
million.  For the  schedule of future rate  reductions  mandated by the BPU, see
Note  2.  Regulatory  Issues  of  Notes.  Additionally,  the  probable  loss  of
generation  customers  through the opening of  competition  could reduce  future
revenues. However, this could create the opportunity for the generation business
to sell available energy and capacity into the wholesale  market.  The degree to
which  generation  revenues  will be impacted will depend on the amount by which
prices to wholesale customers vary from prices under the BGS contract.  Further,
although  the  probable  loss  of  retail   customers   will  not  impact  total
transmission  revenues,  the  mix  of  revenues  from  retail  versus  wholesale
customers, including third party suppliers, will change.

     Gas

     Revenues  increased  $17  million  or 9% and  $110  million  or 10% for the
quarter and nine months ended September 30, 1999 from the comparable  periods in
1998, respectively.  The increases were primarily due to increased revenues from
gas  service  contracts  and higher  sales to large  commercial  and  industrial
customers  than in the  comparable  periods  in  1998.  Additionally,  favorable
weather in the first and second  quarters of 1999  contributed to the increases.
The potential loss of residential customers due to the opening of competition in
2000 could reduce future revenues.

PSE&G -- Expenses

     Electric Energy Costs

     Electric  Energy Costs  increased  $36 million or 13% and $36 million or 5%
for the quarter and nine months  ended  September  30, 1999 from the  comparable
1998 periods,  respectively.  The increases were primarily due to an increase in
electric  sales volumes due to hot summer  weather in 1999.  Beginning in August
1999, higher prices for power purchases also contributed to the increase.
<PAGE>
     Due to the  elimination  of the LEAC on August 1,  1999,  these  historical
trends are not to be considered an indication of future  Electric  Energy Costs.
Given the elimination of the LEAC, the lifting of the requirements that electric
energy  offered  for sale in the PJM  Interconnection,  LLC (PJM) not exceed the
variable cost of producing such energy and that such transactions are now capped
at $1,000 per megawatt-hour (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 Costs

     Gas Costs  increased $14 million or 11% for the quarter ended September 30,
1999 from the comparable 1998 period due to higher sales to large commercial and
industrial  customers than in the comparable 1998 period. Gas Costs for the nine
months ended  September  30, 1999  increased  $43 million or 6% primarily due to
increased  sales of gas  resulting  from colder  weather in the first and second
quarters  of  1999.  It is  expected  that  the  potential  loss of  residential
customers  due to the  opening  of  competition  in  2000  could  reduce  future
expenses.

     Operation and Maintenance

     Operation  and  Maintenance  expense  increased $58 million or 18% and $150
million or 15% for the quarter and nine months ended September 30, 1999 from the
comparable 1998 periods,  respectively. The increase was primarily due to higher
transmission  and  distribution  costs,  including  higher  material and outside
services in 1999,  attributable to several factors,  including  restoration work
required in the wake of Tropical Storm Floyd and higher  information  technology
costs,  including  costs  related  to Year  2000  readiness.  The  change in the
capitalization  policy for PSE&G's  electric  generation  business caused higher
Operation and Maintenance expense as did higher costs related to wholesale power
activities.  Also  contributing  to the increase were higher fringe benefits and
higher costs associated with the preparation for deregulation.  Additionally, in
the nine  months  ended  September  30,  1999,  there  were  higher  Other  Post
Retirement  Benefits (OPEB) costs incurred and 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 of Notes).  This increase in Operation and  Maintenance  expense is not
expected to exceed $85 million per year and will be offset by lower depreciation
expense in the  future due to the lower  level of  expenditures  capitalized  to
electric generation assets.

     Depreciation and Amortization

     Depreciation and Amortization  expense decreased $40 million or 25% and $73
million or 15% for the quarter and nine months ended September 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 and recorded pursuant to
SFAS 121. These decreases were partially offset by higher depreciation rates for
generation-related  assets used in the second and third  quarters of 1999 due to
the change in  depreciation  policy for  generation-related  assets (see Note 1.
Basis of  Presentation/Summary of Significant Accounting Policies of Notes). The
decreases  were  partially  offset by higher  depreciation  expense  related  to
capital additions to the transmission and distribution business.

     Despite the higher  depreciation rates for  generation-related  assets, the
net decrease in generation-related depreciation expense will continue due to the
reduced asset balances. Such reductions are currently anticipated to approximate
$230 million per year.  Additionally,  beginning in 2000, electric  distribution
asset-related  depreciation  will be further reduced due to the  amortization of
the excess  electric  distribution  depreciation  reserve  over the period  from
January 1, 2000 to July 31, 2003. See Note 4. Regulatory  Assets and Liabilities
of Notes for a discussion of the amortization schedule.  Once the securitization
transaction  is complete,  the regulatory  asset  recorded for PSE&G's  stranded
costs will be amortized  with such  amortization  expense  partially  offsetting
these decreases.
<PAGE>

     Income Taxes

     Income Taxes  decreased $7 million or 4% and  increased  $38 million or 11%
for the quarter and nine months  ended  September  30, 1999 from the  comparable
1998 periods,  respectively. The increase in the nine months ended September 30,
1999 is primarily due to higher pre-tax operating income.

Energy Holdings -- Earnings (Losses)
<TABLE>
<CAPTION>


                                                               Quarter Ended                    Nine Months Ended
                                                               September 30,                      September 30,
                                                         ---------------------------        ---------------------------
                                                            1999            1998               1999            1998
                                                         -----------     -----------        -----------     -----------
                                                                            (Millions of Dollars)
<S>                                                           <C>           <C>                 <C>              <C>
Earnings Before Interest, Taxes and
    Preferred Dividends:
     Resources                                                $20           $(40)               $112             $67
     Global                                                    44             21                  85              55
     Energy Technologies                                       (1)            (5)                 (6)            (12)
                                                         -----------     -----------        -----------     -----------
          Sub-total                                            63            (24)                191             110
Interest, Taxes and Preferred Dividends                        45             11                 128              95
                                                         -----------     -----------        -----------     -----------
Earnings (Losses)                                             $18           $(35)                $63             $15
                                                         ===========     ===========        ===========     ===========

</TABLE>

     Energy Holdings' earnings (losses) for the quarter ended September 30, 1999
and 1998 were $18  million and $(35)  million,  respectively.  Energy  Holdings'
earnings for the nine months ended  September 30, 1999 and 1998 were $63 million
and $15 million,  respectively.  The increases in Energy Holdings' earnings were
primarily due to the better overall performance of Resources,  Global and Energy
Technologies.  The  improvements  were  attributable  largely to Resources which
benefited from an upturn in the equities  markets as compared to the same period
in 1998. In addition,  Energy  Holdings'  results reflect Global's gain from the
sale of its interest in a Newark, New Jersey co-generation  facility,  partially
offset by write-downs on other investments in Global's portfolio.

     Additionally,  higher earnings for the nine months ended September 30, 1999
were  primarily  due to  investment  gains in  Resources'  financial  investment
portfolio  and income from new capital  leases.  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  $118  million to $148 million from $30 million for the
quarter  ended  September  30, 1999 as compared to the same period in 1998.  The
increase was  primarily  due to a $60 million  increase in revenues at Resources
primarily due to improved  market  conditions  benefiting  Resources'  financial
investments and a $49 million increase in revenues at Energy Technologies due to
the addition of revenues from acquisitions in 1999.

     Revenues  increased  $131 million to $416 million from $285 million for the
nine months ended September 30, 1999 as compared to the same period in 1998. The
increase was due to an increase of $44 million at Resources due to higher income
from financial investments and higher income from new capital lease investments,
a $71 million increase in revenues at Energy Technologies due to the addition of
revenues  from  acquisitions  in 1999 and a $17 million  increase in revenues at
Global  primarily due to improvement in revenues from the electric  distribution
companies in Brazil and  Argentina as well as the addition of revenues  from the
energy distribution  companies in Chile and Peru acquired in June 1999. Global's
revenue includes its share of the net income from joint ventures  recorded under
the equity method of accounting.
<PAGE>
     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  the  lower  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 energy prices in effect in
the applicable future periods. Global's projects in operation,  construction and
development  are  expected  to  offset  this  revenue  shortfall;   however,  no
assurances of that result can be given.

Energy Holdings -- Expenses

     Operation and Maintenance

     Operation and Maintenance expense increased $52 million to $91 million from
$39  million for the quarter  ended  September  30, 1999 as compared to the same
period in 1998.  Operation and Maintenance expense increased $69 million to $190
million  from $121  million  for the nine  months  ended  September  30, 1999 as
compared to the same period in 1998.  The  increases  were  primarily due to the
addition of expenses from the entities acquired by Energy  Technologies and to a
lesser degree, by higher development expenses at Global.

     Interest Expense and Preferred Dividends

     Interest  Expense  and  Preferred  Dividends  increased  $6  million to $31
million from $25 million for the quarter ended September 30, 1999 as compared to
the same period in 1998.  Interest Expense and Preferred  Dividends increased $5
million to $84 million from $79 million for the nine months ended  September 30,
1999 as compared to the same period in 1998. The increases were primarily due to
financing 1999 investment and acquisition activity.

     Income Taxes

     Income Taxes  increased  $27 million to $14 million from $(13)  million for
the  quarter  ended  September  30, 1999 as compared to the same period in 1998.
Income Taxes  increased $28 million to $44 million from $16 million for the nine
months  ended  September  30, 1999 as  compared to the same period in 1998.  The
increases  were  primarily  due to higher  pre-tax  income for the quarter ended
September 30, 1999.

Energy Holdings -- Other Income (Loss)

     Other Income  (Loss)  increased  $20 million to $21 million from $1 million
for the quarter ended September 30, 1999 as compared to the same period in 1998.
Other Income  increased  $22 million to $28 million from $6 million for the nine
months  ended  September  30, 1999 as  compared to the same period in 1998.  The
increases  were  primarily  due to a gain on the sale of Global's  interest in a
co-generation  facility in Newark,  New Jersey,  as discussed  above,  partially
offset by write-downs on other investments, as discussed below.

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

     Preferred Securities Dividend  Requirements  increased $1 million or 5% and
$13 million or 23% for the quarter and nine months ended  September  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 a holding  company and, as such,  has no operations of its own. The
following  discussion  of  PSEG's  liquidity  and  capital  resources  is  on  a
consolidated  basis,  noting  the uses and  contributions  of PSEG's  two direct
operating subsidiaries, 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  going  forward.  Also,  as a  result  of
deregulation  and  related  corporate  structure  reorganizations,  the  capital
structure of PSEG will likely change with a likely  increase in debt levels.  As
of  September  30,  1999,  PSEG's  capital  structure  consisted of 40.7% common
equity,  47.2%  long-term  debt and 12.1%  preferred  stock and other  preferred
securities.  As of September 30, 1999,  PSE&G's capital  structure  consisted of
48.7% common equity,  42.4%  long-term  debt and 8.9% preferred  stock and other
preferred securities.  The BPU, in the Final 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.

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

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

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

     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)
<PAGE>
     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 September 30, 1999,  PSE&G had a total of $3.9 billion of Mortgage Bonds
outstanding,  of which  $3.105  billion are taxable  registered  Mortgage  Bonds
subject to  special  redemption  provisions,  outlined  in Option 3  (Redeemable
Bonds).  At October 31,  1999,  PSE&G had a total of $3.729  billion of Mortgage
Bonds  outstanding,  of which $2.934 billion are Redeemable  Bonds (see External
Financings).  $624  million of these  Redeemable  Bonds are  scheduled to mature
within  twelve  months.  $780  million of the  Mortgage  Bonds  outstanding  are
tax-exempt  Pollution  Control  Bonds and $15  million are two series of taxable
coupon Mortgage Bonds due 2037 (Coupon Bonds).  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 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)  Retire up to an  additional  $300  million  of  Redeemable  Bonds
               through various means, such as maturities,  open market purchases
               and make-whole calls;

          (d)  Reduce PSE&G's short-term debt; and

          (e)  Reduce PSE&G common and/or  preferred  equity with the balance of
               proceeds, if any.

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

     As previously reported, in anticipation of securitization,  PSEG's Board of
Directors  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 September 30, 1999, PSEG had repurchased  approximately  13.2
million shares of Common Stock at a cost of  approximately  $516 million,  under
these authorizations. As of October 31, 1999, PSEG had repurchased approximately
13.6 million  shares of Common Stock at a cost of  approximately  $532  million.
Market  conditions and the availability of alternative  investments will dictate
if and  when  more  shares  of  Common  Stock  will be  repurchased  under  this
authorization.

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

     Dividend  payments  on Common  Stock  were  $1.62  per  share  and  totaled
approximately  $357 million and $376 million for the nine months ended September
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 $510 million and $376 million to
PSEG during the nine months  ended  September  30, 1999 and 1998,  respectively.

<PAGE>
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 Final 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 Power.  Note that due to the competitive  environment in
which 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 nine months ended September 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.  Currently,
there has been no deferral nor default.

     As a result  of the 1992  focused  audit of PSEG's  non-utility  businesses
(Focused  Audit),  the BPU approved a plan which,  among other things,  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 September 30, 1999 were approximately 21% 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 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 in New Jersey,  PSEG and PSE&G do not  believe  that the Focused  Audit
provision requiring  notification of the BPU if PSEG's non-utility assets exceed
20%  of  its   consolidated   assets  remains   appropriate   and  believe  that
modifications  will be required.  The Final Order  addressed the Focused  Audit,
noted that PSEG's  non-regulated  assets would  likely  exceed 20% of total PSEG
assets  once  the  utility's  generating  assets  were  sold to a  non-regulated
subsidiary  and directed  PSE&G to file a petition  with the BPU to maintain the
existing regulatory  parameters or to propose modifications to the Focused Audit
order no later than the end of the first quarter of 2000 (see Note 2. Regulatory
Issues of  Notes).  It was also  recognized  in the  Final  Order  that,  due to
significant  changes  in the  industry  and,  in  particular,  PSEG's  corporate
structure  as a result of the Final Order,  modifications  to or relief from the
Focused Audit might be warranted.

     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. In addition,  if PSEG were no longer to be exempt under
the Public Utility Holding Company Act (PUHCA),  PSEG and its subsidiaries would
be subject to  additional  regulation  by the SEC with respect to financing  and
investing activities,  including the amount and type of non-utility investments.
Inability to achieve  satisfactory  resolution of these matters could impact the
future  relative size and financing  activities of Energy Holdings and 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.
<PAGE>
     Energy  Holdings  plans to  continue  the  growth of Global  and  Resources
through further  investments  made by these  subsidiaries.  Energy Holdings will
assess the growth prospects and opportunities for Energy Technologies'  business
before committing substantial amounts of additional 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 need  significant  capital to fund its planned  growth.  Factors  affecting
actual expenditures and investments include availability of capital and suitable
investment  opportunities,  market  volatility  and 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 the  Chilean  and
Peruvian distribution companies.

     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 September 30, 1999 and 1998,  Energy  Holdings'  embedded cost of debt was
approximately 6.99% and 7.75%,  respectively.  Energy Holdings' embedded cost of
debt  increased  to  approximately  7.75% as of October 31,  1999 (see  External
Financings).

     Capital Requirements

     PSEG

     PSEG has entered into contracts to purchase a number of combustion turbines
to expand capacity at a number of generating  sites (see Note 5. Commitments and
Contingent Liabilities of Notes).

     PSE&G (including Power)

     PSE&G  has  substantial  commitments  as part of its  ongoing  construction
program.  PSE&G's construction program is continuously reviewed and periodically
revised as a result of changes in economic  conditions,  revised load forecasts,
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
transmission  and/or distribution 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
business and the transmission and distribution businesses. For discussion of the
Energy Master Plan Proceedings and their impacts,  see Note 2. Regulatory Issues
of Notes.

     On October 6, 1999,  Power announced an agreement with Niagara Mohawk Power
Corporation  (Niagara  Mohawk),  a New York State  utility,  to purchase its 400
megawatt oil (MW) and gas-fired electric  generating station in Albany, New York
(Albany Steam Station) for $47.5 million. On September 30, 1999, Power announced
that it has signed an  agreement to acquire all of  Conectiv's  interests in the
Salem Nuclear  Generating  Station (Salem) and the Hope Creek Nuclear Generating
Station (Hope Creek) and half of Conectiv's  interest in the Peach Bottom Atomic
Power Station (Peach Bottom),  for an aggregate  purchase price of $15.4 million
plus the net book value of nuclear fuel at closing. For further discussion,  see
Note 5. Commitments and Contingent Liabilities of Notes.
<PAGE>
     For the nine months ended  September 30, 1999,  PSE&G had plant  additions,
including  capitalized interest and Allowance for Funds Used During Construction
(AFDC),  of $285 million,  an $83 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 has attempted to minimize the uncertainty  associated with the timing
of the final  allocation  of  nitrogen  oxide  (NOx)  allowances  by  purchasing
allowances,   upgrading   control   technologies  and  estimating  the  expected
allocation  with as much precision as is practicable  using  available data (see
Air Pollution  discussion of Note 5.  Commitments and Contingent  Liabilities of
Notes).   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.

     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.,  Power) will likely be required to finance externally based on its growth
strategy.

     Energy Holdings

    From  December  31,  1998  through  September  30,  1999,  Energy  Holdings'
subsidiaries  made  investments  totaling   approximately  $931  million.  These
investments include acquisitions and other investments made by Global, Resources
and Energy Technologies,  discussed below. Projected investment expenditures for
the  fourth  quarter  of 1999  are  approximately  $250  million,  comprised  of
investments in generation and distribution facilities and projects and leveraged
lease  transactions.  Energy  Holdings  has  approximately  $35  million of debt
principal  payments due in November  1999 which are expected to be refinanced or
funded through existing credit facilities and operating cash flow.

         Global

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

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

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

     In June 1999,  Global and a partner acquired 90% of a Chilean  distribution
company,  which at the time owned a 37%  controlling  interest in a distribution
company in Peru,  together  providing  electric and gas service to approximately
one  million  customers.  The  acquisition  was  made in a 50/50  joint  venture
arrangement. Global's equity investment was approximately $268 million including
fees and closing costs.  In addition,  Global's  portion of the  acquisition was
financed  with $160  million  of debt that is  non-recourse  to  Global,  Energy
Holdings  and PSEG,  which is  consolidated  on the  Global  balance  sheet.  In
September 1999, Global and its partner  purchased an additional  interest in the
Peruvian  distribution  company.  Global's  investment in  connection  with this
purchase was approximately $108 million, resulting in a total combined ownership
share of 84.5% in the Peruvian distribution company.
<PAGE>
     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.  Construction  began in August
1999 and is expected to be  completed  by 2001 at a total cost of  approximately
$448  million.  Global's  equity  investment  for  its 33%  interest,  including
contingencies, is expected to be approximately $86 million.

     In May 1999,  Global  acquired a 63% equity  interest in a company which is
developing a 525 MW coal-fired electric generating facility to be constructed in
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 for its 63% interest,
including contingencies, is expected to be approximately $180 million. Financial
closure is expected in the Fall of 1999 with construction to begin by the end 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. 500 MW of this
facility is expected to be  operational  in late 2000 and is expected to qualify
as an EWG.  Global's maximum equity  investment for its 50% interest is expected
to be  approximately  $193 million  including loans and  guarantees.  In October
1999, Global closed on a $312 million non-recourse project financing, consisting
of a $260 million term loan and $52 million in letter of credit  facilities  for
the Guadalupe facility. At the completion of construction (approximately fifteen
months), the loan will convert to a five year term loan.

     Also in April 1999, Global and a partner announced the formation of a joint
venture to construct and operate three gas-fired electric generating  facilities
with total installed capacity of 200 MW and associated  distribution  systems to
serve,  under contract,  industrial  customers in Venezuela.  Global expects the
first two facilities, which are in construction,  to be operational in late 1999
with the third  facility  in  service  in early  2001.  The total  cost of these
facilities  is expected to be  approximately  $140 million and  Global's  equity
investment,  including  contingencies,  for its 50% interest,  is expected to be
approximately $70 million.

         Resources

     In 1999,  Resources,  through its  investment  in a leveraged  buyout (LBO)
fund, has received cash  distributions  of $99 million  resulting in a realized,
after-tax  gain of $23  million  from the fund's sale of a portion of its equity
interests.  This  includes  distributions  totaling  approximately  $40  million
resulting in a realized,  after-tax gain of  approximately  $11 million from the
sales of equity interests held by an LBO fund in the third quarter of 1999.

     In the third  quarter of 1999,  Resources  received  net cash  proceeds  of
approximately  $76  million  from  early  buy-outs  of  leveraged  leases  of  a
generation station and an office building, resulting in an after-tax gain of $10
million.

     In  1999,  Resources  has  invested  approximately  $243  million  in  five
leveraged lease transactions of energy-related assets: gas distribution networks
in the Netherlands,  cogeneration  plants in Germany and a liquefied natural gas
storage  facility  in  the  United  States.   This  includes  an  investment  of
approximately  $66 million in a  leveraged  lease  transaction  of a natural gas
distribution  network in the Netherlands and an investment of approximately  $40
million in a leveraged lease  transaction of  cogeneration  plants in Germany in
September 1999.

         Energy Technologies

     During  1999,  Energy  Technologies  acquired six  mechanical  and building
service contractors in New Jersey, Virginia and Rhode Island for a total cost of
approximately  $44 million  including debt assumed.  The latest  acquisition was
completed in November 1999.
<PAGE>
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,  PSE&G's and Energy Holdings' competitive  strategies by
rating  agencies  will likely  continue.  These  changes  could  affect the bond
ratings, cost of capital and market prices of the respective securities of PSEG,
PSE&G and 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  ultimately 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 affiliates  and the potential  impact of
affiliate  ratings on the consolidated  credit quality of PSEG, PSE&G and Energy
Holdings.

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

     PSEG

     At September 30, 1999, PSEG had a committed $150 million  revolving  credit
facility  which expires in December  2002.  At September 30, 1999,  PSEG had $41
million outstanding under this revolving credit facility.  On September 8, 1999,
PSEG  entered  into an  uncommitted  line of credit with a bank for an unlimited
amount.

     In June 1999, PSEG issued $300 million of Extendible  Notes,  Series C, due
June 15, 2001 with interest at the  three-month  London  Interbank  Offered Rate
(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

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

     Under its Mortgage,  PSE&G may issue new First and Refunding Mortgage Bonds
against  previous  additions and  improvements  and/or  retired  Mortgage  Bonds
provided  that its ratio of earnings to fixed  charges  calculated in accordance
with its Mortgage is at least 2:1. As of September 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 Power. At September 30, 1999, PSE&G's
Mortgage  coverage  ratio was  4.481:1.  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  Power  of  Note 2.
Regulatory Issues of Notes.

     In  anticipation  of   securitization,   PSE&G  purchased  certain  of  its
outstanding series of Mortgage Bonds in the open market. These purchases totaled
$129 million in September 1999 and $171 million in October 1999.
<PAGE>
     On July 1, 1999,  $100 million of PSE&G's 8.750% Bonds,  Series Z, matured.
On September 27, 1999, PSE&G called its $2.990 million of 6.9% Pollution Control
Bonds, Series C, due September 1, 2009. Redemption is scheduled for November 12,
1999.

     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 September 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.  PSE&G has filed with the BPU for extension of this authorization
through  January 2, 2001 and for an increase to $2.0 billion in order to provide
for temporary  funding of maturing  long-term  debt in light of the  uncertainty
associated with the timing of  securitization  and the generation asset sale due
to the recent appeals. An inability to issue short-term obligations would have a
material adverse impact on PSEG's and PSE&G's  financial  condition,  results of
operations  and net cash flows.  On  September  9, 1999,  PSE&G  entered into an
uncommitted line of credit with a bank for an unlimited amount. Borrowings under
this line of credit and all other  short-term  borrowings  in  aggregate  cannot
exceed the maximum amount of short-term debt authorized, currently $1.5 billion.
PSE&G also had additional  uncommitted  lines of credit  totaling $70 million on
September  30,  1999.  On  September  30,  1999,  PSE&G had  $1.014  billion  of
short-term  debt  outstanding,   including  $30  million  borrowed  against  its
uncommitted bank lines of credit.

     PSE&G Fuel Corporation (Fuelco) has a $125 million commercial paper program
to finance a 42.49%  share of Peach  Bottom  nuclear  fuel,  supported by a $125
million  revolving credit facility with a group of banks,  which expires on June
28, 2001.  PSE&G has  guaranteed  repayment of Fuelco's  respective  obligations
under this program. As of September 30, 1999, Fuelco had commercial paper of $68
million outstanding.  Once the purchase of PSE&G's  generation-related assets is
completed,  Fuelco's commercial paper program will be discontinued and financing
of Peach Bottom nuclear fuel will be funded through Power.

     Energy Holdings

     In October 1999,  Energy Holdings issued $400 million of 10.0% Senior Notes
due October 2009.  The proceeds  were used for the repayment of short-term  debt
outstanding  under revolving credit  facilities.  Borrowings under the revolving
credit  facilities  were used to finance  investments and  acquisitions  and for
general  corporate  purposes.  Energy  Holdings  expects to file a  registration
statement  with the SEC  relating  to an  exchange  offer for, or the resale of,
these Senior  Notes.  At  September  30,  1999,  Energy  Holdings had total debt
outstanding of $1.471 billion, including debt at PSEG Capital as discussed below
and consolidated debt that is non-recourse to PSEG, Global and Energy Holdings.

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

     PSEG  Capital's  assets  consist  principally of demand notes of Global and
Resources.   Intercompany  borrowing  rates  are  established  based  upon  PSEG
Capital's  cost of funds.  In March and June  1999,  PSEG  Capital  issued  $252
million of 6.25% MTNs due May 2003 and $35  million of 6.73% MTNs due June 2001,
respectively.  The proceeds were used to repay $100 million of PSEG Capital MTNs
which  matured in February 1999 and $35 million which matured in May 1999 and to
reduce Energy Holdings' short-term debt. At September 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.
<PAGE>
     In September  1999,  Energy  Holdings  closed on a $150  million  letter of
credit facility to support a future equity investment in a generation project in
Texas.

     In May 1999, Energy Holdings closed on two separate 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  revolving credit  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 for the
12-month period then ending. As a condition of borrowing, the pro-forma CFADS to
fixed charges  ratio shall not be less than 1.75x as of the quarterly  financial
period ending  immediately  following the first anniversary of each borrowing or
letter of credit issuance. CFADS includes, but is not limited to, operating cash
before  interest  and  taxes,   pre-tax  cash   distributions   from  all  asset
liquidations and equity capital  contributions  from PSEG to the extent not used
to fund investing  activity.  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 which is
supported by PSEG. As of September 30, 1999, the latest 12 months CFADS coverage
ratio  was  10.9x  and  the  ratio  of   recourse   indebtedness   to   recourse
capitalization was 0.25 to 1.00.

     Compliance  with  applicable  financial  covenants  will depend upon Energy
Holdings' future financial  position and levels of earnings and cash flow, as to
which no  assurances  can be given.  In addition,  Energy  Holdings'  ability to
continue  to grow its  business  will depend to a  significant  degree on PSEG's
ability to access  capital  and Energy  Holdings'  ability to obtain  additional
financing beyond current levels. At September 30, 1999, Energy Holdings had $481
million  outstanding under existing  revolving credit  facilities  totaling $660
million.

Foreign Operations

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

     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,  Peru  and
Venezuela.  Investing in foreign  countries  involves  certain  risks.  Economic
conditions  that  result in higher  comparative  rates of  inflation  in foreign
countries  likely result in declining values in such countries'  currencies.  As
currencies fluctuate against the U.S. dollar, there is a corresponding change in
Global's  investment value in terms of the U.S. dollar. Such change is reflected
as an increase or decrease in  comprehensive  income,  a separate  component  of
stockholders' equity. Net foreign currency  devaluations,  $185 million of which
was caused by the  devaluation of the Brazilian  Real, have reduced the reported
amount of PSEG's total stockholders'  equity by $203 million as of September 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.
<PAGE>
Competitive Environment

     Generation

     PSE&G is  required  to  provide  BGS for all  customers  who do not elect a
different service provider.  Once the sale of the  generation-related  assets to
Power is complete,  Power,  through ER&T, will provide PSE&G with the energy and
capacity  required to meet PSE&G's BGS and OTRA  obligations.  ER&T will provide
such energy and capacity  under the BGS contract  rate for the first three years
of the  transition  period,  which  began  August 1, 1999.  Once the sale of the
generation-related  assets to Power is complete, ER&T will obtain the energy and
capacity  to  supply  PSE&G's  BGS and OTRA  requirements  from its  affiliates,
Nuclear and Fossil,  supplemented  as  necessary  with energy  purchased  in the
competitive  wholesale  electricity market.  Power's earnings will be exposed to
the risks of the  competitive  wholesale  electricity  market to the extent that
ER&T 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
Interconnection,  LLC and Item 3. Qualitative and Quantitative Disclosures About
Market  Risk).  ER&T's  policy  will be to use  derivatives  to manage this risk
consistent with its business plans and prudent  practices.  Also, as part of its
growth  strategy,  Power is  seeking  to  mitigate  this  risk by  building  and
purchasing  additional capacity in the PJM and surrounding  regions. BGS will be
competitively bid for the fourth year and thereafter. ER&T will also participate
in the competitive  wholesale electricity market for other items such as energy,
capacity and  ancillary  services.  Prior to the sale of the  generation-related
assets to Power,  such  energy and  capacity  continues  to be  provided  by the
generation-related assets owned by PSE&G as well as through any energy purchases
needed.  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, and
other rate matters, see Note 2. Regulatory Issues of Notes.

     PJM Interconnection, LLC

     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.

     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 OTRA
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.
<PAGE>
     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 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 is actively  participating  in this rulemaking  proceeding to
advocate positions favorable to PSE&G,  although no assurances on the outcome of
these proceedings can be given.

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,  PSE&G and Energy Holdings 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.

     Year 2000 Readiness Status

     PSEG, PSE&G and Energy Holdings 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  mission  critical  systems as of October  31,  1999.  Mission
critical systems are those systems whose unavailability would immediately impact
PSEG's or PSE&G's ability to meet their regulatory,  safety or fiduciary duties.
By the end of 1999,  a majority of PSEG's and PSE&G's  non-critical  systems are
also  expected  to be Year 2000 ready with the  remainder  of such  non-critical
systems to be ready in 2000.

     Energy Holdings and its subsidiaries have essentially  completed  Inventory
and  Assessment  work on all  systems  impacted by Year 2000  readiness  issues.
Remediation/Testing  is expected to be completed in 1999 on all mission critical
systems and a majority of non-critical systems, with the remaining  non-critical
systems to be  completed  in 2000.  Energy  Holdings  (parent  company),  Energy
Technologies and Resources have completed  required Year 2000 readiness work for
100% of their mission  critical  systems and such systems are Year 2000 ready as
of June 30, 1999. Global has completed required Year 2000 readiness work for 95%
of its mission critical systems through September 1999.

     As previously reported, on May 11, 1998, the NRC issued a Generic Letter to
all nuclear facilities requiring certain written responses addressing the status
of their Year 2000  programs.  In its  responses,  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.  On June 30,  1999,  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.  On October 20, 1999,
PSE&G provided an update to its June 30, 1999 response,  noting that all mission
critical  systems  for Hope  Creek and Salem  were  Year 2000  ready.  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 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.
PSE&G has developed  contingency  plans to address  issues that may arise during
the December 31, 1999 through January 1, 2000 rollover. 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.  Additionally,  PECO informed  PSE&G that the remaining work on
Peach Bottom's mission critical systems has been completed and those systems are
Year 2000 ready.
<PAGE>
     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,   PSE&G  and  their
subsidiaries  designate  a vendor as key under  the Year  2000  project  if that
vendor's product or service has a fiduciary, regulatory or safety impact on PSEG
or PSE&G or their  subsidiaries.  PSEG and PSE&G have indications from more than
97% of their key vendors that they are making or have made  preparations for the
Year 2000. To date, all such 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,  PSE&G's and Energy  Holdings'
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.

     Year 2000 Risks

     PSEG,  PSE&G and Energy  Holdings have  identified  some scenarios and will
continue  working to determine the most  reasonably  likely worst case scenarios
arising from Year 2000 readiness  issues.  PSE&G anticipates its most reasonably
likely worst case scenario as follows:

     o    Many   customers  may  revert  to their own back-up  generation or may
          preemptively  shut down their  operations  during  critical  Year 2000
          periods  (primarily around December 31, 1999 through January 1, 2000).
          Their individual decisions could aggregate to unpredictable and/or low
          electrical demand patterns,  especially given that this is typically a
          low electrical demand period.  Because  electricity  cannot be stored,
          PSE&G  must  anticipate  and  balance  supply  and  demand in order to
          maintain electric generation,  transmission and distribution  systems.
          Unusual demand patterns could  overburden  these systems so that PSE&G
          could fail to  coordinate  demand and supply.  In order to prepare for
          this contingency,  PSE&G has sought to increase system  flexibility by
          implementing measures to:

          o    Prepare  all  plants  for  significant  increase  or  decrease in
               production,

          o    Have equipment and facilities that can use electricity ready to
               run,

          o    Generate with a more diverse fuel mix than usual, and

          o    Have additional  generating units that typically do not  run
               during  this  time  of the  year  (i.e.,  combustion turbines)
               ready to operate.

          PSEG and PSE&G are planning for intense  media  attention  on  PSE&G's
          operations.  The period surrounding  December 31, 1999 through January
          1, 2000 will provide an opportunity to closely review PSE&G's  status.
          Part of PSE&G's  contingency  plans is to provide  timely and accurate
          status information.

     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 have been finalized to address these
scenarios.
<PAGE>
     PSEG, PSE&G and Energy Holdings 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    The BPU has informed  PSE&G that it will expect  periodic  status
               reports  and  specific  outage   information  during  the  period
               December 31, 1999 through January 1, 2000.

     Additionally,  Energy Holdings, through Global, is subject to international
Year 2000 regulatory  initiatives,  which could include  sanctions being imposed
and  requirements  to indemnify  consumers for damages  resulting from Year 2000
non-compliance,   in  the  countries  in  which  it  has  operations,  including
Argentina,  Brazil,  Chile,  China, Peru and Venezuela.  Global has reviewed the
impacts of local  regulations  and laws, has taken all necessary steps to comply
with the international regulatory initiatives and, as noted above, has completed
required  Year  2000  readiness  work for 95% of its  mission  critical  systems
through September 1999.

     Contingency Plans

     PSEG,  PSE&G and Energy  Holdings 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,  PSE&G and Energy  Holdings 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,  which have since been included in the contingency plans. 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.  Additionally,  PSEG  and  PSE&G  participated  in the
NERC-led drill on September 8-9, 1999. The drill was intended to be a full-scale
dress rehearsal for the rollover period of December 31, 1999 to January 1, 2000.
For PSE&G,  this drill  built on previous  exercises.  Multiple  functions  were
involved  including gas, electric and distribution.  The centralized  status and
reporting  function  created for Year 2000 was  activated.  As with the previous
drills,  this exercise showed the basic  feasibility of the  contingency  plans.
Some procedural details,  such as the final development of facility  preparation
checklists,  creation of contact  listings and the distribution of communication
equipment, will be completed before December 31, 1999.

     PSEG,  PSE&G and Energy  Holdings  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,  Energy  Holdings,   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 key 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.
<PAGE>
Accounting Issues

     For a discussion of significant  accounting matters including SFAS 71; SFAS
121;  Emerging  Issues Task Force (EITF) Issue No.  97-4,  "Deregulation  of the
Pricing of Electricity-Issues  Related to the Application of FASB Statements No.
71 and No. 101" (EITF 97-4); SFAS 101, "Regulated Enterprises-Accounting for the
Discontinuation  of Application of FASB Statement No. 71" (SFAS 101); changes in
capitalization,  depreciation and asset retirement policies;  discontinuation of
deferral accounting for fuel revenues and expenses; 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.

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;  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   comprised  of  executive  officers  which  utilizes  an
independent risk oversight function to ensure compliance with corporate policies
and prudent risk management practices.

     PSEG is  exposed  to  credit  losses  in the  event of  non-performance  or
non-payment by  counterparties.  PSEG also has a credit management process which
is used to assess,  monitor and  mitigate  counterparty  exposure  for 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.

     For  discussion of interest  rates and Energy  Holdings'  commodity-related
instruments, equity securities and foreign currency risks, see Note 6. Financial
Instruments and Risk Management of Notes.

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

     The measured  value-at-risk using a  variance/co-variance  model with a 95%
confidence  level and assuming a one week time horizon at September 30, 1999 was
approximately $5 million, compared to the December 31, 1998 level of $4 million.
PSE&G's calculated  value-at-risk represents an estimate of the potential change
in the value of its portfolio of physical and financial derivative  instruments.
These  estimates,  however,  are not  necessarily  indicative of actual results,
which may differ due to the fact that actual market rate fluctuations may differ
from forecasted  fluctuations  and due to the fact that the portfolio of hedging
instruments may change over the holding period.

                           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 Reports on Form
10-Q for the  quarters  ended  March 31,  1999 and June 30, 1999 and the Current
Reports  on Form 8-K  filed  March 18,  1999,  April 26,  1999,  July 21,  1999,
September 15, 1999 and October 14, 1999 is updated below.

(1)  Form  10-K,  page 29 and June 30,  1999 Form 10-Q,  page 52. As  previously
     disclosed,  by complaints  filed in 1995 and 1996,  shareholder  derivative
     actions  on  behalf  of  PSEG  shareholders  were  commenced  by  purported
     shareholders  against certain  directors and officers.  The four complaints
     generally sought recovery of damages for alleged losses purportedly arising
     out of PSE&G's  operation of the Salem and Hope Creek generating  stations,
     together with certain other relief,  including removal of certain executive
     officers of PSE&G and PSEG and certain changes in the composition of PSEG's
     Board of Directors.  By decision dated July 28, 1999, the Court granted the
     defendants'  motions for summary  judgement  dismissing all four derivative
     actions. The plaintiffs have filed Notices of Appeals in all these actions.
     PSEG cannot predict the outcome of these appeals. Public Service Enterprise
     Group Inc. by G. E. Stricklin,  derivatively v. E. James Ferland,  et. al.,
     Superior Court of New Jersey,  Chancery Division,  Essex County, Docket No.
     C-160-96. Dr. Steven Fink and Dr. David Friedman, P.C. Profit Sharing Plan,
     derivatively,  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 and June 30, 1999 Form 10-Q, page 52. 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
<PAGE>
     other relief. 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.  Plaintiff has filed a Notice
     of Appeal.  PSEG cannot predict the outcome of this appeal. G. E. Stricklin
     v. I.  Lerner,  et.  al.,  United  States  District  Court for the  Eastern
     District of Pennsylvania. Civil Action No. 99-1950.

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

     (1)  Pages 10 through 15 and 29 through 30.  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)  Pages 10 through 15 and 29 through 30.  Appeals of I/M/O  PSE&G's Rate
          Unbundling,  Stranded Costs and  Restructuring  Filings before the New
          Jersey Superior Court, Appellate Division,  Docket No. A-643-99-T3 and
          second pending docket number assignment.

     (3)  Pages 10 through 15 and 29 through 30.  Proceedings  before the BPU in
          the Matter of the Petition of PSE&G for a Bondable  Stranded Cost Rate
          Order, Docket No. EF99060390.

     (4)  Pages 10 through 15 and 29 through 30.  Appeals of I/M/O the  Petition
          of PSE&G for a Bondable Stranded Cost Rate Order before the New Jersey
          Superior  Court,  Appellate  Division,   Docket  Nos.  A-772-99T3  and
          A-1050-99T3.

     (5)  Page 15.  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.

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

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

     (8)  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 the March 31, 1999 and June 30, 1999 Quarterly Reports to the SEC is updated
below.  References  are to the related  pages of the Form 10-K and the Quarterly
Reports for the  quarters  ended March 31, 1999 and June 30, 1999 as printed and
distributed.

Executive Officers

     Form 10-K,  page 127.  Lawrence R.  Codey,  President  and Chief  Operating
Officer of PSE&G and a member of the Boards of Directors of PSEG and PSE&G,  has
announced  that he will retire on February  29,  2000.  It is  anticipated  that
Alfred  C.  Koeppe,  currently  Senior  Vice  President-Corporate  Services  and
External  Affairs  of PSE&G,  will  succeed  Mr.  Codey as  President  and Chief
Operating Officer at that time.
<PAGE>
                    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
------------------  ------------------------------------------------------------
     10a            PSE&G Thrift and Tax-Deferred Savings Plan,  as amended
                    effective October 1, 1999

     10b            PSE&G  Employee Savings Plan, as amended effective
                    October 1, 1999

     12             Computation of Ratios of Earnings to Fixed Charges (PSEG)

     27(A)          Financial Data Schedule (PSEG)



                                      PSE&G
--------------------------------------------------------------------------------
Exhibit Number      Document
------------------  ------------------------------------------------------------
     10a            PSE&G  Thrift  and  Tax-Deferred  Savings  Plan,  as amended
                    effective  October 1, 1999

     10b            PSE&G Employee  Savings Plan, as amended  effective
                    October 1, 1999

     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            July 21, 1999             Items 5 and 7

 PSEG and PSE&G         September 15, 1999               Item 5

 PSEG and PSE&G           October 14, 1999            Items 5 and 7


<PAGE>
                           FORWARD LOOKING STATEMENTS

     Except for the  historical  information  contained  herein,  certain of the
matters discussed in this report constitute "forward-looking  statements" within
the  meaning of the  Private  Securities  Litigation  Reform  Act of 1995.  Such
forward-looking  statements are subject to risks and  uncertainties  which could
cause  actual  results  to  differ  materially  from  those  anticipated.   Such
statements are based on management's  beliefs as well as assumptions made by and
information  currently  available to  management.  When used  herein,  the words
"will",  "anticipate",   "intend",  "estimate",   "believe",  "expect",  "plan",
"hypothetical",  "potential",  variations of such words and similar  expressions
are intended to identify forward-looking statements. PSEG and PSE&G undertake no
obligation to publicly update or revise any forward-looking statements,  whether
as a result of new information, future events or otherwise. The following review
of factors  should not be construed as exhaustive or as any admission  regarding
the adequacy of  disclosures  made by PSEG and PSE&G prior to the effective date
of the Private Securities Litigation Reform Act of 1995.

     In addition to any assumptions  and other factors  referred to specifically
in connection  with such  forward-looking  statements,  factors that could cause
actual   results  to  differ   materially   from  those   contemplated   in  any
forward-looking  statements include,  among others, the following:  deregulation
and the unbundling of energy  supplies and services and the  establishment  of a
competitive  energy  marketplace  for products and  services;  managing  rapidly
changing wholesale energy trading operations in conjunction with electricity and
gas  production,   transmission  and  distribution  systems;   managing  foreign
investments  and electric  generation and  distribution  operations in locations
outside of the  traditional  utility  service  territory;  political and foreign
currency risks; an increasingly competitive energy marketplace;  sales retention
and growth  potential in a mature PSE&G service  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.

<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: November 12, 1999